<PAGE> 1
PROSPECTUS Filed Pursuant to Rule 424(b)(1)
3,000,000 PREFERRED SECURITIES
AMERICAN ANNUITY GROUP CAPITAL TRUST I
9 1/4% TRUST ORIGINATED PREFERRED SECURITIES(SM) ("TOPrS (SM)")
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY
AMERICAN ANNUITY GROUP, INC.
------------------------
The 9 1/4% Trust Originated Preferred Securities (the "Preferred
Securities") offered hereby (the "Offering") represent preferred undivided
beneficial interests in the assets of American Annuity Group Capital Trust I, a
statutory business trust formed under the laws of the State of Delaware (the
"Trust"). American Annuity Group, Inc., a Delaware corporation ("AAG" or the
"Company"), will indirectly own all the common securities (the "Common
Securities" and,
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION RELEVANT TO
AN INVESTMENT IN THE PREFERRED SECURITIES, INCLUDING THE PERIOD AND
CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF DISTRIBUTIONS ON THE PREFERRED
SECURITIES MAY BE DEFERRED AND THE RELATED UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF SUCH DEFERRAL.
The Preferred Securities have been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange, Inc. ("NYSE").
Trading of the Preferred Securities on the NYSE is expected to commence within a
30-day period after the initial delivery of the Preferred Securities. See
"Underwriting."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS
OFFERING PRICE(1) COMMISSIONS(2) TO TRUST(3)(4)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Per Preferred Security.................................. $25.00 (3) $25.00
- --------------------------------------------------------------------------------------------------------------------
Total (5)............................................... $75,000,000 (3) $75,000,000
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued distributions, if any, from November 7, 1996.
(2) The Trust, the Company and AAG Holding have each agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(3) Because the proceeds of the sale of the Preferred Securities will be
invested in Subordinated Debentures, AAG Holding will pay to the
Underwriters as compensation ("Underwriters' Compensation") for arranging
the investment therein of such proceeds, $.7875 per Preferred Security (or
$2,362,500 in the aggregate). See "Underwriting."
(4) Expenses of the Offering, which are payable by AAG Holding, are estimated to
be $500,000.
(5) The Trust and the Company have granted to the Underwriters an option
exercisable for 30 days to purchase up to an additional 450,000 Preferred
Securities at the initial public offering price per Preferred Security
solely to cover over-allotments, if any. AAG Holding will pay to the
Underwriters, as Underwriters' Compensation, the commission set forth above
in footnote (3) with respect to such additional Preferred Securities. If
such option is exercised in full, the Initial Public Offering Price,
Underwriters' Compensation, and Proceeds to the Trust will be $86,250,000,
$2,716,875 and $86,250,000, respectively. See "Underwriting."
------------------------
The Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the Preferred Securities will be made only in book-entry form
through the facilities of The Depository Trust Company, on or about November 7,
1996.
------------------------
MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
FURMAN SELZ
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
------------------------
The date of this Prospectus is November 4, 1996.
(SM) "Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co., Inc.
<PAGE> 2
(continued from previous page)
together with the Preferred Securities, the "Trust Securities") representing
undivided beneficial interests in the assets of the Trust. The Trust exists for
the sole purpose of issuing the Preferred Securities and Common Securities and
investing the proceeds thereof in an equivalent amount of 9 1/4% Subordinated
Debentures due October 15, 2026 ("Subordinated Debentures") of AAG Holding
Company, Inc. ("AAG Holding"), an Ohio corporation and wholly-owned subsidiary
of the Company. The Subordinated Debentures are fully and unconditionally
guaranteed (the "Debt Guarantee") on a subordinated basis as to payment of
principal, premium, if any, and interest by the Company. Upon a Declaration
Event of Default (as defined herein), the holders of the Preferred Securities
will have a preference over the holders of the Common Securities with respect to
payments in respect of distributions and payments upon redemption, liquidation
and otherwise.
Holders of the Preferred Securities are entitled to receive cumulative cash
distributions at an annual rate of 9 1/4% of the liquidation amount of $25 per
Preferred Security, accruing from the date of original issuance and payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year, commencing January 15, 1997 ("distributions"). The distribution rate and
the distribution and other payment dates for the Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Subordinated Debentures, which, together with the Debt Guarantee and interest
and principal payments received on the Subordinated Debentures, will be the only
assets of the Trust. As a result, if principal or interest is not paid on the
Subordinated Debentures, no amounts will be paid on the Preferred Securities.
The payment of distributions out of moneys held by the Trust and payments on
liquidation of the Trust or the redemption of Preferred Securities, as set forth
below, are guaranteed by the Company (the "Trust Guarantee") if and to the
extent the Trust has funds available therefor. The Company's obligations under
the Trust Guarantee, the Indenture and any applicable supplemental indentures,
and the Debt Guarantee, provide a full and unconditional guarantee by the
Company of payments due on the Preferred Securities. See "Effect of Obligations
Under the Subordinated Debentures, the Debt Guarantee and the Trust Guarantee"
herein and "Description of Trust Guarantee." If AAG Holding does not make
principal or interest payments on the Subordinated Debentures, as a result of
the election to extend the interest payment period on the Subordinated
Debentures as described below, or otherwise, and the Company does not make such
payments under the Debt Guarantee, the Trust will not have sufficient funds to
make distributions on the Preferred Securities, in which event the Trust
Guarantee will not apply to such distributions until the Company or AAG Holding
has made such principal or interest payments. The obligations of AAG Holding
under the Subordinated Debentures are unsecured and will be subordinate and
junior in right of payment, to the extent set forth herein, to all existing and
future Senior Indebtedness (as defined herein) of AAG Holding and will be
structurally subordinated to all existing and future liabilities and obligations
of AAG Holding's subsidiaries. The obligations of the Company under the Debt
Guarantee are subordinate and junior in right of payment to all present and
future Senior Indebtedness of the Company. At June 30, 1996, the aggregate
amount of Senior Indebtedness and liabilities and obligations of AAG Holding's
subsidiaries that would have effectively ranked senior to the Subordinated
Debentures was approximately $6.2 billion.
AAG Holding has the right to defer payments of interest on the Subordinated
Debentures by extending the interest payment period on the Subordinated
Debentures from time to time for up to 20 consecutive quarters (each, an
"Extension Period") provided that no Extension Period may extend beyond the
Maturity Date (as defined herein). If interest payments are so deferred,
distributions on the Preferred Securities will also be deferred. During any
Extension Period, distributions will continue to accrue with interest thereon
(to the extent permitted by applicable law) at an annual rate of 9 1/4% per
annum compounded quarterly, and during any Extension Period, holders of
Preferred Securities will be required to include deferred interest income in
their gross income for United States federal income tax purposes in advance of
receipt of the cash distributions with respect to such deferred interest
payments. There could be multiple Extension Periods of varying lengths
throughout the term of the Subordinated Debentures. See "Risk Factors--Option to
Extend Interest Payment Period or Change Maturity Date," "Risk Factors--Tax
Consequences of Extension of Interest Payment Period," "Description of the
Subordinated Debentures and Debt Guarantee--Option to Extend Interest Payment
Period," and "United States Federal Income Taxation--Interest Income and
Original Issue Discount."
The Subordinated Debentures are redeemable prior to maturity at the option
of AAG Holding (i) in whole or in part, from time to time, on or after November
7, 2001, or (ii) at any time in whole (but not in part) upon the occurrence and
continuation of a Special Event (as defined herein). If AAG Holding redeems
Subordinated Debentures, the Trust must redeem Trust Securities having an
aggregate liquidation amount equal to the aggregate principal amount of the
Subordinated Debentures so redeemed at $25 per Preferred Security plus accrued
and unpaid distributions thereon to the
<PAGE> 3
date fixed for redemption (the "Redemption Price"). See "Description of the
Preferred Securities--Mandatory Redemption." The outstanding Preferred
Securities will be redeemed upon maturity of the Subordinated Debentures. The
Subordinated Debentures mature on October 15, 2026, which date may be extended
at any time at the election of AAG Holding, but in no event later than the
earlier of (i) October 15, 2045 or (ii) the "Interest Deduction Date" (as
hereinafter defined under "Description of the Subordinated Debentures and Debt
Guarantee--Option to Change Scheduled Maturity Date"), provided certain
financial conditions are met, and may be shortened to a date not earlier than
November 7, 2001 if AAG Holding exercises its right to liquidate the Trust and
distribute the Subordinated Debentures. See "Description of the Subordinated
Debentures and Debt Guarantee--Option to Change Scheduled Maturity Date."
At any time, AAG Holding will have the right to liquidate the Trust and
cause the Subordinated Debentures to be distributed to the holders of the Trust
Securities in liquidation of the Trust. If AAG Holding elects to liquidate the
Trust and thereby causes the Subordinated Debentures to be distributed to
holders of the Trust Securities in liquidation of the Trust, AAG Holding shall
have the right to shorten the maturity of such Subordinated Debentures, to a
date not earlier than November 7, 2001, or extend the maturity of such
Subordinated Debentures to a date not later than the earlier of (i) October 15,
2045 or (ii) the Interest Deduction Date, provided that it can extend the
maturity only if certain conditions are met. If the Subordinated Debentures are
distributed to the holders of the Preferred Securities, AAG Holding will use its
best efforts to have the Subordinated Debentures listed on the NYSE or on such
other exchange as the Preferred Securities are then listed. See "Description of
the Preferred Securities--Distribution of the Subordinated Debentures."
In the event of the involuntary or voluntary liquidation, dissolution,
winding up or termination of the Trust, the holders of the Preferred Securities
will be entitled to receive for each Preferred Security a liquidation amount of
$25 plus accrued and unpaid distributions thereon (including interest thereon)
to the date of payment, unless, in connection with such dissolution, the
Subordinated Debentures are distributed to the holders of the Preferred
Securities. See "Description of the Preferred Securities--Liquidation
Distribution Upon Dissolution."
------------------------
FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
(THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA
INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE DOCUMENTS
INCORPORATED OR DEEMED INCORPORATED BY REFERENCE HEREIN, AND ANY INFORMATION OR
REPRESENTATIONS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, AAG HOLDING OR THE TRUST OR BY ANY AGENT,
DEALER OR UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE OF SUCH INFORMATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
periodic reports, proxy and information statements and other information with
the Securities and Exchange Commission (the "Commission"). The Company, AAG
Holding and the Trust have filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission under the Securities Act of 1933
(the "Securities Act") with respect to the Securities. This Prospectus does not
contain all the information, exhibits and undertakings contained in the
Registration Statement, to which reference is hereby made. Statements contained
in this Prospectus as to the terms of any contract or other document are not
necessarily complete with respect to each such contract or other document filed
as an exhibit to the Registration Statement. Reference is made to the exhibits
for a more complete description of the matter involved. Such reports, proxy and
information statements, the Registration Statement and other information filed
with the Commission by the Company may be inspected at and obtained from the
Commission at its public reference facilities at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Suite 1400, 500 West Madison Avenue, Chicago, Illinois, and at 7 World Trade
Center, 13th Floor, New York, New York. Copies of such material can also be
obtained, at prescribed rates, by mail from the Public Reference Section of the
Commission at its Washington, D.C. address set forth above. In addition,
material filed by the Company can be obtained and inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005 on which AAG's Common Stock
is listed. Such material may also be accessed electronically by means of the
Commission's home page on the World Wide Web located at http://www.sec.gov.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Company and AAG Holding do not believe
that such financial statements would be material to holders of the Preferred
Securities because (i) all of the voting securities of the Trust will be owned,
directly or indirectly, by AAG Holding, a wholly-owned subsidiary of the
Company, (ii) the Trust has no independent operations but exists for the sole
purpose of issuing securities representing undivided beneficial interests in its
assets and investing the proceeds thereof in Subordinated Debentures issued by
AAG Holding, and (iii) the obligations of the Trust under the Preferred
Securities are, to the extent that the Trust shall have funds available to meet
such obligations, fully and unconditionally guaranteed by AAG Holding. See
"Description of Preferred Securities."
No separate financial statements of AAG Holding have been included or
incorporated by reference herein. The Company does not believe that such
financial statements would be material to holders of the Preferred Securities
because (i) all of the common stock of AAG Holding will be owned, directly or
indirectly, by the Company, a reporting company under the Exchange Act and (ii)
the obligations of AAG Holding under the Subordinated Debentures are fully and
unconditionally guaranteed by the Company. See "Description of the Subordinated
Debentures and Debt Guarantee."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Prospectus incorporates by reference certain documents relating to the
Company which are not delivered herewith. These documents (other than the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents) are available, without charge, on oral or
written request by any person to whom this Prospectus is delivered. Written or
telephone requests should be directed to Mark F. Muething, Senior Vice President
and General Counsel, 250 East Fifth Street, Cincinnati,
4
<PAGE> 5
Ohio 45202, telephone (513) 333-5515. The following documents, which have been
filed by the Company with the Commission, are hereby incorporated by reference
in this Prospectus:
American Annuity Group, Inc. (File No. 1-11632):
(i) Annual Report on Form 10-K for the fiscal year ended December 31,
1995; and
(ii) Quarterly Reports on Form 10-Q for the periods ended March 31, 1996
and June 30, 1996.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of this Offering
shall be deemed to be incorporated by reference in this Prospectus and to be a
part of this Prospectus from the date of filing thereof. Any statement contained
in a document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
5
<PAGE> 6
PROSPECTUS SUMMARY
This summary is qualified by the more detailed information and financial
statements appearing elsewhere, or incorporated by reference, in this
Prospectus. Unless otherwise noted, the material set forth herein does not give
effect to the exercise of the Underwriters' over-allotment option.
THE COMPANY
American Annuity Group, Inc. ("AAG" or the "Company") is a holding company
which, through its subsidiaries, is engaged in the life insurance business,
principally the sale of tax-deferred annuities and life and health insurance.
AAG's primary operating subsidiary is 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. At December 31, 1995, GALIC had statutory
assets in excess of $5.4 billion, representing a 30% compounded annual growth in
assets since 1976.
GALIC has several life insurance subsidiaries including (i) American
Memorial Life Insurance Company ("American Memorial"), 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,
(ii) Annuity Investors Life Insurance Company ("AILIC"), which markets group and
individual variable annuities, and (iii) Loyal American Life Insurance Company
("Loyal"), which specializes in life and health insurance sold through payroll
deduction plans and credit unions.
American Financial Group, Inc. and its subsidiaries ("AFG") collectively
own approximately 81% of the Company's outstanding Common Stock.
AAG HOLDING COMPANY
AAG Holding Company, Inc. ("AAG Holding") is a wholly-owned subsidiary of
the Company that owns all of the stock of GALIC. AAG Holding will own, directly
or indirectly, all of the Common Securities and will issue the Subordinated
Debentures to the Trust.
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a declaration of trust, as amended (the "Declaration"), executed by AAG
Holding as sponsor for such trust (the "Sponsor"), and the Trustees (as defined
herein) of such trust and (ii) the filing of a certificate of trust with the
Secretary of State of the State of Delaware on September 13, 1996. The Trust
exists for the exclusive purposes of (i) issuing and selling the Preferred
Securities and Common Securities, (ii) using the gross proceeds from the sale of
the Trust Securities to acquire the Subordinated Debentures, and (iii) engaging
in only those other activities necessary or incidental thereto. All of the
Common Securities will be directly or indirectly owned by AAG Holding. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities, except that, if a Declaration Event of
Default (as defined herein) has occurred and is continuing, the rights of the
holders of the Common Securities to payment in respect of distributions and
payments upon liquidation, redemption and otherwise will be subordinated to the
rights of the holders of the Preferred Securities. AAG Holding will directly or
indirectly acquire Common Securities in an aggregate liquidation amount equal to
at least 3% of the total capital of the Trust.
The Trust's affairs will be conducted by the trustees (the "Trustees")
appointed by AAG Holding as the direct or indirect holder of all of the Common
Securities. The holder of the Common Securities will be entitled to appoint,
remove or replace any of, or increase or reduce the number of, the Trustees (as
defined herein). The duties and obligations of the Trustees shall be governed by
the Declaration. The Trust will initially have four Trustees. Two Trustees (the
"Regular Trustees") will be employees or officers of or otherwise affiliated
with AAG or AAG Holding. A third Trustee (the "Property Trustee") of the Trust
will be a financial institution that is not affiliated with AAG Holding and has
a minimum amount of combined capital
6
<PAGE> 7
and surplus of not less than $50,000,000, which shall act as property trustee
and as indenture trustee for the purposes of compliance with the provisions of
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The fourth
Trustee of the Trust will be an entity having a principal place of business in,
or a natural person resident of, the State of Delaware (the "Delaware Trustee").
AAG Holding will pay all fees and expenses related to the Trust and the offering
of the Trust Securities.
The Property Trustee for the Trust is The Bank of New York and its
principal corporate trust office is at 101 Barclay Street, 21st Floor, New York,
New York 10286, Attention: Corporate Trust Trustee Administration. The Delaware
Trustee for the Trust is The Bank of New York (Delaware) and its address in the
State of Delaware is 23 White Clay Center, Route 273, Newark, Delaware 19711.
The Delaware Trustee is an affiliate of the Property Trustee. The address for
the Trust is c/o American Annuity Group, Inc., at the Company's corporate
headquarters located at 250 East Fifth Street, Cincinnati, Ohio 45202, telephone
(513) 333-5300.
THE OFFERING
Preferred Securities Offered. 3,000,000 9 1/4% Trust Originated Preferred
Securities evidencing preferred undivided beneficial interests in the assets of
the Trust. Holders of the Preferred Securities will be entitled to receive
cumulative cash distributions at an annual rate of 9 1/4% of the liquidation
amount of $25 per Preferred Security, accruing from the date of original
issuance and payable quarterly in arrears on January 15, April 15, July 15 and
October 15 of each year commencing on January 15, 1997. The distribution rate
and the distribution and other payment dates for the Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Subordinated Debentures, which, together with the Debt Guarantee and interest
and principal payments received on the Subordinated Debentures, will be the only
assets of the Trust. As a result, if principal or interest is not paid on the
Subordinated Debentures, no amounts will be paid on the Preferred Securities.
See "Risk Factors--Ranking of Subordinate Obligations Under the Trust Guarantee,
Debt Guarantee and Subordinated Debentures" and "Description of the Preferred
Securities."
Subordinated Debentures. The Trust will invest the proceeds from the
issuance of the Preferred Securities and Common Securities in an equivalent
amount of 9 1/4% Subordinated Debentures of AAG Holding. The Subordinated
Debentures will rank subordinate and junior in right of payment to all Senior
Indebtedness of AAG Holding. In addition, AAG Holding's obligations under the
Subordinated Debentures will be structurally subordinated to all existing and
future liabilities and preferred stock obligations of its subsidiaries. See
"Description of the Subordinated Debentures and Debt Guarantee--Subordination."
Debt Guarantee. The Subordinated Debentures are fully and unconditionally
guaranteed on a subordinated basis as to the payment of principal and interest
by the Company. See "Risk Factors--Holding Company Structure; Ranking of
Subordinate Obligations Under the Trust Guarantee, Subordinated Debenture
Guarantee and Subordinated Debentures" and "Description of Subordinated
Debentures and Debt Guarantee."
Trust Guarantee. Payment of distributions out of moneys held by the Trust,
and payments on liquidation of the Trust or the redemption of Preferred
Securities, are guaranteed by the Company to the extent the Trust has funds
available therefor. If AAG Holding does not make principal or interest payments
on the Subordinated Debentures and AAG does not make payment under the Debt
Guarantee, the Trust will not have sufficient funds to make distributions on the
Preferred Securities, in which event the guarantee shall not apply to such
distribution until the Trust has sufficient funds available therefor. See
"Description of Trust Guarantee" and "Effect of Obligations Under the
Subordinated Debentures, the Debt Guarantee and the Trust Guarantee." The
obligations of AAG under the Guarantee are subordinate and junior in right of
payment to all other liabilities of AAG including the Debt Guarantee. See "Risk
Factors--Holding Company Structure; Ranking of Subordinate Obligations Under the
Trust Guarantee, Debt and Subordinated Debentures."
Right to Defer Interest. AAG Holding has the right to defer payments of
interest on the Subordinated Debentures by extending the interest payment period
on the Subordinated Debentures, from time to time, for
7
<PAGE> 8
up to 20 consecutive quarters. If interest payments on the Subordinated
Debentures are so deferred, distributions on the Preferred Securities will also
be deferred. During any Extension Period, distributions will continue to accrue
with interest thereon (to the extent permitted by the applicable law) as
described herein. There could be multiple Extension Periods of varying lengths
throughout the term of the Subordinated Debentures. During an Extension Period,
holders of Preferred Securities will be required to include deferred interest
income allocated to their Preferred Securities in their gross income (as
Original Issue Discount ("OID")) even though the cash payments attributable
thereto have not been made. See "Description of the Subordinated
Debentures--Option to Extend Interest Payment Period" and "United States Federal
Income Taxation--Interest Income and Original Issue Discount."
Redemption. The Subordinated Debentures are redeemable by AAG Holding (in
whole, or from time to time in part) on or after November 7, 2001, or at any
time, in whole but not in part, upon the occurrence of a Special Event. If the
Subordinated Debentures are redeemed, the Trust must redeem Trust Securities
having an aggregate liquidation amount equal to the aggregate principal amount
of the Subordinated Debentures so redeemed. The Trust Securities will be
redeemed upon maturity of the Subordinated Debentures. See "Description of the
Preferred Securities--Mandatory Redemption" and "--Special Event Redemption."
Option to Extend Maturity. The Subordinated Debentures mature on October
15, 2026, but the maturity may be extended once only for up to an additional 19
years, provided certain financial covenants and conditions are met. If the
maturity of the Subordinated Debentures is extended, the Preferred Securities
will remain outstanding for the same time period. See "Description of the
Subordinated Debentures and Debt Guarantee--Option to Change Scheduled Maturity
Date."
Right to Liquidate Trust. At any time, AAG Holding will have the right to
liquidate the Trust and cause the Subordinated Debentures (including the Debt
Guarantee) to be distributed to the holders of the Trust Securities in
liquidation of the Trust. If AAG Holding elects to liquidate the Trust and
thereby causes the Subordinated Debentures to be distributed to holders of the
Trust Securities in liquidation of the Trust, AAG Holding shall have the right
to shorten the maturity of such Subordinated Debentures, to a date not earlier
than November 7, 2001, or extend the maturity of such Subordinated Debentures to
a date not later than the earlier of (i) October 15, 2045 or (ii) the Interest
Deduction Date, provided that it can extend the maturity only if certain
conditions are met. If the Subordinated Debentures (including the Debt
Guarantee) are distributed to the holders of the Preferred Securities, AAG
Holding will use its best efforts to have the Subordinated Debentures listed on
the NYSE or on such other exchange as the Preferred Securities are then listed.
See "Description of the Preferred Securities--Distribution of the Subordinated
Debentures."
Use Of Proceeds. The net proceeds from the sale of Preferred Securities by
the Trust will be invested in the Subordinated Debentures of AAG Holding. AAG
Holding expects to use the net proceeds from the sale of the Subordinated
Debentures to repay outstanding debt and for general corporate purposes. Until
the net proceeds are used for these purposes, AAG Holding will deposit them in
interest-bearing accounts or invest them in short-term marketable securities.
Ratings of Securities. The Preferred Securities have been assigned an
investment grade rating of "BBB-" by Standard & Poor's Ratings Group, a division
of McGraw-Hill ("S&P")and an investment grade rating of "BBB-" by Duff & Phelps
Credit Rating Co. ("Duff & Phelps"). Moody's Investors Service, Inc. ("Moody's")
has assigned the Preferred Securities a rating of "ba1."
An explanation of the significance of ratings may be obtained from S&P,
Duff & Phelps and Moody's. Generally, rating agencies base their ratings on such
material and information, and such of their own investigations, studies and
assumptions, as they deem appropriate. A credit rating of a security is not a
recommendation to buy, sell or hold securities. There is no assurance that any
rating will apply for any given period of time or that a rating may not be
adjusted or withdrawn.
8
<PAGE> 9
RECENT DEVELOPMENTS
On October 24, 1996, the Company reported its results for the third quarter
and the first nine months of 1996, together with the comparable amounts for the
prior year. The following table summarizes the reported results. Dollar amounts
are stated in millions, except for per share data.
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
THREE MONTHS ENDED SEPTEMBER 30 Total Per share Total Per share
- --------------------------------------------------------- ----- --------- ----- ---------
<S> <C> <C> <C> <C>
Earnings before realized gains and nonrecurring and
extraordinary items ("net operating earnings")......... $16.8 $ 0.38 $12.1 $0.30
Realized investment gains................................ 0.3 0.01 4.5 0.11
Extraordinary--loss on debt prepayment................... (1.7) (0.04) -- --
----- --------- ----- -------
Net income.......................................... $15.4 $ 0.35 $16.6 $0.41
===== ======= ===== =======
NINE MONTHS ENDED SEPTEMBER 30
- ---------------------------------------------------------
Earnings before realized gains and nonrecurring and
extraordinary items ("net operating earnings")......... $47.2 $ 1.07 $35.6 $0.90
Realized investment gains................................ 0.9 0.02 4.6 0.11
Extraordinary--loss on debt prepayment................... (6.0) (0.14) -- --
----- --------- ----- -------
Net income.......................................... $42.1 $ 0.95 $40.2 $1.01
===== ======= ===== =======
</TABLE>
The Company also announced that its annuity premiums increased 22% in 1996
compared to 1995 due to growth in annuity sales at GALIC, as well as from the
acquisition of American Memorial.
9
<PAGE> 10
SUMMARY FINANCIAL INFORMATION
The summary financial data for the six months ended June 30, 1996 and 1995
and three-year period ended December 31, 1995 are derived from the Company's
consolidated financial statements. The summary financial data should be read in
conjunction with the financial statements and notes thereto in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and the
Company's Quarterly Report on Form 10-Q for the six months ended June 30, 1996,
which are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference.".
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues................................. $ 289.9 $ 199.8 $ 439.6 $ 372.7 $ 388.9
======= ======= ======= ======= =======
Income from continuing operations(1)........... $ 31.0 $ 23.6 $ 58.7 $ 40.9 $ 53.0
Loss from discontinued operations.............. -- -- (3.2) (2.6) (9.6)
Extraordinary items............................ (4.3) -- (0.2) (1.7) (3.4)
Change in accounting principle................. -- -- -- (0.5) --
-------- -------- -------- -------- --------
Net income..................................... $ 26.7 $ 23.6 $ 55.3 $ 36.1 $ 40.0
Earnings (loss) per common share:
Continuing operations(1)..................... $ 0.70 $ 0.60 $ 1.45 $ 1.05 $ 1.41
Discontinued operations...................... -- -- (0.08) (0.07) (0.27)
Extraordinary items.......................... (0.10) -- -- (0.05) (0.10)
Change in accounting principle............... -- -- -- (0.01) --
-------- -------- -------- -------- --------
Net income................................... $ 0.60 $ 0.60 $ 1.37 $ 0.92 $ 1.04
Cash dividends per common share................ -- -- $ 0.07 $ 0.06 $ 0.05
BALANCE SHEET DATA:
Total assets................................... $6,711.9 $5,393.2 $6,611.0 $5,089.9 $4,913.8
Notes payable.................................. 170.4 168.1 167.7 183.3 225.9
Net unrealized gains (losses) included in
stockholders' equity......................... 13.8 37.7 89.3 (29.0) 56.9
Total stockholders' equity..................... 380.3 294.7 429.3 204.4 250.3
</TABLE>
- ---------------
(1) Reported amounts include realized gains and losses on sales of investments
and, in 1993, certain non-recurring relocation expenses. Management believes
that reported results which include these items are not indicative of future
results of operations. Results excluding these items were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Income from continuing operations.............. $ 30.4 $ 23.5 $ 48.5 $ 41.0 $ 35.1
Earnings per common share from continuing
operations................................... $ 0.69 $ 0.60 $ 1.20 $ 1.05 $ 0.90
</TABLE>
10
<PAGE> 11
RISK FACTORS
Prospective purchasers of Preferred Securities should consider carefully
all of the information contained in this Prospectus including the information in
the documents incorporated by reference and, in particular, should evaluate the
specific factors set forth below for risks involved with an investment of the
Preferred Securities.
RANKING OF SUBORDINATE OBLIGATIONS UNDER THE TRUST GUARANTEE, DEBT GUARANTEE AND
SUBORDINATED DEBENTURES
The Company's obligations under the Trust Guarantee are unsecured and will
rank (i) subordinate and junior in right of payment to all other liabilities of
the Company, including the Debt Guarantee, except those made pari passu or
subordinate by their terms, (ii) pari passu with the most senior preferred or
preference stock now or hereafter issued by the Company, and with any guarantee
now or hereafter issued by the Company in respect of any preferred stock or
preference stock of any affiliate of the Company, and (iii) senior to the
Company's common stock.
The obligations of AAG Holding under the Subordinated Debentures are
unsecured and will rank subordinate and junior in right of payment, to the
extent set forth herein, to all present and future Senior Indebtedness of AAG
Holding and will be structurally subordinated to all existing and future
liabilities and obligations of AAG Holding's subsidiaries. The obligations of
AAG Holding under the Subordinated Debentures will at all times be senior to
common and preferred equity of AAG Holding.
The obligations of the Company under the Debt Guarantee are subordinate and
junior in right of payment to all present and future Senior Indebtedness of the
Company but will at all times be senior to common and preferred equity of the
Company.
At June 30, 1996, the aggregate amount of Senior Indebtedness and
liabilities and obligations of AAG Holding's subsidiaries that would have
structurally ranked senior to the Subordinated Debentures was approximately $6.2
billion. There are no terms in the Preferred Securities, the Subordinated
Debentures, the Debt Guarantee or the Trust Guarantee that limit the ability of
the Company, AAG Holding or any of their subsidiaries to incur additional
indebtedness, liabilities or obligations, including indebtedness, liabilities or
obligations that rank senior to the Subordinated Debentures, the Debt Guarantee
and the Trust Guarantee. See "Description of Trust Guarantee--Status of the
Trust Guarantee" and "Description of the Subordinated Debentures and Debt
Guarantee--Subordination."
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, then the holders of Preferred Securities would rely on the
enforcement by the Property Trustee of its rights as a holder of the
Subordinated Debentures and Debt Guarantee against AAG Holding and the Company.
The holders of a majority in liquidation amount of the Preferred Securities will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Property Trustee or to direct the exercise of
any trust or power conferred upon the Property Trustee under the Declaration,
including the right to direct the Property Trustee to exercise the remedies
available to it as a holder of the Subordinated Debentures and the Debt
Guarantee. If the Property Trustee fails to enforce its rights with respect to
the Subordinated Debentures or under the Debt Guarantee, any record holder of
Preferred Securities may institute legal proceedings directly against AAG
Holding to enforce the Property Trustee's rights under such Subordinated
Debentures or against the Company under the Debt Guarantee without first
instituting any legal proceedings against such Property Trustee or any other
person or entity, including, in the case of the Debt Guarantee, against the
Company. In addition, if a Declaration Event of Default has occurred and is
continuing and such event is attributable to the failure of AAG Holding to pay
interest, principal or other required payments on the Subordinated Debentures
issued to the Trust on the date such interest, principal or other payments are
otherwise payable, then a record holder of Preferred Securities may institute a
proceeding directly against AAG Holding for enforcement of payment on the
Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Preferred Securities held by such holder (a "Direct
Action") on or
11
<PAGE> 12
after the respective due dates specified in the Subordinated Debentures. In
connection with such Direct Action, the Company will be subrogated to the rights
of such record holder of Preferred Securities to the extent of any payment made
by the Company to such record holder of Preferred Securities pursuant to the
Debt Guarantee. The record holder in the case of the issuance of one or more
global Preferred Securities certificates will be The Depository Trust Company
acting at the direction of the beneficial owners of the Preferred Securities.
The holders of Preferred Securities will not be able to exercise directly any
other remedy available to the holders of the Subordinated Debentures unless the
Property Trustee fails to do so. See "Description of the Preferred
Securities--Declaration Events of Default" and "Description of the Subordinated
Debentures and Debt Guarantee--Indenture Events of Default."
TRUST DISTRIBUTIONS DEPENDENT ON AAG HOLDING'S PAYMENTS ON SUBORDINATED
DEBENTURES
The Trust's ability to make distributions and other payments on the
Preferred Securities is dependent upon AAG Holding making interest and other
payments on the Subordinated Debentures or upon the Company making such payments
pursuant to the Debt Guarantee. If AAG Holding were not to make payments on the
Subordinated Debentures for any reason, including as a result of AAG Holding's
election to defer the payment of interest on the Subordinated Debentures by
extending the interest payment period on the Subordinated Debentures and the
Company does not make such payments under the Debt Guarantee, the Trust will not
make payments on the Trust Securities. In such an event, holders of the
Preferred Securities would not be able to rely on the Trust Guarantee because
distributions and other payments on the Preferred Securities are subject to such
Trust Guarantee only if and to the extent that the Trust has funds available
therefor. See "Description of Trust Guarantee--General" and "Effect of
Obligations Under the Subordinated Debentures, the Debt Guarantee and the Trust
Guarantee."
OPTION TO EXTEND INTEREST PAYMENT PERIOD OR CHANGE MATURITY DATE
AAG Holding has the right under the Indenture to (a) defer payments of
interest on the Subordinated Debentures by extending the interest payment period
at any time, and from time to time, on the Subordinated Debentures or (b) extend
or shorten the maturity date of the Subordinated Debentures. See "Description of
the Subordinated Debentures and Debt Guarantee--Option to Change Scheduled
Maturity Date" and "Description of the Subordinated Debentures and Debt
Guarantee--Option to Extend Interest Payment Period." As a consequence of an
extension of the interest payment period, quarterly distributions on the
Preferred Securities would be deferred (but despite such deferral, to the extent
permitted by law, would continue to accrue with interest thereon compounded
quarterly) by the Trust during any such Extension Period. AAG Holding has the
right to defer payments of interest on the Subordinated Debentures, from time to
time, for up to 20 consecutive quarters, provided that no Extension Period may
extend beyond the Maturity Date (as defined herein) of the Subordinated
Debentures. There could be multiple Extension Periods of varying lengths
throughout the term of the Subordinated Debentures. In the event that AAG
Holding exercises this right to defer interest payments, then, prior to the
payment of all accrued interest on outstanding Subordinated Debentures, (a) the
Company and AAG Holding shall not declare or pay dividends on, or make a
distribution with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock and (b) the
Company and AAG Holding shall not, directly or indirectly, and will not allow
any of their subsidiaries to, make any payment of interest, principal or
premium, if any, on, or repay, repurchase or redeem any debt securities issued
by the Company or AAG Holding that rank pari passu with or junior to the
Subordinated Debentures; provided, however, that the restriction in clause (a)
above does not apply (i) to repurchases or acquisitions of shares of the common
stock of the Company or AAG Holding as contemplated by any employment
arrangement, benefit plan or other similar contract with or for the benefit of
employees, officers or directors entered into in the ordinary course of
business, (ii) as a result of an exchange or conversion of any class or series
of the Company's or AAG Holding's capital stock for common stock, (iii) to the
purchase of fractional interests in shares of the Company's or AAG Holding's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged or (iv) to the payment of any
stock dividend by the Company or AAG Holding payable in common stock of such
company. AAG Holding may further extend the interest payment period; provided
that each Extension Period, if any, may not exceed 20 consecutive quarters and
may not extend beyond the Maturity Date of the
12
<PAGE> 13
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all amounts then due, AAG Holding may commence a new Extension
Period, subject to the above requirements. Consequently, there could be multiple
Extension Periods of varying lengths prior to the Maturity Date of the
Subordinated Debentures. AAG Holding has no current intention of exercising its
right to defer payments of interest by extending the interest payment period on
the Subordinated Debentures. However, should AAG Holding determine to exercise
such right in the future, the market price of the Preferred Securities is likely
to be adversely affected. See "Description of the Preferred
Securities--Distributions" and "Description of the Subordinated Debentures and
Debt Guarantee--Option to Extend Interest Payment Period."
TAX CONSEQUENCES OF EXTENSION OF INTEREST PAYMENT PERIOD
Should AAG Holding exercise its right to defer payments of interest by
extending the interest payment period, each holder of Preferred Securities will
accrue income (as original issue discount ("OID")) in respect of the deferred
interest allocable to its Preferred Securities for United States federal income
tax purposes. Such income will be allocated but not distributed to holders of
the Preferred Securities. As a result, each such holder of the Preferred
Securities will recognize income for United States federal income tax purposes
in advance of the receipt of cash and will not receive the cash from the Trust
related to such income if such holder disposes of its Preferred Securities prior
to the record date for the date on which distributions of such amounts are made.
A holder that disposes of its Preferred Securities during an Extension Period,
therefore, might not receive the same return on its investment as a holder that
continues to hold its Preferred Securities. In addition, as a result of the
existence of AAG Holding's right to defer interest payments, the market price of
the Preferred Securities (which represent an undivided beneficial interest in
the Subordinated Debentures) may be more volatile than other securities that do
not have such feature. See "United States Federal Income Taxation--Interest
Income and Original Issue Discount."
SPECIAL EVENT REDEMPTION
Upon the occurrence of a Special Event, AAG Holding will have the right to
redeem the Subordinated Debentures, in whole (but not in part), in which event
the Trust will redeem all outstanding Trust Securities. See "Description of the
Preferred Securities--Special Event Redemption."
DISTRIBUTION OF THE SUBORDINATED DEBENTURES
At any time, AAG Holding will have the right to terminate the Trust and,
after satisfaction of the liabilities to creditors of the Trust as provided by
applicable law, cause the Subordinated Debentures to be distributed to the
holders of the Preferred Securities in liquidation of the Trust. Under current
United States federal income tax law and interpretation and assuming, as
expected, the Trust is treated as a grantor trust, a distribution of the
Subordinated Debentures should not be a taxable event to holders of the
Preferred Securities. Should there be a change in law, a change in legal
interpretation, a Special Event or other circumstances, however, the
distribution could be a taxable event to the holders of the Preferred
Securities. In addition, a dissolution of the Trust in which holders of the
Preferred Securities receive cash would be a taxable event to such holders. See
"United States Federal Income Taxation--Receipt of Subordinated Debentures or
Cash Upon Liquidation of the Trust."
If AAG Holding elects to liquidate the Trust and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of the Trust, AAG Holding shall have the right to shorten the
maturity of such Subordinated Debentures to a date not earlier than November 7,
2001 or extend the maturity of such Subordinated Debentures to a date which is
not later than the earlier of (i) October 15, 2045 or (ii) the Interest
Deduction Date, provided that it can extend the maturity only if certain
conditions are met. See "Description of the Subordinated Debentures and Debt
Guarantee--Option to Change Scheduled Maturity Date."
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution or liquidation of the Trust were to
occur. Accordingly, the Preferred Securities that an investor may purchase,
whether pursuant to
13
<PAGE> 14
the offer made hereby or in the secondary market, or the Subordinated Debentures
that a holder of Preferred Securities may receive on dissolution and liquidation
of the Trust, may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby. In addition, because AAG
Holding has the right to shorten or extend the maturity of the Subordinated
Debentures upon the termination of the Trust and the distribution of the
Subordinated Debentures to the holders of the Preferred Securities, there can be
no assurance that AAG Holding will not exercise its option to change the
maturity of the Subordinated Debentures upon such an event. Because holders of
Preferred Securities may receive Subordinated Debentures upon any election by
AAG Holding to liquidate the Trust and cause the Subordinated Debentures to be
distributed to the holders of the Preferred Securities, prospective purchasers
of Preferred Securities are also making an investment decision with regard to
the Subordinated Debentures and should review carefully all the information
regarding the Subordinated Debentures, the Company and AAG Holding contained
herein. See "Description of the Preferred Securities--Distribution of the
Subordinated Debentures" and "Description of the Subordinated Debentures and
Debt Guarantee."
PROPOSED TAX LAW CHANGES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"),
the revenue portion of President Clinton's fiscal 1997 budget proposal, was
released. The Bill would, among other things, generally deny interest deductions
for interest or OID on an instrument issued by a corporation that has a maximum
weighted average maturity of more than 40 years. The Bill would also treat as
equity instruments issued by a corporation that have a maximum term of more than
20 years and that are not shown as indebtedness on the consolidated balance
sheet of the issuer. For purposes of determining the weighted average maturity
or the term of an instrument, any right to extend would be treated as exercised.
The above-described provisions of the Bill were proposed to be effective
generally for instruments issued on or after December 7, 1995. However, on March
29, 1996, the Chairmen of the Senate Finance and House Ways and Means Committees
issued a joint statement (the "Joint Statement") to the effect that it was their
intention that the effective date of the President's legislative proposals, if
adopted, would be no earlier than the date of appropriate Congressional action.
In addition, subsequent to the publication of the Joint Statement, Senator
Daniel Patrick Moynihan and Representatives Sam M. Gibbons and Charles B. Rangel
wrote letters to Treasury Department officials concurring with the views
expressed in the Joint Statement. Under current law, it is likely that the
Subordinated Debentures will be treated as indebtedness of AAG Holding, and AAG
Holding will be able to deduct interest on the Subordinated Debentures
beneficially held by the holders of the Preferred Securities. The terms of the
Subordinated Debentures limit AAG Holding's right to extend the maturity of the
Subordinated Debentures to a date which is six months shorter than any
legislative limit on the length of debt securities for which interest is
deductible. Based on the advice of tax counsel, the Company believes this will
allow AAG Holding an interest deduction if the 40-year weighted average maturity
component of the Bill is enacted. However, if the provision of the Bill
regarding a 20-year term is enacted with retroactive effect with regard to the
Subordinated Debentures, AAG Holding will not be entitled to an interest
deduction with respect to the Subordinated Debentures. There can be no assurance
that current or future legislative proposals, adverse judicial decisions, final
legislation or official administrative pronouncements will not affect the
ability of AAG Holding to deduct interest on the Subordinated Debentures, giving
rise to a Tax Event (as defined below) which would permit AAG Holding to cause
the redemption of the Preferred Securities prior to November 7, 2001 (the first
date on which AAG Holding would otherwise be able to cause a redemption of the
Preferred Securities). See "Description of the Preferred Securities--Special
Event Redemption" and "United States Federal Income Taxation."
PREPAYMENT CONSIDERATIONS; OPTION TO CHANGE SCHEDULED MATURITY DATE
At the option of AAG Holding, the Subordinated Debentures may be redeemed,
in whole or in part, at any time on or after November 7, 2001, at a redemption
price equal to 100% of the principal amount to be redeemed plus any accrued and
unpaid interest to the redemption date. See "Description of the Subordinated
Debentures and Debt Guarantee--Optional Redemption." Investors in the Preferred
Securities should assume that AAG Holding will exercise its redemption option if
AAG Holding is able to refinance at a lower interest rate or it is otherwise in
the interest of the Company or AAG Holding to redeem the Subordinated
14
<PAGE> 15
Debentures. If Subordinated Debentures are redeemed, the Trust must redeem Trust
Securities having an aggregate liquidation amount equal to the aggregate
principal amount of Subordinated Debentures so redeemed. See "Description of the
Preferred Securities--Mandatory Redemption."
AAG Holding also has the option to extend the maturity date of the
Subordinated Debentures for one or more periods, but in no event to a date later
than the earlier of (i) October 15, 2045 or (ii) the Interest Deduction Date,
provided certain financial conditions are met. See "Description of the
Subordinated Debentures and Debt Guarantee--Option to Change Scheduled Maturity
Date." Investors in the Preferred Securities should assume that AAG Holding will
exercise its option to extend the term if AAG Holding is unable to refinance at
a lower interest rate or it is otherwise in the interest of AAG Holding to defer
the maturity of the Subordinated Debentures. The Preferred Securities will not
be redeemed until the Subordinated Debentures have been repaid or redeemed. See
"Description of the Preferred Securities--Mandatory Redemption."
LIMITED VOTING RIGHTS
Holders of Preferred Securities will have only limited voting rights,
primarily in connection with directing the activities of the Property Trustee as
the holder of the Subordinated Debentures. Such holders will not be entitled to
vote to appoint, remove or replace, or to increase or decrease the number of,
the Trustees (as defined herein). Voting rights with respect to Trustee matters
are vested exclusively in the holder of the Common Securities. See "Description
of the Preferred Securities--Voting Rights."
TRADING PRICE
The Preferred Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. If AAG Holding exercises its right to defer payments of
interest, a holder who disposes of Preferred Securities between record dates for
payments of distributions thereon will be required to include as ordinary income
OID on the Subordinated Debentures accrued through the date of disposition, and
to add such amount to its adjusted tax basis in its pro rata share of the
underlying Subordinated Debentures deemed disposed of. To the extent the selling
price is less than the holder's adjusted tax basis (which will include, in the
form of OID, all accrued but unpaid interest), a holder will recognize a capital
loss. Subject to certain limited exceptions, capital losses cannot be applied to
offset ordinary income for United States federal income tax purposes. Accrual
basis taxpayers would be subjected to similar treatment without regard to AAG
Holding's election to defer. See "United States Federal Income
Taxation--Interest Income and Original Issue Discount" and "United States
Federal Income Taxation--Sales of Preferred Securities."
ABSENCE OF PUBLIC MARKET FOR SECURITIES
Since the Preferred Securities will be newly issued, there is no current
market for them. The Preferred Securities have been approved for listing,
subject to official notice of issuance, on the NYSE. There can be no assurance
that there will be an active trading market for the Preferred Securities.
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
The Company and AAG Holding are insurance holding companies whose
operations are conducted through GALIC, their principal subsidiary. AAG
Holding's cash flow is derived principally from dividends on the capital stock
of GALIC and tax allocation payments by GALIC. Accordingly, the ability of the
Company and AAG Holding to generate cash flow is dependent primarily on such tax
allocation payments and, subject to regulation and limitations by the insurance
laws and insurance departments of Ohio and California, dividends from GALIC.
Claims of creditors of GALIC and the other subsidiaries of AAG Holding,
including policyholders, will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of AAG Holding, even
though such subsidiary obligations do not constitute Senior Indebtedness. In
addition, in the event of a default on AAG Holding's debt or an insolvency,
liquidation or other reorganization of AAG Holding, the creditors and
stockholders of AAG Holding will have no right to proceed against the
15
<PAGE> 16
assets of GALIC or to cause it to be liquidated, rehabilitated or placed in
receivership or conservatorship. If GALIC were to be liquidated, such
liquidation would be conducted by or under the supervision of the Ohio Insurance
Commissioner as the receiver with respect to GALIC's property and business.
REGULATION
The life insurance business is subject to extensive regulation and
supervision by state insurance departments. Such regulation is primarily for the
benefit and protection of policyholders and not investors. Such regulations,
among other things, limit the amount of dividends and other payments that can be
made by insurance companies without prior regulatory approval and impose
restrictions on the amount and type of investments that such companies may have.
In addition, AAG and AAG Holding may be regulated in various states as insurance
holding companies. Generally, under insurance holding company statutes, a state
insurance authority must approve in advance the direct or indirect acquisition
of 10% or more of the voting securities of an insurance company or its parent
domiciled in its state.
The National Association of Insurance Commissioners has adopted the Risk
Based Capital ("RBC") For Insurers Model Act which applies to both life and
property and casualty companies. The Model Act provides for increasing levels of
regulatory intervention as the ratio of an insurer's total adjusted capital and
surplus decreases relative to risk-based capital, culminating with mandatory
control of the operations of the insurer by the domiciliary insurance department
at the so-called "mandatory control level."
It is not possible to predict the future impact of any of these regulations
on the operations of AAG's insurance subsidiaries.
Recently, several legislative proposals and administrative actions have
been advanced which, if adopted, would result in substantial relaxation of the
restrictions which have limited the affiliation between, and activities of,
banks and insurance companies. It is impossible to predict whether any of these
proposals will be adopted. It is also impossible to predict the impact of the
adoption of any of these proposals on the insurance industry in general or
individual insurance companies.
CERTAIN FACTORS AFFECTING THE INSURANCE BUSINESS
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, maintenance of insurance ratings and other
factors. GALIC competes with other annuity companies in the sale of tax-deferred
annuities based on a number of factors, including the ratings assigned by A.M.
Best Company, Inc. ("A.M. Best") and other independent insurance industry rating
organizations. A.M. Best's ratings range from "A++" (Superior) to "F" (In
Liquidation) and some companies are not rated. GALIC is rated "A" (Excellent).
Management of GALIC believes that a rating in the "A" category is necessary to
successfully market tax-deferred annuities to public education employees and
other not-for-profit groups, the markets in which GALIC competes. Although
management of AAG does not believe that GALIC's rating will be downgraded by
A.M. Best, that company's operations could be materially adversely affected by
such downgrading.
American Memorial and Loyal compete in markets other than the sale of
tax-deferred annuities. Loyal markets various forms of life, accident and health
insurance and annuities, principally with the sponsorship of credit unions and
banks that endorse Loyal's products to their members and customers. It also
writes life and health insurance through independent brokers. American Memorial
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. American Memorial and Loyal are rated "B+" (Very Good) and
"A-" (Excellent) by A.M. Best, respectively. While ratings are an important
factor in competition between insurers in American Memorial's and Loyal's
markets, management believes that insurers can successfully compete in these
markets with ratings of "B+" (Very Good) or better. Although management of AAG
does not believe the American Memorial's or Loyal's ratings will be downgraded
by A.M. Best, AAG's business could be materially adversely affected by any such
downgrading.
16
<PAGE> 17
AILIC is rated "A" (Excellent). Management believes that the rating of the
issuing company is not as important a factor in the variable annuity market as
in the fixed annuity market.
COMPETITION
The various markets in which life insurance companies compete are highly
competitive. GALIC, American Memorial, AILIC and Loyal compete with individual
insurers and insurance groups and other financial institutions of varying size,
many of which possess financial resources in excess of those available to these
companies.
AAG believes the ability to compete with other insurance companies is
dependent in part upon its ability to attract and retain agents to market its
products and its ability to develop competitive and profitable products. In
addition, in connection with the development and sale of its products, GALIC
encounters significant competition from other insurance companies, as well as
from other investment alternatives available to its customers.
AAG'S INVESTMENT PORTFOLIO
AAG's investment portfolio consists primarily of fixed income securities
such as investment grade, publicly traded debt securities and mortgage-backed
securities ("MBSs"). At June 30, 1996, fixed income securities (including policy
loans, mortgage loans and short-term investments) comprised over 98% of AAG's
investment portfolio. Approximately 32% was invested in MBSs. Certain risks are
inherent in connection with fixed income securities, including loss upon default
and price volatility in reaction to changes in interest rates and general market
factors. Certain additional risks are inherent in connection with MBSs,
including the risks associated with reinvestment of proceeds due to prepayment
of such obligations. AAG has sought to reduce the risks associated with MBSs by
investing in tranches of collateralized mortgage obligations which have a
reduced risk of prepayment. AAG's investment portfolio also contains certain
non-investment grade bonds, real estate and mortgage loans, with an aggregate
carrying value of approximately $447 million as of June 30, 1996, representing
less than 8% of its investment portfolio.
SIGNIFICANT STOCKHOLDER; TRADING MARKET RISKS
As the beneficial owner of approximately 81% of the outstanding AAG Common
Stock, AFG is a "controlling person" of AAG and has the ability to approve any
corporate action requiring stockholder approval, including the election of the
entire Board of Directors of AAG, amendments to the Certificate of Incorporation
and extraordinary corporate transactions such as mergers, consolidations and
sale of all or substantially all of AAG's assets. Accordingly, AFG controls
AAG's policy decisions.
FEDERAL INCOME TAX TREATMENT OF ANNUITY PRODUCTS
Current federal income tax law generally permits the tax deferred
accumulation of earnings on the premiums paid by an annuitant. Taxes, if any,
are payable by the annuitant on the accumulated tax-deferred earnings when these
earnings are paid to the annuitant. From time to time, there have been proposed
changes to the federal income tax laws that would eliminate this tax deferral
for certain types of annuity products, although historically such proposals have
not included the annuity products marketed by GALIC. In the event that the
federal income tax laws are changed such that accumulated earnings on annuity
products sold by GALIC no longer enjoy the tax-deferral described above, demand
for the affected annuity products could decline substantially or be eliminated.
The operations and business prospects of GALIC would be materially and adversely
affected by any material decrease in the demand for its annuity products. No
assurance can be given that such a tax law change will not occur in the future.
RECENT TAX LAW CHANGES
In August 1996, a new federal law was enacted which will expand the ability
of not-for-profit organizations to offer deferred compensation plans to their
employees. The full impact of this change is impossible to predict. However, if
the increased availability of these plans reduces the demand for annuities
17
<PAGE> 18
qualified under Section 403(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), the Company's business could be adversely affected.
ENVIRONMENTAL MATTERS INVOLVING AAG
AAG has certain continuing obligations with respect to the investigation
and cleanup of hazardous substances resulting from former electronic component
manufacturing facilities still owned by AAG and facilities transferred in
connection with sales of certain operations, as well as at disposal sites
operated by third parties. In addition, AAG has indemnified certain purchasers
of its former operations for the cost of such activities. Based on the annual
costs incurred by AAG over the past several years and discussions with its
independent environmental consultants, management believes that reserves for
such cleanup activities are sufficient in all material respects to satisfy
anticipated liabilities.
LIABILITIES RELATED TO FORMER OPERATIONS
In 1991, AAG identified possible deficiencies in procedures for reporting
quality assurance information to the Defense Electronics Supply Center ("DESC")
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
the reporting deficiencies. Based on these negotiations, AAG believed it has
sufficient reserves to cover the estimated settlement amount. In March 1995, AAG
received notification from the Government indicating additional reporting
deficiencies. AAG believes that it has sufficient reserves to cover the
estimated settlement amounts.
18
<PAGE> 19
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a declaration of trust, as amended, executed by AAG Holding, as sponsor
(the "Sponsor"), and the trustees of the Trust (the "Trustees"), (the
"Declaration") and (ii) the filing of a certificate of trust with the Secretary
of State of Delaware on September 13, 1996. The Declaration will be qualified as
an indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). Upon issuance of the Preferred Securities, AAG Holding will
directly or indirectly acquire all of the issued and outstanding Common
Securities of the Trust which will represent at least 3% of the total capital of
the Trust. The Trust exists for the exclusive purposes of (i) issuing and
selling the Trust Securities, (ii) using the gross proceeds from the sale of the
Trust Securities to acquire the Subordinated Debentures and (iii) engaging in
only those other activities necessary or incidental thereto.
Pursuant to the Declaration, the number of the Trustees will initially be
four. Two of the Trustees (the "Regular Trustees") will be persons who are
employees or officers of, or who are affiliated with, AAG Holding. The third
trustee will be a financial institution that is not affiliated with AAG Holding
that will serve as property trustee under the Declaration and as indenture
trustee for the purposes of the Trust Indenture Act (the "Property Trustee").
The fourth trustee will be a natural person who is a resident of the State of
Delaware or a legal entity which maintains its principal place of business in
the State of Delaware (the "Delaware Trustee"). The Bank of New York will act as
the Property Trustee and The Bank of New York (Delaware), an affiliate of the
Property Trustee, will act as the Delaware Trustee, in each case until removed
or replaced by the holder of the Common Securities. The Bank of New York will
also act as indenture trustee under the Trust Guarantee (the "Preferred
Securities Guarantee Trustee"). See "Description of Trust Guarantee."
The Property Trustee will hold title to the Subordinated Debentures and the
Debt Guarantee for the benefit of the Trust and the holders of the Trust
Securities and, so long as the Subordinated Debentures and Debt Guarantee are
held by the Trust, the Property Trustee will have the power to exercise all
rights, powers, and privileges of a holder of Subordinated Debentures under the
Indenture (as defined in "Description of the Subordinated Debentures and Debt
Guarantee" herein) and Debt Guarantee. In addition, the Property Trustee will
maintain exclusive control of a segregated non-interest bearing bank account
(the "Property Account") to hold all payments made in respect of the
Subordinated Debentures for the benefit of the holders of the Trust Securities.
The Property Trustee will make payments of distributions and payments on
liquidation, redemption and otherwise to the holders of the Trust Securities out
of funds from the Property Account. The Preferred Securities Guarantee Trustee
will hold the Trust Guarantee for the benefit of the holders of the Preferred
Securities.
AAG Holding, as the direct or indirect holder of all the Common Securities,
will have the right to appoint, remove or replace any Trustee (subject to the
limitations set forth in the Declaration) and to increase or decrease the number
of the Trustees. AAG Holding will pay all fees, expenses and obligations (other
than with respect to the Trust Securities) related to the Trust and the offering
of the Trust Securities. See "Description of the Preferred Securities."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration, the Delaware Business Trust Act, as amended (the "Trust Act"), the
Indenture and the Trust Indenture Act. See "Description of the Preferred
Securities."
THE COMPANY
OVERVIEW
American Annuity Group, Inc. ("AAG" or the "Company") and AAG Holding
Company, Inc. ("AAG Holding") are holding companies which, through their
subsidiaries, are engaged in the life insurance business, principally the sale
of tax-deferred annuities and life and health insurance. AAG's primary operating
subsidiary is 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. At
19
<PAGE> 20
December 31, 1995, GALIC had statutory assets of approximately $5.4 billion,
representing a 30% compounded annual growth in assets since 1976. AAG acquired
GALIC in December 1992.
GALIC has several direct and indirect life insurance subsidiaries including
(i) American Memorial Life Insurance Company ("American Memorial"), 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, (ii) Annuity Investors Life Insurance Company ("AILIC"),
which markets group and individual variable annuities, and (iii) Loyal American
Life Insurance Company, which specializes in life and health insurance sold
through payroll deduction plans and credit unions.
AAG Holding is a wholly-owned subsidiary of the Company which owns all of
the stock of GALIC. AAG Holding will own, directly or indirectly, all of the
Common Securities and will issue the Subordinated Debentures to the Trust.
American Financial Group, Inc. and its subsidiaries ("AFG"), collectively
own approximately 81% of the Company's outstanding common stock.
GREAT AMERICAN LIFE INSURANCE COMPANY
GALIC, located in Cincinnati, Ohio, 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.
20
<PAGE> 21
The following table (in millions) presents information concerning GALIC.
STATUTORY ACCOUNTING PRINCIPLES BASIS
<TABLE>
<CAPTION>
JUNE 30
---------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets (a)........................ $5,590 $5,234 $5,414 $5,057 $4,758 $4,377 $4,541
Insurance Reserves:
Annuities............................. $5,134 $4,812 $4,974 $4,655 $4,299 $4,011 $3,756
Life.................................. 21 22 22 21 22 23 21
Accident and Health................... 1 1 -- 1 1 1 1
------ ------ ------ ------ ------ ------ ------
$5,156 $4,835 $4,996 $4,677 $4,322 $4,035 $3,778
====== ====== ====== ====== ====== ====== ======
Capital and Surplus..................... $ 279 $ 264 $ 273 $ 256 $ 251 $ 216 $ 219
Asset Valuation Reserve (b)(c).......... 88 81 90 80 70 71 112
Interest Maintenance Reserve (c)........ 28 24 32 28 36 17 --
Annuity Receipts:
Flexible Premium:
First Year......................... $ 19 $ 24 $ 42 $ 39 $ 47 $ 48 $ 67
Renewal............................ 101 108 196 208 223 232 240
------ ------ ------ ------ ------ ------ ------
120 132 238 247 270 280 307
Single Premium........................ 142 113 219 196 130 80 153
------ ------ ------ ------ ------ ------ ------
Total Annuity Receipts............. $ 262 $ 245 $ 457 $ 443 $ 400 $ 360 $ 460
====== ====== ====== ====== ====== ====== ======
</TABLE>
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BASIS
<TABLE>
<CAPTION>
JUNE 30
---------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets (a)................... $5,688 $5,351 $5,631 $5,044 $4,883 $4,436 $4,686
Annuity Benefits Accumulated....... 5,065 4,767 4,917 4,596 4,257 3,974 3,727
Net Unrealized Gains (Losses)
Included in Stockholder's
Equity........................... 14 38 89 (28) 57 28 (6)
Stockholder's Equity............... 566 533 645 449 520 418 358
</TABLE>
- ------------------
(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.
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 non-qualified markets. 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.
At December 31, 1995, approximately 95% of GALIC's annuity policyholder
benefit reserves were attributable to fixed rate annuities which provided a
minimum interest rate guarantee of 4%. The balance of the annuities 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
21
<PAGE> 22
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 over the past five years.
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.
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.
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.
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.
AMERICAN MEMORIAL LIFE INSURANCE COMPANY
American Memorial, located in Rapid City, South Dakota, 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 must be used to purchase a
life insurance or annuity contract or to invest in a trust fund. Approximately
half of the premiums received by American Memorial are from single payment
funding and half are from payment plans of three to ten years. Policy values
increase at a rate geared to offset effects of inflation and thus provide for
funeral costs at time of death.
22
<PAGE> 23
The following table (in millions) presents information concerning American
Memorial in accordance with statutory accounting principles.
<TABLE>
<CAPTION>
JUNE 30,
-----------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets....................................... $395 $346 $359 $325 $305 $293 $285
Insurance Reserves:
Life............................................. $264 $240 $248 $228 $211 $201 $193
Annuities........................................ 81 63 72 58 55 57 56
---- ---- ---- ---- ---- ---- ----
$345 $303 $320 $286 $266 $258 $249
==== ==== ==== ==== ==== ==== ====
Capital and Surplus (a)............................ $ 26 $ 24 $ 24 $ 24 $ 23 $ 22 $ 21
Asset Valuation Reserve (b)(c)..................... 3 3 3 2 3 2 3
Interest Maintenance Reserve (c)................... 3 3 3 2 2 1 --
Premiums Written:
Life............................................. $ 32 $ 26 $ 52 $ 40 $ 35 $ 32 $ 32
Annuities........................................ 19 12 28 13 9 11 10
---- ---- ---- ---- ---- ---- ----
Total Premiums................................ $ 51 $ 38 $ 80 $ 53 $ 44 $ 43 $ 42
==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------------
(a) Represents capital and surplus of consolidated American Memorial group of
companies.
(b) For 1991, amount represents the Mandatory Securities Valuation Reserve.
(c) Allocation of surplus.
At December 31, 1995, American Memorial and its subsidiaries had
approximately $800 million of life insurance in force.
American Memorial has approximately 875 actively producing agents and
relationships with approximately 2,000 funeral homes nationwide. More than
two-thirds of American Memorial'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 these corporate accounts will
likely increase.
ANNUITY INVESTORS LIFE INSURANCE COMPANY
AILIC, located in Cincinnati, Ohio, 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 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 are 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 a single premium payment or flexible premiums.
In December 1995, AILIC obtained all approvals necessary to begin offering
a group variable annuity. This product is designed for sale to employees of
school districts, hospitals and other not-for-profit organizations. In August
1996, AILIC received the necessary approvals to begin marketing qualified and
non-qualified individual variable annuities.
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 markets its products through those 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.
23
<PAGE> 24
LOYAL AMERICAN LIFE INSURANCE COMPANY
Loyal, located in Mobile, Alabama, 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.
The following table (in millions) presents information concerning Loyal in
accordance with statutory accounting principles.
<TABLE>
<CAPTION>
JUNE 30
-----------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total Assets....................................... $255 $255 $252 $250 $244 $238 $188
Insurance Reserves:
Life............................................. $168 $166 $166 $163 $158 $154 $113
Accident and Health.............................. 29 28 28 28 29 29 28
Annuities........................................ 6 7 7 8 8 9 7
---- ---- ---- ---- ---- ---- ----
$203 $201 $201 $199 $195 $192 $148
==== ==== ==== ==== ==== ==== ====
Capital and Surplus................................ $ 36 $ 35 $ 35 $ 34 $ 32 $ 29 $ 27
Asset and Valuation Reserve (a)(b)................. 3 2 3 2 3 3 3
Interest Maintenance Reserve (b)................... 1 1 1 1 1 -- --
Premiums Written:
Life............................................. $ 11 $ 11 $ 21 $ 23 $ 24 $ 23 $ 22
Accident and Health.............................. 10 10 20 19 19 17 16
Annuities........................................ -- -- -- 1 -- -- --
---- ---- ---- ---- ---- ---- ----
Total Premiums................................ $ 21 $ 21 $ 41 $ 43 $ 43 $ 40 $ 38
==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------------
(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.
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
employees 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
presentations. The distribution channels for credit unions are comprised of
independent agents and marketing companies who provide personnel for lobby sales
and job-site enrollments.
INVESTMENTS
Investments comprise approximately 90% of the Company's 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.
24
<PAGE> 25
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 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 June
30, 1996:
<TABLE>
<CAPTION>
NAIC % OF TOTAL
RATING COMPARABLE S & P RATING MARKET VALUE
------ -------------------------------------------------- ------------
<C> <S> <C>
1 AAA, AA, A........................................ 66%
2 BBB............................................... 28
-------
Total investment grade.......................... 94
-------
3 BB................................................ 3
4 B................................................. 3
5 CCC, CC, C........................................ *
6 D................................................. *
-------
Total non-investment grade...................... 6
-------
Total fixed maturities.......................... 100%
============
</TABLE>
- ------------------
* 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 June 30, 1996, 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 8 1/2 years). The table below sets forth
the maturities of the Company's fixed maturity investments at June 30, 1996
based on their carrying value.
<TABLE>
<CAPTION>
MATURITY
----------------------------------------------------------------------
<S> <C>
One year or less...................................................... 1%
After one year through five years..................................... 17
After five years through ten years.................................... 38
After ten years....................................................... 12
---
68
Mortgage-backed securities............................................ 32
---
100%
===
</TABLE>
The following table shows the performance of AAG's investment portfolio,
excluding equity investments in affiliates (dollars in millions):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average cash and investments at cost.................. $5,936 $5,040 $5,220 $4,750 $4,455
Gross investment income............................... 231 197 411 377 358
Realized gains........................................ 1 -- 16 -- 35
Percentage earned:
Excluding realized gains............................ 7.8% 7.8% 7.9% 7.9% 8.0%
Including realized gains............................ 7.8% 7.8% 8.2% 7.9% 8.8%
</TABLE>
25
<PAGE> 26
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
at June 30, 1996, as adjusted to give the effect to the third quarter
transactions discussed below and as further adjusted to give pro forma effect to
the sale of the Preferred Securities.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------------
HISTORICAL
HISTORICAL ADJUSTED (a) PRO FORMA
---------- ------------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Notes payable................................................ $ 170.4 $ 159.9 $ 109.9(b)
Preferred Securities of Trust................................ -- -- 75.0
Stockholders' equity:
Series B Preferred Stock (at redemption value)............. 17.0 17.0 17.0
Common Stock, $1.00 par value.............................. 43.1 43.1 43.1
Capital surplus............................................ 360.9 360.9 360.9
Accumulated deficit at December 31, 1992................... (212.6) (212.6) (212.6)
Retained earnings since January 1, 1993.................... 158.1 158.1 158.1
Unrealized gain on marketable securities, net of deferred
income taxes and insurance adjustments................... 13.8 13.8 13.8
-------- -------- --------
Total stockholders' equity............................... 380.3 380.3 380.3
-------- -------- --------
Total capitalization......................................... $ 550.7 $ 540.2 $ 565.2
======== ======== ========
Notes payable as a percentage of total capitalization........ 30.9% 29.6% 19.4%
</TABLE>
- ------------------
(a) Adjusted to reflect the repurchase of $17.4 million in debt through
September 1, 1996 and additional bank line borrowings of $7 million through
September 1, 1996.
(b) Assumes that $50 million of the proceeds of the Offering are used to reduce
the outstanding amount on the Bank Lines of Credit.
ACCOUNTING TREATMENT
The financial statements of the Trust will be consolidated with the
Company's financial statements with the Preferred Securities accounted for and
captioned in the consolidated balance sheet directly above stockholders' equity.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges for the Company and its subsidiaries. Fixed charges are computed on a
"total enterprise" basis. For purposes of calculating the ratios, earnings have
been computed by adding to pretax earnings (excluding discontinued operations)
the fixed charges and the minority interest in earnings of subsidiaries having
fixed charges and deducting (adding) the undistributed equity in earnings
(losses) of investees. Fixed charges include interest (excluding interest on
annuity benefits), amortization of debt issue expense, preferred dividend
requirements and a portion of rental expense deemed to be representative of the
interest factor.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges (1)................ 5.7 4.6 6.0 4.0 3.8
</TABLE>
(1) On March 31, 1994, AAG issued approximately 3.2 million shares of Common
Stock in exchange for all of its outstanding Series A Preferred Stock. In
December 1995, AAG sold 170,000 shares of $8.50 Series B Preferred Stock for
$17 million.
26
<PAGE> 27
USE OF PROCEEDS
The net proceeds from the sale of Preferred Securities by the Trust will be
invested in the Subordinated Debentures of AAG Holding. AAG Holding expects to
use the net proceeds from the sale of the Subordinated Debentures to repay
outstanding debt and for general corporate purposes. Until the net proceeds are
used for these purposes, AAG Holding may deposit them in interest-bearing
accounts or invest them in short-term marketable securities.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the
Declaration. The Declaration will be qualified as an indenture under the Trust
Indenture Act. The Property Trustee, The Bank of New York, will act as the
indenture trustee for purposes of compliance with the provisions of the Trust
Indenture Act. The terms of the Preferred Securities will include those stated
in the Declaration, including those required to be made part of the Declaration
by the Trust Indenture Act. The following summary of the principal terms and
provisions of the Preferred Securities does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the Declaration, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Trust Act and the Trust Indenture Act.
GENERAL
The Declaration authorizes the Regular Trustees to issue, on behalf of the
Trust, the Preferred Securities, which represent undivided beneficial interests
in the assets of the Trust. All of the Common Securities will be owned by,
directly or indirectly, AAG Holding. The Common Securities will have equivalent
terms to and will rank pari passu, and payments will be made thereon on a pro
rata basis, with the Preferred Securities, except that upon the occurrence and
during the continuance of a Declaration Event of Default (as defined herein),
the rights of the holders of the Common Securities to receive payment of
periodic distributions and payments upon liquidation, redemption and otherwise
will be subordinated to the rights of the holders of the Preferred Securities.
In addition, holders of the Common Securities have the exclusive right (subject
to the terms of the Declaration) to appoint, replace or remove the Trustees and
to increase or decrease the number of the Trustees. The Declaration does not
permit the issuance by the Trust of any securities other than the Trust
Securities or the incurrence of any indebtedness by the Trust. Pursuant to the
Declaration, the Property Trustee will hold the Subordinated Debentures and the
Debt Guarantee for the benefit of the holders of the Trust Securities. The
payment of distributions out of money held by the Trust, and payments upon
redemption of the Preferred Securities or liquidation of the Trust, are
guaranteed by the Company to the extent described under "Description of Trust
Guarantee." The Trust Guarantee, the Indenture, the Subordinated Debentures and
the Debt Guarantee issued to the Trust, provide a full and unconditional
guarantee by the Company of the Preferred Securities. The Trust Guarantee will
be held by The Bank of New York, the Preferred Securities Guarantee Trustee, for
the benefit of the holders of the Preferred Securities. The Trust Guarantee only
covers payment of distributions when AAG Holding or the Company has made the
corresponding payment of interest or principal on the Subordinated Debentures or
Debt Guarantee held by the Trust. In the absence of such payment of interest or
principal, the remedy of a holder of Preferred Securities is to direct the
Property Trustee to enforce the Property Trustee's rights as the holder of the
Subordinated Debentures except in the limited circumstances where the holder may
take direct action against AAG Holding. See--"Declaration Events of Default."
DISTRIBUTIONS
Distributions on the Preferred Securities will be fixed at a rate per annum
of 9 1/4% of the stated liquidation amount of $25 per Preferred Security.
Distributions in arrears for more than one quarter will (to the extent permitted
by applicable law) bear interest thereon from and including the last day of such
quarter at the rate per annum of 9 1/4% thereof compounded quarterly. The term
"distributions" as used herein includes any such interest payable unless
otherwise stated. The amount of distributions payable for any period will be
computed
27
<PAGE> 28
on the basis of a 360-day year of twelve 30-day months, and for any period
shorter than a full quarter, on the basis of the actual number of days elapsed
in such 90-day quarter.
Distributions on the Preferred Securities will be cumulative, will accrue
from November 7, 1996 and will be payable quarterly in arrears on January 15,
April 15, July 15 and October 15 of each year, commencing January 15, 1997,
when, as and if available for payment by the Property Trustee, except as
otherwise described below.
AAG Holding has the right under the Indenture to defer payments of interest
on the Subordinated Debentures by extending the interest payment period from
time to time on the Subordinated Debentures, which right, if exercised, would
defer quarterly distributions on the Preferred Securities (although to the
extent permitted by law, such distributions would continue to accrue with
interest since interest would continue to accrue on the Subordinated Debentures)
during any such Extension Period. AAG Holding has the right to defer payments of
interest on the Subordinated Debentures, from time to time, for up to 20
consecutive quarters, provided that no Extension Period may extend beyond the
Maturity Date of the Subordinated Debentures. There could be multiple Extension
Periods of varying lengths throughout the term of the Subordinated Debentures.
In the event that AAG Holding exercises this right, then during any Extension
Period (a) the Company and AAG Holding shall not declare or pay dividends on,
make distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock and (b) the
Company and AAG Holding shall not, directly or indirectly, and will not allow
any of their subsidiaries to, make any payment of interest, principal or
premium, if any, on, or repay, repurchase or redeem, any debt securities issued
by the Company or AAG Holding that rank pari passu with or junior to the
Subordinated Debentures; provided, however, that the restriction in clause (a)
above does not apply (i) to repurchases or acquisitions of shares of the common
stock of the Company or AAG Holding as contemplated by any employment
arrangement, benefit plan or other similar contract with or for the benefit of
employees, officers or directors entered into in the ordinary course of
business, (ii) as a result of an exchange or conversion of any class or series
of the Company's or AAG Holding's capital stock for common stock, (iii) to the
purchase of fractional interests in shares of the Company or AAG Holding's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged or (iv) to the payment of any
stock dividend by the Company or AAG Holding payable in common stock. AAG
Holding may further extend the interest payment period; provided that each
Extension Period, if any, may not exceed 20 consecutive quarters and may not
extend beyond the Maturity Date of the Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due, AAG
Holding may commence a new Extension Period, subject to the above requirements.
See "Description of the Subordinated Debentures and Debt Guarantee--Interest"
and "Description of the Subordinated Debentures and Debt Guarantee--Option to
Extend Interest Payment Period." If distributions are deferred, the deferred
distributions and accrued interest thereon shall be paid to holders of record of
the Preferred Securities as they appear on the books and records of the Trust on
the record date for distributions due at the end of such deferral period.
Distributions on the Preferred Securities must be paid on the dates payable
to the extent that the Trust has funds available for the payment of such
distributions in the Property Account. The Trust's funds available for
distribution to the holders of the Preferred Securities will be limited to
payments received from AAG Holding under the Subordinated Debentures or from the
Company under the Debt Guarantee. See "Description of the Subordinated
Debentures and Debt Guarantee." The payment of distributions out of moneys held
by the Trust is guaranteed by the Company to the extent set forth under
"Description of Trust Guarantee." The Trust Guarantee, the Indenture, the
Subordinated Debentures issued to the Trust and the Subordinated Debt Guarantee,
provides a full and unconditional guarantee by the Company of the Preferred
Securities.
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which, as long as the Preferred Securities remain in global form,
will be one Business Day (as defined below) prior to the relevant payment dates.
Such distributions will be paid through the Property Trustee, which will hold
amounts received in respect of the Subordinated Debentures and Debt Guarantee in
the Property Account for the benefit of the holders of the
28
<PAGE> 29
Trust Securities. Subject to any applicable laws and regulations and the
provisions of the Declaration, each such payment will be made as described under
"--Book-Entry Issuance--The Depository Trust Company" below. In the event that
the Preferred Securities do not continue to remain in global form, the relevant
record dates for the Preferred Securities shall conform to the rules of any
securities exchange on which the Preferred Securities are listed and, if none,
shall be selected by the Regular Trustees, which dates shall be at least one
Business Day but less than 60 Business Days prior to the relevant payment dates.
Distributions payable on any Preferred Securities that are not punctually paid
on any distribution payment date will cease to be payable to the person in whose
name such Preferred Securities are registered on the relevant record date, and
such defaulted distribution will instead be payable to the person in whose name
such Preferred Securities are registered on the special record date or other
specified date determined in accordance with the Indenture. In the event that
any date on which distributions are to be made on the Preferred Securities is
not a Business Day, then payment of the distributions payable on such date will
be made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), except that, if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such record date. A "Business Day" shall mean any day other
than a day on which banking institutions in New York, New York are authorized or
required by law to close.
MANDATORY REDEMPTION
Upon the repayment of the Subordinated Debentures, whether at maturity or
upon redemption, the proceeds from such repayment or redemption shall
simultaneously be applied to redeem Trust Securities having an aggregate
liquidation amount equal to the aggregate principal amount of the Subordinated
Debentures so repaid or redeemed at the Redemption Price; provided that, holders
of Trust Securities shall be given not less than 30 nor more than 60 days notice
of such redemption. The Subordinated Debentures will mature on October 15, 2026
unless the maturity date is changed at the option of AAG Holding (provided in
the case of an extension of the maturity date that certain financial conditions
are met), and may be redeemed, in whole or in part, at any time on or after
November 7, 2001 or at any time, in whole (but not in part), upon the occurrence
of a Special Event. See "Description of the Subordinated Debentures and Debt
Guarantee--Optional Redemption." In the event that fewer than all of the
outstanding Trust Securities are to be redeemed, the Trust Securities will be
redeemed pro rata to each holder according to the aggregate liquidation amount
of Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding. See "--Book-Entry
Issuance--The Depository Trust Company" below for a description of DTC's (as
hereinafter defined) procedures in the event of redemption.
SPECIAL EVENT REDEMPTION
"Tax Event" means that the Regular Trustees shall have received an opinion
of an independent tax counsel experienced in such matters to the effect that, as
a result of (a) any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein or (b) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of original issuance
of the Preferred Securities, there is more than an insubstantial risk that (i)
the Trust is, or will be within 90 days after the date thereof, subject to
United States federal income tax with respect to interest accrued or received on
the Subordinated Debentures, (ii) the Trust is, or will be within 90 days after
the date thereof, subject to more than a de minimis amount of taxes, duties or
other governmental charges, or (iii) interest payable to the Trust on the
Subordinated Debentures is not, or within 90 days of the date thereof, will not
be deductible, in whole or in part, by AAG Holding for United States federal
income tax purposes.
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of an independent counsel experienced in practice under the
Investment Company Act of 1940, as amended (the "1940 Act"), to the effect that,
as a result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
court, governmental agency or
29
<PAGE> 30
regulatory authority (a "Change in 1940 Act Law"), there is more than
insubstantial risk that the Trust is or will be considered an "investment
company" which is required to be registered under the 1940 Act, which Change in
1940 Act Law becomes effective on or after the date of original issuance of the
Preferred Securities.
If, at any time, a Tax Event or an Investment Company Event (each, as
defined above, a "Special Event") shall occur and be continuing, AAG Holding
shall have the right, upon not less than 30 nor more than 60 days notice, to
redeem the Subordinated Debentures in whole (but not in part), for cash within
90 days following the occurrence of such Special Event, and, following such
redemption, all Trust Securities shall be redeemed by the Trust at the
Redemption Price.
DISTRIBUTION OF THE SUBORDINATED DEBENTURES
At any time, AAG Holding will have the right to terminate the Trust and,
after satisfaction of the liabilities of creditors of the Trust as provided by
applicable law, cause the Subordinated Debentures and Debt Guarantee to be
distributed to the holders of the Trust Securities in liquidation of the Trust.
Under current United States federal income tax law and interpretation and
assuming, as expected, the Trust is treated as a grantor trust, a distribution
of the Subordinated Debentures and Debt Guarantee should not be a taxable event
to holders of the Preferred Securities. Should there be a change in law, a
change in legal interpretation, a Special Event or other circumstances, however,
the distribution could be a taxable event to the holders of the Preferred
Securities. In addition, a dissolution of the Trust in which holders of the
Preferred Securities receive cash would be a taxable event to such holders. See
"United States Federal Income Taxation--Receipt of Subordinated Debentures or
Cash Upon Liquidation of the Trust."
If the Subordinated Debentures and Debt Guarantee are distributed to the
holders of the Preferred Securities, AAG Holding will use its best efforts to
cause the Subordinated Debentures to be listed on the NYSE or on such other
exchange as the Preferred Securities are then listed.
After the date for any distribution of Subordinated Debentures, together
with the Debt Guarantee, upon dissolution of the Trust, (i) the Preferred
Securities will no longer be deemed to be outstanding and (ii) the record
holders of the Preferred Securities will receive a registered global certificate
or certificates representing the Subordinated Debentures to be delivered upon
such distribution in exchange for the Preferred Securities held by such holders.
If AAG Holding elects to liquidate the Trust and thereby causes the
Subordinated Debentures and Debt Guarantee to be distributed to holders of the
Preferred Securities in liquidation of the Trust, AAG Holding shall have the
right to shorten the maturity of such Subordinated Debentures to a date not
earlier than November 7, 2001 or extend the maturity of such Subordinated
Debentures to a date not later than the earlier of (a) October 15, 2045 or (b)
the Interest Deduction Date (as defined herein), provided that it can extend the
maturity only if certain conditions are met. See "Description of the
Subordinated Debentures and Debt Guarantee--Option to Change Scheduled Maturity
Date."
There can be no assurance as to the market prices for either the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for the Preferred Securities if a dissolution and liquidation of the Trust were
to occur. Accordingly, the Preferred Securities that an investor may purchase,
whether pursuant to the offer made hereby or in the secondary market, or the
Subordinated Debentures that an investor may receive if a dissolution and
liquidation of the Trust were to occur, may trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"),
the revenue portion of President Clinton's fiscal 1997 budget proposal, was
released. The Bill would, among other things, generally deny interest deductions
for interest or OID on an instrument issued by a corporation that has a maximum
weighted average maturity of more than 40 years. The Bill would also treat as
equity instruments issued by a corporation that have a maximum term of more than
20 years and that are not shown as indebtedness on the consolidated balance
sheet of the issuer. For purposes of determining the weighted average maturity
or the term of an instrument, any right to extend would be treated as exercised.
The above-described provisions of the Bill were proposed to be effective
generally for instruments issued on or after December 7, 1995. However,
30
<PAGE> 31
on March 29, 1996, the Chairmen of the Senate Finance and House Ways and Means
Committees issued a joint statement (the "Joint Statement") to the effect that
it was their intention that the effective date of the President's legislative
proposals, if adopted, would be no earlier than the date of appropriate
Congressional action. In addition, subsequent to the publication of the Joint
Statement, Senator Daniel Patrick Moynihan and Representatives Sam M. Gibbons
and Charles B. Rangel wrote letters to Treasury Department officials concurring
with the views expressed in the Joint Statement. Under current law, it is likely
that the Subordinated Debentures will be treated as indebtedness of AAG Holding,
and AAG Holding will be able to deduct interest on the Subordinated Debentures
beneficially held by the holders of the Preferred Securities. The terms of the
Subordinated Debentures limit AAG Holding's right to extend the maturity of the
Subordinated Debentures to a date which is six months shorter than any
legislative limit on the length of debt securities for which interest is
deductible. Based on the advice of tax counsel, the Company believes this will
allow AAG Holding an interest deduction if the 40-year weighted average maturity
component of the Bill is enacted. However, if the provision of the Bill
regarding a 20-year term is enacted with retroactive effect with regard to the
Subordinated Debentures, AAG Holding will not be entitled to an interest
deduction with respect to the Subordinated Debentures. There can be no assurance
that current or future legislative proposals, adverse judicial decisions, final
legislation or official administrative pronouncements will not affect the
ability of AAG Holding to deduct interest on the Subordinated Debentures, giving
rise to a Tax Event (as defined below) which would permit AAG Holding to cause
the redemption of the Preferred Securities prior to November 7, 2001 (the first
date on which AAG Holding would otherwise be able to cause a redemption of the
Preferred Securities). See "Description of the Preferred Securities--Special
Event Redemption" and "United States Federal Income Taxation."
REDEMPTION PROCEDURES
The Trust may not redeem any of the outstanding Preferred Securities unless
all accrued and unpaid distributions have been paid on all Preferred Securities
for all quarterly distribution periods terminating on or prior to the date of
redemption.
If the Trust gives a notice of redemption in respect of Preferred
Securities (which notice will be irrevocable), then, by 12:00 noon, New York
City time, on the redemption date, provided that AAG Holding has paid to the
Property Trustee a sufficient amount of cash in connection with the related
redemption or maturity of the Subordinated Debentures, the Trust will
irrevocably deposit with the depository funds sufficient to pay the applicable
Redemption Price and will give the depository irrevocable instructions to pay
the Redemption Price to the holders of the Preferred Securities. If notice of
redemption shall have been given and funds deposited as required, then
immediately prior to the close of business on the date of such deposit,
distributions will cease to accrue and all rights of holders of such Preferred
Securities so called for redemption will cease, except the right of the holders
of such Preferred Securities to receive the Redemption Price, but without
interest on such Redemption Price. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
that is a Business Day (without any interest or other payment in respect of any
such delay), except that, if such Business Day falls in the next calendar year,
such payment will be made on the immediately preceding Business Day. In the
event that AAG Holding fails to repay the Subordinated Debentures on maturity or
payment of the Redemption Price in respect of Preferred Securities is improperly
withheld or refused and not paid either by the Trust or by the Company pursuant
to the Trust Guarantee, distributions on such Preferred Securities will continue
to accrue at the then applicable rate from the original redemption date to the
actual date of payment, in which case the actual payment date will be considered
the date fixed for redemption for purposes of calculating the Redemption Price.
In the event that fewer than all of the outstanding Preferred Securities
are to be redeemed, the Preferred Securities will be redeemed as described below
under "--Book-Entry Issuance--The Depository Trust Company."
If a partial redemption of the Preferred Securities would result in the
delisting of the Preferred Securities by a national securities exchange or other
organization on which the Preferred Securities are then listed, AAG
31
<PAGE> 32
Holding, pursuant to the Indenture, will only redeem the Subordinated Debentures
in whole and, as a result, the Trust may only redeem the Preferred Securities in
whole.
Subject to the foregoing and applicable law (including, without limitation,
United States federal securities laws), the Company, AAG Holding or their
affiliates may at any time, and from time to time, purchase outstanding
Preferred Securities by tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (each a "Liquidation"), the then holders
of the Preferred Securities will be entitled to receive on a pro rata basis,
solely out of the assets of the Trust, after satisfaction of liabilities to
creditors, distributions in an amount equal to the aggregate of the stated
liquidation amount of $25 per Preferred Security plus accrued and unpaid
distributions thereon to the date of payment (the "Liquidation Distribution"),
unless, in connection with such Liquidation, Subordinated Debentures in an
aggregate stated principal amount equal to the aggregate stated liquidation
amount of, with an interest rate identical to the distribution rate of, and
accrued and unpaid interest equal to accrued and unpaid distributions on, the
Preferred Securities have been distributed on a pro rata basis to the holders of
the Preferred Securities.
If, upon any such Liquidation, the Liquidation Distribution can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities shall be paid on a pro rata basis. The holders
of the Common Securities will be entitled to receive distributions upon any such
dissolution pro rata with the holders of the Preferred Securities, except that
if a Declaration Event of Default has occurred and is continuing, the Preferred
Securities shall have a preference over the Common Securities with regard to
such distributions.
The Trust Guarantee, when taken together with the back-up undertakings,
consisting of obligations of AAG Holding as set forth in the Declaration
(including the obligation to pay expenses of the Trust), the Indenture, the
Subordinated Debentures issued to the Trust and the Subordinated Debenture
Guarantee, provide a full and unconditional guarantee by the Company of the
Preferred Securities.
DISSOLUTION AND TERMINATION
Pursuant to the Declaration, the Trust shall dissolve upon the earliest of
(i) November 7, 2051, (ii) the bankruptcy of the Company or AAG Holding, (iii)
the filing of a certificate of dissolution or its equivalent with respect to the
Company or AAG Holding, the consent of the holders of at least a majority in
liquidation amount of the Trust Securities to the filing of a certificate of
cancellation with respect to the Trust or the revocation of the charter of the
Company or AAG Holding and the expiration of 90 days after the date of
revocation without a reinstatement thereof, (iv) upon satisfaction of the
liabilities of creditors of the Trust as provided by applicable law, in the
event the Subordinated Debentures shall have been distributed to holders of the
Preferred Securities in liquidation of the Trust, (v) the entry of a decree of a
judicial dissolution of the Company, AAG Holding or the Trust, or (vi) the
redemption of all the Trust Securities. Pursuant to the Declaration, as soon as
practicable after the dissolution of the Trust and upon completion of the
winding of the Trust, the Trustee shall file a certificate of cancellation
terminating the Trust.
DECLARATION EVENTS OF DEFAULT
An Event of Default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"), provided that pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Preferred Securities have been
cured, waived or otherwise eliminated. Until such Declaration Event of Default
with respect to the Preferred Securities has been so cured, waived or otherwise
eliminated, the Property Trustee will be deemed to be acting solely on behalf of
the holders of the Preferred Securities and only the holders of the Preferred
Securities will have the right to direct the Property Trustee with respect to
certain matters under the Declaration, and therefore the Indenture.
32
<PAGE> 33
Upon the occurrence of a Declaration Event of Default, the Indenture
Trustee (as defined herein) or the Property Trustee as the holder of the
Subordinated Debentures will have the right under the Indenture to declare the
principal of and interest on the Subordinated Debentures to be immediately due
and payable. Each of AAG Holding and the Company is required to file annually
with the Property Trustee an officer's certificate as to its compliance with all
conditions and covenants under the Declaration.
If the Property Trustee fails to enforce its rights with respect to the
Subordinated Debentures or Debt Guarantee held by the Trust, any record holder
of Preferred Securities may institute legal proceedings directly against AAG
Holding or the Company to enforce the Property Trustee's rights under such
Subordinated Debentures or Debt Guarantee without first instituting any legal
proceedings against such Property Trustee or any other person or entity. In
addition, if a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of AAG Holding to pay interest,
principal or other required payment on the Subordinated Debentures issued to the
Trust on the date such interest, principal or other payment is otherwise
payable, then a record holder of Preferred Securities may institute a proceeding
directly against AAG Holding for enforcement of payment on the Subordinated
Debentures on or after the respective due dates specified in the Subordinated
Debentures having a principal amount equal to the aggregate liquidation amount
of the Preferred Securities held by such holder. In connection with such Direct
Action, AAG Holding will be subrogated to the rights of such record holder of
Preferred Securities to the extent of any payment made by AAG Holding to such
record holder of Preferred Securities. The record holder in the case of the
issuance of one or more global Preferred Securities certificates will be The
Depository Trust Company acting at the direction of the beneficial owners of the
Preferred Securities.
VOTING RIGHTS
Except as described herein, under the Trust Act, the Trust Indenture Act
and under "Description of Trust Guarantee--Modification of the Trust Guarantee;
Assignment," and as otherwise required by law and the Declaration, the holders
of the Preferred Securities will have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in aggregate liquidation amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee, as holder of
the Subordinated Debentures and Debt Guarantee, to (i) exercise the remedies
available under the Indenture with respect to the Subordinated Debentures and
Debt Guarantee, (ii) waive any past Indenture Event of Default that is waivable
under the Indenture, or (iii) exercise any right to rescind or annul a
declaration that the principal of all the Subordinated Debentures shall be due
and payable, or consent to any amendment, modification or termination of the
Indenture or the Subordinated Debentures, where such consent should be required;
provided, however, that, where a consent or action under the Indenture would
require the consent or act of the holders of greater than a majority in
principal amount of Subordinated Debentures affected thereby (a
"Super-Majority"), the Property Trustee may only give such consent or take such
action at the written direction of the holders of at least the proportion in
liquidation amount of the Preferred Securities which the relevant Super-Majority
represents of the aggregate principal amount of the Subordinated Debentures
outstanding. The Property Trustee shall notify all holders of the Preferred
Securities of any notice of default received from the Indenture Trustee with
respect to the Subordinated Debentures. Except with respect to directing the
time, method and place of conducting a proceeding for a remedy, the Property
Trustee shall not take any of the actions described in clauses (i), (ii) or
(iii) above unless the Property Trustee has obtained an opinion of tax counsel
to the effect that, as a result of such action, the Trust will not be classified
as other than a grantor trust for United States federal income tax purposes.
In the event the consent of the Property Trustee, as the holder of the
Subordinated Debentures and Debt Guarantee, is required under the Indenture with
respect to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, the Property Trustee shall request the direction of the
holders of the Trust Securities with respect to such amendment, modification or
termination and shall vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the Trust
33
<PAGE> 34
Securities voting together as a single class; provided, however, that where a
consent under the Indenture would require the consent of a Super-Majority, the
Property Trustee may only give such consent at the direction of the holders of
at least the proportion in liquidation amount of the Trust Securities which the
relevant Super-Majority represents of the aggregate principal amount of the
Subordinated Debentures outstanding. The Property Trustee shall not take any
such action in accordance with the directions of the holders of the Trust
Securities unless the Property Trustee has obtained an opinion of tax counsel to
the effect that the Trust will not be classified as other than a grantor trust
for United States federal income tax purposes on account of such action.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Preferred Securities may
be given at a separate meeting of holders of Preferred Securities convened for
such purpose, at a meeting of all of the holders of Trust Securities or pursuant
to written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such holders
are entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Preferred Securities will be required for the Trust to redeem
and cancel Preferred Securities or distribute Subordinated Debentures in
accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Company or any entity directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the Company, shall not be entitled to vote or consent and shall,
for purposes of such vote or consent, be treated as if such Preferred Securities
were not outstanding.
The procedures by which holders of Preferred Securities may exercise their
voting rights are described below. See "--Book-Entry Issuance--The Depository
Trust Company" below.
Holders of the Preferred Securities will have no rights to appoint or
remove the Trustees, who may be appointed, removed or replaced solely by the
Company as the indirect or direct holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by a majority of
the Regular Trustees (and in certain circumstances the Property Trustee),
provided that, if any proposed amendment provides for, or the Regular Trustees
otherwise propose to effect, (i) any action that would adversely affect the
powers, preferences or special rights of the Trust Securities, whether by way of
amendment to the Declaration or otherwise or (ii) the dissolution, winding-up or
termination of the Trust other than pursuant to the terms of the Declaration,
then the holders of the Trust Securities voting together as a single class will
be entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of at least a majority in
liquidation amount of the Trust Securities affected thereby; provided that, if
any amendment or proposal referred to in clause (i) above would adversely affect
only the Preferred Securities or the Common Securities, then only the affected
class will be entitled to vote on such amendment or proposal and such amendment
or proposal shall not be effective except with the approval of a majority in
liquidation amount of such class of Trust Securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified as other than a grantor trust for United States federal income tax
purposes, (ii) reduce or otherwise adversely affect the powers of the Property
34
<PAGE> 35
Trustee or (iii) cause the Trust to be deemed an "investment company" which is
required to be registered under the 1940 Act.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other body, except as
described below. The Trust may, with the consent of a majority of the Regular
Trustees and without the consent of the holders of the Trust Securities, the
Property Trustee or the Delaware Trustee, consolidate, amalgamate, merge with or
into, or be replaced by a trust organized as such under the laws of any State;
provided that, (i) such successor entity either (x) expressly assumes all of the
obligations of the Trust under the Trust Securities or (y) substitutes for the
Trust Securities other securities having substantially the same terms as the
Trust Securities (the "Successor Securities"), so long as the Successor
Securities rank the same as the Trust Securities rank with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) AAG
Holding expressly acknowledges a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Subordinated
Debentures and the Company expressly acknowledges such trustee of such successor
entity as the holder of the Debt Guarantee, (iii) the Preferred Securities or
any Successor Securities with respect to the Preferred Securities are listed, or
any such Successor Securities will be listed upon notification of issuance, on
any national securities exchange or with another organization on which the
Preferred Securities are then listed or quoted, (iv) such merger, consolidation,
amalgamation or replacement does not cause the Preferred Securities (including
any Successor Securities with respect to the Preferred Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation or replacement does not adversely
affect the rights, preferences and privileges of the holders of the Trust
Securities (including any Successor Securities) in any material respect (other
than with respect to any dilution of the holders' interest in the new entity),
(vi) such successor entity has a purpose identical to that of the Trust, (vii)
prior to such merger, consolidation, amalgamation or replacement, the Company
has received an opinion of an independent counsel to the Trust experienced in
such matters to the effect that, (A) such merger, consolidation, amalgamation or
replacement does not adversely affect the rights, preferences and privileges of
the holders of the Trust Securities (including any Successor Securities) in any
material respect (other than with respect to any dilution of the holders'
interest in the new entity), (B) following such merger, consolidation,
amalgamation or replacement, neither the Trust nor such successor entity will be
required to register as an investment company under the 1940 Act and (C) the
Trust will continue to be classified as a grantor trust for federal income tax
purposes, and (viii) the Company guarantees the obligations of such successor
entity under the Successor Securities at least to the extent provided by the
Trust Guarantee. Notwithstanding the foregoing, the Trust shall not, except with
the consent of holders of 100% in liquidation amount of the Trust Securities,
consolidate, amalgamate, merge with or into, or be replaced by any other entity
or permit any other entity to consolidate, amalgamate, merge with or into, or
replace it, if such consolidation, amalgamation, merger or replacement would
cause the Trust or the Successor Entity to be classified as other than a grantor
trust for United States federal income tax purposes and each holder of the Trust
Securities not to be treated as owning an undivided interest in the Subordinated
Debentures.
EXPENSES AND TAXES
In the Indenture, AAG Holding has agreed to pay all debts and other
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust (including costs and expenses relating to the organization
of the Trust, the fees and expenses of the Trustees and the costs and expenses
relating to the operation of the Trust) and to pay any and all taxes and all
costs and expenses with respect thereto (other than United States withholding
taxes) to which the Trust might become subject. The foregoing obligations of AAG
Holding under the Indenture are for the benefit of, and shall be enforceable by,
any person to whom any such debts, obligations, costs, expenses and taxes are
owed (a "Creditor") whether or not such Creditor has received notice thereof.
Any such Creditor may enforce such obligations of AAG Holding directly against
AAG Holding, and AAG Holding has irrevocably waived any right or remedy to
require that any such Creditor take any action against the Trust or any other
person before proceeding against AAG Holding. AAG
35
<PAGE> 36
Holding has also agreed in the Indenture to execute such additional agreements
as may be necessary or desirable to give full effect to the foregoing.
BOOK-ENTRY ISSUANCE--THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depository for
the Preferred Securities. The Preferred Securities initially will be issued only
as fully-registered securities registered in the name of Cede&Co. (DTC's
nominee). One or more fully-registered global Preferred Securities certificates,
representing the total aggregate number of Preferred Securities, will be issued
and will be delivered to DTC.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Preferred
Securities as represented by a global certificate.
DTC has advised the Company and the Trust that DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). DTC is owned by a number of its Direct
Participants and by the NYSE, the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others, such as securities brokers and dealers, banks and
trust companies that clear transactions through or maintain a direct or indirect
custodial relationship with a Direct Participant ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Commission.
Purchases of Preferred Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Preferred
Securities on DTC's records. The ownership interest of each actual purchaser of
each Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Preferred Securities.
Transfers of ownership interests in the Preferred Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in the Preferred Securities, except in the event that
use of the book-entry system for the Preferred Securities is discontinued.
To facilitate subsequent transfers, all the Preferred Securities deposited
by Participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of Preferred Securities with DTC and their registration in the name
of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of
the actual Beneficial Owners of the Preferred Securities. DTC's records reflect
only the identity of the Direct Participants to whose accounts such Preferred
Securities are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings on
behalf of Beneficial Owners that are their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements
that may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Preferred Securities are being redeemed, DTC will reduce pro rata the amount of
the interest of each Direct Participant in such Preferred Securities to be
redeemed in accordance with its procedures.
36
<PAGE> 37
Although voting with respect to the Preferred Securities is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts the Preferred
Securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy). The Company and the Trust believe that the arrangements
among DTC, Direct and Indirect Participants, and Beneficial Owners will enable
the Beneficial Owners to exercise rights equivalent in substance to the rights
that can be directly exercised by a holder of a beneficial interest in the
Trust.
Distribution payments on the Preferred Securities will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the account of customers in bearer form or registered in "street name,"
and such payments will be the responsibility of such Participant and not of DTC,
the Trust or the Company, subject to any statutory or regulatory requirements
that may be in effect from time to time. Payment of distributions to DTC is the
responsibility of the Trust, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursement of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a global Preferred
Security certificate will not be entitled to receive physical delivery of
Preferred Securities. Accordingly, each Beneficial Owner must rely on the
procedures of DTC to exercise any rights under the Preferred Securities.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Trust. Under such circumstances, in the event that a successor securities
depository is not obtained, Preferred Securities certificates are required to be
printed and delivered. Additionally, the Regular Trustees (with the consent of
the Company) may decide to discontinue use of the system of book-entry transfers
through DTC (or any successor depository) with respect to the Preferred
Securities. In that event, certificates for the Preferred Securities will be
printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company and the Trust believe to be
reliable, but none of the Company, AAG Holding nor the Trust takes
responsibility for the accuracy thereof. Unless the context otherwise requires,
the term "holder of Preferred Securities" shall refer to Beneficial Owners
rather than to DTC.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, prior to the occurrence of a default with respect to
the Trust Securities, undertakes to perform only such duties as are specifically
set forth in the Declaration, in the terms of the Trust Securities or in the
Trust Indenture Act and, after default, shall exercise the same degree of care
as a prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provisions, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of Preferred Securities, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities which might be incurred
thereby. The holders of Preferred Securities will not be required to offer such
indemnity in the event such holders, by exercising their voting rights, direct
the Property Trustee to take any action following a Declaration Event of
Default. The Property Trustee also serves as Preferred Securities Guarantee
Trustee.
PAYING AGENT
In the event that the Preferred Securities do not remain in book-entry
form, the following provisions would apply:
Securities Transfer Company , Cincinnati, Ohio, will act as the initial
paying agent. The Company may designate an additional or substitute paying agent
at any time.
37
<PAGE> 38
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Trust, but upon payment (with the giving of such
indemnity as the Trust or AAG Holding may require) in respect of any tax or
other government charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Preferred Securities after such Preferred Securities have been
called for redemption.
GOVERNING LAW
The Declaration and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to operate the Trust in
such a way so that the Trust will not be required to register as an "investment
company" under the 1940 Act or be characterized as other than a grantor trust
for United States federal income tax purposes. AAG Holding is authorized and
directed to conduct its affairs so that the Subordinated Debentures will be
treated as indebtedness of AAG Holding for United States federal income tax
purposes. In this connection, AAG Holding and the Regular Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Trust or the Articles of Incorporation of AAG
Holding, that each of AAG Holding and the Regular Trustees determines in their
discretion to be necessary or desirable to achieve such end, as long as such
action does not adversely affect the interests of the holders of the Preferred
Securities or vary the terms thereof.
Holders of the Preferred Securities have no preemptive rights.
38
<PAGE> 39
DESCRIPTION OF TRUST GUARANTEE
Set forth below is a summary of information concerning the Trust Guarantee
that will be executed and delivered by the Company for the benefit of the
holders, from time to time, of Preferred Securities. The Trust Guarantee will be
qualified as an indenture under the Trust Indenture Act. The Bank of New York
will act as independent indenture trustee for Trust Indenture Act purposes under
the Trust Guarantee (the "Preferred Securities Guarantee Trustee"). The terms of
the Trust Guarantee will be those set forth in such Trust Guarantee and those
made part of such Trust Guarantee by the Trust Indenture Act. The summary of
certain provisions of the Trust Guarantee does not purport to be complete and is
subject to and qualified in its entirety by reference to the provisions of the
form of Trust Guarantee, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and the Trust
Indenture Act. The Trust Guarantee will be held by the Preferred Securities
Guarantee Trustee for the benefit of the holders of the Preferred Securities of
the Trust.
GENERAL
Pursuant to the Trust Guarantee, the Company will agree, to the extent set
forth therein, to pay in full to the holders of the Preferred Securities, the
Trust Guarantee Payments (as defined below) (except to the extent paid by the
Trust), as and when due, regardless of any defense, right of set-off or
counterclaim which the Trust may have or assert. The following payments or
distributions with respect to the Preferred Securities (the "Trust Guarantee
Payments"), to the extent not paid by the Trust, will be subject to the Trust
Guarantee (without duplication): (i) any accrued and unpaid distributions that
are required to be paid on such Preferred Securities, to the extent the Trust
shall have funds available therefor, (ii) the redemption price, including all
accrued and unpaid distributions to the date of redemption (the "Redemption
Price"), to the extent the Trust has funds available therefor, with respect to
any Preferred Securities called for redemption by the Trust and (iii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with the distribution of Subordinated Debentures to
the holders of Preferred Securities or the redemption of all of the Preferred
Securities upon maturity or redemption of the Subordinated Debentures) the
lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on such Preferred Securities to the date of payment, to the extent
the Trust has funds available therefor or (b) the amount of assets of the Trust
remaining for distribution to holders of such Preferred Securities in
liquidation of the Trust. The Company's obligation to make a Trust Guarantee
Payment may be satisfied by direct payment of the required amounts by the
Company to the holders of Preferred Securities or by causing the Trust to pay
such amounts to such holders.
The Trust Guarantee will not apply to any payment of distributions except
to the extent the Trust shall have funds available therefor. If AAG Holding does
not make interest or principal payments on the Subordinated Debentures purchased
by the Trust and the Company does not fulfill its obligations under the Debt
Guarantee, the Trust will not pay distributions on the Preferred Securities
issued by the Trust and will not have funds available therefor.
The Company has also agreed to guarantee the obligations of the Trust with
respect to the Common Securities (the "Trust Common Guarantee") to the same
extent as the Trust Guarantee, except that, if an Event of Default under the
Indenture has occurred and is continuing, holders of Preferred Securities under
the Trust Guarantee shall have priority over holders of the Common Securities
under the Trust Common Guarantee with respect to distributions and payments on
liquidation, redemption or otherwise.
CERTAIN COVENANTS OF THE COMPANY
In the Trust Guarantee, the Company will covenant that, so long as any
Preferred Securities remain outstanding, if there shall have occurred any event
of default under the Trust Guarantee or a Declaration Event of Default under the
Declaration, then (a) the Company will not declare or pay any dividend on, make
any distributions with respect to, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock; (b) the Company
shall not make any payment of interest, principal or premium, if any, on or
repay, repurchase or redeem any debt securities (including guarantees) issued by
the Company which
39
<PAGE> 40
rank pari passu with or junior to the Trust Guarantee and (c) the Company shall
not make any guarantee payments with respect to the foregoing (other than
pursuant to the Trust Guarantee or the Debt Guarantee); provided, however, that
the Company may declare and pay a stock dividend where the dividend is paid in
the form of the same stock as that on which the dividend is being paid.
MODIFICATION OF THE TRUST GUARANTEE; ASSIGNMENT
Except with respect to any changes that do not adversely affect the rights
of holders of Preferred Securities (in which case no consent of such holders
will be required), the Trust Guarantee may be amended only with the prior
approval of the holders of not less than a majority in liquidation amount of the
outstanding Preferred Securities. The manner of obtaining any such approval of
holders of such Preferred Securities is set forth above under "Description of
the Preferred Securities--Voting Rights." All guarantees and agreements
contained in the Trust Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Trust Guarantee will occur upon the failure
of the Company to perform any of its payment or other obligations thereunder.
The holders of a majority in liquidation amount of the Preferred Securities have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Preferred Securities Guarantee Trustee in respect of
the Trust Guarantee or to direct the exercise of any trust or power conferred
upon the Preferred Securities Guarantee Trustee under the Trust Guarantee.
If the Preferred Securities Guarantee Trustee fails to enforce the Trust
Guarantee, any record holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce the Preferred Securities
Guarantee Trustee's rights under the Trust Guarantee without first instituting a
legal proceeding against the Trust, the Preferred Securities Guarantee Trustee
or any other person or entity. Notwithstanding the foregoing, if the Company has
failed to make a Trust Guarantee Payment, a record holder of Preferred
Securities may directly institute a proceeding against the Company for
enforcement of the Trust Guarantee for such payment to the record holder of the
Preferred Securities of the principal of or interest on the Subordinated
Debentures on or after the respective due dates specified in the Subordinated
Debentures, and the amount of the payment will be based on the holder's pro rata
share of the amount due and owing on all of the Preferred Securities. The
Company has waived any right or remedy to require that any action be brought
first against the Trust or any other person or entity before proceeding directly
against the Company. The record holder in the case of the issuance of one or
more global Preferred Securities certificates will be DTC acting at the
direction of its Direct Participants who in turn will be acting at the direction
of the Beneficial Owners of the Preferred Securities.
The Company will be required to provide annually to the Preferred
Securities Guarantee Trustee a statement as to the performance by the Company of
certain of its obligations under the Trust Guarantee and as to any default in
such performance.
INFORMATION CONCERNING THE PREFERRED SECURITIES GUARANTEE TRUSTEE
The Preferred Securities Guarantee Trustee, prior to the occurrence of a
default, undertakes to perform only such duties as are specifically set forth in
the Trust Guarantee and, after default with respect to the Trust Guarantee,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provision, the Preferred
Securities Guarantee Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Guarantee at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby.
40
<PAGE> 41
TERMINATION OF THE TRUST GUARANTEE
The Trust Guarantee will terminate as to the Preferred Securities upon full
payment of the Redemption Price of all Preferred Securities, upon distribution
of the Subordinated Debentures held by the Trust to the holders of all of the
Preferred Securities or upon full payment of the amounts payable in accordance
with the Declaration upon liquidation of the Trust. The Trust Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of Preferred Securities must restore payment of any sums paid
under such Preferred Securities or the Trust Guarantee.
STATUS OF THE TRUST GUARANTEE
The Trust Guarantee will constitute an unsecured obligation of the Company
and will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company except those liabilities of the Company made pari
passu or subordinate by their terms, (ii) pari passu with the most senior
preferred or preference stock now or hereafter issued by the Company and with
any guarantee now or hereafter entered into by the Company in respect of any
preferred or preference stock of any affiliate of the Company and (iii) senior
to the Company's Common Stock. The terms of the Preferred Securities provide
that each holder of Preferred Securities by acceptance thereof agrees to the
subordination provisions and other terms of the Trust Guarantee.
The Trust Guarantee will constitute a guarantee of payment and not of
collection (that is, the guaranteed party may institute a legal proceeding
directly against the Company to enforce its rights under the Trust Guarantee
without instituting a legal proceeding against any other person or entity).
GOVERNING LAW
The Trust Guarantee will be governed by and construed in accordance with
the law of the State of New York.
DESCRIPTION OF THE SUBORDINATED DEBENTURES AND DEBT GUARANTEE
Set forth below is a description of the specific terms of the Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale of the Trust Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the description in the Indenture, dated as of November 7, 1996 (the
"Indenture"), among AAG Holding as issuer, AAG, as Guarantor, and The Bank of
New York, as Trustee (the "Indenture Trustee"), the form of which is filed as an
Exhibit to the Registration Statement of which this Prospectus is a part, and
the Trust Indenture Act. Certain capitalized terms used herein are defined in
the Indenture.
At any time, AAG Holding will have the right to liquidate the Trust and
cause the Subordinated Debentures and Debt Guarantee to be distributed to the
holders of the Preferred Securities in liquidation of the Trust. See
"Description of the Preferred Securities--Distribution of the Subordinated
Debentures."
If the Subordinated Debentures and the Debt Guarantee are distributed to
the holders of the Preferred Securities, the Company will use its best efforts
to have such securities listed on the NYSE or on such other exchange on which
the Preferred Securities are then listed.
GENERAL
The Subordinated Debentures will be issued as unsecured subordinated debt
securities under the Indenture. The Subordinated Debentures will be limited in
aggregate principal amount to approximately $77.3 million (approximately $88.9
million if the Underwriters' over-allotment option is exercised in full), such
amount being the sum of the aggregate stated liquidation amount of the Preferred
Securities and the capital contributed by AAG Holding in exchange for the Common
Securities (the "AAG Holding Payment").
The Subordinated Debentures are not subject to a sinking fund provision.
The entire principal amount of the Subordinated Debentures will mature and
become due and payable, together with any accrued and unpaid
41
<PAGE> 42
interest thereon including Compounded Interest (as hereinafter defined), if any,
on October 15, 2026, subject to the election of AAG Holding to shorten or extend
the scheduled maturity date of the Subordinated Debentures, which election, in
the case of an extension of the scheduled maturity date, is subject to AAG
Holding satisfying certain financial conditions. See "--Option to Change
Scheduled Maturity Date." The Subordinated Debentures will be fully and
unconditionally guaranteed on a subordinated basis as to principal, premium, if
any, and interest by the Company.
If Subordinated Debentures are distributed to holders of Preferred
Securities in liquidation of such holders' interests in the Trust, it is
presently anticipated that such Subordinated Debentures will initially be issued
in the form of one or more Global Securities (as defined below). As described
herein, under certain limited circumstances, Subordinated Debentures may be
issued in definitive certificated form in exchange for a Global Security. See
"--Book-Entry and Settlement" below. In the event that Subordinated Debentures
are issued in definitive certificated form, such Subordinated Debentures will be
in denominations of $25 and integral multiples thereof and may be transferred or
exchanged at the offices described below. Payments on Subordinated Debentures
issued as a Global Security will be made to DTC or its nominee, a successor
depository or its nominee. In the event Subordinated Debentures are issued in
definitive certificated form, principal and interest will be payable, the
transfer of the Subordinated Debentures will be registrable and Subordinated
Debentures will be exchangeable for Subordinated Debentures of other
denominations of a like aggregate principal amount at the principal corporate
trust office of the Indenture Trustee in New York, New York; provided that
payment of interest may be made at the option of AAG Holding by check mailed to
the address of the persons entitled thereto.
The Indenture does not contain provisions that afford the holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction involving the Company or AAG Holding or other similar transaction
that may adversely affect such holders.
DEBT GUARANTEE
The Indenture provides that the Company will fully and unconditionally
guarantee the due and punctual payment of the principal and interest on the
Subordinated Debentures when and as the same shall become due and payable,
whether at maturity, upon redemption or otherwise. Since AAG is a holding
company, the right of the Company and, hence, the right of creditors of the
Company (including the holders of the Subordinated Debentures) to participate in
any distribution of the assets of any subsidiaries of the Company, whether upon
liquidation, reorganization or otherwise, is subject to prior claims of
creditors of its subsidiaries, except to the extent that claims of the Company
itself as a creditor of a subsidiary may be recognized.
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinated
and junior in right of payment to all Senior Indebtedness of AAG Holding and
that the Debt Guarantee is subordinated and junior in right of payment to all
Senior Indebtedness of the Company. No payment of principal of (including
redemption payments), premium, if any, or interest on, the Subordinated
Debentures and no payment under the Debt Guarantee may be made if any Senior
Indebtedness of AAG Holding or the Company, as the case may be, is not paid when
due, any applicable grace period with respect to such default has ended and such
default has not been cured or waived or ceased to exist, or if the maturity of
any Senior Indebtedness of AAG Holding or the Company, as the case may be, has
been accelerated because of a default. Upon any distribution of assets of AAG
Holding or the Company to creditors upon any dissolution, winding up,
liquidation or reorganization, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all principal of,
premium, if any, and interest due or to become due on, all Senior Indebtedness
of AAG Holding or the Company, as the case may be, (including interest after the
commencement of any bankruptcy, insolvency, receivership or other proceedings at
the rate specified in the applicable Senior Indebtedness, whether or not such
interest is an allowable claim in any such proceeding) must be first paid in
full before the holders of Subordinated Debentures or the Debt Guarantee are
entitled to receive or retain any payment. The rights of the holders of the
Subordinated Debentures and the Debt Guarantee will be subrogated to the rights
of the holders of Senior Indebtedness of AAG Holding or the Company, as the case
may be, to receive
42
<PAGE> 43
payments or distributions applicable to Senior Indebtedness until the principal
of (and premium, if any) and interest on the Subordinated Debentures or the Debt
Guarantee, as the case may be, (including interest after the commencement of any
bankruptcy, insolvency, receivership or other proceedings at the rate specified
in the applicable Senior Indebtedness, whether or not such interest is an
allowable claim in any such proceeding) are paid in full. In addition, the
Subordinated Debentures and the Debt Guarantee will rank at least pari passu
with all other subordinated debt securities and debt guarantees initially issued
to other trusts, partnerships or other entities affiliated with the Company in
connection with an issuance of securities similar to the Preferred Securities.
The term "Senior Indebtedness" means (i) the principal, premium, if any,
and interest in respect of (A) indebtedness of such obligor for money borrowed
and (B) indebtedness evidenced by securities, debentures, bonds or other similar
instruments issued by such obligor ; (ii) all capital lease obligations of such
obligor; (iii) all obligations of such obligor issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such obligor and
all obligations of such obligor under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of business);
(iv) all obligations of such obligor for the reimbursement on any letter of
credit, banker's acceptance, security purchase facility or similar credit
transaction; (v) all obligations of the type referred to in clauses (i) through
(iv) above of other persons for the payment of which such obligor is responsible
or liable as obligor, guarantor or otherwise, including under all support
agreements or guarantees by such obligor of debentures, notes and other
securities issued by its subsidiaries; and (vi) all obligations of the type
referred to in clauses (i) through (v) above of other persons secured by any
lien on any property or asset of such obligor (whether or not such obligation is
assumed by such obligor); except in each case for (1) any such indebtedness that
is by its terms subordinated to or pari passu with the Subordinated Debentures,
and (2) any indebtedness in respect of debt securities issued to any trust, or a
trustee of such trust, partnership or other entity affiliated with AAG Holding
or the Company that is a financing entity for such obligor (a "financing
entity") in connection with the issuance by such financing entity of securities
that are similar to the Preferred Securities. Such Senior Indebtedness shall
continue to be Senior Indebtedness and be entitled to the benefits of the
subordination provisions irrespective of any amendment, modification or waiver
of any term of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that may be issued by AAG Holding or the Company.
OPTIONAL REDEMPTION
AAG Holding shall have the right to redeem the Subordinated Debentures, (i)
at any time, in whole or in part, from time to time, on or after November 7,
2001 or (ii) at any time in whole (but not in part) upon the occurrence of a
Special Event as described under "Description of the Preferred
Securities--Special Event Redemption," upon not less than 30 nor more than 60
days notice, at a redemption price equal to 100% of the principal amount to be
redeemed plus any accrued and unpaid interest to the redemption date. If a
partial redemption of the Preferred Securities resulting from a partial
redemption of the Subordinated Debentures would result in the delisting of the
Preferred Securities, AAG Holding may only redeem the Subordinated Debentures in
whole. AAG Holding may not redeem any Subordinated Debentures if there is
accrued and unpaid interest on the Subordinated Debentures as of the Interest
Payment Date (as defined below) next preceeding the redemption date.
INTEREST
Each Subordinated Debenture shall bear interest at the rate of 9 1/4% per
annum from the original date of issuance, or from the most recent interest
payment date to which interest has been paid or provided for, payable quarterly
in arrears on January 15, April 15, July 15 and October 15 of each year (each,
an "Interest Payment Date"), commencing January 15, 1997, to the person in whose
name such Subordinated Debenture is registered, subject to certain exceptions,
at the close of business on the Business Day next preceding such Interest
Payment Date. In the event the Subordinated Debentures shall not continue to
remain in book-entry form, AAG Holding shall have the right to select record
dates, which shall be more than one Business Day but less than 60 Business Days
prior to the Interest Payment Date. Any installment of interest not punctually
paid
43
<PAGE> 44
will cease to be payable to the holders of the Subordinated Debentures on the
regular record date and may be paid to the person in whose name the Subordinated
Debentures are registered at the close of business on a special record date to
be fixed by the Indenture Trustee for the payment of such defaulted interest,
notice of which shall be given to the holders of the Subordinated Debentures not
less than 10 days prior to such special record date, or may be paid at any time
in any other lawful manner not inconsistent with the requirements of any
securities exchange, interdealer quotation system or other organization on which
the Subordinated Debentures may be listed, and upon such notice as may be
required by such exchange, system or organization.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full quarterly period for which interest is computed,
will be computed on the basis of the actual number of days elapsed in such 90
day quarter. In the event that any date on which interest is payable on the
Subordinated Debentures is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, then
such payment shall be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on such date.
OPTION TO CHANGE SCHEDULED MATURITY DATE
The "Scheduled Maturity Date" of the Subordinated Debentures is October 15,
2026. AAG Holding, however, may, extend such maturity date (October 15, 2026 or
the maturity date then in effect, as the case may be, is hereinafter referred to
as the "Maturity Date") for one or more periods, but in no event later than the
earlier of (i) October 15, 2045 or (ii) the "Interest Deduction Date." The
"Interest Deduction Date" shall mean the date which is six months earlier than
the ending date of the maximum term (beginning on the date of issue of the
Subordinated Debentures and including any extensions thereof), as determined
under any federal statute applicable by its terms to the Subordinated Debentures
which is enacted at any time after the issuance of the Subordinated Debentures
(including, but not limited to, at any time after an extension of the Maturity
Date), of a debt instrument for which interest is deductible for federal income
tax purposes. In no event shall the extended Maturity Date be later than the
Interest Deduction Date even if the Maturity Date has previously been extended
to a date beyond the Interest Deduction Date. AAG Holding must exercise its
right to extend the term at least 90 days prior to the Maturity Date then in
effect and must satisfy the following conditions on the date AAG Holding
exercises such right and on the Maturity Date then in effect prior to such
proposed extension: (a) AAG Holding is not in bankruptcy or otherwise insolvent,
(b) AAG Holding is not in default on any Subordinated Debenture issued to the
Trust or to any trustee of the Trust in connection with an issuance of Trust
Securities by the Trust, (c) AAG Holding has made timely payments on the
Subordinated Debentures for the immediately preceding six quarters without
deferrals, (d) the Trust is not in arrears on payments of distributions on the
Trust Securities, (e) the Subordinated Debentures or Preferred Securities are
rated investment grade by any one of Standard & Poor's Corporation, Moody's
Investors Service, Inc., Fitch Investor Services, Duff & Phelps Credit Rating
Company or any other nationally recognized statistical rating organization, and
(f) the final maturity of such Subordinated Debentures is not later than the
49th anniversary of the issuance of the Preferred Securities. Pursuant to the
Declaration, the Regular Trustees are required to give notice of AAG Holding's
election to change the Maturity Date to the holders of the Preferred Securities.
In addition, if AAG Holding exercises its right to liquidate the Trust and
distribute the Subordinated Debentures as discussed above under "Description of
the Preferred Securities--Distribution of the Subordinated Debentures,"
effective upon such exercise, the Maturity Date of the Subordinated Debentures
may be changed to (i) any date elected by AAG Holding that is no earlier than
November 7, 2001 and (ii) any date elected by AAG Holding which is not later
than the earlier of (a) October 15, 2045 or (b) the "Interest Deduction Date";
provided that on the date AAG Holding exercises such right, and on the Maturity
Date in effect prior to such proposed extension, the conditions specified in the
previous paragraph are satisfied.
44
<PAGE> 45
OPTION TO EXTEND INTEREST PAYMENT PERIOD
AAG Holding has the right, from time to time, to defer payment of interest
on the Subordinated Debentures for up to 20 consecutive quarters, provided that
no Extension Period may extend beyond the Maturity Date of the Subordinated
Debentures. There could be multiple Extension Periods of varying lengths during
the term of the Subordinated Debentures. At the end of each Extension Period, if
any, AAG Holding shall pay all interest then accrued and unpaid, together with
interest thereon, compounded quarterly at the rate specified for the
Subordinated Debentures to the extent permitted by applicable law ("Compounded
Interest"). In the event AAG Holding exercises this right, then during any
Extension Period, (a) the Company and AAG Holding shall not declare or pay any
dividends on, make any distribution with respect to, or redeem, purchase,
acquire or make a liquidation payment with respect to any of its capital stock
and (b) the Company and AAG Holding shall not, directly or indirectly, and will
not allow any of their subsidiaries to, make any payment of interest, principal
or premium, if any, on, or repay, repurchase or redeem, any debt securities
issued by the Company and AAG Holding that rank pari passu with or junior to the
Subordinated Debentures; provided, however, that, the restriction in clause (a)
above does not apply (i) to repurchases or acquisitions of shares of the common
stock of the Company or AAG Holding as contemplated by any employment
arrangement, benefit plan or other similar contract with or for the benefit of
employees, officers or directors entered into in the ordinary course of
business, (ii) as a result of an exchange or conversion of any class or series
of the Company's or AAG Holding's capital stock for common stock, (iii) to the
purchase of fractional interests in shares of the Company or AAG Holding's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged or (iv) to the payment of any
stock dividend by the Company or AAG Holding payable in common stock. Prior to
the termination of any such Extension Period, AAG Holding may further defer
payments of interest by extending the interest payment period; provided,
however, that such Extension Period, including all such previous and further
extensions, may not exceed 20 consecutive quarters or extend beyond the Maturity
Date. Upon the termination of any Extension Period and the payment of all
amounts then due, AAG Holding may commence a new Extension Period, subject to
the terms set forth in this section. No interest during an Extension Period,
except at the end thereof, shall be due and payable. AAG Holding has no present
intention of exercising its right to defer payments of interest by extending the
interest payment period on the Subordinated Debentures. If the Property Trustee
shall be the sole holder of the Subordinated Debentures, AAG Holding shall give
the Regular Trustees and the Property Trustee notice of its selection of such
Extension Period one Business Day prior to the earlier of (i) the date
distributions on the Preferred Securities are payable or (ii) the date the
Regular Trustees are required to give notice to the NYSE (or other applicable
self-regulatory organization) or to holders of the Preferred Securities of the
record date or the date such distribution is payable. The Regular Trustees shall
give notice of AAG Holding's selection of such Extension Period to the holders
of the Preferred Securities. If the Property Trustee shall not be the sole
holder of the Subordinated Debentures, AAG Holding shall give the holders of the
Subordinated Debentures notice of its selection of such Extension Period ten
Business Days prior to the earlier of (i) the applicable Interest Payment Date
or (ii) the date upon which AAG Holding is required to give notice to the NYSE
(or other applicable self-regulatory organization) or to holders of the
Subordinated Debentures of the record or payment date of such related interest
payment.
COVENANTS
The Indenture requires AAG Holding to covenant to the following with
respect to the Subordinated Debentures: (i) to duly and punctually pay the
principal of and interest on the Subordinated Debentures (together with any
additional amounts payable pursuant to the terms thereof) and comply with all
other terms, agreements and conditions contained therein or made in the
Indenture for the benefit of the Subordinated Debentures; (ii) to maintain an
office or agency where the Subordinated Debentures may be presented, surrendered
for payment, transferred or exchanged and where notices to AAG Holding may be
served; (iii) if AAG Holding shall act as its own paying agent for the
Subordinated Debentures, to segregate and hold in trust for the benefit of the
persons entitled thereto a sum sufficient to pay the principal of and premium or
interest, if any, so becoming due; (iv) to appoint a successor trustee whenever
necessary to avoid or fill a vacancy in the office of trustee, (v) to preserve
its corporate existence, (vi) to cause all properties used or useful in the
conduct of its business or the business of any Subsidiary to be maintained and
kept in good
45
<PAGE> 46
condition and (vii) to pay or discharge, before the same shall become
delinquent, all taxes, assessments, government charges, and all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
upon the property of AAG Holding or a Subsidiary that comprise more than 10% or
more of the combined assets of AAG Holding and its Subsidiaries, other than
claims contested in good faith by AAG Holding. The Indenture also requires AAG
Holding to deliver to the Trustee, within 120 days after the end of each fiscal
year, a written statement as to whether, to the best knowledge of the officer
signing the statement, AAG Holding is in compliance with the terms of the
Indenture and, if not, the nature and status of such non-compliance.
In addition, AAG Holding has also covenanted, with respect to the
Subordinated Debentures, that for so long as the Preferred Securities and the
Common Securities remain outstanding AAG Holding will (i) maintain 100% direct
or indirect ownership of the Common Securities, provided, however, that any
permitted successor of AAG Holding under the Indenture may succeed to AAG
Holding's ownership of the Common Securities, (ii) not voluntarily dissolve,
wind-up or terminate the Trust, except in connection with the distribution of
Subordinated Debentures or certain mergers, consolidations or amalgamations,
each as permitted by the Declaration, (iii) timely perform its duties as sponsor
of the Trust, (iv) use its reasonable efforts to cause the Trust (a) to remain a
business trust classified as a grantor trust, except in connection with a
distribution of the Subordinated Debentures to the holders of Preferred
Securities in liquidation of the Trust, the redemption of all of the Preferred
Securities and Common Securities of the Trust or certain mergers, consolidations
or amalgamations, each as permitted by the Declaration, and (b) continue not to
be treated as an association taxable as a corporation for United States federal
income tax purposes other than in connection with a distribution of Subordinated
Debentures to the holders of Preferred Securities in liquidation of the Trust,
and (v) use its reasonable efforts to cause each holder of Preferred Securities
and Common Securities to be treated as owning an undivided beneficial interest
in the Subordinated Debentures.
CONSOLIDATION, MERGER AND TRANSFER OF ASSETS
Upon any consolidation of AAG Holding with, or merger of AAG Holding into,
any other person or any conveyance, transfer or lease of the properties and
assets of AAG Holding substantially as an entirety, the successor person formed
by such consolidation or into which AAG Holding is merged or to which such
conveyance, transfer or lease is made shall succeed to, and be substituted for,
and may exercise every right and power of, AAG Holding under the Indenture with
the same effect as AAG Holding prior to such transaction, and thereafter, except
in the case of a lease, the predecessor person shall be relieved of all
obligations and covenants under the Indenture and the Subordinated Debentures.
INDENTURE EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the
Subordinated Debentures will, unless otherwise specified, constitute an "Event
of Default" with respect to the Subordinated Debentures: (a) default for thirty
(30) days in the payment of any installment of interest on the Subordinated
Debentures; (b) default in the payment of any of the principal of the
Subordinated Debentures when due, whether at maturity, upon redemption, by
declaration of acceleration or otherwise; (c) default for sixty (60) days by AAG
Holding in the observance or performance of any other covenant or agreement
contained in the Subordinated Debentures or the Indenture (other than a covenant
or agreement default which is specifically designated as having a different time
period) for the benefit of the Subordinated Debentures after written notice
thereof as provided in the Indenture; (d) (i) an event of default occurs under
any instrument (including the Indenture) under which there is at the time
outstanding, or by which there may be secured or evidenced, any indebtedness of
the Company or AAG Holding for money borrowed by the Company or AAG Holding, as
the case may be, (other than non-recourse indebtedness) which results in
acceleration or nonpayment at maturity (after giving effect to any applicable
grace period) of such indebtedness in an aggregate amount exceeding $15,000,000;
or any such indebtedness exceeding $15,000,000 shall otherwise be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
prepayment or exercise of an optional prepayment right), prior to the stated
maturity thereof; or any failure by the Company or AAG Holding to make any
payment under a guarantee in respect of any indebtedness, in each case in an
amount of at least $15,000,000, on the date such
46
<PAGE> 47
payment is due (or within any grace period specified in the agreement or other
instrument governing such indebtedness); in which case the Company or AAG
Holding shall immediately give notice to the Trustee of such acceleration or
non-payment, and (ii) there shall have been a failure to cure such default or to
pay or discharge such defaulted indebtedness within ten (10) days after written
notice thereof as provided in the Indenture; (e) any final non-appealable
judgment or order for the payment of money in excess of $15,000,000 is rendered
against the Company or AAG Holding, such judgment or order is not satisfied by
payment or bonded and either enforcement proceedings have been commenced by the
judgment creditor or there has been a period of 30 consecutive days during which
a stay of enforcement of such judgment or order, by reason of a pending appeal
or otherwise, shall not have been in effect; provided, however, that a judgment
or order fully covered by insurance (or a judgment or order for the payment of
money covered by insurance to the extent of all payments in excess of
$15,000,000), which coverage has not been disputed by the insurer, shall not be
considered a default or an Event of Default; or (f) certain events of
bankruptcy, insolvency or reorganization relating to the Company or AAG Holding.
In addition, an Event of Default shall include the voluntary or involuntary
dissolution or winding up of the business of the Trust or other termination of
the existence of the Trust, other than in connection with (i) the distribution
of the Subordinated Debentures to holders of the Trust Securities in liquidation
of their interests in the Trust, (ii) the redemption of all of the outstanding
Trust Securities, or (iii) certain mergers, consolidations or amalgamations of
the Trust, each as permitted by the Declaration.
If any Event of Default shall occur and be continuing, the Property
Trustee, as the holder of the Subordinated Debentures, will have the right to
declare the principal of and the interest on the Subordinated Debentures
(including any Compounded Interest and any other amounts payable under the
Indenture) to be forthwith due and payable and to enforce its other rights as a
creditor with respect to the Subordinated Debentures subject to the
subordination provisions in the Indenture. An Event of Default also constitutes
a Declaration Event of Default. If the Property Trustee fails to enforce its
rights with respect to the Subordinated Debentures held by the Trust, any record
holder of Preferred Securities may institute legal proceedings directly against
AAG Holding to enforce the Property Trustee's rights under such Subordinated
Debentures without first instituting any legal proceedings against such Property
Trustee or any other person or entity. In addition, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of AAG Holding to pay interest or principal on the Subordinated
Debentures issued to the Trust on the date such interest or principal is
otherwise payable and the Company fails to make payments under the Debt
Guarantee with respect to such amounts, then a record holder of Preferred
Securities may institute a proceeding directly against AAG Holding for
enforcement of payment to the record holder of the Preferred Securities of the
principal of or interest on the Subordinated Debentures on or after the
respective due dates specified in the Subordinated Debentures, and the amount of
the payment will be based on the holder's pro rata share of the amount due and
owing on all of the Preferred Securities. The record holder in the case of the
issuance of one or more global Preferred Securities certificates will be DTC
acting at the direction of its direct participants who will be acting at the
direction of Beneficial Owners. The holders of Preferred Securities in certain
circumstances have the right to direct the Property Trustee to exercise its
rights, with respect to other than principal and interest payments on the
Subordinated Debentures, as the holder of the Subordinated Debentures. See
"Description of the Preferred Securities--Declaration Events of Default" and
"Description of the Preferred Securities--Voting Rights."
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of Preferred Securities in connection with the
involuntary or voluntary dissolution, winding-up or liquidation of the Trust, it
is presently anticipated that the Subordinated Debentures will be issued in the
form of one or more global certificates (each a "Global Security") registered in
the name of a securities depository or its nominee. Except under the limited
circumstances described below, Subordinated Debentures represented by the Global
Security will not be exchangeable for, and will not otherwise be issuable as,
Subordinated Debentures in definitive form. The Global Securities described
above may not be transferred except by the depository to a nominee of the
depository or by a nominee of the depository to the depository or another
nominee of the depository or to a successor depository or its nominee.
47
<PAGE> 48
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in such a Global
Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Subordinated
Debentures in definitive form and will not be considered the Holders (as defined
in the Indenture) thereof for any purpose under the Indenture, and no Global
Security representing Subordinated Debentures shall be exchangeable, except for
another Global Security of like denomination and tenor to be registered in the
name of the depository or its nominee or to a successor depository or its
nominee. Accordingly, each beneficial owner must rely on the procedures of the
depository or, if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest to exercise any rights
of a Holder under the Indenture.
THE DEPOSITORY
If Subordinated Debentures are distributed to holders of Preferred
Securities in liquidation of such holders' interests in the Trust, DTC will act
as securities depository for the Subordinated Debentures. For a description of
DTC and the specific terms of the depository arrangements, see "Description of
the Preferred Securities--Book-Entry Issuance--The Depository Trust Company." As
of the date of this Prospectus, the description therein of DTC's book-entry
system and DTC's practices as they relate to purchases, transfers, notices and
payments with respect to the Preferred Securities apply in all material respects
to any debt obligations represented by one or more Global Securities held by
DTC. AAG Holding may appoint a successor to DTC or any successor depository in
the event DTC or such successor depository is unable or unwilling to continue as
the depository for the Global Securities.
None of AAG Holding, the Trust, the Indenture Trustee, any paying agent and
any other agent of AAG Holding or the Indenture Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Security
for the Subordinated Debentures or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DISCONTINUANCE OF THE DEPOSITORY'S SERVICES
A Global Security shall be exchangeable for Subordinated Debentures in
definitive certificated form registered in the names of persons other than the
depository or its nominee only if (i) the depository notifies AAG Holding that
it is unwilling or unable to continue as a depository for such Global Security
and no successor depository shall have been appointed, (ii) the depository, at
any time, ceases to be a clearing agency registered under the Exchange Act at
which time the depository is required to be so registered to act as such
depository and no successor depository shall have been appointed, or (iii) AAG
Holding, in its sole discretion, determines that such Global Security shall be
so exchangeable. Any Global Security that is exchangeable pursuant to the
preceding sentence shall be exchangeable for Subordinated Debentures registered
in such names as the depository shall direct. It is expected that such
instructions will be based upon directions received by the depository from its
Participants with respect to ownership of beneficial interests in such Global
Security.
MISCELLANEOUS
The Indenture will provide that the AAG Holding will pay all fees and
expenses related to (i) the offering of the Trust Securities and the
Subordinated Debentures, (ii) the organization, maintenance and dissolution of
the Trust, (iii) the retention of the Trustees and (iv) the enforcement by the
Property Trustee of the rights of the holders of the Preferred Securities.
The Indenture and the Subordinated Debentures will be governed by, and
construed in accordance with, the laws of the State of New York.
48
<PAGE> 49
EFFECT OF OBLIGATIONS UNDER THE SUBORDINATED
DEBENTURES, THE DEBT GUARANTEE AND THE TRUST GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to (i)
issue the Trust Securities evidencing undivided beneficial interests in the
assets of the Trust, (ii) invest the proceeds from such issuance and sale in the
Subordinated Debentures and (iii) engage in only those other activities
necessary or incidental thereto.
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover distributions
and payments due on the Trust Securities because: (i) the aggregate principal
amount of Subordinated Debentures will be equal to the sum of the aggregate
stated liquidation amount of the Trust Securities; (ii) the interest rate and
the interest and other payment dates on the Subordinated Debentures will match
the distribution rate and distribution and other payment dates for the Preferred
Securities; (iii) AAG Holding shall pay all, and the Trust shall not be
obligated to pay, directly or indirectly, any, costs, expenses, debts and
obligations (other than with respect to the Trust Securities) related to the
Trust; and (iv) the Declaration provides that the Trustees shall not cause or
permit the Trust to, among other things, engage in any activity that is not
consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by the Company as and to the extent set forth under
"Description of Trust Guarantee." If AAG Holding does not make interest and/or
principal payments on the Subordinated Debentures purchased by the Trust and the
Company does not make payments under the Debt Guarantee, the Trust will not have
sufficient funds to pay distributions on the Preferred Securities. The Trust
Guarantee will not apply to the payment of distributions and other payments on
the Preferred Securities when the Trust does not have sufficient funds to make
such distributions or other payments.
The Debt Guarantee will constitute an unsecured obligation of the Company
and will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company except those made pari passu or subordinate by their
terms, and (ii) senior to the Company's preferred and common stock.
The Trust Guarantee will constitute an unsecured obligation of the Company
and will rank (i) subordinate and junior in right of payment to all other
liabilities of the Company except those made pari passu or subordinate by their
terms, (ii) pari passu with the most senior preferred or preference stock now or
hereafter issued by the Company and with any guarantee now or hereafter entered
into by the Company in respect of any preferred or preference stock of any
affiliate of the Company and (iii) senior to the Company's common stock.
The Trust Guarantee, when taken together with the back-up undertakings,
consisting of obligations of The Company as set forth in the Declaration
(including the obligation to pay expenses of the Trust), the Indenture, the Debt
Guarantee and the Subordinated Debentures issued to the Trust, provide a full
and unconditional guarantee by the Company of the Preferred Securities. If the
Preferred Securities Guarantee Trustee fails to enforce the Trust Guarantee, any
record holder of Preferred Securities may institute a legal proceeding directly
against the Company to enforce the Preferred Securities Guarantee Trustee's
rights under the Trust Guarantee without first instituting a legal proceeding
against the Trust, the Preferred Securities Guarantee Trustee or any other
person or entity. In addition, if the Company has failed to make a Trust
Guarantee Payment, a record holder of Preferred Securities may directly
institute a proceeding against the Company for enforcement of the Trust
Guarantee for such payment to the record holder of the Preferred Securities of
the principal of or interest on the Subordinated Debentures on or after the
respective due dates specified in the Subordinated Debentures, and the amount of
the payment will be based on the holder's pro rata share of the amount due and
owing on all of the Preferred Securities. The Company has waived any right or
remedy to require that any action be brought first against the Trust or any
other person or entity before proceeding directly against the Company. The
record holder in the case of the issuance of one or more global Preferred
Securities certificates will be DTC acting at the direction of its Direct
Participants, who in turn will be acting at the direction of the Beneficial
Owners of the Preferred Securities.
49
<PAGE> 50
If the Property Trustee fails to enforce its rights with respect to the
Subordinated Debentures or Debt Guarantee held by the Trust, any record holder
of Preferred Securities may institute legal proceedings directly against AAG
Holding or the Company to enforce the Property Trustee's rights under such
Subordinated Debentures or Debt Guarantee, respectively, without first
instituting any legal proceedings against such Property Trustee or any other
person or entity. In addition, if a Declaration Event of Default has occurred
and is continuing and such event is attributable to the failure of AAG Holding
to pay interest, principal or other required payments on the Subordinated
Debentures issued to the Trust on the date such interest, principal or other
required payment is otherwise payable, then a record holder of Preferred
Securities may institute a Direct Action against AAG Holding for enforcement of
such payment on the Subordinated Debentures on or after the respective due dates
specified in the Subordinated Debentures. To the extent the Company or AAG
Holding makes a payment to a record holder of Preferred Securities in connection
with proceedings by such record holder directly against the Company or AAG
Holding, the Company or AAG Holding, as the case may be, will be subrogated to
the rights of the record holder of Preferred Securities to the extent of
payments made by the Company or AAG Holding to the record holder. The record
holder in the case of the issuance of one or more global Preferred Securities
certificates will be DTC acting at the direction of its Direct Participants, who
in turn will be acting at the direction of the Beneficial Owners of the
Preferred Securities. If another Indenture Event of Default occurs and is
continuing, the Declaration provides a mechanism whereby the holders of the
Preferred Securities, using the procedures described in "Description of the
Preferred Securities--Voting Rights," may direct the Property Trustee to enforce
its rights under the Subordinated Debentures.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
The following is a summary of certain of the material United States federal
income tax consequences of the purchase, ownership and disposition of Preferred
Securities. Unless otherwise stated, this summary deals only with Preferred
Securities held as capital assets by holders who purchase the Preferred
Securities upon original issuance ("Initial Holders"). It does not deal with
special classes of holders such as banks, thrifts, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors, or persons that will hold the
Preferred Securities as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other integrated
investment, or as other than a capital asset. This summary also does not address
the tax consequences to persons that have a functional currency other than the
U.S. dollar or the tax consequences to shareholders, partners or beneficiaries
of a holder of Preferred Securities. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the Preferred Securities. This summary is based on the Code, U.S. Treasury
regulations thereunder and administrative and judicial interpretations thereof,
as of the date hereof, all of which are subject to change, possibly on a
retroactive basis. Any such changes may be applied retroactively in a manner
that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a beneficial owner of
the Preferred Securities. In particular, legislation has been proposed that
could adversely affect AAG Holding's ability to deduct interest on the
Subordinated Debentures, which may in turn permit AAG Holding to cause a
redemption of the Preferred Securities prior to November 7, 2001. See
"--Proposed Tax Law Changes."
CLASSIFICATION OF THE SUBORDINATED DEBENTURES AND THE TRUST
In connection with the issuance of the Subordinated Debentures, Akin, Gump,
Strauss, Hauer & Feld, L.L.P. ("Tax Counsel"), tax counsel for the Company, AAG
Holding and the Trust, will render its opinion generally to the effect that,
although not entirely free from doubt, under current law and assuming full
compliance with the terms of the Indenture (and certain other documents), and
based upon certain facts and assumptions contained in such opinion, the
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of AAG Holding.
50
<PAGE> 51
In connection with the issuance of the Preferred Securities, Tax Counsel
will render its opinion generally to the effect that under current law and
assuming full compliance with the terms of the Declaration and other documents,
and based upon certain facts and assumptions contained in such opinion, the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for United States federal income tax purposes, each holder of Preferred
Securities generally will be considered the owner of an undivided interest in
the Subordinated Debentures. Each holder will be required to include in its
gross income its allocable share of income on the Subordinated Debentures.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under recently issued income tax regulations applicable to all debt
instruments that, like the Subordinated Debentures, are issued on or after
August 13, 1996, remote contingencies that stated interest will not be timely
paid are ignored in determining whether a debt instrument is issued with OID.
OID must be included in income by all holders as it accrues economically on a
daily basis, without regard to when it is paid in cash or whether a particular
holder generally uses the cash method of accounting. AAG Holding has concluded
that the likelihood of its exercising its option to defer payments of interest
is remote because exercising that option would prevent AAG Holding and the
Company from declaring dividends on its stock. Based upon this conclusion, and
although not entirely free from doubt, in the opinion of Tax Counsel the
Subordinated Debentures will not include OID. As a consequence, holders of the
Preferred Securities should report interest under their own methods of
accounting (e.g., cash or accrual) instead of under the daily economic accrual
rules for OID instruments.
Under the new regulations, however, if AAG Holding exercises its right to
defer payments of interest, the Subordinated Debentures will become OID
instruments, and all holders of the Preferred Securities will be required to
accrue interest on a daily basis during any Extension Period even though AAG
Holding will not pay the interest in cash until the end of the Extension Period,
and even though a holder may use the cash method of accounting. Accordingly,
application of the OID Rules would result in acceleration of income to the
holder. A holder who disposes of the Preferred Securities during such an
Extension Period may suffer a loss because the market value of the Trust
Securities will likely fall if AAG Holding exercises its option to defer
payments of interest on the Subordinated Debentures. Furthermore, the market
value of the Preferred Securities may not reflect the accumulated distribution
that will be paid at the end of the Extension Period, and a holder who sells the
Preferred Securities during the Extension Period will not receive from AAG
Holding any cash related to the interest income the holder accrued and included
in its taxable income under the OID rules (because that cash will be paid to the
holder of record at the end of the Extension Period).
If the Subordinated Debentures become OID instruments (i.e., if AAG Holding
ever exercises its right to defer payment of interest), the Subordinated
Debentures will be taxed as OID instruments for as long as they remain
outstanding. Thus, even after the end of the Extension Period, all holders will
be required to continue accruing interest on the Subordinated Debentures on a
daily basis, regardless of their method of accounting.
The new regulations have not been addressed in any rulings or other
interpretations by the Internal Revenue Service ("IRS"), and it is possible that
the IRS could take a position contrary to the interpretation herein.
Corporate holders of the Preferred Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Preferred Securities.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than Initial Holders may be
considered to have acquired their undivided interests in the Subordinated
Debentures with "market discount" or "acquisition premium" as such phrases are
defined for United States federal income tax purposes. Such holders are advised
to consult their tax advisors as to the income tax consequences of the
acquisition, ownership and disposition of the Preferred Securities.
51
<PAGE> 52
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
As described under the caption "Description of the Preferred
Securities--Distribution of the Subordinated Debentures," Subordinated
Debentures may be distributed to holders in exchange for the Preferred
Securities and in liquidation of the Trust. Under current law, such a
distribution would be treated for United States federal income tax purposes as a
non-taxable event to each holder, and each holder would receive an aggregate tax
basis in the Subordinated Debentures equal to such holder's aggregate tax basis
in its Preferred Securities. A holder's holding period in the Subordinated
Debentures so received in liquidation of the Trust would include the period
during which the Preferred Securities were held by such holder. If, however, the
liquidation of the Trust were to occur because the Trust is subject to United
States federal income tax with respect to income accrued or received on the
Subordinated Debentures, the distribution of the Subordinated Debentures to
holders would be a taxable event to each holder and a holder would recognize
gain or loss as if the holder had exchanged its Preferred Securities for the
Subordinated Debentures it received upon liquidation of the Trust.
Under certain circumstances described herein (see "Description of the
Preferred Securities--Special Event Redemption"), the Subordinated Debentures
may be redeemed for cash, with the proceeds of such redemption distributed to
holders in redemption of their Preferred Securities. Under current law, such a
redemption would constitute a taxable disposition of the redeemed Preferred
Securities for United States federal income tax purposes, and a holder would
recognize gain or loss as if it sold such redeemed Preferred Securities for
cash. See "--Sales of Preferred Securities."
SALES OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between its adjusted tax basis in the Preferred Securities and
the amount realized on the sale of such Preferred Securities. Assuming AAG
Holding does not defer interest on the Subordinated Debentures by extending the
interest payment period, a holder's adjusted tax basis in the Preferred
Securities generally will equal its initial purchase price. Subject to the
market discount rules described above and the discussion below regarding accrued
and unpaid interest, such gain or loss generally will be a capital gain or loss
and generally will be a long-term capital gain or loss if the Preferred
Securities have been held for more than one year.
The Preferred Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. If AAG Holding exercises its right to defer payments of
interest, a holder who disposes of Preferred Securities between record dates for
payments of distributions thereon will be required to include in income as
ordinary income, accured and unpaid interest on the Subordinated Debentures
through the date of disposition, and to add such amount to such holder's
adjusted tax basis in such holder's pro rata share of the underlying
Subordinated Debentures deemed disposed of. To the extent the selling price is
less than the holder's adjusted tax basis (which will include all accrued but
unpaid interest) a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes. Accrual basis taxpayers would be
subjected to similar treatment without regard to AAG Holding's election to
defer.
UNITED STATES ALIEN HOLDERS
Prospective purchasers of Preferred Securities that are United States Alien
Holders should consult their tax advisors with respect to the United States
federal tax consequences, including in particular potential withholding tax
consequences, as well as any tax consequences that may arise under the laws of
any U.S. state, local or other U.S. or non-U.S. tax jurisdiction. For purposes
of this discussion, a "United States Alien Holder" is any corporation,
individual, partnership, estate or trust that is, as to the United States, a
foreign corporation, a non-resident alien individual, a foreign partnership, or
a non-resident fiduciary of a foreign estate or trust.
52
<PAGE> 53
INFORMATION REPORTING TO HOLDERS
Income on the Preferred Securities will be reported to holders on Forms
1099, which forms should be mailed to holders of Preferred Securities by January
31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's federal income tax, provided the required
information is provided to the Internal Revenue Service.
PROPOSED TAX LAW CHANGES
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"),
the revenue portion of President Clinton's fiscal 1997 budget proposal was
released. The Bill would, among other things, generally deny interest deductions
for interest or OID on an instrument, issued by a corporation, that has a
maximum weighted average maturity of more than 40 years. The Bill would also
treat as equity, instruments issued by a corporation that have a maximum term of
more than 20 years and that are not shown as indebtedness on the consolidated
balance sheet of the issuer. For purposes of determining the weighted average
maturity or the term of an instrument, any right to extend would be treated as
exercised. The above-described provisions of the Bill were proposed to be
effective generally for instruments issued on or after December 7, 1995.
However, on March 29, 1996, the Chairmen of the Senate Finance and House Ways
and Means Committees issued a joint statement (the "Joint Statement") to the
effect that it was their intention that the effective date of the President's
legislative proposals, if adopted, would be no earlier than the date of
appropriate Congressional action. In addition, subsequent to the publication of
the Joint Statement, Senator Patrick Moynihan and Representatives Sam M. Gibbons
and Charles B. Rangel wrote letters to Treasury Department officials concurring
with the views expressed in the Joint Statement. Under current law, it is likely
that the Subordinated Debentures will be treated as indebtedness of AAG Holding
and AAG Holding will be able to deduct interest on the Subordinated Debentures
beneficially held by the holders of the Preferred Securities. The terms of the
Subordinated Debentures limit the right to extend the maturity of the
Subordinated Debentures to a date which is six months shorter than any
legislative limit on the length of debt securities for which interest is
deductible. Based on the advice of Tax Counsel, the Company and AAG Holding
believe this will allow AAG Holding an interest deduction if the 40-year
weighted average maturity component of the Bill is enacted. However, if the
provision of the Bill regarding a 20-year term is enacted with retroactive
effect with regard to the Subordinated Debentures, AAG Holding will not be
entitled to an interest deduction with respect to the Subordinated Debentures.
There can be no assurance that current or future legislative proposals, final
legislation, adverse judicial decisions or official administrative
pronouncements will not affect the ability of AAG Holding to deduct interest on
the Subordinated Debentures, giving rise to a Tax Event which would permit AAG
Holding to cause the redemption of the Preferred Securities prior to November 7,
2001 (the first date on which AAG Holding would otherwise be able to cause a
redemption of Preferred Securities) as described more fully under "Description
of Preferred Securities--Special Event Redemption."
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL
OR OTHER TAX LAWS.
53
<PAGE> 54
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Trust has agreed to sell to each of the
Underwriters named herein, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith, Incorporated, Dean Witter Reynolds Inc., Furman Selz
LLC, Lehman Brothers Inc., PaineWebber Incorporated and Prudential Securities
Incorporated, are acting as representatives (the "Representatives"), has
severally agreed to purchase the number of Preferred Securities set forth
opposite its name below. In the Underwriting Agreement, the several Underwriters
have agreed, subject to the terms and conditions set forth therein, to purchase
all the Preferred Securities offered hereby if any of the Preferred Securities
are purchased. In the event of default by an Underwriter, the Underwriting
Agreement provides that, in certain circumstances, the purchase commitments of
the nondefaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER PREFERRED SECURITIES
----------- --------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................ 475,000
Dean Witter Reynolds Inc. ............................... 475,000
Furman Selz LLC.......................................... 475,000
Lehman Brothers Inc...................................... 475,000
PaineWebber Incorporated................................. 475,000
Prudential Securities Incorporated....................... 475,000
CS First Boston Corporation.............................. 50,000
Donaldson, Lufkin & Jenrette Securities Corporation...... 50,000
Murphey, Marseilles, Smith & Nammack, Inc. .............. 50,000
--------------------
Total....................................... 3,000,000
=================
</TABLE>
The Underwriters propose to offer the Preferred Securities in part directly
to the public at the initial public offering price, as set forth on the cover
page of this Prospectus, and in part to certain securities dealers at such price
less a concession not in excess of $.50 per Preferred Security. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $.40 per
Preferred Security to certain brokers and dealers. After the Preferred
Securities are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the Representatives.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of AAG Holding,
the Underwriting Agreement provides that AAG Holding will agree to pay as
compensation ("Underwriters' Compensation") for the Underwriters' arranging the
investment therein of such proceeds, an amount of $.7875 per Preferred Security
(or $2,362,500 in the aggregate) for the accounts of the several Underwriters.
Pursuant to the Underwriting Agreement, the Trust, AAG Holding and the
Company have granted to the Underwriters an option exercisable for 30 days to
purchase up to an additional 450,000 Preferred Securities at the offering price
per Preferred Security set forth on the cover page hereof, solely to cover
over-allotments, if any, in the sale of the Preferred Securities. The Company
will pay Underwriters' Compensation in the amounts per Preferred Security set
forth above with respect to such additional Preferred Securities. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional Preferred Securities as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of Preferred
Securities offered by the Underwriters hereby.
During a period of 90 days from the date of this Prospectus, none of the
Trust, the Company or AAG Holding will, without the prior written consent of the
Representatives, directly or indirectly, sell, offer to sell, grant any option
for the sale of, or otherwise dispose of, any Preferred Securities, any security
convertible into or exchangeable into or exercisable for Preferred Securities or
any equity securities substantially similar to the Preferred Securities (except
for the Subordinated Debentures and the Preferred Securities offered hereby).
54
<PAGE> 55
The Preferred Securities have been approved for listing, subject to
official notice of issuance, on the NYSE. Trading of the Preferred Securities on
the NYSE is expected to commence within a 30-day period after the initial
delivery of the Preferred Securities. The Representatives have advised the Trust
that they intend to make a market in the Preferred Securities prior to the
commencement of trading on the NYSE. The Representatives have no obligation to
make a market in the Preferred Securities, however, and may cease market making
activities, if commenced, at any time.
Prior to this offering, there has been no public market for the Preferred
Securities. In order to meet one of the requirements for listing the Preferred
Securities on the NYSE, the Underwriters will undertake to sell lots of 100 or
more Preferred Securities to a minimum of 400 beneficial holders.
The Company, AAG Holding and the Trust have agreed to indemnify the
Underwriters against, or contribute to payments that the Underwriters may be
required to make in respect of, certain liabilities, including liabilities under
the Securities Act.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, the Company and its subsidiaries in the
ordinary course of business.
LEGAL MATTERS
The validity of the Subordinated Debentures, the Trust Guarantee and the
Debt Guarantee will be passed upon for the Company, AAG Holding and the Trust by
Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio. Certain United States
federal income taxation matters also will be passed upon for AAG Holding and the
Trust by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Washington, D.C. Attorneys
in the Keating, Muething & Klekamp, P.L.L. and Akin, Gump, Strauss, Hauer &
Feld, L.L.P. law firms hold shares of Common Stock of the Company. Certain
matters of Delaware law relating to the validity of the Preferred Securities
will be passed upon for the Trust by Morris, Nichols, Arsht & Tunnell,
Wilmington, Delaware. Certain legal matters in connection with the Securities
will be passed upon for the Underwriters by Taft, Stettinius & Hollister,
Cincinnati, Ohio and Skadden, Arps, Meagher & Flom, L.L.P., New York, New York.
EXPERTS
The consolidated financial statements of AAG appearing in AAG's annual
report (Form 10-K) for the year ended December 31, 1995, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon,
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
55
<PAGE> 56
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST OR
THE UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE TRUST SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 4
Incorporation of Certain Documents by
Reference............................. 4
Prospectus Summary...................... 6
Risk Factors............................ 11
The Trust............................... 19
The Company............................. 19
Capitalization.......................... 26
Accounting Treatment.................... 26
Ratio of Earnings to Fixed Charges...... 26
Use of Proceeds......................... 27
Description of the Preferred
Securities............................ 27
Description of Trust Guarantee.......... 39
Description of the Subordinated
Debentures and Debt Guarantee......... 41
Effect of Obligations Under the
Subordinated Debentures, the Debt
Guarantee and the Trust Guarantee..... 49
United States Federal Income Taxation... 50
Underwriting............................ 54
Legal Matters........................... 55
Experts................................. 55
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,000,000
PREFERRED SECURITIES
AMERICAN ANNUITY GROUP
CAPITAL TRUST I
9 1/4% TRUST ORIGINATED
PREFERRED SECURITIES(SM) ("TOPrS (SM)")
GUARANTEED TO THE EXTENT
SET FORTH HEREIN BY
AMERICAN ANNUITY GROUP, INC.
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
DEAN WITTER REYNOLDS INC.
FURMAN SELZ
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
NOVEMBER 4, 1996
------------------------------------------------------
------------------------------------------------------
