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PROPOSAL 2: APPROVAL OF THE AMERICAN ANNUITY GROUP, INC.EMPLOYEE STOCK PURCHASE PLAN On June 13, 1994, the Board of Directors adopted, subject to approval of AAG stockholders at this Meeting, the American Annuity Group, Inc., Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provides eligible employees with an opportunity to purchase shares of AAG Common Stock at a discount to market prices through regular payroll deductions. The following description is qualified in its entirety by reference to the text of the Stock Purchase Plan which is set forth in Annex 1 to this Proxy Statement. Purpose of the Plan The purpose of the Stock Purchase Plan is to enable employees to acquire or increase ownership interests in AAG on a basis that will encourage them to perform at increasing levels of effectiveness and to use their best efforts to promote the growth and profitability of AAG. Plan Administration and Termination The Stock Purchase Plan is administered by the Organization and Policy Committee of the AAG Board of Directors (the "Committee"). No member of the Committee is eligible to purchase AAG Common Stock under the Stock Purchase Plan or to receive stock or an option to purchase stock under any other AAG plan under which such member has been eligible for selection on a discretionary basis. The Committee has full discretionary authority to interpret the Stock Purchase Plan, to issue rules for administering the Stock Purchase Plan, to change, alter, amend or rescind such rules, and to make all other determinations necessary or appropriate for the administration of the Stock Purchase Plan. The Committee has engaged Star Bank, National Association as agent (the "Agent") to perform certain custodial and record-keeping functions for the Stock Purchase Plan. Unless earlier terminated, the Stock Purchase Plan will continue in effect until the earlier of the purchase of the maximum number of shares available under the Stock Purchase Plan or ten years from the effective date of the Stock Purchase Plan. Eligible Participants Employees of AAG, and of subsidiaries designated by the Committee, will be eligible to participate in the Stock Purchase Plan provided that each such employee (i) has been employed by AAG or such a subsidiary for at least three months, (ii) is customarily employed by AAG or such a subsidiary for more than 20 hours per week and more than five months per calendar year, and (iii) does not beneficially own 5% or more of AAG Common Stock. Eligibility generally ceases upon termination of employment with AAG or a designated subsidiary. Approximately 400 employees were eligible to participate as of March 1, 1995. Securities to be Utilized The maximum number of shares of AAG Common Stock which may be purchased by eligible employees under the Stock Purchase Plan is 1,000,000 (subject to adjustment in certain events). Shares purchased by participating employees may be previously acquired treasury shares or authorized but unissued shares or, if and to the extent authorized by the Committee, shares purchased in market transactions by the Agent. Method and Price of Purchase Each eligible employee may elect to have a specified amount, not to be more than 25% of base salary or wages, deducted from each regular paycheck, but no eligible employee may purchase shares with an aggregate fair market value in excess of $25,000 in any calendar year. The amounts deducted during any "Deduction Period" (one, two or three calendar months, as determined by the Committee) will be used to purchase on the last business day of such Deduction Period or as soon thereafter as practicable (the "Purchase Date") the maximum number of whole and fractional shares of Common Stock which such amounts can purchase at the Purchase Price (as defined below). Dividends received on shares held in an employee's account will, unless otherwise directed by the participant, be used to purchase additional shares. The Purchase Price for each whole or fractional share purchased will be 85% of the fair market value on the Purchase Date, defined as the mean between the high and low sales prices of AAG Common Stock on the New York Stock Exchange Composite Tape on the Purchase Date. If AAG Common Stock is purchased on the open market by the Agent, the other 15% of the cost of acquiring such shares will be paid by the employing corporation. No participating employee may sell shares purchased under the Stock Purchase Plan for one year following the date of purchase of the shares. Amendment of the Stock Purchase Plan The AAG Board of Directors may amend the Stock Purchase Plan in any respect except that, without the approval of AAG's stockholders, no amendment may (i) cause the Stock Purchase Plan to cease to satisfy any applicable conditions of Rule 16b-3 of the Securities Exchange Act of 1934, or (ii) increase the maximum number of shares which may be purchased under the Stock Purchase Plan (other than in connection with the Stock Purchase Plan's antidilution provisions). Federal Income Tax Consequences The following is a summary of the principal Federal income tax consequences of transactions under the Stock Purchase Plan based on current Federal income tax laws. This summary does not describe state or local tax consequences. The Stock Purchase Plan is intended to quality as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code of 1986. Accordingly, income will not result to an employee who elects to participate when the shares purchased are transferred to him. If an employee disposes of such shares more than two years from the date on which he is granted the right to purchase shares under the Stock Purchase Plan and more than one year after the transfer of the shares to him, the employee will be required to include in income, as compensation for the year in which such disposition occurs, an amount equal to the lesser of (i) the excess of the fair market value of such shares at the time of disposition over the Purchase Price or (ii) 15% of the fair market value of such shares at the time of the purchase. The employee's basis in those shares in his hands at the time of such a disposition will be increased by an amount equal to the amount so includable in his income as compensation, and any gain or loss computed with reference to such adjusted basis which is recognized at the time of the disposition will be short or long-term capital gain or loss depending upon the holding period for such shares. In such event, AAG will not be entitled to any deduction from income.If an employee disposes of the shares purchased under the Stock Purchase Plan within two years of the date of grant or one year from the date of transfer, the employee will be required to include in income, as compensation for the year in which such disposition occurs, an amount equal to the 15% discount on the date of purchase. The employee's basis in such shares at the time of disposition will be increased by an amount equal to the amount includable in his income as compensation, and any gain or loss computed with reference to such adjusted basis which is recognized at the time of disposition will be capital gain or loss, either short-term or long-term, depending on the capital gain holding period for such shares. In the event of a disposition prior to the expiration of the holding period, AAG will be entitled to a deduction from income equal to the amount the employee is required to include in income as compensation as a result of such disposition. To the extent this compensation is subject to income tax withholding, Social Security taxes and other employment taxes, AAG will make such provision as it deems appropriate for the withholding or other payment of such taxes. Employees will not be entitled to any deduction from income for payroll deductions under the Stock Purchase Plan. Dividends paid on shares held under the Plan will be taxable for income tax purposes, whether paid in cash or automatically reinvested in additional shares of Common Stock.