SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File
December 31, 1994 No. 1-11632
AMERICAN ANNUITY GROUP, INC.
Incorporated under IRS Employer I.D.
the Laws of Delaware No. 06-1356481
250 East Fifth Street, Cincinnati, Ohio 45202
(513) 333-5300
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
Common Stock, Par Value $1.00 Per Share New York
9-1/2% Senior Notes due August 15, 2001 New York
11-1/8% Senior Subordinated Notes due
February 1, 2003 New York
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and need not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1995, there were 39,141,080 shares of the
Registrant's Common Stock outstanding. The aggregate market value of Common
Stock held by non-affiliates at that date was approximately $75.4 million
based upon non-affiliate holdings of 7,268,359 shares and a market price of
$10.38 per share.
Documents Incorporated by Reference:
Proxy Statement for the 1995 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I
Page
Item 1. Business
Introduction 1
GALIC 1
Discontinued Manufacturing Operations 11
Employees 11
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders *
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
* The response to this item is "none".
<PAGE>
PART I
ITEM 1
Business
Introduction
American Annuity Group, Inc. ("AAG" or "the Company") is a holding company
whose primary asset is the capital stock of Great American Life Insurance
Company ("GALIC").
American Annuity is the successor to STI Group, Inc., formerly known as
Sprague Technologies, Inc. ("STI"). STI was formed in May 1987 by American
Premier Underwriters, Inc., formerly known as The Penn Central Corporation,
for the purpose of divesting its electronics components businesses. STI
subsequently sold substantially all of its assets and retired its debt,
netting approximately $100 million in cash and cash equivalents.
On December 31, 1992, STI purchased 100% of the capital stock of GALIC from
Great American Insurance Company ("GAI") for $468 million. The purchase was
financed with (a) $230 million of borrowings, (b) $156 million of new equity
raised from the sale of common and preferred stock to GAI, and (c) available
cash. American Financial Corporation ("AFC"), the parent of GAI,
beneficially owned approximately 80% of American Annuity's Common Stock at
March 1, 1995.
In 1994, AAG and GALIC formed or acquired several small subsidiaries with
combined total assets of approximately $40 million, including the following:
Lifestyle Financial Investments, Inc. and T'N'T Marketing, Inc., third-party
marketers of annuities through financial institutions; Western Pacific Life
Insurance Company and Carillon Life Insurance Company, two annuity companies
acquired principally for their insurance licenses; and AAG Securities, Inc.,
a broker-dealer licensed to sell mutual funds and variable annuities. The
total investment in these companies was approximately $15 million.
GALIC
GALIC was incorporated in New Jersey in 1959 and redomiciled as an Ohio
corporation in 1982. GALIC entered the tax-deferred annuity business in
1976; prior to that time it wrote primarily whole-life, term-life, and
accident and health insurance policies. GALIC is currently rated "A"
(Excellent) by A.M. Best.
Annuities are long-term retirement savings plans that benefit from interest
accruing on a tax-deferred basis. The issuer of the annuity collects
contributions, credits interest on the policy and pays out a benefit upon
death, surrender or annuitization.
Annuity contracts can be either fixed rate or variable rate. With a fixed
rate annuity, an interest crediting rate is set by the issuer, periodically
reviewed by the issuer, and changed from time to time as determined to be
appropriate. With a variable rate annuity, the value of the policy is tied
to an underlying securities portfolio or other performance index. GALIC has
not issued variable annuities in the past.
1
<PAGE>
GALIC sells annuities primarily to employees of qualified not-for-profit
organizations under Section 403(b) of the Internal Revenue Code. These
employees are eligible to save for retirement through contributions made on
a before-tax basis. Contributions are made at the discretion of the
participants through payroll deductions or through tax-free "rollovers" of
funds. Federal income taxes are not payable on contributions or earnings
until amounts are withdrawn.
The following table (in millions) presents information concerning GALIC in
accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted.
1994 1993 1992 1991 1990
Total Assets (A) $5,071 $4,883 $4,436 $4,686 $3,847
Annuity Policyholders' Funds
Accumulated 4,615 4,257 3,974 3,727 3,398
Stockholders' Equity 449 520 418 358 355
Statutory Basis:
Capital and Surplus 256 251 216 219 192
Asset Valuation Reserve (B)(C) 80 70 71 112 10
Interest Maintenance Reserve (C) 28 36 17 - -
Annuity Receipts:
Flexible Premium:
First Year $ 39 $ 47 $ 48 $ 67 $ 73
Renewal 208 223 232 240 220
247 270 280 307 293
Single Premium 196 130 80 153 238
Total Annuity Receipts $ 443 $ 400 $ 360 $ 460 $ 531
[FN]
(A) Includes the following amounts for securities purchased in December
and paid for in the subsequent year: 1994 - $0; 1993 - $68 million;
1992 - $0.2 million; 1991 - $557 million and 1990 - $46 million.
(B) For 1991 and 1990, amounts represent the Mandatory Securities
Valuation Reserve.
(C) Allocation of surplus for statutory reporting purposes.
GALIC markets its annuities principally to employees of educational
institutions in the kindergarten through high school ("K-12") segment.
Management believes that the K-12 segment is attractive because of the
growth potential and persistency rate it has demonstrated.
Sales of annuities are affected by many factors, including: (i) competitive
rates and products; (ii) the general level of interest rates; (iii) the
favorable tax treatment of annuities; (iv) commissions paid to agents; (v)
services offered; (vi) ratings from independent insurance rating agencies;
and (vii) general economic conditions.
Annuity receipts increased in 1993 and 1994 on the strength of sales of
single premium products introduced in the second half of 1992. Receipts in
1992 and 1991 were lower than in 1990 due to (i) a reduction in receipts
relating to a product introduced in 1990 which encouraged rollovers of other
retirement funds and (ii) unfavorable economic and market conditions,
including the impact of the negative publicity associated with a number of
highly publicized insolvencies in the life insurance industry.
2
<PAGE>
GALIC's Corporate Strategy
GALIC's primary business objective is to maximize its long-term
profitability through the sale of 403(b) annuities. GALIC seeks to achieve
this objective through a strategy of: (i) offering annuity products that
are tailored to meet its policyholders' financial needs and designed to
encourage a high level of persistency; (ii) providing competitive commission
structures and high-quality service in order to foster long-term
relationships with its independent agents; (iii) maintaining a conservative
investment portfolio in order to demonstrate financial stability to its
policyholders; (iv) maintaining competitive crediting rates on annuity
policies to encourage new and renewal business while achieving the desired
spread between investment earnings and interest credited; (v) developing
complementary distribution channels; and (vi) maintaining high ratings from
independent insurance rating agencies.
Annuity Products
GALIC's principal products are Flexible Premium Deferred Annuities ("FPDAs")
and Single Premium Deferred Annuities ("SPDAs"). FPDAs are characterized by
premium payments that are flexible in amount and timing as determined by the
policyholder. SPDAs are issued in exchange for a one-time lump-sum premium
payment. Since January 1, 1990, approximately three-fourths of GALIC's SPDA
receipts have resulted from rollovers of tax-deferred funds previously
maintained by policyholders with other insurers. In 1994, FPDAs accounted
for approximately 55% of GALIC's total annuity receipts.
Tax-qualified premiums represented 85% of GALIC's total premiums written in
1994; written premiums from the K-12 segment represented approximately
three-fourths of GALIC's total tax-qualified premiums in 1994. The
following table summarizes GALIC's written premiums and policyholder benefit
reserves on a statutory basis by product line (dollars in millions).
<TABLE>
<CAPTION>
Policyholder
1994 Premiums Written Benefit Reserves at
First % of December 31, 1994
Year Renewal Total Amount %
<S> <C> <C> <C> <C> <C>
Flexible Premium:
403(b) Single-tier $ 24 $ 30 12.1% $ 134 2.9%
403(b) Two-tier 13 171 41.4 2,808 60.1
Other Single-tier 0 1 0.2 45 1.0
Other Two-tier 2 6 1.8 199 4.2
Total 39 208 55.5 3,186 68.2
Single Premium:
403 (b) Single-tier 39 - 8.7 12 0.3
403 (b) Two-tier 36 - 8.1 430 9.2
Other Single-tier 25 - 5.6 39 0.8
Other Two-tier 96 - 21.6 704 15.1
Total 196 - 44.0 1,185 25.4
Annuities in Payout - - - 277 5.9
Life, Accident & Health - 2 0.5 22 0.5
Total $235 $210 100.0% $4,670 100.0%
</TABLE>
3
<PAGE>
At December 31, 1994, approximately 94% of GALIC's policyholder liabilities
consisted of fixed rate annuities which offered a minimum interest rate
guarantee of 4%. GALIC's new products offer a minimum guaranteed rate of
3%. All of GALIC's annuity policies permit GALIC to change the crediting
rate at any time (subject to the minimum guaranteed interest rate). In
determining the frequency and extent of changes in the crediting rate, GALIC
takes into account the profitability of its annuity business and the
relative competitive position of its products.
GALIC seeks to maintain a desired spread between the yield on its investment
portfolio and the rate it credits to its policies. GALIC accomplishes this
by (i) offering crediting rates which it has the option to change, (ii)
designing annuity products that encourage persistency and (iii) maintaining
an appropriate matching of assets and liabilities. Tax-qualified annuity
policyholders maintain access to their funds without incurring penalties
through provisions in the contracts which allow policy loans.
In addition to its use of two-tier structures explained below, GALIC imposes
certain surrender charges and front-end fees during the first five to ten
years of a policy to discourage customers from surrendering or withdrawing
funds in those early years. As a result of these features, GALIC's annuity
surrenders have averaged approximately 8% of statutory reserves over the
past five years. The following table illustrates GALIC's annual persistency
rates for its major products over the past five years.
Persistency Rates
Product Group 1994 1993 1992 1991 1990
Flexible Premium 92.5% 92.0% 90.6% 89.3% 91.2%
Single Premium 93.5 93.3 93.8 92.8 92.6
GALIC's persistency rates have been helped by the permanent surrender charge
inherent in the two-tier design of many of GALIC's products. Two account
values are maintained for two-tier annuities -- the annuitization (or upper-
tier) value and the surrender (or lower-tier) value.
With some two-tier annuities, the annuitization value and the surrender
value are the same at inception of the policy, but since each value
accumulates interest at a different rate, over time, the annuitization value
will grow to an amount which is greater than the surrender value. Other
two-tier annuities credit the same interest rate to both the surrender and
the annuitization value but withhold a portion of the first-year premiums
when calculating the surrender value, but not the annuitization value.
The annuitization value is paid only if the policyholder chooses to
annuitize (withdraw funds in a series of periodic payments for at least the
minimum number of years specified in the policy). If a lump sum payment is
chosen by the policyholder, the surrender value is paid.
GALIC's two-tier annuities are particularly attractive to policyholders who
intend to utilize funds accumulated to provide retirement income since the
annuitization value is accumulated at a competitive long-term interest rate.
As a result of recent regulatory and market concerns regarding two-tier
products in general, GALIC is also selling new products which feature a
single-tier design. After the initial surrender charges have been reduced
to zero, single-tier annuities have only one value which is available
whether the policy is surrendered or annuitized.
Management believes that over time, as the policyholder population ages, the
percentage of policyholders annuitizing will increase.
4
<PAGE>
Marketing and Distribution
GALIC markets its annuity products through over 50 managing general agents
("MGAs") who, in turn, direct approximately 900 actively producing
independent agents. GALIC has developed its business since 1980 on the
basis of its relationships with MGAs and independent agents primarily
through a consistent marketing approach and responsive service.
GALIC seeks to attract and retain MGAs who are experienced and highly
motivated and who consistently place a high volume of the types of annuities
offered by GALIC. Toward this end, GALIC has established a "President's
Advisory Council" consisting of 10 of the top producers each year, all of
whom must market primarily GALIC products. The President's Advisory Council
serves as a major influence on new product design and marketing strategy.
To extend the distribution of GALIC annuities to a broader customer base,
the Company is developing a Personal Producing General Agent ("PPGA")
distribution system. Approximately 140 PPGAs are contracted to sell GALIC
annuities to both qualified and non-qualified customers. These new
appointments will give the Company the opportunity to expand the premium
writings in those territories not served by an MGA. In addition, new
subsidiaries, Lifestyle Financial Investments, Inc. and T'N'T Marketing,
Inc. are expanding the Company's efforts to sell single premium, non-
qualified products through financial institutions.
GALIC's strategy is to offer its agents competitive commission rates and to
provide prompt processing of agent requests, with the objective of
attracting and retaining agents on the basis of service, as well as
compensation. Commissions paid on first year premiums are significantly
higher than those paid on renewal premiums. Commissions are generally lower
for sales of annuities to older policyholders, reflecting the lower profit
potential available from policyholders who maintain their funds with GALIC
for a shorter period.
GALIC is licensed to sell its products in all states (except New York) and
in the District of Columbia and Virgin Islands. The geographical
distribution of GALIC's annuity premiums written in 1994 compared to 1990
was as follows (dollars in millions):
1994 1990
State Premiums % Premiums %
California $ 91 20.6% $111 20.9%
Michigan 40 9.0 62 11.7
Florida 38 8.6 40 7.5
Massachusetts 35 7.9 48 9.0
Ohio 27 6.1 20 3.8
Connecticut 20 4.5 36 6.8
Minnesota 20 4.5 * *
New Jersey 20 4.5 29 5.5
Washington 16 3.6 * *
Illinois 14 3.2 18 3.4
North Carolina 13 2.9 * *
Texas 11 2.5 47 8.9
Rhode Island 9 2.0 14 2.6
All others, each less than 2% 89 20.1 106 19.9
$443 100.0% $531 100.0%
[FN]
* less than 2%
5
<PAGE>
At December 31, 1994, GALIC had approximately 250,000 annuity policies in
force, nearly all of which were individual contracts. GALIC's policyholders
are employees of over 7,300 institutions nationwide.
Investments
GALIC's annuity products are structured to generate a stable flow of
investable funds. GALIC earns a spread by investing these funds at an
investment earnings rate in excess of the crediting rate payable to its
policyholders.
Investments comprise approximately 96% of assets and are the principal
source of income. Fixed income securities (including policy loans, mortgage
loans and short-term investments) comprise over 98% of the Company's
investment portfolio.
Risks inherent in connection with fixed income securities include loss upon
default and market price volatility. Factors which can affect the market
price of these securities include: (i) creditworthiness of issuers; (ii)
changes in market interest rates; (iii) the number of market makers and
investors; and (iv) defaults by major issuers of securities.
The Company's investment strategy emphasizes high quality fixed income
securities which management believes should produce a relatively consistent
and predictable level of investment income.
The Ohio Insurance Code contains rules governing the types and amounts of
investments which are permissible for Ohio life insurers. These rules are
designed to ensure the safety and liquidity of the insurers' investment
portfolios by placing restrictions on the quality, quantity and
diversification of permitted investments.
The National Association of Insurance Commissioners ("NAIC") assigns quality
ratings to publicly traded as well as privately placed securities. These
ratings range from Class 1 (highest quality) to Class 6 (lowest quality).
The following table shows the Company's fixed maturity portfolio at market
value by NAIC designation (and comparable Standard & Poor's Corporation
rating) at December 31:
NAIC
Rating Comparable S&P Rating 1994 1993 1992
1 AAA, AA, A 59% 58% 67%
2 BBB 35 37 24
Total investment grade 94 95 91
3 BB 4 4 5
4 B 2 1 4
5 CCC, CC, C * * *
6 D - - *
Total non-investment grade 6 5 9
Total fixed maturities 100% 100% 100%
[FN]
* less than 1%
AAG's primary investment objective in selecting securities for its fixed
maturity portfolio is to optimize interest yields while maintaining an
appropriate relationship of maturities between assets and expected
liabilities. The Company invests in bonds that have primarily intermediate-
term maturities. This practice provides flexibility to respond to
fluctuations in the marketplace.
6
<PAGE>
At December 31, 1994, the average maturity of AAG's fixed maturity
investments was approximately 7-1/2 years (including mortgage-backed
securities, which had an estimated average life of approximately 8-1/2
years). The table below sets forth the maturities of the Company's fixed
maturity investments based on their carrying value.
Maturity 1994 1993
One year or less * *
After one year through five years 15% 10%
After five years through ten years 44 43
After ten years 13 12
72 65
Mortgage-backed securities 28 35
100% 100%
[FN]
* less than 1%
The following table shows the performance of the investment portfolio,
excluding equity investments in affiliates (dollars in millions):
1994 1993 1992
Average cash and investments at cost $4,744$4,455 $4,078
Gross investment income 377 358 334
Realized gains - 35 27
Percentage earned:
Excluding realized gains 7.9% 8.0% 8.2%
Including realized gains 7.9% 8.8 8.9
AAG's investment portfolio is managed by a subsidiary of AFC which charges a
management fee limited to a maximum of one-tenth of one percent of invested
assets.
Independent Ratings
GALIC is currently rated "A" (Excellent) by A.M. Best and "A+" (High claims
paying ability) by Duff & Phelps. Publications of A.M. Best indicate that
an "A" rating is assigned to those companies which in A.M. Best's opinion
have achieved excellent overall performance when compared to the standards
established by A.M. Best as norms of the life insurance industry and which
generally have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's
financial and operating performance, independent rating agencies review the
company's profitability, leverage and liquidity, as well as the company's
book of business, the quality and estimated market value of its assets, the
adequacy of its policy reserves and the experience and competency of its
management. Their ratings are based upon factors of concern to
policyholders and agents and are not directed toward the protection of
investors.
Management believes that the ratings assigned to GALIC by independent
insurance rating agencies are important because potential policyholders
often use a company's rating as an initial screening device in considering
annuity products. Management also believes that the majority of purchasers
of 403(b) annuities would not be willing to purchase annuities from an
issuer that had an A.M. Best rating below certain levels. In addition,
certain school districts, hospitals and banks do not allow insurers with an
A.M. Best rating below certain levels to sell annuity products through their
institutions.
7
<PAGE>
Policy Liabilities and Reserves
GALIC establishes and carries reserves to meet future obligations under its
annuity policies. GALIC's $4.6 billion liability for accumulated
policyholders' funds at December 31, 1994, is calculated based upon
assumptions of future interest rate spreads expected to be realized and
expected mortality, maturity and surrender rates to be experienced on the
annuity policies in force. Annuity premiums are recorded under GAAP as
increases to the liability for accumulated policyholders' funds rather than
as revenues. Accumulated interest also increases this liability. Benefit
payments are recorded as decreases to this liability instead of as expenses.
Competition
GALIC operates in a highly competitive environment. More than 100 insurance
companies offer tax-deferred annuities. GALIC competes with other insurers
and financial institutions based on many factors, including ratings,
financial strength, reputation, service to policyholders, product design
(including interest rates credited), commissions and service to agents.
Since GALIC markets and distributes policies through independent agents, it
must also compete for agents. Management believes that consistently
targeting the same market and emphasizing service to agents and
policyholders give GALIC a competitive advantage.
No single insurer dominates the marketplace. Competitors include (i)
individual insurers and insurance groups, (ii) mutual funds and (iii) other
financial institutions of varying sizes, some of which are mutual insurance
companies possessing competitive advantages in that all of their profits
inure to their policyholders, and many of which possess financial resources
substantially in excess of those available to GALIC. In a broader sense,
GALIC competes for retirement savings with a variety of financial
institutions offering a full range of financial services. Financial
institutions have demonstrated a growing interest in marketing investment
and savings products, other than traditional deposit accounts. In addition,
recent judicial and regulatory decisions have expanded powers of financial
institutions in this regard. It is too early to predict what impact, if
any, these developments will have on GALIC.
Regulation
GALIC is subject to comprehensive regulation under the insurance laws of the
States of Ohio and California and the other states in which it operates.
These laws, in general, require approval of the particular insurance
regulators prior to certain actions such as the payment of dividends in
excess of statutory limitations, continuing service arrangements with
affiliates and certain other transactions. Regulation and supervision are
administered by a state insurance commissioner who has broad statutory
powers with respect to granting and revoking licenses, approving forms of
insurance contracts and determining types and amounts of business which may
be conducted in light of the financial strength and size of the particular
company. State insurance departments conduct periodic financial
examinations of insurance companies. GALIC's state of domicile, Ohio,
requires that examinations be conducted at least every three years; its most
recent examination was for the three-year period ended December 31, 1993.
State insurance laws also regulate the character of each insurance company's
investments, reinsurance and security deposits.
GALIC may be required, under the solvency or guaranty laws of most states in
which it does business, to pay assessments (up to certain prescribed limits)
to fund policyholder losses or liabilities of insurance companies that
become insolvent. These assessments may be deferred or forgiven under most
guaranty 8
<PAGE>
laws if they would threaten an insurer's financial strength and, in certain
instances, may be offset against future premium taxes. The incurrence and
amount of such assessments have increased in recent years. In connection
with the GALIC purchase, GALIC's costs for state guarantee funds are set at
$1 million per year for a five-year period with respect to insurance
companies in receivership, rehabilitation, liquidation or similar situations
at December 31, 1992. For any year in which GALIC pays more than $1 million
to the various states, GAI will reimburse GALIC for the excess assessments.
For any year in which GALIC pays less than $1 million, AAG will pay GAI the
difference between $1 million and the assessed amounts. GALIC paid $2.0
million and $2.2 million in assessments in 1994 and 1993, respectively.
Accordingly, GALIC recorded receivables from GAI of $1.0 million for 1994
and $1.2 million for 1993.
The Ohio Department of Insurance is GALIC's principal regulatory agency.
GALIC is deemed to be "commercially domiciled" in California based on past
premium volume written in the state and, as a result, is subject to certain
provisions of the California Insurance Holding Company laws, particularly
those governing the payment of stockholder dividends, changes in control and
intercompany transactions. An insurer's status as "commercially domiciled"
is determined annually under a statutory formula. GALIC's status may change
in California in the future if its premium volume there decreases to below
20% of its overall premium volume over the most recent three years.
The NAIC is an organization comprised of the chief insurance regulator for
each of the 50 states and the District of Columbia. One of its major roles
is to develop model laws and regulations affecting insurance company
operations and encourage uniform regulation through the adoption of such
models in all states. As part of the overall insurance regulatory process,
the NAIC forms numerous task forces to review, analyze and recommend changes
to a variety of areas affecting both the operating and financial aspects of
insurance companies. Recently, increased scrutiny has been placed upon the
insurance regulatory framework, and a number of state legislatures have
considered or enacted legislative proposals that alter, and in many cases
increase, state authority to regulate insurance companies and their holding
company systems. In light of recent legislative developments, the NAIC and
state insurance regulators have also become involved in a process of re-
examining existing laws and regulations and their application to insurance
companies. Legislation has also been introduced in Congress which could
result in the federal government's assuming some role in the insurance
industry, although none has been enacted to date.
In 1990, the NAIC began an accreditation program to ensure that states have
adequate procedures in place for effective insurance regulation, especially
with respect to financial solvency. The accreditation program requires that
a state meet specific minimum standards in over 15 regulatory areas to be
considered for accreditation. The accreditation program is an ongoing
process and once accredited, a state must enact any new or modified
standards approved by the NAIC within two years following adoption. As of
December 31, 1994, 44 states, including Ohio and California, were
accredited.
In December 1992, the NAIC adopted a model law enacting risk-based capital
formulas which became effective in 1993. The model law sets thresholds for
regulatory action, and currently GALIC's capital significantly exceeds risk-
based capital requirements. If the NAIC elects to impose more stringent
risk-based capital rules in the future, GALIC's ability to pay dividends
could be adversely affected.
The current NAIC model for extraordinary dividends requires prior regulatory
approval of any dividend that exceeds the "lesser of" 10% of statutory
surplus or 100% of the prior year's net gain from operations. The NAIC has
approved eight
9
<PAGE>
alternative provisions which may be considered "substantially similar" to
the model. The NAIC model or one of the alternatives must be adopted by a
state in order to be accredited by the NAIC.
In October 1993, Ohio revised its dividend law to adopt one of the eight
alternatives. The standard in Ohio requires 30 days prior notice of any
dividend which, together with all such amounts paid in the preceding twelve
months, exceeds the "greater of" 10% of statutory surplus or 100% of the
prior year's net income, but not exceeding earned surplus as of the prior
year-end. The maximum dividend permitted by law is not indicative of an
insurer's actual ability to pay dividends, which may be constrained by
business and regulatory considerations. These considerations include the
impact of dividends on surplus, which could affect (i) an insurer's ratings,
(ii) its competitive position and (iii) the amount of premiums that can be
written. Furthermore, the Ohio Insurance Department has broad discretion to
limit the payment of dividends by insurance companies domiciled in Ohio.
California amended its dividend law effective January 1, 1994, adopting one
of the alternative provisions approved by the NAIC. Under the new
California law, approval is required for dividends which exceed the "greater
of" 10% of statutory surplus or 100% of "net gain from operations", but not
exceeding earned surplus, in any twelve month period.
The NAIC has been considering the adoption of a model investment law for
several years. A draft of the model law was released for comment in 1994.
It is not possible to predict the content of the final law. However, based
on the draft released in 1994, it is not expected that the final law will
have a material impact on the investment activities of GALIC.
In 1991, the NAIC adopted additional disclosure requirements relating to the
marketing and sale of two-tier annuities. Certain states have adopted
regulations or interpreted existing regulations to restrict the sale of two-
tier annuity products or impose limitations on the terms of such products
that make their sale less attractive to GALIC. To date, these additional
disclosure requirements and restrictions have not had a material impact on
GALIC's business. The NAIC is also considering the adoption of actuarial
guidelines with respect to two-tier annuity products. In connection with
the sale of GALIC, GAI is obligated to neutralize the financial effects of
implementing any such guidelines on GALIC's statutory earnings and capital,
except for the initial, one-time impact on GALIC's statutory earnings.
GAI's obligations will apply only to GALIC's annuity business at the date of
adoption and only if the guidelines are (i) adopted prior to January 1,
1996, or (ii) on the NAIC agenda for adoption as of December 31, 1995, and
actually adopted on or prior to December 31, 1996. Management believes it
is likely that these guidelines will be adopted by December 31, 1995 and
should not have a significant impact on GALIC's financial condition.
10
<PAGE>
Discontinued Manufacturing Operations
Prior to 1993, the Company sold nearly all of its manufacturing operations.
At December 31, 1994, the Company owned a small foreign electronic
components manufacturer which is being held for sale.
Certain manufacturing facilities are still owned by the Company. See
"Properties" below.
Employees
As of December 31, 1994, AAG and its subsidiaries employed approximately 440
persons. None of the employees are represented by a labor union. AAG
believes that its employee relations are excellent.
ITEM 2
Properties
Location
In 1993, AAG and GALIC moved their offices to Cincinnati from Stamford,
Connecticut and Los Angeles, California, respectively.
AAG and GALIC rent office space in Cincinnati totaling approximately 90,000
square feet under leases expiring in 1996 through 1999. Management believes
that its corporate offices are generally well maintained and adequate for
the Company's present needs.
The material properties of the Company's former manufacturing operations are
listed below.
Lease
Interior Expiration
Location Square Feet Use (if leased)
Discontinued operations:
North Adams, MA 154,000 Manufacturing facility Owned
Hudson, NH 121,400 Manufacturing facility March 2003
Concord, NH 113,000 Manufacturing facility Owned
Hillsville, VA 102,000 Manufacturing facility Owned
Ronse, Belgium 85,000 Manufacturing facility Owned
Longwood, FL 60,000 Manufacturing facility Owned
North Adams, MA 44,000 R & D facility Owned
North Adams, MA 22,000 Manufacturing facility January 1998
Most of the manufacturing facilities are still owned and are currently being
leased to companies using them for manufacturing operations. The Company is
attempting to sell or extend leases on these facilities. In addition to the
facilities listed above, the Company has agreed to contribute a facility in
North Adams, Massachusetts which has been vacant for several years to a not-
for-profit entity which intends to develop the property into a multi-
discipline art center.
11
<PAGE>
Environmental Matters
Federal and state laws and regulations, including the federal Comprehensive
Environmental Response, Compensation, and Liability Act and similar state
laws, impose liability on the Company (as the successor to Sprague) for the
investigation and cleanup of hazardous substances disposed of or spilled by
its discontinued manufacturing operations, at facilities still owned by the
Company and facilities transferred in connection with the sales of certain
operations, as well as at disposal sites operated by third parties. In
addition, the Company has indemnified the purchasers of its former
operations for the cost of such activities. At several sites, the Company
is conducting cleanup activities of soil and ground water contamination in
accordance with consent agreements between the Company and state
environmental agencies. The Company has also conducted or is aware of
investigations at a number of other locations of its former operations that
have disclosed environmental contamination that could cause the Company to
incur additional investigative, remedial and legal costs. The Company has
also been identified by state and federal regulators as a potentially
responsible party at a number of other disposal sites.
Based on the costs incurred by the Company over the past several years and
discussions with its independent environmental consultants, management
believes that reserves recorded are sufficient in all material respects to
satisfy the known liabilities. However, the regulatory standards for clean-
up are continually evolving toward more stringent requirements. In
addition, many of the environmental investigations at the Company's former
operating locations and third-party sites are still preliminary, and where
clean-up plans have been proposed, they have not yet received full approval
from the relevant regulatory agencies. Further, the presence of Company-
generated wastes at third-party disposal sites exposes the Company to joint
and several liability for the potential additional costs of cleaning up
wastes generated by others. Accordingly, there can be no assurance that the
costs of environmental clean-up for the Company may not be significantly
higher in future years, possibly necessitating additional charges.
The Maine Department of Environmental Protection has issued a proposed
Administrative Consent Agreement and Enforcement Order calling for a
$328,000 fine based on alleged 1991 violations of certain reporting
regulations. The Company is working with the Department of Environmental
Protection to resolve this matter and is negotiating the amount of the fine.
There are certain other claims involving the Company, including claims
relating to the generation, disposal or release into the environment of
allegedly hazardous substances. In management's opinion, the outcome of
these claims will not, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of
operations.
12
<PAGE>
ITEM 3
Legal Proceedings
AAG and GALIC are subject to litigation and arbitration in the normal course
of business. GALIC is not a party to any material pending litigation or
arbitration.
See "Item 2: Properties - Environmental Matters" for a discussion
concerning certain environmental claims and litigation against the Company.
PART II
ITEM 5
Market for Registrant's Common Equity
and Related Stockholder Matters
AAG's Common Stock is listed and traded principally on the New York Stock
Exchange ("NYSE") under the symbol AAG. On March 1, 1995, there were
approximately 10,000 holders of record of Common Stock. The following table
sets forth the range of high and low sales prices for the Common Stock on
the NYSE Composite Tape.
1994 1993
High Low High Low
First Quarter $10.63 $8.75 $11.38 $5.63
Second Quarter 10.00 8.38 11.38 8.75
Third Quarter 10.00 8.88 11.00 7.88
Fourth Quarter 9.63 8.88 10.38 8.25
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items. The Company paid annual
dividends of $.06 per share in 1994 and $.05 per share in 1993. Although no
future dividend policy has been determined, management believes the Company
will continue to have the capability to pay similar dividend amounts.
13
<PAGE>
ITEM 6
Selected Financial Data
The following financial data have been summarized from, and should be read
in conjunction with, the Company's consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data reflects the purchase of GALIC as of December 31,
1992 (in millions, except per share amounts).
<TABLE>
<CAPTION>
Operations Statement Data: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Total revenues $371.2 $387.2 $3.6 $1.9 $0.4
Income (loss) from continuing
operations 40.9 53.0 (9.0) (4.7) (6.0)
Loss from discontinued operations (2.6) (9.6) (16.8) (47.8) (43.3)
Extraordinary items (1.7) (3.4) - - -
Changes in accounting principle (0.5) - (3.1) - -
Net income (loss) $ 36.1 $ 40.0 ($28.9) ($52.5) ($49.3)
Earnings (loss) per common share:
Continuing operations $1.05 $1.41 ($0.50) ($0.26) ($0.33)
Discontinued operations (.07) (.27) (.94) (2.66) (2.37)
Extraordinary items (.05) (.10) - - -
Changes in accounting
principle (.01) - (.17) - -
Net income (loss) $0.92 $1.04 ($1.61) ($2.92) ($2.70)
Cash dividends per common share $0.06 $0.05 $0.05 $0.05 $0.05
Balance Sheet Data:
Total assets $5,089.9 $4,913.8 $4,480.4 $170.1 $294.8
Notes payable 183.3 225.9 230.9 27.9 30.6
Net unrealized gains (losses)
included in stockholders'
equity (29.0) 56.9 28.4 - -
Total stockholders' equity 204.4 250.3 186.6 108.5 171.8
</TABLE>
14
<PAGE>
ITEM 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
Following is a discussion and analysis of the financial statements and other
statistical data that management believes will enhance the understanding of
AAG's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements beginning on page F-1.
AAG is organized as a holding company with nearly all of its operations
being conducted by Great American Life Insurance Company ("GALIC"). The
parent corporation, however, has continuing expenditures for administrative
expenses, corporate services, liabilities in connection with discontinued
operations and, most importantly, for the payment of interest and principal
on borrowings. Since its continuing business is financial in nature, AAG
does not prepare its consolidated financial statements using a current-
noncurrent format. Consequently, certain traditional ratios and financial
analysis tests are not meaningful.
Liquidity and Capital Resources
Ratios AAG's ratio of earnings to fixed charges was 4.0 in 1994 and 4.7 in
1993. The ratio of AAG's consolidated debt to equity excluding the effects
of unrealized gains and losses on stockholders' equity was .79, 1.17 and
1.46 at December 31, 1994, 1993 and 1992, respectively. These same ratios
including the effects of unrealized gains and losses were .90, .90 and 1.24,
respectively.
The National Association of Insurance Commissioners ("NAIC") has adopted a
model law enacting risk-based capital ("RBC") formulas and setting
thresholds for regulatory action. At December 31, 1994 and 1993, GALIC's
capital ratios significantly exceeded RBC requirements.
Sources and Uses of Funds AAG's ability to make payments of interest and
principal on its debt and other holding company costs is dependent on
payments from GALIC in the form of capital distributions and income tax
payments. In 1994, AAG received $26.6 million in tax allocation payments
and $44.0 million in capital distributions from GALIC.
The amount of capital distributions which can be paid by GALIC is subject to
restrictions relating to capital and surplus and statutory net income. In
addition, any dividend or distribution paid from other than earned surplus
is considered an extraordinary dividend and may be paid only after prior
regulatory approval. (See Note K to the financial statements.) The maximum
amount of dividends payable by GALIC in 1995 without prior regulatory
approval is approximately $49.7 million. In January 1995, GALIC paid a
capital distribution of $16.8 million to AAG.
In connection with the acquisition of GALIC on December 31, 1992, AAG sold
Common and Preferred Stock to GALIC's parent for $156 million in cash. The
proceeds of those stock sales together with $230 million in new borrowings
and most of the accumulated cash funds of the Company were used to purchase
GALIC. The total cost to acquire GALIC was approximately $486 million,
including transaction costs and fees of $17.4 million.
The borrowings used to fund the GALIC acquisition were repaid during 1993
from the sales of $125 million of 11-1/8% Senior Subordinated Notes due 2003
and $100 million of 9-1/2% Senior Notes due 2001.
15
<PAGE>
In 1994, AAG (i) issued 4.0 million shares of Common Stock in exchange for
all of its Preferred Stock and $7.1 million principal amount of its notes
and (ii) repurchased $70.0 million principal amount of its notes (including
$14 million purchased by GALIC).
AAG has a $50 million revolving bank line under which $30.0 million was
outstanding at December 31, 1994 and $25.5 million at March 1, 1995.
Amounts outstanding under this agreement bear interest at variable rates
tied to either Prime or LIBOR, at the discretion of the Company. Borrowings
thereunder may be used for general corporate purposes. AAG has used the
amounts borrowed under the bank line primarily to repurchase its outstanding
debt.
AAG's revolving line of credit matures in 1998. The Company has no other
scheduled principal maturities until 2001. Assuming no further prepayments
of its debt, AAG's annual interest payments will be approximately $17.8
million in 1995, $17.7 million in 1996, 1997, 1998 and $15.5 million in
1999.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments The Ohio Insurance Code contains rules restricting the types
and amounts of investments which are permissible for Ohio life insurers.
These rules are designed to ensure the safety and liquidity of insurers'
investment portfolios. The NAIC is considering the formulation of a model
investment law which, if adopted, would have to be considered by Ohio for
adoption. The formulation is in the preliminary stages and management
believes its impact on AAG's operations will not be material.
The NAIC assigns quality ratings to publicly traded as well as privately
placed securities. At December 31, 1994, 94% of AAG's fixed maturity
portfolio was comprised of investment grade bonds (NAIC rating of "1" or
"2"). Management believes that the high credit quality of AAG's investment
portfolio should generate a stable and predictable investment return.
AAG invests primarily in fixed income investments which, including loans and
short-term investments, comprised over 98% of its investment portfolio at
December 31, 1994. AAG generally invests in securities with intermediate-
term maturities with an objective of optimizing interest yields while
maintaining an appropriate relationship of maturities between AAG's assets
and expected liabilities. AAG's fixed maturity portfolio is classified into
two categories: "held to maturity" and "available for sale". (See Note A
to the financial statements.) At December 31, 1994, AAG had approximately
$279 million in net unrealized losses on its fixed maturity portfolio
compared to net unrealized gains of $206 million at December 31, 1993. This
decrease, representing approximately 11% of the carrying value of AAG's bond
portfolio, resulted from an increase in the general level of interest rates.
During 1994, none of the Company's fixed maturity investments were non-
performing. In addition, AAG has little exposure to mortgage loans and real
estate, which represented only 1.5% of total assets at December 31, 1994.
The majority of mortgage loans and real estate was purchased within the last
two years.
At December 31, 1994, AAG's mortgage-backed securities portfolio consisted
primarily of collateralized mortgage obligations ("CMOs"), which represented
approximately 28% of fixed maturity investments compared to 35% at December
31, 1993. As of December 31, 1994, interest only (I/O), principal only
(P/O) and other "high risk" CMOs represented less than two-tenths of one
percent of total assets. AAG invests primarily in CMOs which are structured
to minimize prepayment risk. In addition,
16
<PAGE>
the majority of CMOs held by AAG were purchased at a discount to par value.
Management believes that the structure and discounted nature of the CMOs
will minimize the effect of prepayments on earnings over the anticipated
life of the CMO portfolio.
Substantially all of AAG's CMOs are AAA-rated by Standard & Poor's
Corporation and are collateralized primarily by GNMA, FNMA and FHLMC single-
family residential pass-through certificates. The market in which these
securities trade is highly liquid. Aside from interest rate risk, AAG does
not believe a material risk (relative to earnings or liquidity) is inherent
in holding such investments.
Results of Operations
General GALIC was acquired by AAG on December 31, 1992; accordingly, its
results are not included in the Company's statement of operations prior to
1993. Following is a condensed statement of operating earnings, excluding
realized gains and losses and the 1993 provision for relocation expense (in
millions):
1994 1993
Operating revenues $371.3 $351.7
Operating expenses:
Benefits to annuity policyholders (241.9) (228.6)
Interest and other debt expenses (21.4) (22.6)
Amortization of DPAC (7.1) (14.7)
Other expenses (37.6) (33.3)
(308.0) (299.2)
Operating earnings before taxes 63.3 52.5
Income tax expense 22.3 17.4
Net operating earnings $ 41.0 $ 35.1
Net operating earnings for 1994 were up 17% from 1993. Increases in
interest margins and growth in invested assets contributed to the
improvement. While net operating earnings is not considered an alternative
to net income as an indication of AAG's overall performance, management
believes that it is helpful in comparing the operating performance of AAG
and other similar companies.
Annuity receipts for GALIC were as follows (in millions):
1994 1993
Flexible Premium Deferred Annuities:
First year $ 39 $ 47
Renewal 208 223
247 270
Single Premium Deferred Annuities 196 130
Total annuity receipts $443 $400
GALIC's annuity receipts in 1994 increased 10.6% over 1993 due to strong
growth in sales of single premium products.
All of GALIC's products are fixed rate annuities which permit GALIC to
change the crediting rate at any time (subject to minimum interest rate
guarantees of 3% to 4% per annum). As a result, management has been able to
react to changes in interest rates and maintain a desired interest rate
spread with little or no effect on persistency.
Net Investment Income Net investment income increased 5% in 1994 over 1993
due primarily to an increase in the Company's average invested asset base.
Investment income is reflected net of investment expenses of $4.9 million in
1994 and 1993.
17
<PAGE>
Realized Gains Individual securities are sold from time to time as market
opportunities appear to present optimal situations under AAG's investment
strategies.
Equity in Net Loss of Affiliate Equity in net loss of affiliate represents
AAG's proportionate share of Chiquita's losses. Chiquita reported a loss
before extraordinary item for 1994 of $49 million compared to a loss of $51
million for 1993. The loss in 1994 reflected higher costs and charges
related to (i) farm closings and write-downs of banana cultivations
following an unusually severe strike in Honduras, and (ii) a substantial
reduction of Chiquita's banana trading operations in Japan. These charges
were partially offset by improved results from Chiquita's meat operations as
well as a higher average worldwide price for bananas. Chiquita's loss in
1993 was attributed primarily to a multi-year investment spending program
and the ongoing impact of its restructuring and cost reduction efforts.
Benefits to Annuity Policyholders Benefits to annuity policyholders
increased 6% in 1994 over 1993 primarily due to an increase in average
annuity policyholder funds accumulated. The rate at which GALIC credits
interest on annuity policyholders' funds is subject to change based on
management's judgment of market conditions.
Interest on Borrowings and Other Debt Expenses Interest on borrowings
decreased 5% in 1994 from 1993 due to repurchases of debt during 1994. (See
Note E to the financial statements.)
Amortization of Deferred Policy Acquisition Costs ("DPAC") DPAC
(principally commissions, advertising, underwriting, policy issuance and
sales expenses that vary with and are primarily related to the production of
new business) amortization in 1994 decreased 52% from 1993. This decrease
reflects reviews during 1993 and 1994 of DPAC assumptions, which resulted in
updating certain factors, primarily the time frame over which DPAC is
amortized. The time frame was extended to more accurately reflect the
estimated lives of policies and the expected gross profits resulting from
these policies. Estimates of lives and expected gross profits were refined
based on actual experience of the Company by product line.
Provision for Relocation Expenses In 1993, GALIC relocated its corporate
offices from Los Angeles to Cincinnati; the estimated pretax cost of this
move ($8.0 million) was included in 1993 continuing operations.
Also in 1993, AAG relocated its corporate offices from Stamford, Connecticut
to Cincinnati; the estimated cost of this relocation and related shutdown
and severance costs ($5.0 million) was provided for in discontinued
operations in 1992.
Other Operating and General Expenses Other operating and general expenses
increased 13% in 1994 compared to 1993. Additional costs for information
systems, communications, rent and new distribution networks were partially
offset by lower employee costs. The 1993 employee costs were unusually high
due to the temporary staff required for the relocation of operations from
Los Angeles to Cincinnati.
Discontinued Operations The Company has sold virtually all of its former
manufacturing businesses. A small Belgium based subsidiary continues to be
held for sale along with certain properties, many of which are currently
leased to companies using them for manufacturing operations.
The Company has certain obligations related to its former business
activities. Among these obligations are the funding of pension plans,
environmental costs, settlement of government claims, lease payments for two
former plant sites, certain retiree medical benefits, and certain
obligations associated with the sales of the Company's manufacturing
operations. (See Note G to the financial statements.)
18
<PAGE>
While it is difficult to estimate future environmental investigative,
remedial and legal costs accurately, management believes the remaining
aggregate cost at all sites for which it has responsibility will range from
$8.6 million to $14.0 million at December 31, 1994. Management's estimate
of this range at year end 1993 was $10 million to $15 million. The reserve
for environmental related costs was $11.7 million at December 31, 1994 and
$10.6 million at December 31, 1993.
Regulatory standards for clean-up are continuously evolving toward more
stringent requirements. Changes in regulatory standards and further
investigations (many of which are still preliminary) at the Company's former
operating locations and third-party sites could affect estimated costs in
the future. Management believes, based on the costs incurred by the Company
over the past several years and discussions with its independent
environmental consultants, that reserves recorded are sufficient to satisfy
the known liabilities and that the ultimate cost will not, individually or
in the aggregate, have a material adverse effect on the financial condition
or results of operations of AAG.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center ("DESC") with respect to the Company's former manufacturing
operations. Over the last several years, the Company has been engaged in
negotiations with the United States Government with respect to the
settlement of claims the Government might have arising out of the reporting
deficiencies. Based on these negotiations, the Company believed it had
sufficient reserves to cover the estimated settlement amount. In March
1995, the Company received notification from the Government indicating
additional reporting deficiencies. The Company is in the process of
evaluating this information and is unable to ascertain the validity of these
new claims or the amounts involved. It is impossible to determine the
impact, if any, of these alleged claims on the Company and its financial
condition.
Extraordinary Items In 1994, AAG repurchased $77.1 million principal amount
of its notes, realizing a pretax loss of $1.5 million ($1.0 million net of
tax). In addition, AAG recorded a pretax charge of $1.1 million ($700,000
net of tax), representing AAG's proportionate share of Chiquita's
extraordinary loss on the retirement of certain of its debt in the first
quarter of 1994.
In 1993, AAG prepaid its bank term loan and wrote off $5.2 million ($3.4
million net of tax) of related unamortized debt issuance costs.
Accounting Changes Effective January 1, 1994, AAG implemented Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits", and recorded a pretax charge of $740,000
($481,000, net of tax) for the projected future costs of providing certain
benefits to employees of GALIC.
Effective January 1, 1992, AAG implemented SFAS No. 106, "Accounting for
Postretirement Benefits Other Than Pensions", and recorded a provision of
$3.1 million for the projected future costs of providing postretirement
benefits to retirees in its discontinued manufacturing operations.
New Accounting Standard to be Implemented The Financial Accounting
Standards Board ("FASB") has issued SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan", which is scheduled to become effective in 1995.
Implementation of this standard is not expected to have a material effect on
AAG.
19
<PAGE>
ITEM 8
Financial Statements and Supplementary Data
PAGE
Reports of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1994 and 1993 F-2
Consolidated Statement of Operations:
Years Ended December 31, 1994, 1993 and 1992 F-3
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statement of Cash Flows:
Years Ended December 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note M to the
Consolidated Financial Statements.
PART III
The information required by the following Items will be included in American
Annuity's definitive Proxy Statement for the 1995 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end and is herein incorporated
by reference:
ITEM 10 Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management
ITEM 13 Certain Relationships and Related Transactions
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Annuity Group, Inc.
We have audited the accompanying consolidated balance sheets of American
Annuity Group, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1994. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American Annuity Group, Inc. and subsidiaries at December 31,
1994 and 1993, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company
made certain accounting changes in 1994, 1993 and 1992.
Ernst & Young LLP
Cincinnati, Ohio
March 13, 1995
F-1
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
December 31,
1994 1993
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $3,062.4 and $2,751.9) $3,273.7 $2,633.2
Available for sale - at market
(amortized cost - $1,326.4 and $1,667.0) 1,258.6 1,754.5
Equity securities - at market
(cost - $10.7 and $12.8) 21.7 25.9
Investment in affiliate 20.8 25.2
Mortgage loans on real estate 47.2 52.1
Real estate, net of accumulated
depreciation of $4.9 and $4.6 28.0 26.1
Policy loans 185.5 166.6
Short-term investments 26.0 57.0
Total investments 4,861.5 4,740.6
Cash 36.7 15.0
Accrued investment income 77.7 66.9
Deferred policy acquisition costs, net 65.1 39.2
Other assets 48.9 52.1
Total assets $5,089.9 $4,913.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Annuity policyholders' funds accumulated $4,618.1 $4,256.7
Notes payable 183.3 225.9
Payable for securities purchased - 68.0
Payable to affiliates, net 1.2 28.3
Accounts payable, accrued expenses and other
liabilities 82.9 84.6
Total liabilities 4,885.5 4,663.5
Series A Preferred Stock
(redemption value - $45.0) - 29.9
Common Stock, $1 par value
-100,000,000 shares authorized
-39,141,080 and 35,097,447
shares outstanding 39.1 35.1
Capital surplus 330.8 301.0
Retained earnings (deficit) (136.5) (172.6)
Unrealized gains (losses)
on marketable securities, net (29.0) 56.9
Total stockholders' equity 204.4 250.3
Total liabilities and
stockholders' equity $5,089.9 $4,913.8
See Notes to Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Revenues:
Net investment income $371.8 $353.3 $ 3.6
Realized gains (losses) on sales
of investments (0.1) 35.5 -
Equity in net loss of affiliate (2.8) (2.9) -
Other income 2.3 1.3 -
371.2 387.2 3.6
Costs and Expenses:
Benefits to annuity policyholders 241.9 228.6 -
Interest on borrowings and other
debt expenses 21.4 22.6 -
Amortization of deferred policy
acquisition costs 7.1 14.7 -
Provision for GALIC relocation expenses - 8.0 -
Other operating and general expenses 37.6 33.3 12.1
308.0 307.2 12.1
Income (loss) from continuing operations
before income taxes 63.2 80.0 (8.5)
Provision for income taxes 22.3 27.0 0.5
Income (loss) from continuing operations 40.9 53.0 (9.0)
Discontinued operations, net of tax (2.6) (9.6) (16.8)
Income (loss) before extraordinary items
and cumulative effect of accounting
changes 38.3 43.4 (25.8)
Extraordinary items, net of tax (1.7) (3.4) -
Cumulative effect of accounting changes,
net of tax (0.5) - (3.1)
Net Income (Loss) $ 36.1 $ 40.0 ($ 28.9)
Preferred Dividend Requirement 0.9 3.6 -
Net income (loss) applicable
to Common Stock $ 35.2 $ 36.4 ($ 28.9)
Average Common Shares outstanding 38.1 35.1 18.0
Earnings (loss) per common share:
Continuing operations $1.05 $ 1.41 ($ .50)
Discontinued operations (.07) (.27) (.94)
Extraordinary items (.05) (.10) -
Cumulative effect of accounting changes (.01) - (.17)
Net income (loss) $0.92 $ 1.04 ($ 1.61)
See Notes to Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Preferred Stock:
Balance at beginning of period $ 29.9 $ 29.4 $ -
Exchanged for common stock (30.0) - -
Issued during the period - - 29.4
Accretion of discount 0.1 0.5 -
Balance at end of period $ - $ 29.9 $ 29.4
Common Stock:
Balance at beginning of period $ 35.1 $ 35.1 $ 20.5
Issued during the period 4.0 - 18.6
Retirement of treasury stock - - (4.0)
Balance at end of period $ 39.1 $ 35.1 $ 35.1
Capital Surplus:
Balance at beginning of period $301.0 $306.3 $297.5
Common stock issued during the period 33.0 - 93.9
Common dividends declared (2.3) (1.7) -
Preferred dividends declared (0.8) (3.1) -
Accretion of preferred stock discount (0.1) (0.5) -
Proceeds in excess of fair value of
preferred stock - - 15.6
Retirement of treasury stock - - (20.6)
Excess of purchase price over GALIC's
net assets - - (79.2)
Other - - (0.9)
Balance at end of period $330.8 $301.0 $306.3
Retained Earnings (Deficit):
Balance at beginning of period ($172.6) ($212.6) ($183.7)
Net income (loss) 36.1 40.0 (28.9)
Balance at end of period ($136.5) ($172.6) ($212.6)
Treasury Stock:
Balance at beginning of period $ - $ - ($ 24.1)
Treasury stock acquired - - (0.5)
Retirement of treasury stock - - 24.6
Balance at end of period $ - $ - $ -
Unrealized Gains (Losses), Net:
Balance at beginning of period $ 56.9 $ 28.4 $ -
Change during period (85.9) 28.5 28.4
Balance at end of period ($ 29.0) $ 56.9 $ 28.4
Pension Adjustment:
Balance at beginning of period $ - $ - ($ 1.7)
Change during period - - 1.7
Balance at end of period $ - $ - $ -
See Notes to Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 36.1 $ 40.0 ($ 28.9)
Adjustments:
Discontinued operations 2.6 9.6 16.8
Loss on retirement of debt 1.7 3.4 -
Cumulative effect of accounting changes 0.5 - 3.1
Benefits to annuity policyholders 241.9 228.6 -
Amortization of deferred policy
acquisition costs 7.1 14.7 -
Equity in net losses of affiliate 2.8 2.9 -
Depreciation and amortization 0.3 0.9 -
Realized (gains) losses on investing
activities 0.1 (35.5) -
Increase in accrued investment income (10.1) (13.9) -
Increase in deferred policy
acquisition costs (30.5) (28.0) -
Change in amounts due affiliates 23.2 32.6 -
Decrease (increase) in other assets 0.7 (2.3) -
Decrease in other liabilities (14.9) (19.3) -
Other, net 0.9 (0.4) (39.3)
262.4 233.3 (48.3)
Cash Flows from Investing Activities:
Purchases of and additional
investments in:
Fixed maturity investments (1,189.2)(2,015.1) -
Equity securities (0.7) (5.6) -
Real estate, mortgage loans and
other assets (27.9) (59.3) -
Subsidiaries and affiliates (14.0) - (216.6)
Maturities and redemptions of fixed
maturity investments 238.2 379.2 -
Sales of:
Fixed maturity investments 621.9 1,202.0 -
Equity securities 4.8 30.6 -
Real estate, mortgage loans and
other assets 27.2 2.5 -
Discontinued operations - - 130.8
Increase in policy loans (16.1) (8.1) -
Other, net - 2.9 -
(355.8) (470.9) (85.8)
Cash Flows from Financing Activities:
Annuity receipts 442.7 400.1 -
Annuity benefits and withdrawals (321.0) (337.9) -
Additions to notes payable 34.7 225.0 230.0
Reductions of notes payable (69.2) (230.0) (27.9)
Issuance of common stock - - 111.3
Issuance of preferred stock - - 45.0
Repurchase of common stock - - (0.5)
Cash dividends paid (3.1) (4.1) (0.9)
84.1 53.1 357.0
Net increase (decrease) in cash and
short-term investments (9.3) (184.5) 222.9
Beginning cash and short-term investments 72.0 256.5 33.6
Ending cash and short-term investments $ 62.7 $ 72.0 $256.5
See Notes to Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial statements
include the accounts of American Annuity Group, Inc. and its subsidiaries
("AAG" or "the Company"). Intercompany transactions and balances are
eliminated in consolidation. Certain reclassifications have been made to
prior periods to conform to the current year's presentation.
American Financial Corporation and subsidiaries ("AFC") owned 31,319,629
shares (80%) of AAG's Common Stock at December 31, 1994.
The acquisition of Great American Life Insurance Company ("GALIC"), a
subsidiary of AFC, on December 31, 1992, was recorded as a transfer of net
assets between companies under common control. As a result, the net assets
of GALIC were recorded by AAG at AFC's historical basis and the excess
consideration paid over AFC's historical basis was treated as a reduction of
common stockholders' equity. The results of GALIC's operations have been
included in AAG's consolidated financial statements since its acquisition.
Investments When available, fair values for investments are based on prices
quoted in the most active market for each security. If quoted prices are
not available, fair value is estimated based on present values, fair values
of comparable securities, or similar methods.
AAG implemented Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities",
beginning December 31, 1993. This standard requires that (i) debt
securities be classified as "held to maturity" and reported at amortized
cost if AAG has the positive intent and ability to hold them to maturity,
(ii) debt and equity securities be classified as "trading" and reported at
fair value, with unrealized gains and losses included in earnings, if they
are bought and held principally for selling in the near term and (iii) debt
and equity securities not classified as held to maturity or trading be
classified as "available for sale" and reported at fair value, with
unrealized gains and losses reported as a separate component of
stockholders' equity. Only in certain limited circumstances, such as
significant issuer credit deterioration or if required by insurance or other
regulators, may a company change its intent to hold a certain security to
maturity without calling into question its intent to hold other debt
securities to maturity in the future.
Short-term investments are carried at cost; mortgage loans on real estate
are generally carried at amortized cost; policy loans are stated at the
aggregate unpaid balance. Carrying amounts of these investments approximate
their fair value.
Gains or losses on sales of securities are recognized at the time of
disposition with the amount of gain or loss determined on the specific
identification basis. When a decline in the value of a specific investment
is considered to be other than temporary, a provision for impairment is
charged to earnings and the carrying value of that investment is reduced.
Premiums and discounts on mortgage-backed securities are amortized over
their expected average lives using the interest method.
F-6
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Investment in Affiliate AAG's investments in equity securities of companies
that are 20% to 50% owned by AFC and its subsidiaries are carried at cost,
adjusted for a proportionate share of their undistributed earnings or
losses.
Deferred Policy Acquisition Costs ("DPAC") DPAC (principally commissions,
advertising, underwriting, policy issuance and sales expenses that vary with
and are primarily related to the production of new business) is deferred and
amortized, with interest, in relation to the present value of expected gross
profits on the policies. These gross profits consist principally of net
investment income and future surrender charges, less interest on
policyholders' funds and future policy administration expenses. DPAC is
reported net of unearned revenue relating to certain policy charges that
represent compensation for future services. These unearned revenues are
recognized as income using the same assumptions and factors used to amortize
DPAC.
To the extent that unrealized gains (losses) from securities classified as
"available for sale" would result in adjustments to DPAC, unearned revenues
and policyholder liabilities had those gains (losses) actually been
realized, such balance sheet amounts are adjusted, net of deferred taxes.
Annuity Policyholders' Funds Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in "annuity
policyholders' funds accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to expense and
decreases for surrender charges are credited to other income.
Income Taxes As of December 31, 1992, AAG and its 80%-owned U.S.
subsidiaries were consolidated with AFC for federal income tax purposes.
AAG and GALIC have separate tax allocation agreements with AFC which
designate how tax payments are shared by members of the tax group. In
general, both companies compute taxes on a separate return basis. GALIC is
obligated to make payments to (or receive benefits from) AFC based on
taxable income without regard to temporary differences. In accordance with
terms of AAG's indentures, AAG receives GALIC's tax allocation payments for
the benefit of AAG's deductions arising from current operations. If GALIC's
taxable income (computed on a statutory accounting basis) exceeds a current
period net operating loss of AAG, the taxes payable by GALIC associated with
the excess are payable to AFC. If the AFC tax group utilizes any of AAG's
net operating losses or deductions that originated prior to 1993, AFC will
pay to AAG an amount equal to the benefit received.
Effective January 1, 1992, the Company implemented SFAS No. 109, "Accounting
for Income Taxes". As permitted under the Statement, AAG's prior year
financial statements have not been restated and no adjustment was necessary
for the cumulative effect of the change. Under SFAS No. 109, the liability
method used in accounting for income taxes is less restrictive than the
liability method under SFAS No. 96, previously used by the Company. The
provisions of SFAS No. 109 allow AAG to recognize deferred tax assets if it
is more likely than not that a benefit will be realized.
F-7
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases and are measured using
enacted tax rates. Current and deferred tax assets and liabilities are
aggregated with other amounts receivable from or payable to affiliates.
Debt Issuance Costs Debt expenses are amortized over the terms of the
respective borrowings on the interest method.
Statement of Cash Flows For cash flow purposes, "investing activities" are
defined as making and collecting loans and acquiring and disposing of debt
or equity instruments and property and equipment. "Financing activities"
include annuity receipts, benefits and withdrawals and obtaining resources
from owners and providing them with a return on their investments. All
other activities are considered "operating". Short-term investments having
original maturities of three months or less when purchased are considered to
be cash equivalents for purposes of the financial statements.
Benefit Plans AAG sponsors an Employee Stock Ownership Retirement Plan
("ESORP") covering all employees who are qualified as to age and length of
service. The ESORP, which invests primarily in securities of AAG, is a
trusteed, noncontributory plan for the benefit of the employees of AAG and
its participating subsidiaries. Contributions are discretionary by the
directors of AAG and are charged against earnings in the year for which they
are declared. Qualified employees having vested rights in the plan are
entitled to benefit payments at age 60.
AAG and certain of its subsidiaries provide health care and life insurance
benefits to eligible retirees. Effective January 1, 1992, AAG implemented
SFAS No. 106, "Accounting for Postretirement Benefits Other Than Pensions".
This standard requires companies to expense projected future costs of
providing benefits as employees render service.
Effective January 1, 1994, AAG implemented SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" which covers benefits provided to
former or inactive employees (primarily those on disability) who were not
deemed retired under other company plans. This standard requires companies
to accrue the projected future cost of providing postemployment benefits
instead of recognizing an expense for these benefits when paid. The
implementation of SFAS No. 112 did not have a material effect on AAG's
financial position or results of operations.
F-8
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
B. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
1994
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 461.2 424.0 0.8 (38.0)
Mortgage-backed securities 721.0 657.9 0.1 (63.2)
All other corporate 2,091.5 1,980.5 6.7 (117.7)
$3,273.7 $3,062.4 $ 7.6 ($218.9)
1994
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 130.3 $125.3 $0.1 ($ 5.1)
Public utilities 66.2 63.7 0.2 (2.7)
Mortgage-backed securities 604.6 564.8 0.7 (40.5)
All other corporate 525.3 504.8 2.2 (22.7)
$1,326.4 $1,258.6 $3.2 ($71.0)
1993
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 412.4 425.5 16.8 (3.7)
Mortgage-backed securities 487.8 496.3 11.5 (3.0)
All other corporate 1,733.0 1,830.1 100.9 (3.8)
$2,633.2 $2,751.9 $129.2 ($10.5)
1993
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 54.5 $ 56.0 $ 1.5 $ -
Public utilities 123.9 128.8 4.9 -
Mortgage-backed securities 1,014.5 1,062.0 47.5 -
All other corporate 474.1 507.7 33.6 -
$1,667.0 $1,754.5 $87.5 $ -
"Investing activities" related to fixed maturity investments during 1994
included in AAG's Consolidated Statement of Cash Flows consisted of the
following:
Held to Available
Maturity for Sale Total
Purchases ($713.6) ($475.6) ($1,189.2)
Maturities and paydowns 54.8 183.4 238.2
Sales 5.6 616.3 621.9
Gross Gains 0.8 7.9 8.7
Gross Losses (1.0) (9.8) (10.8)
Certain securities classified as "held to maturity" were sold for a loss of
$0.6 million in 1994 due to deterioration in the issuer's creditworthiness.
Gross gains of $45.3 million and gross losses of $11.0 million were realized
on sales of fixed maturity investments during 1993.
The table below sets forth the scheduled maturities of AAG's fixed maturity
investments based on carrying value as of December 31:
1994
Held to Available 1993
Maturity Maturity for Sale Total Total
One year or less * * * *
After one year through five years 14% 1% 15% 10%
After five years through ten years 36 8 44 43
After ten years 7 6 13 12
57 15 72 65
Mortgage-backed securities 16 12 28 35
73% 27% 100% 100%
[FN]
* less than 1%
F-9
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Distribution based on market value is generally the same. Mortgage-backed
securities had an expected average life of approximately 8-1/2 years at
December 31, 1994.
The carrying values of investments in any entity or mortgage-backed
security, ("MBS") in excess of 10% of stockholders' equity at December 31,
1994, other than investments in affiliates and investments issued or
guaranteed by the U.S. Government or government agencies, were as follows
(in millions):
Fixed Maturities
Issuer Amount Issuer Amount
General Electric Capital MBS $58.3 Cargill Inc ESOP Series $25.0
Prudential Home MBS 46.1 Philadelphia Electric 25.0
Residential Funding MBS 45.3 American Stores 24.6
Georgia Pacific 44.3 Harcourt General 24.1
Countrywide MBS 43.7 Occidental Petroleum 24.0
CNA Financial 37.3 FMC 23.5
Houston Industries 37.3 Nerco International 23.2
GTE 35.8 VF Corporation 22.9
Ashland Oil 32.3 Whitman 22.9
Anschutz Ranch 31.1 Phillips Petroleum 22.8
Federal Express 31.0 Duquesne Light 22.6
SCE Capital 29.3 Ohio Edison 22.5
Conagra 28.0 Resolution Trust Corp MBS 22.4
Hotel First Mortgage 27.8 Texas Utilities 22.2
Coastal 27.6 Marriott International 22.0
Philip Morris 26.5 First Union 21.9
Time Warner Entertainment 26.5 Praxair 21.6
Omega Healthcare 26.4 The Dial Corporation 20.9
Citicorp MBS 25.4 Bank of New York 20.8
Commonwealth Edison 25.2 Owens Corning 20.7
At December 31, 1994, gross unrealized gains on marketable equity securities
were $11.1 million and gross unrealized losses were $0.1 million. Realized
gains and changes in unrealized appreciation on fixed maturity and equity
security investments are summarized as follows (in millions):
Fixed Equity Tax
1994 MaturitiesSecurities Effects Total
Realized ($ 2.1) $ 2.0 $ 0.0 ($ 0.1)
Change in Unrealized (485.3) (2.1) 170.6 (316.8)
1993
Realized $ 34.3 $ 1.2 ($ 12.4) $ 23.1
Change in Unrealized 88.6 10.9 (34.8) 64.7
As of February 28, 1995, the pretax unrealized losses on AAG's available for
sale portfolio had decreased approximately $50 million since year end 1994,
due primarily to a decrease in the general level of interest rates.
F-10
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Major categories of net investment income were as follows (in millions):
1994 1993
Fixed maturities $372.7 $354.8
Other* 4.0 3.4
Total investment income $376.7 358.2
Investment expenses (4.9) (4.9)
Net investment income $371.8 $353.3
[FN]
* Both years include $1.0 million in payments from a subsidiary of AFC
for the rental of an office building owned by GALIC.
AAG's investment portfolio is managed by a subsidiary of AFC. Investment
expenses in each year included investment management charges of $4.4
million, which represented approximately one-tenth of one percent of AAG's
invested assets.
C. INVESTMENT IN AFFILIATE
Investment in affiliate reflects AAG's 5% ownership (2.7 million shares) of
the common stock of Chiquita Brands International ("Chiquita") which is
accounted for under the equity method. AFC and its other subsidiaries owned
an additional 41% interest in the common stock of Chiquita. Chiquita is a
leading international marketer, processor and producer of quality food
products. The market value of AAG's investment in Chiquita was
approximately $36.4 million and $30.7 million at December 31, 1994 and 1993,
and $36.1 million at March 1, 1995.
In the first quarter of 1994, AAG recorded a pretax extraordinary charge of
$1.1 million, representing its proportionate share of Chiquita's loss on the
retirement of debt.
Included in AAG's retained earnings (deficit) at December 31, 1994, was
approximately $5.5 million applicable to equity in undistributed net losses
of Chiquita.
D. DEFERRED POLICY ACQUISITION COSTS
The DPAC balances at December 31, 1994 and 1993 are shown net of unearned
revenues of $158.8 million and $146.2 million, respectively.
E. NOTES PAYABLE
Notes payable consisted of the following at December 31, (in millions):
1994 1993
AAG (Parent Company):
11-1/8% Senior Subordinated Notes
due February 2003 $103.9 $125.0
9-1/2% Senior Notes due August 2001 44.0 100.0
Bank Credit Line due December 1998 30.0 -
Subsidiary debt 5.4 0.9
Total $183.3 $225.9
F-11
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In 1994, AAG entered into a $50 million revolving credit agreement with
three banks. Loans under the credit agreement bear interest at floating
rates based on prime or Eurodollar rates and are collateralized by 20% of
the Common Stock of GALIC. At December 31, 1994, the average rate on these
borrowings was 7.35%.
During 1994, AAG repurchased $21.1 million principal amount of its 11-1/8%
Notes (including $3 million purchased by GALIC) and $56.0 million principal
amount of its 9-1/2% Notes (including $11 million purchased by GALIC) in
exchange for approximately $69 million in cash and 810,000 shares of its
Common Stock. As a result of the repurchases, AAG realized a pretax
extraordinary loss of $1.5 million.
In connection with the GALIC acquisition, AAG borrowed $180 million under a
Bank Term Loan Agreement and $50 million under a Bridge Loan. In 1993, AAG
sold $225 million principal amount of Notes to the public and used the
proceeds to repay the Bank and Bridge Loans. As a result, AAG recorded an
extraordinary loss of $5.2 million ($3.4 million net of tax) representing
unamortized bank debt issue costs which were written off upon retirement of
the bank debt.
AAG has no scheduled principal payments on its 9-1/2% Notes and 11-1/8%
Notes until 2001. Interest payments were $23.2 million in 1994, $11.7
million in 1993 and $2.0 million in 1992.
F. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share.
On December 31, 1992, AAG acquired GALIC from Great American Insurance
Company ("GAI"), a wholly owned subsidiary of AFC. In connection with the
acquisition, GAI purchased from AAG 17,076,923 shares of AAG's Common Stock
at $6.50 per share, and 450,000 shares of its Series A Preferred Stock at
$100 per share. The preferred shares issued were recorded at $29.4 million
(imputed dividend rate of 12% through 2007) with the excess proceeds of
$15.6 million credited to capital surplus. On March 31, 1994, AAG issued
approximately 3.2 million shares of Common Stock in exchange for the Series
A Preferred shares. The Series A Preferred Stock had a redemption value of
$100 per share and paid dividends at the rate of $7.00 per share per annum.
AAG's dividend paying capability is limited by certain customary debt
covenants to amounts based on cumulative earnings and losses, debt
repurchases, capital transactions and other items.
F-12
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
G. DISCONTINUED OPERATIONS
The results of discontinued operations included in the Consolidated
Statement of Operations were as follows (in millions):
1994 1993 1992
Net sales $ - $ - $ 80.7
Cost of sales - - (80.7)
Interest and debt expense - - (1.2)
Loss on sales of businesses and restructuring
provisions (4.0) (14.8) (24.5)
Loss from discontinued operations before tax (4.0) (14.8) (25.7)
Income tax benefit (1.4) (5.2) (8.9)
Net loss from discontinued operations ($ 2.6) ($ 9.6)($16.8)
All of the Company's former manufacturing businesses are reported as
discontinued operations. At December 31, 1994, the Company's last
manufacturing unit, Electromag NV, was being held for sale and was carried
at estimated net realizable value.
In 1994, AAG recorded a $4.0 million pretax charge for discontinued
operations, primarily related to environmental liabilities. The loss from
discontinued operations in 1993 included charges for employee related
obligations of approximately $9.7 million resulting primarily from a
decrease in the discount rate used to calculate pension obligations. The
remaining charges reflected additional write-downs and other estimated
expenses associated with the Company's former manufacturing properties.
During 1992, the Company recorded charges related to discontinued operations
as follows: employee related obligations - $6.8 million; environmental
liabilities - $5.0 million; corporate office shutdown and severance costs -
$5.0 million; property valuation adjustments - $3.6 million; potential
merchandise returns - $2.0 million and other - $2.1 million.
In 1992, AAG sold its capacitor and thick film network businesses for
approximately $130 million in cash, notes and property. The Company
recorded provisions of $42.6 million related to the anticipated sales of
these operations during 1991.
The Company has a noncontributory defined benefit pension plan covering
former U.S. employees of its discontinued manufacturing operations. The
former employees in this plan generally receive pension benefits that are
based upon formulas that reflect all past service with the Company and the
employee's compensation during employment. Contributions are made on an
actuarial basis in amounts necessary to satisfy requirements of ERISA. At
December 31, 1994, the actuarial value of the benefit obligations, which are
being discounted at 8.0%, exceeded the plan assets by $10.5 million, which
has been included in accrued expenses in the financial statements.
Effective January 1, 1992, AAG implemented SFAS No. 106 and recorded a
provision of $3.1 million for the projected future costs of providing
postretirement medical benefits to retirees in its discontinued
manufacturing operations.
F-13
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
H. INCOME TAXES
Provision (benefit) for income taxes consisted of (in millions):
1994 1993 1992
Federal:
Current $21.2 $27.4 $ -
Deferred (1.4) (7.4) (8.9)
State - - 0.5
Total $19.8 $20.0 ($8.4)
The principal items accounting for the difference in taxes on earnings
computed at the federal statutory rate (35% in 1994 and 1993 and 34% in
1992) and as recorded were as follows (in millions):
1994 1993 1992
Income (loss) before income taxes:
Continuing operations $63.2 $80.0 ($ 8.5)
Discontinued operations (4.0) (14.8) (25.7)
Extraordinary items (2.6) (5.2) -
Accounting changes (0.7) - (3.1)
Income (loss) before income taxes $55.9 $60.0 ($37.3)
Tax (benefit) computed at
statutory rate $19.6 $21.0 ($12.7)
Effect of:
Net operating loss for which no
benefit has been recognized - - 4.0
Other, net 0.2 (1.0) 0.3
Total $19.8 $20.0 ($ 8.4)
The significant components of deferred tax assets and liabilities included
in the Consolidated Balance Sheet were as follows (in millions):
December 31,
1994 1993
Deferred tax assets:
Net operating loss carryforwards $47.6 $56.4
Accrued expenses 13.3 16.7
Investment securities 50.8 -
Valuation allowance for deferred
tax assets (50.6) (61.3)
Deferred tax liabilities:
Deferred policy acquisition costs (21.9) (13.1)
Policyholder liabilities (16.0) (12.3)
Investment securities - (6.1)
At December 31, 1994, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $136 million which are scheduled to
expire as follows: $6 million in 1995 and 1996; $130 million in 2001
through 2005. Cash disbursements for income taxes were not material.
F-14
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
I. LEASES
Leases relate principally to certain administrative facilities and
discontinued operations. Future minimum lease payments, net of sublease
revenues, under operating leases having initial or remaining noncancellable
lease terms in excess of one year at December 31, 1994 are payable as
follows: 1995 - $1.6 million; 1996 - $1.7 million; 1997 - $1.3 million;
1998 - $1.0 million; 1999 - $900,000; 2000 and beyond - $2.2 million.
Rental expense for operating leases was $1.7 million in 1994, $900,000 in
1993 and $1.5 million in 1992.
J. CONTINGENCIES
The Company is continuing its investigations and clean-up activities in
accordance with consent agreements with state environmental agencies. Based
on the costs incurred over the past several years and discussions with
independent environmental consultants, the Company believes the remaining
aggregate cost of environmental work at all sites for which it has
responsibility will range from $8.6 million to $14.0 million. The reserve
for environmental work was $11.7 million at December 31, 1994. Management
does not believe that these clean-up activities will have a material effect
upon the Company's financial position, results of operations or cash flows.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center ("DESC") with respect to the Company's former manufacturing
operations. Over the last several years, the Company has been engaged in
negotiations with the United States Government with respect to the
settlement of claims the Government might have arising out of the reporting
deficiencies. Based on these negotiations, the Company believed it had
sufficient reserves to cover the estimated settlement amount. In March
1995, the Company received notification from the Government indicating
additional reporting deficiencies. The Company is in the process of
evaluating this information and is unable to ascertain the validity of these
new claims or the amounts involved. It is impossible to determine the
impact, if any, of these alleged claims on the Company and its financial
condition.
K. STATUTORY INFORMATION; RESTRICTIONS ON TRANSFERS OF FUNDS AND ASSETS OF
SUBSIDIARIES
GALIC is required to file financial statements with state insurance
regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). Certain statutory amounts
at December 31, were as follows (in millions):
1994 1993
Policyholders' surplus $255.9 $251.3
Asset valuation reserve 79.5 70.3
Interest maintenance reserve 27.7 35.7
Net earnings 54.2 44.0
F-15
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The amount of dividends which can be paid by GALIC without prior approval of
regulatory authorities is subject to restrictions relating to capital and
surplus and statutory net income. Based on earned surplus at December 31,
1994, GALIC may pay approximately $49.7 million in dividends in 1995 without
prior approval.
L. ADDITIONAL INFORMATION
Related Party Transaction In the fourth quarter of 1994, AAG purchased
Carillon Life Insurance Company from a subsidiary of AFC for $9.0 million in
cash. At December 31, 1994, Carillon had statutory assets of $9.0 million
and statutory surplus of $6.3 million. Carillon is licensed to sell annuity
products in 41 states and the District of Columbia.
Fair Value of Financial Instruments The following table shows (in millions)
the carrying value and estimated fair value of AAG's financial instruments
at December 31.
<TABLE>
<CAPTION>
1994 1993
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Assets
Fixed maturity investments $4,532.3 $4,321.0 $4,387.7 $4,506.4
Equity securities 21.7 21.7 25.9 25.9
Investment in affiliate 20.8 36.4 25.2 30.7
Liabilities
Annuity policyholders' funds
accumulated (a) $4,553.0 $4,510.0 $4,217.5 $4,164.0
Notes payable (b) 179.2 182.6 219.1 237.7
<FN>
(a) Carrying values are shown net of deferred policy acquisition
costs of $65.1 million at December 31, 1994 and $39.2 million at
December 31, 1993.
(b) Carrying values are shown net of debt issue costs of $4.1
million at December 31, 1994 and $6.8 million at December 31,
1993.
</TABLE>
When available, fair values are based on prices quoted in the most active
market for each security. If quoted prices are not available, fair value is
estimated based on present values, discounted cash flows, fair value of
comparable securities, or similar methods. The fair value of the liability
for annuities in the payout phase is assumed to be the present value of the
anticipated cash flows, discounted at current interest rates. Fair value of
annuities in the accumulation phase is assumed to be the policyholders' cash
surrender amount.
F-16
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unrealized Gains (Losses) The components of the Consolidated Balance Sheet
caption "Unrealized gains (losses) on marketable securities, net" in
stockholders' equity are summarized as follows (in millions):
<TABLE>
<CAPTION>
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
<S> <C> <C> <C>
1994
Fixed maturities - available for sale $1,326.4 ($67.8) $1,258.6
Equity securities 10.7 11.0 21.7
Deferred policy acquisition costs, net 61.9 3.2 65.1
Annuity policyholders' funds
accumulated (4,627.2) 9.1 (4,618.1)
Deferred income taxes on net
unrealized losses - 15.5 15.5(a)
Unrealized losses on marketable
securities, net ($29.0)
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
1993
Fixed maturities - available for sale $1,667.0 $87.5 $1,754.5
Equity securities 12.8 13.1 25.9
Deferred policy acquisition costs, net 42.5 (3.3) 39.2
Annuity policyholders' funds
accumulated (4,246.9) (9.8) (4,256.7)
Deferred income taxes on net
unrealized gains - (30.6) (30.6)(a)
Unrealized gains on marketable
securities, net $56.9
<FN>
(a) Included in "Payable to affiliates, net" on the Consolidated
Balance Sheet.
</TABLE>
F-17
<PAGE>
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
M. QUARTERLY FINANCIAL DATA (Unaudited)
The following table represents quarterly results of operations for the years
ended December 31, 1994 and 1993 (in millions, except per share data).
<TABLE>
<CAPTION>
First Second Third Fourth Total
1994 Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Realized gains (losses) $ 0.6 $ - $ 0.1 ($ 0.8)($ 0.1)
Total revenues 92.9 94.1 91.7 92.5 371.2
Income from continuing operations 10.8 11.1 9.4 9.6 40.9
Discontinued operations - (2.6) - - (2.6)
Extraordinary items (1.1) (0.3) (0.4) 0.1 (1.7)
Accounting change (0.5) - - - (0.5)
Net income 9.2 8.2 9.0 9.7 36.1
Earnings (loss) per common share:
Continuing operations $0.28 $0.28 $0.24 $0.25 $1.05
Discontinued operations - (0.07) - - (0.07)
Extraordinary items (0.03) (0.01) (0.01) - (0.05)
Accounting change (0.01) - - - (0.01)
Net income per common share $0.24 $0.20 $0.23 $0.25 $0.92
Average common shares outstanding 35.1 39.1 39.1 39.1 38.1
First Second Third Fourth Total
1993 Quarter Quarter Quarter Quarter Year
Realized gains $ 13.4 $ 12.8 $ 2.8 $ 6.5 $ 35.5
Total revenues 101.4 102.0 89.6 94.2 387.2
Income from continuing operations 11.4* 16.9 10.3 14.4 53.0*
Discontinued operations - - - (9.6) (9.6)
Extraordinary item - - (3.4) - (3.4)
Net income 11.4 16.9 6.9 4.8 40.0
Earnings (loss) per common share:
Continuing operations $0.30 $0.46 $0.27 $0.38 $1.41
Discontinued operations - - - (0.27) (0.27)
Extraordinary item - - (0.10) - (0.10)
Net income per common share $0.30 $0.46 $0.17 $0.11 $1.04
Average common shares outstanding 35.1 35.1 35.1 35.1 35.1
<FN>
* Includes GALIC relocation charge of $5.2 million, net of tax.
</TABLE>
F-18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements are Included in Part II, Item 8.
2. Financial Statement Schedules:
Selected Quarterly Financial Data is included in Note L to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1994, 1993 and 1992 Page
II - Condensed Financial Information of Registrant S-2
All other schedules for which provisions are made in the
applicable regulation of the Securities and Exchange
Commission have been omitted as they are not applicable, not
required, or the information required thereby is set forth in
the Financial Statements or the notes thereto.
3. Exhibits - See Exhibit Index on Page E-1.
(b) Reports on Form 8-K: None
S-1
<PAGE>
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Balance Sheet
December 31,
Assets: 1994 1993
Cash and short-term investments $ 1.9 $ 10.4
Investment in subsidiaries 457.4(a) 519.6(a)
Other assets 19.4 24.7
$478.7 $554.7
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 41.6 $ 50.3
Payables to affiliates 40.8 29.1
Notes payable 191.9(b) 225.0
Stockholders' equity 204.4(a) 250.3(a)
$478.7 $554.7
Condensed Statement of Earnings
1994 1993
Revenues:
Equity in undistributed earnings of
subsidiaries $ 47.3 $ 97.2
Dividends from GALIC 44.0 18.2
Net investment income 0.4 0.5
91.7 115.9
Costs and Expenses:
Interest on borrowings and other debt expenses 21.9 22.5
Provision for GALIC relocation expenses - 8.0
Other operating and general expenses 6.6 5.4
28.5 35.9
Income from continuing operations before
income taxes 63.2 80.0
Provision for income taxes 22.3 27.0
Income from continuing operations 40.9 53.0
Discontinued operations, net of tax (2.6) (9.6)
Income before extraordinary items and
cumulative effect of accounting changes 38.3 43.4
Extraordinary items, net of tax (1.7) (3.4)
Cumulative effect of accounting changes,
net of tax (0.5) -
Net Income $ 36.1 $40.0
[FN]
(a) Includes unrealized gains (losses) of ($29.0) million in 1994 and $56.9
million in 1993.
(b) Includes $14.0 million principal amount of notes payable owned by GALIC.
S-2
<PAGE>
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
Year ended December 31
1994 1993
Operating Activities:
Net income $36.1 $40.0
Adjustments:
Discontinued operations 2.6 9.6
Extraordinary items 1.7 3.4
Accounting change 0.5 -
Equity in net earnings of subsidiaries (59.7) (77.6)
Depreciation and amortization 0.8 1.2
Decrease in other assets 2.7 0.4
Increase in balances with affiliates 13.1 40.0
Decrease in other liabilities (12.8) (10.7)
Capital distributions from GALIC 44.0 18.2
Other, net - (0.1)
29.0 24.4
Investing Activities:
Additional investments in subsidiaries (9.3) (13.0)
Financing Activities:
Additions to notes payable 30.0 225.0
Reductions of notes payable (55.1) (230.0)
Cash dividends paid (3.1) (4.1)
(28.2) (9.1)
Net Increase (Decrease) in Cash and Short-term Investments(8.5) 2.3
Cash and short-term investments at beginning of period 10.4 8.1
Cash and short-term investments at end of period $ 1.9 $10.4
S-3
<PAGE>
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Indenture dated as of February 2, 1993, between the Registrant and
Star Bank, National Association, as Trustee, relating to the
Registrant's 11-1/8% Senior Subordinated Notes due 2003, incorporated
herein by reference to Exhibit 4.2 to the Registrant's Current Report
on Form 8-K, dated February 5, 1993.
4.2 Indenture dated as of August 18, 1993, between the Registrant and
NationsBank, National Association, as Trustee, relating to the
Registrant's 9-1/2% Senior Notes due 2001, incorporated herein by
reference to Exhibit 4.1 to the Registrant's Registration Statement
on Form S-2 dated August 11, 1993.
10.1 Agreement of Allocation of Payment of Federal Income Taxes ("American
Annuity Tax Allocation Agreement"), dated December 31, 1992, between
American Financial Corporation and the Registrant incorporated herein
by reference to Exhibit 10.12 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.2 Assignment of Tax Allocation Payments dated December 31, 1992,
between American Financial Corporation and the Registrant
incorporated herein by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-2 dated January 7, 1993.
10.3 Agreement for the Allocation of Federal Income Taxes dated May 13,
1974, between American Financial Corporation and Great American Life
Insurance Company, as supplemented on January 1, 1987 incorporated
herein by reference to Exhibit 10.16 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.4 Investment Services Agreement, dated December 31, 1992, between Great
American Life Insurance Company and American Money Management
Corporation incorporated herein by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.5 Common Stock Registration Agreement, dated December 31, 1992, between
the Registrant and American Financial Corporation and its wholly
owned subsidiary Great American Insurance Company incorporated herein
by reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-2 dated January 7, 1993.
10.6 Common Stock Registration Agreement, dated December 31, 1992 between
Chiquita Brands International, Inc. and Great American Life Insurance
Company incorporated herein by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-2 dated January 7,
1993.
10.7 American Annuity Group's 1993 Stock Appreciation Rights Plan,
incorporated herein by reference to Exhibit 10.8 to the Registrant's
Form 10-K for 1993.
27.0 Financial Data Schedule - included in Report filed electronically
with the Securities and Exchange Commission.
99.1 Credit Agreement dated as of January 31, 1994 amended and restated as
of December 7, 1994.
E-1
<PAGE>
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 24 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-55189) pertaining to the Employee Stock Purchase Plan of
American Annuity Group, Inc. of our report dated March 13, 1995, with
respect to the consolidated financial statements and schedules of American
Annuity Group, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1994.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 16, 1995
E-2
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, American Annuity Group, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, duly authorized.
American Annuity Group, Inc.
Signed: March 20, 1995 BY:s/CARL H. LINDNER
Carl H. Lindner
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date
s/CARL H. LINDNER Chairman of the Board March 20, 1995
Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director March 20, 1995
S. Craig Lindner
s/ROBERT A. ADAMS Director March 20, 1995
Robert A. Adams
s/WILLIAM R. MARTIN Director March 20, 1995
William R. Martin*
s/RONALD F. WALKER Director March 20, 1995
Ronald F. Walker
s/WILLIAM J. MANEY Senior Vice President, March 20, 1995
William J. Maney Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
[FN]
* Chairman of Audit Committee
____________________________________________________________
____________________________________________________________
AMERICAN ANNUITY GROUP, INC.
CREDIT AGREEMENT
Originally Dated as of January 31, 1994
Amended and Restated as of December 7, 1994
THE FIRST NATIONAL BANK OF BOSTON, Agent
____________________________________________________________
____________________________________________________________
<PAGE>
TABLE OF CONTENTS
PAGE
1. Restatement; Definitions . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Amendment and Restatement . . . . . . . . . . . . . . . . . . 1
1.2. Definitions; Certain Rules of Construction . . . . . . . . . . 1
2. The Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2. Borrowing Requests . . . . . . . . . . . . . . . . . . . . . . 1
2.3. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4. Application of Proceeds . . . . . . . . . . . . . . . . . . . 2
3. Interest; Pricing Options; Fees . . . . . . . . . . . . . . . . . . . 2
3.1. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2. Eurodollar Pricing Options . . . . . . . . . . . . . . . . . . 3
3.2.1. Eurodollar Pricing Options . . . . . . . . . . . . . . 3
3.2.2. Notice to Lenders and Company . . . . . . . . . . . . . 3
3.2.3. Selection of Eurodollar Interest Periods . . . . . . . 4
3.2.4. Additional Compensation . . . . . . . . . . . . . . . . 4
3.2.5. Change in Applicable Laws, Regulations, etc. . . . . . 4
3.2.6. Funding Procedure . . . . . . . . . . . . . . . . . . . 5
3.3. Commitment Fees . . . . . . . . . . . . . . . . . . . . . . . 5
3.4. Capital Adequacy; Regulatory Changes . . . . . . . . . . . . . 5
3.4.1. Lender's Compensation . . . . . . . . . . . . . . . . . 5
3.4.2. Substitution or Replacement of Lender . . . . . . . . . 6
3.5. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.6. Computations of Interest . . . . . . . . . . . . . . . . . . . 7
4. Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.1. Payment at Maturity . . . . . . . . . . . . . . . . . . . . . 8
4.2. Maximum Amount of Credit . . . . . . . . . . . . . . . . . . . 8
4.3. Voluntary Prepayments of Loan . . . . . . . . . . . . . . . . 8
4.4. Application of Payments . . . . . . . . . . . . . . . . . . . 8
4.5. Payment and Interest Cut-off . . . . . . . . . . . . . . . . . 8
5. Conditions to Extending Credit . . . . . . . . . . . . . . . . . . . 9
5.1. Officer's Certificate . . . . . . . . . . . . . . . . . . . . 9
5.2. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.3. Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . 9
5.4. Tax Sharing Arrangements . . . . . . . . . . . . . . . . . . . 9
5.5. Perfection of Security . . . . . . . . . . . . . . . . . . . . 9
5.6. Closing Fees . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.7. Proper Proceedings . . . . . . . . . . . . . . . . . . . . . . 10
5.8. Legality, etc. . . . . . . . . . . . . . . . . . . . . . . . . 10
5.9. General . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.1. Credit Security . . . . . . . . . . . . . . . . . . . . . . . 10
6.2. Additional Credit Security . . . . . . . . . . . . . . . . . . 11
<PAGE>
6.3. Representations, Warranties and Covenants with Respect to Credit
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3.1. Pledged Stock . . . . . . . . . . . . . . . . . . . . . 12
6.3.2. No Liens . . . . . . . . . . . . . . . . . . . . . . . 12
6.3.3. Perfection of Credit Security . . . . . . . . . . . . . 12
6.3.4. Governmental Consents; Validity of Pledge . . 12
6.4. Administration of Credit Security . . . . . . . . . . . . . . 13
6.4.1. Distributions . . . . . . . . . . . . . . . . . . . . . 13
6.4.2. Voting . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4.3. Custody of Credit Security . . . . . . . . . . . . . . 14
6.4.4. Governmental Consents and Approvals . . . . . . . . . . 14
6.5. Right to Realize upon Credit Security . . . . . . . . . . . . 14
6.5.1. Marshaling . . . . . . . . . . . . . . . . . . . . . . 15
6.5.2. Sales of Credit Security . . . . . . . . . . . . . . . 15
6.5.3. Sale without Registration . . . . . . . . . . . . . . . 16
6.5.4. Application of Proceeds . . . . . . . . . . . . . . . . 17
6.6. Governmental Regulation . . . . . . . . . . . . . . . . . . . 17
7. General Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1. Taxes and Other Charges . . . . . . . . . . . . . . . . . . . 18
7.2. Conduct of Business, etc. . . . . . . . . . . . . . . . . . . 19
7.2.1. Types of Business . . . . . . . . . . . . . . . . . . . 19
7.2.2. Statutory Compliance . . . . . . . . . . . . . . . . . 19
7.3. Financial Statements and Reports . . . . . . . . . . . . . . . 19
7.3.1. Annual Reports . . . . . . . . . . . . . . . . . . . . 19
7.3.2. Quarterly Reports . . . . . . . . . . . . . . . . . . . 20
7.3.3. Other Reports . . . . . . . . . . . . . . . . . . . . . 21
7.3.4. Notice of Material Litigation, etc. . . . . . . . . . . 21
7.3.5. ERISA Reports . . . . . . . . . . . . . . . . . . . . . 22
7.3.6. Other Information . . . . . . . . . . . . . . . . . . . 23
7.4. Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . 23
7.5. Consolidated Financing Debt . . . . . . . . . . . . . . . . . 23
7.6. GALIC Statutory Surplus . . . . . . . . . . . . . . . . . . . 23
7.7. Restrictions on Liens . . . . . . . . . . . . . . . . . . . . 23
7.8. Restrictions on Distributions . . . . . . . . . . . . . . . . 24
7.9. Merger, Consolidation and Sale of Assets . . . . . . . . . . . 24
7.10. Distributions from Subsidiaries . . . . . . . . . . . . . . . 25
7.11. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . 25
7.12. Compliance with Environmental Laws . . . . . . . . . . . . . 26
8. Representations and Warranties . . . . . . . . . . . . . . . . . . . 26
8.1. Organization and Business . . . . . . . . . . . . . . . . . . 26
8.1.1. The Company . . . . . . . . . . . . . . . . . . . . . . 26
8.1.2. Subsidiaries . . . . . . . . . . . . . . . . . . . . . 27
8.1.3. Qualification . . . . . . . . . . . . . . . . . . . . . 27
8.2. Financial Statements and Other Information . . . . . . . . . . 27
8.2.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.2.2. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.2.3. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
<PAGE>
8.2.4. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.3. Changes in Condition . . . . . . . . . . . . . . . . . . . . . 28
8.4. Title to Assets . . . . . . . . . . . . . . . . . . . . . . . 28
8.5. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.6. Enforceability; No Legal Obstacle to Agreements . . . . . . . 29
8.7. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.8. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . 30
8.9. Government Regulation. . . . . . . . . . . . . . . . . . . . . 30
8.10. Environmental Regulation . . . . . . . . . . . . . . . . . . 30
8.11. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . 31
9. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . 32
9.2. Certain Actions Following an Event of Default . . . . . . . . 35
9.2.1. No Obligation to Extend Credit . . . . . . . . . . . . 35
9.2.2. Exercise of Rights; Credit Security . . . . . . . . . . 35
9.2.3. Acceleration . . . . . . . . . . . . . . . . . . . . . 35
9.2.4. Setoff . . . . . . . . . . . . . . . . . . . . . . . . 36
9.2.5. Cumulative Remedies . . . . . . . . . . . . . . . . . . 36
9.3. Annulment of Defaults . . . . . . . . . . . . . . . . . . . . 36
9.4. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10. Expenses; Indemnity . . . . . . . . . . . . . . . . . . . . . . . . 37
10.1. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.2. General Indemnity . . . . . . . . . . . . . . . . . . . . . . 37
11. Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.1. Interests in Credits . . . . . . . . . . . . . . . . . . . . 38
11.2. Agent's Authority to Act, etc. . . . . . . . . . . . . . . . 38
11.3. Company to Pay Agent, etc. . . . . . . . . . . . . . . . . . 39
11.4. Lender Operations for Advances, etc. . . . . . . . . . . . . 39
11.4.1. Advances . . . . . . . . . . . . . . . . . . . . . . . 39
11.4.2. Agent to Allocate Payments . . . . . . . . . . . . . . 39
11.4.3. Delinquent Lenders . . . . . . . . . . . . . . . . . . 39
11.5. Sharing of Payments, etc. . . . . . . . . . . . . . . . . . . 40
11.6. Amendments, Consents, Waivers, etc. . . . . . . . . . . . . . 41
11.7. Agent's Resignation . . . . . . . . . . . . . . . . . . . . . 42
11.8. Concerning the Agent . . . . . . . . . . . . . . . . . . . . 42
11.8.1. Action in Good Faith, etc. . . . . . . . . . . . . . . 42
11.8.2. No Implied Duties, etc. . . . . . . . . . . . . . . . 43
11.8.3. Validity, etc. . . . . . . . . . . . . . . . . . . . . 43
11.8.4. Compliance . . . . . . . . . . . . . . . . . . . . . . 43
11.8.5. Employment of Agents and Counsel . . . . . . . . . . . 44
11.8.6. Reliance on Documents and Counsel . . . . . . . . . . 44
11.8.7. Agent's Reimbursement . . . . . . . . . . . . . . . . 44
11.8.8. Agent's Fee . . . . . . . . . . . . . . . . . . . . . 44
11.9. Rights as a Lender . . . . . . . . . . . . . . . . . . . . . 45
11.10. Independent Credit Decision . . . . . . . . . . . . . . . . 45
11.11. Indemnification . . . . . . . . . . . . . . . . . . . . . . 46
<PAGE>
12. Successors and Assigns; Lender Assignments and Participations . . . 46
12.1. Assignments by Lenders . . . . . . . . . . . . . . . . . . . 46
12.1.1. Assignees and Assignment Procedures . . . . . . . . . 46
12.1.2. Terms of Assignment and Acceptance . . . . . . . . . . 47
12.1.3. Register . . . . . . . . . . . . . . . . . . . . . . . 48
12.1.4. Notes . . . . . . . . . . . . . . . . . . . . . . . . 49
12.1.5. Foreign Persons . . . . . . . . . . . . . . . . . . . 49
12.1.6. Federal Reserve Bank . . . . . . . . . . . . . . . . . 50
12.1.7. Further Assurances . . . . . . . . . . . . . . . . . . 50
12.2. Credit Participants . . . . . . . . . . . . . . . . . . . . . 50
13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . 51
14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
15. Course of Dealing, Amendments and Waivers . . . . . . . . . . . . . 52
16. Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
17. Venue; Service of Process . . . . . . . . . . . . . . . . . . . . . 53
18. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . 53
19. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
<PAGE>
AMERICAN ANNUITY GROUP, INC.
CREDIT AGREEMENT
This Agreement, dated as of December 7, 1994, is among American Annuity
Group, Inc., a Delaware corporation, the Lenders (as defined in Exhibit 1)
and The First National Bank of Boston, for itself and as agent for the
Lenders. The parties agree as follows:
1. Restatement; Definitions.
1.1. Amendment and Restatement. Effective on the Effective Date, this
Agreement amends and restates in its entirety the Credit Agreement
originally dated as of January 31, 1994, as now in effect, among the parties
hereto.
1.2. Definitions; Certain Rules of Construction. Except as the context
otherwise explicitly requires, (i) the capitalized term "Section" refers to
sections of this Agreement, (ii) the capitalized term "Exhibit" refers to
exhibits to this Agreement, (iii) references to a particular Section shall
include all subsections thereof, and (iv) the word "including" shall be
construed as "including without limitation". Certain capitalized terms are
used in this Agreement as specifically defined in Exhibit 1.
2. The Credit.
2.1. Loan. Subject to all the terms and conditions of this Agreement and
so long as no Default exists, the Lenders will lend to the Company loans in
an aggregate principal amount not to exceed at any time outstanding the
Maximum Amount of Credit. The aggregate principal amount of the loans made
pursuant to this Section 2.1 at any one time outstanding is referred to as
the "Loan."
2.2. Borrowing Requests. Loans will be made to the Company by the
Lenders under Section 2.1 on any Banking Day on or after the Effective Date
and prior to the Final Maturity Date. Not later than noon (Boston time) on
the Closing Date for any such loan (or the third Banking Day prior to the
requested Closing Date if any portion of such loan will be subject to a
Eurodollar Pricing Option), the Company will give the Agent notice of its
request (which may be given by a telephone call received by an Agent Officer
and promptly confirmed in writing), specifying (i) the amount of the
requested loan (not less than $500,000 and an integral multiple of
$100,000), and (ii) the requested Closing Date therefor. Each such loan
will be made at the Boston Office by depositing the amount thereof to the
general account of the Company with the Agent. In connection with each such
loan, the Company shall furnish to the Agent a certificate dated the
applicable Closing Date in substantially the form of Exhibit 5.1, together
with any other documents required by Section 5.
<PAGE>
2.3. 2.3.1. Notes. The Loan shall be evidenced by notes in substantially
the form of Exhibit 2.3 (the "Notes") payable by the Company to each Lender.
Each Lender shall keep a record of the date and amount of (i) each loan made
by such Lender pursuant to Section 2.1 and (ii) each payment of principal
made pursuant to Section 4. Prior to the transfer of any Note, the Lender
shall endorse on a schedule thereto appropriate notations evidencing such
dates and amounts; provided, however, that the failure of any Lender to make
any such recordation or endorsement shall not affect the obligations of the
Company under this Agreement, the Notes or any other Credit Document.
2.4. Application of Proceeds. The Company covenants that the proceeds of
the Loan will be applied only for lawful corporate purposes of the Company,
including increasing the capital of any Subsidiary. The Company will not
directly or indirectly apply any part of the proceeds of any extension of
credit made pursuant to this Agreement to purchase or to carry Margin Stock
or to refinance any loan incurred for such purpose or to any transaction
prohibited by the Foreign Trade Regulations or by other laws or regulations
applicable to any of the Lenders.
3. Interest; Pricing Options; Fees.
3.1. Interest. The Loan shall accrue and bear daily interest at a rate
per annum which shall at all times equal the Applicable Rate. Prior to any
stated or accelerated maturity of the Loan, the Company will, on each
Payment Date, beginning on the first Payment Date after the Effective Date,
pay the accrued and unpaid interest on the portion of the Loan which was not
subject to a Eurodollar Pricing Option. On the last day of each Eurodollar
Interest Period or on any earlier termination of any Eurodollar Pricing
Option, the Company will pay the accrued and unpaid interest on the portion
of the Loan which was subject to the Eurodollar Pricing Option which expired
or terminated on such date; provided, however, that if any Eurodollar
Interest Period is longer than three months, the Company will also pay the
accrued and unpaid interest on the portion of the principal amount of the
Loan subject to the Eurodollar Pricing Option having such Eurodollar
Interest Period at three month intervals, the first such payment to be made
on the last Banking Day of the three month period which begins on the first
day of such Eurodollar Interest Period. On any stated or accelerated
maturity of the Loan, the Company will pay all accrued and unpaid interest
on the Loan, including any accrued and unpaid interest on such portion of
the Loan which is subject to a Eurodollar Pricing Option. In addition, the
Company will on demand pay daily interest on any overdue principal and, to
the extent not prohibited by applicable law, on any overdue installments of
interest and fees owed under any Credit Document at a rate per annum which
is at all times equal to the sum of 3% plus the highest Applicable Rate then
in effect. All payments of interest hereunder shall be made to the Agent
for the account of the Lenders in accordance with the Lenders' respective
Percentage Interests.
3.2. Eurodollar Pricing Options.
3.2.1. Eurodollar Pricing Options. Subject to all the terms and
conditions hereof and so long as no Default exists, the Company may from
time to time, by irrevocable notice to the Agent received not less than
three Banking Days prior to the commencement of the Eurodollar Interest
Period selected in such notice, elect to have such portion of the Loan as
the Company may specify in such notice accrue and bear daily interest
during the Eurodollar Interest Period so selected at the Applicable Rate
computed on the basis of the Eurodollar Rate. No such election shall
become effective if, prior to the commencement of any such Eurodollar
Interest Period, the Agent determines that (a) the electing or granting of
the Eurodollar Pricing Option in question would violate a Legal
Requirement or (b) Eurodollar deposits in an amount equal to the principal
amount of the Loan as to which such Eurodollar Pricing Option has been
elected and which have a term corresponding to the proposed Eurodollar
Interest Period are not readily available in the inter-bank Eurodollar
market for delivery at any Eurodollar Office or, by reason of
circumstances affecting such market, adequate and reasonable methods do
not exist for ascertaining the interest rate applicable to such deposits
for the proposed Eurodollar Interest Period.
3.2.2. Notice to Lenders and Company. Upon determination by the
Agent of the Eurodollar Rate for such Eurodollar Interest Period or in the
event no such election shall become effective, the Agent will promptly
notify the Company and each Lender (by telephone subsequently confirmed in
writing or otherwise) of the Eurodollar Rate so determined or why such
election did not become effective.
3.2.3. Selection of Eurodollar Interest Periods. Eurodollar
Interest Periods shall be selected so that:
(i) the minimum portion of the Loan subject to any Eurodollar
Pricing Option shall be $1,000,000 and an integral multiple of
$500,000;
(ii) no more than six Eurodollar Pricing Options shall be
outstanding at any one time; and
(iii) no Eurodollar Interest Period with respect to any part of
the Loan subject to a Eurodollar Pricing Option shall expire later
than the Final Maturity Date.
3.2.4. Additional Compensation. If any portion of the Loan which is
subject to a Eurodollar Pricing Option is repaid, or any Eurodollar
Pricing Option is terminated on a date which is prior to the last Banking
Day of the Eurodollar Interest Period applicable to such Eurodollar
Pricing Option, the Company will pay to the Agent for the account of each
Lender, in accordance with the Lenders' respective Percentage Interests,
in addition to any amounts of interest otherwise payable hereunder, an
amount equal to daily interest for the unexpired portion of such
Eurodollar Interest Period on the portion of the Loan so repaid, or as to
which a Eurodollar Pricing Option was so terminated, at a per annum rate
equal to the excess, if any, of (i) the Eurodollar Rate calculated on the
basis of the rate applicable to such Eurodollar Pricing Option minus (ii)
the rate of interest obtainable by the Agent upon the purchase of debt
securities customarily issued by the Treasury of the United States of
America which have a maturity date approximating the last Banking Day of
such Eurodollar Interest Period. For purposes of this Section 3.2.4, if
any portion of the Loan which was to have been subject to a Eurodollar
Pricing Option is not outstanding on the first day of the Eurodollar
Interest Period applicable to such Eurodollar Pricing Option, the Company
shall be deemed to have terminated such Eurodollar Pricing Option with
respect to such principal amount. The determination by the Agent of such
amount of interest shall, in the absence of manifest error, be conclusive.
3.2.5. Change in Applicable Laws, Regulations, etc. If any Legal
Requirement shall prevent any Lender from funding or maintaining through
the purchase or holding of Eurodollar deposits any portion of the Loan
subject to a Eurodollar Pricing Option or otherwise from giving effect to
such Lender's obligations as contemplated hereby, (i) the Agent may (and,
upon the request of the affected Lender, shall) by notice to the Company
terminate all of the affected Eurodollar Pricing Options, (ii) the portion
of the Loan subject to such terminated Eurodollar Pricing Options shall
immediately bear interest thereafter at the Applicable Rate computed on
the basis of the Base Rate and (iii) the Company shall make any payment
required by Section 3.2.4.
3.2.6. Funding Procedure. The Lenders may actually fund any portion
of the Loan subject to a Eurodollar Pricing Option in any manner they may
choose in their discretion. Regardless of the manner selected by any of
the Lenders to fund any portion of the Loan subject to a Eurodollar
Pricing Option, however, all amounts payable hereunder, including the
interest rate applicable to any such portion of the Loan and the amounts
payable under Sections 3.2.4 and 3.6, shall be computed as if each Lender
had actually funded such Lender's Percentage Interest in such portion of
the Loan through the purchase of deposits in such amount with a maturity
the same as the applicable Eurodollar Interest Period relating thereto and
through the transfer of such deposits from an office of the Lender having
the same location as the applicable Eurodollar Office to one of such
Lender's offices in the United States of America.
3.3. Commitment Fees. In consideration of the Lenders' Commitments to
make the extensions of credit provided for in Section 2, while such
commitments are outstanding, the Company will pay to the Agent for the
account of the Lenders in accordance with their respective Percentage
Interests, on each Payment Date after the Effective Date, an amount equal to
daily interest at the rate of 1/4 of 1% per annum on the amount by which (i)
the daily Maximum Amount of Credit during the three-month period ending on
such date exceeded (ii) the daily Loan during such period; provided,
however, that the amount due on the first Payment Date after the Effective
Date shall be for the period beginning on the Effective Date and ending on
such Payment Date.
3.4. Capital Adequacy; Regulatory Changes.
3.4.1. Lender's Compensation. If any Lender shall have determined
that (a) compliance by such Lender with any applicable law, governmental
rule, regulation or order regarding capital adequacy of banks or bank
holding companies, or any interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by such Lender
with any request or directive regarding capital adequacy (whether or not
having the force of law and whether or not failure to comply therewith
would be unlawful) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on
such Lender's capital as a consequence of such Lender's obligations
hereunder to a level below that which such Lender could have achieved but
for such adoption, change or compliance (taking into consideration such
Lender's policies with respect to capital adequacy immediately before such
compliance and assuming that such Lender's capital was fully utilized
prior to such compliance) by any amount deemed by such Lender to be
material, or (b) any change in any Legal Requirement after the date hereof
shall directly or indirectly (i) reduce the amount of any sum received or
receivable by such Lender with respect to the Loan, (ii) impose a cost on
such Lender that is attributable to the making or maintaining of, or such
Lender's commitment to make, its portion of the Loan, or (iii) require
such Lender to make any payment on or calculated by reference to the gross
amount of any amount received by such Lender under any Credit Document,
then, in the case of clause (a) or (b), upon demand by the Lender so
affected, accompanied by the certificate referred to below, the Company
shall pay to such Lender from time to time as specified by such Lender
such additional amounts as such Lender determines will be sufficient to
fully compensate such Lender for such reduced return, reduction, increased
cost or payment, each such payment to be made within 90 days after
delivery of such notice. A certificate of an officer of such Lender
setting forth the amount to be paid to it and the basis for computation
thereof hereunder shall, in the absence of manifest error, be conclusive.
In determining such amount, such Lender may use any reasonable averaging
and attribution methods.
3.4.2. Substitution or Replacement of Lender. If any Lender shall
demand compensation under Section 3.4.1, the Company shall not be
obligated to make any payment under Section 3.4.1 if, within 90 days after
delivery of such demand:
(a) The Company shall have obtained a substitute Lender (which may
be one or more of the Lenders and which shall be reasonably satisfactory
to the Agent) to purchase the portion of the Loan then held by, and to
assume the Commitment of, the Lender demanding compensation. Such
substitution shall be consummated as an assignment, with the substitute
Lender paying to the Lender being replaced the amount of principal,
interest and commitment fees hereunder owed to the Lender being replaced,
accrued through the date of such assignment, and the Company paying to the
Lender being replaced all other Credit Obligations (including any amounts
due under Section 3.2.4) owed to the Lender being replaced, accrued
through the date of such assignment; or
(b) The Company shall have (i) repaid to the Lender demanding
compensation its Percentage Interest of the Loan, without premium (but
including any repayments required by Section 3.2.4), (ii) repaid to such
Lender all other amounts required by this Agreement, (iii) terminated the
Commitment of such Lender and (iv) reduced the Maximum Amount of Credit
then in effect by the amount of such Lender's Commitment, at which time
the remaining Lenders' respective Percentage Interests shall be adjusted
accordingly.
3.5. Taxes. If (a) any Lender shall be subject to any Tax or (b) the
Company shall be required to withhold or deduct any Tax, the Company will on
demand by the Agent (which demand shall be made by the Agent upon request by
the affected Lender), accompanied by the certificate referred to below, pay
to the Agent for such Lender's account such additional amount as is
necessary to enable such Lender to receive on an after-Tax basis the full
amount of all payments of principal, interest, fees, expenses, indemnities
and other amounts payable to such Lender under any Credit Document.
Whenever Taxes must be withheld by the Company with respect to any payments
of the Credit Obligations, the Company shall promptly furnish to the Agent
for the account of the applicable Lender official receipts (to the extent
that the relevant governmental authority delivers such receipts) evidencing
payment of any such Taxes so withheld. If the Company fails to pay any such
Taxes when due or fails to remit to the Agent for the account of the
applicable Lender the required receipts evidencing payment of any such Taxes
so withheld or deducted, the Company shall indemnify the affected Lender for
any incremental Taxes and interest or penalties that may become payable by
such Lender as a result of any such failure. Each Lender agrees that if,
after the payment by the Company of any such additional amount, any amount
identifiable as a part thereof is subsequently recovered or used as a credit
by such Lender, such Lender shall reimburse the Company to the extent of the
amount so recovered or used. A certificate of an officer of such Lender
setting forth the amount of such Tax or recovery or use and the basis
therefor shall, in the absence of manifest error, be conclusive.
3.6. Computations of Interest. For purposes of this Agreement, interest
(and any amount expressed as interest) shall be computed on a daily basis
and on the basis of a 360-day year.
4. Payment.
4.1. Payment at Maturity. On the stated or any accelerated maturity of
the Notes, the Company will pay to the Agent for the account of each Lender
an amount equal to the Loan then due, together with all accrued and unpaid
interest thereon and all other Credit Obligations then outstanding.
4.2. Maximum Amount of Credit. If at any time the Loan exceeds the
Maximum Amount of Credit, the Company will promptly pay the amount of such
excess to the Agent for the account of the Lenders for credit to the Loan.
4.3. Voluntary Prepayments of Loan. In addition to the prepayments
required by Section 4.2, the Company may from time to time prepay all or any
portion of the Loan (in a minimum amount of $100,000 and an integral
multiple of $100,000), without premium (except as provided in Section 3.2.4
with respect to Eurodollar Pricing Options). The Company shall give the
Agent at least one Banking Day's prior notice of its intention to prepay
(three Banking Days' notice if any such portion of the Loan to be prepaid is
subject to a Eurodollar Pricing Option), specifying the date of payment, the
total principal amount of the Loan to be paid on such date and the amount of
interest to be paid with such prepayment.
4.4. Application of Payments. Any prepayment of the Loan shall be
applied (pro rata in accordance with the Lenders' respective Percentage
Interests) first to the portion of the Loan not then subject to Eurodollar
Pricing Options, then the balance of any such prepayment shall be applied to
the portion of the Loan then subject to Eurodollar Pricing Options, in the
chronological order of the respective maturities thereof, together with any
payments required by Section 3.2.4. All payments of principal hereunder
shall be made to the Agent for the account of each Lender in accordance with
the Lenders' respective Percentage Interests.
4.5. Payment and Interest Cut-off. For all prepayments of the Loan, the
Company shall pay to the Agent for each Lender's account the principal
amount to be prepaid, together with unpaid interest in respect thereof
accrued to the date of prepayment. Notice of prepayment having been given
in accordance with Section 4.3, and whether or not notice is given of
prepayments pursuant to Section 4.2, the amount specified to be prepaid
shall become due and payable on the date specified for prepayment, and from
and after such date (except to the extent the Company shall fail to make the
payment thereof) interest thereon shall cease to accrue.
5. Conditions to Extending Credit. The obligations of the Lenders to make
any extension of credit pursuant to Section 2 shall be subject to the
satisfaction, on or before the Closing Date for such extension of credit, of
the following conditions:
5.1. Officer's Certificate. The representations and warranties contained
in Sections 6.3 and 8 shall be true and correct on and as of each Closing
Date with the same force and effect as though originally made on and as of
such date; no Default shall exist on such Closing Date prior to or
immediately after giving effect to the requested extension of credit; as of
such Closing Date, no Material Adverse Change shall have occurred; and the
Company shall have furnished to the Agent on such Closing Date a certificate
to these effects, in substantially the form of Exhibit 5.1, signed by a
Financial Officer.
5.2. Notes. On the Effective Date, the Company shall have executed the
Notes and delivered them to the Agent.
5.3. Legal Opinions. On the Effective Date, the Lenders shall have
received from the following counsel, hereby authorized and directed by the
Company with respect to its counsel, their respective opinions with respect
to the transactions contemplated by the Credit Documents, which opinions
shall be in form and substance satisfactory to the Agent.
5.3.1. Keating, Muething & Klekamp, counsel for the Company.
5.3.2. Ropes & Gray, special counsel for the Agent.
5.4. Tax Sharing Arrangements. The tax sharing agreements (a) between
AFC and the Company, and (b) between AFC and GALIC, previously furnished by
the Company to the Agent, shall be satisfactory in form and substance to the
Agent in its sole discretion.
5.5. Perfection of Security. The Company shall have duly authorized,
executed, acknowledged, delivered, filed, registered and recorded such
security agreements, notices, financing statements and other instruments as
the Agent may have requested in order to perfect the security interests and
encumbrances purported or required pursuant to the Credit Documents to be
created in the Credit Security.
5.6. Closing Fees. On the Effective Date the Company shall pay to the
Agent (a) for the Lenders' accounts in accordance with their respective
Percentage Interests a closing fee in the aggregate amount of $50,000 and
(b) for its own account a structuring fee in the amount separately agreed
between the Company and the Agent.
5.7. Proper Proceedings. This Agreement, each other Credit Document and
the transactions contemplated hereby and thereby shall have been authorized
by all necessary proceedings of the Company. All necessary consents,
approvals and authorizations of any governmental or administrative agency or
any other Person of any of the transactions contemplated hereby or by any
other Credit Document shall have been obtained and shall be in full force
and effect.
5.8. Legality, etc. The making of the requested extension of credit
shall not (i) subject any Lender to any penalty or special Tax (other than a
Tax for which the Company has reimbursed the Lenders under Section 3.5),
(ii) be prohibited by any law or governmental order or regulation applicable
to any Lender or (iii) violate any voluntary credit restraint program of the
executive branch of the government of the United States of America, the
Board of Governors of the Federal Reserve System or any other governmental
or administrative agency so long as any Lender reasonably believes that
compliance therewith is in the best interests of such Lender.
5.9. General. All instruments and legal and corporate proceedings in
connection with the transactions contemplated by this Agreement and each
other Credit Document shall be satisfactory in form and substance to the
Agent, and the Lenders shall have received copies of all documents,
including records of corporate proceedings, appraisals and opinions of
counsel, which any Lender may have reasonably requested in connection
therewith, such documents where appropriate to be certified by proper
corporate or governmental authorities.
6. Security.
6.1. Credit Security. As security for the payment and performance of the
Credit Obligations, the Company hereby mortgages, pledges, grants and
assigns to the Agent for the benefit of the Lenders and the holders from
time to time of any Credit Obligation, and creates a first priority security
interest in, all of the Company's right, title and interest in and to (but
none of its obligations or liabilities with respect to) the following:
6.1.1. 40,200 shares or such greater or lesser number of shares of
the Common Stock of GALIC which constitutes at all times at least 20% of
the issued and outstanding shares of capital stock of all classes of
GALIC.
6.1.2. All Distributions with respect to the stock described in
Section 6.1.1.
6.1.3. Such Additional Collateral provided by the Company as may be
necessary from time to time in order for the Company to comply with
Section 6.2.
6.1.4. All proceeds of the foregoing.
The Company has delivered to the Agent in pledge under this Section 6.1,
certificates representing 40,200 shares of the Common Stock of GALIC
accompanied by stock transfer powers duly executed in blank. The shares of
capital stock from time to time pledged hereunder are referred to as the
"Pledged Stock", and the Pledged Stock, Distributions with respect thereto,
any other Additional Collateral provided by the Company under Section 6.2
and all proceeds thereof are included in the term "Credit Security."
6.2. Additional Credit Security. If GALIC shall receive at any time an
A.M. Best rating below any "A" category, then, upon the written request of
the Required Majority Lenders, the Agent shall by notice in writing to the
Company, request the delivery of additional shares of Common Stock of GALIC,
or other additional collateral offered by the Company in form and substance
satisfactory to the Required Majority Lenders (the "Additional Collateral"),
and in any event having a Collateral Value at all times equal to or
exceeding the amount of the Loan then outstanding in excess of $25,000,000
(the "Loan Margin"). Upon receipt of any such notice, the Company shall
promptly, and in any event within 10 Banking Days, deliver to the Agent the
Additional Collateral. If the Agent shall at any time give the Company
notice that the aggregate Collateral Value of the Additional Collateral is
less than the Loan Margin, the Company will promptly, and in any event,
within 10 Banking Days, deliver to the Agent further Additional Collateral
so that after giving effect thereto the aggregate Collateral Value of all
Additional Collateral equals or exceeds the Loan Margin. If the aggregate
Collateral Value of the Additional Collateral exceeds the Loan Margin for a
period of 10 Banking Days, then upon the written request of the Company, so
long as no Default shall exist, the Agent shall return to the Company such
portion of the Additional Collateral then in excess of the Loan Margin as
the Company may request. If GALIC shall subsequently receive an A.M. Best
Rating in any "A" category, then, upon written request of the Company, so
long as no Default shall exist, the Agent shall return to the Company such
Additional Collateral as the Company may so request.
6.3. Representations, Warranties and Covenants with Respect to Credit
Security. The Company represents, warrants and covenants that:
6.3.1. Pledged Stock. The Pledged Stock is and shall be at all
times duly authorized, validly issued, fully paid and nonassessable and is
owned by the Company. The certificates delivered to the Agent pursuant to
Section 6.1 evidence capital stock that constitutes the percentages of the
capital stock of GALIC specified in such Section. Contemporaneously with
the issuance of any additional capital stock by GALIC, the Company will
hold in trust and promptly deliver to the Agent on behalf of the Lenders
certificates representing the additional Pledged Stock necessary to
maintain the percentages specified in Section 6.1, accompanied by stock
transfer powers duly executed in blank, and, if the Agent shall so
request, with the signature guaranteed, all in form and manner
satisfactory to the Lenders. Upon the occurrence of an Event of Default,
the Agent shall have the right to have such certificates issued in its
name, or the name of its nominee, as pledgee. The Company will cause the
Agent to be registered as pledgee with respect to any uncertificated
Pledged Stock on the transfer books of the issuer, any transfer agent or
clearing house.
6.3.2. No Liens. All Credit Security is and shall be free and clear
of any Liens and restrictions on the transfer thereof except for (i)
restrictions on transfer of the Pledged Stock imposed by state, federal or
other applicable securities or insurance laws or the regulations of any
Insurance Authority, and (ii) Liens created hereby.
6.3.3. Perfection of Credit Security. Upon the Agent's written
request from time to time, the Company will make, execute, acknowledge and
deliver all such instruments, including without limitation, appropriate
financing statements and notices, and take all such action as the Agent
may deem necessary or advisable to carry out the intent and purposes of
this Agreement or for assuring and confirming to the Lenders the Credit
Security, including any Additional Collateral under Section 6.2.
6.3.4. Governmental Consents; Validity of Pledge. The Company has
obtained or has caused to be obtained all material approvals, consents,
orders, authorizations and licenses from, has given all notices promptly
to, has registered or filed all material agreements, instruments or
documents with, and has taken all other action with respect to, any
governmental or regulatory authority, agency or official (including
Insurance Authorities) necessary to ensure the legality, validity, binding
effect and enforceability of the grant of the security interests in the
Credit Security owned by it to the Agent for the ratable benefit of the
Lenders. The provisions of this Section 6 are effective to create in
favor of the Agent for the ratable benefit of the Lenders a legal, valid
and enforceable first priority Lien on and security interest in, all
right, title and interest of the Company in the Credit Security.
6.4. Administration of Credit Security. The Credit Security shall be
administered as follows, and if an Event of Default shall have occurred,
Section 6.5 shall also apply.
6.4.1. Distributions.
(i) Unless an Event of Default shall occur, the Company shall
be entitled to receive all Ordinary Dividends paid on the Pledged
Stock as distributions of earnings and profits. All distributions
other than Ordinary Dividends made or paid on the Pledged Stock will
be retained by the Agent (or if received by the Company shall be held
by the Company in trust and shall be forthwith paid by it to the
Agent in the original form received, endorsed in blank) and held by
the Agent as a part of the Credit Security.
(ii) If an Event of Default shall occur, all Distributions and
other payments with respect to the Pledged Stock shall be retained by
the Agent (or if received by the Company shall be held by the Company
in trust and shall be forthwith paid by it to the Agent in the
original form received, endorsed in blank) and held by the Agent as
part of the Credit Security or applied by the Agent to the payment of
the Credit Obligations in accordance with Section 6.5.4.
6.4.2. Voting.
(i) Until an Event of Default shall occur, the Company shall be
entitled to vote or consent with respect to the Pledged Stock in any
manner not inconsistent with the terms of any Credit Document, and
the Agent will, if so requested, execute appropriate revocable
proxies therefor.
(ii) If an Event of Default shall occur, and if and to the
extent that the Agent shall so notify the Company in writing, only
the Agent (with the written consent of the Required Majority Lenders)
shall be entitled to vote or consent or take any other action with
respect to the Pledged Stock (and the Company or the appropriate
Subsidiary of the Company will, if so requested, execute or cause to
be executed appropriate proxies therefor).
6.4.3. Custody of Credit Security. The Agent will use reasonable
care in the custody and physical preservation of any Credit Security in
its possession. Except as set forth in the immediately preceding
sentence, and except as provided by applicable law that cannot be waived,
the Agent will have no duty with respect to the custody and protection of
the Credit Security, the collection of any part thereof or of any income
thereon or the preservation or exercise of any rights pertaining thereto,
including rights against prior parties. The Lenders will not be liable or
responsible for any loss or damage to any Credit Security, or for any
diminution in the value thereof, by reason of the act or omission of any
agent selected by the Agent acting in good faith in a commercially
reasonable manner.
6.4.4. Governmental Consents and Approvals. The Company will, and
will cause each of its Subsidiaries to, obtain or cause to be obtained
promptly all such material approvals, consents, orders, authorizations and
licenses from, give all such notices promptly to, register, enroll or file
all such material agreements, instruments or documents promptly with, and
promptly take all such other action with respect to, any governmental or
regulatory authority (including Insurance Authorities), agency or official
as may be required from time to time under any provision of any applicable
law:
6.4.4.1. For the performance by the Company of any of its
agreements or obligations under any of the Credit Documents;
6.4.4.2. To ensure the continuing legality, validity or binding
effect or enforceability of the grant of a security interest pursuant
to this Agreement, or any other security interests made or created in
favor of the Lenders upon the terms contained in any of the Credit
Documents; and
6.4.4.3. To continue the conduct and operation of its business
in the ordinary course.
6.5. Right to Realize upon Credit Security. Except to the extent
prohibited by applicable law that cannot be waived, this Section 6.5 shall
govern the Lenders' right to realize upon the Credit Security if any Event
of Default shall have occurred until such time as such Event of Default
shall have been deemed not to exist nor to have occurred pursuant to Section
9.3. The provisions of this Section 6.5 are in addition to any rights and
remedies available at law or in equity and in addition to the provisions of
any other Credit Document. In the case of a conflict between this Section
6.5 and any other Credit Document, this Section 6.5 shall govern.
6.5.1. Marshaling. The Lenders shall not be required to make any
demand upon, accelerate, or pursue or exhaust any of their rights or
remedies against the Company, any Subsidiary or any other Person with
respect to the payment of the Credit Obligations, or to pursue or exhaust
any of its rights or remedies with respect to any of the collateral
therefor or any direct or indirect guarantee thereof. The Lenders shall
not be required to marshal the Credit Security or any guarantee of the
Credit Obligations or to resort to the Credit Security or any such
guarantee in any particular order, and all of their rights hereunder shall
be cumulative. To the extent it may lawfully do so, the Company hereby
absolutely and irrevocably waives and relinquishes the benefit and
advantage of, and covenants not to assert against the Lenders, any
valuation, stay, appraisement, extension, redemption or similar laws now
or hereafter existing which, but for this provision, might be applicable
to the sale of any Credit Security made under the judgment, order or
decree of any court, or privately under the power of sale conferred by
this Agreement, or otherwise. Without limiting the generality of the
foregoing, the Company agrees that it will not invoke or utilize any law
which might delay or impede the enforcement of the Lenders' rights under
this Agreement and hereby waives the same. In addition, the Company
hereby waives any right to prior notice (except to the extent expressly
required by this Agreement) or judicial hearing in connection with
foreclosure on or disposition of any Credit Security, including any such
right which the Company would otherwise have under the Constitution of the
United States of America, any state or territory thereof or any other
jurisdiction.
6.5.2. Sales of Credit Security. Any Credit Security may be sold
for cash or other value in any number of lots at any commercially
reasonable public or private sale, without demand, advertisement or
notice; provided, however, that unless the Credit Security to be sold
threatens to decline speedily in value or is of a type customarily sold on
a recognized market, the Agent shall give the Company 15 days' prior
written notice of the time and place of any public sale, or the time after
which a private sale may be made, which notice the Company and the Lenders
hereby agree to be reasonable. At any sale of Credit Security (except to
the extent prohibited by applicable law that cannot be waived) the Agent
or any Lender or any of its respective officers acting on its behalf, or
such Agent's or Lender's assigns, may bid for and purchase all or any part
of the property and rights so sold and upon compliance with the terms of
such sale may hold and dispose of such property and rights without further
accountability to the Company, except for the proceeds of such sale
pursuant to Section 6.5.4. The Company acknowledges that any such sale
will be made by the Agent on an "as is" basis with disclaimers of all
warranties, whether express or implied, to the extent permitted by
applicable law. The Company will execute and deliver or cause to be
executed and delivered such instruments, documents, assignments, waivers,
certificates and affidavits, will supply or cause to be supplied such
further information and will take such further action as the Agent shall
require in connection with any such sale.
6.5.3. Sale without Registration. If, at any time when the Agent
shall determine to exercise its rights hereunder to sell all or part of
the securities included in the Credit Security, the securities in question
shall not be effectively registered under the Securities Act (or other
applicable law), the Agent may, in its sole discretion, sell such
securities by private or other sale not requiring such registration in
such manner and in such circumstances as the Agent may deem necessary or
advisable in order that such sale may be effected in a commercially
reasonable manner without such registration and without the related
delays, expense and uncertainty. Without limiting the generality of the
foregoing, in any event the Agent may, in its sole discretion, (i)
approach and negotiate with one or more possible purchasers to effect such
sale, (ii) restrict such sale to one or more purchasers each of whom will
represent and agree that such purchaser is purchasing for its own account,
for investment and not with a view to the distribution or sale of such
securities and (iii) cause to be placed on certificates representing the
securities in question a legend to the effect that such securities have
not been registered under the Securities Act (or other applicable law) and
may not be disposed of in violation of the provisions thereof. The
Company agrees that such manner of disposition is commercially reasonable,
that it will upon the Agent's request give any such purchaser access to
such information regarding the issuer of the securities in question as the
Agent may reasonably request and that the Lenders shall not incur any
responsibility for selling all or part of the securities included in the
Credit Security at any private or other sale not requiring such
registration, notwithstanding the possibility that a substantially higher
price might be realized if the sale were deferred until after registration
under the Securities Act (or other applicable law) or until made in
compliance with rules or other exemptions from the registration provisions
under the Securities Act (or other applicable law). In the event that
such securities are to be sold in a registered offering, the Company shall
cooperate in preparing such registration statement and providing access to
information in connection therewith. The Company acknowledges that no
adequate remedy at law exists for breach by it of this Section 6.5.3 and
that such breach would not be adequately compensable in damages and
therefore agrees that this Section 6.5.3 may be specifically enforced.
6.5.4. Application of Proceeds. The proceeds of all sales and
collections in respect of any Credit Security or other assets of the
Company, all funds collected from the Company and any cash contained in
the Credit Security, the application of which is not otherwise
specifically provided for herein, shall be applied as follows:
First, to the payment of the costs and expenses of such
sales and collections, the reasonable expenses of the Agent
and the reasonable fees and expenses of its special counsel;
Second, any surplus then remaining to the payment of the
Credit Obligations in such order and manner as the Required
Majority Lenders may in their sole discretion determine;
provided, however, that any such payment shall be pro rata in
accordance with the relative Percentage Interests of the
Lenders;
Third, any surplus then remaining shall be paid to the
Company, subject, however, to the rights of the holder of any
then existing Lien of which the Agent has actual notice.
6.6. Governmental Regulation. To the extent that Credit Security shall
include investments in or stock of an entity regulated as an insurance
company by any Insurance Authority, then, notwithstanding anything else
herein contained to the contrary, no action shall be taken by the Agent with
respect to such Pledged Stock unless all requirements of applicable state
and local law, and all applicable rules and regulations thereunder,
requiring the consent to or approval of such action by an Insurance
Authority or of any other governmental authority have been satisfied.
Without limiting the generality of the foregoing, the Agent will effect an
acquisition of control of the Company only with such approval or other
action as may be required to be taken by the Ohio Superintendent of
Insurance pursuant to Chapter 3901.31 of Title 39 of the Ohio Revised Code
(or any similar successor provision). The Company covenants that, upon the
Agent's request, it will file or cause to be filed such applications and
take such other action as the Agent may request to obtain consent or
approval of such Insurance Authority or of any governmental authority
applicable to the Company and its Subsidiaries to any action contemplated by
this Agreement and to give effect to the Lenders' security interests,
including the execution of an application for consent by such Insurance
Authority to an assignment or transfer involving a change in ownership or
control. The Agent is hereby irrevocably appointed the true and lawful
attorney of the Company, in its name and stead, to execute and file all
necessary applications with such Insurance Authority and with any other
governmental authority, the exercise of such appointment to commence only
after the occurrence of a Default.
7. General Covenants. The Company covenants that, until all of the Credit
Obligations shall have been paid in full and until the Lenders' Commitments
to extend credit under this Agreement and any other Credit Document shall
have been irrevocably terminated, it and its respective Subsidiaries will
comply with the following provisions:
7.1. Taxes and Other Charges. Each of the Company and its Subsidiaries
will duly pay and discharge, or cause to be paid and discharged, before the
same shall become in arrears, all taxes, assessments and other governmental
charges imposed upon such Person and its properties, sales or activities, or
upon the income or profits therefrom, as well as all claims for labor,
materials or supplies which if unpaid might by law become a Lien upon any of
its property; provided, however, that any such tax, assessment, charge, or
claim need not be paid if the validity or amount thereof shall at the time
be contested in good faith by appropriate proceedings and if such Person
shall, in accordance with GAAP, have set aside on its books adequate
reserves with respect thereto; and provided, further, that each of the
Company and its Subsidiaries will pay or bond all such taxes, assessments,
charges or other governmental claims immediately upon the commencement of
proceedings to foreclose any Lien which may have attached as security
therefor (except to the extent such proceedings have been dismissed or
stayed).
7.2. Conduct of Business, etc.
7.2.1. Types of Business. The Company and its Subsidiaries will
engage only (i) in the businesses now conducted by the Company and
described in the Annual Report of the Company on Form 10-K for the fiscal
year ended December 31, 1993 (the "Company's 1993 Form 10-K") and (ii) in
businesses related thereto.
7.2.2. Statutory Compliance. Each of the Company and its
Subsidiaries will comply in all material respects with all valid and
applicable statutes, laws, ordinances, zoning and building codes and other
rules and regulations of the United States of America, of the states and
territories thereof and their counties, municipalities and other
subdivisions and of any foreign country or other jurisdictions applicable
to such Person, except where compliance therewith shall at the time be
contested in good faith by appropriate proceedings or where failure so to
comply has not resulted, or does not pose a material risk of resulting, in
the aggregate in any Material Adverse Change.
7.3. Financial Statements and Reports. The Company and its Subsidiaries
will maintain a system of accounting in which full and correct entries will
be made of all transactions in relation to their business and affairs in
accordance with GAAP. The fiscal year of the Company and its Subsidiaries
will end on December 31 in each year.
7.3.1. Annual Reports. The Company will furnish to the Lenders as
soon as available, and in any event within 120 days after the end of each
fiscal year:
(i) The Annual Report of the Company as required by the
Exchange Act on Form 10-K for the fiscal year then ended.
(ii) The audited Consolidated financial statements of the
Company and its Subsidiaries as at the end of such fiscal year (all
in reasonable detail), together with comparative figures for the
preceding fiscal year.
(iii) Unqualified reports of the Company's present independent
auditors (or other independent auditors reasonably satisfactory to
the Agent), containing no material uncertainty, to the effect that
they have audited such Consolidated financial statements in
accordance with generally accepted auditing standards and that such
Consolidated financial statements present fairly, in all material
respects, the financial position of the Company and its Subsidiaries
at the dates thereof and the results of their operations for the
periods covered thereby in conformity with GAAP.
(iv) The internally prepared Consolidating balance sheet of the
Company and its Subsidiaries and the Consolidating statement of
earnings of the Company and its Subsidiaries for such fiscal year
(all in reasonable detail).
(v) A certificate of a Financial Officer to the effect that such
officer has caused this Agreement to be reviewed and has no knowledge
of any Default, or if such officer has such knowledge, specifying
such Default and the nature thereof, and what action the Company has
taken, is taking or proposes to take with respect thereto, and (b)
stating what changes, if any, have occurred in GAAP since the date of
the financial statements described in Section 8.2(i).
(vi) Computations by the Company demonstrating, as of the close
of such fiscal year, compliance with Sections 7.4, 7.5 and 7.6.
(vii) Supplements to Exhibits 8.1 and 8.10 showing any changes
in the information set forth in such Exhibits during the last quarter
of such fiscal year, as well as any changes in the Charter, Bylaws or
incumbency of officers of the Company and its Subsidiaries from those
previously certified to the Agent.
7.3.2. Quarterly Reports. The Company will furnish to the Lenders
as soon as available and, in any event, within 60 days after the end of
each of the first three fiscal quarters of the Company:
(i) The Quarterly Report of the Company as required by the
Exchange Act on Form 10-Q for the fiscal quarter then ended.
(ii) The internally prepared Consolidated financial statements
of the Company and its Subsidiaries as of the end of such fiscal
quarter and for the portion of the fiscal year then ending (all in
reasonable detail).
(iii) The internally prepared Consolidating balance sheet of the
Company and its Subsidiaries and the Consolidating statement of
earnings of the Company and its Subsidiaries for the portion of the
fiscal year then ending (all in reasonable detail).
(iv) A certificate signed by a Financial Officer to the effect
that such officer has caused this Agreement to be reviewed and has no
knowledge of any Default, or if such officer has such knowledge,
specifying such Default and the nature thereof and what action the
Company has taken, is taking or proposes to take with respect
thereto.
(v) Computations by the Company demonstrating, as of the end of
such quarter, compliance with Sections 7.4, 7.5 and 7.6.
(vi) Supplements to Exhibits 8.1 and 8.10 showing any changes in
the information set forth in such Exhibits during such fiscal
quarter, as well as any changes in the Charter, Bylaws or incumbency
of officers of the Company and its Subsidiaries from those previously
certified to the Agent.
7.3.3. Other Reports. The Company will promptly furnish to the
Lenders as soon as available copies of:
7.3.3.1. all quarterly and annual financial statements,
including all exhibits and schedules thereto, registration statements
and other reports of GALIC in the form filed with the Superintendent
of Insurance of the State of Ohio; and
7.3.3.2. registration statements, proxy statements, financial
statements and reports, including reports on Form 8-K, as may be
filed with the Securities and Exchange Commission by the Company, as
the Agent may request from time to time.
7.3.4. Notice of Material Litigation, etc. The Company will
promptly furnish to the Lenders notice of the occurrence of any litigation
or any administrative or arbitration proceeding to which the Company or
any Subsidiary may hereafter become a party which may involve any material
risk of any material final judgment or liability not adequately covered by
insurance or which may otherwise result in a Material Adverse Change or
questions the validity or enforceability of any Credit Document. Promptly
upon acquiring knowledge thereof, the Company will notify the Lenders of
the existence of any Default, specifying the nature thereof and what
action the Company has taken, is taking or proposes to take with respect
thereto.
7.3.5. ERISA Reports. The Company will:
(i) Furnish the Lenders with a copy of any request for a
waiver of the funding standards or an extension of the
amortization period required by sections 303 and 304 of ERISA or
section 412 of the Code, promptly after the Company or any
Subsidiary (or any Person on their behalf) submits such request
to the Department of Labor or the Internal Revenue Service.
(ii) Notify the Lenders of any reportable event (as defined
in section 4043 of ERISA), unless the notice requirement with
respect thereto has been waived by regulation, promptly after
the Company or any Subsidiary learns of such reportable event;
and furnish the Lenders with a copy of the notice of such
reportable event required to be filed with the PBGC, promptly
after such notice is required to be given.
(iii) Furnish the Lenders with a copy of any notice received
by the Company or any Subsidiary that the PBGC has instituted or
intends to institute proceedings under section 4042 of ERISA to
terminate any Plan, or that any Multiemployer Plan is insolvent
or in reorganization status under Title IV of ERISA, promptly
after receipt of such notice.
(iv) Notify the Lenders of the possibility of the
termination of any Plan by its administrator pursuant to section
4041 of ERISA, as soon as the Company or any Subsidiary learns
of such possibility and in any event prior to such termination;
and furnish the Lenders with a copy of any notice to the PBGC
that a Plan is to be terminated, promptly after the Company or
any Subsidiary files a copy of such notice.
(v) Notify the Lenders of the intention of the Company or
any Subsidiary to withdraw, in whole or in part, from any
Multiemployer Plan which may result in the incurrence by the
Company or any Subsidiary of withdrawal liability in excess of
$100,000 under Subtitle E of Title IV of ERISA, or of the
termination, insolvency or reorganization status of any
Multiemployer Plan under such Subtitle E which may result in
liability to the Company or any Subsidiary in excess of
$100,000, and, upon any Lender's request from time to time, of
the extent of the liability, if any, of such Person as a result
of such withdrawal, to be the best of such Person's knowledge at
such time.
7.3.6. Other Information. From time to time upon request of any
authorized officer of the Lenders, the Company will furnish to the Lenders
such other information regarding the business, affairs and financial
condition of the Company and its Subsidiaries as such officer may
reasonably request. The Agent's authorized officers and representatives
shall have the right during normal business hours to examine the books and
records of the Company and its Subsidiaries, to make copies, notes and
abstracts therefrom and to make an independent examination of its books
and records, for the purpose of verifying the accuracy of the reports
delivered by any of the Company and its Subsidiaries pursuant to this
Section 7.3 or otherwise and ascertaining compliance with this Agreement.
7.4. Consolidated Net Worth. Consolidated Net Worth shall at all times
equal or exceed an amount equal to (a) $165,000,000 plus (b) 50% of
Consolidated Net Income (but only if positive for any fiscal quarter) for
each fiscal quarter of the Company ending after March 31, 1994.
7.5. Consolidated Financing Debt. Consolidated Financing Debt (excluding
shares of preferred stock of the Company or its Subsidiaries that have
mandatory redemption or dividend rights) shall at no time exceed 150% of
Consolidated Net Worth.
7.6. GALIC Statutory Surplus. The Company will cause GALIC to maintain
its surplus with respect to policyholders (including the Mandatory
Securities Valuation Reserve, Asset Valuation Reserve and Interest
Maintenance Reserve), calculated in accordance with the applicable statutes
of the State of Ohio as in effect on January 1, 1994, at all times in an
amount equal to or greater than $250,000,000.
7.7. Restrictions on Liens. Neither the Company nor any Subsidiary
shall create, incur or enter into, or suffer to be created or incurred or to
exist, any Lien (including any arrangement or agreement which prohibits it
from creating any Lien), except the following:
7.7.1. Liens on the Credit Security which secure the Credit
Obligations and restrictions on transfer and on Liens contained in the
Credit Documents.
7.7.2. Security interests in assets other than assets included in
the Credit Security, so long as no Default exists either before or
immediately after giving effect to the creation of such security
interests.
7.7.3. Liens securing Indebtedness of the Company's Subsidiaries
owing to the Company.
7.7.4. Purchase money Liens (including mortgages, conditional sales,
Capitalized Leases and any other title retention or deferred purchase
devices) in property of the Company or a Subsidiary existing or created at
the time of acquisition thereof, and the extension and refunding of any
such Lien in an amount not exceeding the amount thereof remaining unpaid
immediately prior to such extension or refunding; provided, however, that
the principal amount of Indebtedness (including Indebtedness in respect of
Capitalized Lease Obligations) secured by each such security interest in
each item of property shall not exceed the cost (including all such
Indebtedness secured thereby, whether or not assumed) of the item subject
thereto.
7.8. Restrictions on Distributions. Neither the Company nor any of its
Subsidiaries shall make any Distribution unless no Default exists both
before and immediately after giving effect to such Distribution, except that
any Subsidiary of the Company may at any time make a Distribution to any
other Subsidiary or to the Company.
7.9. Merger, Consolidation and Sale of Assets. Neither the Company nor
any of its Subsidiaries will become party to any merger or consolidation or
sell, lease or otherwise dispose of any substantial portion of its assets
(including capital stock), except in connection with the sale or other
disposition of inventory in the ordinary course of business, or sell, lease,
sublease or otherwise dispose of any fixed assets, except that, so long as
immediately after giving effect thereto no Default exists:
7.9.1. Any Subsidiary of the Company, other than a Subsidiary whose
shares of capital stock are included from time to time in the Pledged
Stock, may be merged into or consolidated with, or may sell, lease or
otherwise dispose of any of its assets to, the Company or any Wholly Owned
Subsidiary of the Company; provided, however, that in any such merger or
consolidation to which the Company is party, the Company shall be the
surviving or resulting corporation.
7.9.2. The Company may become party to any merger or consolidation
of which the Company is the surviving or resulting Person so long as (i)
the Company shall continue to own 100% of the voting Common Stock of GALIC
and (ii) AFC shall continue to own the number of shares of the voting
Common Stock of the Company required by Section 9.1.6.
7.9.3. The Company may become party to any merger or consolidation
of which a Person other than the Company is the surviving or resulting
Person so long as the surviving or resulting Person (i) shall own
beneficially 100% of the voting Common Stock of GALIC and (ii) shall
assume all Credit Obligations of the Company pursuant to a written
agreement in form and substance satisfactory to the Lenders.
7.9.4. The Company and its Subsidiaries may sell or otherwise
dispose of assets for fair value in addition to dispositions permitted by
Section 7.9.1.
7.9.5. The Company and its Subsidiaries may dispose of assets in the
ordinary course of business that are no longer used or useful in such
business or with respect to any business which is discontinued.
7.10. Distributions from Subsidiaries. The Company will not permit any
of its Subsidiaries to enter into or be bound by any agreement (including
covenants requiring the maintenance of specified amounts of net worth or
working capital) which materially burdens or restricts the right or ability
of any Subsidiary to pay Distributions to another Subsidiary or to the
Company, subject to any limitations imposed by applicable insurance laws.
7.11. Compliance with ERISA. Each of the Company and its Subsidiaries
will meet all minimum funding requirements applicable to them with respect
to any Plan pursuant to section 302 of ERISA or section 412 of the Code,
without giving effect to any waivers of such requirements or extensions of
the related amortization periods which may be granted. Each of the Company
and its Subsidiaries will comply in all material respects with the
provisions of ERISA and the Code applicable to each Plan. At no time shall
the Accumulated Benefit Obligations under any Plan that is not a
Multiemployer Plan (excluding the Company's Retirement Income Guarantee
Plan) exceed the fair market value of the assets of such Plan allocable to
such benefits by more than $500,000.
7.12. Compliance with Environmental Laws. The Company will, and will
cause each of its Subsidiaries to:
(a) Use and operate all of its facilities and properties in material
compliance with all Environmental Laws, keep all necessary permits,
approvals, certificates, licenses and other authorizations relating to
environmental matters in effect and remain in material compliance
therewith, and handle all Hazardous Materials in material compliance with
all applicable Environmental Laws;
(b) Immediately notify the Agent, and provide copies upon receipt,
of all written claims, complaints, notices or inquiries relating to the
condition of its facilities and properties or compliance with
Environmental Laws, and shall take all reasonable steps necessary to have
dismissed with prejudice to the satisfaction of the Agent any actions and
proceedings relating to compliance with Environmental Laws; and
(c) Provide such information and certifications which the Agent may
reasonably request from time to time to evidence compliance with this
Section 7.11.
8. Representations and Warranties. In order to induce the Lenders to
extend credit to the Company hereunder, the Company hereby represents and
warrants that:
8.1. Organization and Business.
8.1.1. The Company. The Company is a duly organized and validly
existing corporation, in good standing under the laws of the state of
Delaware, with all power and authority, corporate or otherwise, necessary
to (i) enter into and perform this Agreement and each other Credit
Document to which it is party and make any borrowings hereunder, (ii)
grant the Lenders the security interests in the Credit Security to secure
the Credit Obligations and (iii) own its properties and carry on the
business now conducted or proposed to be conducted by it. The Company has
taken all corporate action required to execute, deliver and perform this
Agreement and each other Credit Document to which it is party, to make the
borrowings hereunder, and to grant the Lenders a first priority security
interest in the Credit Security. Certified copies of the Charter and
By-laws of the Company have been previously delivered to the Agent and are
correct and complete. Exhibit 8.1, as from time to time hereafter
supplemented in accordance with Sections 7.3.1 and 7.3.2, sets forth (a)
the jurisdiction of incorporation of the Company, (b) the address of the
Company's chief executive office and chief place of business and (c) the
name under which the Company conducts its business and the jurisdictions
in which the name is used.
8.1.2. Subsidiaries. Exhibit 8.1, as supplemented from time to
time, sets forth as to each such Subsidiary of the Company, its name,
jurisdiction of organization and ownership. Each Subsidiary of the
Company is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction in which it is organized, with
powers adequate for carrying on its business as now conducted or proposed
to be conducted by it. GALIC is a Wholly Owned Subsidiary of the Company.
8.1.3. Qualification. Each of the Company and each of its
Subsidiaries is duly and legally qualified to do business as a foreign
corporation and is in good standing in each state or jurisdiction in which
such qualification is required and is duly authorized, qualified and
licensed under all laws, regulations, ordinances or orders of public
authorities, or otherwise, to carry on its business in the places and in
the manner in which it is conducted, except for failures to be so
qualified, authorized or licensed which would not in the aggregate result,
or create a material risk of resulting, in any Material Adverse Change.
8.2. Financial Statements and Other Information. The Company has
previously furnished to the Lenders copies of the following:
8.2.1. The audited Consolidated financial statements of the Company
and its Subsidiaries as at December 31, 1993, accompanied by the reports
of the Company's independent auditors;
8.2.2. The Company's 1993 Form 10-K.
8.2.3. The Quarterly Report of the Company on Form 10-Q for the
fiscal quarter ended September 30, 1994 (the "Company's 1994 Form 10-Q");
and
8.2.4. The September 30, 1994 quarterly and December 31, 1993 annual
financial statements of GALIC in the form filed with the Superintendent of
Insurance of the State of Ohio.
The financial statements (including the notes thereto) referred to in
Sections 8.2.1, 8.2.2 and 8.2.3 have been prepared in accordance with
GAAP, subject to year-end audit adjustments and the absence of footnotes
for interim statements (and in the case of the financial statements
referred to in Section 8.2.4, have been prepared in accordance with
applicable statutory accounting principles) and fairly present (and in the
case of the financial statements referred to in Section 8.2.4, present in
accordance with applicable statutory regulations and guidelines) the
financial conditions of the Persons covered thereby at the dates thereof
and the results of their operations for the periods covered thereby.
Neither the Company nor any Subsidiary of the Company has any known
material contingent liabilities which are not referred to in said
financial statements or in the notes thereto.
The Company's 1993 Form 10-K and 1994 Form 10-Q (including all of the
financial statements and schedules included therein) contain all
information which is required to be stated therein in accordance with the
Exchange Act and conform in all material respects to the requirements
thereof; and the Company's 1993 Form 10-K and 1994 Form 10-Q did not when
filed include any untrue statement of a material fact or omit to state a
material fact which was required to be stated therein or was necessary to
make the statements therein not misleading in the light of the
circumstances in which they were made.
8.3. Changes in Condition. Since December 31, 1993, no Material Adverse
Change has occurred, and neither the Company nor any Subsidiary has entered
into any material transaction outside the ordinary course of business which
has not been previously disclosed to the Lenders.
8.4. Title to Assets. Each of the Company and its Subsidiaries has good
and marketable title to all assets necessary for or used in the operations
of their business as now conducted or proposed to be conducted by them and
reflected in the most recent balance sheet referred to in Section 8.2(i) (or
the balance sheet most recently furnished to the Lenders pursuant to
Sections 7.3.1 or 7.3.2), and to all assets acquired subsequent to the date
of such balance sheet, subject to no Liens except for those permitted by
Section 7.7.
8.5. Litigation. There is no litigation, at law or in equity, or any
proceeding before any federal, state, provincial or municipal court, board
or other governmental or administrative agency or any arbitrator pending or
to the knowledge of the Company threatened which may involve any material
risk of any final judgment or liability not adequately covered by insurance
or which may otherwise result in any Material Adverse Change and no
judgment, decree, or order of any federal, state, provincial or municipal
court, board or other governmental or administrative agency or arbitrator
has been issued against the Company or any of its Subsidiaries which has
resulted, or poses a material risk of resulting in, any Material Adverse
Change.
8.6. Enforceability; No Legal Obstacle to Agreements. This Agreement and
each of the Notes constitutes the legal, valid and binding obligation of the
Company, enforceable against it in accordance with its terms. Neither the
execution and delivery of this Agreement or any other Credit Document, nor
the making of any borrowings hereunder, nor the securing of the Credit
Obligations with the Credit Security, nor the consummation of any
transaction referred to in or contemplated by this Agreement or any other
Credit Document, nor the fulfillment of the terms hereof or thereof or of
any other agreement, instrument, deed or lease referred to in this Agreement
or any other Credit Document, has constituted or resulted in or will
constitute or result in:
(i) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company or any of its Subsidiaries
is a party or by which it is bound resulting or creating a material risk
of resulting in any Material Adverse Change or challenge to the validity
or enforceability of any Credit Document or Credit Security, or any breach
of the Charter or By-laws of the Company or any of its Subsidiaries;
(ii) the violation of any law, statute, judgment, decree or
governmental order, rule or regulation applicable to the Company or any of
its Subsidiaries resulting or creating a material risk of resulting in any
Material Adverse Change or challenge to the validity or enforceability of
any Credit Document or Credit Security;
(iii) the creation under any agreement, instrument, deed or lease of
any Lien (other than Liens on the Credit Security which secure the Credit
Obligations) upon any of the assets of the Company or any of its
Subsidiaries; or
(iv) any redemption, retirement or other repurchase obligation of the
Company or any of its Subsidiaries under any Charter, Bylaw, agreement,
instrument, deed or lease.
No approval, authorization or other action by, or declaration to or filing
with, any governmental or administrative authority or any other Person
(including Insurance Authorities) is required to be obtained or made by the
Company or any Subsidiary in connection with the execution, delivery and
performance of this Agreement or any other Credit Document, the transactions
contemplated hereby or thereby or the making of any borrowing or the grant
of any security interest by the Company hereunder.
8.7. Defaults. Neither the Company nor any of its Subsidiaries is in
default under any provision of its Charter or By-laws or of this Agreement
or any other Credit Document. Neither the Company nor any Subsidiary is in
default under any provision of any agreement, instrument, deed or lease to
which it is party or by which it or its property is bound, or has violated
any law, judgment, decree or governmental order, rule or regulation, so as
to result, or pose a material risk of resulting, in any Material Adverse
Change.
8.8. Pension Plans. Each Plan maintained by the Company or any of its
Subsidiaries is in material compliance with the applicable provisions of
ERISA and the Code. Except as set forth on Exhibit 8.8, neither the Company
nor any of its Subsidiaries maintains, contributes to, or participates in
any Plan that is a "defined benefit plan" as defined in ERISA, or is a
Multiemployer Plan. The Company and each Subsidiary have met all of the
minimum funding standards applicable to such Plans, and there exists no
event or condition which would permit the institution of proceedings to
terminate any Plan under section 4042 of ERISA. Except as set forth on
Exhibit 8.8, the current value of the Accumulated Benefit Obligations under
the Plans as of the most recent valuation date does not exceed the current
value of the Plans' assets allocable to such benefits.
8.9. Government Regulation. Neither the Company nor any Subsidiary, nor
any Person controlling the Company or any Subsidiary or under common control
with the Company or any Subsidiary is subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act of 1935, the
Investment Company Act of 1940, the Interstate Commerce Act or any statute
or regulation which regulates the incurring by the Company of Financing Debt
as contemplated by this Agreement and the other Credit Documents. Various
aspects of the business conducted by the Company and its Subsidiaries,
including the nature of the services required to be furnished and the rates
that may be charged therefor, are subject to regulation by the
Superintendent of Insurance of the State of Ohio and by similar authorities
in other jurisdictions in which the Company and its Subsidiaries conduct
business.
8.10. Environmental Regulation. Except as set forth in Exhibit 8.10 and
to the best of the Company's knowledge:
(a) There have been no past, and there are no pending or
threatened:
(i) claims, complaints, notices or requests for
information received by the Company or any of its Subsidiaries
with respect to any alleged violation of any Environmental Law
that, singly or in the aggregate, have resulted in, or may
reasonably be expected to result in, any Material Adverse
Change, or
(ii) complaints, notices or inquiries to the Company or
any of its Subsidiaries regarding potential liability under any
Environmental Law that, singly or in the aggregate, have
resulted in, or may reasonably be expected to result in, any
Material Adverse Change;
(b) No property now or previously owned or leased by the
Company or any of its Subsidiaries is listed or proposed for listing
(with respect to owned property only) on the National Priorities List
pursuant to CERCLA, on CERCLIS or on any similar state list of sites
requiring investigation or clean-up; and
(c) Neither the Company nor any of its Subsidiaries has
directly transported or directly arranged for the transportation of
any Hazardous Material to any location which is listed or proposed
for listing on the National Priorities List pursuant to CERCLA, on
CERCLIS or on any similar state list or which is the subject of
federal, state or local enforcement actions or other investigations
which may lead to material claims against the Company or such
Subsidiary for any remedial work, damage to natural resources or
personal injury, including claims under CERCLA.
8.11. Disclosure. Neither this Agreement nor any other Credit Document
to be furnished to the Lenders by or on behalf of the Company or any
Subsidiary in connection with the transactions contemplated hereby or by
such Credit Document contains any untrue statement of material fact or omits
to state a material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances under which
they were made.
9. Defaults.
9.1. Events of Default. The following events are referred to as "Events
of Default":
9.1.1. The Company shall fail to make any payment in respect of: (i)
interest on any of the Credit Obligations as the same shall become due and
payable and such failure shall continue for a period of five Banking Days,
(ii) any fee on, or any expense or indemnity in respect of, any of the
Credit Obligations as the same shall become due and payable and such
failure shall continue for a period of five Banking Days after notice
thereof by the Agent to the Company, or (iii) principal of any of the
Credit Obligations as the same shall become due, whether at maturity or by
acceleration or otherwise; or
9.1.2. The Company or any Subsidiary shall fail to perform or
observe any of the provisions of Section 6.2 or of Sections 7.4 through
7.11; or
9.1.3. The Company or any Subsidiary shall fail to perform or
observe any other covenant, agreement or provision to be performed or
observed by it under this Agreement or any other Credit Document, and such
failure shall not be rectified or cured to the written satisfaction of the
Required Majority Lenders within 30 days after notice thereof by the Agent
to the Company; or
9.1.4. Any representation or warranty of or with respect to the
Company or any Subsidiary in connection with this Agreement or any other
Credit Document shall be materially false on the date as of which it was
made; or
9.1.5.(i) the Company or any of its Subsidiaries shall fail to make
any payment when due (after giving effect to any applicable grace
periods) in respect of any Financing Debt (other than the Credit
Obligations) outstanding in an aggregate amount of principal and
accrued and unpaid interest exceeding $1,000,000;
(ii) the Company or any Subsidiary shall fail to perform or
observe the terms of any agreement relating to such Financing Debt,
and such failure or condition shall continue, without having been
duly cured, waived or consented to, beyond the period of grace, if
any, specified in such agreement, and such failure or condition shall
permit the acceleration of such Financing Debt;
(iii) any such Financing Debt of the Company or any Subsidiary
shall be accelerated or become due or payable prior to its stated
maturity for any reason whatsoever (other than voluntary prepayments
thereof);
(iv) any Lien on any property of the Company or any Subsidiary
securing any such Financing Debt shall be enforced by foreclosure or
similar action; or
(v) any holder of any such Financing Debt shall exercise any
right of rescission with respect to the issuance thereof; or
(vi) any "default" or "event of default" shall have occurred
under any Letter of Credit or the reimbursement agreement therefor,
or the Company shall have failed to perform any obligation under the
reimbursement agreement for any Letter of Credit; or
9.1.6. (i) AFC and its Affiliates shall collectively cease to own
beneficially (A) at least 35% of the outstanding Common Stock of the
Company entitled generally to vote for the election of directors and (B) a
sufficient number of shares of such voting Common Stock of the Company so
that AFC and its Affiliates in the aggregate own more shares of such
Common Stock than any other Person or group of Persons by a margin of at
least 10% of the total number of shares of such voting Common Stock of the
Company then outstanding, or (ii) at least 40% of the members of the Board
of Directors of the Company shall not actually consist of representatives
of AFC and its Affiliates; or
9.1.7. The Company shall cease to own, directly or indirectly, all
of the Common Stock of GALIC entitled generally to vote for the election
of directors; or
9.1.8. Any Credit Document shall cease, for any reason to be in full
force and effect, or the Company or any Subsidiary shall so assert, or the
security interests created by this Agreement and the other Credit
Documents shall cease to be enforceable and of the same effect and
priority purported to be created hereby; or
9.1.9. A final judgment which, with other outstanding final
judgments against the Company or its Subsidiaries, exceeds an aggregate of
$1,000,000 shall be rendered against the Company or any of its
Subsidiaries and if, within 60 days after entry thereof, such judgment
shall not have been discharged or execution thereof stayed pending appeal,
or if, within 60 days after the expiration of any such stay, such judgment
shall not have been discharged; or
9.1.10. GALIC or any of its Subsidiaries shall, at any time after
the date hereof, be prohibited by law from engaging in the business of
effecting and carrying out contracts of insurance, and such prohibition
would result in a Material Adverse Change.
9.1.11. Any court or any Insurance Authority or any other
governmental or regulatory authority, agency or official of competent
jurisdiction shall issue an order or decree which shall require GALIC or
any of its Subsidiaries to reduce or to terminate all or any substantial
part of its insurance business, and such reduction or termination would
result in a Material Adverse Change.
9.1.12. The Company or any Subsidiary shall:
(i) commence a voluntary case under the Bankruptcy Code or
authorize, by appropriate proceedings of its board of directors or
other governing body, the commencement of such a voluntary case;
(ii) have filed against it a petition commencing an involuntary
case under the Bankruptcy Code which shall not have been dismissed
within 60 days after the date on which such petition is filed; or
file an answer or other pleading within such 60-day period admitting
or failing to deny the material allegations of such a petition or
seeking, consenting to or acquiescing in the relief therein provided;
(iii) have entered against it an order for relief in any
involuntary case commenced under the Bankruptcy Code;
(iv) seek relief as a debtor under any applicable law, other
than the Bankruptcy Code, of any jurisdiction relating to the
liquidation or reorganization of debtors or to the modification or
alteration of the rights of creditors, or consent to or acquiesce in
such relief;
(v) have entered against it an order by a court of competent
jurisdiction (a) finding it to be bankrupt or insolvent, (b) ordering
or approving its liquidation, reorganization or any modification or
alteration of the rights of its creditors or (c) assuming custody of,
or appointing a receiver or other custodian for, all or a substantial
portion of its property; or
(vi) make an assignment for the benefit of, or enter into a
composition with, its creditors, or appoint, or consent to the
appointment of, or suffer to exist a receiver or other custodian for,
all or a substantial portion of its property.
9.2. Certain Actions Following an Event of Default. If any one or more
Events of Default shall occur, then in each and every such case:
9.2.1. No Obligation to Extend Credit. Upon notice by the Agent to
the Company, the obligations of the Lenders to make any further extensions
of credit hereunder shall automatically terminate.
9.2.2. Exercise of Rights; Credit Security. Upon the written
request of the Required Majority Lenders, the Agent shall proceed to
protect and enforce the Lenders' rights by suit in equity, action at law
and/or other appropriate proceeding, either for specific performance of
any covenant or condition contained in this Agreement or any other Credit
Document or in any instrument or assignment delivered to the Lenders
pursuant to this Agreement or any other Credit Document, or in aid of the
exercise of any power granted in this Agreement or any other Credit
Document or any such instrument or assignment. Upon the written request
of the Required Majority Lenders, the Agent shall proceed to enforce
payment of the unpaid Credit Obligations and to realize upon any and all
rights in the Credit Security.
9.2.3. Acceleration. Upon the written request of the Required
Majority Lenders, the Agent on behalf of the Lenders shall by notice in
writing to the Company (i) declare all or any part of the unpaid balance
of the Credit Obligations then outstanding to be immediately due and
payable, and thereupon such unpaid balance or part thereof shall become so
due and payable without presentation, protest or further demand or notice
of any kind, all of which are hereby expressly waived; provided, however,
that if a Bankruptcy Default shall have occurred, the unpaid balance of
the Credit Obligations shall automatically become immediately due and
payable.
9.2.4. Setoff. If all or any part of the unpaid balance of the
Credit Obligations shall have become due and payable pursuant to Section
9.2.3, the Lenders may offset and apply toward the payment of such balance
or part thereof (and/or toward the curing of any Event of Default) any
Indebtedness from the Lenders to the Company, including any Indebtedness
represented by deposits in any account maintained with the Lenders,
regardless of the adequacy of any security for the Credit Obligations, and
the Lenders shall have no duty to determine the adequacy of any such
security in connection with any such offset.
9.2.5. Cumulative Remedies. To the extent not prohibited by
applicable law which cannot be waived, all of the Lenders' rights
hereunder and under each other Credit Document shall be cumulative.
9.3. Annulment of Defaults. Any Default or Event of Default shall be
deemed not to exist or to have occurred for any purpose of this Agreement if
the required holders of Credit Obligations in accordance with Section 11 or
the Agent (with any consent of holders of Credit Obligations required by
Section 11) shall have waived such Default or Event of Default in writing,
stated in writing that the same has been cured to such Lenders' reasonable
satisfaction or entered into an amendment to this Agreement which by its
express terms cures such Default or Event of Default. No such action by the
Lenders or the Agent shall extend to or affect any subsequent Default or
Event of Default or impair any rights of the Lenders upon the occurrence
thereof. The making of any extension of credit during the existence of any
Default or Event of Default shall not constitute a waiver thereof.
9.4. Waivers. The Company hereby waives to the extent not prohibited by
applicable law:
(i) all presentments, demands for performance, notices of
nonperformance (except to the extent required by the provisions of this
Agreement or any other Credit Document), protests, notices of protest and
notices of dishonor;
(ii) any requirement of diligence or promptness on the part of any
Lender in the enforcement of its rights under this Agreement, the Notes or
any other Credit Document;
(iii) any and all notices of every kind and description which may be
required to be given by any statute or rule of law; and
(iv) any defense of any kind (other than indefeasible payment in
full) which it may now or hereafter have with respect to its liability
under this Agreement, the Notes or any other Credit Document or with
respect to the Credit Obligations.
10. Expenses; Indemnity.
10.1. Expenses. The Company will bear:
(i) all reasonable expenses of the Agent (including the out-of-
pocket expenses related to forming the group of Lenders and reasonable
fees and disbursements of the special counsel to the Agent, but excluding
fees and expenses of counsel to the other Lenders) in connection with the
preparation and duplication of this Agreement, each other Credit Document,
the transactions contemplated hereby and thereby and operations hereunder
and thereunder;
(ii) all recording and filing fees and transfer and documentary stamp
and similar taxes at any time payable in respect of this Agreement, any
other Credit Document, any Credit Security or the incurrence of the Credit
Obligations; and
(iii) to the extent not prohibited by applicable law that cannot be
waived, all other reasonable expenses incurred by the Lenders or the
holder of any Credit Obligation in connection with the enforcement of any
rights hereunder or under any other Credit Document (including, during the
existence of a Default the Lenders' examination rights provided in Section
7.3.6), including costs of collection and reasonable attorneys' fees and
expenses (which shall include costs attributable to in-house legal
counsel).
10.2. General Indemnity. The Company will, jointly and severally,
indemnify the Agent and each Lender, each of the Agent's and the Lenders'
directors, officers and employees, and each Person, if any, who controls the
Agent or any Lender (the Agent and each Lender and each of such directors,
officers, employees and control Persons is referred to as an "Indemnitee")
and hold each of them harmless from and against any and all claims, damages,
liabilities and reasonable expenses (including reasonable fees and
disbursements of counsel with whom any Indemnitee may consult in connection
therewith and all reasonable expenses of litigation or preparation therefor)
which any Indemnitee may incur or which may be asserted against any
Indemnitee in connection with any litigation or investigation involving the
Company or any Subsidiary, or any officer, director or employee thereof
(including the Agent's or the Lenders' compliance with or contest of any
subpoena or other process issued against it in any proceeding involving the
Company or any of its Subsidiaries), or any matters involving the
transactions contemplated hereby or in connection with the existence or
exercise of any rights with respect to the Credit Security in accordance
with the provisions of the Credit Documents, other than litigation commenced
by the Company against the Agent or the Lenders which seeks enforcement of
any of the rights of the Company hereunder or under any other Credit
Document and is finally determined adversely to the Agent or the Lenders and
except to the extent such claims, damages, liabilities and expenses result
from the Agent's or any Lender's gross negligence or willful misconduct.
11. Operations.
11.1. Interests in Credits. The percentage interest of each Lender in
the Loan shall be computed based on the Commitment for each Lender as
follows:
Lender Commitment Amount Percentage Interest
The First National $20,000,000 40%
Bank of Boston
Credit Lyonnais $15,000,000 30%
Cayman Island
Branch
Bank of America $15,000,000 30%
Illinois
Total $50,000,000 100%
The foregoing percentage interests, as otherwise adjusted pursuant to the
terms of this Agreement and otherwise as the Lenders may from time to time
agree among themselves, are referred to as the "Percentage Interests" with
respect to all or any portion of the Loan. References in any Credit
Document to the Lenders' respective Percentage Interests are to such
interests as from time to time in effect.
11.2. Agent's Authority to Act, etc. Each of the Lenders hereby appoints
and authorizes the Agent to act for the Lenders as the Lenders' Agent in
connection with the transactions contemplated by this Agreement and the
other Credit Documents on the terms set forth herein. In acting hereunder,
the Agent is acting for its own account to the extent of its Percentage
Interest and for the accounts of the other Lenders to the extent of the
Lenders' respective Percentage Interests, and all action in connection with
the enforcement of, or the exercise of any remedies (other than the Lenders'
rights of set-off as provided in Section 9.2.4 or in any Credit Document) in
respect of the Credit Obligations and Credit Documents shall be taken by the
Agent.
11.3. Company to Pay Agent, etc. The Company shall be fully protected in
making all payments in respect of the Credit Obligations to the Agent, in
relying upon consents, modifications and amendments executed by the Agent
purportedly on the Lenders' behalf, and in dealing with the Agent as herein
provided. The Agent shall charge the account of the Company, on the dates
when the amounts thereof become due and payable, with the amounts of the
principal of and interest on the Loan, the commitment fees and all other
fees and amounts owing under any Credit Document.
11.4. Lender Operations for Advances, etc.
11.4.1. Advances. Upon receipt of a borrowing request by the Agent
under Section 2.1, the Agent shall promptly notify each of the Lenders (by
telephone confirmed in writing or otherwise). On each Closing Date, each
Lender shall advance to the Agent in immediately available funds such
Lender's Percentage Interest in the portion of the Loan advanced on such
Closing Date prior to 10:00 a.m. (Boston time). If such funds are not
received at such time, but all the conditions set forth in Section 5 have
been satisfied, each Lender hereby authorizes and requests the Agent to
advance for the Lender's account, pursuant to the terms hereof, the
Lender's respective Percentage Interest in such portion of the Loan and
agrees to reimburse the Agent in immediately available funds for the
amount thereof prior to 2:00 p.m. (Boston time) on the day any portion of
the Loan is advanced hereunder.
11.4.2. Agent to Allocate Payments. Subject to Section 11.4.3, all
payments of principal and interest in respect of the extensions of credit
made pursuant to this Agreement and commitment fees and other fees under
this Agreement shall, as a matter of convenience, be made by the Company
to the Agent in immediately available funds, and the share of each Lender
shall be credited to such Lender by the Agent in immediately available
funds in such manner that the principal amount, interest and fees in
respect of the Credit Obligations to be paid shall be paid proportionately
in accordance with the Lenders' respective Percentage Interests in such
Credit Obligations.
11.4.3. Delinquent Lenders. In the event that any Lender fails to
reimburse the Agent pursuant to Section 11.4.1 for the Percentage Interest
of such Lender (the "Delinquent Lender") in any credit advanced by the
Agent pursuant hereto, overdue amounts (the "Delinquent Payment") due from
the Delinquent Lender to the Agent shall bear interest, payable by the
Delinquent Lender on demand, at a per annum rate equal to (a) the Federal
Funds Rate for the first three days overdue and (b) the sum of 2% plus the
Federal Funds Rate for any longer period. Such interest shall be payable
to the Agent for the account of each party making reimbursements or
otherwise bearing the credit risk of such Delinquent Payment as provided
below for the period commencing on the date of the Delinquent Payment and
ending on the date the Delinquent Lender reimburses such other parties on
account of the Delinquent Payment and the accrued interest thereon (the
"Delinquency Period"), whether pursuant to the assignments referred to
below or otherwise. During the Delinquency Period, in order to make
reimbursements for the Delinquent Payment and accrued interest thereon,
the Delinquent Lender shall be deemed to have assigned to the Agent all
payments which would have thereafter otherwise been payable under the
Credit Documents to the Delinquent Lender, and the Agent shall credit a
portion of such payments to each Lender that is not a Delinquent Lender (a
"Performing Lender") in an amount equal to the Percentage Interest of such
Performing Lender divided by one minus the Percentage Interest of the
Delinquent Lender.
Upon notice by the Agent, the Company will pay to the Agent the
principal (but not interest) portion of the Delinquent Payment. The Agent
will promptly notify each Lender of the Agent's determination of the
Federal Funds Rate.
The foregoing provisions shall be in addition to any other remedies
the Agent, the Performing Lenders or the Company may have under law or
equity against the Delinquent Lender as a result of the Delinquent
Payment.
11.5. Sharing of Payments, etc. Subject to Section 11.4.3, each Lender
agrees that (a) if by exercising any right of set-off or counterclaim or
otherwise, it shall receive payment of a proportion of the aggregate amount
of principal and interest due with respect to its Percentage Interest in the
Loan which is greater than the proportion received by any other Lender in
respect of the aggregate amount of principal and interest due with respect
to the Percentage Interest in the Loan of such other Lender and (b) if such
inequality shall continue for more than 10 days, the Lender receiving such
proportionately greater payment shall purchase participations in the
Percentage Interests in the Loan held by the other Lenders, and such other
adjustments shall be made from time to time, as may be required so that all
such payments of principal and interest due with respect to the Loan held by
the Lenders shall be shared by the Lenders pro rata in accordance with their
respective Percentage Interests; provided, however, that this Section 11.5
shall not impair the right of any Lender to exercise any right of set-off or
counterclaim it may have and to apply the amount subject to such exercise to
the payment of Indebtedness of the Company other than the Company's
Indebtedness with respect to the Loan. The Company agrees, to the fullest
extent permitted by applicable law, that any Credit Participant and any
Lender purchasing a participation from another Lender pursuant to this
Section 11.5 may exercise all rights of payment (including the right of
set-off), and shall be obligated to share payments under this Section 11.5,
with respect to its participation as fully as if such Credit Participant or
such Lender were the direct creditor of the Company and a Lender hereunder
in the amount of such participation.
11.6. Amendments, Consents, Waivers, etc. Except as otherwise set forth
herein, the Agent may (and upon the written request of the Required Majority
Lenders, the Agent shall) take or refrain from taking any action under this
Agreement or any other Credit Document, which action shall be binding upon
all of the Lenders; provided, however, that:
(a) Except as provided below, without the written consent of the
Required Majority Lenders, no modification of or amendment to, or waiver
of compliance with or of a Default under, any of the Credit Documents
shall be made.
(b) Without the written consent of such Lenders as own 100% of the
Percentage Interests (other than Delinquent Lenders during the existence
of a Delinquency Period so long as such Delinquent Lender is treated the
same as the other Lenders with respect to any actions enumerated below):
(i) No reduction in the interest rate or the fees on the Loan
shall be made.
(ii) No extension or postponement of the stated time of payment
of all or any portion of the Loan or interest thereon or any fees
shall be made.
(iii) No waiver or forgiveness of payment of any portion of the
Loan shall be made.
(iv) No increase in the amount, or extension of the term, of the
Lenders' Commitments beyond that provided for under Section 2 shall
be made.
(v) No alteration of the Lenders' several rights of set-off
contained in Section 9.2.4 shall be made.
(vi) No release of any Credit Security other than as permitted
by Section 6.2 or 7.9 shall be made.
(vii) No amendment to Section 2.4, 3.2.4, 3.2.5, 3.4, 3.5, 10,
11.5, 11.6 or 16, or the definition of "Required Majority Lenders" in
Exhibit 1, shall be made.
(viii) No assignment by the Company of its rights or delegation of
its duties under the Credit Documents shall be made.
11.7. Agent's Resignation. The Agent may resign at any time by giving at
least 60 days' prior written notice of its intention to do so to each other
of the Lenders and to the Company and upon the appointment by the Required
Majority Lenders of a successor Agent satisfactory to the Company. If no
successor Agent shall have been so appointed and shall have accepted such
appointment within 45 days after the retiring Agent's giving of such notice
of resignation, then the retiring Agent may with the consent of the Company,
which consent shall not be unreasonably withheld, appoint a successor Agent
which shall be a bank or a trust company organized under the laws of the
United States of America or any state thereof and having a combined capital,
surplus and undivided profit of at least $500,000,000 and a tier one ratio
of equity to risk-weighted assets ranking in the top half of all domestic
banks having greater than $1,000,000,000 in assets pursuant to regulations
issued by the federal Comptroller of the Currency, the Board of Governors of
the Federal Reserve System or other applicable federal bank regulatory
agencies; provided, however, that any successor Agent appointed under this
sentence may be removed upon the written request of the Required Majority
Lenders, which request shall also appoint a successor Agent satisfactory to
the Company. Upon the appointment of a new Agent hereunder, the term
"Agent" shall for all purposes of this Agreement thereafter mean such
successor. After any retiring Agent's resignation hereunder as Agent, or
the removal hereunder of any successor Agent, the provisions of this
Agreement shall continue to inure to the benefit of such Agent as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
11.8. Concerning the Agent.
11.8.1. Action in Good Faith, etc. The Agent and its officers,
directors, employees and agents shall be under no liability to any of the
Lenders or to any future holder of any interest in the Credit Obligations
for any action or failure to act taken or suffered in good faith, and any
action or failure to act in accordance with an opinion of its counsel
shall conclusively be deemed to be in good faith. The Agent shall in all
cases be entitled to rely, and shall be fully protected in relying, on
instructions given to the Agent by the required holders of Credit
Obligations as provided in this Agreement.
11.8.2. No Implied Duties, etc. The Agent shall have and may
exercise such powers as are specifically delegated to the Agent under this
Agreement or any other Credit Document, together with all other powers
incidental thereto. The Agent shall have no implied duties to any Person
or any obligation to take any action under this Agreement or any other
Credit Document except for action specifically provided for in this
Agreement or any other Credit Document to be taken by the Agent. Before
taking any action under this Agreement or any other Credit Document, the
Agent may request an appropriate specific indemnity satisfactory to it
from each Lender in addition to the general indemnity provided for in
Section 11.11, and until the Agent has received such specific indemnity,
the Agent shall not be obligated to take (although it may in its sole
discretion take) any such action under this Agreement or any other Credit
Document; provided, however, that no such indemnity shall extend to
actions or omissions which are taken by the Agent with gross negligence or
willful misconduct.
11.8.3. Validity, etc. Subject to Section 11.8.1, the Agent shall
not be responsible to any Lender or any future holder of any interest in
the Credit Obligations (a) for the legality, validity, enforceability or
effectiveness of this Agreement or any other Credit Document, (b) for any
recitals, reports, representations, warranties or statements contained in
or made in connection with this Agreement or any other Credit Document,
(c) for the existence or value of any assets included in any security for
the Credit Obligations, (d) for the perfection or effectiveness of any
Lien purported to be included in such security or (e) for the
specification or failure to specify any particular assets to be included
in such security.
11.8.4. Compliance. The Agent shall not be obligated to ascertain
or inquire as to the performance or observance of any of the terms of this
Agreement or any other Credit Document; and in connection with any
extension of credit under this Agreement or any other Credit Document, the
Agent shall be fully protected in relying on a certificate of the Company
as to the fulfillment by the Company of any conditions to such extension
of credit.
11.8.5. Employment of Agents and Counsel. The Agent may execute any
of its duties as Agent under this Agreement or any other Credit Document
by or through employees, agents and attorneys-in-fact and shall not be
responsible to any of the Lenders, the Company or any Subsidiary (except
as to money or securities received by the Agent or the Agent's authorized
agents) for the default or misconduct of any such agents or
attorneys-in-fact selected by the Agent, except where the Agent has acted
with gross negligence or willful misconduct. The Agent shall be entitled
to advice of counsel concerning all matters pertaining to the agency
hereby created and its duties hereunder or under any other Credit
Document.
11.8.6. Reliance on Documents and Counsel. The Agent shall be
entitled to rely, and shall be fully protected in relying, upon any
affidavit, certificate, cablegram, consent, instrument, letter, notice,
order, document, statement, telecopy, telegram, telex or teletype message
or writing reasonably believed in good faith by the Agent to be genuine
and correct and to have been signed, sent or made by the Person in
question, including without limitation any telephonic or oral statement
made by such Person, and, with respect to legal matters, upon the opinion
of counsel selected by the Agent.
11.8.7. Agent's Reimbursement. Each of the Lenders severally agrees
to reimburse the Agent in the amount of such Lender's Percentage Interest,
for any expenses not reimbursed by the Company (without limiting the
obligation of the Company to make such reimbursement): (a) for which the
Agent is entitled to reimbursement by the Company under this Agreement or
any other Credit Document, and (b) after the occurrence of a Default, for
any other expenses incurred by the Agent on the Lenders' behalf in
connection with the enforcement of the Lenders' rights under this
Agreement or any other Credit Document; provided, however, that no such
reimbursement shall apply to actions or omissions which are taken by the
Agent with gross negligence or willful misconduct.
11.8.8. Agent's Fee. The Company will pay to the Agent for its
account an Agent's fee equal to $25,000 per annum, payable quarterly in
arrears on each Payment Date after the Effective Date and on the Final
Maturity Date.
11.9. Rights as a Lender. With respect to any credit extended by it
hereunder, The First National Bank of Boston shall have the same rights,
obligations and powers hereunder as any other Lender and may exercise such
rights and powers as though it were not the Agent, and unless the context
otherwise specifies, The First National Bank of Boston shall be treated in
its individual capacity as though it were not the Agent hereunder. Without
limiting the generality of the foregoing, the Percentage Interest of The
First National Bank of Boston shall be included in any computations of
Percentage Interests. The First National Bank of Boston and its Affiliates
may accept deposits from, lend money to, act as trustee for and generally
engage in any kind of banking or trust business with the Company or any of
its Subsidiaries or any other Person, including any Person who may do
business with or own an equity interest in the Company or any of its
Subsidiaries, all as if such bank were not the Agent and without any duty to
account therefor to the other Lenders.
11.10. Independent Credit Decision. Each of the Lenders acknowledges
that it has independently and without reliance upon the Agent, based on the
financial statements and other documents referred to in Section 8.2, on the
other representations and warranties contained herein and on such other
information with respect to the Company and its Subsidiaries as such Lender
deemed appropriate, made such Lender's own credit analysis and decision to
enter into this Agreement and to make the extensions of credit provided for
hereunder. Each Lender represents to the Agent that such Lender will
continue to make its own independent credit and other decisions in taking or
not taking action under this Agreement or any other Credit Document. Each
Lender expressly acknowledges that neither the Agent nor any of its
officers, directors, employees, agents, attorneys-in-fact or Affiliates has
made any representations or warranties to such Lender, and no act by the
Agent taken under this Agreement or any other Credit Document, including any
review of the affairs of the Company and its Subsidiaries, shall be deemed
to constitute any representation or warranty by the Agent. Except for
notices, reports and other documents expressly required to be furnished to
each Lender by the Agent under this Agreement or any other Credit Document,
the Agent shall not have any duty or responsibility to provide any Lender
with any credit or other information concerning the business, operations,
property, condition, financial or otherwise, or credit worthiness of the
Company or any Subsidiary which may come into the possession of the Agent or
any of its officers, directors, employees, agents, attorneys-in-fact or
Affiliates.
11.11. Indemnification. The holders of the Credit Obligations hereby
agree to indemnify the Agent (to the extent not reimbursed by the Company
and without limiting the obligation of the Company to do so), pro rata
according to their respective Percentage Interests, from and against any and
all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever
which may at any time be imposed on, incurred by or asserted against the
Agent relating to or arising out of this Agreement, any other Credit
Document, the transactions contemplated hereby or thereby, or any action
taken or omitted by the Agent in connection with any of the foregoing;
provided, however, that the foregoing shall not extend to actions or
omissions which are taken by the Agent with gross negligence or willful
misconduct.
12. Successors and Assigns; Lender Assignments and Participations. Any
reference in this Agreement to any of the parties hereto shall be deemed to
include the successors and assigns of such party, and all covenants and
agreements by or on behalf of the Company, any Subsidiary, the Agent or the
Lenders that are contained in this Agreement shall bind and inure to the
benefit of their respective successors and assigns; provided, however, that
no party may assign its rights or obligations under this Agreement except to
the extent set forth below in this Section 12.
12.1. Assignments by Lenders.
12.1.1. Assignees and Assignment Procedures. Each Lender may, with
the written consent of the Company and the Agent in the case of
assignments to a Person other than an Affiliate of such Lender (which
consent will not be unreasonably withheld or delayed), in compliance with
applicable laws in connection with such assignment, assign to one or more
assignees which are Qualified Institutional Buyers (each, an "Assignee")
all or a portion of its interests, rights and obligations under this
Agreement and the other Credit Documents, its Commitment, the portion of
the Loan at the time owing to it and the Notes held by it; provided,
however, that:
(a) If less than the entire interests, rights and obligations
of a Lender are assigned, the aggregate amount of the Commitment and
the Loan of the assigning Lender subject to each such assignment
(determined as of the date the Assignment and Acceptance with respect
to such assignment is delivered to the Agent) shall not be less than
$5,000,000 and in increments of $1,000,000;
(b) If less than the entire interests, rights and obligations
of a Lender are assigned, after giving effect to such assignment, the
portion of the Commitment retained by the assigning Lender shall not
be less than 50% of its original Commitment; and
(c) The parties to each such assignment shall execute and
deliver to the Agent an Assignment and Acceptance (the "Assignment
and Acceptance"), substantially in the form of Exhibit 12.1.1,
together with the Notes subject to such assignment and a processing
and recordation fee of $3,000; provided, however, that no such
processing and recordation fee shall be payable upon any such
assignment effected pursuant to Section 3.4.2(a).
Upon acceptance and recording pursuant to Section 12.1.3, from and after
the assignment date specified in each Assignment and Acceptance:
(i) The Assignee shall be a party hereto and, to the
extent provided in such Assignment and Acceptance, have the
rights and obligations of a Lender under this Agreement, and
(ii) The assigning Lender shall, to the extent provided in
such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such
Lender shall cease to be a party hereto but shall continue to be
entitled to the benefits of Sections 3.2.4, 3.4, 3.5 and 10, as
well as to any interest and fees accrued for its account
hereunder and not yet paid).
12.1.2. Terms of Assignment and Acceptance. By executing and
delivering an Assignment and Acceptance, the assigning Lender and Assignee
shall be deemed to confirm to and agree with each other and the other
parties hereto as follows:
(a) Other than the representation and warranty that it is the
legal and beneficial owner of the interest being assigned thereby
free and clear of any adverse claim, such assigning Lender makes such
assignment without recourse and makes no representation or warranty
and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, any other Credit
Document or any other instrument or document furnished pursuant
hereto;
(b) Such assigning Lender makes no representation or warranty
and assumes no responsibility with respect to the financial condition
of the Company and its Subsidiaries or the performance or observance
by the Company of any of its obligations under this Agreement, any
other Credit Document or any other instrument or document furnished
pursuant hereto;
(c) Such Assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial
statements delivered pursuant to Section 7.3 and 8.2 and such other
documents and information as it has deemed appropriate to make its
own credit analysis and decision to enter into such Assignment and
Acceptance;
(d) Such Assignee will independently and without reliance upon
the Agent, such assigning Lender or any other Lender and based on
such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not
taking action under this Agreement;
(e) Such Assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under
this Agreement as are delegated to the Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and
(f) Such Assignee agrees that it will perform in accordance
with the terms of this Agreement all the obligations which are
required to be performed by it as a Lender.
(g) Such Assignee agrees that it will not further assign its
rights and obligations under this Agreement.
12.1.3. Register. The Agent shall maintain at the Boston Office a
register (the "Register") for the recordation of (a) the names and
addresses of the Lenders and the Assignees which assume rights and
obligations pursuant to an assignment under Section 12.1.1, (b) the
Percentage Interest and Commitment of each such Lender as set forth in
Section 11.1 and (c) the amount of the Loan owing to each Lender from time
to time. The entries in the Register shall be conclusive, in the absence
of manifest error, and the Company, the Agent and the Lenders may treat
each Person whose name is registered therein for all purposes as a party
to this Agreement. The Register shall be available for inspection by the
Company or any Lender at any reasonable time and from time to time upon
reasonable prior notice. The Agent agrees to provide the Company with
notice of any changes in the information required by the Register, as set
forth in items (a) and (b) above.
12.1.4. Notes. Upon its receipt of a completed Assignment and
Acceptance executed by an assigning Lender and an Assignee, together with
the Notes subject to such assignment and the processing and recordation
fee referred to in Section 12.1.1, the Agent shall (a) accept such
Assignment and Acceptance, (b) record the information contained therein in
the Register and (c) give prompt notice thereof to the Company. Within
five Banking Days after receipt of notice, the Company, at its own
expense, shall execute and deliver to the Agent, in exchange for the
surrendered Notes, a new Note to the order of such Assignee in a principal
amount equal to the applicable Commitment and Loan assumed by it pursuant
to such Assignment and Acceptance and, if the assigning Lender has
retained a Commitment and Loan, a new Note to the order of such assigning
Lender in a principal amount equal to the applicable Commitment and Loan
retained by it. Such new Notes shall be in an aggregate principal amount
equal to the aggregate principal amount of such surrendered Notes, and
shall be dated the date of the surrendered Notes which they replace.
12.1.5. Foreign Persons. If any assignment is made under Section
12.1 to any Person which is not incorporated or organized under the laws
of the United States of America or a state thereof, the Lender making such
assignment shall cause such Person to agree that, on or prior to the
assignment, to the extent necessary to receive payments under this
Agreement and the Notes without deduction or withholding of any United
States federal income taxes, it will deliver to the Company and the Agent:
(a) Two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 or successor form, as the case may be,
certifying in each case that such Person is entitled to receive
payments under this Agreement and the Notes, without deduction or
with-
holding of any United States federal income taxes; and
(b) A duly completed Internal Revenue Service Form W-8 or W-9
or successor form, as the case may be, to establish an exemption from
United States backup withholding tax.
12.1.6. Federal Reserve Bank. Notwithstanding the foregoing
provisions of this Section 12, any Lender may at any time pledge or assign
all or any portion of such Lender's rights under this Agreement and the
other Credit Documents to a Federal Reserve Bank; provided, however, that
no such pledge or assignment shall release such Lender from such Lender's
obligations hereunder or under any other Credit Document.
12.1.7. Further Assurances. The Company and its Subsidiaries shall
sign such documents and take such other actions from time to time
reasonably requested by an Assignee to enable it to share in the benefits
of the rights created by the Credit Documents.
12.2. Credit Participants. Each Lender may, without the consent of the
Company or the Agent, in compliance with applicable laws in connection with
such participation, sell to one or more Qualified Institutional Buyers (each
a "Credit Participant") participations in a portion of such Lender's
interests, rights and obligations under this Agreement and the other Credit
Documents (including a portion of such Lender's Commitment and the Loan
owing to such Lender and the Notes held by such Lender); provided, however,
that:
(i) the amount of such participation shall not be less than
$5,000,000 and in increments of $1,000,000;
(ii) after giving effect to such participation, the Lender shall
retain not less than 50% of its original Commitment;
(iii) such Lender's obligations under this Agreement shall remain
unchanged;
(iv) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations;
(v) the Company, the Agent and the other Lenders shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement, and such Lender shall retain
the sole right to enforce the obligations of the Company relating to the
Loan and the Notes and to approve any amendment, modification or waiver of
any provision of this Agreement (other than amendments, modifications or
waivers with respect to any fees payable hereunder or the amount of
principal of or the rate at which interest is payable on the Loan, or the
dates fixed for payments of principal of or interest on the Loan, or the
release of any Credit Security); and
(vi) the Credit Participant shall not grant further participations
with respect to its Percentage Interest.
13. Confidentiality. Each Lender agrees that it will make no disclosure of
any information furnished to it by the Company or any Subsidiary unless such
information shall have become public, except:
(i) in connection with operations under or the enforcement of this
Agreement or any other Credit Document;
(ii) to any proposed assignee or Credit Participant who agrees
(subject to the customary exceptions) to preserve the confidentiality of
any confidential information relating to the Company or any Subsidiary
received from such Lender;
(iii) pursuant to any statutory or regulatory requirement or any
mandatory court order, subpoena or other legal process;
(iv) to any parent or corporate Affiliate of such Lender; provided,
however, that any such Person shall also agree to comply with the
restrictions set forth in this Section 13 with respect to such
information;
(v) to its independent counsel, auditors and other professional
advisors with an instruction to such Person to keep such information
confidential; and
(vi) with the prior written consent of the Company, to any other
Person.
14. Notices. Except as otherwise specified in this Agreement, any notice
required to be given pursuant to this Agreement shall be given in writing.
Any notice, demand or other communication in connection with this Agreement
shall be deemed to be given if given in writing (including telex, telecopy
(confirmed by telephone or writing) or similar teletransmission) addressed
as provided below (or to the addressee at such other address as the
addressee shall have specified by notice actually received by the
addressor), and if either (i) actually delivered in fully legible form to
such address (evidenced in the case of a telex by receipt of the correct
answerback) or (ii) in the case of a letter, five days shall have elapsed
after the same shall have been deposited in the United States mails, with
first-class postage prepaid and registered or certified.
If to the Company, to it at the following address:
American Annuity Group, Inc.
250 East Fifth Street
Cincinnati, Ohio 45202
Attention: William J. Maney
With a copy to:
Keating, Muething & Klekamp
1800 Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Paul V. Muething
If to any Lender, to it at its address set forth on the signature page of
this Agreement, to the attention of the account officer specified on the
signature page, with a copy to the Agent.
15. Course of Dealing, Amendments and Waivers. No course of dealing
between any Lender and the Company or any Subsidiary of the Company shall
operate as a waiver of any of the Lenders' rights under this Agreement or
any other Credit Document or with respect to the Credit Obligations. No
delay or omission on the part of any Lender in exercising any right under
this Agreement or any other Credit Document or with respect to the Credit
Obligations shall operate as a waiver of such right or any other right
hereunder or thereunder. A waiver on any one occasion shall not be
construed as a bar to or waiver of any right or remedy on any future
occasion. No waiver, consent or amendment with respect to this Agreement or
any other Credit Document shall be binding unless it is in writing and
signed by the Agent or the holders of the required Credit Obligations.
16. Defeasance. When all Credit Obligations have been paid, performed and
reasonably determined by the Lenders to have been indefeasibly discharged in
full, and if at the time no Lender continues to be committed to extend any
credit to the Company hereunder or under any other Credit Document, this
Agreement shall terminate and, at the Company's written request, accompanied
by such certificates and opinions as the Agent shall reasonably deem
necessary, the Credit Security shall revert to the Company and the right,
title and interest of the Lenders therein shall terminate; provided,
however, that Sections 3.2.4, 3.4, 3.5, 10, 11, 13, 17 and 18 shall survive
the termination of this Agreement. Thereupon, on the Company's demand and
at their cost and expense, the Agent shall execute proper instruments,
acknowledging satisfaction of and discharging this Agreement, and shall
redeliver to the Company any Credit Security then in its possession.
17. Venue; Service of Process. The Company by its execution hereof:
(i) Irrevocably submits to the nonexclusive jurisdiction of the
state courts of The Commonwealth of Massachusetts and to the nonexclusive
jurisdiction of the United States District Court for the District of
Massachusetts for the purpose of any suit, action or other proceeding
arising out of or based upon this Agreement or any other Credit Document
or the subject matter hereof or thereof.
(ii) Waives to the extent not prohibited by applicable law, and
agrees not to assert, by way of motion, as a defense or otherwise, in any
such proceeding brought in any of the above-named courts, any claim that
it is not subject personally to the jurisdiction of such court, that its
property is exempt or immune from attachment or execution, that such
proceeding is brought in an inconvenient forum, that the venue of such
proceeding is improper, or that this Agreement or any other Credit
Document, or the subject matter hereof or thereof, may not be enforced in
or by such court.
The Company hereby consents to service of process in any such proceeding in
any manner permitted by Chapter 223A of the General Laws of The Commonwealth
of Massachusetts and agrees that service of process by registered or
certified mail, return receipt requested, at its address specified in or
pursuant to Section 14 is reasonably calculated to give actual notice.
18. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
THAT CANNOT BE WAIVED, EACH OF THE COMPANY AND THE LENDERS HEREBY WAIVES,
AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE,
CLAIM, DEMAND OR ACTION ARISING OUT OF THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY CREDIT OBLIGATION OR
IN ANY WAY CONNECTED WITH THE DEALINGS OF THE LENDERS OR THE COMPANY IN
CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR OTHERWISE. The Company
acknowledges that it has been informed by the Lenders that the provisions of
this Section 18 constitute a material inducement upon which each of the
Lenders has relied, is relying and will rely in entering into this Agreement
and any other Credit Document, and that it has reviewed the provisions of
this Section 18 with its counsel. Any Lender or the Company may file an
original counterpart or a copy of this Section 18 with any court as written
evidence of the consent of the Company and the Lenders to the waiver of
their rights to trial by jury.
19. General. All covenants, agreements, representations and warranties
made in this Agreement or any other Credit Document or in certificates
delivered pursuant hereto or thereto shall be deemed to have been material
and relied on by each Lender, notwithstanding any investigation made by any
Lender on its behalf, and shall survive the execution and delivery to the
Lenders hereof and thereof. The invalidity or unenforceability of any term
or provision hereof shall not affect the validity or enforceability of any
other term or provision hereof. The headings in this Agreement are for
convenience of reference only and shall not limit, alter or otherwise affect
the meaning hereof. This Agreement and the other Credit Documents
constitute the entire understanding of the parties with respect to the
subject matter hereof and thereof and supersedes all prior and current
understandings and agreements, whether written or oral. This Agreement may
be executed in any number of counterparts which together shall constitute
one instrument. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE
COMMONWEALTH OF MASSACHUSETTS.
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of
the date first above written.
AMERICAN ANNUITY GROUP, INC.
By s\William J. Maney
Senior Vice President and Treasurer
THE FIRST NATIONAL BANK OF BOSTON
By s\Robert F. Milordi
Director
Media and Communications
Mail Stop 01-08-08
100 Federal Street
Boston, Massachusetts 02110
Telecopy: (617) 434-3401
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By s\W. Michael George
Authorized Signature
c/o Credit Lyonnais
New York Branch
Credit Lyonnais Building
1301 Avenue of the Americas
New York, New York 10019
Telecopy: (212) 459-3176
BANK OF AMERICA ILLINOIS
By s\Paul Higdon
Managing Director
231 South LaSalle Street, 9-Q
Chicago, Illinois 60697
Telecopy: (312) 987-0303
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 1,258,600
<DEBT-CARRYING-VALUE> 3,273,700
<DEBT-MARKET-VALUE> 3,062,400
<EQUITIES> 21,700
<MORTGAGE> 47,200
<REAL-ESTATE> 28,000
<TOTAL-INVEST> 4,861,500
<CASH> 36,700
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 65,100
<TOTAL-ASSETS> 5,089,900
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,618,100
<NOTES-PAYABLE> 183,300
<COMMON> 39,100
0
0
<OTHER-SE> 165,300
<TOTAL-LIABILITY-AND-EQUITY> 5,089,900
0
<INVESTMENT-INCOME> 371,800
<INVESTMENT-GAINS> (100)
<OTHER-INCOME> 2,300
<BENEFITS> 241,900
<UNDERWRITING-AMORTIZATION> 7,100
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 63,200
<INCOME-TAX> 22,300
<INCOME-CONTINUING> 40,900
<DISCONTINUED> (2,600)
<EXTRAORDINARY> (1,700)
<CHANGES> (500)
<NET-INCOME> 36,100
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
