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, 1995 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 29, 1996, there were 43,074,038 shares of the
Registrant's Common Stock outstanding. The aggregate market value of Common
Stock held by non-affiliates at that date was approximately $96.2 million
based upon non-affiliate holdings of 8,014,043 shares and a market price of
$12.00 per share.
Documents Incorporated by Reference:
Proxy Statement for the 1996 Annual Meeting of Shareholders (portions of
which are incorporated by reference into Part III hereof).
AMERICAN ANNUITY GROUP, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
Part I
Page
Item 1. Business
Introduction 1
Great American Life Insurance Company 1
Prairie States Life Insurance Company 6
Loyal American Life Insurance Company 7
Annuity Investors Life Insurance Company 9
Other Subsidiaries 10
Investments 10
Independent Ratings 12
Competition 13
Regulation 13
Discontinued Manufacturing Operations 15
Employees 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
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 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure *
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 26
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K S-1
* The response to this item is "none".
PART I
ITEM 1
Business
Introduction
American Annuity Group, Inc. ("AAG" or "the Company") was incorporated as a
Delaware corporation in 1987. AAG is a holding company whose primary asset
is the capital stock of Great American Life Insurance Company ("GALIC").
GALIC sells annuities primarily to employees of qualified not-for-profit
organizations under Section 403(b) of the Internal Revenue Code. AAG
acquired GALIC in December 1992.
In November 1995, AAG acquired Laurentian Capital Corporation ("LCC"). As a
result, the Company's subsidiaries now include (i) Prairie States Life
Insurance Company ("Prairie"), which markets individual life insurance and
annuity policies with the sponsorship of state associations of funeral
directors as well as individual funeral directors across the country and
(ii) Loyal American Life Insurance Company ("Loyal"), which specializes in
life and health insurance sold through payroll deduction plans and credit
unions.
AAG is an 81% owned subsidiary of American Financial Group, Inc. ("AFG").
Great American Life Insurance Company
GALIC, located in Cincinnati, 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
premiums, credits interest on the policy and pays out a benefit upon death,
surrender or annuitization.
Annuity contracts are generally classified as either fixed rate or variable.
With a fixed rate annuity, the interest crediting rate is initially set by
the issuer and thereafter may be changed from time to time by the issuer
based on market conditions, subject to any guaranteed interest crediting
rates in the policy. With a variable annuity, the value of the policy is
tied to an underlying securities portfolio. All annuities issued by GALIC
itself have been fixed rate annuities. A GALIC subsidiary began marketing
variable annuities in the fourth quarter of 1995. See "Annuity Investors
Life Insurance Company".
Employees of qualified not-for-profit organizations 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.
1
The following table (in millions) presents information concerning GALIC.
Statutory Accounting Principles Basis
1995 1994 1993 1992 1991
Total Assets (a) $5,414 $5,057 $4,758 $4,377 $4,541
Insurance Reserves:
Annuities $4,974 $4,655 $4,299 $4,011 $3,756
Life 22 21 22 23 21
Accident and Health - 1 1 1 1
$4,996 $4,677 $4,322 $4,035 $3,778
Capital and Surplus $ 273 $ 256 $ 251 $ 216 $ 219
Asset Valuation Reserve (b)(c) 90 80 70 71 112
Interest Maintenance Reserve (c) 32 28 36 17 -
Annuity Receipts:
Flexible Premium:
First Year $ 42 $ 39 $ 47 $ 48 $ 67
Renewal 196 208 223 232 240
238 247 270 280 307
Single Premium 219 196 130 80 153
Total Annuity Receipts $ 457 $ 443 $ 400 $ 360 $ 460
Generally Accepted Accounting Principles Basis
1995 1994 1993 1992 1991
Total Assets (a) $5,631 $5,044 $4,883 $4,436 $4,686
Annuity Benefits Accumulated 4,917 4,596 4,257 3,974 3,727
Stockholder's Equity 645 449 520 418 358
(a) Includes $557 million for securities purchased in December 1991 and
paid for in 1992.
(b) For 1991, amount represents the Mandatory Securities Valuation
Reserve.
(c) Allocation of surplus.
Single premium annuity receipts have increased each year since 1992 due
primarily to sales of newly introduced products and, in 1995, the
development of new distribution channels. This increase more than offset
the decline in flexible premium receipts. Receipts in 1992 were lower than
in 1991 due to (i) a reduction in annuity 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.
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.
2
Tax-qualified premiums represented the majority of GALIC's total premiums in
1995. Over the last several years, sales of non-qualified annuities have
represented an increasing percentage of premiums as GALIC has developed
products and distribution channels targeted to the non-qualified markets.
The following table summarizes GALIC's written premiums and insurance
reserves on a statutory basis by product line (dollars in millions).
1995 Premiums Written Insurance Reserves
First % of December 31, 1995
Year Renewal Total Amount %
Flexible Premium:
Single-tier - qualified $ 29 $ 41 15.3% $ 220 4.4%
Single-tier - non-qual - - - 17 0.3
Two-tier - qualified 13 155 36.6 3,131 62.7
Two-tier - non-qual - - - 3 0.1
Total 42 196 51.9 3,371 67.5
Single Premium:
Single-tier - qualified 95 - 20.7 214 4.3
Single-tier - non-qual 36 - 7.8 76 1.5
Two-tier - qualified 56 - 12.2 664 13.3
Two-tier - non-qual 32 - 7.0 328 6.6
Total 219 - 47.7 1,282 25.7
Annuities in Payout - - - 321 6.4
Life, Accident & Health - 2 0.4 22 0.4
Total $261 $198 100.0% $4,996 100.0%
At December 31, 1995, approximately 95% of GALIC's annuity policyholder
benefit reserves consisted of fixed rate annuities which offered a minimum
interest rate guarantee of 4%. The balance of the liabilities had 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 after issuance of a policy to discourage policyholders from
surrendering or withdrawing funds in those early years. Partly due to these
features, GALIC's annuity surrenders have averaged approximately 8% of
statutory reserves
3
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 1995 1994 1993 1992 1991
Flexible Premium 91.0% 92.5% 92.0% 90.6% 89.3%
Single Premium 93.6 93.5 93.3 93.8 92.8
Management believes that the favorable persistency rate has been enhanced by
GALIC's interest crediting policy and the high level of service offered to
agents and policyholders. GALIC's persistency rates, as well as the
policyholders' higher accumulation value, have been helped by 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 accumulate interest at different
rates. 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 accumulate funds to provide retirement income since the
annuitization value is accumulated at a competitive long-term interest rate.
GALIC also offers single-tier products. 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. In 1995,
nearly 70% of first year FPDA premiums and SPDA premiums received were on
single-tier policies compared to 7% in 1991.
Marketing and Distribution
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,
(vii) alternative investment products and (viii) general economic
conditions.
GALIC markets its tax-deferred annuities principally to employees of
educational institutions in the kindergarten through high school ("K-12")
segment. Written premiums from the K-12 segment represented approximately
three-fourths of GALIC's total tax-qualified premiums in 1995. Management
believes that the K-12 segment is attractive because of its size and growth
potential, and the persistency rate it has demonstrated.
4
GALIC distributes its annuity products through over 80 managing general
agents ("MGAs") who, in turn, direct approximately 1,000 actively producing
independent agents. GALIC has developed its business 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 agents who are experienced and highly
motivated and who consistently sell a high volume of the types of annuities
offered by GALIC. Toward this end, GALIC has established a "President's
Advisory Council" consisting of leading producers who 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,
GALIC has developed a Personal Producing General Agent ("PPGA")
distribution system. Approximately 120 PPGAs are contracted to sell GALIC
annuities in those territories not served by an MGA. AAG has also developed
two agency organizations to expand premium writings through banks, hospitals
and certain not-for-profit organizations. (See "Other Subsidiaries".)
GALIC is licensed to sell its products in all states (except New York) and
in the District of Columbia. The following table reflects the geographical
distribution of GALIC's annuity premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
California 19.4% 20.1% Minnesota 3.8% *
Florida 7.8 9.8 Connecticut 3.4 6.2%
Massachusetts 6.5 9.1 Illinois 2.9 3.3
Ohio 6.4 5.1 Iowa 2.1 *
Michigan 6.2 9.4 Rhode Island * 2.8
Washington 5.4 * All others, each
North Carolina 4.8 2.9 less than 2% 22.6 20.0
Texas 4.6 5.0
New Jersey 4.1 6.3 100.0% 100.0%
* less than 2%
At December 31, 1995, GALIC had over 250,000 annuity policies in force,
nearly all of which were individual contracts.
5
Prairie States Life Insurance Company
Prairie, located in Rapid City, was incorporated in South Dakota in 1959.
In March 1996, Prairie will change its name to American Memorial Life
Insurance Company.
The following table (in millions) presents information concerning Prairie in
accordance with statutory accounting principles.
1995 1994 1993 1992 1991
Total Assets $359 $325 $305 $293 $285
Insurance Reserves:
Life $248 $228 $211 $201 $193
Annuities 72 58 55 57 56
$320 $286 $266 $258 $249
Capital and Surplus (a) $ 24 $ 24 $ 23 $ 22 $ 21
Asset Valuation Reserve (b)(c) 3 2 3 2 3
Interest Maintenance Reserve (c) 3 2 2 1 -
Premiums Written:
Life $ 52 $ 40 $ 35 $ 32 $ 32
Annuities 28 13 9 11 10
Total Premiums $ 80 $ 53 $ 44 $ 43 $ 42
(a) Represents capital and surplus of consolidated Prairie group of
companies.
(b) For 1991, amount represents the Mandatory Securities Valuation
Reserve.
(c) Allocation of surplus.
At December 31, 1995, Prairie and its subsidiaries had approximately $800
million of life insurance in force.
Since 1993, Prairie's premiums have increased and expanded geographically
due primarily to new relationships with corporate funeral homes.
Products
Prairie offers a variety of life insurance and annuity products to finance
pre-arranged funerals. In a typical arrangement, a consumer pays in advance
for certain goods and services to be provided by a funeral director. These
payments may be used by the funeral director to purchase a life insurance or
annuity contract or to invest in a trust fund. Approximately half of the
premiums received by Prairie are from single payment funding and half are
from payment plans of three to ten years. The policy values increase at a
rate geared to offset effects of inflation and thus provide for funeral
costs at time of death.
Marketing and Distribution
Prairie markets individual life insurance and annuity policies with the
sponsorship of state associations of funeral directors as well as individual
funeral directors in various locations. Prairie has approximately 875
actively producing agents and relationships with approximately 2,000 funeral
homes nationwide. More than two-thirds of Prairie's new sales of life
insurance and annuities in 1995 came from sales resulting from large
corporate accounts. As the funeral home industry continues to consolidate,
reliance on those corporate accounts will likely increase.
6
The following table reflects the geographical distribution of Prairie's
premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
North Carolina 12.0% * Oregon 3.2% 4.4%
Washington 11.8 19.4% Pennsylvania 2.6 *
California 11.7 18.6 South Dakota * 3.8
Minnesota 11.6 18.0 Montana * 3.6
Tennessee 8.0 * Oklahoma * 3.2
Illinois 3.8 * Florida * 2.6
Louisiana 3.8 * Nebraska * 2.4
Wisconsin 3.7 2.3 All others, each
Texas 3.6 7.9 less than 2% 20.7 10.0
Missouri 3.5 3.8 100.0% 100.0%
* less than 2%
Loyal American Life Insurance Company
Loyal, located in Mobile, was incorporated in Alabama in 1955. The
following table (in millions) presents information concerning Loyal in
accordance with statutory accounting principles.
1995 1994 1993 1992 1991
Total Assets $252 $250 $244 $238 $188
Insurance Reserves:
Life $166 $163 $158 $154 $113
Accident and Health 28 28 29 29 28
Annuities 7 8 8 9 7
$201 $199 $195 $192 $148
Capital and Surplus $ 35 $ 34 $ 32 $ 29 $ 27
Asset Valuation Reserve (a)(b) 3 2 3 3 3
Interest Maintenance Reserve (b) 1 1 1 - -
Premiums Written:
Life $ 21 $ 23 $ 24 $ 23 $ 22
Accident and Health 20 19 19 17 16
Annuities - 1 - - -
Total Premiums $ 41 $ 43 $ 43 $ 40 $ 38
(a) For 1991, amount represents the Mandatory Securities Valuation
Reserve.
(b) Allocation of surplus.
At December 31, 1995, Loyal had approximately $2.1 billion of life insurance
in force.
7
Products
Loyal offers a variety of life and supplemental health insurance products
that are normally sold on a fixed dollar amount per pay period program. For
products sold through payroll deduction plans, the premiums are deducted
from the individual's paycheck and remitted to Loyal on a monthly basis.
For products sold through credit unions, the premiums are normally paid on a
monthly or quarterly basis through deductions from the member's credit union
account. The products currently being offered include traditional whole
life, universal life, term life, hospital indemnity, cancer and short-term
disability.
In 1996, Loyal will begin marketing certain annuity products and related
programs through payroll deduction plans and credit unions.
Marketing and Distribution
Loyal's marketing strategy emphasizes third party sponsorship to assist in
its selling process. In the payroll deduction market, with the approval of
the employer, Loyal's products are presented to the employees at the work
place and premiums are paid by payroll deduction with billings sent directly
to the employer for processing and remittance.
With credit unions, the products are offered with the endorsement of the
credit union management. The products are presented to the membership
through in-home sales, job-site or lobby enrollments and direct mail
solicitation.
The distribution channel for payroll deduction plans is comprised of
selective relationships with marketing companies who provide job-site
product presentation. The distribution channels for credit unions are
comprised of independent agents and marketing companies who provide
personnel for lobby sales and job-site enrollments.
The main advantages of Loyal's current methods of distribution are the
relatively low cost of home office administration, the ability to set up
relatively inexpensive producing units in the field, and the endorsement or
consent by the credit union or the employer in presenting products.
8
The following table reflects the geographical distribution of Loyal's
premiums in 1995 compared to 1991:
State 1995 1991 State 1995 1991
Alabama 12.6% 14.1% West Virginia 3.3% 3.4%
Tennessee 12.2 15.0 Indiana 3.2 3.2
Florida 8.5 9.8 Illinois 2.6 3.2
Mississippi 7.6 8.4 Louisiana 2.6 2.3
Georgia 4.2 3.9 California 2.4 2.4
North Carolina 4.1 * Texas 2.4 *
South Carolina 4.1 3.2 All others, each
Arkansas 3.3 3.3 less than 2% 23.6 23.9
Missouri 3.3 3.9 100.0% 100.0%
* less than 2%
Loyal has approximately 500 actively producing agents.
Annuity Investors Life Insurance Company ("AILIC")
AILIC (formerly Carillon Life Insurance Company), located in Cincinnati, was
acquired by the Company in 1994 to facilitate its entrance into the variable
annuity market. Industry sales of variable annuities have increased
substantially over the last ten years as investors have sought to obtain the
returns available in the equity markets while enjoying the tax-deferred
status of annuities. With a variable annuity, the earnings credited to the
policy varies based on the investment results of the underlying investment
options chosen by the policyholder. Policyholders may also choose to direct
all or a portion of their premiums to various fixed rate options. Premiums
directed to the variable options in policies issued by AILIC will be
invested in funds managed by independent investment managers, including
Dreyfus, Janus and Merrill Lynch. Variable annuities can be either tax-
qualified or non-qualified and be funded with either a single premium
payment or flexible premiums.
In December 1995, AILIC obtained all approvals necessary to begin offering a
group variable annuity. The first product is designed for sale to employees
of school districts, hospitals and other not-for-profit organizations.
AILIC expects to receive approvals in 1996 to begin marketing qualified and
non-qualified individual variable annuities.
As of February 29, 1996, AILIC was licensed to sell fixed annuities in 41
states and the District of Columbia and had licenses to sell variable
annuities in 28 states and the District of Columbia. Applications have been
filed to obtain licenses in the majority of the remaining states.
Under federal law and the laws of many states, variable annuities are
considered securities. As a result, variable annuities can be sold only by
agents who possess the requisite securities licenses and are affiliated with
a broker-dealer. Accordingly, not all agents who market fixed annuities
also market variable annuities. AILIC intends to market its products
through those
9
members of the GALIC agency force who possess the requisite licenses as well
as through new agents not currently licensed with GALIC. AILIC also intends
to market its products through other distribution channels including broker-
dealers and financial institutions. It is expected that Lifestyle Financial
Investments, Inc. ("LFI") and Retirement Resources Group, Inc. ("RRG"),
subsidiaries of AAG, will also market AILIC's products.
Other Subsidiaries
The Company owns several other insurance subsidiaries, none of which is
currently writing new business. AAG may utilize one or more of these
companies in the future to take advantage of specific product or
distribution channel opportunities. Collectively, these insurance
subsidiaries had statutory assets of $105 million at December 31, 1995.
Several non-insurance subsidiaries market additional funeral products as
well as administrative and co-operative purchasing services. One of these
subsidiaries, International Funeral Associates ("IFA") is a co-operative
buying service organization with approximately 1,900 independent members at
year-end 1995. Including corporate members, total membership is
approximately 3,000 funeral homes nationwide. IFA negotiates discounts with
organizations that service the funeral industry; members of IFA are able to
take advantage of these discounts, thereby enhancing their profitability
through lower cost of goods and services.
In addition to annuity and life insurance contracts, funeral contract funds
may also be held in trust. Laurentian Investment Services, Inc. ("LIS") was
established to provide financial services to funeral directors in managing
funds held in trust. LIS offers a variety of services, including state
master trusts, investment advisory services, administrative services, and
combinations thereof. CSW Management Services, Inc. specializes in
providing administrative services, including accounting, tax reporting,
commission accounting and income and expense allocations, for funeral trust
assets in excess of $100 million.
AAG Securities, Inc. is a broker-dealer licensed to sell stocks, bonds,
mutual funds and variable annuities through independent agents and financial
institutions.
In the last two years, AAG has developed two organizations designed to
market GALIC products to previously underserved markets. LFI and its
subsidiaries focus on the sale of single premium, non-qualified annuities
through financial institutions. These companies concentrate their efforts
on community banks primarily in the Midwest and Southeast. RRG was formed
in 1995 to market annuities and investment products to employees of
hospitals and not-for-profit organizations. Beginning in 1996, RRG intends
to begin marketing products through credit unions with which Loyal already
operates.
Collectively, these non-insurance subsidiaries had assets of $3.6 million at
December 31, 1995.
Investments
Investments comprise approximately 90% 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.
10
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 insurance laws of each of AAG's life insurance subsidiaries' domiciliary
states govern the types and amounts of investments which are permissible.
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 1995 1994
1 AAA, AA, A 64% 59%
2 BBB 31 35
Total investment grade 95 94
3 BB 3 4
4 B 2 2
5 CCC, CC, C * *
6 D * -
Total non-investment grade 5 6
Total fixed maturities 100% 100%
* 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.
At December 31, 1995, the average maturity of AAG's fixed maturity
investments was approximately 7 years (including mortgage-backed securities,
which had an estimated average life of approximately 7-1/2 years). The
table below sets forth the maturities of the Company's fixed maturity
investments based on their carrying value.
Maturity 1995 1994
One year or less 1% *
After one year through five years 18 15%
After five years through ten years 40 44
After ten years 9 13
68 72
Mortgage-backed securities 32 28
100% 100%
* less than 1%
11
The following table shows the performance of AAG's investment portfolio,
excluding equity investments in affiliates (dollars in millions):
1995 1994 1993
Average cash and investments at cost $5,220 $4,750 $4,455
Gross investment income 411 377 358
Realized gains 16 - 35
Percentage earned:
Excluding realized gains 7.9% 7.9% 8.0%
Including realized gains 8.2% 7.9% 8.8%
Independent Ratings
The Company's principal insurance subsidiaries ("Insurance Companies") are
rated by A.M. Best as follows:
GALIC A (Excellent) Loyal A- (Excellent)
AILIC A (Excellent) Prairie B+ (Very Good)
In addition, GALIC is rated AA- (very high claims paying ability) by Duff &
Phelps.
In evaluating a company's financial and operating performance, independent
rating agencies review the company's (i) profitability, (ii) leverage and
liquidity, (iii) book of business, (iv) quality and estimated market value
of assets, (v) adequacy of policy reserves and (vi) experience and
competency of management. Such ratings generally are based on factors of
concern to policyholders and agents and are not directed toward the
protection of investors.
Management believes that the ratings assigned 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, some 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.
Management believes that a rating in the "A" category is necessary for GALIC
to successfully market tax-deferred annuities to public education employees
and other not-for-profit groups, the markets in which GALIC competes.
Prairie and Loyal compete in markets other than the sale of tax-deferred
annuities. While ratings are an important factor in competition between
insurers in Prairie's and Loyal's markets, management believes that insurers
can successfully compete in these markets with ratings of "B+" (Very Good)
or better.
Ratings are less of a competitive factor in the variable annuity market in
which AILIC competes, in part because a substantial portion of the insurers'
assets are invested in the mutual funds which underlie the variable
annuities rather than in the insurers' general accounts.
12
Although management of AAG believes that its Insurance Companies' ratings
are very stable, those companies' operations could be materially adversely
affected by a downgrade in ratings.
Competition
The Insurance Companies operate in highly competitive markets. They compete
with other insurers and financial institutions based on many factors,
including (i) ratings, (ii) financial strength, (iii) reputation, (iv)
service to policyholders, (v) product design (including interest rates
credited), (vi) commissions and (vii) service to agents. Since policies are
marketed and distributed primarily through independent agents, the Insurance
Companies must also compete for agents. Management believes that
consistently targeting the same market and emphasizing service to agents and
policyholders provides a competitive advantage.
More than 100 insurance companies offer tax-deferred annuities. 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 these are mutual insurance companies
having 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 AAG's Insurance Companies. In a broader
sense, AAG's Insurance Companies compete 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 the
Insurance Companies.
In recent years, several proposals have been made to change the federal
income tax system. These proposals have included a flat tax rate and
various types of consumption taxes. Many of these proposals include changes
in the method of treating investment income and tax-deferred income. It is
impossible to predict the effect on the Company's business of the adoption
of one of these new tax systems. To the extent that a new system reduces or
eliminates the tax-deferred status of annuities, the Company's business
could be adversely affected.
Regulation
The Insurance Companies are subject to comprehensive regulation under the
insurance laws of their states of domicile and the other states in which
they operate. 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 periodically examine the business and accounts
of the Insurance Companies and require such companies to submit detailed
annual financial statements prepared in accordance with statutory
requirements. State insurance laws also regulate the character of each
insurance company's investments, reinsurance and security deposits.
13
The Insurance Companies may be required, under the solvency or guaranty laws
of most states in which they do 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 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 Company's 1992 purchase of GALIC
from Great American Insurance Company ("GAI"), a subsidiary of AFG, GALIC's
costs for state guaranty 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,
with respect to such companies, 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 $2.2 million and $2.0 million in assessments in 1995 and 1994,
respectively. Accordingly, GALIC recorded receivables from GAI of $1.2
million for 1995 and $1.0 million for 1994.
While the Ohio Department of Insurance is GALIC's principal regulatory
agency, GALIC is also deemed to be "commercially domiciled" in California
based on past premium volume written in the state. As a result, GALIC 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
model laws 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, 1995, 46 states and the District of Columbia were accredited,
including the states of domicile of AAG's principal subsidiaries.
14
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 each of the Insurance Companies' capital
significantly exceeds risk-based capital requirements. If more stringent
risk-based capital rules are adopted in the future, the Insurance Companies'
ability to pay dividends could be adversely affected.
The maximum amount of dividends which can be paid to stockholders by life
insurance companies domiciled in the State of Ohio without prior approval of
the Ohio Insurance Commissioner is the greater of 10% of policyholder
surplus or prior year's "net income", but only to the extent of earned
surplus as of the preceding December 31.
Under California law, approval is required for dividends which exceed the
greater of 10% of statutory surplus or prior year's "net gain from
operations", but only to the extent of statutory earned surplus as of the
preceding December 31.
Since 1991, the NAIC and some states have adopted additional requirements
relating to the marketing and sale of non-traditional life insurance and
annuities. To date, these additional requirements have not had a material
impact on GALIC's business. In December 1994, the NAIC adopted Actuarial
Guideline 33 (formerly called GGG), which clarifies the minimum statutory
reserving requirements for some annuity products. The impact of this new
reserving requirement is that GALIC added $17 million to its statutory
reserves as of December 31, 1995, as part of a three year phase-in allowed
by this guideline and approved by the Ohio Department of Insurance.
Management believes that these additional reserves are redundant and result
in additional conservatism in GALIC's statutory reserves. In connection
with AAG's purchase of GALIC, GAI is obligated to neutralize the financial
effects of any such guidelines on GALIC's statutory earnings and capital.
In satisfaction of its obligation, (i) GAI agreed to purchase, at AAG's
option, up to $57 million of AAG Preferred Stock and (ii) terms of GALIC's
investment management services contract with AFG were modified to reduce the
fees owed under certain circumstances. On December 31, 1995, GAI purchased
$17 million of newly issued Series B Preferred Stock from AAG; the proceeds
from this sale were contributed to GALIC.
The NAIC has under consideration numerous proposals related to the marketing
and sale of annuity products. In addition, the NAIC is considering a model
law covering insurance companies' investments.
Many of the Company's other subsidiaries are subject to regulation by
various state and federal regulatory authorities. LFI and RRG are licensed
as insurance agencies in various states, which subject them to licensing,
record keeping and similar requirements. AAG Securities is subject to the
rules of the National Association of Securities Dealers, Inc. and the laws
of the states in which it transacts business.
Discontinued Manufacturing Operations
AAG 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.
Certain manufacturing facilities are still owned by the Company. See
"Properties" below.
15
Employees
As of December 31, 1995, AAG and its subsidiaries employed approximately 850
persons. None of the employees are represented by a labor union. AAG
believes that its employee relations are satisfactory.
ITEM 2
Properties
Location
AAG and GALIC rent office space in Cincinnati totaling approximately 105,000
square feet under leases expiring in 1996 through 1999. Several of the
Company's non-insurance subsidiaries lease marketing and administrative
offices in locations throughout the United States.
Loyal's home office building in Mobile, Alabama, contains approximately
89,000 square feet, of which approximately two-thirds is utilized for
Company purposes. The remainder of the building is leased to unaffiliated
tenants.
Prairie's home office building in Rapid City, South Dakota, contains
approximately 44,000 square feet, of which approximately three-fourths is
utilized for Company purposes. The remainder of the building is leased to
unaffiliated tenants. Prairie also leases marketing and administrative
space in several locations throughout the United States.
Management believes that its corporate offices are generally well maintained
and adequate for the Company's present needs.
The remaining material properties of the Company's former manufacturing
operations are listed below.
Lease
Interior Expiration
Location Square Feet Use (if leased)
North Adams, MA 154,000 Manufacturing facility Owned
Hudson, NH 121,400 Manufacturing facility March 2003
Longwood, FL 60,000 Manufacturing facility Owned
North Adams, MA 44,000 R & D facility Owned
These facilities are currently being leased to companies using them for
manufacturing operations. The Company is attempting to sell these
facilities.
Environmental Matters
See "Item 3: Legal Proceedings" for a discussion concerning certain
environmental claims and litigation against the Company.
16
ITEM 3
Legal Proceedings
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 estimated liabilities. However, the regulatory standards for
clean-up are continually evolving and may impose 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.
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.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center with respect to AAG's former manufacturing operations. Over the last
several years, AAG has been engaged in negotiations with the United States
Government with respect to settlement of claims the Government might have
arising out of these reporting deficiencies. AAG believes it has sufficient
reserves to cover the estimated settlement amount of these claims. (See
Notes I and L to Consolidated Financial Statements.)
AAG is subject to other litigation and arbitration in the normal course of
business. AAG is not a party to any material pending litigation or
arbitration.
17
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 February 29, 1996, there were
approximately 9,000 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.
1995 1994
High Low High Low
First Quarter $10.38 $ 9.38 $10.63 $8.75
Second Quarter 10.25 9.13 10.00 8.38
Third Quarter 11.13 9.50 10.00 8.88
Fourth Quarter 12.00 10.63 9.63 8.88
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 $.07 per share in 1995 and $.06 per share in 1994. Although no
future dividend policy has been determined, management believes the Company
will continue to have the capability to pay similar dividend amounts.
In August 1995, AAG sold 3.92 million shares of Common Stock at $9.50 per
share under a rights offering to existing shareholders.
18
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 (as indicated by the vertical line) and the acquisition of Laurentian
as of November 13, 1995 (in millions, except per share amounts).
Income Statement Data: 1995 1994 1993 1992 1991
Total revenues $439.6 $372.7 $388.9 $3.6 $1.9
Income (loss) from continuing
operations 58.7 40.9 53.0 (9.0) (4.7)
Loss from discontinued operations (3.2) (2.6) (9.6) (16.8) (47.8)
Extraordinary items (0.2) (1.7) (3.4) - -
Changes in accounting principle - (0.5) - (3.1) -
Net income (loss) $ 55.3 $ 36.1 $ 40.0 ($28.9) ($52.5)
Earnings (loss) per common share:
Continuing operations $1.45 $1.05 $1.41 ($0.50) ($0.26)
Discontinued operations (0.08) (.07) (.27) (.94) (2.66)
Extraordinary items - (.05) (.10) - -
Changes in accounting principles - (.01) - (.17) -
Net income (loss) $1.37 $0.92 $1.04 ($1.61) ($2.92)
Cash dividends per common share $0.07 $0.06 $0.05 $0.05 $0.05
Balance Sheet Data:
Total assets $6,611.0$5,089.9$4,913.8 $4,480.4 $170.1
Notes payable 167.7 183.3 225.9 230.9 27.9
Net unrealized gains (losses)
included in stockholders' equity 89.3 (29.0) 56.9 28.4 -
Total stockholders' equity 429.3 204.4 250.3 186.6 108.5
Selected Financial Data of GALIC Prior to its Acquisition by AAG
(in millions)
Income Statement Data:
Total revenues * * * $342.5 $402.6
Income from continuing operations * * * 49.2 103.0
Net income * * * 42.5 64.3
Balance Sheet Data:
Total assets * * * *$4,685.5
Net unrealized gains (losses)
included in stockholders' equity * * * * (5.5)
Total stockholders' equity * * * * 358.2
* Included in the AAG data above.
On December 31, 1992, the Company purchased 100% of the capital stock of
GALIC from 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. AFG, the
parent of GAI, beneficially owned approximately 81% of AAG's Common Stock at
February 29, 1996.
19
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
the financial condition and results of operations of American Annuity Group,
Inc. ("AAG" or "the Company"). 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 its subsidiaries. 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 6.0 in 1995, 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 .49, .79 and 1.17 at December 31, 1995, 1994 and 1993, respectively.
These same ratios including the effects of unrealized gains and losses were
.39, .90 and .90, respectively.
The National Association of Insurance Commissioners' ("NAIC") model law for
risk-based capital ("RBC") formulas determines the amount of capital that an
insurance company needs to ensure that it has an acceptable expectation of
not becoming financially impaired. At December 31, 1995, the capital ratios
of each of AAG's principal insurance subsidiaries exceeded the RBC
requirements by substantial amounts.
Sources and Uses of Funds On December 31, 1992, AAG acquired Great American
Life Insurance Company ("GALIC") for $468 million. To finance the
acquisition, AAG used cash on hand, issued $156 million of Common and
Preferred Stock to Great American Insurance Company ("GAI") and borrowed
$230 million. The Company refinanced substantially all of that indebtedness
with the proceeds of the sale of $125 million principal amount of 11-1/8%
Notes in February 1993 and $100 million principal amount of 9-1/2% Notes in
August 1993.
In 1994, management concluded that the Company's operations would benefit
from a reduction in total indebtedness and the resulting reduction in debt
service requirements. The perceived benefits included (i) the ability to
retain cash to be utilized to expand the Company's operations, and (ii) the
prospect for better ratings for the Company's insurance subsidiaries. As a
result, in March 1994, AAG began to acquire its outstanding indebtedness,
primarily through privately negotiated transactions. In total (through
February 1996), the Company has repurchased $104 million principal amount of
Notes. The total consideration paid in these transactions was 810,000
shares of the Company's Common Stock and $98 million in cash.
20
The Company has financed a portion of the cost of its Note repurchases with
borrowings under its line of credit with a group of commercial banks. The
line of credit matures in 1999; the Company has no other scheduled principal
maturities until 2001.
The November 1995 acquisition of Laurentian Capital Corporation ("LCC") was
funded primarily with internal funds supplemented by bank borrowings and the
proceeds of the August stock offering.
In December 1995, AAG sold $17 million of newly issued 8.5% Series B
Preferred Stock to GAI. (See Note N to Consolidated Financial Statements.)
AAG's ability to pay interest and principal on its debt, dividends on its
preferred stock, obligations related to the Company's discontinued
manufacturing operations and other holding company costs is dependent on
payments from GALIC in the form of capital distributions and income tax
payments. In 1995, AAG received $41.0 million in tax allocation payments
and $54.2 million in capital distributions from GALIC. In 1995, AAG made
capital contributions of $31.5 million to GALIC.
The amount of capital distributions which can be paid by GALIC is subject to
restrictions relating to statutory surplus and earnings. In addition, any
dividend or distribution paid from other than earned surplus is considered
an extraordinary dividend and may be paid only after regulatory approval.
(See Note M to Consolidated Financial Statements.) The maximum amount of
dividends payable by GALIC in 1996 without prior regulatory approval is
approximately $58.6 million. In January 1996, GALIC paid a capital
distribution of $11.0 million to AAG.
Based upon the current level of operations and anticipated growth, AAG
believes that it will have sufficient resources to meet its liquidity
requirements.
Investments Insurance laws restrict the types and amounts of investments
which are permissible for life insurers. These restrictions are designed to
ensure the safety and liquidity of insurers' investment portfolios. The
NAIC is still considering the formulation of a model investment law. 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, 1995, 95% 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, 1995. 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. At December 31, 1995, AAG had approximately $242
million in net unrealized gains on its fixed maturity portfolio compared to
net unrealized
21
losses of $279 million at December 31, 1994. This increase, representing
approximately 10% of the carrying value of AAG's bond portfolio, resulted
from a decrease in the general level of interest rates.
At December 31, 1995, AAG had approximately 1.7% of total assets invested in
mortgage loans and real estate. The majority of these investments were
purchased within the last three years.
At December 31, 1995, AAG's mortgage-backed securities ("MBSs") portfolio
represented approximately 32% of fixed maturity investments compared to 28%
at December 31, 1994. This increase resulted from the acquisition of LCC,
which had a higher concentration of invested assets in MBSs. As of December
31, 1995, interest only (I/O), principal only (P/O) and other "high risk"
MBSs represented less than six-tenths of one percent of total assets. AAG
invests primarily in MBSs which have a reduced risk of prepayment. In
addition, the majority of MBSs held by AAG were purchased at a discount.
Management believes that the structure and discounted nature of the MBSs
will minimize the effect of prepayments on earnings over the anticipated
life of the MBS portfolio.
Approximately 90% of AAG's MBSs are rated "AAA" with substantially all being
of investment grade quality. The majority are collateralized 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 The results of LCC and its principal subsidiaries, Prairie States
Life Insurance Company ("Prairie") and Loyal American Life Insurance Company
("Loyal"), are included in the Company's income statement subsequent to
their acquisition on November 13, 1995.
The following table (in millions) illustrates the Company's net operating
earnings, as analyzed by management.
AAG (Consolidated): 1995 1994 1993
Revenues per income statement $439.6 $372.7 $388.9
Less realized (gains) losses (15.7) 0.1 (35.5)
Operating revenues 423.9 372.8 353.4
Costs and expenses per income statement (348.9) (309.5) (308.9)
Less provision for GALIC relocation expenses - - 8.0
Operating expenses (348.9) (309.5) (300.9)
Operating earnings before taxes 75.0 63.3 52.5
Income tax expense 26.5 22.3 17.4
Net operating earnings $ 48.5 $ 41.0 $ 35.1
Management believes net operating earnings (or "core" earnings) is helpful
in comparing the operating performance of AAG with that of similar
companies. Net operating earnings for 1995 and 1994 were up 18% and 17%,
respectively, over the comparable prior years. Net operating earnings
should not be considered an alternative to net income as an indication of
AAG's overall performance.
22
Annuity receipts for GALIC were as follows (in millions):
GALIC: 1995 1994 1993
Annuity receipts:
Flexible Premium Deferred Annuities:
First year $ 42 $ 39 $ 47
Renewal 196 208 223
238 247 270
Single Premium Deferred Annuities 219 196 130
Total annuity receipts $457 $443 $400
GALIC's annuity receipts have increased primarily on the strength of sales
of newly introduced single premium products and the development of new
single premium distribution channels.
Life, Accident and Health Premiums and Benefits Life, accident and health
revenues and expenses reflect primarily premiums and benefits of Prairie and
Loyal since their acquisition in November 1995.
Net Investment Income Net investment income increased 9% in 1995 and 5% in
1994 due primarily to an increase in the Company's average invested asset
base. Investment income is reflected net of investment expenses of $5.4
million in 1995, and $4.9 million in both 1994 and 1993.
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 Earnings (Loss) of Affiliate Equity in net earnings (loss) of
affiliate represents AAG's proportionate share of Chiquita's earnings
(losses). Chiquita reported income before extraordinary items for 1995 of
$17 million compared to losses before extraordinary items of $49 million for
1994 and $51 million in 1993.
Annuity Benefits Annuity benefits reflects primarily interest credited to
annuity policyholders' funds accumulated. 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 market interest
rates and maintain a desired interest rate spread without a substantial
effect on persistency. Annuity benefits increased 5% in 1995 and 6% in 1994
primarily due to an increase in average annuity benefits accumulated.
Amortization of Insurance Acquisition Costs Amortization of insurance
acquisition costs increased to $12.7 million in 1995 from $7.1 million in
1994 due primarily to an increase in the average balance of deferred policy
acquisition costs ("DPAC").
DPAC amortization decreased 52% in 1994. This decrease reflects evaluations
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. The
overall effect of the evaluations was to increase the estimated effective
lives of the policies from approximately five years to approximately ten
years. Estimates of lives and expected gross profits were refined based on
actual experience of the Company.
Interest on Borrowings and Other Debt Expenses Interest on borrowings
decreased 18% in 1995 and 5% in 1994 due to repurchases of debt during 1995
and 1994. (See Note G to Consolidated Financial Statements.)
23
Other Expenses Other expenses increased 35% in 1995, reflecting additional
costs for Guaranty Association fees and expanded distribution networks, and
the operating and general expenses of Prairie and Loyal. In 1994, other
expenses increased 13%. Additional costs for information systems,
communications, rent and new distribution networks were partially offset by
lower employee costs; 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 all of its former
manufacturing operations. Certain properties utilized in the former
manufacturing operations continue to be held for sale, 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 a
former plant site, certain retiree medical benefits, and certain obligations
associated with the sales of the Company's manufacturing operations. (See
Notes I and L to Consolidated Financial Statements.)
Extraordinary Items Extraordinary items reflect AAG's losses, net of tax,
on retirements of its debt in 1995 ($150,000), 1994 ($1.0 million) and 1993
($3.4 million). 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 debt in 1994.
Accounting Change 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.
24
ITEM 8
Financial Statements and Supplementary Data
PAGE
Report of Independent Auditors F-1
Consolidated Balance Sheet:
December 31, 1995 and 1994 F-2
Consolidated Income Statement:
Years Ended December 31, 1995, 1994 and 1993 F-3
Consolidated Statement of Changes in Stockholders' Equity:
Years Ended December 31, 1995, 1994 and 1993 F-4
Consolidated Statement of Cash Flows:
Years Ended December 31, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-6
"Selected Quarterly Financial Data" has been included in Note O to the
Consolidated Financial Statements.
25
PART III
The information required by the following Items will be included in AAG's
definitive Proxy Statement for the 1996 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
26
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, 1995 and 1994, 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, 1995. 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,
1995 and 1994, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1995, 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 B to the consolidated financial statements, the Company
made an accounting change in 1994.
Ernst & Young LLP
Cincinnati, Ohio
February 29, 1996
F-1
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
December 31,
1995 1994
Assets
Investments:
Fixed maturities:
Held to maturity - at amortized cost
(market - $2,600.0 and $3,062.4) $2,497.2 $3,273.7
Available for sale - at market
(amortized cost - $2,787.6 and $1,326.4) 2,926.6 1,258.6
Equity securities - at market
(cost - $14.1 and $10.7) 32.6 21.7
Investment in affiliate 20.3 20.8
Mortgage loans on real estate 70.4 47.2
Real estate 39.9 28.0
Policy loans 241.4 185.5
Short-term investments 140.7 26.0
Total investments 5,969.1 4,861.5
Cash 28.7 36.7
Accrued investment income 87.4 77.7
Unamortized insurance acquisition costs, net 149.8 65.1
Other assets 137.5 48.9
Assets held in separate accounts 238.5 -
Total assets $6,611.0 $5,089.9
Liabilities and Stockholders' Equity
Annuity benefits accumulated $5,052.0 $4,618.1
Life, accident and health benefit reserves 538.3 19.9
Notes payable 167.7 183.3
Payable to affiliates, net 29.1 16.7
Deferred taxes (benefits) on unrealized
gains (losses) 48.0 (15.5)
Accounts payable, accrued expenses and other
liabilities 108.1 63.0
Liabilities related to separate accounts 238.5 -
Total liabilities 6,181.7 4,885.5
Series B Preferred Stock (at redemption value) 17.0 -
Common Stock, $1 par value
-100,000,000 shares authorized
- 43,071,882 and 39,141,080 shares outstanding 43.1 39.1
Capital surplus 361.1 330.8
Accumulated deficit at December 31, 1992 (212.6) (212.6)
Retained earnings since January 1, 1993 131.4 76.1
Unrealized gains (losses) on marketable
securities, net of deferred income taxes and
insurance adjustments 89.3 (29.0)
Total stockholders' equity 429.3 204.4
Total liabilities and
stockholders' equity $6,611.0 $5,089.9
See Notes to Consolidated Financial Statements.
F-2
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In millions, except per share amounts)
Year ended December 31,
1995 1994 1993
Revenues:
Net investment income $405.5 $371.8 $353.3
Realized gains (losses) on sales
of investments 15.7 (0.1) 35.5
Life, accident and health premiums 15.7 2.2 2.4
Equity in net earnings (loss) of
affiliate 0.1 (2.8) (2.9)
Other income 2.6 1.6 0.6
439.6 372.7 388.9
Costs and Expenses:
Annuity benefits 254.7 241.9 228.6
Life, accident and health benefits 13.2 1.5 1.7
Amortization of insurance acquisition
costs 12.7 7.1 14.7
Interest on borrowings and other debt
expenses 17.6 21.4 22.6
Provision for GALIC relocation expenses - - 8.0
Other expenses 50.7 37.6 33.3
348.9 309.5 308.9
Income from continuing operations before
income taxes 90.7 63.2 80.0
Provision for income taxes 32.0 22.3 27.0
Income from continuing operations 58.7 40.9 53.0
Discontinued operations, net of tax (3.2) (2.6) (9.6)
Income before extraordinary items and
cumulative effect of accounting change 55.5 38.3 43.4
Extraordinary items, net of tax (0.2) (1.7) (3.4)
Cumulative effect of accounting change,
net of tax - (0.5) -
Net Income $ 55.3 $ 36.1 $ 40.0
Preferred dividend requirement - 0.9 3.6
Net income applicable to Common Stock $ 55.3 $ 35.2 $ 36.4
Average common shares outstanding 40.5 38.1 35.1
Earnings (loss) per common share:
Continuing operations $1.45 $1.05 $1.41
Discontinued operations (.08) (.07) (.27)
Extraordinary items - (.05) (.10)
Cumulative effect of accounting change - (.01) -
Net income $1.37 $0.92 $1.04
Cash dividends per common share $0.07 $0.06 $0.05
See Notes to Consolidated Financial Statements.
F-3
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions)
Year ended December 31,
1995 1994 1993
Preferred Stock:
Balance at beginning of year $ - $ 29.9 $ 29.4
Exchanged for Common Stock - (30.0) -
Issued during the year 17.0 - -
Accretion of discount - 0.1 0.5
Balance at end of year $ 17.0 $ - $ 29.9
Common Stock:
Balance at beginning of year $ 39.1 $ 35.1 $ 35.1
Issued during the year 4.0 4.0 -
Balance at end of year $ 43.1 $ 39.1 $ 35.1
Capital Surplus:
Balance at beginning of year $330.8 $301.0 $306.3
Common Stock issued during the year 33.3 33.0 -
Common dividends declared (3.0) (2.3) (1.7)
Preferred dividends declared - (0.8) (3.1)
Accretion of Preferred Stock discount - (0.1) (0.5)
Balance at end of year $361.1 $330.8 $301.0
Accumulated Deficit at December 31, 1992 ($212.6) ($212.6) ($212.6)
Retained Earnings Since January 1, 1993:
Retained earnings from January 1, 1993
to beginning of year $ 76.1 $ 40.0 $ -
Net income 55.3 36.1 40.0
Balance at end of year $131.4 $ 76.1 $ 40.0
Unrealized Gains (Losses), Net:
Balance at beginning of year ($ 29.0) $ 56.9 $ 28.4
Change during year 118.3 (85.9) 28.5
Balance at end of year $ 89.3 ($ 29.0) $ 56.9
See Notes to Consolidated Financial Statements.
F-4
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
Year ended December 31,
1995 1994 1993
Cash Flows from Operating Activities:
Net income $ 55.3 $ 36.1 $ 40.0
Adjustments:
Discontinued operations 3.2 2.6 9.6
Loss on retirement of debt 0.2 1.7 3.4
Cumulative effect of accounting change - 0.5 -
Increase (decrease) in life, accident
and health reserves 17.5 (1.4) (0.6)
Benefits to annuity policyholders 254.7 241.9 228.6
Amortization of insurance acquisition
costs 12.7 7.1 14.7
Equity in net (earnings) loss of
affiliate (0.1) 2.8 2.9
Realized (gains) losses on
investing activities (15.7) 0.1 (35.5)
Increase in insurance acquisition costs (34.9) (30.5) (28.0)
Other, net (1.0) 1.5 (1.8)
291.9 262.4 233.3
Cash Flows from Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (1,107.5)(1,189.2)(2,015.1)
Equity securities - (0.7) (5.6)
Real estate, mortgage loans and
other assets (22.6) (27.9) (59.3)
Purchase of subsidiaries, net of
cash acquired (55.2) (14.0) -
Maturities and redemptions of
fixed maturity
investments 147.1 238.2 379.2
Sales of:
Fixed maturity investments 768.5 621.9 1,202.0
Equity securities 2.0 4.8 30.6
Real estate, mortgage loans and
other assets 8.2 27.2 2.5
Increase in policy loans (6.1) (16.1) (8.1)
Other, net - - 2.9
(265.6) (355.8) (470.9)
Cash Flows from Financing Activities:
Annuity receipts 457.5 442.7 400.1
Annuity benefits and withdrawals (412.8) (321.0) (337.9)
Additions to notes payable 33.5 34.7 225.0
Reductions of notes payable (49.1) (69.2) (230.0)
Issuance of Common Stock 37.3 - -
Issuance of Preferred Stock 17.0 - -
Cash dividends paid (3.0) (3.1) (4.1)
80.4 84.1 53.1
Net increase (decrease) in cash and
short-term investments 106.7 (9.3) (184.5)
Beginning cash and short-term investments 62.7 72.0 256.5
Ending cash and short-term investments $ 169.4 $ 62.7 $ 72.0
See Notes to Consolidated Financial Statements.
F-5
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF THE COMPANY
American Annuity Group, Inc. ("AAG" or "the Company") markets (i) individual
and group annuities nationwide to the savings and retirement markets, (ii)
individual life insurance and annuity policies with the sponsorship of state
associations of funeral directors as well as individual funeral directors
across the country and (iii) various forms of life, accident and health
insurance and annuities through payroll deduction plans and financial
institutions.
AAG's parent, American Financial Corporation ("AFC"), was acquired by
American Financial Group, Inc. ("AFG") in April 1995. AFG and its
subsidiaries owned 35,059,995 shares (81%) of AAG's Common Stock at December
31, 1995.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying consolidated financial statements
include the accounts of AAG and its subsidiaries. Intercompany transactions
and balances are eliminated in consolidation. Certain reclassifications
have been made to prior periods to conform to the current year's
presentation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Changes in circumstances could cause actual results to
differ materially from those estimates.
AAG's acquisition of Laurentian Capital Corporation ("LCC") in November 1995
was recorded as a purchase. The results of LCC's operations have been
included in AAG's consolidated financial statements since its acquisition.
Investments Debt securities are classified as "held to maturity" and
reported at amortized cost if AAG has the positive intent and ability to
hold them to maturity. Debt and equity securities are classified as
"available for sale" and reported at fair value with unrealized gains and
losses reported as a separate component of stockholders' equity if the debt
or equity securities are not classified as held to maturity or bought and
held principally for selling in the near term. 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.
In accordance with guidance issued by the Financial Accounting Standards
Board in November 1995, AAG reassessed the classifications of its investment
securities and transferred approximately $1.1 billion of its fixed maturity
portfolio from "held to maturity" to "available for sale". The
reclassification resulted in an increase of $55.6 million in the carrying
value of fixed maturity investments and an increase of $36.1 million in
stockholders' equity. The transfer had no effect on net earnings.
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.
F-6
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Investment in Affiliate AAG's investments in equity securities of companies
that are 20% to 50% owned by AFG and its subsidiaries are carried at cost,
adjusted for a proportionate share of their undistributed earnings or
losses.
Insurance Acquisition Costs Unamortized insurance acquisition costs consist
primarily of deferred policy acquisition costs and the present value of
future profits of acquired companies.
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 to the extent that such costs are deemed recoverable.
Deferred costs related to annuities and universal life insurance products
are amortized, with interest, in relation to the present value of expected
gross profits on the policies. These expected gross profits consist
principally of estimated future net investment income and surrender,
mortality and other policy charges, less estimated future interest on
policyholders' funds, policy administration expenses and death benefits in
excess of account values. 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.
Deferred costs related to traditional life and health insurance are
amortized over the expected premium paying period of the related policies,
in proportion to the ratio of annual premium revenues to total anticipated
premium revenues. Such anticipated premium revenues were estimated using
the same assumptions used for computing liabilities for future policy
benefits.
To the extent that realized gains and losses result in adjustments to the
amortization of DPAC, such adjustments are reflected as components of
realized gains.
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.
Present Value of Future Profits Included in Insurance Acquisition
Costs are amounts representing the present value of future profits on
business in force of the acquired insurance companies, which represent the
portion of the costs to acquire such companies that is allocated to the
value of the right to receive future cash flows from insurance contracts
existing at the date of acquisition. These amounts are amortized with
interest over the estimated remaining life of the acquired policies for
annuities and universal life products and over the expected premium paying
period for traditional life and health insurance products.
F-7
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Annuity Benefits Accumulated Annuity receipts and benefit payments are
generally recorded as increases or decreases in "annuity benefits
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.
Life, Accident and Health Benefit Reserves Liabilities for future policy
benefits under traditional ordinary life, accident and health policies are
computed using the net level premium method. Computations are based on
anticipated investment yields (primarily 7%), mortality, morbidity and
surrenders and include provisions for unfavorable deviations. Reserves are
modified as necessary to reflect actual experience and developing trends.
The liability for future policy benefits for interest sensitive life
policies is equal to the sum of the accumulated fund balances under such
policies.
Assets Held In and Liabilities Related To Separate Accounts Investment
annuity deposits and related liabilities represent deposits maintained by
several banks under a previously offered tax-deferred annuity program. The
Company receives an annual fee from each bank for sponsoring the program; if
depositors elect to purchase an annuity from the Company, funds are
transferred to the Company.
Income Taxes AAG, Great American Life Insurance Company ("GALIC") and all
other 80%-owned U.S. non-life subsidiaries are consolidated with AFC for
federal income tax purposes. The life insurance subsidiaries of LCC will
file separate federal income tax returns through the year 2000.
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 AAG's entering
AFC's consolidated tax group, AFC will pay to AAG an amount equal to the
benefit received.
Deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases and are measured using
enacted tax rates. The Company recognizes deferred tax assets if it is more
likely than not that a benefit will be realized. Current and deferred tax
assets and liabilities of companies in AFC's consolidated tax group are
aggregated with other amounts receivable from or payable to affiliates.
Life, Accident and Health Premiums and Benefits For traditional life,
accident and health products, premiums are recognized as revenue when
legally collectible from policyholders. Policy reserves have been
established in a manner which allocates policy benefits and expenses on a
basis consistent with the recognition of related premiums and generally
results in the recognition of profits over the premium-paying period of the
policies.
F-8
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
For interest-sensitive life and universal life products, premiums are
recorded in a policyholder account which is reflected as a liability.
Revenue is recognized as amounts are assessed against the policyholder
account for mortality coverage and contract expenses. Surrender benefits
reduce the account value. Death benefits are expensed when incurred, net of
the account value.
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 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 certain benefits to eligible
retirees. Effective January 1, 1994, AAG implemented Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" which covers benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other Company plans.
The projected future cost of providing these benefits is expensed over the
period the employees earn such benefits.
C. ACQUISITION
On November 13, 1995, AAG acquired all of the outstanding shares of LCC.
Its principal insurance subsidiaries were Prairie States Life Insurance
Company ("Prairie") and Loyal American Life Insurance Company ("Loyal").
AAG paid approximately $106 million for the outstanding common stock of LCC
and repaid $45 million of LCC indebtedness concurrently with the
acquisition. GALIC provided approximately $90 million of the purchase price
in exchange for Prairie and Loyal. AAG funded the balance of the cost of
acquiring LCC with the proceeds from a Common Stock rights offering
completed in August 1995, borrowings under its line of credit, and cash on
hand.
F-9
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table provides certain unaudited consolidated proforma results
of operations assuming the acquisition of LCC had occurred at the beginning
of each period presented (in millions, except per share amounts).
1995 1994
Total revenues $563.6 $500.6
Income before extraordinary items 61.6 47.5
Net income 61.4 45.3
Net income per share 1.42 1.06
D. INVESTMENTS
Fixed maturity investments at December 31, consisted of the following (in
millions):
1995
Held to Maturity
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ - $ - $ - $ -
Public utilities 393.1 405.5 13.4 (1.0)
Mortgage-backed securities 659.6 686.0 27.0 (0.6)
All other corporate 1,444.5 1,508.5 64.1 (0.1)
$2,497.2 $2,600.0 $104.5 ($1.7)
1995
Available for Sale
Amortized Market Gross Unrealized
Cost Value Gains Losses
U. S. Government and government
agencies and authorities $ 162.5 $ 169.9 $ 7.5 ($ 0.1)
Public utilities 227.7 239.1 12.1 (0.7)
Mortgage-backed securities 1,045.2 1,073.8 32.2 (3.6)
All other corporate 1,352.2 1,443.8 97.9 (6.3)
$2,787.6 $2,926.6 $149.7 ($10.7)
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 corporte 525.3 504.8 2.2 (22.7)
$1,326.4 $1,258.6 $3.2 ($71.0)
"Investing activities" related to fixed maturity investments during 1995
included in AAG's Consolidated Statement of Cash Flows consisted of the
following (in millions):
1995 1994
Held to Available Held to Available
Maturity for sale Total Maturity for Sale Total
Purchases ($280.7) ($826.8) ($1,107.5) ($713.6) ($475.6) ($1,189.2)
Maturities and
paydowns 50.5 96.6 147.1 54.8 183.4 238.2
Sales 1.4 767.1 768.5 5.6 616.3 621.9
Gross gains 0.8 23.2 24.0 0.8 7.9 8.7
Gross losses (0.6) (8.3) (8.9) (1.0) (9.8) (10.8)
Certain securities classified as "held to maturity" were sold for losses of
$0.2 million in 1995 and $0.6 million in 1994, respectively, due to
deterioration in the issuers' creditworthiness.
Gross gains of $45.3 million and gross losses of $11.0 million were realized
on sales of fixed maturity investments during 1993.
F-10
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The table below sets forth the scheduled maturities of AAG's fixed maturity
investments based on carrying value as of December 31:
1995
Held to Available 1994
Maturity Maturity for Sale Total Total
One year or less 1% * 1% *
After one year through five years 13 5% 18 15%
After five years through ten years 18 22 40 44
After ten years 2 7 9 13
34 34 68 72
Mortgage-backed securities 12 20 32 28
46% 54% 100% 100%
* less than 1%
Distribution based on market value is generally the same. Mortgage-backed
securities had an expected average life of approximately 7-1/2 years at
December 31, 1995.
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in
interest rates and general market factors and risks associated with
reinvestment of proceeds due to prepayments or redemptions in a period of
declining interest rates.
The carrying values of investments in any entity or mortgage-backed security
("MBS") issuer in excess of 10% of stockholders' equity at December 31,
1995, other than investments issued or guaranteed by the U.S. Government or
government agencies, consisted of the following fixed maturity investments
(in millions):
Issuer Amount
Prudential Home MBS (18 different issues) $118.9
Residential Funding MBS (16 different issues) 96.3
General Electric Capital MBS (10 different issues) 88.8
Countrywide MBS (17 different issues) 80.3
Resolution Trust Corporation MBS 58.2
Securitized Asset Sales, Inc. 56.1
Georgia-Pacific Corporation 43.6
F-11
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At December 31, 1995 and 1994, respectively, gross unrealized gains on
marketable equity securities were $18.5 million and $11.1 million and gross
unrealized losses were zero and $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
MaturitiesSecurities Effects Total
1995
Realized $ 15.1 $ 0.6 ($ 5.5) $ 10.2
Change in unrealized 520.9 7.5 (184.9) 343.5
1994
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
Major categories of net investment income were as follows (in millions):
1995 1994 1993
Fixed maturities $405.2 $372.7 $354.8
Other 5.7 4.0 3.4
Total investment income 410.9 376.7 358.2
Investment expenses (5.4) (4.9) (4.9)
Net investment income $405.5 $371.8 $353.3
AAG's investment portfolio is managed by a subsidiary of AFG. Investment
expenses included investment management charges of $4.7 million in 1995 and
$4.4 million in both 1994 and 1993 which represented approximately one-tenth
of one percent of AAG's invested assets in all three years.
E. INVESTMENT IN AFFILIATE
Investment in affiliate (carrying value of $20.3 million at December 31,
1995) 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. AFG and its other subsidiaries owned an additional 39%
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 $36.7
million and $36.4 million at December 31, 1995 and 1994, and $41.8 million
at February 29, 1996.
Included in AAG's retained earnings (deficit) at December 31, 1995, was
approximately $5.8 million applicable to equity in undistributed net losses
of Chiquita.
In the first quarter of 1994, AAG recorded a pretax extraordinary charge of
$1.1 million ($0.7 million net of tax), representing its proportionate share
of Chiquita's loss on the retirement of debt.
F-12
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
F. UNAMORTIZED INSURANCE ACQUISITION COSTS
Unamortized insurance acquisition costs consisted of the following at
December 31, (in millions):
1995 1994
DPAC - annuities $224.6 $220.8
DPAC - life policies 3.6 3.1
Present value of future profits acquired 73.4 -
Unearned revenues (151.8) (158.8)
$149.8 $ 65.1
At December 31, 1995, the expected rate of amortization of the present value
of future profits acquired for the next five years was as follows: 10% in
1996; 9% in 1997; 9% in 1998; 8% in 1999; and 7% in 2000.
G. NOTES PAYABLE
Notes payable consisted of the following at December 31, (in millions):
1995 1994
Direct obligations of AAG:
11-1/8% Senior Subordinated Notes
due February 2003 $101.4 $103.9
9-1/2% Senior Notes due August 2001 41.5 44.0
Bank Credit Line due September 1999 20.5 30.0
Subsidiary debt 4.3 5.4
Total $167.7 $183.3
AAG has a $75 million revolving credit agreement with four banks. Loans
under the credit agreement bear interest at floating rates based on prime or
Eurodollar rates and are collateralized by 25% of the Common Stock of GALIC.
At December 31, 1995, the average rate on these borrowings was 6.83%.
In the first two months of 1996, the Company repurchased $22.1 million
principal amount of its 11-1/8% Senior Subordinated Notes realizing a pretax
extraordinary loss of approximately $2.5 million.
During 1995, AAG repurchased $2.4 million principal amount of its 11-1/8%
Notes and $2.5 million principal amount of its 9-1/2% Notes. As a result of
the repurchases, AAG realized a pretax extraordinary loss of $231,000.
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 ($1.0 million net of tax).
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 debt issue costs which were written off upon retirement of the
bank debt.
F-13
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
AAG has no scheduled principal payments on its 9-1/2% Notes and 11-1/8%
Notes until 2001. Interest payments were $17.2 million in 1995, $23.2
million in 1994 and $11.7 million in 1993.
H. STOCKHOLDERS' EQUITY
The Company is authorized to issue 25,000,000 shares of Preferred Stock, par
value $1.00 per share.
On December 28, 1995, AAG sold 170,000 shares of newly issued Series B
Preferred Stock to Great American Insurance Company ("GAI") for $17 million.
(See Note N to Consolidated Financial Statements.) The Series B Preferred
Stock has a redemption value of $100 per share and is redeemable at AAG's
option. Dividends are cumulative and payable at the rate of $8.50 per share
per annum.
In August 1995, AAG sold 3.92 million shares of common stock at $9.50 per
share under a rights offering to existing shareholders.
On March 31, 1994, AAG issued approximately 3.2 million shares of Common
Stock to GAI in exchange for all of AAG's outstanding $7.00 Series A
Preferred shares.
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.
I. DISCONTINUED OPERATIONS
All of the Company's former manufacturing businesses are reported as
discontinued operations. During 1995, the Company's last manufacturing
unit, Electromag NV, was sold and no gain or loss was recognized on the
sale.
In 1995, AAG recorded a $5.0 million pretax charge for discontinued
operations. This charge represents primarily additional reserves related to
possible deficiencies by AAG's predecessor in reporting quality assurance
information in connection with certain military related sales prior to 1991.
In 1994, AAG recorded a $4.0 million pretax charge for discontinued
operations, primarily related to environmental liabilities. In 1993, the
pretax loss from discontinued operations was $14.8 million which 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.
The Company has a defined benefit pension plan covering former U.S.
employees of its discontinued manufacturing operations. Pension benefits
are based upon past service with the Company and compensation levels.
Contributions are made by the Company in amounts necessary to satisfy
requirements of ERISA. At December 31, 1995, the actuarial value of the
benefit obligations, discounted at 6.75%, exceeded the plan assets by $11.8
million, which has been included in other liabilities in the balance sheet.
F-14
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
J. INCOME TAXES
Provision for income taxes consisted of (in millions):
1995 1994 1993
Federal:
Current $31.9 $21.2 $27.4
Deferred (1.7) (1.4) (7.4)
Total $30.2 $19.8 $20.0
The significant components of deferred tax assets and liabilities, excluding
the effects of unrealized gains and losses on marketable securities,
included in the Consolidated Balance Sheet were as follows (in millions):
December 31,
1995 1994
Deferred tax assets:
Net operating loss carryforwards $46.7 $47.6
Accrued expenses 13.9 13.3
Investment securities, including
affiliate 36.7 31.1
Valuation allowance for deferred
tax assets (48.4) (50.6)
Deferred tax liabilities:
Unamortized insurance
acquisition costs (52.4) (20.8)
Policyholder liabilities (17.1) (12.8)
At December 31, 1995, AAG had net operating loss carryforwards for federal
income tax purposes of approximately $131 million which are scheduled to
expire as follows: $1 million in 1996; $130 million in 2001 through 2005.
K. 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 non-cancelable
lease terms in excess of one year at December 31, 1995 are payable as
follows: 1996 - $2.0 million; 1997 - $1.8 million; 1998 - $1.2 million;
1999 - $780,000; 2000 - $510,000; 2001 and beyond - $1.2 million.
Rental expense for operating leases was $1.6 million in 1995, $1.7 million
in 1994 and $900,000 in 1993.
L. CONTINGENCIES
The Company is continuing its clean-up activities at certain of its former
manufacturing operations and third-party sites, in some cases in accordance
with consent agreements with federal and state environmental agencies.
Changes in regulatory standards and further investigations could affect
estimated costs in the future. Management believes 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. Based on prior
costs and discussions with independent environmental consultants, the
Company believes the remaining
F-15
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
aggregate cost of environmental work at all sites for which it has
responsibility will range from $8.8 million to $13.6 million. The reserve
for environmental work was $10.3 million at December 31, 1995.
In 1991, the Company identified possible deficiencies in procedures for
reporting quality assurance information to the Defense Electronics Supply
Center 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. In March
1995, the Company received notification of additional alleged reporting
deficiencies and based on management's evaluations additional reserves were
established. The Company believes it has sufficient reserves to cover the
estimated settlement amount.
M. STATUTORY INFORMATION; RESTRICTIONS ON TRANSFERS OF FUNDS AND ASSETS OF
SUBSIDIARIES
Insurance companies are 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 for GALIC, Prairie and Loyal were as follows (in millions):
1995 1994 1993
GALIC
Policyholders' surplus $272.8 $255.9
Asset valuation reserve 90.2 79.5
Interest maintenance reserve 32.2 27.7
Pretax earnings from operations $ 85.8 $ 83.4 $73.1
Net earnings from operations 60.5 53.4 51.1
Net earnings 71.4 54.2 44.0
Prairie
Policyholders' surplus $ 24.4 $ 24.1
Asset valuation reserve 3.0 2.5
Interest maintenance reserve 2.6 1.8
Pretax earnings from operations $ 5.6 $ 6.0 $10.3
Net earnings from operations 4.6 5.6 10.4
Net earnings 4.3 7.1 7.9
Loyal
Policyholders' surplus $ 35.2 $ 33.6
Asset valuation reserve 2.9 2.4
Interest maintenance reserve 0.8 0.9
Pretax earnings from operations $ 4.3 $ 3.5 $ 1.3
Net earnings from operations 2.3 3.4 1.8
Net earnings 2.4 5.5 1.8
F-16
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, statutory net gain from operations and statutory net income. GALIC
has been approved by the Ohio Department of Insurance to account for its
investments in Prairie and Loyal on the equity method. Accordingly, under
Ohio insurance regulations, GALIC's dividends are not dependent upon
dividends from Prairie and Loyal. Based on net gain from operations at
December 31, 1995, GALIC may pay approximately $58.6 million in dividends in
1996 without prior approval, according to the most restrictive dividend
requirements of GALIC's domiciliary states.
N. ADDITIONAL INFORMATION
Related Party Transactions In the fourth quarter of 1994, AAG purchased
Annuity Investors Life Insurance Company ("AILIC", formerly Carillon Life
Insurance Company) from GAI for $9.0 million in cash. At December 31, 1994,
AILIC had statutory assets of $9.0 million and statutory surplus of $6.3
million. AAG acquired AILIC primarily for its variable annuity licenses.
In connection with AAG's purchase of GALIC from GAI in 1992, GAI agreed to
neutralize the financial effects on GALIC of the adoption of an actuarial
guideline with respect to non-traditional life insurance and annuity
products. In satisfaction of this obligation, (i) GAI has agreed to
purchase, at AAG's option, up to $57 million of AAG Preferred Stock and (ii)
terms of GALIC's investment management services contract with AFG were
modified to reduce the fees owed under certain circumstances. On December
28, 1995, AAG sold $17 million of newly issued Series B Preferred Stock to
GAI; the proceeds were contributed to GALIC.
Net investment income includes approximately $1 million in 1995, 1994 and
1993 of payments from a subsidiary of AFG for the rental of an office
building owned by GALIC.
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.
1995 1994
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets
Fixed maturity investments $5,423.8 $5,526.6 $4,532.3 $4,321.0
Equity securities 32.6 32.6 21.7 21.7
Investment in affiliate 20.3 36.7 20.8 36.4
Liabilities
Annuity benefits accumulated (a)$4,979.3 $4,887.0 $4,556.1 $4,510.0
Notes payable (b) 164.1 177.7 179.2 182.6
(a) Carrying values are shown net of deferred policy acquisition
costs of $72.7 million at December 31, 1995 and $62.0
million at December 31, 1994.
(b) Carrying values are shown net of debt issue costs of $3.6 at
December 31, 1995 and $4.1 million at December 31, 1994.
F-17
AMERICAN ANNUITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 short-term
investments, mortgage loans on real estate and policy loans approximate
their carrying value. 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.
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):
Unadjusted
Asset Effect of Reported
(Liability) SFAS 115 Amount
1995
Fixed maturities - available for sale $2,787.6 $139.0 $2,926.6
Equity securities 14.1 18.5 32.6
Unamortized insurance acquisition
costs, net 155.0 (5.2) 149.8
Annuity benefits accumulated (5,037.0) (15.0) (5,052.0)
Deferred income taxes on net
unrealized gains - (48.0) (48.0)
Unrealized gains on marketable
securities, net $ 89.3
1994
Fixed maturities - available for sale $1,326.4 ($67.8) $1,258.6
Equity securities 10.7 11.0 21.7
Unamortized insurance acquisition
costs, net 61.9 3.2 65.1
Annuity benefits accumulated (4,627.2) 9.1 (4,618.1)
Deferred income taxes on net
unrealized losses - 15.5 15.5
Unrealized losses on marketable
securities, net ($29.0)
Other Several proposals have been made in recent years to change the
federal income tax system. Some proposals included changes in the method of
treating investment income and tax-deferred income. To the extent a new law
reduces or eliminates the tax-deferred status of annuities, the Company's
operations could be materially affected.
F-18
O. QUARTERLY FINANCIAL DATA (Unaudited)
The following table represents quarterly results of operations for the years
ended December 31, 1995 and 1994 (in millions, except per share data).
First Second Third Fourth Total
1995 Quarter Quarter Quarter Quarter Year
Realized gains $ 0.1 $ - $ 6.9 $ 8.7 $ 15.7
Total revenues(a) 98.6 101.2 109.4 130.4 439.6
Income from continuing operations 11.4 12.2 16.6 18.5 58.7
Discontinued operations - - - (3.2) (3.2)
Extraordinary item - - - (0.2) (0.2)
Net income 11.4 12.2 16.6 15.1 55.3
Earnings (loss) per common share(b)
Continuing operations $0.29 $0.31 $0.41 $0.43 $1.45
Discontinued operations - - - (.08) (.08)
Extraordinary item - - - - -
Net income per common share $0.29 $0.31 $0.41 $0.35 $1.37
Average common shares outstanding 39.1 39.1 40.8 43.1 40.5
1994
Realized gains (losses) $ 0.6 $ - $ 0.1 ($ 0.8) ($ 0.1)
Total revenues(a) 93.4 94.3 92.3 92.7 372.7
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
(a) As a result of the acquisition of LCC, AAG reclassified certain
life insurance revenues and expenses on its consolidated income
statement. As a result, reported revenues (and expenses)
increased by $400,000, $700,000 and $200,000 in the first,
second and third quarters of 1995, respectively; revenues (and
expenses) for the first through fourth quarters of 1994
increased by $500,000, $200,000, $600,000 and $200,000,
respectively.
(b) Quarterly earnings per share do not add to year-to-date amounts
due to issuance of shares in conjunction with the rights
offering.
F-19
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 O to the
Consolidated Financial Statements.
Schedules filed herewith:
For 1995, 1994 and 1993 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:
Date of Report Item Reported
November 28, 1995 Acquisition of Laurentian Capital Corporation
S-1
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Balance Sheet
December 31,
Assets: 1995 1994
Cash and short-term investments $ 1.4 $ 1.9
Investment in subsidiaries(a) 687.0 457.4
Other assets 20.0 19.4
$708.4 $478.7
Liabilities and Capital:
Accounts payable, accrued expenses and
other liabilities $ 49.4 $ 41.6
Payables to affiliates 52.3 40.8
Notes payable(b) 177.4 191.9
Stockholders' equity(a) 429.3 204.4
$708.4 $478.7
Condensed Income Statement
Year ended December 31,
1995 1994 1993
Revenues:
Equity in undistributed earnings of
subsidiaries $ 64.7 $ 47.3 $ 97.2
Dividends from GALIC 54.2 44.0 18.2
Other revenues 1.7 0.4 0.5
120.6 91.7 115.9
Costs and Expenses:
Interest on borrowings and other debt expenses 19.0 21.9 22.5
Provision for GALIC relocation expenses - - 8.0
Other expenses 10.9 6.6 5.4
29.9 28.5 35.9
Income from continuing operations before
income taxes 90.7 63.2 80.0
Provision for income taxes 32.0 22.3 27.0
Income from continuing operations 58.7 40.9 53.0
Discontinued operations, net of tax (3.2) (2.6) (9.6)
Income before extraordinary items and
cumulative effect of accounting change 55.5 38.3 43.4
Extraordinary items, net of tax (0.2) (1.7) (3.4)
Cumulative effect of accounting change,
net of tax - (0.5) -
Net Income $ 55.3 $ 36.1 $ 40.0
(a) Includes unrealized gains (losses) of $89.3 million and ($29.0) million
in 1995 and 1994, respectively, and includes advances to subsidiaries.
(b) Includes $14.0 million principal amount of notes payable owned by GALIC.
S-2
AMERICAN ANNUITY GROUP, INC. - PARENT ONLY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(In millions)
Condensed Statement of Cash Flows
Year Ended December 31,
1995 1994 1993
Operating Activities:
Net income $55.3 $36.1 $40.0
Adjustments:
Discontinued operations 3.2 2.6 9.6
Extraordinary items 0.2 1.7 3.4
Accounting change - 0.5 -
Equity in net earnings of subsidiaries (77.0) (59.7) (77.6)
Depreciation and amortization 0.9 0.8 1.2
Decrease in other assets 0.1 2.7 0.4
Increase in balances with affiliates 13.5 13.1 40.0
Decrease (increase) in other liabilities 2.5 (12.8) (10.7)
Capital distributions from GALIC 54.2 44.0 18.2
Contributions to subsidiaries (33.0) - -
Other, net - - (0.1)
19.9 29.0 24.4
Investing Activities:
Purchase of Laurentian Capital Corporation,
net of cash acquired (63.6) - -
Additional investments in subsidiaries - (9.3) (13.0)
Sale of AILIC to GALIC 6.5 - -
(57.1) (9.3) (13.0)
Financing Activities:
Additions to notes payable 33.5 30.0 225.0
Reductions of notes payable (48.1) (55.1) (230.0)
Issuance of Common Stock 37.3 - -
Issuance of Preferred Stock 17.0 - -
Cash dividends paid (3.0) (3.1) (4.1)
36.7 (28.2) (9.1)
Net Increase (Decrease) in Cash and
Short-term Investments (0.5) (8.5) 2.3
Cash and short-term investments at beginning
of period 1.9 10.4 8.1
Cash and short-term investments at end
of period $ 1.4 $ 1.9 $10.4
S-3
AMERICAN ANNUITY GROUP, INC.
INDEX TO EXHIBITS
Number Exhibit Description
2.0 Agreement and Plan of Merger dated as of May 25, 1995 incorporated by
reference to the Schedule 13D filed by American Premier Group, Inc.
on June 2, 1995 with respect to the equity securities of Laurentian
Capital Corporation.
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.
E-1
21.0 Subsidiaries of the Registrant.
23.0 Consent of Independent Auditors.
27.0 Financial Data Schedule for 1995 - included in Report filed
electronically with the Securities and Exchange Commission.
27.1 Financial Data Schedule for 1994 - reclassified to conform to the
current year's presentation - 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 November 10, 1995.
E-2
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 18, 1996 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 18, 1996
Carl H. Lindner of Directors
s/S. CRAIG LINDNER Director March 18, 1996
S. Craig Lindner
s/ROBERT A. ADAMS Director March 18, 1996
Robert A. Adams
s/WILLIAM R. MARTIN Director March 18, 1996
William R. Martin*
s/RONALD F. WALKER Director March 18, 1996
Ronald F. Walker
s/WILLIAM J. MANEY Senior Vice President, March 18, 1996
William J. Maney Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
* Chairman of Audit Committee
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 2,926,600
<DEBT-CARRYING-VALUE> 2,497,200
<DEBT-MARKET-VALUE> 2,600,000
<EQUITIES> 32,600
<MORTGAGE> 70,400
<REAL-ESTATE> 39,900
<TOTAL-INVEST> 5,969,100
<CASH> 28,700
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 149,800
<TOTAL-ASSETS> 6,611,000
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 538,300
<POLICY-HOLDER-FUNDS> 5,052,000
<NOTES-PAYABLE> 167,700
0
17,000
<COMMON> 43,100
<OTHER-SE> 369,200
<TOTAL-LIABILITY-AND-EQUITY> 6,611,000
15,700
<INVESTMENT-INCOME> 405,500
<INVESTMENT-GAINS> 15,700
<OTHER-INCOME> 2,600
<BENEFITS> 267,900
<UNDERWRITING-AMORTIZATION> 12,700
<UNDERWRITING-OTHER> 50,700
<INCOME-PRETAX> 90,700
<INCOME-TAX> 32,000
<INCOME-CONTINUING> 58,700
<DISCONTINUED> (3,200)
<EXTRAORDINARY> (200)
<CHANGES> 0
<NET-INCOME> 55,300
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of AAG at December 31,
1995. All corporations are subsidiaries of AAG and, if indented,
subsidiaries of the company under which they are listed.
Name of Company
Great American Life Insurance Company Ohio 100%
Loyal American Life Insurance Company Alabama 100
Prairie National Life Insurance Company South Dakota 100
Prairie States Life Insurance Company South Dakota 100
Annuity Investors Life Insurance Company Ohio 100
The names of certain subsidiaries are omitted, as such
subsidiaries in the aggregate would not constitute a significant
subsidiary.
See Part I, Item 1 of this Report for a description of certain
companies in which AAG owns a significant portion and accounts
for under the equity method.
E-3
AMERICAN ANNUITY GROUP, INC.
EXHIBIT 23 - 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. and the
Registration Statement (Form S-2 No. 33-57259) pertaining to the
Agent Stock Purchase Plan of American Annuity Group, Inc. of our
report dated February 29, 1996, 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, 1995.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 18, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<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> 19,900
<POLICY-HOLDER-FUNDS> 4,618,100
<NOTES-PAYABLE> 183,300
0
0
<COMMON> 39,100
<OTHER-SE> 165,300
<TOTAL-LIABILITY-AND-EQUITY> 5,089,900
2,200
<INVESTMENT-INCOME> 371,800
<INVESTMENT-GAINS> (100)
<OTHER-INCOME> 2,300
<BENEFITS> 243,400
<UNDERWRITING-AMORTIZATION> 7,100
<UNDERWRITING-OTHER> 37,600
<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>
Execution Copy
___________________________________________________________________
___________________________________________________________________
AMERICAN ANNUITY GROUP, INC.
CREDIT AGREEMENT
Originally Dated as of January 31, 1994
Amended and Restated as of November 10, 1995
THE FIRST NATIONAL BANK OF BOSTON, Agent
___________________________________________________________________
___________________________________________________________________
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 . . . . . . . 3
3.2.4. Additional Compensation . . . . . . . . . . . . . . . . 4
3.2.5. Change in Applicable Laws, Regulations, etc. . . . . . 4
3.2.6. Funding Procedure . . . . . . . . . . . . . . . . . . . 4
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 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6. Computations of Interest . . . . . . . . . . . . . . . . 7
4. Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.1. Payment at Maturity . . . . . . . . . . . . . . . . . . . 7
4.2. Maximum Amount of Credit . . . . . . . . . . . . . . . . 7
4.3. Voluntary Prepayments of Loan . . . . . . . . . . . . . . 7
4.4. Application of Payments . . . . . . . . . . . . . . . . . 7
4.5. Payment and Interest Cut-off . . . . . . . . . . . . . . 8
5. Conditions to Extending Credit . . . . . . . . . . . . . . . . . . . 8
5.1. Officer's Certificate . . . . . . . . . . . . . . . . . . 8
5.2. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.3. Legal Opinions . . . . . . . . . . . . . . . . . . . . . 8
5.4. Tax Sharing Arrangements . . . . . . . . . . . . . . . . 8
5.5. Perfection of Security . . . . . . . . . . . . . . . . . 8
5.6. Closing Fees . . . . . . . . . . . . . . . . . . . . . . 9
5.7. Proper Proceedings . . . . . . . . . . . . . . . . . . . 9
5.8. Legality, etc. . . . . . . . . . . . . . . . . . . . . . 9
5.9. General . . . . . . . . . . . . . . . . . . . . . . . . . 9
6. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.1. Credit Security . . . . . . . . . . . . . . . . . . . . . 9
6.2. Additional Credit Security . . . . . . . . . . . . . . . 10
6.3. Representations, Warranties and Covenants with Respect to
Credit Security . . . . . . . . . . . . . . . . . . . . . . . . 10
6.3.1. Pledged Stock . . . . . . . . . . . . . . . . . . . . . 11
6.3.2. No Liens . . . . . . . . . . . . . . . . . . . . . . . 11
6.3.3. Perfection of Credit Security . . . . . . . . . . . . . 11
6.3.4. Governmental Consents; Validity of Pledge . . . . . . . 11
6.4. Administration of Credit Security . . . . . . . . . . . . 12
6.4.1. Distributions . . . . . . . . . . . . . . . . . . . . . 12
6.4.2. Voting . . . . . . . . . . . . . . . . . . . . . . . . 12
-i-
6.4.3. Custody of Credit Security . . . . . . . . . . . . . . 12
6.4.4. Governmental Consents and Approvals . . . . . . . . . . 13
6.5. Right to Realize upon Credit Security . . . . . . . . . . 13
6.5.1. Marshaling . . . . . . . . . . . . . . . . . . . . . . 13
6.5.2. Sales of Credit Security . . . . . . . . . . . . . . . 14
6.5.3. Sale without Registration . . . . . . . . . . . . . . . 14
6.5.4. Application of Proceeds . . . . . . . . . . . . . . . . 15
6.6. Governmental Regulation . . . . . . . . . . . . . . . . . 16
7. General Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1. Taxes and Other Charges . . . . . . . . . . . . . . . . 16
7.2. Conduct of Business, etc. . . . . . . . . . . . . . . . . 17
7.2.1. Types of Business . . . . . . . . . . . . . . . . . . . 17
7.2.2. Statutory Compliance . . . . . . . . . . . . . . . . . 17
7.3. Financial Statements and Reports . . . . . . . . . . . . 17
7.3.1. Annual Reports . . . . . . . . . . . . . . . . . . . . 17
7.3.2. Quarterly Reports . . . . . . . . . . . . . . . . . . . 18
7.3.3. Other Reports . . . . . . . . . . . . . . . . . . . . . 19
7.3.4. Notice of Material Litigation, etc. . . . . . . . . . . 19
7.3.5. ERISA Reports . . . . . . . . . . . . . . . . . . . . . 20
7.3.6. Other Information . . . . . . . . . . . . . . . . . . . 20
7.4. Consolidated Net Worth . . . . . . . . . . . . . . . . . 21
7.5. GALIC Statutory Surplus . . . . . . . . . . . . . . . . . 21
7.6. Consolidated Financing Debt . . . . . . . . . . . . . . . 21
7.7. GALIC Risk Based Capital Ratio . . . . . . . . . . . . . 21
7.8. Restrictions on Liens . . . . . . . . . . . . . . . . . . 21
7.9. Restrictions on Distributions . . . . . . . . . . . . . . 22
7.10. Merger, Consolidation and Sale of Assets . . . . . . . . 22
7.11. Distributions from Subsidiaries . . . . . . . . . . . . 23
7.12. Compliance with ERISA . . . . . . . . . . . . . . . . . 23
7.13. Transactions with Affiliates. . . . . . . . . . . . . . 23
7.14. Compliance with Environmental Laws . . . . . . . . . . . 23
8. Representations and Warranties . . . . . . . . . . . . . . . . . . . 24
8.1. Organization and Business . . . . . . . . . . . . . . . . 24
8.1.1. The Company . . . . . . . . . . . . . . . . . . . . . . 24
8.1.2. Subsidiaries . . . . . . . . . . . . . . . . . . . . . 25
8.1.3. Qualification . . . . . . . . . . . . . . . . . . . . . 25
8.2. Financial Statements and Other Information . . . . . . . 25
8.3. Changes in Condition . . . . . . . . . . . . . . . . . . 26
8.4. Title to Assets . . . . . . . . . . . . . . . . . . . . . 26
8.5. Litigation . . . . . . . . . . . . . . . . . . . . . . . 26
8.6. Enforceability; No Legal Obstacle to Agreements . . . . . 27
8.7. Defaults . . . . . . . . . . . . . . . . . . . . . . . . 28
8.8. Pension Plans . . . . . . . . . . . . . . . . . . . . . . 28
8.9. Government Regulation. . . . . . . . . . . . . . . . . . 28
8.10. Environmental Regulation . . . . . . . . . . . . . . . . 28
8.11. Laurentian Acquisition Agreement, etc . . . . . . . . . 29
8.12. Margin Stock . . . . . . . . . . . . . . . . . . . . . . 29
8.13. Disclosure . . . . . . . . . . . . . . . . . . . . . . . 29
9. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.1. Events of Default . . . . . . . . . . . . . . . . . . . . 29
9.2. Certain Actions Following an Event of Default . . . . . . 32
9.2.1. No Obligation to Extend Credit . . . . . . . . . . . . 32
9.2.2. Exercise of Rights; Credit Security . . . . . . . . . . 33
9.2.3. Acceleration . . . . . . . . . . . . . . . . . . . . . 33
9.2.4. Setoff . . . . . . . . . . . . . . . . . . . . . . . . 33
9.2.5. Cumulative Remedies . . . . . . . . . . . . . . . . . . 33
-ii-
9.3. Annulment of Defaults . . . . . . . . . . . . . . . . . . 33
9.4. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . 34
10. Expenses; Indemnity . . . . . . . . . . . . . . . . . . . . . . . . 34
10.1. Expenses . . . . . . . . . . . . . . . . . . . . . . . . 34
10.2. General Indemnity . . . . . . . . . . . . . . . . . . . 35
11. Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.1. Interests in Credits . . . . . . . . . . . . . . . . . . 35
11.2. Agent's Authority to Act, etc. . . . . . . . . . . . . . 36
11.3. Company to Pay Agent, etc. . . . . . . . . . . . . . . . 36
11.4. Lender Operations for Advances, etc. . . . . . . . . . . 36
11.4.1. Advances . . . . . . . . . . . . . . . . . . . . . . . 37
11.4.2. Agent to Allocate Payments . . . . . . . . . . . . . . 37
11.4.3. Delinquent Lenders . . . . . . . . . . . . . . . . . . 37
11.5. Sharing of Payments, etc. . . . . . . . . . . . . . . . 38
11.6. Amendments, Consents, Waivers, etc. . . . . . . . . . . 38
11.7. Agent's Resignation . . . . . . . . . . . . . . . . . . 39
11.8. Concerning the Agent . . . . . . . . . . . . . . . . . . 40
11.8.1. Action in Good Faith, etc. . . . . . . . . . . . . . . 40
11.8.2. No Implied Duties, etc. . . . . . . . . . . . . . . . 40
11.8.3. Validity, etc. . . . . . . . . . . . . . . . . . . . . 40
11.8.4. Compliance . . . . . . . . . . . . . . . . . . . . . . 41
11.8.5. Employment of Agents and Counsel . . . . . . . . . . . 41
11.8.6. Reliance on Documents and Counsel . . . . . . . . . . 41
11.8.7. Agent's Reimbursement . . . . . . . . . . . . . . . . 41
11.8.8. Agent's Fee . . . . . . . . . . . . . . . . . . . . . 42
11.9. Rights as a Lender . . . . . . . . . . . . . . . . . . . 42
11.10. Independent Credit Decision . . . . . . . . . . . . . . 42
11.11. Indemnification . . . . . . . . . . . . . . . . . . . . 42
12. Successors and Assigns; Lender Assignments and Participations . . . 43
12.1. Assignments by Lenders . . . . . . . . . . . . . . . . . 43
12.1.1. Assignees and Assignment Procedures . . . . . . . . . 43
12.1.2. Terms of Assignment and Acceptance . . . . . . . . . . 44
12.1.3. Register . . . . . . . . . . . . . . . . . . . . . . . 45
12.1.4. Notes . . . . . . . . . . . . . . . . . . . . . . . . 45
12.1.5. Foreign Persons . . . . . . . . . . . . . . . . . . . 46
12.1.6. Federal Reserve Bank . . . . . . . . . . . . . . . . . 46
12.1.7. Further Assurances . . . . . . . . . . . . . . . . . . 46
12.2. Credit Participants . . . . . . . . . . . . . . . . . . 46
13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . 47
14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
15. Course of Dealing, Amendments and Waivers . . . . . . . . . . . . . 49
16. Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
17. Venue; Service of Process . . . . . . . . . . . . . . . . . . . . . 49
18. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . 50
19. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
-iii-
EXHIBITS
Exhibit 1 - Definitions of Capitalized Terms
Exhibit 2.3 - Form of Note
Exhibit 5.1 - Form of Officer's Certificate
Exhibit 8.1 - The Company and its Subsidiaries
Exhibit 8.8 - Defined Benefit Plans
Exhibit 8.10 - Environmental Regulation
Exhibit 12.1.1 - Assignment and Acceptance
AMERICAN ANNUITY GROUP, INC.
CREDIT AGREEMENT
This Agreement, dated as of November 10, 1995, 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 amended and restated as of
December 7, 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.
2..3. 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 and the
consummation of the Laurentian Acquisition. 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.
-2-
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
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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
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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.
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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.
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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 $75,000 and
(b) for its own account an arrangement 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
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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. 50,250 shares or such greater or lesser number of shares of
the Common Stock of GALIC which constitutes at all times at least 25% 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 50,250 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 $37,500,000
(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
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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 perfect the security interests granted
by this Section 6 and otherwise 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
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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
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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.
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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
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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, 1994 (the "Company's 1994 Form 10-K"), (ii) in
businesses related thereto, and (iii) following the Laurentian
Acquisition, in any of the businesses now conducted by Laurentian, and in
businesses related thereto.
7..2..2. Statutory Compliance. Each of the Company and its
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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, 7.6 and 7.7.
(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
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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, 7.6 and 7.7.
(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.
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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 (a) prior to the consummation of the Laurentian Acquisition,
an amount equal to (i) $165,000,000 plus (ii) 50% of Consolidated Net Income
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(but only if positive for any fiscal quarter) for each fiscal quarter of the
Company ending after March 31, 1994, and (b) after giving effect to the
Laurentian Acquisition, an amount equal to (i) $230,000,000 plus (ii) 25% of
Consolidated Net Income (but only if positive for any fiscal quarter) for
each fiscal quarter of the Company ending after the consummation of the
Laurentian Acquisition.
7..5. GALIC Statutory Surplus. The Company will cause GALIC to maintain
its surplus with respect to policyholders (including the Asset Valuation
Reserve and Interest Maintenance Reserve), calculated in accordance with the
applicable statutes of the State of Ohio as from time to time in effect
("GALIC Statutory Surplus"), at all times in an amount equal to or greater
than $250,000,000.
7..6. 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 (a) (i) prior
to the consummation of Laurentian Acquisition, exceed 150% of Consolidated
Net Worth, and (ii) after giving effect to the Laurentian Acquisition,
exceed 125% of Consolidated Net Worth, or (b) exceed 90% of GALIC Statutory
Surplus.
7..7. GALIC Risk Based Capital Ratio. The Company will cause GALIC to
maintain a Risk Based Capital Ratio (as defined by the National Association
of Insurance Commissioners) at all times equal to or greater than 400%.
7..8. 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..8..1. Liens on the Credit Security which secure the Credit
Obligations and restrictions on transfer and on Liens contained in the
Credit Documents.
7..8..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..8..3. Liens securing Indebtedness of the Company's Subsidiaries
owing to the Company.
7..8..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..9. 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
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other Subsidiary or to the Company.
7..10. 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..10..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..10..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) American Financial shall continue to own the
number of shares of the voting Common Stock of the Company required by
Section 9.1.6.
7..10..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..10..4. The Company and its Subsidiaries may sell or otherwise
dispose of assets for fair value in addition to dispositions permitted by
Section 7.10.1.
7..10..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..11. 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..12. 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.
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7..13. Transactions with Affiliates. Neither the Company nor any of its
Subsidiaries will effect a transaction with any Affiliate (other than the
Company or any Wholly-Owned Subsidiary of the Company) on a basis less
favorable to the Company or such Subsidiary than would be the case if such
transaction had been effected with a non-Affiliate, other than transactions
involving less than $10,000,000 per year in the aggregate; provided,
however, that the Company may effect any transaction with any Affiliate
required by the terms of the Agreement for the Sale and Purchase of Stock
dated as of September 14, 1992 between the Company and Great American
Insurance Company, as in effect on the date hereof.
7..14. 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 7.14.
7..15. Laurentian Acquisition. Except as consented to in writing by the
Agent, (a) no material provision of the Laurentian Acquisition Agreement
shall be amended, modified, waived or terminated, and (b) the Company will
comply in all material respects with the provisions of the Laurentian
Acquisition Agreement and will not have consummated the Laurentian
Acquisition except in compliance with all material conditions set forth in
the Laurentian Acquisition Agreement, including the receipt of any material
consents, authorizations, orders or approvals of any Person (including any
Insurance Authority) required in connection with the consummation of such
transaction.
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
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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, 1994, accompanied by the
reports of the Company's independent auditors;
8..2..2. The Company's 1994 Form 10-K.
8..2..3. The Quarterly Report of the Company on Form 10-Q for the
fiscal quarter ended June 30, 1995 (the "Company's 1995 Form 10-Q"); and
8..2..4. The June 30, 1995 quarterly and December 31, 1994 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.
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The Company's 1994 Form 10-K and 1995 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 1994 Form 10-K and 1995 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, 1994, 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 7.8.
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, except as set forth in the financial statements (including the notes
thereto) furnished to the Lenders pursuant to Sections 8.2.1, 8.2.2 and
8.2.3.
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
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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:
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(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. Laurentian Acquisition Agreement, etc. The Laurentian Acquisition
Agreement is a valid and binding contract as to the Company and, to the best
of the Company's knowledge, as to the Sellers. The Company is not in
default in any material respect of its obligations under the Laurentian
Acquisition Agreement and, to the best of the Company's knowledge, no other
party thereto is in default in any material respect of any of its
obligations thereunder.
8..12. Margin Stock. Neither the Company nor any of its Subsidiaries
owns any Margin Stock.
8..13. 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
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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
7.15; 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) American Financial and its Affiliates shall
collectively cease to own beneficially (A) at least 35% of the outstanding
Common Stock of the Company (or any successor permitted by Section 7.10.3
(a "Successor")) entitled generally to vote for the election of directors
and (B) a sufficient number of shares of such voting Common Stock of the
Company (or such Successor) so that American Financial 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 (or such Successor)
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then outstanding, or (ii) at least 40% of the members of the Board of
Directors of the Company (or a Successor) shall not actually consist of
representatives of American Financial and its Affiliates; or
9..1..7. The Company (or a Successor) 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;
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(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
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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 or the protection 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'
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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 26.67%
Bank of Boston
Credit Lyonnais $20,000,000 26.67%
Cayman Island Branch
Bank of America $20,000,000 26.67%
Illinois
The Bank of New York $15,000,000 20.00%
Total $75,000,000 100%
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
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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
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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):
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(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 7.10 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
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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
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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,
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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
$7,500,000 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
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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
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(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
withholding 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
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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
$7,500,000 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;
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(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.
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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
-39-
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.
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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 _________________________________
Title:
THE FIRST NATIONAL BANK OF BOSTON
By _________________________________
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
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
Managing Director
231 South LaSalle Street, 9-Q
Chicago, Illinois 60697
Telecopy: (312) 987-0303
THE BANK OF NEW YORK
By
Title:
One Wall Street
New York, New York 10286
Telecopy: (212) 809-9520
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