SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File
June 30, 1997 No. 1-8013
AMERICAN FINANCIAL ENTERPRISES, INC.
Incorporated under IRS Employer I.D.
the Laws of Connecticut No. 31-0996797
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2172
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
As of August 1, 1997, there were 13,617,521 shares of the Registrant's
Common Stock outstanding.
Page 1 of 9
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL ENTERPRISES, INC.
BALANCE SHEET
(Dollars in Thousands)
June 30, December 31,
1997 1996
Assets
Cash and short-term investments $ 65,873 $ 59,939
Investment in affiliates:
American Financial Group, Inc. 424,263 397,421
American Annuity Group, Inc. 47,760 43,237
Other equities - at market (cost - $7,368) 8,968 5,168
Other assets 442 499
$547,306 $506,264
Liabilities and Shareholders' Equity
Accounts payable, accrued expenses and
other liabilities $ 2,130 $ 1,230
Payable to American Financial Corporation 93,929 80,935
96,059 82,165
Shareholders' Equity:
Preferred Stock, none issued - -
Common Stock, $1 par value
- 20,000,000 shares authorized
- 13,410,036 and 13,291,117 shares outstanding
13,410 13,291
Capital surplus 116,666 114,106
Retained earnings 282,749 278,802
Net unrealized gain on marketable
securities, net of deferred income taxes 38,422 17,900
Total Shareholders' Equity 451,247 424,099
$547,306 $506,264
2
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income:
Equity in net earnings of affiliates:
American Financial Group, Inc. $ - $5,929 $ - $14,550
American Annuity Group, Inc. 1,751 1,575 3,423 3,018
Citicasters Inc. - 610 - 490
Dividend and interest income 3,370 30 6,644 53
5,121 8,144 10,067 18,111
Costs and Expenses:
Interest charges on borrowed money - 315 - 630
Administrative and general expenses 758 386 1,514 788
758 701 1,514 1,418
Earnings before federal income taxes and
extraordinary items 4,363 7,443 8,553 16,693
Provision for federal income taxes 917 1,996 1,774 4,624
Earnings before extraordinary items 3,446 5,447 6,779 12,069
Extraordinary items - share of affiliates'
losses on prepayment of debt, net of
tax benefit of $525 and $915 - (974) - (1,699)
Net Earnings $3,446 $4,473 $ 6,779 $10,370
Average number of Common Shares 13,357 13,291 13,324 13,291
Earnings (loss) per Common Share:
Before extraordinary items $.26 $.41 $.51 $.91
Extraordinary items - (.07) - (.13)
Net earnings $.26 $.34 $.51 $.78
Cash dividends per Common Share $.10 $.10 $.20 $.20
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
AMERICAN FINANCIAL ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
(In Thousands)
Six months ended
June 30,
1997 1996
Operating Activities:
Net earnings $ 6,779 $10,370
Adjustments:
Extraordinary items - share of affiliates'
losses on prepayment of debt - 1,699
Equity in net earnings of affiliates (3,423) (18,058)
Cash dividends from equity method affiliates - 4,976
Increase in payable to affiliates 1,774 4,927
Other, net 957 223
6,087 4,137
Financing Activities:
Repayments of borrowings from affiliates - (67)
Exercise of stock options 2,512 -
Cash dividends paid (2,665) (2,658)
(153) (2,725)
Net Increase in Cash and Short-term Investments 5,934 1,412
Cash and short-term investments at beginning of period 59,939 506
Cash and short-term investments at end of period $65,873 $ 1,918
4
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
NOTES TO FINANCIAL STATEMENTS
A. Basis of Presentation The accompanying financial statements for
American Financial Enterprises, Inc. ("AFEI") are unaudited, but
management believes that all adjustments (consisting only of
normal recurring accruals unless otherwise disclosed herein)
necessary for fair presentation have been made. The results of
operations for interim periods are not necessarily indicative of
results to be expected for the year. The financial statements
have been prepared in accordance with the instructions to
Form 10-Q and therefore do not include all information and
footnotes necessary to be in conformity with generally accepted
accounting principles.
The preparation of the financial statements requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Changes in
circumstances could cause actual results to differ materially from
those estimates.
At June 30, 1997, American Financial Group, Inc. ("AFG") owned
10,981,429 shares (82%) of AFEI's outstanding Common Stock.
In July 1997, AFEI entered into an agreement with AFG under which
all shares of AFEI Common Stock not owned by AFG would be
exchanged on a one-for-one basis for AFG common stock or $37.00
per AFEI share in cash and AFEI would become wholly-owned. The
transaction is structured to be tax-free to AFEI shareholders who
receive only new stock and is subject to the approval by holders
of two-thirds of AFEI's shares other than AFG or AFG's officers,
directors or associates.
Income Taxes AFEI files consolidated federal income tax returns
with American Financial Corporation ("AFC"), all of whose common
stock is owned by AFG. Deferred income taxes are calculated using
the liability method. Under this method, deferred income tax
assets and liabilities are determined based on differences between
financial reporting and tax bases and are measured using enacted
tax rates. Current and deferred tax assets and liabilities are
aggregated with other amounts receivable from or payable to AFC.
Earnings Per Share Earnings per share are calculated on the basis
of the weighted average number of shares of common stock outstanding
during the period and the dilutive effect, if material, of assumed
conversion of common stock options.
New accounting standards issued in 1997 revise current rules for
computing and presenting earnings per share beginning with financial
statements issued for periods ending after December 15, 1997. The
new rules require the presentation of basic and diluted earnings per
share for entities with potentially dilutive securities.
Implementation of these new rules will not materially affect AFEI's
reported earnings per share amounts.
<PAGE>
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as acquiring and disposing of debt or
equity instruments. "Financing activities" include obtaining
resources from owners and providing them with a return on their
investments, borrowing money and repaying amounts borrowed. All
other activities are considered "operating". Short-term
investments having original maturities of three months or less
when purchased are considered to be cash equivalents for purposes
of the financial statements.
5
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
NOTES TO FINANCIAL STATEMENTS - CONTINUED
B. Investment in Affiliates In light of the proposed transaction
discussed in Note A, AFEI suspended accounting for its investment
in AFG under the equity method beginning in January 1997. As a
result, AFEI carries its investment in AFG at market value and
recognizes only the dividends received as income from AFG.
AFEI's and AFC's combined ownership of the common stock of
American Annuity Group, Inc. exceeds 20%. Accordingly, this
investment is treated as an affiliate under the equity method of
accounting. Since AFEI's basis in certain assets and liabilities
of affiliates differs from amounts reported by these companies,
adjustments are made to their reported earnings in calculating
AFEI's share of affiliate earnings. Included in AFEI's balance
sheet is its portion of affiliates' unrealized gains and losses on
marketable securities.
Investment in American Financial Group AFEI owned 10.0 million
shares (13%) of AFG common stock at June 30, 1997. Since AFEI and
AFC are AFG subsidiaries, AFG does not report shares owned by them
as outstanding for financial reporting purposes. AFEI (and AFC)
receive dividends paid on AFG common stock; however, their shares
generally will not be eligible to be voted as long as AFEI (and
AFC) are owned by AFG. The market value of AFEI's investment in
AFG was $424 million and $376 million at June 30, 1997 and
December 31, 1996, respectively. The book value (cost plus equity
in net earnings through December 31, 1996) of AFEI's investment in
AFG was $374 million at June 30, 1997. AFG's subsidiaries operate
primarily in specialty and multi-line property and casualty
insurance and the sale of tax-deferred annuities.
Summarized financial information for AFG (for the period it was
accounted for under the equity method) follows (in millions):
Six months ended
June 30, 1996
Revenues $2,063.7
Earnings Before Extraordinary Items 139.5
Extraordinary Items - Loss
on Debt Prepayments (17.5)
Net Earnings 122.0
Investment in American Annuity Group AFEI owned 4.2 million
shares (10%) of American Annuity common stock at June 30, 1997.
The market value of AFEI's investment in American Annuity was
$76 million and $60 million at June 30, 1997 and December 31,
1996, respectively. American Annuity is engaged in the sale of
tax-deferred annuities and certain life and health insurance.
Summarized financial information for American Annuity follows (in
millions):
Six months ended
June 30,
1997 1996
Revenues $304.2 $289.9
Income Before Extraordinary Item 35.7 31.0
Extraordinary Item - Loss on
Debt Prepayments - (4.3)
Net Income 35.7 26.7
Investment in Citicasters In September 1996, AFEI sold its
investment in Citicasters to Jacor Communications for
approximately $76 million in cash plus warrants to purchase Jacor
common stock.
6
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
NOTES TO FINANCIAL STATEMENTS - CONTINUED
C. Payable to American Financial Corporation AFEI's payable to AFC at
June 30, 1997 and December 31, 1996 represents primarily tax
payments due under AFEI's tax agreement and deferred taxes on
AFEI's net unrealized gain on marketable securities.
AFEI has a $20 million credit agreement with an AFC subsidiary
which expires in December 1997. Borrowings bear interest at rates
1/8th of 1% below AFEI's bank line rates. All other terms are
similar to those in the bank line agreement. Maximum aggregate
borrowings under the two lines may not exceed $25 million at any
one time. AFEI had no borrowings under this agreement at June 30,
1997 or December 31, 1996.
D. Bank Line Agreement AFEI has a revolving credit agreement under
which it may borrow a maximum of $20 million through December
1997. Loans under the line of credit bear interest at rates
approximating prime and are collateralized by a pledge of AFG
common stock having a market value of two times the amount
borrowed under the line. The lender charges an annual fee of 1/4%
of the unused portion of the line of credit. There was no
outstanding balance under the bank line at June 30, 1997 or
December 31, 1996.
E. Shareholders' Equity During the second quarter of 1997, options
for 125,000 shares of AFEI Common Stock were exercised for
aggregate proceeds of $2.7 million (including 6,081 AFEI Common
Shares received in lieu of cash).
At June 30, 1997, there were 337,500 shares of AFEI Common Stock
reserved for issuance upon exercise of stock options (most of
which were exercised in July).
The components of AFEI's net unrealized gain on marketable
securities were as follows (in millions):
June 30, December 31,
1997 1996
American Financial Group common stock $50.3 $ -
Other equities 1.6 (2.2)
Equity in affiliates' net unrealized gains:
American Annuity Group 7.2 6.1
American Financial Group - 23.5
59.1 27.4
Deferred taxes 20.7 9.5
Net unrealized gain $38.4 $17.9
7
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL AFEI's assets consist primarily of investments in the common
stock of American Financial Group and American Annuity.
LIQUIDITY AND CAPITAL RESOURCES At the current indicated rate,
$10 million in annual dividends from AFG is expected to be more than
sufficient to cover AFEI's fixed charges and other operating expenses.
If, in the future, affiliate dividends are insufficient to meet its
fixed charges, AFEI would be required to meet them through bank
borrowings, sales of investments, borrowings from affiliates, or
similar transactions.
Since March 1995, AFEI has paid quarterly dividends of $1.3 million
($.10 per share). Additionally, AFEI paid a special dividend in
December 1995 of $2.0 million or $.15 per share.
RESULTS OF OPERATIONS
Affiliates Since AFEI's basis in certain assets and liabilities of
affiliates differs from amounts reported by these companies,
adjustments are made to AFEI's share of affiliate earnings. The
following table presents the significant amounts used in calculating
AFEI's equity in net earnings of affiliates for the six months ended
June 30 (in millions):
<TABLE>
<CAPTION>
AFG American Annuity Citicasters
1997(a) 1996 1997 1996 1996(b)
<S> <C> <C> <C> <C> <C>
Affiliate earnings before
extraordinary items $124.4 $139.5 $35.7 $31.0 $4.7
AFEI's share of affiliate earnings $ 18.1 $ 3.4 $ 3.0 $0.6
Basis adjustments, including
amortization of goodwill (3.5) - - (0.1)
Equity in net earnings of affiliates
as shown in Statement of Earnings $ 14.6 $ 3.4 $ 3.0 $0.5
<FN>
(a) In light of the proposed transaction under which AFEI would become
wholly-owned, AFEI suspended accounting for AFG under the equity method
in January 1997. See Note A to the financial statements.
(b) AFEI sold its Citicasters shares in September 1996.
</FN>
</TABLE>
Dividend and Interest Income Dividends of $2.5 million received from
AFG in the first and second quarters of 1997 were included in dividend
and interest income. Dividends of $2.5 million received from AFG for
the same periods of 1996 were recorded as reductions in AFEI's
investment in AFG under the equity method of accounting.
<PAGE>
Interest Expense Interest expense for 1996 represents interest on
borrowings under AFEI's credit agreement with an AFC subsidiary which
were repaid in September 1996.
Administrative and General Expenses Administrative and general
expenses for the second quarter and six months of 1997 increased due
primarily to an increase in franchise taxes.
Income Taxes The provision for income taxes reflects the effects of
deductions relating to affiliate dividends.
NEW TAX LEGISLATION New federal tax legislation was signed into law
in August 1997. Management believes the legislation will not have a
material effect on AFEI's financial condition or results of operations.
8
<PAGE>
AMERICAN FINANCIAL ENTERPRISES, INC. 10-Q
PART II
OTHER INFORMATION
ITEM 1
Legal Proceedings
A lawsuit was filed following the April 23, 1997 public announcement
of a proposal whereby AFG would acquire the AFEI Common Stock not
owned by AFG. See Note A to the Financial Statements. The lawsuit
names AFG, AFEI and six of AFEI's directors as defendants, alleges
that the price offered in the proposal for AFEI's Common Stock is
inadequate, and seeks to temporarily or permanently enjoin any
transaction, or, alternatively, seeks recision or compensatory
damages. The class action complaint was filed in Superior Court in
Hartford, Connecticut, as Harry Lewis v. Carl H. Lindner, et al. The
defendants have filed a motion to dismiss based on Connecticut law
"prior demand" requirements and cases and statutes which would hold or
indicate that appraisal is the sole remedy which would be available to
plaintiffs in this instance. Management believes that the suit is
without merit and intends to contest it vigorously.
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule - Included in Report filed
electronically with the Securities and Exchange Commission.
(b) Report on Form 8-K:
Date of Report Item Reported
July 14, 1997 Merger Agreement with AFG
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
American Financial Enterprises, Inc. has duly caused this Report to be
signed on its behalf by the undersigned duly authorized.
American Financial Enterprises, Inc.
August 12, 1997 BY: FRED J. RUNK
Fred J. Runk
Vice President and Treasurer
9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
American Financial Enterprises, Inc. 10-Q for the six months ended
June 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> $ 65,773
<SECURITIES> 480,991<F1>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 547,306
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 13,410
<OTHER-SE> 437,837
<TOTAL-LIABILITY-AND-EQUITY> 547,306
<SALES> 0
<TOTAL-REVENUES> 10,067<F2>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,553
<INCOME-TAX> 1,774
<INCOME-CONTINUING> 6,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,779
<EPS-PRIMARY> $.51
<EPS-DILUTED> $.51
<FN>
<F1>Included in "Marketable securities" is AFEI's investment in affiliates of
$472 million.
<F2>Included in "Total revenue" is equity in net earnings of affiliates of
$3.4 million.
</FN>
</TABLE>
