-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gct9iA4Ozo2gz+TfdvYEEO9R1MYiHNv6viQUo7um28+LR7xSMAQe9Sxufcae5v99 ke/4TZO2ejvbPcO13SDueQ== /in/edgar/work/0000005103-00-000060/0000005103-00-000060.txt : 20001115 0000005103-00-000060.hdr.sgml : 20001115 ACCESSION NUMBER: 0000005103-00-000060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 740483432 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07981 FILM NUMBER: 762411 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number 1-7981 American General Corporation (Exact name of registrant as specified in its articles of incorporation) Texas 74-0483432 (State of Incorporation) (I.R.S. Employer Identification No.) 2929 Allen Parkway, Houston, Texas 77019-2155 (Address of principal executive offices) (Zip Code) (713) 522-1111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of October 31, 2000, there were 251,444,968 shares (excluding shares held in treasury and by a subsidiary) of American General's Common Stock outstanding. INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Income Statement for the nine months and quarters ended September 30, 2000 and 1999 .... 2 Consolidated Balance Sheet at September 30, 2000 and December 31, 1999 ............................. 3 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the nine months ended September 30, 2000 and 1999 ....................... 4 Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2000 and 1999 . 5 Notes to Consolidated Financial Statements .......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 28 Part II. OTHER INFORMATION. Item 1. Legal Proceedings ................................... 29 Item 6. Exhibits and Reports on Form 8-K .................... 29 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Income Statement (Unaudited) (In millions, except per share data) Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Revenues Premiums and other considerations. $ 2,903 $ 2,866 $ 937 $ 952 Net investment income ............ 4,054 3,897 1,379 1,300 Finance charges .................. 1,203 1,077 414 364 Realized investment losses ....... (129) (12) (20) (5) Other ............................ 234 181 83 65 Total revenues ............... 8,265 8,009 2,793 2,676 Benefits and expenses Insurance and annuity benefits ... 4,128 4,020 1,377 1,329 Operating expenses ............... 1,198 1,215 402 407 Commissions ...................... 957 910 311 311 Change in deferred policy acquisition costs and cost of insurance purchased ............. (372) (337) (130) (116) Provision for finance receivable losses .......................... 147 150 50 50 Goodwill amortization ............ 36 36 12 12 Interest expense Corporate ....................... 167 146 57 51 Consumer Finance ................ 514 420 181 144 Other charges .................... 315 - - - Total benefits and expenses .. 7,090 6,560 2,260 2,188 Earnings Income before income tax expense . 1,175 1,449 533 488 Income tax expense ............... 401 507 188 171 Income before net dividends on preferred securities of subsidiaries .................... 774 942 345 317 Net dividends on preferred securities of subsidiaries ...... 76 68 26 23 Net income ................... $ 698 $ 874 $ 319 $ 294 Net income per share Basic ........................... $ 2.80 $ 3.48 $ 1.27 $ 1.18 Diluted ......................... $ 2.76 $ 3.39 $ 1.26 $ 1.15 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions) September 30, December 31, 2000 1999 Assets Investments Fixed maturity securities (amortized cost: $64,350; $62,375) ........................ $ 62,848 $ 60,625 Mortgage loans on real estate .............. 3,773 3,686 Equity securities (cost: $330; $299) ....... 361 339 Policy loans ............................... 2,423 2,375 Investment real estate ..................... 217 222 Other long-term investments ................ 531 412 Short-term investments ..................... 2,487 676 Total investments ...................... 72,640 68,335 Cash ........................................ 309 294 Assets held in separate accounts ............ 25,986 24,097 Finance receivables, net .................... 11,257 10,634 Deferred policy acquisition costs ........... 5,524 4,980 Cost of insurance purchased ................. 1,087 1,170 Goodwill .................................... 1,449 1,501 Other assets ................................ 4,950 4,436 Total assets ........................... $123,202 $115,447 Liabilities Insurance and annuity liabilities ........... $ 67,614 $ 66,401 Liabilities related to separate accounts .... 25,986 24,097 Debt (short-term) Corporate ($2,165; $1,932) ................. 3,253 3,120 Consumer Finance ($5,018; $4,489) .......... 10,778 10,206 Income tax liabilities ...................... 949 833 Other liabilities ........................... 5,705 2,446 Total liabilities ...................... 114,285 107,103 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible .......................... 1,970 1,675 Convertible .............................. - 249 Total redeemable equity ................ 1,970 1,924 Shareholders' equity Convertible preferred stock (shares issued and outstanding: 0, 2.3) ................... - 85 Common stock (shares issued: 269.3, 269.3; outstanding: 251.8, 248.1) ................. 882 962 Retained earnings ........................... 8,099 7,732 Accumulated other comprehensive income (loss) (1,101) (1,278) Cost of treasury stock ...................... (933) (1,081) Total shareholders' equity ............. 6,947 6,420 Total liabilities and equity ........... $123,202 $115,447 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) (In millions, except per share data) Nine Months Ended September 30, Shareholders' Equity 2000 1999 Convertible preferred stock Balance at beginning of period .................. $ 85 $ 85 Conversion ...................................... (85) - Balance at end of period ........................ - 85 Common stock Balance at beginning of period .................. 962 939 Issuance of treasury shares ..................... (80) (10) Balance at end of period ........................ 882 929 Retained earnings Balance at beginning of period .................. 7,732 7,007 Net income ...................................... 698 874 Cash dividends (per share) Preferred ($.64; $1.93) ........................ (1) (4) Common ($1.32; $1.20) .......................... (330) (300) Balance at end of period ........................ 8,099 7,577 Accumulated other comprehensive income (loss) Balance at beginning of period................... (1,278) 1,599 Change in net unrealized gains (losses) on securities .................................. 177 (1,847) Balance at end of period ........................ (1,101) (248) Cost of treasury stock Balance at beginning of period .................. (1,081) (759) Issuance for conversion of preferred stock and preferred securities .......................... 418 - Issuance for employee benefit plans and other ... 46 47 Share repurchases ............................... (316) (421) Balance at end of period ........................ (933) (1,133) Total shareholders' equity .................... $ 6,947 $ 7,210 Comprehensive Income Net income ....................................... $ 698 $ 874 Change in net unrealized gains (losses) on securities Fair value of fixed maturity securities ........ 248 (3,914) Deferred policy acquisition costs and cost of insurance purchased ........................... 42 1,072 Deferred income taxes .......................... (102) 1,002 Change in fixed maturity securities ............ 188 (1,840) Change in equity securities and other .......... (11) (7) Total ......................................... 177 (1,847) Comprehensive income (loss) ...................... $ 875 $ (973) Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Nine Months Ended September 30, 2000 1999 Operating activities Net cash provided by operating activities ... $ 1,729 $ 1,709 Investing activities Investment purchases .............................. (12,908) (17,221) Investment dispositions and repayments ............ 10,791 14,278 Finance receivable originations and purchases ..... (4,762) (4,484) Finance receivable principal payments received .... 3,966 3,817 Net increase in short-term investments ............ (1,811) (1,046) Other, net ........................................ (147) (152) Net cash used for investing activities ...... (4,871) (4,808) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 5,480 4,903 Policyholder account withdrawals ................ (4,993) (3,626) Net policyholder account deposits .............. 487 1,277 Short-term collateralized financings ............ 2,213 1,047 Total Retirement Services and Life Insurance .. 2,700 2,324 Consumer Finance Net increase in short-term debt ................. 529 234 Long-term debt issuances ........................ 1,240 680 Long-term debt redemptions ...................... (1,200) (354) Short-term collateralized financings ............ 29 - Total Consumer Finance ........................ 598 560 Corporate Net increase in short-term debt ................. 233 143 Long-term debt issuances ........................ 246 150 Long-term debt redemptions ...................... (350) - Issuance of preferred securities of subsidiary .. 295 194 Common stock repurchases ........................ (313) (419) Dividends on common and preferred stock ......... (331) (304) Non-recourse obligation collateralized by bonds . - 483 Other, net ...................................... 79 (8) Total Corporate ............................... (141) 239 Net cash provided by financing activities ... 3,157 3,123 Net increase in cash ............................... 15 24 Cash at beginning of period ........................ 294 341 Cash at end of period .............................. $ 309 $ 365 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 319 $ 152 Interest Corporate ...................................... 166 145 Consumer Finance ............................... 532 438 Dividends on preferred securities of subsidiaries ................................... 90 83 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements September 30, 2000 (In millions, except per share data) 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation (American General) and its subsidiaries (collectively, the company or we) have been prepared in accordance with generally accepted accounting principles for interim periods. In the opinion of management, these statements include all adjustments that are necessary for a fair presentation of the company's consolidated financial position at September 30, 2000, the consolidated results of operations for the nine months and quarters ended September 30, 2000 and 1999, and the consolidated shareholders' equity, comprehensive income, and cash flows for the nine months ended September 30, 2000 and 1999. 2. Future Accounting Standards. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value in the balance sheet. Changes in the fair value of a derivative instrument will be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. We have identified our derivative instruments and are currently documenting hedging activities as required by SFAS 133. We will be prepared to adopt SFAS 133 on January 1, 2001. We do not expect adoption to have a material impact on the company's results of operations and financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," which provides criteria for revenue recognition. SAB 101 must be adopted no later than fourth quarter 2000. There will be no changes to the company's revenue recognition policies as a result of SAB 101. Item 1. Financial Statements (continued). 3. Calculation of Earnings Per Share. We calculate basic and diluted earnings per share as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Net income .................. $ 698 $ 874 $ 319 $ 294 Net dividends on convertible preferred stock ............ - (4) - (1) Basic earnings .............. 698 870 319 293 Net dividends on dilutive securities Convertible preferred securities of subsidiary . 5 8 - 3 Convertible preferred stock - 4 - 1 Dilutive earnings ........... $ 703 $ 882 $ 319 $ 297 Average basic shares outstanding ................ 249.0 249.8 251.4 248.0 Dilutive securities Convertible preferred securities of subsidiary . 4.1 6.1 - 6.1 Convertible preferred stock - 2.3 - 2.3 Stock options ............. 1.0 1.4 1.3 1.9 Restricted stock .......... .8 .3 .8 .4 Average diluted shares outstanding ................ 254.9 259.9 253.5 258.7 Net income per share Basic ...................... $2.80 $3.48 $1.27 $1.18 Diluted .................... $2.76 $3.39 $1.26 $1.15 4. Derivative Financial Instruments. Derivative financial instruments did not have a material effect on net investment income, interest expense, or net income during the nine months ended September 30, 2000 or 1999. Significant activity related to derivative financial instruments in 2000 was as follows: During the nine months ended September 30, 2000, we purchased call swaptions with notional amounts of $1.8 billion, while swaptions with notional amounts of $16.8 billion expired. Swaptions, which are options to enter into interest rate swap agreements, limit the company's exposure to reduced spreads between investment yields and interest rates credited to policyholders should interest rates decrease or increase significantly over prolonged periods. Call swaptions with notional amounts of $1.8 billion, an average strike rate of 5.5%, and total premium paid of $.4 million were outstanding at September 30, 2000. These swaptions expire in October 2000. Should the strike rates remain below market rates for call swaptions outstanding, the swaptions will expire and the company's exposure would be limited to the premiums paid. Item 1. Financial Statements (continued). 5. Dollar Rolls. We use dollar roll agreements as part of our strategy to increase investment income. Dollar rolls are agreements to sell mortgage-backed securities and repurchase substantially the same securities at a specified price and date in the future. We account for dollar rolls as short-term collateralized financings and include the repurchase obligation in other liabilities. At September 30, 2000, the company had $2.2 billion of outstanding dollar roll agreements. The average amount outstanding and the weighted-average interest rate on the short-term collateralized borrowings for the first nine months ended September 30, 2000 were $1.9 billion and 6.0%, respectively. 6. Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Nine Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 Fixed maturity securities $12,293 $16,593 $10,318 $13,945 Mortgage loans 381 381 300 239 Equity securities 67 38 100 27 Other 167 209 73 67 Total $12,908 $17,221 $10,791 $14,278 7. Redeemable Equity. Activity in preferred securities of subsidiaries during 2000 was as follows: 1) On June 27, 2000, American General Capital II (the trust), a subsidiary trust of American General, issued 300,000 shares, or $300 million, of non-convertible preferred securities. Semi-annual cumulative dividends on the preferred securities are payable by the trust at the annual rate of 8-1/2%. The trust has no independent operations. The sole assets of the trust are Junior Subordinated Debentures (subordinated debentures) issued by American General that are mandatorily redeemable in 2030. The interest terms and payment dates of the subordinated debentures held by the trust correspond to those of the trust's preferred securities. The subordinated debentures are eliminated in our consolidated financial statements. Our obligations under the subordinated debentures and related agreements, when taken together, constitute a full and unconditional guarantee of payments due on the preferred securities. The subordinated debentures are redeemable, under certain conditions, at the option of the company, on a proportionate basis. 2) On June 30, 2000, holders of approximately 5 million shares of our 6% convertible preferred securities of subsidiaries converted their securities at a conversion rate of 1.2288 per share into 6.1 million shares of American General common stock. On that date, the conversion rights expired for the remaining 10,811 shares. We exercised our right to redeem these shares at $50 par value on August 31, 2000. Item 1. Financial Statements (continued). 8. Convertible Preferred Stock. On March 1, 2000, we redeemed all outstanding shares of our mandatorily convertible preferred stock. Holders received .8264 share of our common stock for each share of preferred stock redeemed. In total, we issued 1.9 million shares of common stock. 9. Other Charges. The company recorded the following non-recurring items, totaling $315 million ($193 million aftertax or $.76 per share), during second quarter 2000: 1) On June 21, 2000, one of the company's life insurance subsidiaries entered into settlements to resolve pending class action litigation and related regulatory inquiries concerning industrial life insurance. See Note 10 for further discussion of this matter. In conjunction with the proposed settlements, we recorded a charge of $265 million ($175 million aftertax or $.68 per share). The charge covers the cost of policyholder benefits, including premium adjustments and benefit enhancements, and other charges and expenses resulting from the proposed settlements, as well as related administrative and legal costs. 2) In late June 2000, we discovered a potential fraud committed against a subsidiary that conducts mortgage warehouse lending activities in our consumer finance division. Recent mortgages processed by one originator allegedly had been funded based on fraudulent information. In July, the originator's license was suspended and the originator and its parent company filed for bankruptcy. Based on the available information, we recorded a charge of $50 million ($32 million aftertax or $.13 per share) for our estimated loss related to this alleged fraud. We are pursuing all appropriate remedies to recover this loss, including insurance recovery and legal action. 3) During second quarter 2000, we finalized certain tax issues associated with our 1989-1992 tax returns under examination by the Internal Revenue Service. As a result, we reduced goodwill by $27 million and recognized a $14 million ($.05 per share) tax benefit to reflect the use of acquired net operating loss carryforwards. 10. Legal Proceedings. The company is party to various lawsuits and proceedings, including the following: 1) In the mid-1990s, one of our subsidiaries, American General Financial Center (renamed A.G. Financial Service Center, Inc.) (Financial Service Center), provided financing for satellite dishes sold by independent unaffiliated dealers. On May 18, 1999, the Chancery Court of the First Judicial District of Jones County, Mississippi in a case captioned Clayton D. Smith, et al. v. Delta TV Corporation, Don Acy, US Electronics, American General Financial Center, Civil Action No. 96-0254 (the Clayton Smith matter), rendered a judgment awarding approximately $500,000 in compensatory damages and $167 million in punitive damages against Financial Service Center. The lawsuit was filed on November 15, 1996, by 29 individuals who had each purchased a satellite dish. Financial Service Center, together with certain other American General companies, currently are named as defendants in other pending cases involving the financing of satellite dishes. Item 1. Financial Statements (continued). In August 1999, Financial Service Center filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of Indiana. The decision to reorganize was necessitated by the judgment rendered against Financial Service Center by the Mississippi state court. The filing for reorganization under Chapter 11 is limited to Financial Service Center and was intended to provide a fair and orderly process for managing the claims against Financial Service Center. In January 2000, settlement agreements were entered into in connection with the Clayton Smith matter and other pending cases relating to satellite dish financing. Accordingly, we recorded a charge of $57 million ($36 million aftertax) in fourth quarter 1999 to cover the proposed settlements and other litigation. On September 1, 2000, payment was made in connection with the final settlement of the Clayton Smith matter. Resolution of the satellite dish litigation, the timing of which is uncertain, within the recorded charge is dependent upon a number of factors, including obtaining the bankruptcy court's approval of Financial Service Center's plan of reorganization. 2) Prior to our acquisition of USLIFE Corporation, one of its subsidiaries entered the workers' compensation reinsurance business in 1997. We discontinued writing new workers' compensation reinsurance business in 1998. Our largest contract was a quota share reinsurance agreement with Superior National Insurance Group, Inc. and its affiliates (collectively, Superior National), effective May 1, 1998. On November 29, 1999, we initiated an arbitration proceeding to rescind this contract from its inception, based in part on misrepresentations and nondisclosures which we believe were made by Superior National. On March 3, 2000, the California Department of Insurance ordered seizure of certain of Superior National's insurance subsidiaries as a result of their financial condition. On April 26, 2000, Superior National Insurance Group, Inc. filed a voluntary petition to reorganize under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Central District of California. Through the arbitration with Superior National, which is scheduled to commence in the fourth quarter of 2000, we plan to fully pursue all remedies. Although we believe, based on the advice of counsel, that the company will succeed in rescinding the contract, risks and uncertainties remain with respect to the ultimate outcome. In the unlikely event the company does not prevail in the arbitration, we do not expect the additional aftertax losses from our workers' compensation business to exceed $85 million, after recoveries from reinsurers. We believe that any ultimate loss related to our workers' compensation business will not have a material adverse effect on our results of operations and financial position. Item 1. Financial Statements (continued). 3) Certain companies acquired by American General Life and Accident Insurance Company (collectively, AGLA), a subsidiary of the company, previously issued small face amount life insurance policies known as industrial life insurance. AGLA ceased writing industrial life insurance more than twenty years ago. On December 10, 1999, a class action was filed against AGLA, Leola McNeil v. American General Life and Accident Insurance Company, et al., Civil Action No. 3-99-1157 (M.D. TN 1999), principally challenging AGLA's pricing practices with respect to certain minority purchasers of industrial life insurance and seeking compensatory and punitive damages and injunctive relief. On April 27, 2000, the Florida Department of Insurance (the Department) issued a cease and desist order to AGLA, In the Matter of American General Life and Accident Insurance Company, Case No. 348600-00-C, requiring AGLA to cease collecting a portion of premiums from Florida minority policyholders and to submit a corrective action plan to the Department. Prior to that date, AGLA had taken action to cease collecting a portion of the premiums on its industrial life policies from affected minority policyholders nationwide. On June 21, 2000, American General announced that AGLA entered into a settlement, subject to court approval, to resolve the McNeil class action. We also announced that AGLA entered into an agreement with the Department to resolve related regulatory matters, including the cease and desist order. Since the announcement, 35 other states, representing in excess of 90% of AGLA's industrial life policyholders, have joined in the settlement. The class action settlement received court approval on September 8, 2000 and became final and no longer subject to appeal on October 8, 2000. In addition, the regulatory settlement agreements are now final. In conjunction with the proposed settlements, we recorded a charge of $265 million ($175 million aftertax) in second quarter 2000. The charge covers the cost of policyholder benefits, including premium adjustments and benefit enhancements, and other charges and expenses resulting from the proposed settlements, as well as related administrative and legal costs. The company is also party to various other lawsuits and proceedings arising in the ordinary course of business. These lawsuits and proceedings include certain class action claims and claims filed by individuals who excluded themselves from industrial life and market conduct settlements relating to life insurance pricing and sales practices. In addition, many of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts that will ultimately be paid, if any, arising from these lawsuits and proceedings will not have a material adverse effect on the company's results of operations and financial position. However, it should be noted that the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for any unpredictable judgment in any given suit. Item 1. Financial Statements (continued). 11. Tax Return Examinations. American General and the majority of its subsidiaries file a consolidated Federal income tax return. The Internal Revenue Service has completed examinations of our tax returns through 1992 and is currently examining our tax returns for 1993 through 1997. Although the final outcome of any issues raised is uncertain, we believe that the ultimate liability, including interest, will not have a material adverse effect on the financial statements. 12. Division Results. We report our financial results in three business divisions, as well as a category for corporate operations. Results of each division include earnings from its business operations and earnings on the amount of equity we consider necessary to support its business. Corporate operations include corporate capital costs and other income or expenses not allocated to the business divisions. Goodwill amortization, net realized investment gains (losses), and non-recurring items are also excluded from division results, consistent with the manner in which we review and evaluate the divisions. Division results for the nine months ended September 30, were as follows: Income Revenues Before Taxes Net Income 2000 1999 2000 1999 2000 1999 Retirement Services $2,946 $2,661 $ 745 $ 641 $ 495 $ 427 Life Insurance 4,050 4,079 867 814 570 532 Consumer Finance 1,416 1,280 286 259 184 167 Total divisions 8,412 8,020 1,898 1,714 1,249 1,126 Corporate operations (18) 1 (243) (217) (162) (140) Goodwill amortization (36) (36) (36) (36) Net dividends on preferred securities of subsidiaries (76) (68) Operating earnings 975 882 Realized investment losses (129) (12) (129) (12) (84) (8) Non-recurring items (315) - (193) - Consolidated total $8,265 $8,009 $1,175 $1,449 $ 698 $ 874 Item 1. Financial Statements (continued). Division results for the quarter ended September 30, were as follows: Income Revenues Before Taxes Net Income 2000 1999 2000 1999 2000 1999 Retirement Services $ 999 $ 903 $ 253 $ 213 $ 167 $ 140 Life Insurance 1,327 1,340 294 277 193 182 Consumer Finance 484 436 97 88 63 57 Total divisions 2,810 2,679 644 578 423 379 Corporate operations 3 2 (79) (73) (53) (46) Goodwill amortization (12) (12) (12) (12) Net dividends on preferred securities of subsidiaries (26) (23) Operating earnings 332 298 Realized investment losses (20) (5) (20) (5) (13) (4) Consolidated total $2,793 $2,676 $ 533 $ 488 $ 319 $ 294 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This item presents specific comments on material changes to our consolidated results of operations, investments, capital resources, and liquidity for the periods reflected in the interim financial statements filed with this report. This analysis should be read in conjunction with the consolidated financial statements and related notes on pages 2 through 13 of this Quarterly Report on Form 10-Q. The reasons for any significant variations between the quarters ended September 30, 2000 and 1999 are the same as those discussed below for the respective nine month periods, unless otherwise noted. Amounts in the tables are in millions, except per share data. OVERVIEW The company is a diversified financial services organization with over $123 billion of assets, over $22 billion of annual revenues and deposits, and targeted operating earnings per share of $5.17 for full-year 2000. We are a leading provider of retirement services, life insurance, consumer loans, and investments to 12 million customers. Our financial highlights were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Revenues and deposits(1) $ 16,802 $ 14,914 $ 5,519 $ 4,949 Earnings Operating earnings 975 882 332 298 Net income 698 874 319 294 Earnings per share Operating earnings 3.85 3.42 1.31 1.16 Net income 2.76 3.39 1.26 1.15 Assets(2) 124,344 111,689 Shareholders' equity(2) Total 8,068 7,477 Per share 31.84 30.13 Operating return on equity(2) 16.63% 15.88% 16.78% 15.65% (1) Excludes realized investment losses. (2) Excludes fair value adjustment under SFAS 115. Revenues and deposits increased $1.9 billion, or 13%, for the nine months ended September 30, 2000, compared to the same period in 1999, primarily due to higher fixed and variable deposits in our retirement services division. Operating earnings increased 11% for the first nine months of 2000 due to increases in earnings in our retirement services division (up 16%), life insurance division (up 7%), and consumer finance division (up 10%). Operating earnings per share increased 13%, compared to the 11% increase in operating earnings, as a result of the decline in average shares outstanding primarily due to the repurchase of 5.2 million shares of our common stock in the last twelve months. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net income decreased $176 million, or 20%, for the nine months ended September 30, 2000, and included aftertax charges of $193 million and aftertax realized investment losses of $84 million. The charges mainly relate to our settlement of industrial life insurance litigation and a fraud loss in second quarter 2000. See Note 9 of the financial statements for further discussion of the charges. The investment losses from sale of our securities reflect our ongoing management of the investment portfolio to maximize its relative value and to optimize the company's tax position. The $591 million increase in shareholders' equity over the last twelve months reflects $955 million in net income in addition to a $250 million increase related to the conversion of our convertible preferred securities, partially offset by dividends paid to our shareholders of $433 million and share repurchases of $320 million. BUSINESS DIVISIONS We manage our business operations through three divisions retirement services, life insurance, and consumer finance based on products and services offered. Results of each of our business divisions' operations are discussed below. Retirement Services Our retirement services division results were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Fixed margin $ 743 $ 695 $ 253 $ 227 Variable fees 182 133 63 49 Asset management fees 45 24 14 9 Other revenue 53 24 21 8 Net revenue 1,023 876 351 293 Operating expenses 250 232 84 81 Other, net* 28 3 14 (1) Pretax earnings 745 641 253 213 Income taxes 250 214 86 73 Division earnings $ 495 $ 427 $ 167 $ 140 *Primarily commissions and change in DPAC/CIP. Earnings. Retirement services earnings are a function of the level of our managed assets, fixed margin, variable fees, asset management fees, and operating expenses. Division earnings for the nine months ended September 30, 2000 increased 16%, or $68 million, compared to the same period in 1999. The increase was due to the 19% growth in managed assets from September 30, 1999 to September 30, 2000, which generated increases in fixed margin, variable fees, and asset management fees that were partially offset by higher operating expenses. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Assets and Deposits. Investments and separate account assets grew 9% and 31%, respectively, from September 30, 1999 to September 30, 2000. Assets and deposits were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Assets under management Investments (1) $44,364 $40,875 Separate accounts 22,896 17,512 Mutual funds (2) 2,885 782 Premiums and deposits Fixed 4,248 3,697 $1,420 $1,311 Variable 2,537 2,221 751 692 Mutual funds 758 85 282 36 Surrender ratios Fixed 9.81% 7.71% 9.59% 7.90% Variable 5.82 5.14 5.92 4.86 (1) Excludes fair value adjustment under SFAS 115. (2) Not included on the balance sheet. Total premiums and deposits for the nine months and quarter ended September 30, 2000 increased 26%, or $1.5 billion, and 20%, or $414 million, respectively, compared to the same periods in 1999. The 15% increase in fixed premiums and deposits for the nine-month period and the 8% increase for third quarter resulted from our sales of fixed annuities through financial institutions and expanded distribution of annuities through our life insurance agents. Variable deposit growth of 14% and 8% for the first nine months and third quarter of 2000, respectively, reflects continued consumer interest in equity-based products provided through our group retirement plans. Mutual fund deposit growth was $673 million in the first nine months and $246 million in third quarter, compared to the 1999 periods, reflecting our recent introduction of mutual funds to both group and retail markets. Changes in the surrender ratios resulted from widening of the spread between market and credited interest rates, more policies past the surrender protection period, and increased competition. Fixed Margin. Fixed margin, the difference between net investment income on general account investments and interest credited to policyholders' fixed accounts, increased 7% in the first nine months of 2000 compared to 1999. Fixed investment spread measures this difference in terms of interest rates. Net investment income and the components of fixed investment spread were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Net investment income $2,382 $2,205 $ 815 $ 748 Investment yield* 7.76% 7.71% 7.84% 7.68% Average crediting rate 5.38 5.38 5.41 5.35 Fixed investment spread 2.38% 2.33% 2.43% 2.33% *Excludes fair value adjustment under SFAS 115. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). The $48 million increase in fixed margin for the first nine months of 2000 was largely due to a higher level of invested assets and the resulting 8% increase in net investment income. Investment yield and fixed investment spread increased during the first nine months of 2000, compared to the same period in 1999, due to higher market rates on new investments. Variable and Asset Management Fees. Variable fees are annuity product fees, primarily mortality and expense charges, which we earn from separate accounts. Asset management fees are the advisory and management fees we earn on mutual fund and separate account assets. The increase in these combined fees of $70 million, or 45%, for the first nine months of 2000, compared to the same period of 1999, was driven by a 31% growth in separate account assets. Our total variable fee rate, which is variable fees and asset management fees as a percentage of average separate account assets, increased 5 basis points to 1.35% for the first nine months of 2000, primarily due to more favorable revenue-sharing agreements with third-party asset managers. Other Revenue. Other revenue consists primarily of surrender charges and dealer concessions on mutual fund sales. The increase in other revenue over 1999 was due to higher surrender charges and increased marketing revenues earned on mutual funds in 2000. Operating Expenses. Operating expenses increased $18 million for the nine months and $3 million for the quarter ended September 30, 2000, compared to the same periods in 1999, primarily due to increased marketing-related and administrative costs to support the growth in business and $6 million of year- to-date operating expenses for a mutual fund group that we purchased in first quarter 2000. The ratio of operating expenses to average assets under management improved to .49% for the first nine months of 2000 from .54% for the same period a year ago due to growth in assets under management over the last twelve months exceeding growth in operating expenses. Life Insurance Our life insurance division results were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Premiums and other considerations $2,256 $2,294 $ 729 $ 755 Net investment income 1,636 1,651 545 539 Other income 158 134 53 46 Total revenues 4,050 4,079 1,327 1,340 Insurance and annuity benefits 2,137 2,171 709 696 Operating expenses 495 530 161 173 Other expenses* 551 564 163 194 Total expenses 3,183 3,265 1,033 1,063 Pretax earnings 867 814 294 277 Income taxes 297 282 101 95 Division earnings $ 570 $ 532 $ 193 $ 182 *Primarily commissions and change in DPAC/CIP. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Earnings. The division's profitability is driven by growth in insurance and annuity reserves and insurance in force, as well as interest spread, mortality, and operating expenses. Earnings increased 7% for the nine months ended September 30, 2000 compared to the same period in 1999. The increase resulted from a 4% growth in combined general and separate account reserves, an 8% increase in insurance in force, and reduced operating and other expenses. Sales and Premiums and Deposits. Sales represent annualized premiums and deposits for new products issued. Premiums represent funds received on traditional life insurance products, while deposits represent funds we receive for interest-sensitive insurance and annuities. Sales and premiums and deposits of the life insurance division were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Sales Individual life insurance $ 388 $ 378 $ 109 $ 126 Individual annuities 662 445 198 148 Life insurance in force $383,292 $354,313 Direct premiums and deposits Life insurance $ 2,567 $ 2,663 $ 822 $ 834 Annuities 674 491 197 159 Other 443 492 152 159 Total $ 3,684 $ 3,646 $1,171 $1,152 Individual life insurance sales for the first nine months of 2000 increased 3% over the 1999 period, and declined 13% quarter over quarter, due to a 17% year-to-date increase in life insurance sales through our independent distribution channel, partially offset by a decline in sales through career agents resulting from our planned change in marketing emphasis. Direct life insurance premiums and deposits (before net reinsurance ceded) decreased 4% in the nine month period due to lower corporate market deposits, which can fluctuate significantly from quarter to quarter. Individual annuity sales increased 49% in the first nine months of 2000, compared to the same period of 1999, while annuity premiums and deposits increased 37%. These increases were due to a 102% growth in sales of variable annuities through our financial institution channel. Life insurance in force grew 8% from September 30, 1999 to September 30, 2000, due to new sales including larger size policies. Other premiums and deposits, which include primarily accident and health and property and casualty business, declined 10% for the first nine months of 2000, compared to the same period of 1999, due to our de-emphasis of these lines of business. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Investment Spread. Investment results and interest crediting rates were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Assets Investments* $28,447 $27,997 Separate accounts 3,090 1,940 Liabilities Insurance and annuities 25,933 26,034 Separate accounts 3,090 1,940 Investment yield 8.06% 8.24% 8.06% 8.02% Average crediting rate 5.93 5.91 5.93 5.93 Investment spread 2.13% 2.33% 2.13% 2.09% *Excludes fair value adjustment under SFAS 115. Net investment income and the investment yield decreased during the first nine months of 2000, compared to the same period in 1999, due to lower income from securities called before their maturity dates. This decrease in net investment income was partially offset by an increase in investment income generated by the higher amount of investments. Mortality, Morbidity, and Persistency. Death claims and premium termination rates were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Death claims $ 770 $ 753 $ 252 $ 245 Death claims per $1,000 in force $ 3.80 $ 3.68 $ 3.75 $ 3.60 Premium termination rate 12.41% 12.61% 13.47% 13.29% Death claims per $1,000 of in force increased during the first nine months and third quarter of 2000, compared to the same periods in 1999, consistent with the increasing average age of the in force business. Premium termination rates for the nine months and quarter ended September 30, 2000 were relatively stable compared to the same periods in 1999. Mortality and persistency experience during the first nine months of 2000 reflected normal fluctuations and remained within our pricing assumptions. Higher claims in our group medical business, which has been discontinued, and certain long-term disability cases adversely impacted year-to-date 2000 morbidity experience. Expenses. Operating expenses decreased $35 million, or 6%, for the first nine months and decreased 5% for third quarter 2000 compared to the same periods in 1999 due to the benefit of our ongoing shared service initiatives, the reduction of postretirement life insurance benefits for former employees of an acquired company to conform to company-wide standards, and a decline in premium tax expense. The year-to-date ratio of operating expenses to direct premiums and deposits improved to 13.48% in 2000 compared to 14.52% in 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Other expenses, which consist of commissions and the change in DPAC and CIP, decreased 3% in the first nine months of 2000 compared to the same period in 1999. The amortization rate for previously-capitalized DPAC and CIP was reduced for certain product lines during third quarter 2000, as a result of more favorable than expected experience that has resulted from operating efficiencies, as well as better than expected mortality and interest spreads. Consumer Finance Our consumer finance division results were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Finance margin $ 689 $ 657 $ 233 $ 220 Other income 213 203 70 72 Net revenue 902 860 303 292 Provision for finance receivable losses 147 150 50 50 Operating expenses 377 366 126 124 Other expenses* 92 85 30 30 Pretax earnings 286 259 97 88 Income taxes 102 92 34 31 Division earnings $ 184 $ 167 $ 63 $ 57 *Primarily insurance benefits. Earnings. Division earnings are a function of the amount and mix of finance receivables, interest spread, credit quality, and operating expenses. Earnings increased 10% for the nine months ended September 30, 2000, compared to the same period in 1999, due to increases in average receivables and improved credit quality, partially offset by lower interest spread. Finance Receivables. The mix of finance receivables was as follows: September 30, 2000 1999 Real estate loans $ 7,244 $ 6,404 Non-real estate loans 2,970 2,514 Retail sales finance 1,426 1,258 Total finance receivables 11,640 10,176 Allowance for losses (383) (386) Finance receivables, net $11,257 $ 9,790 Average finance receivables Year-to-date $11,331 $ 9,867 Quarter 11,631 10,018 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). We increased our finance receivables portfolio by $1.5 billion during the last twelve months. Average finance receivables in the first nine months of 2000 increased 15% compared to the same period in 1999, due to higher loan production. Over the last twelve months, we generated $6.7 billion of loans in our branch offices and purchased $1.0 billion of real estate loans and $.5 billion of non-real estate loans, while $6.7 billion of loans were repaid. At quarter end, 62% of the portfolio was secured by real estate compared to 63% a year ago. During first quarter 2000, we completed the sale of $27 million of fully-reserved receivables, resulting in a pretax gain of $1 million. The allowance for finance receivable losses decreased $3 million from the prior year period, primarily due to the sale of these receivables and improved credit quality, partially offset by increases for portfolio purchases in the last twelve months. Finance Margin. Finance margin is the difference between the finance charges we charge our customers and interest expense on the debt required to fund finance receivables. Interest spread measures this difference in terms of interest rates. Finance margin and the components of interest spread were as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Finance charges $1,203 $1,077 $ 414 $ 364 Interest expense 514 420 181 144 Finance margin $ 689 $ 657 $ 233 $ 220 Yield on finance receivables 14.17% 14.59% 14.18% 14.45% Borrowing cost 6.55 6.19 6.69 6.18 Interest spread 7.62% 8.40% 7.49% 8.27% Year-to-date finance charges increased 12% from the prior year period due to the increase in our average finance receivables, partially offset by the decline in yield. Interest expense increased for the same period due to increases in average debt outstanding and higher borrowing costs. Interest spread decreased in 2000 due to the combined effect of the decline in yield and the increase in our borrowing cost. Other Income. Other income consists primarily of insurance premiums for credit insurance policies and net investment income. The increase in other income of $10 million, or 5%, was due to increased premium production resulting from greater loan volume and higher net investment income from an increase in invested assets. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Credit Quality. Net charge-off and delinquency ratios reflect the quality of our finance receivables portfolio, the success of our collection efforts, and general economic conditions. Credit quality information was as follows: Nine Months Ended Quarter Ended September 30, September 30, 2000 1999 2000 1999 Charge offs $ 147 $ 150 $ 50 $ 50 Delinquencies 406 393 Allowance for losses 383 386 Ratios Charge-off 1.73% 2.04% 1.72% 2.02% Delinquency 3.33 3.67 Allowance 3.29 3.80 Charge-off coverage 1.96x 1.93x 1.91x 1.92x Risk-adjusted yield 12.44% 12.55% 12.46% 12.43% The decrease in the charge-off ratio reflects the result of past and ongoing credit quality improvement efforts. Delinquencies are finance receivables which are 60 days or more past due. Delinquencies increased while the delinquency ratio decreased at September 30, 2000, compared to September 30, 1999, due to increased receivables, improved credit quality, and the sale of $27 million of fully-reserved receivables in first quarter 2000. The allowance for finance receivable losses is maintained at an amount that we believe is adequate to absorb anticipated charge offs in our existing portfolio. The allowance as a percentage of finance receivables has continued to decline as the portfolio has grown, reflecting improved credit quality. We have maintained a slightly higher year-to-date charge-off coverage ratio at 2 times annual charge offs. Risk-adjusted yield represents the yield on finance receivables less the charge-off ratio. Risk-adjusted yield declined from the nine months ended September 30, 1999; however, the decrease is less than the decline in yield on finance receivables due to the improvement in the charge-off ratio. The risk adjusted yield for third quarter 2000 improved slightly from the prior year quarter due to an improved charge-off ratio, offset by a decline in yield. Operating Expenses. Operating expenses as a percentage of average finance receivables for the first nine months of 2000 improved to 4.42% from 4.96% for the same period of 1999. This decrease reflects a 15% increase in average finance receivables compared to a 2% increase in operating expenses. INVESTMENTS Our invested assets consisted primarily of fixed maturity securities (87%), mortgage loans on real estate (5%), short-term investments (3%), and policy loans (3%) at September 30, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Fair Value of Securities. At September 30, 2000, the market value of our fixed maturity securities was 97.7% of amortized cost compared to 97.2% of amortized cost at December 31, 1999. The negative fair value adjustment on our fixed maturity securities portfolio decreased by $248 million, with a related $188 million positive adjustment to shareholders' equity. The components of the fair value adjustment at September 30, 2000 and December 31, 1999, and the nine month change, were as follows: September 30, December 31, 2000 1999 Change Fair value adjustment to fixed maturity securities $(1,502) $(1,750) $ 248 Related increase in DPAC/CIP 389 347 42 Related decrease in deferred income taxes 393 495 (102) Valuation allowance on deferred tax asset (381) (381) - Net unrealized losses Fixed maturity securities (1,101) (1,289) 188 Other - 11 (11) Net unrealized losses on securities $(1,101) $(1,278) $ 177 Fixed Maturity Securities. At September 30, 2000, our fixed maturity securities investment portfolio consisted of $47.1 billion of corporate bonds, $13.6 billion of mortgage-backed securities, and $2.1 billion of bonds issued by governmental agencies. The average credit rating of the portfolio was A at September 30, 2000 and A+ at December 31, 1999. Average ratings by category at September 30, 2000 were as follows: September 30, Average Credit 2000 % Rating Investment grade $45,804 72% A Mortgage-backed 13,579 22 AAA Below investment grade 3,465 6 B+ Total fixed maturity securities $62,848 100% A Investment income from our below investment grade securities was $291 million (10.3% yield) for the nine months ended September 30, 2000 and $264 million (9.9% yield) for the same period in 1999. Realized investment losses on below investment grade securities were $110 million and $83 million for the nine months ended September 30, 2000 and 1999, respectively. Non-performing bonds were less than .1% of total fixed maturity securities at September 30, 2000 and December 31, 1999. We classify bonds as non-performing when the payment of interest is sufficiently uncertain as to preclude accrual of interest. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Assets Under Management. Assets under management, which include invested assets, separate account assets, finance receivables, and mutual funds, increased to $118 billion at September 30, 2000 from $102 billion at September 30, 1999. The 16% increase over the prior year was due to growth in separate account assets and invested assets, as well as mutual funds under management. Mutual funds under management increased $2.1 billion to $2.9 billion, primarily from our acquisition of the North American Funds, a family of 16 sub-advised mutual funds, in first quarter 2000. CAPITAL RESOURCES Corporate Capital. The level of our corporate capital is determined primarily by the required equity of our business divisions. The mix of corporate capital between debt and equity is influenced by our overall corporate strategy and structure. Our target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. The amount and mix of our corporate capital at September 30, 2000 and December 31, 1999 were as follows: September 30, December 31, 2000 1999 Corporate capital* $13,291 $12,768 Corporate debt 24.5% 24.4% Redeemable equity 14.8 15.1 Shareholders' equity 60.7 60.5 *Excludes fair value adjustment under SFAS 115. Corporate Debt. On August 11, 2000, we issued $250 million of Senior Notes due August 11, 2010, which bear interest at 7-1/2%. Net proceeds of $246 million were used to reduce short-term debt. Redeemable Equity. On June 27, 2000, we issued $300 million of 8-1/2% preferred securities. Net proceeds of $295 million were used to reduce short- term debt. On June 30, 2000, holders of approximately 5 million shares of our 6% convertible preferred securities converted their securities into 6.1 million shares of American General common stock. The conversion rights expired for the remaining shares and we exercised our right to redeem these shares on August 31, 2000. Shareholders' Equity. On March 1, 2000, we redeemed all outstanding shares of our mandatorily convertible preferred stock, with a stated value of $85 million. Holders received .8264 share of our common stock for each share of preferred stock redeemed, for a total of 1.9 million common shares. We use share repurchases as a means of maintaining our target capital structure. We repurchased 5.2 million shares for $316 million in the nine months ended September 30, 2000 and 1.0 million shares for $73 million in third quarter 2000. Since 1987, American General has repurchased 127.7 million common shares for an aggregate cost of $3.5 billion. Our future repurchase activity will be based on the company's corporate development activities, capital management strategy, and fluctuations in our common stock price. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Retirement Services and Life Insurance. The amount of statutory equity required to support the business of our retirement services and life insurance companies is principally a function of four factors: (1) quantity and quality of assets invested to support insurance and annuity reserves, (2) mortality and other insurance-related risks, (3) interest-rate risk resulting from potential mismatching of asset and liability durations, and (4) general business risks. Each of these items is a key factor in the National Association of Insurance Commissioners' risk-based capital (RBC) formula, used to evaluate the adequacy of a life insurance company's statutory equity. We currently manage the statutory equity of our principal retirement services and life insurance companies to a target of 2.5 times the Company Action Level RBC (or 5.0 times the Authorized Control Level RBC). We adjust dividends from, or contributions to, these companies to maintain this target. At September 30, 2000, our principal retirement services and life insurance companies had statutory equity in a range of 2.4 to 3.3 times the Company Action Level RBC, with a weighted-average of 2.6 times. Consumer Finance. The capital of our consumer finance division varies directly with the level of its finance receivables. This capital, totaling $12.4 billion at September 30, 2000, consisted of $1.6 billion of equity and $10.8 billion of consumer finance debt, which was not guaranteed by American General. The capital mix of consumer finance debt and equity is based upon maintaining leverage at a level that supports cost-effective funding. The consumer finance division's target ratio of debt to tangible net worth, a standard measure of financial risk in the consumer finance industry, is currently 7.5 to 1. The ratio was 7.5 to 1 at September 30, 2000 and 7.6 to 1 at December 31, 1999. LIQUIDITY Our overall liquidity is based on cash flows from the business divisions and our ability to borrow in both the long-term and short-term markets at competitive rates. At September 30, 2000, we had committed and unused credit facilities of $6.2 billion, substantially all of which were to support the company's commercial paper borrowings. We believe that our overall sources of liquidity will continue to be sufficient to satisfy our foreseeable financial obligations. Corporate Operations. The primary sources of cash for corporate operations include net dividends from our business divisions and the proceeds from issuances of debt and redeemable equity. Corporate operations use cash to pay dividends to shareholders, to pay interest on corporate debt and dividends on preferred securities, to repurchase common stock, and to pay other corporate expenses. We expect to fund future acquisitions and maturities of debt and preferred securities through external sources, while maintaining our capital structure. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Net dividends received from our business divisions were as follows: Nine Months Ended September 30, 2000 1999 Dividends received Retirement Services $ 139 $ 124 Life Insurance 339 381 Consumer Finance 43 164 Total received 521 669 Contributions paid Retirement Services 83 21 Life Insurance 133 247 Total paid 216 268 Net dividends received $ 305 $ 401 Dividends received from our life insurance division declined in 2000 since additional capital was required to support its target capital level and new business growth. Dividends received from our consumer finance division also declined in 2000 because the division retained capital to support its purchase of a non-real estate portfolio in second quarter 2000. The life insurance division received contributions in 2000 and 1999 to partially fund the industrial life insurance litigation and the market conduct litigation settlements, respectively. Retirement Services. Principal sources of cash for our retirement services division were as follows: Nine Months Ended September 30, 2000 1999 Cash from operating activities $1,394 $1,228 Fixed policyholder account deposits, net of withdrawals 574 1,093 Variable account deposits, net of withdrawals 1,963 1,867 Mutual fund deposits, net of withdrawals 403 28 Short-term collateralized financings 1,394 643 The increase in net variable account and mutual fund deposits and the decline in net fixed policyholder account deposits period over period resulted from policyholders continuing to seek higher returns in equity-based investments, as well as new variable product introductions. Because the investment risk on variable accounts and mutual fund products lies predominately with the policyholder, deposits and withdrawals related to separate accounts and mutual funds are not included in the company's cash flow statement. The increase in cash from short-term collateralized financings relates to the company's expanded use of dollar rolls as part of our investment strategy. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. The division also paid net dividends of $56 million to the parent in the first nine months of 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Life Insurance. Principal sources of cash for our life insurance division were as follows: Nine Months Ended September 30, 2000 1999 Cash from operating activities $ 59 $209 Fixed policyholder account deposits, net of withdrawals (87) 184 Variable account deposits, net of withdrawals 584 567 Short-term collateralized financings 819 404 The $271 million decline in net fixed policyholder account deposits and the increase in net variable account deposits in the first nine months of 2000 compared to 1999, resulted from policyholders seeking higher returns from equity-based investments, new variable product introductions, and the transfer of lump sum fixed deposits to variable accounts, partially offset by lower corporate market deposits. The increase in short-term collateralized financings relates to our expanded use of dollar rolls. The division's major use of cash was the net purchase of investments necessary to support increases in insurance and annuity liabilities. In the first nine months of 2000, the division paid net dividends of $206 million to the parent. Consumer Finance. Principal sources of cash for our consumer finance division were as follows: Nine Months Ended September 30, 2000 1999 Cash from operating activities $409 $377 Increase in debt 569 560 Net cash provided by operating activities increased $32 million in 2000 compared to 1999 due to the increase in finance charges from higher average net receivables. Cash generated by borrowings increased due to higher growth in finance receivables in 2000. The division's major use of cash was to fund finance receivables growth. Net cash used to fund finance receivables was $796 million in the first nine months of 2000, compared to $667 million in the first nine months of 1999. The division paid dividends of $43 million to the parent in 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). FORWARD-LOOKING STATEMENTS All statements, trend analyses, and other information contained herein relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "target," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. We have made these forward-looking statements based upon our current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that we anticipated. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: (1) changes in general economic conditions, including the performance of financial markets and interest rates; (2) customer responsiveness to both products and distribution channels; (3) competitive, regulatory, accounting, or tax changes that affect the cost of, or demand for, our products; (4) our ability to secure necessary regulatory approvals, including approvals for dividends and products; 5) our ability to realize projected expense savings; (6) adverse litigation or arbitration results or resolution of litigation or arbitration, including proceedings related to industrial life insurance, satellite dish financing, and workers' compensation insurance; and (7) the formation of strategic alliances or business combinations among our competitors or business partners. Investors are also directed to other risks and uncertainties discussed in documents we filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Our exposure to market risk is primarily related to changes in interest rates. Quantitative and qualitative disclosures about our market risk resulting from changes in interest rates are included in the section titled "Asset/Liability Management" of Management's Discussion and Analysis in our 1999 Annual Report to Shareholders. There have been no material changes in such risks or our asset/liability management program during the nine months ended September 30, 2000. See Note 4 of the financial statements for information about significant derivative financial instrument activity during the year. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Refer to Note 10 of Notes to Consolidated Financial Statements included in Part I of this Form 10-Q for the quarter ended September 30, 2000. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. 3 Amended and Restated Bylaws of American General 10.1 Amendment to American General Corporation 1994 Stock and Incentive Plan (November 2000) 10.2 Amendment to American General Corporation 1997 Stock and Incentive Plan (November 2000) 10.3 Amendment to American General Corporation 1999 Stock and Incentive Plan (November 2000) 11 Computation of Earnings per Share (included in Note 3 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule b. Reports on Form 8-K. The following reports on Form 8-K were filed after June 30, 2000: 1) Current Report on Form 8-K dated August 8, 2000, with respect to authorization for issuance in an underwritten public offering of $250 million aggregate principal amount of the company's 7-1/2% Notes Due 2010. 2) Current Report on Form 8-K dated October 30, 2000, with respect to authorization for issuance in an underwritten public offering of an additional $250 million aggregate principal amount of the company's 7-1/2% Notes Due 2010. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 13, 2000. AMERICAN GENERAL CORPORATION (Registrant) By: NICHOLAS R. RASMUSSEN Nicholas R. Rasmussen Executive Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) EXHIBIT INDEX Exhibit 3 Amended and Restated Bylaws of American General 10.1 Amendment to American General Corporation 1994 Stock and Incentive Plan (November 2000) 10.2 Amendment to American General Corporation 1997 Stock and Incentive Plan (November 2000) 10.3 Amendment to American General Corporation 1999 Stock and Incentive Plan (November 2000) 11 Computation of Earnings per Share (included in Note 3 of Notes to Consolidated Financial Statements) 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 27 Financial Data Schedule EX-3 2 0002.txt Amended and Restated Bylaws (as of November 2, 2000) of American General Corporation Houston, Texas [LOGO OF AMERICAN GENERAL APPEARS HERE] AMENDED AND RESTATED BYLAWS OF AMERICAN GENERAL CORPORATION ARTICLE I. Capital Stock SECTION 1. Certificates for Shares. The certificates for shares of the capital stock of the company shall be in such form as shall be approved by the board of directors. The certificates shall be signed by the chairman of the board or president, and also by the secretary, and may be sealed with the seal of the company or a facsimile thereof. Where any such certificate is countersigned by a transfer agent, or registered by a registrar, either of which is other than the company itself or an employee of the company, the signatures of the chairman of the board or president and of the secretary may be facsimiles. The certificates shall be consecutively numbered and shall be entered on the stock records of the company as they are issued, and each shall exhibit the holder's name and the number of shares. SECTION 2. Transfer of Shares. The shares of stock of the company shall be transferable only on the stock records of the company by the registered holders thereof in person or by their duly authorized attorneys or legal representatives, upon surrender of certificates representing such shares duly endorsed or in proper form for transfer, with appropriate evidence of authority to transfer, and cancellation thereof. SECTION 3. Fixing of Record Date; Closing of Transfer Books. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, or for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days and, in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. In lieu of fixing a record date, the board of directors may provide that the stock transfer books of the company shall be closed for a stated period not to exceed, in any case, sixty (60) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided herein, such determination shall apply to any adjournment of the meeting except wherethe determination has been made through the closing of stock transfer books and the stated period of closing has expired. SECTION 4. Registered Shareholders. The company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person or entity, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Texas. SECTION 5. Lost, Destroyed, or Stolen Stock Certificates. No certificate for shares of stock in the company shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen except on production of evidence satisfactory to the board of directors, or such person or persons as it may designate, of such loss, destruction, or theft, and, if the board of directors so requires, upon the furnishing of an indemnity bond in such amount (but not to exceed twice the then-market value of the shares represented by the certificate) and with such terms and such surety or sureties as the board of directors may, in its discretion, require. SECTION 6. Regulations. The board of directors shall have the power and authority to make all such rules and regulations to the extent permitted by law, the articles of incorporation, and these bylaws, as it may deem expedient concerning the issue, transfer, registration, or replacement of certificates for shares of the capital stock of the company. ARTICLE II. Shareholders SECTION 1. Annual Meeting. The annual meeting of the shareholders shall be held at such hour as shall be designated by the board of directors either (i) on the last business day of April of each year, or (ii) on such other date, not more than thirteen (13) months after the last preceding annual meeting, as the board of directors shall designate, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. SECTION 2. Special Meetings. A special meeting of shareholders for any purpose or purposes may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request therefor, stating the purpose or purposes of the meeting, delivered to such officer, signed by the holders of at least ten percent (10%) of the issued and outstanding shares entitled to vote at such meeting. Only such business as shall be stated or indicated in the notice of the meeting shall be transacted at any such special meeting of shareholders. SECTION 3. Place. The annual meeting of shareholders may be held at any place as may be designated in the call of the meeting. Meetings of shareholders shall be held at the principal office of the company unless another place is designated for a meeting in the manner provided herein. SECTION 4. Notice. Written or printed notice stating the place, day, and hour of each meeting of shareholders, and in case of a special meeting the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the officer calling the meeting, to each shareholder of record entitled to vote at such meeting. SECTION 5. Quorum and Vote of Shareholders. Except as may be otherwise provided by law or the articles of incorporation, no meeting of shareholders shall elect directors, or transact other business of the company, unless there shall be present, in person or by proxy, a quorum, which is defined as the holders of a majority of the issued and outstanding shares of capital stock of the company entitled to vote at the meeting. Directors shall be elected by a plurality of the votes cast by the holders of shares entitled to vote in the election of directors at a meeting of shareholders at which a quorum is present. With respect to any matter other than the election of directors, the act of the shareholders shall be the affirmative vote of the holders of a majority of the shares entitled to vote on, and that voted for or against, the matter at a meeting of shareholders at which a quorum is present, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. The shareholders present at any meeting, though less than a quorum, may adjourn the meeting, and any business may be transacted at the adjourned meeting that could have been transacted at the original meeting. No notice of adjournment, other than the announcement at the meeting, need be given. SECTION 6. Proxies. At any meeting of shareholders, a shareholder may vote either in person or by proxy executed in writing in any manner permitted by law or by any other media permitted by law. Such proxies shall be filed with the secretary of the company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless it conspicuously states that it shall be irrevocable and it is otherwise in conformance with applicable law, or unless it is otherwise made irrevocable by law. SECTION 7. Voting of Shares. Except as otherwise provided in the articles of incorporation, each outstanding share of a class of stock entitled to vote upon a matter submitted to a vote at a meeting of shareholders shall be entitled to one vote on such matter. Votes for directors, and upon demand of any shareholder votes upon any question before a meeting, shall be by ballot. SECTION 8. Presiding Officer and Secretary. The chairman of the board, or in his absence the president, shall preside at each meeting of shareholders. In the absence of both, a chairman selected by the board of directors from among the directors present shall preside. The records of each meeting shall be kept by the secretary, or in his absence an assistant secretary, or in the absence of both, a person appointed by the chairman of the meeting. SECTION 9. List of Shareholders. A complete list of shareholders entitled to vote at each shareholders' meeting, arranged in alphabetical order, with the address of each and number of shares of each class and series of stock held by each, shall be prepared by the secretary and filed at the registered office of the company, and shall be subject to inspection by any shareholder during usual business hours for a period of ten (10) days prior to such meeting. It shall be produced at such meeting and shall at all times during such meeting be subject to inspection by any shareholder. SECTION 10. Inspectors of Election. The chairman of each meeting of shareholders shall appoint a committee to act as inspectors of election. Such committee shall report to the meeting the number of shares of each class and series of stock, and of all classes, represented by proxy and shall prepare a list showing the total number of shares of each class and series of stock, and of all classes, represented either in person or by proxy. The inspectors of election shall oversee the vote of the shareholders for the election of directors and for any other matters that are put to a vote of shareholders at the meeting; receive a ballot evidencing votes cast by the proxy committee; judge the qualifications of shareholders voting; collect, count, and report the results of ballots cast by any shareholders voting in person; and perform such other duties as may be required by the chairman of the meeting or the shareholders. SECTION 11. Nature of Business at Meetings of Shareholders. No business may be transacted at an annual meeting of shareholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the board of directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by a shareholder of the company (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 11 and on the record date for the determination of shareholders entitled to vote at such annual meeting, and (ii) who complies with the notice procedures set forth in this Section 11. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to the secretary of the company. To be timely, a shareholder's notice to the secretary must be delivered to or mailed and received at the principal executive offices of the company not less than one hundred and twenty (120) days nor more than one hundred and fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a shareholder's notice to the secretary must set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such shareholder, (iii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by such shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and any material interest of such shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. No business shall be conducted at the annual meeting of shareholders except business brought before the annual meeting in accordance with the procedures set forth in this Section 11; provided, however, that, once business has been properly brought before the annual meeting in accordance with such procedures, nothing in this Section 11 shall be deemed to preclude discussion by any shareholder of any such business. If the chairman of an annual meeting determines that business was not properly brought before the annual meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. ARTICLE III. Board of Directors SECTION 1. Number, Term of Office, Nomination, Vacancy and Removal. The business affairs and property of the company shall be managed and controlled by the board of directors, and, subject to the restrictions imposed by law, by the articles of incorporation, or by these bylaws, the board of directors may exercise all of the powers of the company. (a) Number. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of the directors of the company shall be fixed from time to time by the board of directors but shall not be fewer than three (3) nor more than twenty-five (25). Within these limits, the number of directors may be increased or decreased (provided that any decrease does not shorten the term of any incumbent director) from time to time by resolution of the board of directors. Directors must be shareholders, but they need not be residents of the State of Texas. (b) Election and Terms. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect additional directors under specified circumstances, directors shall be elected at the annual meeting of the shareholders. Each director shall serve until the next annual meeting and until his successor shall have been elected and qualified, or until his earlier death, resignation, or removal; provided, however, that the term of any director who is also an officer of the company or of any subsidiary of the company shall simultaneously terminate when that director ceases, for whatever reason, to be an officer of the company or of any subsidiary of the company, unless the board of directors, in its discretion and upon resolution adopted by a majority of the remaining directors then in office, waives the applicability hereof. (c) Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the company, except as may be otherwise provided in the articles of incorporation with respect to the right of holders of preferred stock of the company to nominate and elect a specified number of directors in certain circumstances. Nominations of persons for election to the board of directors may be made at any annual meeting of shareholders, or at any special meeting of shareholders called for the purpose of electing directors, (a) by or at the direction of the board of directors (or any duly authorized committee thereof) or (b) by any shareholder of the company (i) who is a shareholder of record on the date of the giving of the notice provided for in this Section 1(c) and on the record date for the determination of shareholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 1(c). In addition to any other applicable requirements, for a nomination to be made by a shareholder, such shareholder must have given timely notice thereof in proper written form to the secretary of the company. To be timely, a shareholder's notice to the secretary must be delivered to or mailed and received at the principal executive offices of the company (a) in the case of an annual meeting, not less than one hundred and twenty (120) days nor more than one hundred fifty (150) days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a shareholder's notice to the secretary must set forth (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder; and (b) as to the shareholder giving the notice (i) the name and record address of such shareholder, (ii) the class or series and number of shares of capital stock of the company which are owned beneficially or of record by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the company unless nominated in accordance with the procedures set forth in this Section 1(c). If the chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. (d) Vacancies. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect directors under specified circumstances, any vacancies on the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors. Any director so elected by the board of directors to fill a vacancy shall hold office for the remainder of the full term of the director whose departure from the board created the vacancy. A directorship to be filled by reason of an increase in the number of directors by action of the board of directors (within the limits set forth in paragraph (a) of Section 1 of this article) may be filled by the board of directors for a term of office continuing only until the next election at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, that the board of directors shall not fill more than two such directorships during the period between two successive annual meetings of shareholders. (e) Removal. Subject to the rights of any class or series of stock having a preference over the Common Stock of the company as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office, with or without cause, only by the affirmative vote of the holders of at least seventy-five percent (75%) of the combined voting power of the then outstanding shares of all classes of stock of the company entitled to vote generally in the election of directors, voting together as a single class. SECTION 2. Annual Meeting. Each newly elected board of directors shall hold its first meeting immediately following the annual meeting of shareholders each year, for the purposes of organization, the election of a chairman of the board from among their number, the election of officers of the company, and the transaction of such other business as may properly come before such meeting, and no notice of such meeting shall be necessary. SECTION 3. Regular Meetings. In addition to the annual meeting of the board of directors, at least four (4) regular meetings shall be held in each year at the time and place designated by the chairman of the board, for the purpose of transacting any business within the powers of the board. Notice of such regular meetings shall be given as provided herein. SECTION 4. Special Meetings. A special meeting of the board of directors shall be held whenever called by the chief executive officer or by the secretary on the written request of any five (5) of the directors, and at such time and place as may be specified in the notice thereof. Such notice, or any waiver pursuant to Article VII, Section 6 hereof, need not state the purpose or purposes of such meeting. SECTION 5. Notice. The secretary shall give notice to each director of each regular and special meeting in person or by mail or by any form of telecommunication, at least twenty-four (24) hours before the meeting, or such shorter notice as the person or persons calling the meeting deems appropriate in the circumstances. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting has not been lawfully called or convened. SECTION 6. Quorum. A majority of the directors in office shall constitute a quorum for the transaction of business, but if at any meeting of the board of directors there is less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors, unless the act of a greater number is required by law, the articles of incorporation, or these bylaws. SECTION 7. Chairman of the Board. The chairman of the board shall preside at all meetings of the shareholders and of the board of directors; shall have authority to execute all legal instruments necessary for the transaction of the company's business; may sign certificates for shares of capital stock of the company; may be designated as chief executive officer as provided in these bylaws; and shall have such other responsibilities and powers as may be prescribed in these bylaws or from time to time by the board of directors. If he is not designated as chief executive officer, the chairman of the board shall have such powers and perform such duties as maybe delegated to him by the chief executive officer, and shall be vested with all the powers and authorized to perform all the duties of the chief executive officer in his absence or inability to act. SECTION 8. Order of Business and Officers at Meetings. At meetings of the board of directors, business shall be transacted in such order as the board may determine from time to time. At all meetings of the board of directors, the chairman of the board shall preside, and in the absence of the chairman of the board, a chairman shall be chosen by the board of directors from among the directors present. The secretary of the company shall act as secretary of all meetings of the board of directors, or in the absence of the secretary an assistant secretary shall so act; or in the absence of both, the presiding officer shall appoint any person to act as secretary of the meeting. SECTION 9. Compensation. Directors shall not receive any stated salary for their service as directors, but by resolution of the board of directors an annual retainer may be paid and a fixed sum and expenses of attendance, if any, may be allowed for attendance at any meeting of the board of directors; provided that nothing contained herein shall be construed to preclude any director from serving the company in any other capacity and receiving compensation therefor. SECTION 10. Presumption of Assent. A director of the company who is present at a meeting of the board of directors at which action on any company matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 11. Retirement. Unless the board of directors, in its discretion, waives the applicability of this provision, no person shall stand for election as a director following his seventieth birthday with the exception of any person who is serving, or has served, as chief executive officer of the company at any time, which person shall not be prevented by this provision from standing for election as a director for five years after retirement from the position of chief executive officer, or until the annual meeting following the attainment of age seventy-five, whichever shall first occur. Any director who is also an officer, other than the chief executive officer, of the company or an officer of any subsidiary of the company shall retire as provided in Section 1 of this article. ARTICLE IV. Committees of the Board of Directors SECTION 1. Executive Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members an executive committee of not fewer than three (3) nor more than ten (10) members, which committee shall have and may exercise all of the authority of the board of directors in the business and affairs of the company except where action of the full board of directors is specified by law. The chief executive officer shall be a member of the executive committee and shall be chairman of such committee. The executive committee shall meet at such times and places as may be fixed by the committee, or on the call of the chief executive officer, at such times and places as may be designated in the call of such meetings. The executive committee shall maintain a record of its proceedings and shall report to each regular meeting of the board of directors a summary of the actions taken by such committee since the last regular meeting of the board of directors. SECTION 2. Audit Committee. The following shall be the charter of the audit committee: (a) Membership. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members an audit committee of not fewer than three (3) nor more than ten (10) members, none of whom shall be an officer of the company or any of its subsidiaries, or have any relationship to the company or any of its subsidiaries that, in the opinion of the board of directors, would interfere with the exercise of independent judgment as a committee member. The chairman of the committee shall be elected by a majority of the full board of directors at the time the committee is elected or at such time as it becomes necessary to elect a new chairman because of the chairman's death, resignation or removal. Each member of the committee shall be financially literate, or shall undertake to become financially literate within a reasonable period of time after being elected to the committee, and at least one member shall have accounting or related financial management expertise, as these qualifications are determined in the opinion of the board of directors. (b) Process. The audit committee shall meet at such times and places as may be fixed by the committee, or on the call of its chairman, at such times and places as may be designated in the call of such meetings. The committee shall also meet promptly upon the request of the company's principal outside auditors. The committee shall maintain a record of its proceedings and shall report to the board of directors a summary of its activities not less frequently than twice each fiscal year, along with such recommendations as the committee deems appropriate. (c) Responsibilities. The audit committee shall have the following powers and duties: (1) subject to confirmation by the board of directors, to select, evaluate and, where appropriate, replace the principal outside auditors (or to nominate the principal outside auditors to be proposed for shareholder approval in any proxy statement); (2) to discuss with the principal outside auditors that the outside auditors are ultimately accountable to the board of directors and the audit committee; (3) to review at regular intervals audit arrangements for the company and its subsidiaries and the reports to be rendered; (4) to review in advance the plan and scope of the audit of the company and its subsidiaries to be performed by the principal outside auditors and the related estimate of fees, and to recommend such audit plan, scope, and fee estimate for board approval; (5) to review non-audit services and fees of the company's principal outside auditors, giving appropriate consideration to the possible effect on the auditors' independence of each non-audit service provided; (6) to ensure that the principal outside auditors submit to the committee at least annually a formal written statement delineating all relationships between the principal outside auditors and the company, and to review with the principal outside auditors any disclosed relationships or services that may impact the objectivity and independence of the outside auditors for the purpose of recommending, as necessary, that the board of directors take appropriate action to satisfy itself of the outside auditors' independence; (7) to review periodically with the company's principal outside auditors the accounting principles and policies of the company, including any matters required to be discussed by Statement on Auditing Standards No. 61, as it may be amended or supplemented; (8) to review periodically with the company's principal outside auditors such matters relating to the internal auditing systems and procedures and the internal accounting controls of the company and its subsidiaries as the committee or the board of directors may determine to be necessary or desirable; (9) to review periodically the coordination between the company's principal outside auditors and the company's internal audit staff, and to review with the company's principal outside auditors, upon completion of their audit, their findings and recommendations and the responses of the company's management to such findings and recommendations; (10) to review and discuss with management the company's audited financial statements; (11) to recommend to the board of directors that the audited financial statements presented to the audit committee be included in the company's annual report on Form 10-K; (12) to periodically review the company's corporate responsibility program and receive information and assurances from management as to its effectiveness; (13) to conduct from time to time, or cause to be conducted, such investigations or inquiries relating to the committee's responsibilities, including accounting or audit matters, as the facts presented to the committee warrant and as the committee may deem necessary or appropriate in the interest of the company and its shareholders; (14) to confer with and direct the officers of the company to the extent necessary to exercise the committee's powers and to carry out its duties; (15) to meet with representatives of any outside auditors of the company and/or its internal audit staff in the absence of management, whenever the committee deems such to be appropriate; and (16) to perform such additional duties as may be assigned to the committee by the board of directors. SECTION 3. Personnel Committee. The board of directors, acting by resolution adopted by a majority of the full board of directors, may elect from among its members a personnel committee of not fewer than three (3) nor more than ten (10) members, none of whom shall be an officer of the company or of any of its subsidiaries during the time of service on this committee. The chairman of the committee shall be elected by a majority of the full board of directors at the time the committee is elected or at such time as it becomes necessary to elect a new chairman because of the chairman's death, resignation or removal. The committee shall meet at such times and places as may be fixed by the committee, or on the call of its chairman, at such times and places as may be designated in the call of such meetings. The committee shall maintain a record of its proceedings and shall report to each regular meeting of the board of directors a summary of the actions taken by the committee since the last regular meeting of the board of directors. The personnel committee shall have the following powers and duties: (a) to review the relationship of the contribution of key officers and employees to the company's performance and prospects; (b) to review and approve and recommend to the board of directors for approval or ratification the annual salary of any officer of the company or of a subsidiary of the company whose annual salary is or will be of an amount which will place him or her among the twenty-five most highly salaried officers in the group; (c) to review and approve or ratify the annual salary of any officer or employee of the company or of a subsidiary of the company whose annual salary is or will be of an amount which will place him or her among the second twenty-five most highly salaried officers in the group; (d) to review and approve incentive compensation and other employee benefit programs; (e) to review key personnel issues; and (f) to perform such additional duties as may be assigned to the committee by the board of directors. SECTION 4. Other Committees. In addition to the executive, audit, and personnel committees, the board of directors may, by resolution adopted by a majority of the full board of directors, elect from among its own members such other committees as it shall deem to be appropriate, each of which shall have and may exercise that authority of the board of directors which shall have been delegated to it in the resolution creating such committee, except as may be prohibited by law. SECTION 5. Term of Office and Committee Size. The term of office of each member of any committee shall be the period designated by the board of directors, but shall not be longer than one year and until his successor shall be elected, unless such member shall be removed by the board of directors, as provided in this section, or the committee is dissolved by the board of directors. A member of any committee may be removed during the period between annual meetings by action of the majority of the full board of directors at any regular or special meeting. The membership of any committee elected by the board of directors may be increased or decreased during the period between annual meetings, subject to any limitations of this article, by action of the majority of the full board of directors at any regular or special meeting. SECTION 6. Quorum. A majority of the members of any committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at a meeting at which a quorum is present shall be the act of the committee. SECTION 7. Responsibility. The designation of any committee and the delegation thereto of authority shall not operate to relieve the board of directors, or any member thereof, of any responsibility imposed upon it or him by law. SECTION 8. Vacancies. The board of directors may fill all vacancies in any committee. ARTICLE V. Officers SECTION 1. Election and Term of Office. Only the board of directors shall elect the following officers of the company: chief executive officer, vice chairman, president and secretary. The chief executive officer, subject to ratification by the board of directors at its next regularly scheduled meeting or a special meeting called for that purpose, may appoint such other officers and agents as he may deem necessary, including one or more vice presidents, a general counsel, a controller, and a general auditor. The board of directors shall elect, or reaffirm the election of, all officers at least annually. No officer shall be given a contract of employment unless such contract is approved by the personnel committee of the board of directors. Each officer shall hold office for the term for which he is elected or appointed and until his successor shall have been duly elected or appointed and qualified, or until his death, resignation, or removal in the manner hereinafter provided. One person may hold more than one office except that the president shall not also hold the office of secretary. The chief executive officer shall be a director of the company, but no other officer need be a director. SECTION 2. Removal. Any officer who may be elected only by the board of directors may be removed only by the board of directors. Any officer who may be elected or appointed by either the board of directors or the chief executive officer may be removed by either the board of directors or the chief executive officer. Removal of any officer shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer shall not of itself create contract rights. SECTION 3. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term by the board of directors if the vacant office may be filled only by the board of directors,and otherwise may be filled by the board of directors or the chief excutive officer as provided in Section 1 of this article. SECTION 4. Chief Executive Officer. The board of directors shall designate either the chairman of the board or the president to be the chief executive officer of the company. All other officers of the company shall be subordinate to the chief executive officer and shall report to him as he may direct. The chief executive officer shall have responsibility for the general management and direction of the business of the company and for the execution of all orders and resolutions of the board of directors. In addition to the powers prescribed in these bylaws, he shall have all of the powers usually vested in the chief executive officer of a corporation and such other powers as may be prescribed from time to time by the board of directors. He may delegate any of his powers and duties to any other officer with such limitations as he may deem proper. SECTION 5. President. In the absence of the chairman of the board, the president shall preside at all meetings of the shareholders; shall have authority to execute all legal instruments necessary for the transaction of the company's business; may sign certificates for shares of capital stock of the company; and may be designated as chief executive officer, as provided in these bylaws. He may delegate such of his powers and duties to other officers with such limitations as he may deem proper. The president shall have such other powers and duties as may be prescribed in these bylaws or from time to time by the board of directors. If he is not designated as chief executive officer, the president shall have such powers and perform such duties as may be delegated to him by the chief executive officer, and shall be vested with all the powers and authorized to perform all the duties of the chief executive officer in his absence or inability to act. SECTION 6. Vice Chairman. Each vice chairman shall have authority to execute all legal instruments necessary for the transaction of the company's business; shall have such other powers and duties as may be delegated to him by the board of directors or the chief executive officer; and may exercise the powers of the president during his absence or inability to act. SECTION 7. Vice President. Each vice president shall have such powers and duties as may be delegated to him by the board of directors or the chief executive officer, or any authorized officers senior to the vice president. SECTION 8. Secretary. The secretary shall keep the minutes of all meetings of the board of directors, of the shareholders, and of the executive committee; shall issue all notices; may sign with the chairman of the board, the president, or a vice chairman in the name of the company all legal instruments necessary for the transaction of the company's business and affix the seal of the company thereto; shall sign with the chairman of the board or president all certificates for shares of the capital stock of the company; and shall have such other powers and duties as may be prescribed by the board of directors or the chief executive officer. SECTION 9. Treasurer. The treasurer shall have responsibility for the safekeeping and custody of all the funds and securities of the company; shall establish and execute programs for the provision of the capital required by the company, including negotiating the procurement of capital and maintaining the required financial arrangements; shall establish and maintain adequate sources for the company's short-term borrowings; shall establish and maintain liaison with investment bankers and financial analysts; shall establish and maintain banking arrangements; and shall have such other powers and duties as may be prescribed by the board of directors or the chief executive officer. SECTION 10. Powers and Duties of Assistant Secretaries. Each assistant secretary shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the secretary, and may exercise the powers of the secretary during that officer's absence or inability to act. Any action taken by an assistant secretary in the performance of the duties of the secretary shall be conclusive evidence of the absence or inability to act of the secretary at the time such action was taken. SECTION 11. Powers and Duties of Assistant Treasurers. Each assistant treasurer shall have the usual powers and duties pertaining to his office, together with such other powers and duties as may be assigned to him by the treasurer, and may exercise the powers of the treasurer during that officer's absence or inability to act. Any action taken by an assistant treasurer in the performance of the duties of the treasurer shall be conclusive evidence of the absence or inability to act of the treasurer at the time such action was taken. ARTICLE VI. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1. Actions. The company shall indemnify any person who was or is a named defendant or respondent or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative, or investigative (including any action by or in the right of the company), or any appeal of such action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding, by reason of the fact that he is or was a director, officer or employee of the company, or is or was serving at the request of the company as a director, officer, partner, venturer, proprietor, trustee, employee, or similar functionary of another foreign or domestic corporation or non-profit corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (any such person acting in any such capacity being hereinafter referred to as "potential indemnitee"), against judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement, and reasonable expenses (including court costs and attorneys' fees) actually incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed, (i) in the case of conduct in his official capacity as a director of the company, to be in the best interests of the company and (ii) in all other cases, to be not opposed to the best interests of the company; and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe his conduct was unlawful; provided, however, that in connection with any action, suit or proceeding in which the person shall have been adjudged to be liable to the company or liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity as a director or officer, (i) indemnification shall be limited to reasonable expenses (including court costs or attorneys' fees) actually incurred in connection with such proceeding, and (ii) indemnification shall be prohibited, if the person is found liable for willful or intentional misconduct in the performance of his duty to the company. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction, or on a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the company; and, with respect to any criminal action or proceeding, shall not create a presumption that the person had reasonable cause to believe that his conduct was unlawful. SECTION 2. Success on Merits or 0therwise. Where a potential indemnitee has been wholly successful, on the merits or otherwise, in defense of any such action, suit or proceeding, he shall be indemnified against reasonable expenses (including court costs and attorneys' fees) actually incurred by him in connection therewith. SECTION 3. Determination that Indemnification is Proper. Any indemnification under Section 1 of this article (unless otherwise ordered by a court of competent jurisdiction) shall be made by the company only as authorized in a specific case upon a determination that the applicable standard of conduct has been met. Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who at the time of the vote have not been named as defendants or respondents in such action, suit or proceeding, or (ii) if such a quorum cannot be obtained, by a majority vote of a committee of the board of directors, designated to act in the matter by a majority vote of all directors, consisting solely of two or more directors who at the time of the vote are not named defendants or respondents in such action, suit or proceeding, or (iii) by special legal counsel selected by the board of directors (or a committee thereof) by vote in the manner set forth in subparagraphs (i) and (ii) of this Section 3, or if such a quorum cannot be obtained and such a committee cannot be established, by a majority vote of all directors, or (iv) by the shareholders in a vote that excludes the shares held by any director who is named as a defendant or respondent in such action, suit or proceeding. SECTION 4. Expenses Prior to Final Disposition. Reasonable expenses incurred by a director, officer, or employee of the company or other person entitled to indemnity hereunder, who was, is or is threatened to be made a named defendant or respondent in any such action, suit or proceeding described in Section 1 shall be paid by the company in advance of the final disposition thereof upon receipt of a written affirmation by the director, officer, employee or other person of his good faith belief that he has met the standard of conduct necessary for indemnification under this article and a written undertaking by or on behalf of the director, officer, employee or other person to repay such amount if it is ultimately determined that the person has not met such necessary standard of conduct or that indemnification is prohibited by Section 1 of this article. Determinations with respect to payments under this Section 4 shall be made in the manner specified by Section 3 for determining that indemnification is permissible, except as otherwise provided by law. SECTION 5. Nonexclusive Rights-Continuance Beyond Tenure. The indemnification provided by this article shall not be deemed (i) to be exclusive of any other rights consistent with law to which the person indemnified may be entitled under the articles of incorporation of the company, bylaws, any general or specific action of the board of directors, agreement, authorization of shareholders, or otherwise, or as may be permitted or required by law, both as to action in his official capacity as a director and as to action in another capacity while holding such office, or (ii) to be a limitation upon the power of the company to indemnify and to advance expenses, consistent with law. The indemnification provided by this article shall continue as to a person who has ceased to be a director, officer, or employee of the company or other person entitled to indemnity hereunder or to serve in such other capacity in which he was entitled to indemnification hereunder, and shall inure to the benefit of his heirs and legal representatives. SECTION 6. Insurance Authorized. Subject to any restrictions now or hereafter established by applicable law, the company shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, or employee of the company or who is or was serving at the request of the company as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation or non-profit corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the company would have the power to indemnify him against that liability under the provisions of this article or the Texas Business Corporation Act. SECTION 7. Definitions. For purposes of this article, references to "the company" include any domestic or foreign predecessor entity of the company in a merger, consolidation, or other transaction in which the liabilities of the predecessor are transferred to the company by operation of law and in any other transaction in which the company assumes the liabilities of the predecessor but does not specifically exclude liabilities that are the subject matter of this article. For purposes of this article, references to "serving at the request of the company" shall include any service as a director, officer or employee of the company which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the company" as referred to in this article. SECTION 8. Expenses as Witness. Notwithstanding any other provision of this article, the company may pay or reimburse expenses incurred by any director, officer, or employee of the company or any other potential indemnitee hereunder in connection with his appearance as a witness or other participation in any action, suit or a proceeding described in Section 1 at a time when he is not a named defendant or respondent in such action, suit or proceeding. SECTION 9. Notice to Shareholders. Any indemnification of or advance of expenses to a director in accordance with this article shall be reported in writing to the shareholders of the company with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve-month period immediately following the date of the indemnification or advance. ARTICLE VII. Miscellaneous Provisions SECTION 1. Registered Office. Unless the board of directors otherwise determines, the registered office of the company, required by the Texas Business Corporation Act to be maintained in the State of Texas, shall be the principal place of business of the company, but such registered office may be changed from time to time by the board of directors in the manner provided by law and need not be identical to the principal place of business of the company. SECTION 2. Books and Records. Correct and complete books and records of account of the company and the minutes of the proceedings of its shareholders, board of directors, and each committee of its board of directors shall be kept at the registered office of the company. Records of the original issuance of shares issued by the company and of each transfer of those shares that have been presented for registration of transfer shall be kept at the registered office of the company or at the office of its principal transfer agent or registrar. A record of the past and present shareholders of the company, giving the names and addresses of all such shareholders and the number of shares of each class and series of stock held by each, shall also be kept at the registered office of the company or at the office of its principal transfer agent or registrar. Any books, records, and minutes may be in written form or in any other form capable of being converted into written form within a reasonable time. Any person who shall have been a holder of record of shares for at least six (6) months immediately preceding his demand, or who shall be the holder of record of at least five percent (5%) of all the outstanding shares of the company, upon written demand stating the purpose thereof, or any director of the company shall have the right to examine, in person or by agent, accountant, or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of account, minutes, and share transfer records, and to make extracts therefrom. SECTION 3. Action Without Meeting and Telephone Meetings. Any action permitted, or required by law, these bylaws, or the articles of incorporation of the company, to be taken at a meeting of the board of directors or of any committee thereof may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the board of directors or of such committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting. Subject to the notice requirements of these bylaws, members of the board of directors or of any committee created by the board of directors may participate in and hold a meeting of such board or committee by means of conference telephone or similar communications equipment, including teleconferencing via a satellite communications system, provided all persons participating in the meeting can hear each other. SECTION 4. Fiscal Year. The fiscal year of the company shall be the calendar year. SECTION 5. Seal. The seal of the company shall be such as from time to time may be approved by the board of directors. SECTION 6. Notice and Waiver of Notice. Whenever any notice is required to be given under the provisions of these bylaws, said notice shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed postpaid wrapper addressed to the person entitled thereto at his post office address, as it appears on the records of the company, and such notice shall be deemed to have been given on the day of such mailing. A waiver of notice, signed by the person or persons entitled to said notice, whether before or after the date and time stated therein, shall be deemed equivalent thereto. SECTION 7. Resignations. Any director or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the chairman of the board, the president, or the secretary. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. SECTION 8. Securities of Other Corporations. The board of directors shall by resolution designate the officers of the company who shall have power and authority to transfer, endorse for transfer, vote, or consent to or take any other action with respect to any securities of another issuer which may be held or owned by the company and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. SECTION 9. Investments and Loans. Investments and loans of the company shall be made pursuant and subject to the provisions of the law. SECTION 10. Execution of Contracts and Other Instruments. All contractual or obligatory undertakings, including but not limited to deeds, conveyances, transfers, and releases, shall be signed by, (a) the chairman of the board, the president, a vice chairman, or a vice president, or (b) any attorney-in-fact or agent of the company who has been, or at any time in the future may be, appointed by the chairman of the board, the president, a vice chairman, or a vice president, and by the company secretary or an assistant secretary. When necessary, such instruments may have the corporate seal affixed and may be attested by the secretary or an assistant secretary. Checks may be signed by the chairman of the board, the president, a vice chairman, a vice president, the secretary, the treasurer, or any other person who may be authorized by the board of directors or the chief executive officer. SECTION 11. Rules and Regulations. Rules and regulations for the conduct of the company's business not in conflict with these bylaws may be adopted by the executive committee by resolution duly recorded in the minutes of the committee; provided, however, that such action may be modified or abrogated by the board of directors. SECTION 12. Gender Neutrality. As used in these bylaws, terms denoting a specific gender such as "he," "him" or "his" shall be read to be gender inclusive of "she," "her" or "hers" as appropriate. ARTICLE VIII. Amendments Unless otherwise provided in the Articles of Incorporation, the power to alter, amend, or repeal these bylaws or adopt new bylaws shall be vested in the full board of directors subject, however, to repeal or change by action of the affirmative vote of the holders of at least seventy-five percent (75%) of the then outstanding shares of all classes of stock of the company entitled to vote generally in election of directors, voting together as a single class. EX-10 3 0003.txt AMENDMENT TO AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN AS AMENDED AND RESTATED AS OF FEBRUARY 8, 1994 AS FURTHER AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 WHEREAS, AMERICAN GENERAL CORPORATION, its shareholders and certain affiliates have heretofore adopted the above-captioned stock and incentive plan (as amended to date on January 20, 1999 and January 20, 2000, the "1994 Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the 1994 Plan allows AMERICAN GENERAL CORPORATION to amend the 1994 Plan (subject to the limitations expressed therein); NOW, THEREFORE, the 1994 Plan shall be amended effective as of November 2, 2000, as follows: 1. Subparagraph (d) of Section 2 shall be modified to read in its entirety, as follows: "(d) "Committee" means a committee of one or more directors of American General Corporation who are selected by the Board as provided in Section 4(a)." 2. The following new paragraph shall be added to Section 4: "(d) Special Committee. Notwithstanding the foregoing, the Board may select and appoint a special Committee comprised of one or more directors, which directors need not meet the qualifications set forth in Section 4(a), for issuance of Awards under the Plan to Employees of the Company; provided that the authority of such special Committee shall exclude awards to individuals who are either reporting persons for purposes of Section 16 of the Securities Exchange Act of 1934 or "covered employees" (or Employees designated as potential "covered employees") under Section 162(m) of the Code. Such special Committee shall have the powers of the Committee set forth in Section 4 for the limited purpose set forth in the preceding sentence." 3. As amended hereby, the 1994 Plan is specifically ratified and reaffirmed. EXECUTED by the undersigned officer as of November 2, 2000. AMERICAN GENERAL CORPORATION By: /S/ GARY D. REDDICK Name: Gary D. Reddick Title: Executive Vice President and Chief Administrative Officer EX-10 4 0004.txt AMENDMENT TO AMERICAN GENERAL CORPORATION 1997 STOCK AND INCENTIVE PLAN AS AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 WHEREAS, AMERICAN GENERAL CORPORATION, its shareholders and certain affiliates have heretofore adopted the above-captioned stock and incentive plan (as amended to date on January 20, 1999, the "Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the Plan allows AMERICAN GENERAL CORPORATION to amend the Plan (subject to the limitations expressed therein); NOW, THEREFORE, the Plan shall be amended effective as of November 2, 2000, as follows: 1. The following new paragraph shall be added to Section 4: "(d) Special Committee. Notwithstanding the foregoing, the Board may select and appoint a special Committee comprised of one or more directors, which directors need not meet the qualifications set forth in Section 4(a), for issuance of Awards under the Plan to Employees of the Company; provided that the authority of such special Committee shall exclude awards to individuals who are either reporting persons for purposes of Section 16 of the Securities Exchange Act of 1934 or "covered employees" (or Employees designated as potential "covered employees") under Section 162(m) of the Code. Such special Committee shall have the powers of the Committee set forth in Section 4 for the limited purpose set forth in the preceding sentence." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED by the undersigned officer as of November 2, 2000. AMERICAN GENERAL CORPORATION By: /S/ GARY D. REDDICK Name: Gary D. Reddick Title: Executive Vice President and Chief Administrative Officer EX-10 5 0005.txt SECOND AMENDMENT TO AMERICAN GENERAL CORPORATION 1999 STOCK AND INCENTIVE PLAN WHEREAS, AMERICAN GENERAL CORPORATION, its shareholders and certain affiliates have heretofore adopted the above-captioned stock and incentive plan (as amended to date, the "Plan") for the benefit of certain eligible individuals; and WHEREAS, Section 12 of the Plan allows AMERICAN GENERAL CORPORATION to amend the Plan (subject to the limitations expressed therein); NOW, THEREFORE, the Plan shall be amended effective as of November 2, 2000, as follows: 1. The following new paragraph shall be added to Section 4: "(d) Special Committee. Notwithstanding the foregoing, the Board may select and appoint a special Committee comprised of one or more directors, which directors need not meet the qualifications set forth in Section 4(a), for issuance of Awards under the Plan to Employees of the Company; provided that the authority of such special Committee shall exclude awards to individuals who are either reporting persons for purposes of Section 16 of the Securities Exchange Act of 1934 or "covered employees" (or Employees designated as potential "covered employees") under Section 162(m) of the Code. Such special Committee shall have the powers of the Committee set forth in Section 4 for the limited purpose set forth in the preceding sentence." 2. As amended hereby, the Plan is specifically ratified and reaffirmed. EXECUTED by the undersigned officer as of November 2, 2000. AMERICAN GENERAL CORPORATION By: /S/ GARY D. REDDICK Name: Gary D. Reddick Title: Executive Vice President and Chief Administrative Officer EX-12 6 0006.txt Exhibit 12 AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Nine Months Ended September 30, 2000 1999 Consolidated operations: Income before income tax expense and net dividends on preferred securities of subsidiaries ..........$1,175 $1,449 Fixed charges deducted from income Interest expense ................................. 681 566 Implicit interest in rents ....................... 18 18 Total fixed charges deducted from income ....... 699 584 Earnings available for fixed charges..........$1,874 $2,033 Fixed charges per above ............................$ 699 $ 584 Dividends on preferred stock and securities ........ 120 111 Combined fixed charges and preferred stock dividends ................................$ 819 $ 695 Ratio of earnings to fixed charges .......... 2.68 3.48 Ratio of earnings to combined fixed charges and preferred stock dividends ........... 2.29 2.93 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities of subsidiaries ........$1,175 $1,449 Corporate fixed charges deducted from income - corporate interest expense ..................... 188 169 Earnings available for fixed charges .........$1,363 $1,618 Corporate fixed charges per above ................$ 188 $ 169 Dividends on preferred stock and securities ...... 120 111 Combined corporate fixed charges and preferred stock dividends ....................$ 308 $ 280 Ratio of earnings to corporate fixed charges ................................. 7.26 9.55 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ......................... 4.43 5.78 Exhibit 12 (continued) AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Nine Months Ended September 30, 2000 1999 American General Finance, Inc.: Income before income tax expense .................... $ 233 $ 252 Fixed charges deducted from income Interest expense .................................. 514 420 Implicit interest in rents ........................ 12 11 Total fixed charges deducted from income......... 526 431 Earnings available for fixed charges .......... $ 759 $ 683 Ratio of earnings to fixed charges ........ 1.44 1.58 Exhibit 12 (continued) AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Quarter Ended September 30, 2000 1999 Consolidated operations: Income before income tax expense and net dividends on preferred securities of subsidiaries .......... $533 $488 Fixed charges deducted from income Interest expense ................................. 238 195 Implicit interest in rents ....................... 6 6 Total fixed charges deducted from income ....... 244 201 Earnings available for fixed charges.......... $777 $689 Fixed charges per above ............................ $244 $201 Dividends on preferred stock and securities ........ 41 38 Combined fixed charges and preferred stock dividends ................................ $285 $239 Ratio of earnings to fixed charges .......... 3.20 3.43 Ratio of earnings to combined fixed charges and preferred stock dividends ........... 2.74 2.89 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense and net dividends on preferred securities of subsidiaries ........ $533 $488 Corporate fixed charges deducted from income - corporate interest expense ..................... 64 58 Earnings available for fixed charges ......... $597 $546 Corporate fixed charges per above ................ $ 64 $ 58 Dividends on preferred stock and securities ...... 41 38 Combined corporate fixed charges and preferred stock dividends .................... $105 $ 96 Ratio of earnings to corporate fixed charges ................................. 9.39 9.36 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ......................... 5.73 5.69 Exhibit 12 (continued) AMERICAN GENERAL CORPORATION Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (Unaudited) ($ in millions) Quarter Ended September 30, 2000 1999 American General Finance, Inc.: Income before income tax expense .................... $ 96 $ 86 Fixed charges deducted from income Interest expense .................................. 181 144 Implicit interest in rents ........................ 4 4 Total fixed charges deducted from income......... 185 148 Earnings available for fixed charges .......... $281 $234 Ratio of earnings to fixed charges ........ 1.52 1.58 EX-27 7 0007.txt
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 62,848 0 0 361 3,773 217 72,640 309 0 6,611 123,202 64,540 343 378 2,353 14,031 1,970 0 882 6,065 123,202 2,903 4,054 (129) 1,437 4,128 510 (882) 1,175 401 698 0 0 0 698 2.80 2.76 0 0 0 0 0 0 0 ALL FIXED MATURITY SECURITIES ARE CLASSIFIED AS AVAILABLE-FOR-SALE AND RECORDED AT FAIR VALUE. INCLUDES COST OF INSURANCE PURCHASED (CIP). THE SUM OF POLICY LOSSES, UNEARNED PREMIUMS, POLICY-OTHER, AND POLICYHOLDER FUNDS COMPRISES INSURANCE AND ANNUITY LIABILITIES. CONSISTS OF NON-CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES. CONSISTS OF NET OF THE FOLLOWING: COST OF TREASURY STOCK; RETAINED EARNINGS, AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS). INCLUDES INSURANCE CHARGES. INCLUDES PRIMARILY FINANCE CHARGES ON FINANCE RECEIVABLES. CONSISTS OF AMORTIZATION OF POLICY ACQUISITION COSTS AND CIP, NET OF ACCRETION OF INTEREST. CONSISTS OF CAPITALIZATION OF POLICY ACQUISITION COSTS AND CIP. EXCLUDES $117 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $41 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
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