File Pursuant to Rule 424(b)(1)
Registration No. 333-72876
PROSPECTUS
$1,519,734,000
[AIG Logo]
AMERICAN INTERNATIONAL GROUP, INC.
ZERO COUPON CONVERTIBLE SENIOR DEBENTURES DUE 2031
------------------------
Holders may convert the debentures into shares of AIG common stock at a
conversion ratio of 6.0627 shares per $1,000 principal amount of debentures at
maturity, subject to adjustment, before November 9, 2031 under any of the
following circumstances: (1) during any fiscal quarter commencing after December
31, 2001 or on any business day commencing after September 30, 2031, if the
closing sale price of AIG common stock exceeds 120% of the conversion price as
in effect for at least (x) 20 trading days in the 30 consecutive trading days
ending on the last trading day of the preceding fiscal quarter or (y) one
trading day after September 30, 2031; (2) if the debentures have been called for
redemption; or (3) upon the occurrence of certain corporate events. The
conversion ratio will not be adjusted for accrued original issue discount.
------------------------
AIG will pay upside contingent interest to the holders of debentures during any
six-month period from May 9 to November 8 and from November 9 to May 8, with the
initial six-month period commencing November 9, 2006, if the average closing
sale price of AIG common stock for a certain measurement period equals 120% or
more of the conversion price. During any period when upside contingent interest
is payable, the contingent interest payable per debenture in either the first
three months or second three months of such period will equal the greater of (x)
the sum of all regular cash dividends paid by AIG per share on AIG common stock
during those three months multiplied by the number of shares of AIG common stock
issuable upon conversion of a debenture at the applicable conversion rate and
(y) .00125 multiplied by the sum of the issue price and accrued original issue
discount for a debenture to the last day of the relevant three-month period. AIG
will also pay downside contingent interest for these six-month periods
commencing November 9, 2006 if the closing sale price of AIG common stock for a
certain measurement period is less than or equal to 95% of the conversion price
of the debentures then in effect. You should read the discussion of selected
United States federal income tax consequences relevant to the debentures
beginning on page 23.
------------------------
On or after November 9, 2006, AIG may redeem any of the debentures at the
redemption prices set forth herein. Holders may require AIG to repurchase the
debentures at the repurchase prices set forth herein on November 9, 2006, 2011,
2016, 2021 and 2026.
------------------------
The debentures will constitute unsecured debt of AIG.
------------------------
AIG common stock is listed on the New York Stock Exchange under the symbol
"AIG." On November 6, 2001, the reported last sale price of AIG common stock on
the New York Stock Exchange was $82.85 per share.
------------------------
INVESTING IN THE DEBENTURES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
5.
------------------------
PRICE 65.801% AND ACCRUED ORIGINAL ISSUE DISCOUNT, IF ANY
------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT AIG
-------- ------------ -----------
Per Debenture........................... 65.801% .658% 65.143%
Total................................... $1,000,000,169 $9,999,850 $990,000,319
AIG has granted Morgan Stanley & Co. Incorporated the right to purchase up to an
additional $227,960,000 principal amount of debentures to cover over-allotments.
Morgan Stanley & Co. Incorporated expects to deliver the debentures to
purchasers on November 9, 2001.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
------------------------
MORGAN STANLEY
November 7, 2001
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. AIG HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT FROM THAT CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. AIG IS OFFERING TO SELL THE DEBENTURES ONLY WHERE OFFERS AND
SALES ARE PERMITTED. THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS OR THE DATES
OF THE DOCUMENTS INCORPORATED BY REFERENCE, REGARDLESS OF THE TIME OF DELIVERY
OF THIS PROSPECTUS OR OF ANY SALE OF THE DEBENTURES.
------------------------
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-
Looking Information................... ii
Summary................................. 1
Risk Factors............................ 5
American International Group, Inc....... 6
Use of Proceeds......................... 6
Consolidated Ratios of Earnings to Fixed
Charges............................... 6
Description of Capital Stock............ 7
Market Price and Dividend Information... 8
Description of Debentures............... 8
Certain United States Federal Income Tax
Consequences.......................... 23
Underwriting............................ 32
Where You Can Find More Information..... 34
Incorporation by Reference.............. 34
Validity of the Debentures and Common
Stock................................. 35
Experts................................. 35
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking information. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking information to encourage companies to provide prospective
information about themselves without fear of litigation so long as that
information is identified as forward-looking and is accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ, possibly materially, from those in the information.
Forward-looking information may be included in this prospectus or may be
"incorporated by reference" from other documents filed with the SEC by AIG. You
can find many of these statements by looking for words including, for example,
"believes," "expects," "anticipates," "estimates" or similar expressions in this
prospectus or in documents incorporated by reference in this prospectus.
The forward-looking information is subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ, possibly
materially, from those contemplated by the forward-looking information include,
among others, the following:
-- the continuing impact on the global economy of the September 11, 2001
terrorist attacks;
-- the impact of changes in international political conditions,
including as a result of the September 11, 2001 terrorist attacks;
-- currency fluctuations and changes in the availability, cost and
collectibility of reinsurance;
-- the entry of new or stronger competitors and the intensification of
pricing competition;
-- the loss of current customers or the inability to obtain new
customers;
-- changes in interest rates and the performance of the financial
markets;
-- catastrophic events, including, for example, earthquakes or
hurricanes and other severe weather-related events;
-- changes in the coverage terms selected by insurance customers,
including higher deductibles and lower limits;
-- the adequacy of loss reserves;
-- political risk in some of the countries in which AIG operates or
insures risks;
-- changes in asset valuations;
-- consolidation and restructuring in the insurance industry;
-- changes in regulations and tax laws affecting the cost, availability
or demand for the products of AIG; and
-- adverse litigation or arbitration results, including proceedings
related to industrial life insurance, satellite dish financing and
workers' compensation insurance.
Because forward-looking information is subject to various risks and
uncertainties, actual results may differ materially from that expressed or
implied by the forward-looking information.
ii
SUMMARY
The following summary is provided solely for your convenience. It is not
intended to be complete. You should read the entire prospectus carefully,
especially the risks of investing in the debentures discussed under "Risk
Factors" beginning on page 5.
Securities Offered............ $1,519,734,000 principal amount at maturity of
Zero Coupon Convertible Senior Debentures Due
2031 (and up to an additional $227,960,000
aggregate principal amount if Morgan Stanley &
Co. Incorporated exercises its option to
purchase additional debentures). AIG will not
pay periodic interest on the debentures, unless
contingent interest becomes payable as
described under "Description of
Debentures--Contingent Interest" beginning on
page 13.
Maturity Date................. November 9, 2031.
Ranking....................... The debentures will constitute unsecured debt
of AIG.
Yield to Maturity of
Debentures.................... 1.40% per year compounded semi-annually,
calculated from November 9, 2001, excluding any
contingent interest.
Original Issue Discount....... AIG is offering the debentures at an issue
price substantially below the principal amount
at final maturity of the debentures. The
difference between the issue price and the
principal amount at maturity of a debenture is
referred to as original issue discount. This
original issue discount will accrue daily at a
rate of 1.40% per year beginning on November 9,
2001, calculated on a semi-annual bond
equivalent basis, using a 360-day year
comprised of twelve 30-day months. The accrual
of imputed interest income, also referred to as
tax original issue discount, as calculated for
United States federal income tax purposes, will
likely exceed the accrued original issue
discount. See "Certain United States Federal
Income Tax Consequences."
Contingent Interest........... AIG will pay upside contingent interest during
any six-month period from May 9 to November 8
and from November 9 to May 8, with the initial
six-month period commencing November 9, 2006,
if the average closing sale price of AIG common
stock for the five trading days ending on, and
including, the third trading day immediately
preceding the first day of the applicable
six-month period equals 120% or more of the sum
of the issue price and accrued original issue
discount for a debenture to the day immediately
preceding the first day of the applicable
six-month period divided by the number of
shares of common stock issuable upon a
conversion of a debenture. Notwithstanding the
above, if AIG declares a dividend for which the
record date falls prior to the first day of a
six-month period but the payment date falls
within that six-month period, then the five
trading day period for determining the average
closing sale price of its
1
common stock will be the five trading days
ending on, and including, the third trading day
immediately preceding such record date. During
any period when upside contingent interest is
payable, the contingent interest payable per
debenture in either the first three months or
the second three months of such period will
equal the greater of (x) the sum of all regular
cash dividends paid by AIG per share on AIG
common stock during those three months
multiplied by the number of shares of AIG
common stock issuable upon conversion of a
debenture at the then applicable conversion
rate and (y) .00125 multiplied by the sum of
the issue price and accrued original issue
discount for a debenture to the last day of the
relevant three-month period. The original issue
discount will continue to accrue at the yield
to maturity whether or not upside contingent
interest is paid.
Downside contingent interest will be payable on
the debentures for any six-month period from
May 9 to November 8 or from November 9 to May
8, commencing on November 9, 2006, for which
the closing sale price of AIG common stock for
any 20 out of the last 30 trading days ending
on but not including the third business day
prior to the commencement of such six-month
period is less than or equal to 95% of the
conversion price of the debentures in effect
for each of those 20 trading days. Downside
contingent interest will be payable until but
not including the first day of the first
subsequent six-month period for which the
trading price condition described above is not
satisfied, at which time downside contingent
interest on the debentures will cease to accrue
unless and until the trading price condition is
satisfied for any subsequent six-month period.
The downside contingent interest rate
determined for any six-month period will be
equal to the difference between (x) the
six-month London interbank offered rate plus
the applicable spread (which may be positive or
negative) as determined by the contingent
interest rate agent and (y) 1.40% (but in no
event will be less than zero). The applicable
spread will be determined by the contingent
interest rate agent on each November 9 of 2006,
2011, 2016, 2021 and 2026. The original issue
discount will continue to accrue at the yield
to maturity whether or not downside contingent
interest is paid.
Conversion Rights............. The holder may convert the debentures into
shares of AIG common stock at a conversion
ratio of 6.0627 shares per $1,000 principal
amount of debentures, subject to adjustment,
prior to the final maturity date under any of
the following circumstances:
-- during any fiscal quarter commencing
after December 31, 2001 or on any
business day commencing after
2
September 30, 2031 if the closing sale price
of AIG common stock exceeds 120% of the
conversion price as in effect for at least
(x) 20 trading days in the 30 consecutive
trading days ending on the last trading day
of the preceding fiscal quarter or (y) one
trading day after September 30, 2031; or
-- if the debentures have been called for
redemption; or
-- upon the occurrence of specified
corporate events described under
"Description of Debentures--Conversion of
Debentures--Conversion Upon Specified
Corporate Events" on page 11.
Tax Original Issue Discount... Pursuant to the terms of the indenture, AIG and
each holder of the debentures agree, for United
States federal income tax purposes, to treat
the debentures as indebtedness subject to the
regulations governing contingent payment debt
instruments. Under these regulations, even if
AIG does not pay any contingent cash interest
on the debentures, the holder will be required
to include interest in gross income for United
States federal income tax purposes. This
imputed interest is also referred to as tax
original issue discount. The rate at which the
tax original issue discount accrues for United
States federal income tax purposes will likely
exceed the stated yield of 1.40% at which
original issue discount is stated to accrue on
the debentures and, if applicable, any
additional yield resulting from contingent
interest. Under these regulations, the holder
will also recognize gain or loss on the sale,
exchange, conversion or redemption of a
debenture in an amount equal to the difference
between the amount realized on the sale,
exchange, conversion or redemption, including
the fair market value of any common stock
received upon conversion or otherwise, and the
adjusted tax basis in the debenture. Any gain
recognized by the holder on the sale, exchange,
conversion or redemption of a debenture
generally will be ordinary interest income; any
loss will be ordinary loss to the extent of the
interest previously included in income, and
thereafter, capital loss. See "Certain United
States Federal Income Tax Consequences."
Redemption.................... AIG may redeem any of the debentures on or
after November 9, 2006, by giving the holder at
least 15 days' notice. AIG may redeem the
debentures either in whole or in part at
redemption prices equal to the issue price,
accrued original issue discount and any accrued
contingent interest through the date of
redemption.
Repurchase at the Option of
the Holder.................... The holder may require AIG to repurchase
debentures on November 9, 2006, 2011, 2016,
2021 or 2026 for a purchase
3
price equal to the issue price plus accrued
original issue discount and any accrued and
unpaid contingent interest to but not including
the date of repurchase. AIG may choose to pay
the repurchase price in cash or in common stock
(based on the five-day average of the closing
sale price of common stock ending on but not
including the third day prior to the repurchase
date) or a combination of cash and common
stock. See "Description of
Debentures--Repurchase of Debentures at Option
of the Holder" beginning on page 16.
Sinking Fund.................. None.
Use of Proceeds............... The net proceeds from the sale of the
debentures will be used as described under "Use
of Proceeds."
Trading....................... The debentures will not be listed on any
securities exchange. The debentures will be a
new issue of securities for which there
currently is no public market. AIG common stock
is traded on the NYSE under the symbol "AIG."
4
RISK FACTORS
You should carefully consider the risks described below before making a
decision to purchase the debentures.
AIG EXPECTS THAT THE TRADING VALUE OF THE DEBENTURES WILL BE SIGNIFICANTLY
AFFECTED BY THE PRICE OF ITS COMMON STOCK.
The market price of the debentures is expected to be significantly affected
by the market price of AIG common stock. This may result in greater volatility
in the trading value of the debentures than would be expected for nonconvertible
debt securities AIG issues.
THE CONDITIONS TO THE CONVERSION OF THE DEBENTURES MAY RESULT IN A HOLDER
RECEIVING LESS THAN THE VALUE OF THE COMMON STOCK INTO WHICH A DEBENTURE IS
CONVERTIBLE.
The debentures are convertible only if certain conditions are met. These
conditions are described under "Description of Debentures--Conversion of
Debentures" beginning on page 10. If these conditions are not satisfied, a
holder may be unable to receive the value of the common stock into which the
debenture is convertible. This feature may adversely affect the value and the
trading prices for the debentures.
THE YIELD ON THE DEBENTURES MAY BE LOWER THAN THE YIELD ON A STANDARD DEBT
SECURITY OF COMPARABLE MATURITY.
The amount AIG pays the holder may be less than the return the holder could
earn on other investments. The yield will be less than the yield the holder
would earn if on the issue date of the debentures he or she bought a standard
senior debt security of AIG with the same stated maturity date. An investment in
the debentures may not reflect the full opportunity cost to the holder taking
into account factors that affect the time value of money.
THE TRADING MARKET FOR THE DEBENTURES MAY BE LIMITED.
The debentures are a new issue of securities for which there is currently
no public market. If the debentures are traded, they may do so at a discount
from their initial public offering price, depending on prevailing interest
rates, the market for similar securities, the market prices for AIG common
stock, AIG's financial performance and other factors. The debentures will not be
listed on any securities exchange, and AIG does not know whether an active
trading market will develop or be maintained for the debentures. To the extent
that an active trading market for the debentures does not develop, their
liquidity and trading price may be harmed.
HOLDERS SHOULD CONSIDER THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
OF HOLDING, PURCHASING AND SELLING DEBENTURES, INCLUDING THE RULES APPLICABLE TO
CONTINGENT PAYMENT DEBT INSTRUMENTS.
Pursuant to the terms of the indenture, AIG and each holder of the
debentures agrees, for United States federal income tax purposes, to treat the
debentures as indebtedness that is subject to the regulations governing
contingent payment debt instruments. This treatment is highly uncertain,
however, and no assurance can be given that the IRS will not assert that the
debentures should be treated differently. Assuming that the debentures are so
treated, a holder will likely be required to include amounts in income, as
ordinary income, in advance of the receipt of the cash or other property,
including shares of AIG common stock, attributable thereto. The amount of
interest income required to be included by the holder for each year will likely
be in excess of the stated yield to maturity of the debentures. The holder will
recognize gain or loss on the sale, purchase by AIG at the holder's option,
conversion or redemption of a debenture in an amount equal to the difference
between the amount realized on the sale, purchase by AIG at the holder's option,
conversion or redemption, including the fair market value of any common stock
received upon conversion or otherwise, and the holder's adjusted tax basis in
the debenture. Any gain recognized by the holder on the sale, purchase by AIG at
the holder's option, conversion or redemption of a debenture generally will be
ordinary interest income; any loss will be ordinary loss to the extent of the
interest previously included in income, and thereafter, capital loss.
5
THE CONVERSION RATE MAY NOT BE ADJUSTED FOR ALL DILUTIVE EVENTS.
The conversion rate is subject to adjustment for certain events arising
from common stock dividends, the issuance of rights or warrants, subdivisions,
combinations, distributions of capital stock, indebtedness or assets and
extraordinary cash dividends as described under "Description of
Debentures -- Conversion of Debentures -- Conversion Rate Adjustments" below.
The conversion rate will not be adjusted for other events, such as an issuer
tender or exchange offer at a premium to the then current market price or a
third party tender or exchange offer, that may adversely affect the price of the
common stock and, therefore, adversely affect the trading price of the
debentures and the amount of common stock into which the debentures may be
convertible. There can be no assurance that an event which adversely affects the
value of the debentures but does not result in an adjustment to the conversion
rate will not occur.
AMERICAN INTERNATIONAL GROUP, INC.
AIG, a Delaware corporation, is a holding company which through its
subsidiaries is primarily engaged in a broad range of insurance and
insurance-related activities and financial services in the United States and
abroad.
AIG's principal executive offices are located at 70 Pine Street, New York,
New York 10270, and its telephone number is 212-770-7000.
USE OF PROCEEDS
The net proceeds from the sale of the debentures (assuming Morgan Stanley &
Co. Incorporated does not exercise its right to purchase additional debentures)
are expected to be approximately $990,000,319 before deducting the expenses of
the offering. AIG intends to use the net proceeds from the sale of debentures
for general corporate purposes, which may include repayment of indebtedness,
additions to working capital, capital expenditures and acquisitions.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the historical ratios of earnings to fixed
charges of AIG and its consolidated subsidiaries for the periods indicated:
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- --------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ---- ---- ---- ---- ----
3.25 3.70 3.59 3.96 3.57 3.36 3.24
Earnings represent
-- Income from operations before income taxes and adjustments for
minority interest
plus
-- Fixed charges other than capitalized interest
-- Amortization of capitalized interest
-- The distributed income of equity investees
less
-- The minority interest in pre-tax income of subsidiaries that do
not have fixed charges.
Fixed charges include
-- Interest, whether expensed or capitalized
-- Amortization of debt issuance costs
-- One third of rental expense. Management of AIG believes this is
representative of the interest factor.
6
DESCRIPTION OF CAPITAL STOCK
The following description of the material terms of the capital stock of AIG
is not complete. You should read AIG's restated certificate of incorporation, as
amended, and bylaws for a complete description of AIG's capital stock. See
"Where You Can Find More Information."
GENERAL
AIG's authorized capital stock includes 5,000,000,000 shares of common
stock, par value $2.50 per share, and 6,000,000 shares of serial preferred
stock, par value $5.00 per share. As of September 30, 2001, there were
2,612,478,763 shares of common stock outstanding and no shares of preferred
stock outstanding.
COMMON STOCK
All of the outstanding shares of common stock are fully paid and
nonassessable. Subject to the prior rights of the holders of shares of preferred
stock that may be issued and outstanding, the holders of common stock are
entitled to receive:
-- dividends as and when declared by the AIG board of directors out of
funds legally available for the payment of dividends; and
-- in the event of the dissolution of AIG, to share ratably in all
assets remaining after payment of liabilities and satisfaction of the
liquidation preferences, if any, of then outstanding shares of
preferred stock, as provided in AIG's amended and restated
certificate of incorporation.
Each holder of common stock is entitled to one vote for each share held of
record on all matters presented to a vote at a shareholders meeting, including
the election of directors. Holders of common stock have no cumulative voting
rights or preemptive rights to purchase or subscribe for any stock or other
securities and there are no conversion rights or redemption or sinking fund
provisions with respect to the common stock. Additional authorized shares of
common stock may be issued without shareholder approval.
PREFERRED STOCK
The authorized but unissued shares of preferred stock are available for
issuance from time to time at the discretion of the AIG board of directors
without shareholder approval. The AIG board of directors has the authority to
determine for each series of preferred stock it establishes the number,
designation, preferences, limitations and relative rights of the shares of the
series, subject to applicable law and the provisions of any outstanding series
of preferred stock. The terms of any series of preferred stock, including the
dividend rate, redemption price, liquidation rights, sinking fund provisions,
conversion rights and voting rights, and any corresponding effect on other
shareholders, will be dependent largely on factors existing at the time of
issuance. These terms and effects could include:
-- restrictions on dividends on the common stock if dividends on the
preferred stock are in arrears;
-- dilution of the voting power of other shareholders to the extent a
series of the preferred stock has voting rights; and
-- reduction of amounts available for liquidation as a result of any
liquidation preference granted to any series of preferred stock.
7
MARKET PRICE AND DIVIDEND INFORMATION
The table below sets forth, for the calendar quarters indicated, the high
and low closing sales prices per share of common stock as reported on the New
York Stock Exchange ("NYSE") composite transactions reporting system, and the
dividends per share of common stock declared by AIG during those periods.
COMMON STOCK(a)
------------------------------
HIGH LOW DIVIDENDS
------- ------ ---------
1999:
First Quarter...................................... $ 65.40 $52.00 $.030
Second Quarter..................................... 70.90 59.47 .030
Third Quarter...................................... 66.50 56.33 .033
Fourth Quarter..................................... 74.76 54.67 .033
2000:
First Quarter...................................... $ 76.04 $54.29 $.033
Second Quarter..................................... 82.17 67.75 .033
Third Quarter...................................... 95.69 78.79 .037
Fourth Quarter..................................... 103.69 90.13 .037
2001:
First Quarter...................................... $ 96.88 $75.12 $.037
Second Quarter..................................... 86.51 76.18 .037
Third Quarter...................................... 87.06 67.05 .042
Fourth Quarter (through November 6, 2001).......... 86.01 76.74 .042
------------
(a) All common stock information has been adjusted to reflect stock splits
effected as a 25% common stock dividend paid July 30, 1999 and a 50% common
stock dividend paid July 28, 2000.
On November 6, 2001, the last reported sale price for AIG common stock on
the NYSE was $82.85 per share. As of September 30, 2001, there were
approximately 41,300 holders of record of AIG common stock.
The declaration of dividends by AIG is subject to the discretion of the AIG
board of directors. The AIG board of directors will take into account such
matters as general business conditions, AIG's financial results and capital
requirements, contractual, legal and regulatory restrictions on the payment of
dividends by AIG to shareholders or by AIG's subsidiaries to it, the effect on
AIG's debt ratings and such other factors as the board of directors may deem
relevant. A number of AIG's subsidiaries are subject to regulatory regimes that
limit their ability to pay dividends and make loans and distributions to AIG.
DESCRIPTION OF DEBENTURES
As required by federal law for all bonds and notes of companies that are
publicly offered, the debentures are governed by a document called the
indenture. The indenture is a contract that will be entered into between AIG and
The Bank of New York, which acts as trustee.
The trustee has two main roles:
(1) The trustee can enforce the holders' rights against AIG if AIG
defaults on its obligations under the terms of the indenture or the
debentures. There are some limitations on the extent to which the trustee
acts on the holders' behalf, described later on page 20 under "Default and
Related Matters -- Remedies If an Event of Default Occurs."
(2) The trustee performs administrative duties for AIG, such as
sending notices to the holders.
The indenture and its associated documents contain the full legal text of
the matters described in this section. The indenture and the debentures are
governed by New York law. A copy of the indenture is an
8
exhibit to AIG's registration statement. See "Where You Can Find More
Information" on page 34 for information on how to obtain a copy.
Because this section is a summary, it does not describe every aspect of the
debentures. This summary is subject to and qualified in its entirety by
reference to all the provisions of the indenture, including definitions of
certain terms used in the indenture. In this summary, AIG describes the meaning
for only some of the more important terms. The holders must look to the
indenture for the most complete description of what AIG describes in summary
form in this prospectus.
Please note that all references to AIG in this description refer only to
American International Group, Inc., a holding company, and not to any of its
consolidated subsidiaries or affiliates.
GENERAL
The debentures will be limited to $1,519,734,000 aggregate principal amount
(or $1,747,694,000 if Morgan Stanley & Co. Incorporated exercises its right to
purchase additional debentures in full). The debentures will be issued only in
denominations of $1,000 and multiples of $1,000. The debentures will mature on
November 9, 2031 unless earlier converted, redeemed at AIG's option or
repurchased at the holder's option upon an optional repurchase date.
The debentures are being offered at a substantial discount from their
principal amount at maturity. There will be no periodic cash payments of
interest on the debentures unless contingent interest becomes payable as
described below under "Contingent Interest." In periods during which a debenture
remains outstanding, the accrual of original issue discount (the difference
between the issue price of a debenture and its principal amount at maturity)
will be calculated on a semi-annual bond equivalent basis at the yield to
maturity of the debentures, using a 360-day year composed of twelve 30-day
months. The accrual of original issue discount will commence on the date the
debentures are issued. Original issue discount will cease to accrue upon
conversion, repurchase or redemption of the debentures under the terms of the
indenture.
The indenture does not contain any covenant or restriction on AIG's
business or operations except for the restriction on mergers and the sale of
assets. AIG is not restricted under the indenture from paying dividends,
incurring debt, or issuing or repurchasing its securities. No provision of the
indenture would afford the holders of debentures protection in the event of a
highly leveraged transaction involving AIG or a change in control of AIG.
Pursuant to the terms of the indenture, AIG and each holder of a debenture
agrees to treat the debentures as debt instruments subject to the contingent
payment debt regulations. The debentures will be issued with original issue
discount for United States federal income tax purposes. In general, beneficial
owners of the debentures will be required to accrue interest income on the
debentures for United States federal income tax purposes in the manner described
herein, regardless of whether such owner uses the cash or accrual method of tax
accounting. Beneficial owners will be required, in general, to accrue interest,
which AIG refers to as tax original issue discount, based on the rate at which
AIG would issue a fixed rate nonconvertible debt instrument with no contingent
payments, but with terms and conditions otherwise comparable to those of the
debentures rather than at a lower rate based on the stated yield of the
debentures for non-tax purposes. Accordingly, owners of debentures will be
required to include tax original issue discount as interest in taxable income in
each year in excess of the amount of original issue discount that accrues on the
debentures for non-tax purposes. Furthermore, upon a sale, exchange, conversion
or redemption of a debenture, the holder will recognize gain or loss equal to
the difference between the amount realized and the adjusted tax basis in the
debenture. The amount realized will include, in the case of a conversion, the
fair market value of the common stock the holder receives. Any gain on a sale,
exchange, conversion or redemption of a debenture will be treated as ordinary
interest income. Holders are expected to consult their own tax advisors as to
the United States federal, state, local or other tax consequences of acquiring,
owning and disposing of the debentures. See "Certain United States Federal
Income Tax Consequences."
9
CONVERSION OF DEBENTURES
Holders may convert debentures, in whole or in part, into common stock
prior to the final maturity date of the debentures, subject to prior redemption
or repurchase of the debentures, under the circumstances described below. The
number of shares of common stock a holder will receive upon conversion of
debentures will be determined by multiplying the number of $1,000 principal
amount at maturity of debentures converted by the conversion rate on the date of
conversion. If AIG calls debentures for redemption, a holder may convert the
debentures up to, but not including, the third business day prior to the
redemption date unless AIG fails to pay the redemption price. A holder may
convert debentures in part so long as this part is $1,000 principal amount or an
integral multiple of $1,000. Similarly, if a holder exercises the option to
require AIG to repurchase debentures, those debentures may be converted only if
the holder withdraws the repurchase notice as described below under "Repurchase
of Debentures at Option of the Holder."
Before the final maturity date of the debentures, a holder may convert
debentures into common stock only under the following circumstances:
-- during any fiscal quarter commencing after December 31, 2001 or on
any business day commencing after September 30, 2031, if the closing
sale price of common stock exceeds 120% of the conversion price as in
effect for at least (x) 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding fiscal quarter
or (y) one trading day after September 30, 2031;
-- if the debentures have been called for redemption, from the date of
the notice of redemption up to, but not including, the third business
day prior to the redemption date; or
-- upon the occurrence of the corporate events described below on page
11 under "Conversion Upon Specified Corporate Events."
The "closing sale price" of common stock on any date means the closing per
share sale price (or, if no closing sale price is reported, the average of the
closing bid and ask prices) on such date as reported on the NYSE or, if AIG
common stock is not listed on the NYSE, as reported on a national securities
exchange, or if not reported on a national securities exchange, as reported by
the Nasdaq. The closing sale price is calculated without reference to extended
or after-hours trading. In the absence of such a quotation, AIG will determine
the closing sale price on the basis of such quotations as AIG considers
appropriate. The "conversion price" as of any day will equal the sum of the
issue price and the accrued original issue discount divided by the number of
shares of common stock issuable upon a conversion of a debenture.
"Trading day" means a day during which trading in AIG common stock occurs
regular way on the NYSE or, if AIG common stock is not listed on the NYSE, on
the principal other national or regional securities exchange on which AIG common
stock is then listed or, if AIG common stock is not listed on a national or
regional securities exchange, as reported by the Nasdaq or, if AIG common stock
is not so quoted, on the principal other market on which AIG common stock is
then traded.
"Business day" means each day of the year other than a Saturday or Sunday
on which banking institutions in The City of New York are not authorized or
obligated to close.
CONVERSION UPON SATISFACTION OF MARKET PRICE CONDITION
A holder may surrender debentures for conversion into common stock prior to
final maturity during any fiscal quarter commencing after December 31, 2001 or
on any business day commencing after September 30, 2031, if the closing sale
price of common stock exceeds 120% of the conversion price as in effect for at
least (x) 20 trading days in the 30 consecutive trading days ending on the last
trading day of the preceding fiscal quarter or (y) one trading day after
September 30, 2031. For purposes of clause (x) the conversion price will be
determined at the close of business on each of the 30 trading days.
10
CONVERSION UPON NOTICE OF REDEMPTION
If AIG calls debentures for redemption, a holder may convert the debentures
from the date of the notice of redemption up to, but not including, the third
business day prior to the redemption date, after which time the right to convert
will expire unless AIG defaults in the payment of the redemption price.
CONVERSION UPON SPECIFIED CORPORATE EVENTS
If AIG elects to:
-- distribute to all holders of common stock certain rights entitling
them to purchase, for a period expiring within 45 days, common stock
at less than the current market price (measured by averaging the
closing sale prices of AIG common stock for the 10 trading days
preceding the date of the first public announcement of such
distribution); or
-- distribute to all holders of common stock, assets, debt securities or
certain rights to purchase AIG securities, which distribution has a
per share value exceeding 15% of the closing sale price of AIG common
stock on the day preceding the date of the first public announcement
of such distribution;
AIG must notify the holders at least 10 days prior to the ex-dividend date for
such distribution. Once AIG has given such notice, the holders may surrender
debentures for conversion at any time until the earlier of the close of business
on the business day prior to the ex-dividend date or any announcement by AIG
that such distribution will not take place.
In addition, if
-- AIG is a party to a consolidation, merger or sale of all or
substantially all of its assets;
-- AIG is not the resulting or surviving entity;
-- the transaction is not with one of AIG's affiliates; and
-- after the transaction, more than 50% of the surviving or resulting
entity's
-- shareholders were not shareholders of AIG prior to the
transaction, or
-- directors were not directors of AIG or approved by the board of
directors of AIG prior to the transaction,
then the holders may surrender debentures for conversion at any time from and
after the date which is 15 days prior to the anticipated effective date of the
transaction until and including the date which is 15 days after the actual date
of such transaction. If AIG is a party to a consolidation, merger or sale of all
or substantially all of its assets, in each case pursuant to which AIG common
stock is converted into cash, securities or other property, then at the
effective time of the transaction, the holders' right to convert a debenture
into AIG common stock will be changed into a right to convert it into the kind
and amount of cash, securities and other property which a holder would have
received if the holder had converted debentures immediately prior to the
transaction. See "Conversion Rate Adjustments" below.
CONVERSION PROCEDURES
The conversion rate for the debentures is 6.0627 shares of common stock per
$1,000 principal amount at maturity of the debentures, subject to adjustment as
described below. AIG will not issue fractional shares of common stock upon
conversion of debentures. Instead, AIG will pay cash based on the market price
of the common stock on the business day prior to the conversion date. Holders
will not receive any cash payment on conversion of a debenture representing
accrued original issue discount, accrued tax original issue discount or any
contingent interest. Instead, accrued original issue discount, accrued tax
original issue discount or any contingent interest will be deemed paid in full
rather than cancelled, extinguished or forfeited. Consequently, AIG's delivery
of the fixed number of shares of common stock into which the debenture is
convertible, together with the cash payment, if any, in lieu of a fractional
share of common stock, will be deemed to satisfy AIG's obligation to pay the
principal amount at maturity of the debenture, including accrued original issue
11
discount, accrued tax original issue discount and any contingent interest
attributable to the period from the issue date to the conversion date. AIG will
not adjust the conversion rate to account for accrued original issue discount,
accrued tax original issue discount or any contingent interest.
To convert debentures into common stock a holder must:
-- complete and manually sign the conversion notice on the back of the
debenture or a facsimile of the conversion notice and deliver this
notice to the conversion agent;
-- surrender the debentures to the conversion agent or comply with the
procedures of the depositary;
-- if required, furnish appropriate endorsements and transfer documents;
and
-- if required, pay all transfer or similar taxes.
If contingent interest is payable to holders of the debentures during any
particular six-month period, and such debentures are converted after the
applicable accrual or record date therefor and prior to the next succeeding
interest payment date, holders of such debentures at the close of business on
the accrual or record date will (except if the debentures so converted are to be
redeemed or repurchased prior to the payment date, in which case no contingent
interest will be paid on any such debentures so converted) receive the
contingent interest payable on such debentures on the corresponding interest
payment date notwithstanding the conversion. Such debentures, upon surrender for
conversion, must be accompanied by funds equal to the amount of contingent
interest payable on the principal amount of the debentures so converted (unless
such debentures are to be redeemed on a redemption date after the record date
and prior to the interest payment date).
The date a holder complies with all of these requirements is the conversion
date under the indenture.
CONVERSION RATE ADJUSTMENTS
AIG will adjust the conversion rate if any of the following events occurs:
-- AIG issues to all holders common stock as a dividend or distribution
on AIG common stock.
-- AIG issues to all holders of common stock in-the-money rights or
warrants to purchase AIG common stock that are exercisable for not
more than 45 days.
-- AIG subdivides or combines AIG common stock.
-- AIG distributes to all holders of AIG common stock shares of AIG
capital stock, evidences of indebtedness or assets, including
securities but excluding:
-- rights or warrants specified above;
-- dividends or distributions specified above; and
-- cash distributions specified below.
-- AIG distributes cash in any calendar year if the per share amount of
such cash distribution, together with all other cash distributions
paid in that calendar year up to the record date for such
distribution, less the per share amount of all regular quarterly cash
dividends declared in such calendar year up to the record date for
such distribution exceeds 15% of the average of the last reported
sale prices of the common stock during the ten consecutive trading
days selected by the board of directors not more than 20 trading days
prior to the date such dividend or distribution is first publicly
announced (such amount in excess of such 15%, the "adjustment
amount"). Any adjustment for the conversion rate for a cash
distribution meeting these requirements will be based on the
adjustment amount.
AIG will not adjust the conversion rate for any other event.
In the event of:
-- any reclassification of AIG common stock;
-- a consolidation, merger or combination involving AIG; or
12
-- a sale, lease or conveyance to another person or entity of all or
substantially all of AIG's property and assets;
in which holders of common stock would be entitled to receive stock, other
securities, other property, assets or cash for their common stock, upon
conversion of debentures a holder will be entitled to receive the same type of
consideration which he or she would have been entitled to receive if he or she
had converted the debentures into common stock immediately prior to any of these
events.
Holders may in certain situations be deemed to have received a distribution
subject to United States federal income tax as a dividend in the event of any
taxable distribution to holders of common stock or in certain other situations
requiring a conversion rate adjustment. See "Certain United States Federal
Income Tax Consequences."
AIG may, from time to time, increase the conversion rate for a period of at
least 20 days. AIG's determination to increase the conversion rate will be
conclusive. AIG will give holders at least five business days' notice of any
increase in the conversion rate. AIG may also increase the conversion rate if
AIG deems it advisable to avoid or diminish any income tax to holders of common
stock resulting from any stock or rights distribution. See "Certain United
States Federal Income Tax Consequences."
AIG will not be required to make an adjustment in the conversion rate
unless the adjustment would require a change of at least 1% in the conversion
rate. However, we will carry forward any adjustments that are less than 1% of
the conversion rate.
CONTINGENT INTEREST
Cash interest, referred to below as both "upside" and "downside" contingent
interest, will accrue on the debentures upon the occurrence of the events
described below.
UPSIDE CONTINGENT INTEREST
Subject to the accrual and record date provisions described below, AIG will
pay upside contingent interest to the holders of debentures during any six-month
period from May 9 to November 8 and from November 9 to May 8, with the initial
six-month period commencing November 9, 2006, if the average closing sale price
of common stock for the five trading days ending on and including the third
trading day immediately preceding the first day of the applicable six-month
period equals 120% or more of the sum of the issue price and accrued original
issue discount for a debenture to the day immediately preceding the first day of
the applicable six-month period divided by the number of shares of common stock
issuable upon a conversion of that debenture. Notwithstanding the above, if AIG
declares a dividend for which the record date falls prior to the first day of a
six-month period but the payment date falls within such six-month period, then
the five trading day period for determining the average closing sale price of
common stock will be the five trading days ending on and including the third
trading day immediately preceding such record date.
During any period when upside contingent interest is payable, the
contingent interest payable per debenture in either the first three months or
the second three months of such period will equal the greater of (x) the sum of
the regular cash dividends paid by AIG per share on common stock during those
three months multiplied by the number of shares of common stock issuable upon
conversion of a debenture at the then applicable conversion rate and (y) .00125
multiplied by the sum of the issue price and accrued original issue discount for
a debenture to the last day of the relevant three-month period. Regular cash
dividends mean quarterly or other periodic cash dividends on common stock as
declared by the AIG board of directors as part of its cash dividend payment
practices and that are not considered by the AIG board of directors as
extraordinary, special or nonrecurring. The determination of the AIG board of
directors as to the nature of the dividend will be conclusive.
Upside contingent interest, if any, will accrue and be payable to holders
of debentures as of the record date for the related common stock dividend or, if
AIG does not pay a regular cash dividend on common stock during the relevant
six-month period, to holders of debentures as of the 15th day preceding the last
day of the relevant six-month period. AIG will make upside contingent interest
payments on the payment date of the
13
related common stock dividend or, if AIG does not pay a regular cash dividend on
the common stock during the relevant six-month period, on the last day of the
relevant six-month period. The original issue discount will continue to accrue
at the yield to maturity whether or not upside contingent interest is paid.
In the event upside contingent interest is payable, AIG will disseminate a
press release through Dow Jones & Company, Inc. or Bloomberg Business News
containing this information or publish the information on its Web site or
through such other public medium as it may use at that time.
DOWNSIDE CONTINGENT INTEREST
Downside contingent interest will be payable on the debentures for any
six-month period from May 9 to November 8 or from November 9 to May 8,
commencing on November 9, 2006, for which the closing sale price of AIG common
stock for any 20 out of the last 30 trading days ending on but not including the
third business day prior to the commencement of such six-month period is less
than or equal to 95% of the conversion price of the debentures in effect for
each of those 20 trading days.
Downside contingent interest will be payable until but not including the
first day of the first subsequent six-month period for which the trading price
condition described above is not satisfied, at which time downside contingent
interest on the debentures will cease to accrue unless and until the trading
price condition is satisfied for any subsequent six-month period. Such interest
will be calculated on the basis of the issue price plus accrued original issue
discount to the day prior to the commencement of the applicable six-month
period.
The downside contingent interest rate determined for any six-month period
will be equal to the difference between (x) the six-month London interbank
offered rate plus the applicable spread (which may be positive or negative) as
determined by the contingent interest rate agent and (y) 1.40% (but in no event
will be less than zero). Original issue discount will continue to accrue at the
yield to maturity whether or not downside contingent interest is paid.
AIG will appoint a contingent interest rate agent, which may be one of
AIG's affiliates. For the determination of the downside contingent interest
rate, the contingent interest rate agent will ask three nationally recognized
investment banks, at 11:00 A.M., London time, on the second London business day
prior to the commencement of the applicable five-year period, to provide the
spread that would be applicable to the issuance by AIG of an unsecured,
unsubordinated debt security with a five-year maturity that accrues interest
based on the London interbank offered rate with semi-annual interest rate reset
provisions. The downside contingent interest rate spread will be the average of
such three indicative reference spreads, provided that if at least three such
indicative reference spreads cannot reasonably be obtained by the contingent
interest rate agent, but two such indicative reference spreads are obtained,
then the average of the two indicative reference spreads shall be used, and if
only one such indicative reference spread can reasonably be obtained by the
contingent interest rate agent, this one indicative reference spread shall be
used. The spread determined by the contingent interest rate agent will be
determined for each five-year period commencing November 9, 2006, 2011, 2016,
2021 and 2026, and will be applicable for each six-month period falling within
such five-year period. The London interbank offered rate will be determined on
the second London business day prior to the commencement of the applicable
six-month period based on the Telerate LIBOR page 3750 (or a successor thereto)
at 11:00 A.M., London time. The determination of any downside contingent
interest rate will be conclusive in the absence of manifest error.
Downside contingent interest, if any, will accrue and be payable to holders
of debentures as of the 15th day preceding the last day of the relevant
six-month period. AIG will make downside contingent interest payments on the
last day of the relevant six-month period.
In the event downside contingent interest is payable, AIG will disseminate
a press release through Dow Jones & Company, Inc. or Bloomberg Business News
containing this information or publish the information on its Web site or
through such other public medium as it may use at that time.
14
OPTIONAL REDEMPTION BY AIG
The debentures are not entitled to any sinking fund. At any time on or
after November 9, 2006, AIG may redeem the debentures in whole, or in part, for
an amount in cash equal to 100% of the sum of:
-- $658.01, the original issue price per $1,000 principal amount; and
-- accrued original issue discount and any accrued and unpaid contingent
interest to and including the date of redemption.
The table below shows redemption prices of debentures per $1,000 principal
amount at maturity, at November 9, 2006, and at each November 9 thereafter until
maturity on November 9, 2031. These redemption prices reflect accrued original
issue discount up to but excluding each redemption date but do not assume the
payment of any contingent interest. The redemption price of a debenture redeemed
between any two of the dates listed below would reflect original issue discount
accrued from the next preceding redemption date up to but excluding the actual
date of redemption.
(1) (2) (3)
----------- ----------------- ----------
ACCRUED ORIGINAL REDEMPTION
DEBENTURE ISSUE DISCOUNT AT PRICE
ISSUE PRICE 1.40% (1)+(2)
----------- ----------------- ----------
November 9, 2006............................... $658.01 $ 47.54 $ 705.55
November 9, 2007............................... 658.01 57.46 715.47
November 9, 2008............................... 658.01 67.51 725.52
November 9, 2009............................... 658.01 77.70 735.71
November 9, 2010............................... 658.01 88.04 746.05
November 9, 2011............................... 658.01 98.52 756.53
November 9, 2012............................... 658.01 109.15 767.16
November 9, 2013............................... 658.01 119.92 777.93
November 9, 2014............................... 658.01 130.85 788.86
November 9, 2015............................... 658.01 141.94 799.95
November 9, 2016............................... 658.01 153.17 811.18
November 9, 2017............................... 658.01 164.57 822.58
November 9, 2018............................... 658.01 176.13 834.14
November 9, 2019............................... 658.01 187.85 845.86
November 9, 2020............................... 658.01 199.73 857.74
November 9, 2021............................... 658.01 211.78 869.79
November 9, 2022............................... 658.01 224.00 882.01
November 9, 2023............................... 658.01 236.39 894.40
November 9, 2024............................... 658.01 248.95 906.96
November 9, 2025............................... 658.01 261.70 919.71
November 9, 2026............................... 658.01 274.62 932.63
November 9, 2027............................... 658.01 287.72 945.73
November 9, 2028............................... 658.01 301.01 959.02
November 9, 2029............................... 658.01 314.48 972.49
November 9, 2030............................... 658.01 328.14 986.15
At Stated Maturity (November 9, 2031).......... 658.01 341.99 1,000.00
If less than all of the outstanding debentures are to be redeemed, the
trustee will select the debentures to be redeemed in principal amounts of $1,000
or multiples of $1,000 by lot, pro rata or by another method the trustee
considers fair and appropriate. If a portion of a holder's debentures is
selected for partial redemption and a holder converts a portion of the
debentures, the converted portion will be deemed to be part of the portion
selected for redemption.
AIG is required to give notice of redemption by mail to holders not more
than 60 but not less than 15 days prior to the redemption date.
15
REPURCHASE OF DEBENTURES AT OPTION OF THE HOLDER
Holders have the right to require AIG to repurchase the debentures on
November 9, 2006, 2011, 2016, 2021 and 2026. AIG will be required to repurchase
any outstanding debenture for which the holder properly delivers a written
repurchase notice to the paying agent, subject to certain additional conditions.
The paying agent will initially be the trustee. This notice must be delivered
during the period beginning at any time from the opening of business on the date
that is 24 business days prior to the repurchase date until the close of
business on the fourth business day prior to the repurchase date. A holder may,
without AIG's consent, withdraw his or her repurchase notice at any time up to,
but excluding, the third business day prior to the repurchase date. On or after
the third business day, a holder needs AIG's consent to withdraw his or her
repurchase notice, and AIG may withhold its consent for any reason. If a
repurchase notice is properly withdrawn, AIG will not repurchase the debentures
listed in the notice. Once a repurchase notice is given, a holder may not
convert his or her debenture until it is properly withdrawn.
The repurchase price payable for a debenture will be equal to the issue
price plus accrued original issue discount and any accrued and unpaid contingent
interest to, but excluding, the repurchase date. AIG may, at its option, elect
to pay the repurchase price in cash, shares of common stock or any combination
thereof. For a discussion of the tax treatment of a holder receiving cash,
shares of common stock or any combination thereof, see "Certain United States
Federal Income Tax Consequences." The table below shows the repurchase prices of
a debenture as of the specified repurchase dates.
REPURCHASE DATE REPURCHASE PRICE
--------------- ----------------
November 9, 2006............................................ $705.55
November 9, 2011............................................ 756.53
November 9, 2016............................................ 811.18
November 9, 2021............................................ 869.79
November 9, 2026............................................ 932.63
The repurchase notice must state:
-- if certificated debentures have been issued, the debenture
certificate numbers (or, if debentures are not certificated, the
repurchase notice must comply with appropriate DTC procedures);
-- the portion of the principal amount at maturity of debentures to be
repurchased, which must be in $1,000 multiples;
-- that the debentures are to be repurchased by AIG pursuant to the
applicable provisions of the debentures and the indenture; and
-- in the event AIG elects, pursuant to the notice that it is required
to give, to pay the repurchase price in common stock, in whole or in
part, but the repurchase price is ultimately to be paid to you
entirely in cash because any of the conditions to payment of the
repurchase price or portion of the repurchase price in common stock
is not satisfied prior to the close of business on the repurchase
date, as described below, whether you elect:
(1) to withdraw the repurchase notice as to some or all of the
debentures to which it relates; or
(2) to receive cash in such event in respect of the entire repurchase
price for all the debentures or portions of the debentures subject
to such repurchase notice (in the case of a failure to make an
election, this option will be deemed to have been chosen).
16
You may withdraw any written repurchase notice by delivering a written
notice of withdrawal to the paying agent up to but excluding the third day prior
to the repurchase date. Any withdrawal notice must state:
-- the principal amount at maturity of the withdrawn debentures;
-- if certificated debentures have been issued, the certificate numbers
of the withdrawn debentures (or, if debentures are not certificated,
the withdrawal notice must comply with appropriate DTC procedures);
and
-- the principal amount at maturity, if any, which remains subject to
the repurchase notice.
AIG must give notice of an upcoming repurchase date to all debenture
holders not less than 24 business days prior to the repurchase date at their
addresses shown in the register of the registrar. This notice will state among
other things:
-- the repurchase price;
-- whether AIG will pay the repurchase price of debentures in cash or
common stock or any combination thereof, specifying the percentages
of each;
-- if AIG elects to pay in common stock, the method of calculating the
market price of the common stock; and
-- the procedures that debenture holders must follow to require AIG to
repurchase their debentures.
If AIG elects to pay the repurchase price, in whole or in part, in shares
of common stock, the number of shares of common stock to be delivered by AIG
shall be equal to the portion of the repurchase price to be paid in common stock
divided by the average of the closing sale prices of the common stock during the
five-trading day period ending on, but not including, the third business day
prior to the repurchase date.
AIG will pay cash based on the market price for all fractional shares of
common stock in the event it elects to deliver common stock in payment, in whole
or in part, of the repurchase price.
Because the market price of the common stock is determined prior to the
applicable repurchase date, holders of debentures bear the market risk with
respect to the value of the common stock to be received from the date the market
price is determined to the repurchase date.
Upon determination of the actual number of shares of common stock to be
issued upon repurchase of debentures in accordance with the foregoing
provisions, AIG will disseminate a press release through Dow Jones & Company,
Inc. or Bloomberg Business News or publish the information on AIG's web site or
through such other public medium as AIG may use at the time.
In addition to the above conditions, AIG's right to repurchase debentures,
in whole or in part, with common stock is subject to AIG satisfying various
conditions, including:
-- the registration of the common stock under the Securities Act and the
Exchange Act, in each case, if required;
-- listing the common stock on the NYSE or other national securities
exchange or the quotation system on which the common stock is then
listed or traded; and
-- any necessary qualification or registration under applicable state
securities law or the availability of an exemption from such
qualification and registration.
If these conditions are not satisfied with respect to a holder prior to the
close of business on the repurchase date, AIG will be required to pay the
repurchase price of the debentures of the holder entirely in cash.
Payment of the repurchase price for a debenture for which a repurchase
notice has been delivered and not withdrawn is conditioned upon book-entry
transfer or delivery of the debenture, together with necessary endorsements, to
the paying agent at its office in New York City, New York, or any other office
of the paying agent, at any time after delivery of the repurchase notice.
Payment of the repurchase price for the debenture
17
will be made promptly following the later of the repurchase date and the time of
book-entry transfer or delivery of the debenture. If the paying agent holds
money or securities sufficient to pay the repurchase price of the debenture on
the business day following the repurchase date, then, on and after the
repurchase date:
-- the debenture will cease to be outstanding;
-- original issue discount and any contingent interest will cease to
accrue; and
-- all other rights of the holder will terminate.
This will be the case whether or not book-entry transfer of the debenture
has been made or the debenture has been delivered to the paying agent, and all
other rights of the debenture holder will terminate, other than the right to
receive the repurchase price upon delivery of the debenture.
AIG will comply with any tender offer rules under the Securities Exchange
Act of 1934 that may be applicable at the time of its offer to repurchase the
debentures.
MERGER AND SALE OF ASSETS BY AIG
AIG is generally permitted to consolidate or merge with another company or
firm. AIG is also permitted to sell or lease substantially all of its assets to
another firm. However, the indenture provides AIG may not take any of these
actions unless all of the following conditions are met:
-- Where AIG merges out of existence or sells or leases its assets to
another entity, the other entity may not be organized under a foreign
country's laws, that is, it must be a corporation, partnership,
limited liability company or trust organized under the laws of a
state of the United States or the District of Columbia or under
federal law, and it must agree to be legally responsible for the
debentures.
-- The merger, sale of assets or other transaction must not cause a
default on the debentures, and AIG must not already be in default
(unless the merger or other transaction would cure the default). For
purposes of this no-default test, a default would include an event of
default that has occurred and not been cured. A default for this
purpose would also include any event that would be an event of
default if the requirements for giving a default notice or AIG's
default having to exist for a specific period of time were
disregarded.
MODIFICATION AND WAIVER
There are three types of changes AIG can make to the indenture and the
debentures.
CHANGES REQUIRING EACH HOLDER'S APPROVAL
The following modifications would require the consent of the holders of
each outstanding debenture affected thereby:
-- alter the manner or rate of accrual of original issue discount (but
not tax original issue discount) or contingent interest on any
debenture;
-- make any debenture payable in money or securities other than that
stated in the debenture;
-- reduce the principal amount payable at maturity, accrued original
issue discount, redemption price or repurchase price with respect to
any debenture;
-- make any change that affects the right of a holder to convert any
debenture in any adverse manner;
-- make any change that adversely affects the right to require AIG to
repurchase a debenture;
-- impair the right to institute suit for the enforcement of any payment
with respect to, or conversion of, the debentures;
-- reduce the percentage of principal amount required to waive a
default; and
-- reduce the percentage of principal amount required to amend the
indenture.
18
CHANGES REQUIRING A MAJORITY VOTE
The second type of change to the indenture and the debentures is the kind
that requires a vote in favor by holders owning a majority of the principal
amount of the debentures affected thereby. Most changes fall into this category.
AIG may obtain a waiver of a past default from the holders owning a majority of
the principal amount of the debentures then outstanding. However, AIG cannot
obtain a waiver of a payment default or any other aspect of the indenture or the
debentures listed in the first category described above under "Changes Requiring
Each Holder's Approval" unless AIG obtains each holder's consent to the waiver.
CHANGES NOT REQUIRING APPROVAL
The third type of change does not require any vote by holders of the
debentures. This type is limited to clarifications and certain other changes
that would not adversely affect, in any material respect, holders of the
debentures.
DEFAULT AND RELATED MATTERS
RANKING
The debentures are not secured by any of AIG's property or assets.
Accordingly, ownership of debentures means the holder is one of AIG's unsecured
creditors. The debentures are not subordinated to any of AIG's other debt
obligations and therefore they rank equally with all of AIG's other unsecured
and unsubordinated indebtedness.
As a holding company, AIG's right to participate in any distribution of
assets of any of its subsidiaries upon the subsidiary's liquidation or
otherwise, and thus the ability of a holder of debentures to benefit indirectly
from that distribution, will be subject to the prior claims of creditors of that
subsidiary, except to the extent that any of AIG's claims as a creditor of that
subsidiary may be recognized. As a result, the debentures will effectively be
subordinated to all existing and future liabilities and obligations of AIG's
subsidiaries. Moreover, AIG provides credit support to creditors of certain of
its subsidiaries, and creditors of the subsidiaries may have claims against AIG.
EVENTS OF DEFAULT
Holders will have special rights if an event of default occurs and is not
cured, as described later in this subsection.
The term "Event of Default" means any of the following:
-- AIG does not pay the principal of, or redemption or repurchase price
on, a debenture on its due date.
-- AIG does not pay contingent interest on a debenture within 30 days of
its due date.
-- AIG remains in breach of any other term of the indenture for 60 days
after it receives a notice of default stating it is in breach. The
notice must be sent by either the trustee or holders of at least 25%
of the principal amount of debentures then outstanding.
-- AIG files for bankruptcy or certain other events of bankruptcy,
insolvency or reorganization occur.
LIMITATIONS OF CLAIMS IN BANKRUPTCY
If a bankruptcy proceeding is commenced in respect of AIG, the claim of the
holder of a debenture is, under the United States Bankruptcy Code, limited to
the issue price of the debenture plus that portion of the original issue
discount that has accrued from the date of issue to the commencement of the
proceeding, plus any accrued but unpaid contingent interest.
19
REMEDIES IF AN EVENT OF DEFAULT OCCURS
If an event of default has occurred and has not been cured, the trustee or
the holders of at least 25% in principal amount of the debentures then
outstanding may declare the issue price of the debentures plus original issue
discount accrued on the debentures and any accrued and unpaid contingent
interest, through the declaration of acceleration to be due and immediately
payable. This is called a declaration of acceleration of maturity. However, a
declaration of acceleration of maturity may be cancelled, but only before a
judgment or decree based on the acceleration has been obtained, by the holders
of at least a majority in principal amount of the debentures.
In case of a default in payment of the debentures, whether at the stated
maturity or upon acceleration, from and after the maturity date the amount owing
on the debentures will bear interest, payable upon demand of their beneficial
owners, at the rate of 1.40% per year, to the date payment of that amount has
been made or duly provided for.
Except in cases of default, where the trustee has some special duties, the
trustee is not required to take any action under the indenture at the request of
any holders unless the holders offer the trustee reasonable protection from
expenses and liability called an indemnity. If reasonable indemnity is provided,
the holders of a majority in principal amount of the outstanding debentures may
direct the time, method and place of conducting any lawsuit or other formal
legal action seeking any remedy available to the trustee. These majority holders
may also direct the trustee in performing any other action under the indenture.
AIG will furnish to the trustee every year a written statement of AIG's
officers certifying as to whether, to their knowledge, AIG is in compliance with
the indenture and the debentures.
CALCULATIONS IN RESPECT OF DEBENTURES
AIG will be responsible for making all calculations called for under the
debentures. These calculations include, but are not limited to, determination of
the market price of the debentures and common stock and the closing sale price
of common stock and amounts of contingent interest, if any, payable on the
debentures. AIG will make all these calculations in good faith and, absent
manifest error, its calculations will be final and binding on holders of
debentures. AIG will provide a schedule of its calculations to the trustee, and
the trustee is entitled to rely upon the accuracy of AIG's calculations without
independent verification.
NOTICES
AIG and the trustee will send notices regarding the debt securities only to
direct holders, using their addresses as listed in the trustee's records.
UNCLAIMED FUNDS
Regardless of who acts as paying agent, all money paid by AIG to a paying
agent that remains unclaimed at the end of two years after the amount is due to
direct holders will be repaid to AIG. After the two-year period, the holder may
look to AIG for payment and not to the trustee or any other paying agent.
GOVERNING LAW
The indenture and the debentures will be governed by, and construed in
accordance with, the laws of the State of New York.
FORM, DENOMINATION AND REGISTRATION
The debentures will be issued:
-- in fully registered form;
-- without interest coupons; and
-- in denominations of $1,000 principal amount and integral multiples of
$1,000.
20
BOOK-ENTRY SYSTEM
The debentures will be represented by one or more Global Securities (each a
"Global Security"). Each Global Security will be deposited with, or on behalf
of, The Depository Trust Company ("DTC") and be registered in the name of a
nominee of DTC. Except under circumstances described below, the debentures will
not be issued in definitive form.
Upon the issuance of a Global Security, DTC will credit on its book-entry
registration and transfer system the accounts of persons designated by Morgan
Stanley & Co. Incorporated with the respective principal amounts of the
debentures represented by the Global Security. Ownership of beneficial interests
in a Global Security will be limited to persons that have accounts with DTC or
its nominee ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests in a Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of persons
other than participants). The laws of some states require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and such laws may impair the ability to transfer beneficial
interests in a Global Security.
So long as DTC or its nominee is the registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the debentures represented by that Global Security for all purposes
under the indenture. Except as provided below, owners of beneficial interests in
a Global Security will not be entitled to have debentures represented by that
Global Security registered in their names, will not receive or be entitled to
receive physical delivery of debentures in definitive form and will not be
considered the owners or holders thereof under the indenture. Principal and
interest payments, if any, or payments of the redemption price or the repurchase
price on debentures registered in the name of DTC or its nominee will be made to
DTC or its nominee, as the case may be, as the registered owner of the relevant
Global Security. Neither AIG, the trustee, any paying agent nor the registrar
for the debentures will have any responsibility or liability for any aspect of
the records relating to nor payments made on account of beneficial interests in
a Global Security or for maintaining, supervising or reviewing any records
relating to such beneficial interests.
AIG expects that DTC or its nominee, upon receipt of any payment of
principal or interest, if any, or payments of the redemption price or the
repurchase price will credit immediately participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Security as shown on the records of DTC or its nominee. AIG
also expects that payments by participants to owners of beneficial interests in
a Global Security held through such participants will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such participants.
A Global Security may be terminated and physical certificates issued if:
-- DTC is at any time unwilling or unable to continue as a depositary
and a successor depositary is not appointed by AIG within 90 days; or
-- AIG determines not to have debentures represented by a Global
Security; or
-- an event of default has occurred and not been cured.
In any such case, AIG will issue debentures in definitive form in exchange
for the entire Global Security relating to such debentures. AIG will issue the
certificates to the persons specified by DTC. Debentures so issued in definitive
form will be issued as registered debentures in denominations of $1,000 and
integral multiples thereof, unless otherwise specified by AIG.
DTC has advised AIG as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a clearing corporation within the meaning of the Uniform
Commercial Code and a clearing agency registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
changes to the accounts of its participants. This practice eliminates the need
for physical movement of
21
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Some of the participants, or their representatives, together with other
entities, own DTC. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through, or maintain a
custodial relationship with, a participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Security among participants, it is under no
obligation to perform or continue to perform these procedures, and these
procedures may be discontinued at any time.
Conveyance of notices and other communications by DTC to participants, by
participants to indirect participants and indirect participants to beneficial
owners will be governed by arrangements among them, subject to any statutory or
regulatory requirements that may be in effect from time to time. Redemption
notices will be sent to Cede & Co., as nominee of DTC. If less than all of the
debentures are being redeemed, DTC will reduce the amount of interest of
participants in the debentures in accordance with its procedures.
AIG'S RELATIONSHIP TO THE TRUSTEE
AIG has appointed The Bank of New York, the trustee under the indenture, as
paying agent, conversion agent, and debenture registrar for the debentures. The
Bank of New York from time to time provides normal banking services to AIG and
its subsidiaries.
22
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This discussion describes the material United States federal income tax
consequences of owning the debentures and, to the extent described below, common
stock received upon an exchange, conversion or redemption of the debentures. The
following discussion of U.S. federal income tax consequences is the opinion of
Sullivan & Cromwell, tax counsel to AIG. It applies to holders only if they hold
debentures or common stock as a capital asset for tax purposes. This section
does not apply to holders if they are members of a class of holders subject to
special rules, such as:
-- a dealer in securities or currencies,
-- a trader in securities that elects to use a mark-to-market method of
accounting for securities holdings,
-- a bank,
-- a life insurance company,
-- a tax-exempt organization,
-- a person that owns debentures that are a hedge or that are hedged
against interest rate risks,
-- a person that owns debentures as part of a straddle or conversion
transaction for tax purposes, or
-- a United States person (as defined below) whose functional currency
for tax purposes is not the U.S. dollar.
This discussion is based on the Internal Revenue Code of 1986, as amended,
its legislative history, existing and proposed regulations under the Internal
Revenue Code, published rulings and court decisions, all as currently in effect.
These laws are subject to change, possibly on a retroactive basis.
No statutory, administrative or judicial authority directly addresses the
treatment of the debentures or instruments similar to the debentures for United
States federal income tax purposes. No rulings have been sought or are expected
to be sought from the Internal Revenue Service (the "IRS") with respect to any
of the United States federal income tax consequences discussed below, and no
assurance can be given that the IRS will not take contrary positions. As a
result, no assurance can be given that the IRS will agree with the tax
characterizations and the tax consequences described below.
AIG urges prospective investors to consult their own tax advisors with
respect to the tax consequences to them of the purchase, ownership and
disposition of the debentures and the common stock in light of their own
particular circumstances, including the tax consequences under state, local,
foreign and other tax laws and the possible effects of changes in United States
federal or other tax laws.
CLASSIFICATION OF THE DEBENTURES
Pursuant to the terms of the indenture, AIG and each holder of the
debentures agree, for United States federal income tax purposes, to treat the
debentures as indebtedness that is subject to the regulations governing
contingent payment debt instruments, and the remainder of this discussion
assumes that the debentures will be so treated. This treatment of the debentures
is highly uncertain, however, and no assurance can be given that the IRS will
not assert that the debentures should be treated differently. Such treatment
could affect the amount, timing and character of income, gain or loss in respect
of an investment in the debentures.
UNITED STATES HOLDERS
This discussion applies to U.S. holders. A holder is a U.S. holder if the
holder is a beneficial owner of a debenture and the holder is:
-- a citizen or resident of the United States,
-- a domestic corporation,
-- an estate whose income is subject to United States federal income tax
regardless of its source, or
-- a trust if a United States court can exercise primary supervision
over the trust's administration and one or more United States persons
are authorized to control all substantial decisions of the trust.
23
A beneficial owner of debentures that is a non-U.S. holder (as defined in
"--Non-U.S. Holders" below) should see "--Non-U.S. Holders" below.
Under the rules governing contingent payment debt obligations, a holder
will be required to accrue interest income on the debentures, in the amounts
described below, regardless of whether the holder uses the cash or accrual
method of tax accounting. Accordingly, a holder would likely be required to
include interest in taxable income in each year in excess of the accruals of
original issue discount on the debentures for non-tax purposes and in excess of
any interest payments actually received in that year.
PAYMENTS MADE WITH RESPECT TO THE DEBENTURES
If a holder purchases a debenture at a price equal to the adjusted issue
price (as defined below) of the debenture, the holder must accrue an amount of
ordinary income for United States federal income tax purposes for each accrual
period prior to and including the maturity date of a debenture that equals:
-- the product of (i) the adjusted issue price of the debenture as of
the beginning of the accrual period; and (ii) the comparable yield
(as defined below) of the debenture, adjusted for the length of the
accrual period;
-- divided by the number of days in the accrual period; and
-- multiplied by the number of days during the accrual period that the
holder held the debenture.
The issue price of a debenture is the first price at which a substantial
amount of the debentures was sold to the public, excluding bond houses, brokers
or similar persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers. The adjusted issue price of a debenture is its
issue price increased by any interest income previously accrued, determined
without regard to any adjustments to interest accruals described below and
decreased by the projected amounts of any payments previously made with respect
to the debenture.
The term "comparable yield" means the annual yield that an issuer of a
contingent payment debt obligation would pay, as of the initial issue date, on a
fixed rate nonconvertible debt security with no contingent payments, but with
terms and conditions otherwise comparable to those of the instrument.
If a holder purchases a debenture at a price other than its adjusted issue
price determined for tax purposes, a holder must determine the extent to which
the difference between the price the holder paid for the debenture and its
adjusted issue price is attributable to a change in expectations as to the
projected payment schedule, a change in interest rates, or both, and reasonably
allocate the difference accordingly.
AIG is required to provide to holders, solely for United States federal
income tax purposes, a schedule of the projected amounts of payments on the
debentures. This schedule must produce the comparable yield. The projected
payment schedule includes estimates for payments of contingent interest and an
estimate for a payment at maturity taking into account the conversion feature.
The comparable yield and projected payment schedule are available from AIG by
telephoning AIG Investor Relations Department at (212) 770-6293 or submitting a
written request for such information to: AIG, 70 Pine Street, New York, New York
10270, Attention: Investor Relations Department.
For United States federal income tax purposes, holders must use the
comparable yield and projected payment schedule in determining interest
accruals, and the adjustments thereto described below, in respect of the
debentures, unless the holder timely discloses and justifies the use of other
estimates to the IRS. If the holder determines the holder's own comparable yield
or projected payment schedule, the holder must also establish that AIG's
comparable yield or projected payment schedule is unreasonable.
Because any Form 1099-OID that the holder receives will not reflect the
effects of positive or negative adjustments resulting from the holder's purchase
of a debenture at a price other than the adjusted issue price determined for tax
purposes, a holder is urged to consult with the holder's tax advisor as to
whether and how adjustments should be made to the amounts reported on any Form
1099-OID.
24
THE COMPARABLE YIELD AND PROJECTED PAYMENT SCHEDULE ARE NOT DETERMINED
FOR ANY PURPOSE OTHER THAN FOR THE DETERMINATION OF INTEREST ACCRUALS
AND ADJUSTMENTS THEREOF IN RESPECT OF THE DEBENTURES FOR UNITED STATES
FEDERAL INCOME TAX PURPOSES AND DO NOT CONSTITUTE A PROJECTION OR
REPRESENTATION REGARDING THE ACTUAL AMOUNTS PAYABLE TO HOLDERS OF THE
DEBENTURES.
ADJUSTMENTS TO INTEREST ACCRUALS ON THE DEBENTURES
If a holder receives actual payments with respect to a debenture in a
taxable year that in the aggregate exceed the total amount of projected payments
for that taxable year, the holder would incur a "net positive adjustment" equal
to the amount of such excess. The holder would treat the "net positive
adjustment" as additional interest income for the taxable year. For this
purpose, the payments in a taxable year include the fair market value of
property received in that year.
If a holder receives actual payments with respect to a debenture in a
taxable year that in the aggregate were less than the amount of the projected
payments for that taxable year, the holder would incur a "net negative
adjustment" equal to the amount of such deficit. This adjustment will (a) reduce
interest income on the debentures for that taxable year, and (b) to the extent
of any excess after the application of (a), give rise to an ordinary loss to the
extent of interest income on the debenture during prior taxable years, reduced
to the extent such interest was offset by prior net negative adjustments. Any
excess would be carried forward as a net negative adjustment to the next taxable
year or would reduce the amount realized upon sale, exchange, conversion or
redemption of the debenture.
If the adjusted issue price of a debenture is greater than the price paid
for the debenture, a holder must make positive adjustments increasing the amount
of interest that the holder would otherwise accrue and include in income each
year, and increasing the amount of ordinary income (or decreasing the amount of
ordinary loss) recognized upon redemption or maturity by the amounts allocated
to each of the interest and projected payment schedule; if the adjusted issue
price of the debenture is less than the price paid for the debenture, a holder
must make negative adjustments, decreasing the amount of interest that the
holder must include in income each year, and decreasing the amount of ordinary
income (or increasing the amount of ordinary loss) recognized upon redemption or
maturity by the amounts allocated to each of interest and projected payment
schedule. Adjustments allocated to the interest amount are not made until the
date the daily portion of interest accrues.
SALE, EXCHANGE, CONVERSION OR REDEMPTION OF THE DEBENTURES
Generally, the sale, exchange or conversion of a debenture, or the
redemption of a debenture for cash, will result in taxable gain or loss. As
described above, AIG's calculation of the comparable yield and the projected
payment schedule for the debentures includes the receipt of stock upon exchange
as a contingent payment with respect to the debentures. Accordingly, AIG intends
to treat the receipt of common stock by a holder upon the exchange or conversion
of a debenture, or upon the redemption of a debenture where AIG elects to pay in
common stock, as a contingent payment. As described above, a holder is generally
bound by AIG's determination of the comparable yield and projected payment
schedule. Under this treatment, an exchange, conversion or such a redemption
will also result in taxable gain or loss to a holder. The amount of gain or loss
on a taxable sale, exchange, conversion or redemption will be equal to the
difference between (a) the amount of cash plus the fair market value of any
other property received by a holder, including the fair market value of any
common stock received, and (b) the adjusted tax basis in the debenture. The
adjusted tax basis in a debenture will generally be equal to the original
purchase price for the debenture, increased by any interest income previously
accrued (determined without regard to any adjustments to interest accruals
described above), decreased by the amount of any projected payments previously
made on the debenture, and increased or decreased by the amount of any positive
or negative adjustment, respectively, that a holder is required to make if the
holder purchases the debenture at a price other than the adjusted issue price
determined for tax purposes. Gain recognized upon a sale, exchange, conversion
or redemption of a debenture will generally be treated as ordinary interest
income; any loss will be ordinary loss to the extent of interest previously
included in
25
income and reduced to the extent such interest was offset by prior net negative
adjustments, and thereafter, capital loss (which will be long-term if the
debenture is held for more than one year). The deductibility of net capital
losses by individuals and corporations is subject to limitations.
The tax basis in common stock received upon an exchange or conversion of a
debenture or upon exercise of a put right that AIG elects to pay in common stock
will equal the then current fair market value of such common stock. The holding
period for the common stock received will commence on the day immediately
following the date of exchange or redemption.
CONSTRUCTIVE DIVIDENDS
In accordance with the anti-dilution provisions of the debentures, certain
corporate adjustments and distributions may result in an increase in the
exchange rate of the debentures. In certain circumstances, such an increase may
be deemed to be the payment of a taxable dividend to holders.
For example, an increase in the exchange rate in the event of distribution
of AIG's evidence of indebtedness or assets generally would result in deemed
dividend treatment to holders, but an increase in the event of stock dividends
or the distribution of rights to subscribe for common stock generally would not.
NON-U.S. HOLDERS
This discussion describes the tax consequences to a non-U.S. holder. A
holder is a non-U.S. holder if the holder is the beneficial owner of a debenture
and is, for United States federal income tax purposes:
-- a nonresident alien individual,
-- a foreign corporation,
-- a foreign partnership, or
-- an estate or trust that in either case is not subject to United
States federal income tax on a net income basis on income or gain
from a debenture.
If a holder is a U.S. holder, this section does not apply to the holder.
PAYMENTS MADE WITH RESPECT TO THE DEBENTURES
Under United States federal income and estate tax law, and subject to the
discussions of backup withholding and dividends below, if a holder is a non-U.S.
holder:
-- payments of contingent cash interest in respect of any regular cash
dividends paid by AIG on its common stock during a quarterly period
made to a holder will not be exempt from United States federal income
or withholding tax and, therefore, a holder will be subject to
withholding on such payments of contingent cash interest at a rate of
30%, unless reduced by a treaty or by receipt of a Form W-8ECI from a
holder claiming that the payments are effectively connected with the
holder's United States trade or business;
-- AIG and other U.S. payors generally will not be required to deduct
United States withholding tax at a 30% rate (or at a lower rate if
the holder is eligible for the benefits of an applicable income tax
treaty that provides for a lower rate) from other payments of
interest and principal (other than the portion of principal
attributable to accrued but unpaid contingent cash interest in
respect of regular cash dividends) to a holder if, in the case of
other payments of interest:
(1) a holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of AIG stock entitled to
vote,
(2) a holder is not a controlled foreign corporation that is related to
AIG through stock ownership, and
26
(3) the U.S. payor does not have actual knowledge or reason to know
that a holder is a United States person and:
(a) a holder has furnished to the U.S. payor an IRS Form W-8BEN or
an acceptable substitute form upon which the holder certifies,
under penalties of perjury, that the holder is a non-United
States person,
(b) in the case of payments made outside the United States to a
holder at an offshore account (generally, an account maintained
by the holder at a bank or other financial institution at any
location outside the United States), the holder has furnished to
the U.S. payor documentation that establishes the holder's
identity and status as a non-United States person,
(c) the U.S. payor has received a withholding certificate (furnished
on an appropriate IRS Form W-8 or an acceptable substitute form)
from a person claiming to be:
i. a withholding foreign partnership (generally a foreign
partnership that has entered into an agreement with the IRS
to assume primary withholding responsibility with respect to
distributions and guaranteed payments it makes to its
partners),
ii. a qualified intermediary (generally a non-United States
financial institution or clearing organization or a
non-United States branch or office of a United States
financial institution or clearing organization that is a
party to a withholding agreement with the IRS), or
iii. a U.S. branch of a non-United States bank or of a
non-United States insurance company,
and the withholding foreign partnership, qualified intermediary
or U.S. branch has received documentation upon which it may rely
to treat the payment as made to a non-United States person in
accordance with U.S. Treasury regulations (or, in the case of a
qualified intermediary or withholding foreign partnership, in
accordance with its agreement with the IRS),
(d) the U.S. payor receives a statement from a securities clearing
organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or
business,
i. certifying to the U.S. payor under penalties of perjury that
an IRS Form W-8BEN or an acceptable substitute form has been
received from the holder by it or by a similar financial
institution between it and the holder, and
ii. to which is attached a copy of the IRS Form W-8BEN or
acceptable substitute form, or
(e) the U.S. payor otherwise possesses documentation upon which it
may rely to treat the payment as made to a non-United States
person in accordance with U.S. Treasury regulations;
-- no deduction for any United States federal withholding tax will be
made from any gain that a holder realizes on the sale or exchange of
a debenture; and
-- if interest paid to a holder is "effectively connected" with the
holder's conduct of a trade or business within the United States,
and, if required by an applicable tax treaty, the interest is
attributable to a permanent establishment that the holder maintains
in the United States, AIG and other payors generally are not required
to withhold tax from the interest, provided that the holder has
furnished to
27
AIG or another payor a valid Internal Revenue Service Form W-8ECI or
an acceptable substitute form upon which the holder represents, under
penalties of perjury, that:
(1) the holder is a non-United States person, and
(2) the interest is effectively connected with the holder's conduct of
a trade or business within the United States and is includible in
the holder's gross income.
"Effectively connected" interest is taxed at rates applicable to United
States citizens, resident aliens and domestic United States corporations.
If the holder is a corporate non-U.S. holder, "effectively connected"
interest that a holder receives may, under certain circumstances, be subject to
an additional "branch profits tax" at a 30% rate or at a lower rate if the
holder is eligible for the benefits of an applicable income tax treaty that
provides for a lower rate.
DIVIDENDS ON COMMON STOCK AND CONSTRUCTIVE DIVIDENDS
Except as described below, if a holder is a non-U.S. holder of common
stock, dividends paid to the holder are subject to withholding of United States
federal income tax at a 30% rate or at a lower rate if the holder is eligible
for the benefits of an applicable income tax treaty that provides for a lower
rate. Moreover, if a holder is a non-U.S. holder of a debenture and receives a
constructive dividend as a result of a change in the exchange ratio of the
debenture, AIG and other payors may withhold on other payments made on the
debenture in between the date of the constructive dividend and the due date for
filing of Form 1042-S (including extensions) for the tax year in which the
constructive dividend is made if the relevant payor has control over, or custody
of money or property owned by the holder and knowledge of the facts that give
rise to the withholding. Even if the holder is eligible for a lower treaty rate,
AIG and other payors will generally be required to withhold at a 30% rate
(rather than the lower treaty rate) on dividend or such other payments to the
holder, unless the holder has furnished to AIG or another payor:
-- a valid Internal Revenue Service Form W-8BEN or an acceptable
substitute form upon which the holder certifies, under penalties of
perjury, the holder's status as a non-United States person and
entitlement to the lower treaty rate with respect to such payments,
or
-- in the case of payments made outside the United States to an offshore
account (generally, an account maintained by the holder at an office
or branch of a bank or other financial institution at any location
outside the United States), other documentary evidence establishing
entitlement to the lower treaty rate in accordance with U.S. Treasury
regulations.
If the holder is eligible for a reduced rate of United States withholding
tax under a tax treaty, the holder may obtain a refund of any amounts withheld
in excess of that rate by filing a refund claim with the United States Internal
Revenue Service.
If dividends paid to a holder are "effectively connected" with the conduct
of a trade or business within the United States, and, if required by an
applicable tax treaty, the dividends or constructive dividends are attributable
to a permanent establishment that the holder maintains in the United States, AIG
and other payors generally are not required to withhold tax from the dividends
or any other payments, provided that the holder has furnished to AIG or another
payor a valid Internal Revenue Service Form W-8ECI or an acceptable substitute
form upon which the holder represents, under penalties of perjury, that:
-- the holder is a non-United States person, and
-- the dividends or constructive dividends are effectively connected
with the conduct of a trade or business within the United States and
are includible in the holder's gross income.
"Effectively connected" dividends are taxed at rates applicable to United States
citizens, resident aliens and domestic United States corporations.
If the holder is a corporate non-U.S. holder, "effectively connected"
dividends or constructive dividends that the holder receives may, under certain
circumstances, be subject to an additional "branch profits tax" at a
28
30% rate or at a lower rate if the holder is eligible for the benefits of an
applicable income tax treaty that provides for a lower rate.
GAIN ON DISPOSITION OF COMMON STOCK
If the holder is a non-U.S. holder, the holder generally will not be
subject to United States federal income tax on gain recognized on a disposition
of common stock unless:
-- the gain is "effectively connected" with conduct of a trade or
business in the United States, and the gain is attributable to a
permanent establishment maintained in the United States, if that is
required by an applicable income tax treaty as a condition for
subjecting the holder to United States taxation on a net income
basis,
-- the holder is an individual, he or she holds the common stock as a
capital asset, he or she is present in the United States for 183 or
more days in the taxable year of the sale and certain other
conditions exist, or
-- AIG is or has been a United States real property holding corporation
for federal income tax purposes and the holder held, directly or
indirectly, at any time during the five-year period ending on the
date of disposition, more than 5% of the common stock and the holder
is not eligible for any treaty exemption.
If the holder is a corporate non-U.S. holder, "effectively connected" gains
that it recognizes may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or at a lower rate if the holder
is eligible for the benefits of an income tax treaty that provides a lower rate.
AIG has not been, is not and does not anticipate becoming a United States
real property holding corporation for United States federal income tax purposes.
UNITED STATES FEDERAL ESTATE TAX
A debenture held by an individual who at death is not a citizen or resident
of the United States will not be includible in the individual's gross estate for
United States federal estate tax purposes if:
-- the decedent did not actually or constructively own 10% or more of
the total combined voting power of all classes of AIG stock entitled
to vote at the time of death, and
-- the income on the debenture would not have been effectively connected
with a United States trade or business of the decedent at the same
time.
However, shares of common stock held by the decedent at the time of death will
be included in the decedent's gross estate for United States federal estate tax
purposes unless an applicable estate tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. HOLDERS
In general, if the holder is a noncorporate U.S. holder, AIG and other
payors are required to report to the IRS all payments of principal and interest
on and any constructive distribution with respect to a debenture, including
amounts accruing under the rules for contingent payment debt instruments, and
dividends on common stock. In addition, certain payors are required to report to
the IRS any payment of proceeds of the sale of debentures before maturity or
common stock within the United States. Additionally, backup withholding will
apply to any payments, if the holder fails to provide an accurate taxpayer
identification number, or the holder is notified by the IRS that the holder has
failed to report all interest and dividends required to be shown on the holder's
federal income tax returns.
29
NON-U.S. HOLDERS
In general, payments of principal, dividends and interest made by AIG and
other payors will not be subject to backup withholding and information
reporting, provided that the certification requirements described above under
"Non-U.S. Holders--Payments Made with Respect to the Debentures" are satisfied
or the holder otherwise establishes an exemption.
In general, payment of the proceeds from the sale of debentures or common
stock effected at a United States office of a broker is subject to both United
States backup withholding and information reporting. The holder will not be
subject to backup withholding and information reporting on such a sale provided
that:
-- the broker does not have actual knowledge or reason to know that the
holder is a United States person and the holder has furnished to the
broker:
(1) an appropriate IRS Form W-8 or an acceptable substitute form upon
which the holder certifies, under penalties of perjury, that the
holder is a non-United States person, or
(2) other documentation upon which it may rely to treat the payment as
made to a non-United States person in accordance with U.S. Treasury
regulations, or
-- the holder otherwise establishes an exemption.
If the holder fails to establish an exemption and the broker does not
possess adequate documentation of the holder's status as a non-United States
person, the payments may be subject to information reporting and backup
withholding. However, backup withholding will not apply with respect to payments
made outside the United States to an offshore account maintained by the holder
unless the payor has actual knowledge that the holder is a United States person.
AIG and other payors are required to report payments of interest and
constructive distributions on debentures and dividends on common stock on IRS
Form 1042-S even if the payments are not otherwise subject to information
reporting requirements.
In general, payment of the proceeds from the sale of debentures or common
stock effected at a foreign office of a broker will not be subject to
information reporting or backup withholding. However, a sale effected at a
foreign office of a broker will be subject to information reporting and backup
withholding if:
-- the proceeds are transferred to an account maintained by the holder
in the United States,
-- the payment of proceeds or the confirmation of the sale is mailed to
the holder at a United States address, or
-- the sale has some other specified connection with the United States
as provided in U.S. Treasury regulations,
unless the broker does not have actual knowledge or reason to know that the
holder is a United States person and the documentation requirements described
above (relating to a sale of debentures or common stock effected at a United
States office of a broker) are met or the holder otherwise establishes an
exemption.
In addition, payment of the proceeds from the sale of debentures or common
stock effected at a foreign office of a broker will be subject to information
reporting if the sale is effected at a foreign office of a broker that is:
-- a United States person,
-- a controlled foreign corporation for United States tax purposes,
-- a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a
specified three-year period, or
-- a foreign partnership, if at any time during its tax year:
(1) one or more of its partners are "U.S. persons", as defined in U.S.
Treasury regulations, who in the aggregate hold more than 50% of
the income or capital interest in the partnership, or
(2) such foreign partnership is engaged in the conduct of a United
States trade or business,
30
unless the broker does not have actual knowledge or reason to know that the
holder is a United States person and the documentation requirements described
above (relating to a sale of debentures or common stock effected at a United
States office of a broker) are met or the holder otherwise establishes an
exemption. Backup withholding will apply if the sale is subject to information
reporting and the broker has actual knowledge that the holder is a United States
person.
The holder generally may obtain a refund of any amounts withheld under the
backup withholding rules that exceed the holder's income tax liability by filing
a refund claim with the Internal Revenue Service.
31
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, Morgan Stanley & Co. Incorporated
has agreed to purchase, and AIG has agreed to sell to it, the entire principal
amount of the debentures.
The underwriting agreement provides that the obligation of the underwriter
to pay for and accept delivery of the debentures offered by this prospectus is
subject to the approval of certain legal matters by its counsel and to certain
other conditions. Morgan Stanley & Co. Incorporated is obligated to take and pay
for all of the debentures offered by this prospectus if any such debentures are
taken.
If Morgan Stanley & Co. Incorporated sells more than $1,519,734,000
principal amount of debentures, Morgan Stanley & Co. Incorporated has an option
to buy up to an additional $227,960,000 principal amount of debentures from AIG
to cover such sales. Morgan Stanley & Co. Incorporated may exercise that option
for 30 days.
The following table shows the per debenture and total underwriting
discounts to be paid to Morgan Stanley & Co. Incorporated by AIG. Such amounts
are shown assuming both no exercise and full exercise of Morgan Stanley & Co.
Incorporated's option to purchase $227,960,000 additional principal amount of
debentures.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Debenture........................................... $ 6.580 $ 6.580
Total......................................... $9,999,850 $11,499,827
Morgan Stanley & Co. Incorporated initially proposes to offer part of the
debentures directly to the public at the public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $3.948 per debenture. After the
debentures are released to the public, the offering price and other selling
terms may from time to time be varied by Morgan Stanley & Co. Incorporated.
The debentures are a new issue of securities with no established trading
market. Morgan Stanley & Co. Incorporated has advised AIG that it presently
intends to make a market in the debentures as permitted by applicable laws and
regulations. Morgan Stanley & Co. Incorporated is not obligated, however, to
make a market in the debentures and any such market-making activity may be
discontinued at any time at the sole discretion of Morgan Stanley & Co.
Incorporated. Accordingly, AIG cannot assure the holders as to the liquidity of,
or trading markets for, the debentures.
In connection with the offering, Morgan Stanley & Co. Incorporated may
purchase and sell debentures and shares of common stock in the open market.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by Morgan Stanley & Co. Incorporated of a greater principal amount of
debentures than it is required to purchase in the offering. "Covered" short
sales are sales made in an amount not greater than Morgan Stanley & Co.
Incorporated's option to purchase additional debentures from AIG in the
offering. Morgan Stanley & Co. Incorporated may close out any covered short
position by either exercising its option to purchase additional debentures or
purchasing debentures in the open market. In determining the source of
debentures to close out the covered short position, Morgan Stanley & Co.
Incorporated will consider, among other things, the price of debentures
available for purchase in the open market as compared to the price at which it
may purchase shares through the overallotment option. "Naked" short sales are
any sales in excess of such option. Morgan Stanley & Co. Incorporated must close
out any naked short position by purchasing debentures in the open market. A
naked short position is more likely to be created if Morgan Stanley & Co.
Incorporated is concerned that there may be downward pressure on the price of
the debentures in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of debentures made by Morgan Stanley & Co.
Incorporated in the open market prior to the completion of the offering.
32
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
debentures and may stabilize, maintain or otherwise affect the market price of
the debentures. As a result, the price of the debentures may be higher than the
price that otherwise might exist in the open market. If these activities are
commenced, they may be discontinued at any time. These transactions may be
effected in the over-the-counter market or otherwise.
From time to time, Morgan Stanley & Co. Incorporated or its affiliates have
in the past provided and in the future may provide investment banking and other
services to AIG, for which they have received and will receive customary
compensation.
AIG has agreed to indemnify Morgan Stanley & Co. Incorporated against
certain liabilities, including liabilities under the Securities Act of 1933.
The expenses of the offering, not including the underwriting discount, are
estimated to be $788,000.
33
WHERE YOU CAN FIND MORE INFORMATION
AIG is subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith files reports, proxy statements and
other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, as well as at the following Regional Office: Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained at the SEC's Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC also
maintains a Web Site at http://www.sec.gov. which contains reports and other
information regarding registrants that file electronically with the SEC.
AIG common stock is listed on the NYSE and AIG's reports, proxy statements
and other information can be inspected at such Exchange at 20 Broad Street, New
York, New York 10005.
This prospectus constitutes part of a registration statement on Form S-3
(together with all amendments and exhibits, the "Registration Statement") filed
by AIG with the SEC under the Securities Act of 1933. This prospectus does not
contain all of the information included in the Registration Statement, certain
parts of which are omitted in accordance with applicable rules and regulations
of the SEC. For further information pertaining to AIG and the debentures offered
hereby, reference is made to the Registration Statement and the exhibits
thereto.
INCORPORATION BY REFERENCE
The following documents have been filed by AIG with the SEC (File No.
1-8787) and are incorporated herein by reference:
(1) AIG's Annual Report on Form 10-K for the year ended December 31,
2000;
(2) AIG's Quarterly Report on Form l0-Q for the quarter ended March
31, 2001;
(3) AIG's Quarterly Report on Form l0-Q for the quarter ended June
30, 2001; and
(4) AIG's Current Reports on Form 8-K, dated August 29, 2001,
September 18, 2001, October 9, 2001 and November 6, 2001.
All documents filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this prospectus and prior to
the termination of this offering shall be deemed to be incorporated by reference
in this prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained or incorporated by reference herein or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein is
modified or superseded such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus.
AIG will provide without charge to each person to whom this prospectus is
delivered, upon the written or oral request of any such person, a copy of any or
all documents (excluding exhibits unless specifically incorporated by reference
into such documents) referred to above which have been or may be incorporated
herein by reference and not furnished herewith. Requests for such documents
should be directed to AIG's Director of Investor Relations, 70 Pine Street, New
York, New York 10270, telephone (212) 770-6293.
34
VALIDITY OF THE DEBENTURES AND COMMON STOCK
The validity of the debentures and shares of common stock initially
issuable upon conversion of the debentures offered hereby will be passed upon
for us by Kathleen E. Shannon, Vice President, Secretary and Associate General
Counsel, and for Morgan Stanley & Co. Incorporated by Davis Polk & Wardwell, New
York, New York. Ms. Shannon is regularly employed by AIG, participates in
various AIG employee benefit plans under which she may receive shares of common
stock and currently beneficially owns less than 1% of the outstanding shares of
common stock.
EXPERTS
The consolidated financial statements and financial statement schedules of
American International Group, Inc. at December 31, 2000 and 1999 and for the
three-year period ended December 31, 2000 included in AIG's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 and incorporated by
reference in this prospectus have been audited by PricewaterhouseCoopers LLP,
independent accountants, as stated in their report, which is incorporated herein
by reference. Those consolidated financial statements and financial statement
schedules are incorporated herein by reference in reliance upon their report
given upon the authority of that firm as experts in accounting and auditing.
The supplemental consolidated financial statements and financial statement
schedules of American International Group, Inc. at December 31, 2000 and 1999
and for the three-year period ended December 31, 2000 included in AIG's Current
Report on Form 8-K, dated October 9, 2001, and incorporated by reference in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants, as stated in their report, which is incorporated herein by
reference in reliance upon their report given upon the authority of that firm as
experts in accounting and auditing.
The consolidated financial statements of American General Corporation
incorporated by reference in American General's Annual Report on Form 10-K for
the year ended December 31, 2000 and the related financial statement schedules
included therein, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon incorporated by reference therein and
included in AIG's Current Report on Form 8-K, dated October 9, 2001 and
incorporated herein by reference. Such consolidated financial statements and
financial statement schedules are incorporated herein by reference in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
35
[AIG Logo]