-----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, PlhtfXiVMkl6Z9VJnsZ0BTG6iKaxnRq7PJYq8v4l3obvH7KvWsh7anEV84vn+9PF 0ZTu0JAngX7ArC4WrRLAYA== 0000005103-98-000057.txt : 19980813 0000005103-98-000057.hdr.sgml : 19980813 ACCESSION NUMBER: 0000005103-98-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN GENERAL CORP /TX/ CENTRAL INDEX KEY: 0000005103 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [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: 98683864 BUSINESS ADDRESS: STREET 1: 2929 ALLEN PKWY CITY: HOUSTON STATE: TX ZIP: 77019 BUSINESS PHONE: 7135221111 10-Q 1 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 June 30, 1998 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 July 31, 1998, there were 253,099,226 shares (excluding shares held in treasury and by a subsidiary) of American General's Common Stock and 2,317,701 shares of American General's 7% Convertible Preferred Stock outstanding. AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 INDEX TO FORM 10-Q Page Part I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Statement of Income for the six months and quarters ended June 30, 1998 and 1997 . 2 Consolidated Balance Sheet at June 30, 1998 and December 31, 1997 ................................ 3 Consolidated Statement of Shareholders' Equity for the six months ended June 30, 1998 and 1997 ...... 4 Consolidated Condensed Statement of Cash Flows for the six months ended June 30, 1998 and 1997 ...... 5 Notes to Consolidated Financial Statements ......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 11 Part II. OTHER INFORMATION. Item 1. Legal Proceedings .................................. 25 Item 4. Submission of Matters to a Vote of Security Holders ............................................ 25 Item 5. Other Information .................................. 26 Item 6. Exhibits and Reports on Form 8-K ................... 26 AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. AMERICAN GENERAL CORPORATION Consolidated Statement of Income (Unaudited) (In millions, except per share data) Six Months Ended Quarter Ended June 30, June 30, 1998 1997 1998 1997 Revenues Premiums and other considerations. $ 1,769 $ 1,633 $ 891 $ 832 Net investment income ............ 2,506 1,973 1,280 1,002 Finance charges .................. 658 635 331 315 Realized investment gains ........ 5 14 4 20 Equity in earnings of Western National Corporation ............ - 26 - 13 Other ............................ 97 87 50 44 Total revenues ............... 5,035 4,368 2,556 2,226 Benefits and expenses Insurance and annuity benefits ... 2,510 2,123 1,286 1,083 Operating costs and expenses ..... 770 692 388 345 Commissions ...................... 504 424 255 214 Change in deferred policy acquisition costs and cost of insurance purchased ............. (84) (51) (50) (26) Provision for finance receivable losses .......................... 100 131 51 63 Interest expense Corporate ....................... 92 77 42 41 Consumer Finance ................ 246 226 124 113 Other charges Year 2000 costs ................. 17 6 8 4 Merger-related costs ............ - 272 - 272 Losses on sale of non-strategic assets ......................... - 113 - 113 Litigation settlement ........... - 50 - 50 Total benefits and expenses .. 4,155 4,063 2,104 2,272 Earnings Income (loss) before income tax expense, minority interest, and dividends on preferred securities ...................... 880 305 452 (46) Income tax expense ............... 316 180 165 56 Income (loss) before minority interest and dividends on preferred securities ............ 564 125 287 (102) Minority interest in net income of -2- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Western National Corporation .... 11 - - - Net dividends on preferred securities of subsidiaries ...... 45 39 23 22 Net income (loss) ............ $ 508 $ 86 $ 264 $ (124) Net income (loss) per share Basic ........................... $ 2.02 $ .34 $ 1.03 $ (.52) Diluted ......................... $ 1.97 $ .34 $ 1.01 $ (.52) Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Balance Sheet (Unaudited) (In millions, except share data) June 30, December 31, 1998 1997 Assets Investments Fixed maturity securities (amortized cost: $58,216; $44,961) ........................... $ 61,615 $47,747 Mortgage loans on real estate ................. 3,498 3,272 Equity securities (cost: $96; $93) ............ 114 116 Policy loans .................................. 2,256 2,156 Investment real estate ........................ 232 233 Other long-term investments ................... 253 176 Short-term investments ........................ 1,324 306 Total investments ......................... 69,292 54,006 Assets held in Separate Accounts ............... 14,297 11,482 Finance receivables, net ....................... 8,257 7,639 Deferred policy acquisition costs .............. 3,132 2,718 Cost of insurance purchased .................... 879 680 Goodwill ....................................... 1,558 677 Other assets ................................... 3,610 2,835 Investment in Western National Corporation ..... - 583 Total assets .............................. $101,025 $80,620 Liabilities Insurance and annuity liabilities .............. $ 60,860 $47,659 Liabilities related to Separate Accounts ....... 14,297 11,482 Debt (short-term) Corporate ($1,552; $575) ...................... 2,687 1,916 Consumer Finance ($3,610; $3,255) ............. 7,864 7,266 Income tax liabilities ......................... 1,626 1,380 Other liabilities .............................. 3,167 1,608 Total liabilities ......................... 90,501 71,311 Redeemable equity Company-obligated mandatorily redeemable preferred securities of subsidiaries holding solely company subordinated notes Non-convertible ............................. 1,480 1,479 Convertible ................................. 247 247 -3- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Total redeemable equity ................... 1,727 1,726 Shareholders' equity Convertible preferred stock (shares issued and outstanding: 2,317,701) ................... 85 85 Common stock (shares issued: 269,298,493; 259,135,053; outstanding: 253,132,936; 243,206,215) .................................. 929 326 Cost of treasury stock ......................... (660) (621) Retained earnings .............................. 6,943 6,624 Accumulated other comprehensive income ......... 1,500 1,169 Total shareholders' equity ................ 8,797 7,583 Total liabilities and equity .............. $101,025 $80,620 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Statement of Shareholders' Equity (Unaudited) (In millions, except per share data) Six Months Ended June 30, 1998 1997 Compre- Compre- hensive hensive Total Income Total Income Convertible preferred stock Balance at beginning and end of period ........................... $ 85 $ 85 Common stock Balance at beginning of period .... 326 572 Issuance for Western National Corporation acquisition .......... 580 - Valuation of stock options issued for acquisition .................. 37 - Retirement of USLIFE treasury shares ........................... - (346) Issuance of treasury shares ....... (14) 95 Balance at end of period .......... 929 321 Cost of treasury stock Balance at beginning of period .... (621) (860) Share repurchases ................. (78) (363) Retirement of USLIFE treasury shares ........................... - 346 Issuance for acquisition .......... - 304 Issuance under employee benefit plans and other .................. 39 36 Balance at end of period .......... (660) (537) -4- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Retained earnings Balance at beginning of period .... 6,624 6,420 Net income ........................ 508 $ 508 86 $ 86 Cash dividends (per share) Preferred stock ($1.29; $1.29) ... (3) (3) Common stock ($.75; $.70) ........ (186) (159) Balance at end of period .......... 6,943 6,344 Accumulated other comprehensive income Balance at beginning of period.... 1,169 627 Change in net unrealized gains (losses) on securities, net of reclassification adjustment ..... 331 331 (94) (94) Balance at end of period ......... 1,500 533 Comprehensive income (loss) ..... $ 839 $ (8) Total shareholders' equity ...... $8,797 $6,746 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) (In millions) Six Months Ended June 30, 1998 1997 Operating activities Net cash provided by operating activities ... $ 1,059 $ 929 Investing activities Investment purchases .............................. (5,290) (6,969) Investment dispositions and repayments ............ 4,625 6,489 Finance receivable originations and purchases ..... (3,069) (2,256) Finance receivable principal payments received .... 2,353 2,146 Disposition of non-strategic assets ............... - 733 Net increase in short-term investments ............ (386) (44) Acquisitions ...................................... (590) (283) Other, net ........................................ (152) (15) Net cash used for investing activities ...... (2,509) (199) Financing activities Retirement Services and Life Insurance Policyholder account deposits ................... 2,122 1,595 Policyholder account withdrawals ................ (2,231) (1,472) Net policyholder account deposits (withdrawals) ............................... (109) 123 Short-term collateralized financings ............ 446 - -5- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Total Retirement Services and Life Insurance. 337 123 Consumer Finance Net increase (decrease) in short-term debt ...... 355 (348) Long-term debt issuances ........................ 873 163 Long-term debt redemptions ...................... (632) (711) Total Consumer Finance ..................... 596 (896) Corporate Net increase in short-term debt ................. 882 135 Long-term debt redemptions ...................... (354) - Dividends on common and preferred stock ......... (189) (162) Common stock repurchases ........................ (74) (365) Issuance of preferred securities of subsidiaries. - 498 Other, net ...................................... 184 50 Total Corporate ............................ 449 156 Net cash provided by (used for) financing activities ..................... 1,382 (617) Net increase (decrease) in cash .................... (68) 113 Cash at beginning of period ........................ 263 176 Cash at end of period .............................. $ 195 $ 289 Supplemental disclosure of cash flow information: Cash paid during the period for Income taxes .................................... $ 143 $ 188 Interest Corporate ...................................... 98 67 Consumer Finance ............................... 240 254 Dividends on preferred securities of subsidiaries ................................... 68 59 -6- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 1. Financial Statements (continued). AMERICAN GENERAL CORPORATION Notes to Consolidated Financial Statements June 30, 1998 1. Accounting Policies. The accompanying unaudited consolidated financial statements of American General Corporation and its subsidiaries (American General or the company) 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 June 30, 1998, the consolidated results of operations for the three months and six months ended June 30, 1998 and 1997, and the consolidated shareholders' equity and cash flows for the six months ended June 30, 1998 and 1997. 2. New Accounting Standards. During first quarter 1998, the company adopted Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. American General elected to report comprehensive income and its components in the consolidated statement of shareholders' equity, which is included herein. Application of this statement did not change recognition or measurement of net income and, therefore, did not impact the company's consolidated results of operations or financial position. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which requires all derivative instruments to be recognized at fair value as either assets or liabilities in the balance sheet. Changes in the fair value of a derivative instrument are to be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. This statement is effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact on the company's consolidated results of operations or financial position. 3. Acquisitions. Western National. On February 25, 1998, the company acquired the remaining 54% equity interest of Western National Corporation (Western National) for $1.2 billion. The purchase price consisted of $580 million cash and 10.2 million shares of American General common stock. In addition, the company issued options to acquire 1.4 million shares of American General common stock to replace outstanding options to acquire Western National common stock. The fair value of these options, excluding options surrendered for $10 million cash pursuant to a pre- existing employment agreement, was $37 million. -7- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 1. Financial Statements (continued). Western National's results of operations and cash flows have been consolidated in the company's financial statements effective January 1, 1998. Earnings attributable to minority interests through February 25, 1998 have been reflected as a charge against consolidated income. The acquisition was accounted for using the purchase method, and the purchase price has been allocated to Western National's specific assets and liabilities based on management's best estimate of their fair values at the date of acquisition. Evaluation of fair values assigned to Western National's assets and liabilities (primarily related to insurance and annuity liabilities) is continuing, and allocation of the purchase price may be adjusted when additional information is available. The difference between the aggregate purchase price and the net assets acquired is attributed to goodwill that will be amortized on a straight- line basis over 40 years. Non-cash activities related to the acquisition that are not reflected in the consolidated condensed statement of cash flows for the six months ended June 30, 1998 were as follows: (In millions) Fair value of assets acquired $ 7,169 Liabilities assumed (5,962) Issuance of common stock (580) Fair value of stock options issued (37) Net cash paid $ 590 Western National is the parent of Western National Life Insurance Company, which changed its name to American General Annuity Insurance Company (American General Annuity) effective May 1, 1998. Provident. Effective April 30, 1998, the Retirement Services division of the company completed the acquisition of substantially all of the in- force individual annuity business of Provident Companies, Inc. (Provident) in a coinsurance transaction with a ceding commission of approximately $32 million. The transaction increased insurance and annuity liabilities by $2.3 billion. -8- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 1. Financial Statements (continued). 4. Calculation of Earnings Per Share. The calculation of basic and diluted earnings per share follows: Six Months Ended Quarter Ended (In millions, June 30, June 30, except share data) 1998 1997 1998 1997 Net income (loss) .... $508 $ 86 $264 $(124) Dividends on convertible preferred stock ............... (3) (3) (2) (2) Earnings available to common shareholders (a)..... 505 83 262 (126) Dividends on dilutive securities Convertible preferred securities of subsidiary, net of tax ............... 5 - 2 - Convertible preferred stock ............. 3 - 2 - Earnings available to common shareholders assuming dilution (b) ........ $513 $ 83 $266 $(126) Average shares outstanding (a) ..... 250,380,928 240,785,292 253,464,428 241,925,669 Dilutive securities Convertible preferred securities of subsidiary ........ 6,144,016 - 6,144,016 - Convertible preferred stock ............. 2,317,701 - 2,317,701 - Stock options ...... 1,276,659 1,114,004 1,634,096 - Average shares outstanding assuming dilution (b) ........ 260,119,304 241,899,296 263,560,241 241,925,669 Net income (loss) per share Basic .............. $2.02 $ .34 $1.03 $(.52) Diluted ............ $1.97 $ .34 $1.01 $(.52) (a) Used to compute basic earnings per share. (b) Used to compute diluted earnings per share. -9- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 1. Financial Statements (continued). 5. Investing Activities. Cash flows related to investing activities were as follows: Dispositions and Purchases Repayments Six Months Ended Six Months Ended (In millions) June 30, June 30, 1998 1997 1998 1997 Fixed maturity securities $5,103 $6,728 $4,264 $5,848 Mortgage loans 145 198 280 433 Equity securities 1 2 37 65 Other 41 41 44 143 Total $5,290 $6,969 $4,625 $6,489 6. Derivative Financial Instruments. During the six months ended June 30, 1998, the company purchased options to enter into interest rate swap agreements (swaptions) to limit its exposure to reduced spreads between investment yields and interest crediting rates should interest rates decline significantly over prolonged periods. These swaptions, with a total notional amount of $1.5 billion and strike rates ranging from 4.00% to 5.00%, expire during 1998 and 1999. During the six months ended June 30, 1998, the company entered into interest rate swap agreements with a total notional amount of $35 million. In addition, American General Annuity had interest rate swap agreements with a total notional amount of $120 million outstanding at the acquisition date, of which $80 million is outstanding at June 30, 1998. These interest rate swap agreements, which require the receipt of fixed rates and the payment of floating rates, were entered into to convert specific investment securities from a floating rate to a fixed rate basis. In June 1998, the company entered into a treasury rate lock agreement with a notional amount of $190 million to hedge against the risk of rising interest rates on an anticipated debt issuance expected to occur in 1998. Derivative financial instruments did not have a material effect on net investment income, interest expense, or net income during the six months ended June 30, 1998 or 1997. -10- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 1. Financial Statements (continued). 7. Dollar Rolls. American General has entered into dollar roll agreements as part of its strategy to increase investment yields. Dollar rolls are agreements to sell mortgage-backed securities (MBSs) and repurchase substantially the same securities at a specified price and date in the future. The dollar rolls are accounted for as short-term collateralized financings and are included in other liabilities. American General Annuity had outstanding dollar rolls of $520 million at the acquisition date. At June 30, 1998, the company had outstanding dollar roll agreements of $976 million, which were collateralized by MBSs with approximately the equivalent fair value. The average amount outstanding and the weighted average interest rate on dollar rolls for the six months ended June 30, 1998 were $828 million and 5.19%, respectively. 8. Legal Contingencies. Market Conduct. In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. Certain of American General's subsidiaries are defendants in such purported class action lawsuits filed since 1996, asserting claims related to pricing and sales practices. These claims are being defended vigorously by the subsidiaries. Given the uncertain nature of litigation and the early stages of this litigation, the outcome of these actions cannot be predicted at this time. American General nevertheless believes that the ultimate outcome of all such pending litigation should not have a material adverse effect on American General's consolidated financial position. It is possible that settlements or adverse determinations in one or more of these actions or other future proceedings could have a material adverse effect on American General's consolidated results of operations for a given period. No provision for any adverse determinations in this pending litigation has been made in the consolidated financial statements because the amount of the loss, if any, from these actions cannot be reasonably estimated at this time. Other. In addition to those lawsuits or proceedings disclosed herein, and in the company's 1997 annual report on Form 10-K, the company is a party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, the company believes 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 consolidated 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 jurisdictions like Alabama continues to create the potential for an unpredictable judgment in any given suit. -11- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 1. Financial Statements (continued). 9. Tax Return Examinations. American General and the majority of its subsidiaries file a consolidated federal income tax return. The Internal Revenue Service (IRS) has completed examinations of the company's tax returns through 1988 and has raised certain issues related to 1987 and 1988 that the company is currently contesting in the United States Tax Court. The IRS is currently examining the company's tax returns for 1989 through 1996. Although the final outcome of any issue raised is uncertain, the company believes that the ultimate liability, including interest, will not materially exceed amounts recorded in the consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This item presents specific comments on material changes to the company's consolidated results of operations, 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 11 of this Quarterly Report on Form 10-Q. OVERVIEW American General reported financial highlights as follows: Six Months Ended Quarter Ended (In millions, June 30, June 30, except share data) 1998 1997 1998 1997 Net income (loss) $ 508 $ 86 $ 264 $ (124) Net income (loss) per share (diluted) 1.97 .34 1.01 (.52) Revenues and deposits 8,876 6,890 4,450 3,487 Assets 101,025 77,387 101,025 77,387 Shareholders' equity 8,797 6,746 8,797 6,746 As discussed below, the acquisitions of Home Beneficial Life on April 16, 1997 and American General Annuity on February 25, 1998 affected the comparability of the company's year over year financial results. The reasons for any significant variations between the quarters ended June 30, 1998 and 1997 are the same as those discussed below for the respective six month periods, unless otherwise noted. -12- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). BUSINESS DIVISIONS To facilitate meaningful period-to-period comparisons, earnings of each business division include earnings from its business operations and earnings on that amount of equity considered necessary to support its business, and exclude non-recurring items and net realized investment gains. Division earnings were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1998 1997 1998 1997 Retirement Services $ 229 $ 127 $ 117 $ 64 Life Insurance 323 278 165 140 Consumer Finance 89 79 44 40 Division earnings $ 641 $ 484 $ 326 $ 244 Retirement Services Retirement Services division results were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1998 1997 1998 1997 Earnings $ 229 $ 127 $ 117 $ 64 Assets Investments 38,495 22,703 38,495 22,703 Separate Accounts 13,168 8,902 13,168 8,902 Sales Tax-qualified 786 744 395 323 Non-qualified 1,081 51 502 24 Deposits Fixed Tax-qualified 735 844 363 419 Non-qualified 1,026 - 477 - Variable (mainly tax-qualified) 1,152 862 601 441 Operating expenses 107 75 50 39 Earnings. Division earnings increased 81% for the six months ended June 30, 1998 compared to the same period in 1997. American General Annuity's operations, which were included in the division's results effective January 1, 1998, increased division earnings by $56 million. Earnings attributable to minority interests through February 25, 1998 are reported in corporate operations. Asset growth, higher investment income from prepayment of investments, and management of fixed investment spread also contributed to the -13- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). division's profitability. Asset growth, excluding $13.1 billion and $2.3 billion related to the acquisitions of American General Annuity and Provident, respectively, and the fair value adjustment related to the division's securities, was 18% from June 30, 1997 to June 30, 1998, and 11% from December 31, 1997. This growth was due to an increase in variable deposits in each of the division's primary markets, interest credited to fixed account deposits, and stock market appreciation on assets held in Separate Accounts. Sales and Deposits. American General Annuity, which primarily markets non- qualified fixed annuities through financial institutions, contributed $1.0 billion to sales and total deposits in the first six months of 1998. Excluding American General Annuity, 1998 year-to-date sales were 5% higher and second quarter 1998 sales were 21% higher than in the same periods in 1997. Excluding American General Annuity, total deposits increased 10% and variable account deposits increased 32% for the six months ended June 30, 1998 compared to the same period in 1997, as a result of new sales and customers' preference for equity-based investments. The division's Separate Account assets, which relate to variable account options, increased $4.3 billion from June 30, 1997 to June 30, 1998 and $2.6 billion from December 31, 1997, reflecting variable deposit growth and stock market appreciation. Fixed Investment Spread. Investment results and crediting rates on fixed accounts were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1998 1997 1998 1997 Net investment income $1,333 $ 845 $ 687 $ 425 Investment yield 8.03% 7.91% 8.16% 7.89% Average crediting rate 5.85 6.13 5.88 6.09 Fixed investment spread 2.18 1.78 2.28 1.80 Net investment income increased 58% in 1998 as a result of the acquisition of American General Annuity, income on the Provident investments acquired as of April 30, 1998, growth in invested assets, and an increase in investment yield. Investment yield for the six months and quarter ended June 30, 1998 increased 12 basis points and 27 basis points, respectively, compared to the same periods in 1997 due to changes in investment strategy and higher premium income on investments called or tendered before their maturity dates. This increase was partially offset by lower market rates on new investment purchases. In response to the effect of declining market rates on investment yield, the company adjusted the rates credited to policyholders. The higher yields and reduced crediting rates increased the investment spread on fixed accounts by 40 basis points in the six months and 48 basis points in the quarter ended June 30, 1998 compared to the same periods in 1997. -14- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Separate Account Fees. Separate Account fees include mortality, administrative, and investment advisory fees. These fees increased $28 million, or 57%, for the first six months of 1998 compared to the same period in 1997, due to growth in Separate Account assets. Surrenders. Policyholder surrenders are influenced by both competition and market performance. The division's rate of policyholder surrenders for tax- qualified accounts was 5.52% of average reserves for the first six months of 1998 (5.49% for the quarter) compared to 4.61% (4.06% for the quarter) for the same period in 1997. The policyholder surrender rate for non-qualified accounts, which relate to American General Annuity's fixed annuity business, was 11.40% of average reserves for the first six months and 12.28% for the second quarter of 1998. The higher levels of surrenders were primarily due to participants seeking variable investments to take advantage of the strong stock market in 1998. Operating Expenses. Operating expenses increased $32 million for the six months and $11 million for the quarter ended June 30, 1998 compared to the same periods of 1997 due to the addition of American General Annuity's operating expenses and the increase in variable expenses to support the division's growth in deposits. The ratio of operating expenses to average assets decreased from .48% in 1997 to .42% in 1998, reflecting growth in assets in excess of growth in operating expenses and American General Annuity's lower overall expense ratio. Life Insurance Life Insurance division results were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1998 1997 1998 1997 Earnings $ 323 $ 278 $ 165 $ 140 Premiums and other considerations 1,551 1,490 775 760 Net investment income 1,114 1,034 566 524 Insurance and annuity benefits 1,468 1,445 737 741 Operating expenses 369 356 182 178 Assets 35,478 34,087 35,478 34,087 Insurance and annuity liabilities 25,323 25,332 25,323 25,332 Earnings. Division earnings for the six months and quarter ended June 30, 1998 increased 16% and 18%, respectively, compared to the same periods in 1997. The increases were due to the acquisition of Home Beneficial Life in April 1997, higher investment income from prepayment of investments, and expense savings from consolidation of recently acquired companies, partially offset by higher death claims and startup costs for new product initiatives. -15- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Premiums and Deposits. Sales and deposits of individual life insurance and annuities were as follows: Six Months Ended Quarter Ended June 30, June 30, (In millions) 1998 1997 1998 1997 Individual life insurance Sales $ 320 $ 257 $ 143 $ 141 Deposits 641 565 301 284 Annuities Sales 245 194 136 98 Deposits 287 251 152 117 Premiums and other considerations increased 4% for the first six months of 1998 compared to the same period of 1997 primarily due to the acquisition of Home Beneficial Life in April 1997 and growth in sales of group and credit insurance. Individual life insurance sales and deposits for the first six months of 1998 exceeded comparable 1997 amounts by 25% and 13%, respectively, primarily due to the recent entry into corporate executive benefits markets. Sales in these markets can fluctuate significantly quarter to quarter due to large case size. Annuity sales increased 26% and 40% for the six months and quarter ended June 30, 1998, respectively, compared to the same periods in the prior year. Annuity deposits increased 14% and 30% for the comparable periods. These increases were due to recently introduced variable annuity products, partially offset by a decrease in sales of fixed annuities and structured settlements due to an unfavorable interest-rate environment. Investment Spread. Investment results and interest crediting rates were as follows: Six Months Ended Quarter Ended June 30, June 30, 1998 1997 1998 1997 Investment yield 8.48% 8.11% 8.61% 8.15% Average crediting rate 6.01 6.06 6.01 6.08 Investment spread 2.47 2.05 2.60 2.07 Net investment income increased 8% in 1998 compared to 1997, primarily due to an increase in premiums on investments called or tendered before their maturity dates and asset growth from the Home Beneficial Life acquisition. Although market rates were lower on new investment purchases, investment yield and spread increased due to the higher premiums on calls and tenders and lower investment expenses. -16- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Mortality and Persistency. Death claims and premium termination rates were as follows: Six Months Ended Quarter Ended June 30, June 30, 1998 1997 1998 1997 Death claims (in millions) $ 502 $ 453 $ 251 $ 222 Death claims per $1,000 in force $ 3.64 $ 3.37 $ 3.64 $ 3.30 Premium termination rate 12.23% 13.13% 11.79% 13.22% Death claims, included in insurance and annuity benefits, increased 11% in the first six months of 1998 and 13% in the second quarter compared to the same periods of 1997 reflecting the acquisition of Home Beneficial Life and less favorable mortality experience in 1998. The higher death claims were partially offset by the reduction of insurance reserves due to normal runoff of older policies. The lower premium termination rate in 1998 compared to 1997 reflected lower terminations in ancillary lines of business. Overall, mortality and persistency experience was within pricing assumptions. Operating Expenses. Operating expenses increased $13 million for the first six months of 1998 and $4 million for the second quarter compared to the same periods in 1997. During 1998, the division achieved significant cost savings from the ongoing consolidation and integration of acquired companies. These cost savings were more than offset by startup costs to introduce new variable and annuity products in 1998, as well as higher expenses to support increased group sales. In addition, 1998 included Home Beneficial's operating expenses for six months compared to two months in 1997. The ratio of operating expenses to direct premiums and deposits was 16.49% and 16.38% for the first six months and second quarter, respectively, of 1998 compared to 16.97% and 16.76% in the same periods of 1997. The lower ratios for 1998 reflected smaller percentage increases in operating expenses compared to the percentage increases in life insurance premiums and deposits. Consumer Finance Consumer Finance division results were as follows: Six Months Ended Quarter Ended June 30, June 30, ($ in millions) 1998 1997 1998 1997 Earnings $ 89 $ 79 $ 44 $ 40 Average finance receivables 8,122 7,501 8,242 7,453 Yield on finance receivables 16.30% 17.02% 16.13% 16.95% Borrowing cost 6.66 6.76 6.60 6.82 Interest spread 9.64 10.26 9.53 10.13 Operating expenses $ 235 $ 225 $ 116 $ 113 -17- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Earnings. Division earnings increased 13% for the six months ended June 30, 1998, compared to the same period of 1997, primarily due to improved credit quality and an increase in average finance receivables. Finance Receivables. Average finance receivables for the first six months of 1998 increased $621 million compared to the same period of 1997 and increased $789 million for the comparable second quarter periods. Finance receivables at June 30, 1998 increased $1.2 billion compared to the June 30, 1997 balance and $610 million compared to the December 31, 1997 balance. These increases were due to higher loan production and bulk purchases of real estate secured loans, which reflect the company's program to improve credit quality by increasing the proportion of real estate secured loans. The increase from June 30, 1997 was also attributable to growth in retail sales contracts resulting from the introduction of new marketing programs. Credit Quality. Charge offs, the allowance for finance receivable losses, and delinquencies were as follows: Six Months Ended Quarter Ended June 30, June 30, ($ in millions) 1998 1997 1998 1997 Charge offs $ 108 $ 141 $ 54 $ 68 Annualized % of average finance receivables 2.66% 3.76% 2.62% 3.68% June 30, December 31, 1998 1997 1997 Allowance for finance receivable losses $ 365 $ 385 $ 373 % of finance receivables 4.24% 5.20% 4.65% Delinquencies $ 317 $ 300 $ 310 % of finance receivables 3.43% 3.73% 3.60% The decreases in the charge off and delinquency ratios compared to prior periods reflect the positive impact of the company's credit quality improvement program, which included an increase in the proportion of real estate secured loans and higher underwriting standards. The decrease in the allowance reflects the improvement in charge-off experience, partially offset by an increase in the allowance to support the growth in receivables. -18- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Interest Spread. The interest spread between yield and borrowing cost decreased 62 basis points for the six months of 1998 and 60 basis points for the second quarter of 1998, compared to the same periods in 1997. The decline in spread reflected lower yields from the increased proportion of real estate secured loans, which generally have a higher level of credit quality and lower yields, and lower yields on retail sales contracts due to increased competition, partially offset by lower borrowing cost. Operating Expenses. Operating expenses as a percentage of average finance receivables decreased to 5.80% for the first six months of 1998 from 5.98% for the same period of 1997, and to 5.73% from 5.99% for the comparable second quarter periods, due to the increase in average finance receivables, which more than offset the increase in operating expenses. INVESTMENTS Invested assets consist primarily of fixed maturity securities, mortgage loans on real estate, and policy loans. Fair Value of Securities. A decrease in interest rates and resulting increases in bond values in second quarter 1998 caused a $555 million increase in the fair value adjustment to fixed maturity securities and a related $335 million positive adjustment to shareholders' equity from December 31, 1997. The components of the adjustment to report fixed maturity and equity securities at fair value at June 30, 1998 and December 31, 1997, and the 1998 change, were as follows: June 30, December 31, (In millions) 1998 1997 Change Fair value adjustment to fixed maturity securities $3,399 $ 2,844 $ 555 Decrease in deferred policy acquisition costs and cost of insurance purchased (1,097) (1,062) (35) Increase in deferred income taxes (813) (628) (185) Net unrealized gains Fixed maturity securities 1,489 1,154 335 Equity securities 11 15 (4) Net unrealized gains on securities $1,500 $ 1,169 $ 331 -19- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Fixed Maturity Securities. At June 30, 1998, fixed maturity securities included $45.9 billion of corporate bonds, $13.4 billion of mortgage-backed securities, and $2.2 billion of bonds issued by governmental agencies. The average credit rating of the fixed maturity securities was A+ at June 30, 1998 and December 31, 1997. Average credit ratings by category at June 30, 1998 were as follows: June 30, Average Credit (In millions) 1998 % Rating Investment grade $44,793 72% A Mortgage-backed 13,429 22 AAA Below investment grade 3,393 6 BB- Total fixed maturity securities $61,615 100% A+ Below Investment Grade. Below investment grade securities have credit ratings below BBB-. Below investment grade securities were 5% of invested assets at June 30, 1998 and 4% at December 31, 1997. The company invests in below investment grade securities to enhance the overall yield of the portfolio. Investment income from below investment grade securities was $148 million for the six months ended June 30, 1998 and $85 million for the same period in 1997. Realized investment gains (losses) were immaterial. Non-Performing. Bonds are deemed to be non-performing when the payment of interest is sufficiently uncertain as to preclude accrual of interest. Non- performing bonds were less than 0.1% of total fixed maturity securities at June 30, 1998 and December 31, 1997. Mortgage Loans. Mortgage loans on real estate, consisting primarily of loans on office and retail properties, represented 5% of invested assets at June 30, 1998 and 6% at December 31, 1997. Mortgage loan statistics at June 30, 1998 and December 31, 1997 were as follows: June 30, December 31, (In millions) 1998 1997 Mortgage loans $ 3,544 $ 3,326 Allowance for losses (46) (54) Mortgage loans, net $ 3,498 $ 3,272 Allowance for losses 1.3% 1.6% Delinquent loans (60+ days) $ 43 $ 20 % of mortgage loans 1.2% .6% Restructured loans $ 99 $ 115 % of mortgage loans 2.8% 3.5% Yield on restructured loans 7.9% 8.6% -20- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Watch List. At June 30, 1998, $106 million of mortgage loans were on the company's watch list, compared to $128 million at December 31, 1997. The decrease was due to loans that were no longer undercollateralized or were reinstated, refinanced, or repaid. While the watch list loans may be predictive of future delinquent loans, the company does not anticipate a significant effect on operations, liquidity, or capital from these loans. CAPITAL RESOURCES Corporate Capital. American General's target capital structure consists of 25% corporate debt, 15% redeemable equity, and 60% shareholders' equity. At June 30, 1998, corporate capital totaling $11.7 billion, excluding the fair value adjustment on securities, consisted of $2.7 billion corporate debt (23%), $1.7 billion redeemable equity (15%), and $7.3 billion shareholders' equity (62%). On February 25, 1998, American General issued 10.2 million shares of common stock and paid $580 million cash to complete the $1.2 billion acquisition of Western National. The cash portion of the purchase price was financed through short-term borrowings. Additionally, the company issued options to acquire 1.4 million shares of American General common stock with an average exercise price of $24.75 to replace outstanding options to acquire Western National common stock. The fair value of these options, excluding options surrendered for $10 million cash pursuant to a pre-existing employment agreement, was $37 million. In connection with the acquisition, the company assumed Western National's long-term debt of $148 million. The ratings assigned by rating agencies serve as an indicator of an insurance company's financial strength and ability to meet its future obligations to policyholders. During second quarter 1998, A.M. Best adjusted its ratings of American General's principal insurance companies to A+, its second highest rating. In August 1998, Moody's assigned an initial rating of Aa3 to American General Life and Accident. As of August 10, 1998, financial strength ratings were as follows: A.M. Standard Duff & Best & Poor's Phelps Moody's American General Annuity A+ AA- AAA Aa3 All American Life A+ AA+ Aa3 American General Life A+ AA+ AAA Aa3 American General Life & Accident A+ AA+ AAA Aa3 Franklin Life A+ AA+ AAA Aa3 Old Line Life A+ AA+ Aa3 United States Life A+ AA+ Aa3 VALIC A+ AA+ AAA Aa2 -21- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Consumer Finance. The Consumer Finance division's capital varies directly with the amount of total finance receivables. The capital mix of consumer finance debt and equity is based primarily upon maintaining leverage at a level that supports cost-effective funding. Consumer finance capital of $9.2 billion at June 30, 1998 included $7.9 billion of consumer finance debt, which was not guaranteed by the parent company, and $1.3 billion of equity. 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 7.5 to 1. The ratio equaled the target at June 30, 1998 and December 31, 1997. LIQUIDITY The company's overall liquidity is based on cash flows from the business divisions and its ability to borrow in both the long-term and short-term markets at competitive rates. At June 30, 1998, the company had committed and unused credit facilities of $4.8 billion. The company believes that its overall sources of liquidity will continue to be sufficient to satisfy its foreseeable financial obligations. Parent Company. The parent company received $536 million of dividends, net of capital contributions, from subsidiaries during the six months ended June 30, 1998 compared to $26 million (excluding dividends paid to USLIFE Corporation prior to its acquisition by the company) for the same period in 1997. Net dividends were low in 1997 because the company was re-evaluating the capital requirements for its business divisions. While the subsidiaries are restricted in the amount of dividends they may pay to the parent company, these restrictions are not expected to affect American General's ability to meet its cash obligations. In 1998, the company repurchased 1.2 million shares of its common stock for a total cost of $78 million, of which 700,000 shares at a cost of $47 million were purchased in the second quarter. Retirement Services and Life Insurance. Principal sources (uses) of cash for the Retirement Services and Life Insurance divisions were as follows: Six Months Ended June 30, (In millions) 1998 1997 Operating activities $1,028 $1,040 Fixed policyholder account deposits, net of withdrawals (109) 123 Variable account deposits, net of withdrawals 1,366 952 Short-term collateralized financings 446 - -22- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). Operating cash flows for the Retirement Services and Life Insurance divisions in the first six months of 1998 approximated the amounts in the same period of 1997. The decrease in net fixed policyholder account deposits and the increase in net variable account deposits in 1998 related to policyholders seeking higher returns in equity-based investments, including the company's Separate Accounts. Because the investment risk on variable accounts lies solely with the policyholder, deposits and withdrawals related to Separate Accounts are not included in the company's consolidated condensed statement of cash flows. The company had adequate cash liquidity to fund the net withdrawals of fixed account deposits in 1998. Short-term collateralized financings relate to dollar roll agreements entered into in 1998. Major uses of cash were the net purchase of investments necessary to support increases in insurance and annuity liabilities, and net dividends paid to the parent. The subsidiaries in these divisions paid dividends, net of capital contributions, of $367 million in the first six months of 1998 and $103 million for the same period of 1997. The 1998 net dividends also reflect $188 million of capital contributions made by an intermediate holding company to the Retirement Services division in second quarter 1998 to support the Provident acquisition. Consumer Finance. Principal sources (uses) of cash for the Consumer Finance division were as follows: Six Months Ended June 30, (In millions) 1998 1997 Operating activities $ 259 $ 283 Increase (decrease) in borrowings 596 (896) Cash provided by operating activities decreased in the first six months of 1998 since 1997 included operations related to non-strategic assets sold in second quarter 1997. Cash provided by borrowings increased in the six months ended June 30, 1998 compared to the same period in 1997 due to growth in receivables. Other major uses of cash were to fund finance receivables and net dividends paid to the parent company. Net cash used to fund finance receivables was $716 million for the six months ended June 30, 1998, up from $110 million for the same period in 1997. Net dividends paid to the parent company totaled $18 million in the first six months of 1998 compared to $66 million for the same period in 1997. -23- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued). YEAR 2000 American General has numerous technology systems which are managed on a decentralized basis. The company's Year 2000 readiness efforts are being undertaken by its key business units with centralized oversight. Each business unit has developed and is implementing a plan to minimize the risk of a significant negative impact on its operations. While the specifics of the plans vary, the plans include the following activities: (1) perform an inventory of the company's information technology and non-information technology systems; (2) assess which items in the inventory may expose the company to business interruptions due to Year 2000 issues; (3) test systems for Year 2000 readiness; (4) reprogram or replace systems that are not Year 2000 ready; and (5) return the systems to operations. The company expects to substantially complete the foregoing for significant systems by December 31, 1998. However, activities (3) through (5) for certain systems will continue in 1999. In addition, the company has relationships with various third parties that must also be Year 2000 ready. Therefore, the plans also assess and attempt to mitigate the risks associated with the potential failure of third parties to achieve Year 2000 readiness. Due to the various stages of third parties' Year 2000 readiness, these activities will extend through 1999. Through June 30, 1998, the company has incurred and expensed $33 million (pretax) related to Year 2000 readiness, including $17 million incurred during the first six months of 1998. The company currently anticipates that it will incur future costs of approximately $30 to $40 million (pretax) for additional internal staff, third-party vendors, and other expenses to achieve Year 2000 readiness. In addition, the company has elected to accelerate the planned replacement of certain systems as part of its Year 2000 plans. Costs of the replacement systems will be capitalized and amortized over their useful lives, in accordance with the company's normal accounting policies. Due to the magnitude and complexity of this project, risks and uncertainties exist. If conversion of the company's systems is not completed on a timely basis (due to non-performance by significant third-party vendors, lack of qualified personnel to perform the Year 2000 work, or other unforeseen circumstances in completing the company's plans), or if significant third parties fail to achieve Year 2000 readiness on a timely basis, the Year 2000 issue could have a material adverse impact on the operations of the company. -24- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 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 in this report and elsewhere (such as other filings by the company with the Securities and Exchange Commission, press releases, presentations by management of the company, or oral statements) relative to markets for the company's products and trends in the company's operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the company. There can be no assurance that future developments affecting the company will be those anticipated by management. 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 new products and distribution channels; (3) competitive, regulatory, or tax changes that affect the cost of or demand for the company's products; (4) the company's ability to achieve Year 2000 readiness for significant systems and operations on a timely basis; (5) adverse litigation results or resolution of litigation, including market conduct litigation; and (6) the company's failure to achieve anticipated levels of earnings or operational efficiencies related to recently acquired companies, as well as other cost-saving initiatives. Investors are also directed to other risks and uncertainties discussed in other documents filed by the company with the Securities and Exchange Commission. The company undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. -25- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Note 8 to the Registrant's Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the quarter ended June 30, 1998. Item 4. Submission of Matters to a Vote of Security Holders. Annual Meeting. On April 30, 1998, American General held its annual meeting of shareholders. As of that date, shareholders of the company's common and preferred shares outstanding were entitled to 255,594,219 votes. At the meeting, the company's shareholders voted on the following matters: 1) election of twelve directors constituting the company's entire board, for one-year terms; 2) approval of an amendment to the Restated Articles of Incorporation increasing the number of shares of common stock authorized for issuance from 300,000,000 to 800,000,000; 3) approval of an Employee Stock Purchase Plan; and 4) ratification of the appointment of Ernst & Young LLP as independent auditors for 1998. Each matter was approved by the shareholders. The votes cast for, against, and abstentions as to each such matter were as follows: Votes For Votes Against Abstentions ELECTIONS OF DIRECTORS: J. Evans Attwell 225,804,723 2,598,311 - Brady F. Carruth 226,280,858 2,122,176 - James S. D'Agostino Jr. 226,618,920 1,784,114 - W. Lipscomb Davis Jr. 226,553,624 1,849,410 - Robert M. Devlin 226,579,535 1,823,499 - Larry D. Horner 226,600,890 1,802,144 - Richard J. V. Johnson 226,562,343 1,840,691 - Michael E. Murphy 226,583,331 1,819,703 - Jon P. Newton 226,607,939 1,795,095 - Michael J. Poulos 226,562,933 1,840,101 - Robert E. Smittcamp 226,622,693 1,780,341 - Anne M. Tatlock 226,610,670 1,792,364 - AMENDMENT TO RESTATED ARTICLES OF INCORPORATION: 206,915,976 20,961,989 525,069 APPROVAL OF THE EMPLOYEE STOCK PURCHASE PLAN: 222,266,724 3,343,323 2,792,987 INDEPENDENT AUDITORS: 227,704,960 313,304 384,770 A more detailed description of the matters voted on by shareholders of the company at this meeting is included in the definitive Proxy Statement dated March 17, 1998 and incorporated herein by reference. -26- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 Item 5. Other Information. The company's bylaws provide generally that nominations of persons for election to the board of directors and shareholder proposals for an annual meeting may be made by a shareholder only if the shareholder is a shareholder of record and such shareholder gives timely written notice of such shareholder's intent to make such nomination or nominations or shareholder proposals to the corporate secretary. In the case of the company's 1999 annual meeting, to be timely, notice of shareholder proposals or director nominations must be given to the corporate secretary by December 31, 1998, but no earlier than December 1, 1998; in the event the 1999 annual meeting is called for a date that is not within 30 days before or after April 30, 1999, notice by the shareholder in order to be timely must be given not later than the close of business on the tenth day following the day on which notice of the date of such annual meeting is mailed or public disclosure of the date of such annual meeting is made, whichever first occurs. Item 6. Exhibits and Reports on Form 8-K. a. Exhibits. Exhibit 10.1 1984 Stock and Incentive Plan (As Amended and Restated) Exhibit 10.2 1994 Stock and Incentive Plan (As Amended and Restated) In the Annual Report on Form 10-K for the year ended December 31, 1997, this plan was referred to as "1984 Stock and Incentive Plan (As Amended and Restated Effective as of February 8, 1994)". Exhibit 10.3 1997 Stock and Incentive Plan (As Amended and Restated) Exhibit 11 Computation of Earnings per Share (included in Note 4 of Notes to Financial Statements) Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends Exhibit 27 Financial Data Schedule b. Reports on Form 8-K. None. -27- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 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 August 12, 1998. AMERICAN GENERAL CORPORATION (Registrant) By: PAMELA J. PENNY Pamela J. Penny Vice President and Controller (Duly Authorized Officer and Chief Accounting Officer) -28- AMERICAN GENERAL CORPORATION FORM 10-Q For the Quarter Ended June 30, 1998 EXHIBIT INDEX Exhibit 10.1 1984 Stock and Incentive Plan (As Amended and Restated) 10.2 1994 Stock and Incentive Plan (As Amended and Restated) In the Annual Report on Form 10-K for the year ended December 31, 1997, this plan was referred to as "1984 Stock and Incentive Plan (As Amended and Restated Effective as of February 8, 1994)". 10.3 1997 Stock and Incentive Plan (As Amended and Restated) 11 Computation of Earnings per Share (included in Note 4 of Notes to 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 -29- EX-10.1 2 EXHIBIT 10.1 AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN AS AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 1. PURPOSE The purpose of the American General Corporation 1984 Stock and Incentive Plan (the "Plan") is to provide a means through which American General Corporation, a Texas corporation, and its subsidiaries (collectively, the "Company") may attract able persons to enter the employ of the Company and to provide a means whereby those key employees upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and their desire to remain in its employ. A further purpose of the Plan is to provide such key employees with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. So that the maximum incentive can be provided each employee, the Plan provides for granting Incentive Stock Options, nonqualified Options, Restricted Stock Awards, Performance Awards and Incentive Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee. 2. DEFINITIONS The following definitions shall be applicable throughout the Plan: (a) "Award" means, individually or collectively, any Option, Restricted Stock Award , Performance Award or Incentive Award. (b) "Board" means the Board of Directors of American General Corporation. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. (d) "Committee" means not less than three members of the Board who are selected by the Board as provided in Section 4(a). (e) "Common Stock" means the common stock of American General Corporation. (f) "Company" means, collectively, American General Corporation and its subsidiaries, except that, in Section 14 hereof, "Company" means only American General Corporation. (g) "Fair Market Value" means, as of any specified date, the average of the highest and lowest quoted selling prices of the Common Stock as reported on the Composite Tape for issues listed on the New York Stock Exchange on the specified date, or, if no sales were reported on the Composite Tape on such specified date, the average of the highest and lowest quoted selling prices of the Common Stock on the nearest dates before and after such specified date on which sales of the Common Stock were so reported. (h) "Grant Document" means the document or documents evidencing an Award under the Plan, which may be either an agreement between the Company and the Holder as to the Award or a notice of grant of the Award from the Company to the Holder (including any attached statement of the terms and conditions of the Award). (i) "Holder" means an employee of the Company who has been granted an Option, a Restricted Stock Award, a Performance Award or an Incentive Award. (j) "Incentive Award" means an Award granted under Section 10 of the Plan. (k) "Incentive Stock Option" means an incentive stock option within the meaning of section 422(b) of the Code. (l) "Option" means an Award under Section 7 of the Plan and includes both nonqualified Options and Incentive Stock Options to purchase Common Stock. (m) "Performance Award" means an Award granted under Section 9 of the Plan. 2 (n) "Personal Representative" means the person or persons who upon the death, disability or incompetency of a Holder shall have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to exercise an Option or the right to any Restricted Stock Award, Performance Award or Incentive Award theretofore granted or made to such Holder. (o) "Plan" means the American General Corporation 1984 Stock and Incentive Plan, as Amended and Restated as of February 1, 1998, and as amended from time to time. (p) "Restricted Stock Award" means an Award granted under Section 8 of the Plan. 3. EFFECTIVE DATE AND DURATION OF THE PLAN The American General Corporation 1984 Stock and Incentive Plan became effective upon adoption by the Board on February 8, 1984, subject to approval by the shareholders of American General Corporation at the annual meeting of shareholders held on May 2, 1984, which was given. No further Awards can be granted under the Plan after ten years from the date the Plan was adopted by the Board. The Plan (as amended and restated as of February 1, 1998) shall remain in effect until all Options granted under the Plan have been exercised or expired by reason of lapse of time, all restrictions imposed upon Restricted Stock Awards have been eliminated or the Restricted Stock Awards have been forfeited and all Performance Awards and Incentive Awards have been satisfied or have terminated. 4. ADMINISTRATION (a) Composition of Committee. The Committee shall be selected and appointed by the Board to administer the Plan. The members of the Committee shall not include any employee of the Company or any individual who is or was within the 12-month period immediately preceding the date he or she became a member of the Committee eligible for selection to receive any stock option, stock appreciation right, stock option surrender right or other stock allocation under the Plan or under any other plan of the Company. A majority of the Committee shall constitute a quorum. 3 The Committee shall act by majority action at a meeting, except that action permitted to be taken at a meeting may be taken without a meeting if written consent thereto is given by all member of the Committee. (b) Powers. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine which employees of the Company shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option or nonqualified Options shall be granted, the number of shares to be subject to each Option and Restricted Stock Award and the value of each Performance Award and Incentive Award. In making such determinations the Committee shall take into account the nature of the services rendered by the respective employees, their present and potential contribution to the Company's success and such other factors as the Committee shall deem relevant. (c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, this shall include the power to construe the Plan and the respective Grant Documents thereunder, to prescribe rules and regulations relating to the Plan, and to determine the terms, restrictions and provisions of the Grant Document for each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Grant Document relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The Committee may delegate to other persons the responsibility of performing ministerial acts in furtherance of the Plan's purposes, but only the Committee may act on any aspect of the Plan affecting (i) an officer or director of the Company who is an employee of the Company or (ii) an employee to whom the Committee delegates authority with respect to the Plan. The determinations of the Committee on the matters referred to in this Section 4 shall be conclusive. 5. GRANT OF OPTIONS, RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS AND INCENTIVE AWARDS; SHARES SUBJECT TO THE PLAN (a) Stock Grant Limit. The Committee may from time to time grant Awards to one or more employees determined by it to be eligible for participation in the Plan in accordance with the provisions of Section 6. Subject to Section 11, the 4 aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 4,500,000 shares. Shares shall be deemed to have been issued under Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Common Stock subject to such Award shall again be available to the grant of an Award. (b) Stock Offered. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. 6. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are key employees of the Company. Awards may not be granted to (i) any director who is not an employee of the Company or (ii) any person who immediately after such grant is the owner directly or indirectly of more than 10% of the total combined voting power of all classes of stock of the Company. An Award may be granted on more than one occasion to the same person, and such Award may include an Incentive Stock Option, nonqualified Option, Restricted Stock Award, Performance Award, Incentive Award or any combination thereof. 7. STOCK OPTIONS (a) Option Period. The term of each Option shall be as specified by the Committee at the date of grant but shall not exceed ten years. (b) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times, commencing not earlier than six months from the date of grant, as determined by the Committee. (c) Special Limitation on Exercise of Incentive Stock Options. Notwithstanding any other provisions of the Plan, an Incentive Stock Option granted hereunder before January 1, 1987 shall not be exercisable while there is outstanding (within the meaning of former section 422A(c)(7) of the Code) any Incentive Stock Option previously granted to the Holder under the Plan or under any other stock option plan to purchase stock in American General Corporation, or the subsidiary by which the Holder is employed, or in a predecessor corporation of any such corpora- 5 tions, unless otherwise permitted by former section 422A of the Code (or any other provision of the Code or successor provision to section 422A of the Code). (d) Stock Option Grant Document. Each Option shall be evidenced by an Option Grant Document in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under former section 422A of the Code (or successor provision thereto). (e) Option Price and Payment. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee but, subject to adjustment as provided in Section 11, shall not be less than the Fair Market Value of a share of Common Stock at the date such Option is granted. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. (f) Restrictions on Transfer. An Option shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercisable during the lifetime of the Holder only by such Holder. (g) Shareholder Rights and Privileges. The Holder shall be entitled to all the privileges and rights of a shareholder only with respect to such shares of Common Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. (h) Individual Dollar Limitations. In the case of an Incentive Stock Option, the aggregate Fair Market Value (determined as of the time such Option is granted) of the stock for which any employee may be granted Incentive Stock Options in any calendar year (under this Plan and any other plan of his or her employer corporation, its parent or subsidiary corporation which provide for the granting of incentive stock options) shall not exceed $100,000 (or such other individual grant limit as may be in effect under the Code on the date of grant) plus any unused limit carry-over to such year permitted under the Code. (i) Surrender of Options. The Committee (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, grant to any Option Holder the right, upon written request, to surrender any exercisable Option or portion thereof in exchange for cash, whole shares of Common Stock or a combination thereof, as determined by the Committee, with a value equal to the 6 excess of the Fair Market Value, as of the date of such request, of one share of Common Stock over the Option price for such share multiplied by the number of shares covered by the Option or portion thereof to be surrendered. In the case of any such surrender right which is granted in connection with an Incentive Stock Option, such right shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or portion thereof to be surrendered. In the event of the exercise of any surrender right granted hereunder, the number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such surrender right. Additional terms and conditions governing any such surrender rights may from time to time be prescribed by the Committee in its sole discretion. 8. RESTRICTED STOCK AWARDS (a) Restriction Period to be Established by the Committee. At the time a Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such Award. Each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. The Restriction Period applicable to a particular Restricted Stock Award shall not be changed except as permitted by Section 8(b). (b) Other Terms and Conditions. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends during the Restriction Period, to vote Common Stock subject thereto and to enjoy all other shareholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Restriction Period shall have expired, (ii) the Company shall retain custody of the stock during the Restriction Period, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock during the Restriction Period and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award, shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment (by retirement, disability, death or otherwise) of a Holder prior to expiration of the Restriction Period. 7 (c) Payment for Restricted Stock. A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law or the Committee. 9. PERFORMANCE AWARDS (a) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance of the Holder shall be measured. (b) Performance Awards. Each Performance Award shall have a maximum value established by the Committee at the time of such Award. (c) Performance Measures. A Performance Award shall be awarded to an employee contingent upon future performance of the Company or any subsidiary, division or department thereof by or in which he is employed during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period but subject to such later revisions as the Committee shall deem appropriate to reflect significant, unforeseen events or changes. (d) Awards Criteria. In determining the value of Performance Awards, the Committee shall take into account an employee's responsibility level, performance, potential, other Awards and such other considerations as it deems appropriate. (e) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Common Stock or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or installments as prescribed by the Committee. Any payment to be made in Common Stock shall be based on the Fair Market Value of the Common Stock on the payment date. (f) Termination of Employment. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Company at all 8 times during the applicable performance period, except as may be determined by the Committee. 10. INCENTIVE AWARDS (a) Incentive Awards. Incentive Awards are rights to receive shares of Common Stock (or the Fair Market Value thereof), or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without payment of any amounts by the Holder thereof or satisfaction of any performance criteria or objectives. Each Incentive Award shall have a maximum value established by the Committee at the time of such Award. (b) Award Period. The Committee shall establish, with respect to and at the time of each Incentive Award, a period over which the Award shall vest with respect to the Holder. (c) Awards Criteria. In determining the value of Incentive Awards, the Committee shall take into account an employee's responsibility level, performance, potential, other Awards and such other considerations as it deems appropriate. (d) Payment. Following the end of the vesting period for an Incentive Award, the Holder of an Incentive Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award, based on the then vested value of the Award. Payment of an Incentive Award may be made in cash, Common Stock or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in Common Stock shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to an Incentive Award, as determined by the Committee. (e) Termination of Employment. An Incentive Award shall terminate if the Holder does not remain continuously in the employ of the Company at all times during the applicable vesting period, except as may be otherwise determined by the Committee. 9 11. EQUITABLE ADJUSTMENTS Subject to any required action by the Company's shareholders, upon the occurrence of any event which affects the shares of Common Stock in such a way that an adjustment of outstanding Awards is appropriate in order to prevent the dilution or enlargement of rights under the Awards (including, without limitation, any extraordinary dividend or other distribution (whether in cash or in kind), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event), the Committee shall make appropriate equitable adjustments, which may include, without limitation, adjustments to any or all of the number and kind of shares of stock (or other securities) which may thereafter be issued in connection with such outstanding Awards and adjustments to any exercise price specified in the outstanding Awards and shall also make appropriate equitable adjustments to the number and kind of shares of stock (or other securities) authorized by or to be granted under the Plan. Further, the Committee, in its sole discretion, may make appropriate equitable adjustments, including, without limitation, those described in the immediately preceding sentence, in any other circumstances under which the Committee deems such adjustments to be desirable. Any adjustment made to an Incentive Stock Option hereunder, with respect to either (i) the number or price of shares of stock subject to Incentive Stock Options or (ii) the aggregate number of shares which may be issued pursuant to Incentive Stock Options, shall be made in a manner which will permit such option to continue to constitute an Incentive Stock Option within the meaning of section 422 of the Code. 12. AMENDMENT OF THE PLAN The Board may amend the Plan at any time and the Committee may amend any Award (and its related Grant Document) at any time, except as otherwise specifically provided in such Grant Document; provided that no change in any Award theretofore granted may be made that would impair the rights of the Holder of any Award under the Plan without the consent of the Holder, and provided, further, that the Board may not, without approval of the shareholders, amend the Plan: (a) to increase the maximum number of shares which may be issued on exercise or surrender of Options or pursuant to Restricted Stock Awards, Performance Awards or Incentive Awards, except as provided in Section 11; 10 (b) to change the minimum Option price; (c) to extend the maximum Option term; (d) to change the class of employees eligible to receive Awards; (e) to extend the maximum period during which Awards may be granted under the Plan; or (f) to materially increase the benefits accruing to employees under the Plan. 13. EFFECT OF THE PLAN (a) No Right to an Award. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an employee any right to be granted an Option to purchase Common Stock, a right to a Restricted Stock Award or a right to a Performance Award or Incentive Award or any other rights hereunder except as may be evidenced by an Award or by a Grant Document with respect to an Option or other Award, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award. (b) No Employment Rights Conferred. Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or (ii) interfere in any way with the right of the Company to terminate his or her employment at any time. (c) Other Laws; Withholding. The Company shall not be obligated to issue any shares of Common Stock until there has been compliance with such laws and regulations as the Company may deem applicable. No fractional shares of Common Stock shall be delivered. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. 11 14. MODIFICATION OF OUTSTANDING AWARDS Except as specified in this Section 14, notwithstanding the provisions of any Grant Document evidencing any Award outstanding hereunder on February 1, 1998, if such Grant Document contains provisions with respect to the effect of a "Change of Control" upon such Award, certain of those provisions shall be deemed modified as follows (subject to any consent of the Holder specifically required by the Grant Document): (a) Any provision in the applicable Grant Document which states that a Change of Control shall be deemed to have occurred in circumstances described substantially as follows: "the Company shall (i) merge or consolidate with or into another corporation or entity or enter into a share exchange between shareholders of the Company and another corporation or entity pursuant to Article 5.02 of the Texas Business Corporation Act and as a result of such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity shall then be owned in the aggregate by the former shareholders of the Company, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the Company or (y) any party to such merger, consolidation or share exchange or (ii) sell, lease, exchange or otherwise dispose of all or substantially all of the Company's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of the Company;" shall be modified to provide that a Change of Control shall be deemed to have occurred if: "(i) the Company or any direct or indirect subsidiary of the Company shall merge or consolidate with or into another corporation or entity or enter into a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 of the Texas Business Corporation Act and as a result of such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity or any parent thereof shall then be owned in the aggregate by the former shareholders of the Company, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the Company or (y) any party to such merger, 12 consolidation or share exchange or (ii) the Company shall sell, lease, exchange or otherwise dispose of all or substantially all of the Company's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of the Company;" (b) Any provisions in the Grant Document of a stock option which would require the payment of the "Merger Spread" in connection with the automatic surrender and cancellation of the stock option when a Change of Control occurs because of a merger, consolidation or share exchange shall be deemed modified by the addition of the following provision: "Notwithstanding any other provision hereof, if a Change of Control occurs which would otherwise require the payment to the Holder of the Merger Spread and the automatic surrender and cancellation of the option hereunder, there shall be no payment of the Merger Spread and no automatic surrender and cancellation of the option. Instead, immediately prior to the occurrence of that particular type of Change of Control, the option shall become fully vested and exercisable. As used in the immediately preceding sentence, "immediately prior" to the Change of Control shall mean sufficiently in advance of the Change of Control to permit the Holder to take all steps reasonably necessary to exercise the option fully and to deal with the shares purchased under the option so that those shares may be treated in the same manner in connection with the Change of Control as the shares of Stock of other shareholders." (c) Any provision in a Grant Document which might limit the Change-of- Control vesting of, or the Change-of-Control lapse of Forfeiture Restrictions with respect to, the Award under the Grant Document in the event that such vesting or lapse might constitute a "parachute payment" shall not apply if the Holder of the Award also holds, immediately prior to any such Change of Control, an individual employment or severance agreement with the Company pursuant to which the Company undertakes to pay the excise tax which might otherwise be imposed upon the Holder under section 280G of the Code in connection with such vesting or lapse. 13 EX-10.2 3 EXHIBIT 10.2 AMERICAN GENERAL CORPORATION 1984 STOCK AND INCENTIVE PLAN, RESTATED AS OF FEBRUARY 8, 1994, AS FURTHER AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 1. PURPOSE The purpose of the American General Corporation 1984 Stock and Incentive Plan, Restated as of February 8, 1994, as further amended and restated through February 1, 1998 (the "Plan") is to provide a means through which American General Corporation, a Texas corporation, and its subsidiaries (collectively, the "Company") may attract able persons to enter the employ of the Company and to provide a means whereby those key employees upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and their desire to remain in its employ. A further purpose of the Plan is to provide such key employees with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. So that the maximum incentive can be provided each employee, the Plan provides for granting Incentive Stock Options, Non-Qualified Options, Restricted Stock Awards, Performance Awards, and Incentive Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee. 2. DEFINITIONS The following definitions shall be applicable throughout the Plan: (a) "Award" means, individually or collectively, any Option, Restricted Stock Award, Performance Award or Incentive Award. (b) "Board" means the Board of Directors of American General Corporation. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. (d) "Committee" means not less than three members of the Board who are selected by the Board as provided in Section 4(a). (e) "Common Stock" means the common stock of American General Corporation. (f) "Company" means, collectively, American General Corporation and its subsidiaries, except that, in Section 14 hereof, "Company" means only American General Corporation. (g) "Fair Market Value" means, as of any specified date, the average of the highest and lowest quoted selling prices of the Common Stock as reported on the Composite Tape for issues listed on the New York Stock Exchange on the specified date, or, if no sales were reported on the Composite Tape on such specified date, the average of the highest and lowest quoted selling prices of the Common Stock on the nearest dates before and after such specified date on which sales of the Common Stock were so reported. (h) "Grant Document" means the document or documents evidencing an Award under the Plan, which may be either an agreement between the Company and the Holder as to the Award or a notice of grant of the Award from the Company to the Holder (including any attached statement of the terms and conditions of the Award). (i) "Holder" means an employee of the Company who has been granted an Option, a Restricted Stock Award, a Performance Award or an Incentive Award. (j) "Incentive Award" means an Award granted under Section 10 of the Plan. (k) "Incentive Stock Option" means an incentive stock option within the meaning of section 422(b) of the Code. (l) "Option" means an Award under Section 7 of the Plan and includes both Non-Qualified Options and Incentive Stock Options to purchase Common Stock. 2 (m) "Performance Award" means an Award granted under Section 9 of the Plan. (n) "Personal Representative" means the person who upon the death, disability or incompetency of a Holder shall have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to exercise an Option or the right to any Restricted Stock Award, Performance Award or Incentive Award theretofore granted or made to such Holder. (o) "Plan" means the American General Corporation 1984 Stock and Incentive Plan, Restated as of February 8, 1994, as Further Amended and Restated as of February 1, 1998, and as amended from time to time. (p) "Restricted Stock Award" means an Award granted under Section 8 of the Plan. 3. EFFECTIVE DATE AND DURATION OF THE PLAN The 1994 restatement of the Plan became effective as of February 8, 1994 upon its adoption by the Board, following its approval by the shareholders of American General Corporation on April 29, 1993. No further Awards can be granted under the Plan after February 8, 2004 and no Incentive Stock Options can be granted under the Plan after April 29, 2003. The 1998 restatement of the Plan became effective as of February 1, 1998. The Plan (as so restated) shall remain in effect until all Options granted under the Plan have been exercised or expired by reason of lapse of time, all restrictions imposed upon Restricted Stock Awards have been eliminated or the Restricted Stock Awards have been forfeited and all Performance Awards and Incentive Awards have been satisfied or have terminated. 4. ADMINISTRATION (a) Composition of Committee. The Committee shall be selected and appointed by the Board to administer the Plan. The Members of the Committee shall be not include any employee of the Company or any individual who is or was within 3 the 12-month period immediately preceding the date he or she became a member of the Committee eligible for selection to receive any stock option, stock appreciation right, stock option surrender right or other stock allocation under the Plan or under any other plan of the Company. A majority of the Committee shall constitute a quorum. The Committee shall act by majority action at a meeting, except that action permitted to be taken at a meeting may be taken without a meeting if written consent thereto is given by all members of the Committee. (b) Powers. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine which employees of the Company shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option or Non-Qualified Option shall be granted, the number of shares to be subject to each Option and Restricted Stock Award, and the value of each Performance Award and Incentive Award. In making such determinations the Committee shall take into account the nature of the services rendered by the respective employees, their present and potential contribution to the Company's success and such other factors as the Committee shall deem relevant. (c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, this shall include the power to construe the Plan and the respective Grant Documents thereunder, to prescribe rules and regulations relating to the Plan, and to determine the terms, restrictions, and provisions of the Grant Document for each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, to ensure that grants of Awards are exempt under Rule 16b-3 under the Securities Exchange Act of 1934, as amended from time to time, and to make all other determinations necessary or advisable for administering the Plan. Without limiting the generality of the foregoing, Grant Documents for Awards under the Plan may contain such provisions covering a change of control (sometimes called a "change in control") of the Company, as defined by the Committee in its sole discretion, as the Committee may approve, not inconsistent with the terms of this Plan, including without limitation provisions for the acceleration of, vesting of, or the payment of cash in lieu of, any Award. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Grant Document relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The Committee may delegate to other persons the responsibility of performing ministerial acts in furtherance of the Plan's purposes, but only the Committee may act on any aspect of the Plan affecting (i) an officer or director of the Company who is an employee of the Company or (ii) an employee to 4 whom the Committee delegates authority with respect to the Plan. The determinations of the Committee on the matters referred to in this Section 4 shall be conclusive. 5. GRANT OF OPTIONS, RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS, AND INCENTIVE AWARDS; SHARES SUBJECT TO THE PLAN (a) Stock Grant Limit. The Committee may from time to time grant Awards to one or more employees determined by it to be eligible for participation in the Plan in accordance with the provisions of Section 6. Subject to Section 11, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed the number of shares originally authorized by shareholders in 1984, 9,000,000 (formerly 4,500,000 prior to the 2-for-1 stock split effected March 1, 1993), less the aggregate number of shares issued or issuable under the Plan prior to its amendment and restatement as of February 8, 1994. In addition to the foregoing limit on the aggregate number of shares that may be issued under all Awards, the aggregate number of Restricted Stock Awards that may granted during any calendar year shall not exceed one- tenth of one percent (0.1%) of the number of shares of Common Stock outstanding as of December 31 of the prior year. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Common Stock subject to such Award shall again be available to the grant of an Award. (b) Stock Offered. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. 6. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are key employees of the Company. Awards may not be granted to (i) any director who is not an employee of the Company or (ii) any person who immediately after such grant is the owner, directly or indirectly, of more than 10% of the total combined voting power of all classes of stock of the Company. An Award may be granted on more than one occasion to the same person, and such Award may include an Incentive Stock Option, Non-Qualified Option, Restricted Stock Award, Performance Award, Incentive Award or any combination thereof. 5 7. STOCK OPTIONS (a) Option Period. The term of each Option shall be as specified by the Committee at the date of grant but shall not exceed ten years. (b) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times, commencing not earlier than six months from the date of grant, as determined by the Committee. (c) Stock Option Grant Document. Each Option shall be evidenced by a Grant Document in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under section 422 of the Code. (d) Option Price and Payment. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee but, subject to adjustment as provided in Section 11, shall not be less than the Fair Market Value of a share of Common Stock at the date such Option is granted. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. (e) Restrictions on Transfer. An Option shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercisable during the lifetime of the Holder only by such Holder. (f) Shareholder Rights and Privileges. The Holder shall be entitled to all the privileges and rights of a shareholder only with respect to such shares of Common Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. (g) Individual Dollar Limitations. In the case of Incentive Stock Options, the value of shares of stock for which such Options are exercisable for the first time in any one calendar year cannot exceed $100,000 based on the Fair Market Value of the stock at the date of grant according to section 422(d)(1) of the Code (or such other individual limit as may be in effect under the Code on the date of grant). 6 (h) Surrender of Options. The Committee (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, grant to any Option Holder the right, upon written request, to surrender any exercisable Option or portion thereof in exchange for cash, whole shares of Common Stock or a combination thereof, as determined by the Committee, with a value equal to the excess of the Fair Market Value, as of the date of such request, of one share of Common Stock over the Option price for such share multiplied by the number of shares covered by the Option or portion thereof to be surrendered. In the case of any such surrender right which is granted in connection with an Incentive Stock Option, such right shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or portion thereof to be surrendered. In the event of the exercise of any surrender right granted hereunder, the number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such surrender right. Additional terms and conditions governing any such surrender rights may from time to time be prescribed by the Committee in its sole discretion. 8. RESTRICTED STOCK AWARDS (a) Restriction Period to be Established by the Committee. At the time a Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such Award. Each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. The Restriction Period applicable to a particular Restricted Stock Award shall not be changed except as permitted by Section 8(b). (b) Other Terms and Conditions. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends during the Restriction Period, to vote Common Stock subject thereto and to enjoy all other shareholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Restriction Period shall have expired, (ii) the Company shall retain custody of the stock during the Restriction Period, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock during the Restriction Period and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award, shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules 7 pertaining to the termination of employment (by retirement, disability, death or otherwise) of a Holder prior to expiration of the Restriction Period. (c) Payment for Restricted Stock. A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law or the Committee. 9. PERFORMANCE AWARDS (a) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance of the Holder shall be measured. (b) Performance Awards. Each Performance Award shall have a maximum value established by the Committee at the time of such Award. (c) Performance Measures. A Performance Award shall be awarded to an employee contingent upon future performance of the Company or any subsidiary, division or department thereof by or in which he is employed during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period but subject to such later revisions as the Committee shall deem appropriate to reflect significant, unforeseen events or changes. (d) Awards Criteria. In determining the value of Performance Awards, the Committee shall take into account an employee's responsibility level, performance, potential, other Awards and such other considerations as it deems appropriate. (e) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Common Stock or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in Common Stock shall be based on the Fair Market Value of the Common Stock on the payment date. 8 (f) Termination of Employment. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Company at all times during the applicable performance period, except as may be determined by the Committee. 10. INCENTIVE AWARDS (a) Incentive Awards. Incentive Awards are rights to receive shares of Common Stock (or the Fair Market Value thereof), or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without payment of any amounts by the Holder thereof or satisfaction of any performance criteria or objectives. Each Incentive Award shall have a maximum value established by the Committee at the time of such Award. (b) Award Period. The Committee shall establish, with respect to and at the time of each Incentive Award, a period over which the Award shall vest with respect to the Holder. (c) Awards Criteria. In determining the value of Incentive Awards, the Committee shall take into account an employee's responsibility level, performance, potential, other Awards and such other considerations as it deems appropriate. (d) Payment. Following the end of the vesting period for an Incentive Award, the Holder of an Incentive Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award, based on the then vested value of the Award. Payment of an Incentive Award may be made in cash, Common Stock or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in Common Stock shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to an Incentive Award, as determined by the Committee. (e) Termination of Employment. An Incentive Award shall terminate if the Holder does not remain continuously in the employ of the Company at all times during the applicable vesting period, except as may be otherwise determined by the Committee. 9 11. EQUITABLE ADJUSTMENTS Subject to any required action by the Company's shareholders, upon the occurrence of any event which affects the shares of Common Stock in such a way that an adjustment of outstanding Awards is appropriate in order to prevent the dilution or enlargement of rights under the Awards (including, without limitation, any extraordinary dividend or other distribution (whether in cash or in kind), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event), the Committee shall make appropriate equitable adjustments, which may include, without limitation, adjustments to any or all of the number and kind of shares of stock (or other securities) which may thereafter be issued in connection with such outstanding Awards and adjustments to any exercise price specified in the outstanding Awards and shall also make appropriate equitable adjustments to the number and kind of shares of stock (or other securities) authorized by or to be granted under the Plan. Further, the Committee, in its sole discretion, may make appropriate equitable adjustments, including, without limitation, those described in the immediately preceding sentence, in any other circumstances under which the Committee deems such adjustments to be desirable. Any adjustment made to an Incentive Stock Option hereunder, with respect to either (i) the number or price of shares of stock subject to Incentive Stock Options or (ii) the aggregate number of shares which may be issued pursuant to Incentive Stock Options, shall be made in a manner which will permit such option to continue to constitute an Incentive Stock Option within the meaning of section 422 of the Code. 12. AMENDMENT OF THE PLAN The Board may amend the Plan at any time and the Committee may amend any Award (and its related Grant Document) at any time, except as otherwise specifically provided in such Grant Document; provided that no change in any Award theretofore granted may be made that would impair the rights of the Holder of any Award under the Plan without the consent of the Holder, and provided, further, that the Board may not, without approval of the shareholders, amend the Plan: (a) to increase the maximum number of shares which may be issued on exercise or surrender of Options or pursuant to Restricted Stock Awards, Performance Awards or Incentive Awards, except as provided in Section 11; (b) to change the minimum Option price; 10 (c) to extend the maximum Option term; (d) to change the class of employees eligible to receive Awards; (e) to extend the maximum period during which Awards may be granted under the Plan; or (f) to materially increase the benefits accruing to employees under the Plan. 13. EFFECT OF THE PLAN (a) No Right to an Award. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an employee any right to be granted an Option to purchase Common Stock, a right to a Restricted Stock Award or a right to a Performance Award or Incentive Award or any other rights hereunder except as may be evidenced by an Award or by a Grant Document with respect to an Option or other Award, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award. (b) No Employment Rights Conferred. Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or (ii) interfere in any way with the right of the Company to terminate his or her employment at any time. (c) Other Laws; Withholding. The Company shall not be obligated to issue any shares of Common Stock until there has been compliance with such laws and regulations as the Company may deem applicable. No fractional shares of Common Stock shall be delivered. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. 11 14. MODIFICATION OF OUTSTANDING AWARDS Except as specified in this Section 14, notwithstanding the provisions of any Grant Document evidencing any Award outstanding hereunder on February 1, 1998, if such Grant Document contains provisions with respect to the effect of a "Change of Control" upon such Award, certain of those provisions shall be deemed modified as follows (subject to any consent of the Holder specifically required by the Grant Document): (a) Any provision in the applicable Grant Document which states that a Change of Control shall be deemed to have occurred in circumstances described substantially as follows: "the Company shall (i) merge or consolidate with or into another corporation or entity or enter into a share exchange between shareholders of the Company and another corporation or entity pursuant to Article 5.02 of the Texas Business Corporation Act and as a result of such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity shall then be owned in the aggregate by the former shareholders of the Company, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the Company or (y) any party to such merger, consolidation or share exchange or (ii) sell, lease, exchange or otherwise dispose of all or substantially all of the Company's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of the Company;" shall be modified to provide that a Change of Control shall be deemed to have occurred if: "(i) the Company or any direct or indirect subsidiary of the Company shall merge or consolidate with or into another corporation or entity or enter into a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 of the Texas Business Corporation Act and as a result of such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity or any parent thereof shall then be owned in the aggregate by the former shareholders of the Company, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the Company or (y) any party to such merger, 12 consolidation or share exchange or (ii) the Company shall sell, lease, exchange or otherwise dispose of all or substantially all of the Company's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of the Company;" (b) Any provisions in the Grant Document of a stock option which would require the payment of the "Merger Spread" in connection with the automatic surrender and cancellation of the stock option when a Change of Control occurs because of a merger, consolidation or share exchange shall be deemed modified by the addition of the following provision: "Notwithstanding any other provision hereof, if a Change of Control occurs which would otherwise require the payment to the Holder of the Merger Spread and the automatic surrender and cancellation of the option hereunder, there shall be no payment of the Merger Spread and no automatic surrender and cancellation of the option. Instead, immediately prior to the occurrence of that particular type of Change of Control, the option shall become fully vested and exercisable. As used in the immediately preceding sentence, "immediately prior" to the Change of Control shall mean sufficiently in advance of the Change of Control to permit the Holder to take all steps reasonably necessary to exercise the option fully and to deal with the shares purchased under the option so that those shares may be treated in the same manner in connection with the Change of Control as the shares of Stock of other shareholders." (c) Any provision in a Grant Document which might limit the Change-of- Control vesting of, or the Change-of-Control lapse of Forfeiture Restrictions with respect to, the Award under the Grant Document in the event that such vesting or lapse might constitute a "parachute payment" shall not apply if the Holder of the Award also holds, immediately prior to any such Change of Control, an individual employment or severance agreement with the Company pursuant to which the Company undertakes to pay the excise tax which might otherwise be imposed upon the Holder under section 280G of the Code in connection with such vesting or lapse. 13 EX-10.3 4 EXHIBIT 10.3 AMERICAN GENERAL CORPORATION 1997 STOCK AND INCENTIVE PLAN AS AMENDED AND RESTATED AS OF FEBRUARY 1, 1998 1. PURPOSE The purpose of the American General Corporation 1997 Stock and Incentive Plan (the "Plan") is to provide a means through which American General Corporation, a Texas corporation, and its subsidiaries (collectively, the "Company") may attract able persons to enter the employ or become directors of the Company and to provide a means whereby those persons upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and their desire to remain in its employ or as directors. A further purpose of the Plan is to provide such persons with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. So that the maximum incentive can be provided, the Plan provides for granting Incentive Stock Options, Non-Qualified Options, Restricted Stock Awards, Performance Awards, and Incentive Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular person. 2. DEFINITIONS The following definitions shall be applicable throughout the Plan: (a) "Award" means, individually or collectively, any Option, Restricted Stock Award, Performance Award, or Incentive Award. (b) "Board" means the Board of Directors of American General Corporation. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. (d) "Committee" means a committee of the Board that is selected by the Board as provided in Section 4(a). (e) "Common Stock" means the common stock of American General Corporation. (f) "Company" means, collectively, American General Corporation and its subsidiaries, except that, in Section 14 hereof, "Company" means only American General Corporation. (g) "Director" means an individual elected to the Board by the shareholders of American General Corporation or by the Board under applicable corporate law. 1 (h) "Employee" means any person (including a Director) in an employment relationship with the Company or any parent or subsidiary corporation (as defined in section 424 of the Code). (i) "Fair Market Value" means, as of any specified date, the average of the highest and lowest quoted selling prices of the Common Stock as reported on the Composite Tape for issues listed on the New York Stock Exchange on the specified date, or, if no sales were reported on the Composite Tape on such specified date, the average of the highest and lowest quoted selling prices of the Common Stock on the nearest dates before and after such specified date on which sales of the Common Stock were so reported. (j) "Grant Document" means the document or documents evidencing an Award under the Plan, which may be either an agreement between the Company and the Holder as to the Award or a notice of grant of the Award from the Company to the Holder (including any attached statement of the terms and conditions of the Award). (k) "Holder" means an employee or a non-employee Director who has been granted an Option, a Restricted Stock Award, a Performance Award, or an Incentive Award. (l) "Incentive Award" means an Award granted under Section 10 of the Plan. (m) "Incentive Stock Option" means an incentive stock option within the meaning of section 422(b) of the Code. (n) "Immediate Family" means, with respect to a Holder, the Holder's spouse, children or grandchildren (including adopted and step children and grandchildren). (o) "1934 Act" means the Securities Exchange Act of 1934, as amended. (p) "Non-Qualified Option" means an Option that is not an Incentive Stock Option. (q) "Option" means an Award under Section 7 of the Plan and includes both Non-Qualified Options and Incentive Stock Options to purchase Common Stock. (r) "Performance Award" means an Award granted under Section 9 of the Plan. (s) "Personal Representative" means the person who upon the death, disability, or incompetency of a Holder shall have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to exercise an Option or the right to any Restricted Stock Award, Performance Award, or Incentive Award theretofore granted or made to such Holder. (t) "Plan" means the American General Corporation 1997 Stock and Incentive Plan, as amended from time to time. 2 (u) "Restricted Stock Award" means an Award granted under Section 8 of the Plan. (v) "Rule 16b-3" means Securities and Exchange Commission Rule 16b-3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation, or statute fulfilling the same or similar function. 3. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall become effective on February 6, 1997, following adoption by the Board, provided the Plan is approved by the shareholders of American General Corporation within twelve months thereafter. Notwithstanding any provision in the Plan or in any Grant Document under the Plan, no Option shall be exercisable and no Award shall vest prior to such shareholder approval. No further Awards may be granted under the Plan after ten years from the date the Plan becomes effective. The Plan shall remain in effect until all Options granted under the Plan have been exercised or expired by reason of lapse of time, all restrictions imposed upon Restricted Stock Awards have been eliminated or the Restricted Stock Awards have been forfeited, and all Performance Awards and Incentive Awards have been satisfied or have terminated. 4. ADMINISTRATION (a) Composition of Committee. The Plan shall be administered by a committee of, and appointed by, the Board, and such Committee shall be comprised solely of two or more outside Directors of American General Corporation (within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder) who are also non-employee Directors (within the meaning of Rule 16b- 3). A majority of the Committee shall constitute a quorum. The Committee shall act by majority action at a meeting, except that action permitted to be taken at a meeting may be taken without a meeting if written consent thereto is given by all members of the Committee. (b) Powers. Subject to the express provisions of the Plan and except as otherwise provided below with respect to non-employee Directors, the Committee shall have authority, in its discretion, to determine which Employees or Directors of the Company shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option or Non-Qualified Option shall be granted, the number of shares to be subject to each Option and Restricted Stock Award, and the value of each Performance Award and Incentive Award. In making such determinations, the Committee shall take into account the nature of the services rendered by the respective Employees or Directors, their present and potential contribution to the Company's success, and such other factors as the Committee shall deem relevant. Notwithstanding the foregoing, the Board shall have authority, in its discretion, to make the determinations set forth above with respect to non-employee Directors. (c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan and except as 3 otherwise provided below with respect to non-employee Directors, this shall include the power to construe the Plan and the respective Grant Documents thereunder, to prescribe rules and regulations relating to the Plan and to determine the terms, restrictions, and provisions of the Grant Document for each Award, including such terms, restrictions, and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, to ensure that the grants of Awards are exempt under Rule 16b-3, and to make all other determinations necessary or advisable for administering the Plan. Without limiting the generality of the foregoing, Grant Documents providing for Awards under the Plan may contain such provisions covering a change of control (sometimes called a "change in control") of the Company, as defined by the Committee in its sole discretion, as the Committee may approve, not inconsistent with the terms of this Plan, including without limitation provisions for the acceleration of, vesting of, or the payment of cash in lieu of, any Award. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Grant Document relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The Committee may delegate to other persons the responsibility of performing ministerial acts in furtherance of the Plan's purposes. The determinations of the Committee on the matters referred to in this Section 4 shall be conclusive. Notwithstanding the foregoing, the Board, in its discretion, shall have the power to determine the terms, restrictions, and provisions of the Grant Document for each Award with respect to non-employee Directors. 5. GRANT OF OPTIONS, RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS, AND INCENTIVE AWARDS; SHARES SUBJECT TO THE PLAN (a) Stock Grant Limit. The Committee may from time to time grant Awards to one or more Employees or Directors determined by it to be eligible for participation in the Plan in accordance with the provisions of Section 6. Subject to adjustment in the same manner as provided in Section 11 with respect to shares of Common Stock subject to Awards then outstanding, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 7,000,000. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Common Stock subject to such Award shall again be available for the grant of an Award. The separate limitations contained in Sections 7, 8, and 9 with respect to specific types of Awards shall be applied in a manner which will permit compensation generated under the Plan which is intended to constitute "performance-based" compensation for purposes of section 162(m) of the Code to be treated as such "performance-based" compensation. (b) Stock Offered. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. 4 6. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are key Employees of the Company or Directors. Awards may not be granted to any person who immediately after such grant is the owner, directly or indirectly, of more than 10% of the total combined voting power of all classes of stock of the Company. An Award may be granted on more than one occasion to the same person, and such Award may include an Incentive Stock Option, Non-Qualified Option, Restricted Stock Award, Performance Award, Incentive Award, or any combination thereof. 7. STOCK OPTIONS (a) Limitations on Awards. The maximum number of shares of Common Stock that may be subject to Option Awards granted to any one individual during any calendar year may not exceed 500,000 shares of Common Stock (subject to adjustment in the same manner as provided in Section 11 with respect to shares of Common Stock subject to Options then outstanding). (b) Option Period. The term of each Option shall be as specified by the Committee at the date of grant but shall not exceed ten years. (c) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times, commencing not earlier than six months from the date of grant, as determined by the Committee. (d) Stock Option Grant Document. Each Option shall be evidenced by an Option Grant Document in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify as an Incentive Stock Option under section 422 of the Code. (e) Option Price and Payment. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee, but, subject to adjustment in the same manner as provided in Section 11, shall not be less than the Fair Market Value of a share of Common Stock at the date such Option is granted. Notwithstanding the foregoing, Non-Qualified Options granted pursuant to the Letter Agreement dated February 12, 1997, between USLIFE Corporation and American General Corporation respecting Non-Qualified Options to be granted following the `Effective Time' of the `Merger Agreement' as referenced in such Letter Agreement, may be at a price less than the Fair Market Value of a share of Common Stock at the date such Non-Qualified Options are granted. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. (f) Shareholder Rights and Privileges. The Holder shall be entitled to all the privileges and rights of a shareholder only with respect to such shares of Common Stock as have been purchased under the Option, for which certificates of stock have been registered in the Holder's name, and as to which the Grant Document for the respective Option requires no further restrictions. 5 (g) Special Limitations on Incentive Stock Options. An Incentive Stock Option may be granted only to an individual who is an Employee at the time the Option is granted. In the case of Incentive Stock Options, the value of shares of stock for which such Options are exercisable for the first time in any one calendar year cannot exceed $100,000 based on the Fair Market Value of the stock at the date of grant according to section 422(d)(1) of the Code (or such other individual limit as may be in effect under the Code on the date of grant). An Incentive Stock Option shall not be transferable or assignable otherwise than by will or the laws of descent and distribution. (h) Stock Appreciation Rights. The Committee (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, grant to any Holder of an Option stock appreciation rights ("SARs"). SARs may give the Holder of an Option the right, upon written request, to surrender any exercisable Option or portion thereof in exchange for cash, whole shares of Common Stock, or a combination thereof, as determined by the Committee, with a value equal to the excess of the Fair Market Value, as of the date of such request, of one share of Common Stock over the Option price for such share multiplied by the number of shares covered by the Option or portion thereof to be surrendered. In the case of any SAR which is granted in connection with an Incentive Stock Option, such SAR shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or portion thereof to be surrendered. In the event of the exercise of any SAR granted hereunder, the number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such SAR. Additional terms and conditions governing any such SARs may from time to time be prescribed by the Committee in its sole discretion. 8. RESTRICTED STOCK AWARDS (a) Limitations on Awards. The maximum number of shares of Common Stock that may be subject to Restricted Stock Awards granted to any one individual during any calendar year may not exceed 50,000 shares of Common Stock (subject to adjustment in the same manner as provided in Section 11 with respect to shares of Common Stock subject to Restricted Stock Awards then outstanding). Subject to adjustment in the same manner as provided in Section 11 with respect to shares of Common Stock subject to Restricted Stock Awards then outstanding, the aggregate number of shares of Common Stock that may be issued under the Plan with respect to Restricted Stock Awards shall not exceed 700,000. (b) Restriction Period to be Established by the Committee. At the time a Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such Award. Each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. (c) Forfeiture Restrictions to be Established by the Committee. Shares of Common Stock that are the subject of a Restricted Stock Award shall be subject to restrictions on disposition by the Holder and an obligation of the Holder to forfeit and surrender the shares to the Company under 6 certain circumstances (the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of one or more performance measures established by the Committee that are based on (1) the price of a share of Common Stock, (2) net income, (3) market share, (4) return on shareholders' equity, (5) the payment of cash dividends, (6) operating income, (7) operating return on shareholders' equity, (8) finance receivables, (9) premium growth, or (10) total shareholder return, (ii) the Holder's continued employment with the Company or continued service as a Director for a specified period of time, (iii) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion, or (iv) a combination of any of the foregoing. The performance measures may be subject to adjustment for specified significant extraordinary items or events, and may be absolute, relative to one or more other companies, or relative to one or more indexes, and may be contingent upon future performance of the Company or any subsidiary, division, or department thereof by or in which the Holder is employed during the performance period. Each Restricted Stock Award may have different Forfeiture Restrictions, in the discretion of the Committee. (d) Other Terms and Conditions. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends during the Restriction Period, to vote Common Stock subject thereto, and to enjoy all other shareholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Restriction Period shall have expired, (ii) the Company shall retain custody of the stock during the Restriction Period, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of the stock during the Restriction Period, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award shall cause a forfeiture of the Restricted Stock Award. (e) Payment for Restricted Stock. A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law or the Committee. 9. PERFORMANCE AWARDS (a) Limitations on Awards. The maximum number of shares of Common Stock that may be subject to Performance Awards granted to any one individual during any calendar year may not exceed 100,000 shares of Common Stock, subject to adjustment in the same manner as provided in Section 11 with respect to shares of Common Stock subject to Performance Awards then outstanding. (b) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance of the Holder shall be measured. 7 (c) Performance Measures. A Performance Award shall be awarded to a Holder contingent upon future performance of the Company or any subsidiary, division, or department thereof by or in which such Holder is employed during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period; provided such measures may be made subject to adjustment for specified significant extraordinary items or events. The performance measures may be absolute, relative to one or more other companies, or relative to one or more indexes. The performance measures established by the Committee may be based upon (i) the price of a share of Common Stock, (ii) net income, (iii) market share, (iv) return on shareholders' equity, (v) the payment of cash dividends, (vi) operating income, (vii) operating return on shareholders' equity, (viii) finance receivables, (ix) premium growth, (x) total shareholder return, or (xi) a combination of any of the foregoing. The Committee, in its sole discretion, may provide for an adjustable Performance Award value based upon the level of achievement of performance measures. (d) Awards Criteria. In determining the value of Performance Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. The Committee, in its sole discretion, may provide for a reduction in the value of a Holder's Performance Award during the performance period. (e) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Common Stock, or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in cash shall be based on the Fair Market Value of the Common Stock on the payment date. (f) Termination of Employment. A Performance Award shall terminate if the Holder does not remain continuously in the employ (or in service as a Director) of the Company at all times during the applicable performance period, except as may be determined by the Committee. 10. INCENTIVE AWARDS (a) Incentive Awards. Incentive Awards are rights to receive shares of Common Stock (or the Fair Market Value thereof), or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without satisfaction of any performance criteria or objectives. The Committee may, in its discretion, require payment or other conditions of the Holder respecting any Incentive Award. (b) Award Period. The Committee shall establish, with respect to and at the time of each Incentive Award, a period over which the Award shall vest with respect to the Holder. 8 (c) Awards Criteria. In determining the value of Incentive Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. (d) Payment. Following the end of the vesting period for an Incentive Award, the Holder of an Incentive Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award, based on the then vested value of the Award. Payment of an Incentive Award may be made in cash, Common Stock, or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in cash shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to an Incentive Award, as determined by the Committee. (e) Termination of Employment. An Incentive Award shall terminate if the Holder does not remain continuously in the employ (or in service as a Director) of the Company at all times during the applicable vesting period, except as may be otherwise determined by the Committee. 11. EQUITABLE ADJUSTMENTS Subject to any required action by the Company's shareholders, upon the occurrence of any event which affects the shares of Common Stock in such a way that an adjustment of outstanding Awards is appropriate in order to prevent the dilution or enlargement of rights under the Awards (including, without limitation, any extraordinary dividend or other distribution (whether in cash or in kind), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event), the Committee shall make appropriate equitable adjustments, which may include, without limitation, adjustments to any or all of the number and kind of shares of stock (or other securities) which may thereafter be issued in connection with such outstanding Awards and adjustments to any exercise price specified in the outstanding Awards and shall also make appropriate equitable adjustments to the number and kind of shares of stock (or other securities) authorized by or to be granted under the Plan. Further, the Committee, in its sole discretion, may make appropriate equitable adjustments, including, without limitation, those described in the immediately preceding sentence, in any other circumstances under which the Committee deems such adjustments to be desirable. Any adjustment made to an Incentive Stock Option hereunder, with respect to either (i) the number or price of shares of stock subject to Incentive Stock Options or (ii) the aggregate number of shares which may be issued pursuant to Incentive Stock Options, shall be made in a manner which will permit such option to continue to constitute an Incentive Stock Option within the meaning of section 422 of the Code. 12. AMENDMENT AND TERMINATION OF THE PLAN The Board may amend the Plan at any time and the Committee may amend any Award (and its 9 related Grant Document) at any time, except as otherwise specifically provided in such Grant Document; provided that no change in any Award theretofore granted may be made that would impair the rights of the Holder of any Award under the Plan without the consent of the Holder, and provided, further, that the Board may not, without approval of the shareholders, amend the Plan (a) to increase the maximum aggregate number of shares which may be issued under the Plan or (b) to change the class of individuals eligible to receive Awards under the Plan. The Board, in its discretion, may terminate the Plan at any time with respect to any shares of Common Stock for which Awards have not theretofore been granted. 13. EFFECT OF THE PLAN (a) No Right to an Award. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an Employee or Director any right to an Award except as may be evidenced by a written instrument from the Company reflecting a grant by the Company of an Award and setting forth the terms and conditions thereof. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award. (b) No Employment/Membership Rights Conferred. Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or (ii) interfere in any way with the right of the Company to terminate his or her employment at any time. Nothing contained in the Plan shall confer upon any Director any right with respect to continuation of membership on the Board. (c) Other Laws; Withholding. The Company shall not be obligated to issue any shares of Common Stock until there has been compliance with such laws and regulations as the Company may deem applicable. No fractional shares of Common Stock shall be delivered. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. (d) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company from taking any corporate action which is deemed by the Company to be appropriate or in its best interests, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No Employee, Director, beneficiary, or other person shall have any claim against the Company as a result of any such action. (e) Restrictions on Transfer. An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Section 7(g)) shall not be transferable or assignable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a "qualified domestic relations order" (as defined by the Code), (iii) with respect to Awards of Non- Qualified Options, if such transfer is permitted in the sole discretion of the Committee, by transfer by a Holder to a member of the Holder's Immediate Family, to a trust solely for the benefit of the Holder and the 10 Holder's Immediate Family, or to a partnership or limited liability company whose only partners or shareholders are the Holder and members of the Holder's Immediate Family, or (iv) with the consent of the Committee. (f) Section 162(m). It is intended that the Plan comply fully with and meet all the requirements of section 162(m) of the Code so that Options and Performance Awards granted hereunder and, if determined by the Committee, Restricted Stock Awards shall constitute "performance-based" compensation within the meaning of such section. If any provision of the Plan would disqualify the Plan or would not otherwise permit the Plan to comply with section 162(m) as so intended, such provision shall be construed or deemed amended to conform to the requirements or provisions of section 162(m); provided that no such construction or amendment shall have an adverse effect on the economic value to a Holder of any Award previously granted hereunder. (g) Governing Law. This Plan shall be construed in accordance with the laws of the State of Texas. 14. MODIFICATION OF OUTSTANDING AWARDS Except as specified in this Section 14, notwithstanding the provisions of any Grant Document evidencing any Award outstanding hereunder on February 1, 1998, if such Grant Document contains provisions with respect to the effect of a "Change of Control" upon such Award, certain of those provisions shall be deemed modified as follows (subject to any consent of the Holder specifically required by the Grant Document): (a) Any provision in the applicable Grant Document which states that a Change of Control shall be deemed to have occurred in circumstances described substantially as follows: "the Company shall (i) merge or consolidate with or into another corporation or entity or enter into a share exchange between shareholders of the Company and another corporation or entity pursuant to Article 5.02 of the Texas Business Corporation Act and as a result of such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity shall then be owned in the aggregate by the former shareholders of the Company, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the Company or (y) any party to such merger, consolidation or share exchange or (ii) sell, lease, exchange or otherwise dispose of all or substantially all of the Company's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of the Company;" shall be modified to provide that a Change of Control shall be deemed to have occurred if: "(i) the Company or any direct or indirect subsidiary of the Company shall merge or consolidate 11 with or into another corporation or entity or enter into a share exchange between shareholders of the Company or any direct or indirect subsidiary of the Company and another corporation or entity pursuant to Article 5.02 of the Texas Business Corporation Act and as a result of such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity or any parent thereof shall then be owned in the aggregate by the former shareholders of the Company, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of the Company or (y) any party to such merger, consolidation or share exchange or (ii) the Company shall sell, lease, exchange or otherwise dispose of all or substantially all of the Company's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of the Company;" (b) Any provisions in the Grant Document of a stock option which would require the payment of the "Merger Spread" in connection with the automatic surrender and cancellation of the stock option when a Change of Control occurs because of a merger, consolidation or share exchange shall be deemed modified by the addition of the following provision: "Notwithstanding any other provision hereof, if a Change of Control occurs which would otherwise require the payment to the Holder of the Merger Spread and the automatic surrender and cancellation of the option hereunder, there shall be no payment of the Merger Spread and no automatic surrender and cancellation of the option. Instead, immediately prior to the occurrence of that particular type of Change of Control, the option shall become fully vested and exercisable. As used in the immediately preceding sentence, "immediately prior" to the Change of Control shall mean sufficiently in advance of the Change of Control to permit the Holder to take all steps reasonably necessary to exercise the option fully and to deal with the shares purchased under the option so that those shares may be treated in the same manner in connection with the Change of Control as the shares of Stock of other shareholders." (c) Any provision in a Grant Document which might limit the Change-of- Control vesting of, or the Change-of-Control lapse of Forfeiture Restrictions with respect to, the Award under the Grant Document in the event that such vesting or lapse might constitute a "parachute payment" shall not apply if the Holder of the Award also holds, immediately prior to any such Change of Control, an individual employment or severance agreement with the Company pursuant to which the Company undertakes to pay the excise tax which might otherwise be imposed upon the Holder under section 280G of the Code in connection with such vesting or lapse. 12 EX-12 5 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Six Months Ended June 30, 1998 1997 Consolidated operations: Income before income tax expense, minority interest, and dividends on preferred securities ............. $ 880 $ 305 Undistributed income of Western National ............ - (23) Fixed charges deducted from income Interest expense .................................. 338 326 Implicit interest in rents ........................ 10 10 Total fixed charges deducted from income ........ 348 336 Earnings available for fixed charges........... $1,228 $ 618 Fixed charges per above ............................. $ 348 $ 336 Capitalized interest ................................ - 6 Total fixed charges ............................. 348 342 Dividends on preferred stock and securities ..... 73 65 Combined fixed charges and preferred stock dividends ............................. $ 421 $ 407 Ratio of earnings to fixed charges .......... 3.53 1.80 Ratio of earnings to combined fixed charges and preferred stock dividends ............. 2.91 1.52 Consolidated operations, corporate fixed charges and preferred stock dividends only: Income before income tax expense, minority interest, and dividends on preferred securities . $ 880 $ 305 Undistributed income of Western National .......... - (23) Corporate fixed charges deducted from income - corporate interest expense ...................... 104 87 Earnings available for fixed charges ............ $ 984 $ 369 Total corporate fixed charges per above ........... $ 104 $ 87 Capitalized interest related to real estate operations ...................................... - 5 Total corporate fixed charges ................... 104 92 Dividends on preferred stock and securities ..... 73 65 Combined corporate fixed charges and preferred stock dividends ................... $ 177 $ 157 Ratio of earnings to corporate fixed charges 9.44 3.99 Ratio of earnings to combined corporate fixed charges and preferred stock dividends ................................. 5.54 2.35 Exhibit 12 (continued) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Unaudited) ($ in millions) Six Months Ended June 30, 1998 1997 American General Finance, Inc.: Income before income tax expense .................... $ 144 $ 83 Fixed charges deducted from income Interest expense .................................. 246 249 Implicit interest in rents ........................ 6 5 Total fixed charges deducted from income ........ 252 254 Earnings available for fixed charges .......... $ 396 $ 337 Ratio of earnings to fixed charges .......... 1.57 1.33 Exhibit 12 (continued) 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 June 30, 1998 1997 Consolidated operations: Income (loss) before income tax expense, minority interest, and dividends on preferred securities ... $ 452 $ (46) Undistributed income of Western National ............ - (11) Fixed charges deducted from income Interest expense .................................. 166 164 Implicit interest in rents ........................ 5 5 Total fixed charges deducted from income ........ 171 169 Earnings available for fixed charges........... $ 623 $ 112 Fixed charges per above ............................. $ 171 $ 169 Capitalized interest ................................ - 3 Total fixed charges ............................. 171 172 Dividends on preferred stock and securities ..... 36 37 Combined fixed charges and preferred stock dividends ............................. $ 207 $ 209 Ratio of earnings to fixed charges .......... 3.65 -* Ratio of earnings to combined fixed charges and preferred stock dividends ............. 3.00 -* Consolidated operations, corporate fixed charges and preferred stock dividends only: Income (loss) before income tax expense, minority interest, and dividends on preferred securities . $ 452 $ (46) Undistributed income of Western National .......... - (11) Corporate fixed charges deducted from income - corporate interest expense ...................... 50 47 Earnings available for fixed charges ............ $ 502 $ (10) Total corporate fixed charges per above ........... $ 50 $ 47 Capitalized interest related to real estate operations ...................................... - 2 Total corporate fixed charges ................... 50 49 Dividends on preferred stock and securities ..... 36 37 Combined corporate fixed charges and preferred stock dividends ................... $ 86 $ 86 Ratio of earnings to corporate fixed charges 10.07 -* Ratio of earnings to combined corporate fixed charges and preferred stock dividends ................................. 5.81 -* Exhibit 12 (continued) 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 June 30, 1998 1997 American General Finance, Inc.: Income before income tax expense .................... $ 73 $ 21 Fixed charges deducted from income Interest expense .................................. 124 124 Implicit interest in rents ........................ 3 2 Total fixed charges deducted from income ........ 127 126 Earnings available for fixed charges .......... $ 200 $ 147 Ratio of earnings to fixed charges .......... 1.57 1.17 * Earnings were inadequate to cover fixed charges. The amount of deficiency was as follows: Amount Consolidated operations: Ratio of earnings to fixed charges ....................... $ 60 Ratio of earnings to combined fixed charges and preferred stock dividends .......................... 97 Consolidated operations, corporate fixed charges and preferred stock dividends only: Ratio of earnings to corporate fixed charges ............. 59 Ratio of earnings to combined corporate fixed charges and preferred stock dividends .................. 96 EX-27 6
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 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 61,615 0 0 114 3,498 232 69,292 195 0 4,011 101,025 57,831 189 422 2,418 10,551 1,727 85 929 7,783 101,025 1,769 2,506 5 755 2,510 321 (405) 880 316 508 0 0 0 508 2.02 1.97 0 0 0 0 0 0 0 MOST 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 AND CONVERTIBLE MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES. CONSISTS OF CONVERTIBLE PREFERRED STOCK. CONSISTS OF NET OF THE FOLLOWING: NET UNREALIZED GAINS (LOSSES) ON SECURITIES; RETAINED EARNINGS; COST OF TREASURY STOCK; AND FOREIGN CURRENCY TRANSLATION GAINS (LOSSES). 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 $17 MILLION OF MINORITY INTEREST AND $69 MILLION OF DIVIDENDS ON PREFERRED SECURITIES OF SUBSIDIARIES, SHOWN SEPARATELY, NET OF TAX, IN THE CONSOLIDATED INCOME STATEMENT. EXCLUDES $6 MILLION TAX BENEFIT FOR MINORITY INTEREST AND $24 MILLION TAX BENEFIT FOR TAX DEDUCTIBLE DIVIDENDS RELATED TO PREFERRED SECURITIES OF SUBSIDIARIES.
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