<PAGE>
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
March 31, 1996 No. 1-7361
AMERICAN FINANCIAL CORPORATION
Incorporated under IRS Employer I.D.
the Laws of Ohio No. 31-0624874
One East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
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 May 1, 1996, there were 53,000,000 shares of the Registrant's
Common Stock outstanding, all of which were owned by American
Financial Group, Inc.
Page 1 of 15
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART I
FINANCIAL INFORMATION
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and short-term investments $ 180,461 $ 331,825
Investments:
Bonds and redeemable preferred stocks:
Held to maturity - at amortized cost
(market - $3,339,300 and $3,386,000) 3,306,636 3,257,204
Available for sale - at market
(amortized cost - $4,523,570 and $4,211,883) 4,587,770 4,412,483
Other stocks - principally at market
(cost - $134,429 and $133,665) 250,029 248,665
Investment in investees 838,179 833,886
Loans receivable 595,854 591,105
Real estate and other investments 200,654 198,120
Total investments 9,779,122 9,541,463
Recoverables from reinsurers and prepaid
reinsurance premiums 949,057 984,500
Agents' balances and premiums receivable 370,437 376,330
Deferred acquisition costs 341,095 330,353
Other receivables 267,143 202,099
Assets held in separate accounts 240,551 238,524
Prepaid expenses, deferred charges and other assets 227,012 224,858
Cost in excess of net assets acquired 183,503 183,639
$12,538,381 $12,413,591
<PAGE>
Liabilities and Shareholders' Equity
Unpaid losses and loss adjustment expenses $ 2,953,561 $ 2,965,700
Unearned premiums 872,109 920,641
Annuity benefits accumulated 5,130,239 5,051,959
Life, accident and health reserves 544,181 538,274
Payable to American Premier Underwriters 802,578 639,455
Other long-term debt:
Direct obligations of AFC Parent Company 261,806 311,202
Obligations of AFC subsidiaries:
American Annuity Group 166,053 167,734
Other subsidiaries 55,975 56,705
Liabilities related to separate accounts 240,551 238,524
Accounts payable, accrued expenses and other
liabilities 712,465 675,052
Minority interest 134,472 148,338
Total liabilities 11,873,990 11,713,584
Shareholders' Equity:
Preferred Stock (redemption value - $278,719) 168,484 168,484
Common Stock without par value 9,625 9,625
Retained earnings 375,282 335,798
Net unrealized gain on marketable securities,
net of deferred income taxes 111,000 186,100
Total shareholders' equity 664,391 700,007
$12,538,381 $12,413,591
</TABLE>
2
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
<S> <C> <C>
Income:
Property and casualty insurance premiums $373,615 $349,133
Life, accident and health premiums 24,253 739
Investment income 166,682 152,334
Realized gains on sales of securities 12,669 3,476
Equity in net earnings of investees 18,662 22,901
Other income 26,082 25,024
621,963 553,607
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 247,112 243,643
Commissions and other underwriting expenses 121,187 119,611
Annuity benefits 68,015 64,262
Life, accident and health benefits 21,593 415
Interest charges on borrowed money 35,121 29,129
Other operating and general expenses 71,825 57,445
564,853 514,505
Earnings before income taxes and extraordinary
items 57,110 39,102
Provision for income taxes 11,059 9,237
Earnings before extraordinary items 46,051 29,865
Extraordinary items - loss on prepayment of debt (6,376) -
Net Earnings $ 39,675 $ 29,865
</TABLE>
3
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
<S> <C> <C>
Operating Activities:
Net earnings $ 39,675 $ 29,865
Adjustments:
Extraordinary losses from retirement of debt 6,376 -
Depreciation and amortization 10,879 7,723
Annuity benefits 68,015 64,262
Equity in net earnings of investees (18,662) (22,901)
Changes in reserves on assets 3,610 (1,154)
Realized gains on investing activities (11,708) (3,568)
Decrease in reinsurance and other receivables 5,193 8,641
Increase in other assets (13,728) (49,619)
Increase (decrease) in insurance claims
and reserves (54,764) 71,072
Decrease in other liabilities (4,987) (13,960)
Increase in minority interest 3,809 3,102
Dividends from investees 5,704 5,815
Other, net (2,479) (1,197)
36,933 98,081
Investing Activities:
Purchases of and additional investments in:
Fixed maturity investments (602,006) (254,863)
Equity securities (8,420) -
Investees and subsidiaries (2,236) -
Real estate, property and equipment (6,153) (5,331)
Maturities and redemption's of fixed maturity
investments 134,922 49,019
Sales of:
Fixed maturity investments 159,570 54,732
Equity securities 19,829 9,007
Real estate, property and equipment 412 2,079
Increase in other investments (3,179) (3,574)
(307,261) (148,931)
<PAGE>
Financing Activities:
Annuity receipts 137,241 119,420
Annuity payments (113,852) (99,374)
Additional long-term borrowings 100,200 29,750
Reductions of long-term debt (159,470) (13,176)
Borrowings from American Premier 188,600 -
Repayments of borrowings from American Premier (33,564) -
Repurchases of preferred stock - (147)
Cash dividends paid (191) (191)
118,964 36,282
Net Decrease in Cash and Short-term Investments (151,364) (14,568)
Cash and short-term investments at beginning
of period 331,825 171,335
Cash and short-term investments at end of period $180,461 $156,767
</TABLE>
4
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Mergers On April 3, 1995, American Financial Corporation ("AFC")
merged with a subsidiary of American Financial Group, Inc.
("AFG"), a new company formed to own 100% of the common stock of
both AFC and American Premier Underwriters, Inc. ("American
Premier"). In the transaction, Carl H. Lindner and members of his
family, who owned 100% of the Common Stock of AFC, exchanged their
AFC Common Stock for approximately 55% of AFG voting common stock.
Former shareholders of American Premier, including AFC and its
subsidiaries, received shares of AFG stock on a one-for-one basis.
AFC continues to be a separate SEC reporting company with publicly
traded debentures and preferred stock. Holders of AFC Series F
and G Preferred Stock were granted voting rights equal to
approximately 21% of the total voting power of AFC shareholders
immediately prior to the Mergers.
B. Accounting Policies
Basis of Presentation The accompanying consolidated financial
statements for AFC and subsidiaries are unaudited; however,
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.
Certain reclassifications have been made to prior years to conform
to the current year's presentation. All significant intercompany
balances and transactions have been eliminated. All acquisitions
have been treated as purchases. The results of operations of
companies since their formation or acquisition are included in the
consolidated financial statements.
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.
<PAGE>
AFC's ownership of subsidiaries and significant affiliates with
publicly traded shares was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995 1994
<S> <C> <C> <C>
American Annuity Group, Inc. ("AAG") 81% 80% 80%
American Financial Enterprises, Inc. ("AFEI") 83% 83% 83%
American Financial Group, Inc. 23% 24% -
American Premier Underwriters, Inc. (a) (a) 42%
Chiquita Brands International, Inc. 38% 38% 46%
Citicasters Inc. 38% 38% 37%
<FN>
(a) Exchanged for shares of AFG in April 1995.
</TABLE>
Investments Debt securities are classified as "held to maturity"
and reported at amortized cost if AFC has the positive intent and
ability to hold them to maturity. Debt and equity securities are
classified as "available for sale" and reported at fair value with
unrealized gains and losses reported as a separate component of
shareholders' equity if the securities are not classified as held to
maturity or bought and held principally for selling in the near term.
5
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Only in certain limited circumstances, such as significant issuer credit
deterioration or if required by insurance or other regulators, may
a company change its intent to hold a certain security to maturity
without calling into question its intent to hold other debt
securities to maturity in the future.
Premiums and discounts on mortgage-backed securities are amortized
over their expected average lives using the interest method.
Gains or losses on sales of securities are recognized at the time
of disposition with the amount of gain or loss determined on the
specific identification basis. When a decline in the value of a
specific investment is considered to be other than temporary, a
provision for impairment is charged to earnings and the carrying
value of that investment is reduced.
Short-term investments are carried at cost; loans receivable are
stated primarily at the aggregate unpaid balance.
Investment in Investees Investments in securities of 20%- to
50%-owned companies are carried at cost, adjusted for AFC's
proportionate share of their undistributed earnings or losses.
Investments in less than 20%-owned companies are accounted for by
the equity method when, in the opinion of management, AFC can
exercise significant influence over operating and financial
policies of the investee.
Cost in Excess of Net Assets Acquired The excess of cost of
subsidiaries and investees over AFC's equity in the underlying net
assets ("goodwill") is being amortized over 40 years. The excess
of AFC's equity in the net assets of other subsidiaries and
investees over its cost of acquiring these companies ("negative
goodwill") is allocated to AFC's basis in these companies' fixed
assets, goodwill and other long-term assets and is amortized on a
10- to 40-year basis.
<PAGE>
Insurance As discussed under "Reinsurance" below, unpaid losses
and loss adjustment expenses and unearned premiums have not been
reduced for reinsurance recoverable.
Reinsurance In the normal course of business, AFC's insurance
subsidiaries cede reinsurance to other companies to diversify risk
and limit maximum loss arising from large claims. To the extent
that any reinsuring companies are unable to meet obligations under
the agreements covering reinsurance ceded, AFC's insurance
subsidiaries would remain liable. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsurance policies. AFC's
insurance subsidiaries report as assets (a) the estimated
reinsurance recoverable on unpaid losses, including an estimate
for losses incurred but not reported, and (b) amounts paid to
reinsurers applicable to the unexpired terms of policies in force.
AFC's insurance subsidiaries also assume reinsurance from other
companies. Income on reinsurance assumed is recognized based on
reports received from ceding reinsurers.
Deferred Acquisition Costs Policy acquisition costs (principally
commissions, premium taxes and other underwriting expenses)
related to the production of new businesses are deferred ("DPAC").
For the property and casualty companies, the deferral of
acquisition costs is limited based upon their recoverability
without any consideration for anticipated investment income. DPAC
is charged against income ratably over the terms of the related
policies. For the annuity companies, DPAC is amortized, with
interest, in relation to the present value of expected gross
profits on the policies.
6
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Unpaid Losses and Loss Adjustment Expenses The net liabilities
stated for unpaid claims and for expenses of investigation and
adjustment of unpaid claims are based upon (a) the accumulation of
case estimates for losses reported prior to the close of the
accounting period on the direct business written; (b) esti-mates
received from ceding reinsurers and insurance pools and
associations; (c) estimates of unreported losses based on past
experience; (d) estimates based on experience of expenses for
investigating and adjusting claims and (e) the current state of
the law and coverage litigation. These liabilities are subject to
the impact of changes in claim amounts and frequency and other
factors. In spite of the variability inherent in such estimates,
management believes that the liabilities for unpaid losses and
loss adjustment expenses are adequate. Changes in estimates of
the liabilities for losses and loss adjustment expenses are
reflected in the Statement of Earnings in the period in which
determined.
Annuity Benefits Accumulated Annuity receipts and benefit
payments are generally recorded as increases or decreases in
"annuity benefits accumulated" rather than as revenue and expense.
Increases in this liability for interest credited are charged to
expense and decreases for surrender charges are credited to other
income.
Life, Accident and Health Reserves Liabilities for future policy
benefits under traditional ordinary life, accident and health
policies are computed using a net level premium method.
Computations are based on anticipated investment yields,
mortality, morbidity and surrenders and include provisions for
unfavorable deviations. Reserves are modified as necessary to
reflect actual experience and developing trends.
Assets Held In and Liabilities Related to Separate Accounts
Investment annuity deposits and related liabilities represent
deposits maintained by several banks under a previously offered
tax deferred annuity program. AAG receives an annual fee from
each bank for sponsoring the program; depositors can elect to
purchase an annuity from AAG with funds in their account.
<PAGE>
Premium Recognition Property and casualty premiums are earned
over the terms of the policies on a pro rata basis. Unearned
premiums represent that portion of premiums written which is app
licable to the unexpired terms of policies in force. On
reinsurance assumed from other insurance companies or written
through various underwriting organizations, unearned premiums are
based on reports received from such companies and organizations.
For traditional life, accident and health products, premiums are
recognized as revenue when legally collectible from policyholders.
For interest-sensitive life and universal life products, premiums
are recorded in a policyholder account which is reflected as a
liability. Revenue is recognized as amounts are assessed against
the policyholder account for mortality coverage and contract
expenses.
Income Taxes AFC files consolidated federal income tax returns
which include all 80%-owned U.S. subsidiaries, except for certain
life insurance subsidiaries. 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. Deferred tax assets are recognized if it is
more likely than not that a benefit will be realized.
7
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Benefit Plans AFC provides retirement benefits, through
contributory and noncontributory defined contribution plans, to
qualified employees of participating companies. Contributions to
benefit plans are charged against earnings in the year for which
they are declared. AFC's Employee Stock Ownership Retirement Plan
("ESORP") is a noncontributory, qualified plan which invests in
securities of AFG and affiliates for the benefit of their
employees.
AFC and many of its subsidiaries provide health care and life
insurance benefits to eligible retirees. AFC also provides
postemployment benefits to former or inactive employees (primarily
those on disability) who were not deemed retired under other
company plans. The projected future cost of providing these
benefits is expensed over the period the employees qualify for
such benefits.
Debt Discount Debt discount and expenses are being amortized over
the lives of respective borrowings, generally on the interest
method.
Statement of Cash Flows For cash flow purposes, "investing
activities" are defined as making and collecting loans and
acquiring and disposing of debt or equity instruments and property
and equipment. "Financing activities" include obtaining resources
from owners and providing them with a return on their investments,
borrowing money and repaying amounts borrowed. Annuity receipts,
benefits and withdrawals are also reflected as financing
activities. 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.
C. Segments of Operations AFC operates its property and casualty
insurance business in two major segments: specialty lines and
commercial and personal lines. AFC's annuity business sells tax-
deferred annuities principally to employees of primary and
secondary educational institutions and hospitals. These insurance
businesses operate throughout the United States. AFC also owns
significant portions of the voting equity securities of certain
companies (investee corporations - see Note D). The following
table (in thousands) shows AFC's revenues by significant business
segment. Intersegment transactions are not significant.
<PAGE>
Three months ended March 31,
Revenues 1996 1995
Property and casualty insurance:
Premiums earned:
Specialty lines $193,910 $181,348
Commercial and personal lines 179,547 167,369
Other lines 158 416
373,615 349,133
Investment and other income 79,595 71,485
453,210 420,618
Annuities and life (*) 139,414 97,922
Other 10,677 12,166
603,301 530,706
Equity in net earnings of investees 18,662 22,901
$621,963 $553,607
(*) Represents primarily investment income.
8
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. Investment in Investees Investment in investees represents AFC's
ownership of securities of certain companies. The companies named
in the following table are subject to the rules and regulations of
the SEC. Market value of the investments was approximately
$1.1 billion and $1.0 billion at March 31, 1996 and December 31,
1995, respectively. AFC's investment (and common stock ownership
percentage) in these investees was as follows (dollars in
thousands):
March 31, 1996 December 31, 1995
American Financial Group $566,795 (23%) $568,781 (24%)
Chiquita 197,635 (38%) 191,026 (38%)
Citicasters 73,749 (38%) 74,079 (38%)
$838,179 $833,886
In addition to owning the common stock of AFC, American Financial
Group owns all of the common stock of American Premier, a
specialty property and casualty insurance company. Chiquita is a
leading international marketer, producer and distributor of
bananas and other quality fresh and processed food products.
Citicasters owns and operates radio and television stations in
major markets throughout the country.
In February 1996, Citicasters entered into a merger agreement with
Jacor Communications, Inc. providing for the acquisition of
Citicasters by Jacor. Under the agreement, AFC and its
subsidiaries would receive approximately $220 million in cash plus
warrants to buy approximately 1.5 million shares of Jacor common
stock at $28 per share. AFC expects to realize a pretax gain of
approximately $150 million on the sale. Consummation of the
transaction is subject to regulatory approvals, and certain
adjustments to the price will be made if the transaction closes
after September 30, 1996.
<PAGE>
Summarized financial information for AFC's investees follows (in
millions):
Three months ended
American Financial Group March 31, 1996
Revenues $1,031
Income before Extraordinary Item 81
Extraordinary Item (7)
Net Earnings 74
Three months ended March 31,
Chiquita 1996 1995
Net Sales $625 $674
Operating Income 58 76
Income from Continuing Operations 24 34
Discontinued Operations - 4
Net Income 24 38
Three months ended March 31,
Citicasters 1996 1995
Net Revenues $31 $29
Operating Income 4 5
Net Earnings (Loss) (1) 1
9
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
E. Payable to American Premier Underwriters At March 31, 1996, AFC
(parent) had borrowed $675 million under its credit agreement with
American Premier. Accrued interest of $19.9 million at March 31,
1996, was paid in April 1996.
Also included in the payable to American Premier at March 31,
1996, is an aggregate of $107.7 million representing borrowings of
two AFC subsidiaries under credit facilities with American
Premier.
F. Other Long-Term Debt During the first quarter of 1996, AFC
(parent) repurchased $49.0 million of its debentures for
$53.2 million. AAG repurchased $22.1 million of its Notes for
$24.1 million. During the second quarter of 1996 (through May 13),
these companies repurchased an aggregate of $45.6 million of debt
for $48.9 million.
At March 31, 1996, sinking fund and other scheduled principal
payments on debt for the balance of 1996 and the subsequent five
years were as follows (in thousands):
Parent
Company Other Total
1996 $ - $ 1,035 $ 1,035
1997 5,431 1,740 7,171
1998 - 1,934 1,934
1999 - 41,725 41,725
2000 - 7,151 7,151
2001 - 42,934 42,934
Debentures purchased in excess of scheduled payments may be
applied to satisfy any sinking fund requirement. The scheduled
principal payments shown above assume that debentures purchased
are applied to the earliest scheduled retirements.
<PAGE>
G. Preferred Stock Under provisions of both the Nonvoting
(21.1 million shares authorized) and Voting (17.0 million shares
authorized, 14.1 million shares outstanding) Cumulative Preferred
Stock, the Board of Directors may divide the authorized stock into
series and set specific terms and conditions of each series. At
March 31, 1996, the outstanding shares of voting preferred stock
consisted of the following:
Series F, $1 par value - authorized 15,000,000
shares; annual dividends per share $1.80; 10% may be
retired at AFC's option at $20 per share in 1996;
13,744,754 shares (stated value - $167.9 million)
outstanding at March 31, 1996 and December 31, 1995.
Series G, $1 par value - authorized 2,000,000
shares; annual dividends per share $1.05; may be retired
at AFC's option at $10.50 per share; 364,158 shares
(stated value - $600,000) outstanding at March 31, 1996
and December 31, 1995.
H. Common Stock At March 31, 1996, AFG owned all 53.0 million
outstanding shares of AFC's Common Stock.
I. Extraordinary Items Extraordinary items represent AFC's
proportionate share of losses recorded by the following companies
from their debt retirements. Amounts shown are net of minority
interest (in thousands):
AFC (parent) ($4,198)
AAG (2,178)
($6,376)
10
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
J. Cash Flows - Fixed Maturity Investments "Investing activities"
related to fixed maturity investments in AFC's Statement of Cash
Flows consisted of the following (in thousands):
Held to Available
1996 Maturity For Sale Total
Purchases $64,896 $537,110 $602,006
Maturities and redemptions 50,200 84,722 134,922
Sales - 159,570 159,570
1995
Purchases $97,511 $157,352 $254,863
Maturities and redemptions 26,700 22,319 49,019
Sales - 54,732 54,732
K. Pending Legal Proceedings Counsel has advised AFC that there is
little likelihood of any substantial liability being incurred from
any litigation pending against AFC and subsidiaries.
11
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
ITEM 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
GENERAL
AFC is organized as a holding company with almost all of its
operations being conducted by subsidiaries and affiliates. The parent
corporation, however, has continuing expenditures for administrative
expenses and corporate services and, most importantly, for the payment
of principal and interest on borrowings and dividends on AFC Preferred
Stock. Therefore, certain analyses are best done on a parent only
basis while others are best done on a total enterprise basis. In
addition, since most of its businesses are financial in nature, AFC
does not prepare its consolidated financial statements using a
current-noncurrent format. Consequently, certain traditional ratios
and financial analysis tests are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Ratios AFC's ratio of debt to total capital at the holding company
level (excluding amounts due to affiliates) was .28 at March 31, 1996
compared to .31 at December 31, 1995. Including the notes payable to
American Premier, the ratio changes to .61 at March 31, 1996 compared
to .57 at December 31, 1995. AFC's ratio of earnings to fixed charges
on a total enterprise basis was 2.13 for the first three months of
1996 compared to 2.23 for the entire year of 1995; ratios of earnings
to fixed charges and preferred dividends were 1.82 and 1.90 for the
same periods.
Sources of Funds Management believes AFC has sufficient resources to
meet its liquidity requirements through operations in the short-term
and long-term future. If funds generated from operations, including
dividends from subsidiaries, are insufficient to meet fixed charges in
any period, AFC would be required to generate cash through borrowings,
sales of securities or other assets, or similar transactions.
Bank credit lines at several subsidiary holding companies provide
ample liquidity which can be used to obtain funds for the operating
subsidiaries or, if necessary, for the parent company. Agreements
with the banks generally run for three to seven years and are renewed
before maturity. While it is highly unlikely that all such amounts
would ever be borrowed at one time, up to $395 million is available
under these bank facilities.
In the past, funds have been borrowed under certain of these bank
facilities and used for working capital, capital infusions into
subsidiaries, and to retire other issues of short-term or high-rate
debt. Also, while little was drawn on the bank lines at March 31,
1996, AFC believes it may be prudent and advisable to borrow up to
$200 million of bank debt in the normal course and use the proceeds to
retire additional amounts of public or privately held fixed rate debt
over the next year or two.
<PAGE>
In April 1995, AFC entered into a subordinated credit agreement with
American Premier under which it can borrow up to $675 million. The
credit line bears interest at 11-5/8% and converts to a four-year term
loan in March 2005 with scheduled principal payments to begin in April
2005. At March 31, 1996, AFC had borrowed $675 million under the
agreement which it used for debt retirements, capital contributions to
subsidiaries and other corporate purposes.
In addition, two AFC subsidiaries have separate credit agreements with
American Premier allowing for maximum aggregate borrowings of
$170 million. Borrowings under these credit lines bear interest at
rates approximating prime or LIBOR.
12
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
Investments Approximately 95% of the bonds and redeemable preferred
stocks held by AFC were rated "investment grade" (credit rating of AAA
to BBB) by nationally recognized rating agencies at March 31, 1996.
Investment grade securities generally bear lower yields and lower
degrees of risk than those that are unrated and non-investment grade.
Management believes that the high quality investment portfolio should
generate a stable and predictable investment return.
AFC's equity securities are concentrated in a relatively limited
number of major positions. This approach allows management to more
closely monitor these companies and the industries in which they
operate.
RESULTS OF OPERATIONS
General Pretax earnings for the three months ended March 31, 1996
were $57.1 million, an increase of $18.0 million over the comparable
1995 period. The increase is attributable primarily to improved
results from the property and casualty insurance segment.
Property and Casualty Insurance Great American (GAI and its property
and casualty insurance subsidiaries) manages and operates its property
and casualty business as two major sectors. The specialty lines are a
diversified group of over twenty-five business lines that offer a wide
variety of specialty insurance products. Some of the more significant
areas are executive liability, inland and ocean marine, U.S.-based
operations of Japanese companies, agricultural-related coverages,
excess and surplus lines and fidelity and surety bonds. The
commercial and personal lines provide coverages in commercial multi-
peril, workers' compensation, umbrella and commercial automobile,
standard private passenger automobile and homeowners insurance.
Underwriting profitability is measured by the combined ratio which is
a sum of the ratios of underwriting expenses, losses, and loss
adjustment expenses to premiums. When the combined ratio is under
100%, underwriting results are generally considered profitable; when
the ratio is over 100%, underwriting results are generally considered
unprofitable. The combined ratio does not reflect investment income,
other income or federal income taxes.
<PAGE>
Net written premiums and combined ratios for Great American's
property and casualty insurance subsidiaries were as follows (dollars
in millions):
Three months ended
March 31,
1996 1995
Net Written Premiums (GAAP)
Specialty Operations $182.6 $199.0
Commercial and Personal Operations 165.3 155.9
Other lines .1 .6
$348.0 $355.5
Combined Ratios (GAAP)
Specialty Operations 90.4% 101.9%
Commercial and Personal Operations 103.7 99.8
Aggregate 98.5% 103.6%
Specialty Operations Net written premiums for the specialty
operations decreased 8% during the first three months of 1996 from
the comparable 1995 period due primarily to the withdrawal from a
voluntary pool. The improvement in the combined ratio is due
primarily to large losses in 1995 from (i) participation in a
voluntary pool
13
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
Management's Discussion and Analysis
of Financial Condition and Results of Operations - Continued
in which AFC is no longer a member and (ii) prior accident year
development on coverages of U.S. based operations of Japanese
companies.
Commercial and Personal Operations The 6% increase in net written
premiums for the commercial and personal operations for the first
three months of 1996 over the comparable 1995 period was due
principally to commercial lines writings. The deterioration in the
combined ratio is due primarily to increased winter storm losses
partially offset by improved results in the commercial operations
workers' compensation line of business.
Life, Accident and Health Premiums and Benefits The increase in life,
accident and health premiums and benefits reflects AAG's acquisition
of Laurentian Capital Corporation in November 1995.
Investment Income Investment income increased $14.3 million (9%) from
1995 due to AAG's acquisition of Laurentian and an increase in the
average amount of investments held.
Realized Gains Realized capital gains have been an important part of
the return on investments in marketable securities. Individual
securities are sold creating gains and losses as market opportunities
exist.
Investee Corporations Equity in net earnings of investees (companies
in which AFC owns a significant portion of the voting stock)
represents AFC's proportionate share of the investees' earnings and
losses.
Annuity Benefits Annuity benefits increased approximately 6% over
those of the comparable three month period in 1995 due primarily to an
increase in average annuity benefits accumulated. The rate at which
interest is credited on annuity policyholders' funds is subject to
change based on management's judgment of market conditions.
Interest on Borrowed Money Interest expense on borrowed money
increased $6.0 million (21%) from 1995 due to borrowings from American
Premier, used primarily to retire other long-term debt.
Other Operating and General Expenses Included in other operating and
general expenses in the first three months of 1996 is approximately
$7.5 million attributable to Laurentian. Also included in the first
three months of 1996 and 1995 are charges of $4.0 million and
$3.4 million, respectively, for minority interest.
14
<PAGE>
AMERICAN FINANCIAL CORPORATION 10-Q
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
10(a) Credit Agreement dated April 3, 1995 between
American Financial Corporation (borrower) and
Pennsylvania Company (lender).
10(b) Reducing Revolving Credit Agreement dated March 29,
1996 between Great American Holding Corporation
(borrower) and Pennsylvania Company (lender).
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
February 14, 1996 Agreement to sell Citicasters Common Stock
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
American Financial Corporation has duly caused this Report to be
signed on its behalf by the undersigned duly authorized.
American Financial Corporation
May 14, 1996 BY: FRED J. RUNK
Fred J. Runk
Senior Vice President and Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
American Financial Corporation 10-Q for the three months ended March 31,
1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> $180,362
<SECURITIES> 8,982,614<F1>
<RECEIVABLES> 370,437
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,538,381
<CURRENT-LIABILITIES> 0
<BONDS> 483,834
0
168,484
<COMMON> 9,625
<OTHER-SE> 486,282
<TOTAL-LIABILITY-AND-EQUITY> 12,538,381
<SALES> 0
<TOTAL-REVENUES> 621,963
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 71,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,121
<INCOME-PRETAX> 57,110
<INCOME-TAX> 11,059
<INCOME-CONTINUING> 46,051
<DISCONTINUED> 0
<EXTRAORDINARY> (6,376)
<CHANGES> 0
<NET-INCOME> 39,675
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Includes an investment in investees of $838 million.
<F2>Not applicable since all common shares are owned by American Financial
Group.
</FN>
</TABLE>
CREDIT AGREEMENT
This Credit Agreement is made and entered into as of the 3rd day of
April, 1995 by and between Pennsylvania Company, a Delaware corporation
("Lender"), and American Financial Corporation, an Ohio corporation
("Borrower").
WHEREAS, Borrower and Lender wish to enter into this Credit Agreement
pursuant to which Borrower may borrow from Lender up to Six Hundred Seventy-
Five Million Dollars ($675,000,000);
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereby agree as follows:
Section 1. Revolving Loans. From and after the date hereof to
and including April 2, 2005, Lender will make available to the Borrower loans
as requested by Borrower pursuant to the provisions hereof. Each such loan
shall be referred to herein as a "Loan". Borrower may borrow, repay and
reborrow Loans hereunder from time to time so long as the aggregate amount of
Loans outstanding hereunder at any one time does not exceed $675,000,000.
The Lender shall, and is hereby irrevocably authorized by the Borrower to,
endorse on the schedule to the attached Subordinated Promissory Note ("Note")
or a continuation of such schedule, an appropriate notation evidencing
advances and repayments of Loans pursuant to this Credit Agreement.
<PAGE>
On March 31, 2005, the outstanding principal balance on the revolving
credit will be converted to a term note which will be repaid in sixteen equal
installments, one of which will be due and payable, along with any accrued
interest under this note, on each April 1, July 1, October 1, and January 1
beginning April 1, 2005 and ending January 1, 2009.
Borrower may pay any and all amounts outstanding hereunder at any time
without penalty.
Section 2. The Note. The absolute and unconditional obligation
of the Borrower to repay to Lender the principal of Loans pursuant to this
Credit Agreement shall be evidenced by a Note in the form attached; provided
that the principal amount and interest on the Note are and shall be
subordinate and junior to all principal of, premium, if any, and interest on
all Senior Debt (as defined in the Note) to the extent set forth in the Note.
Section 3. Procedure for Obtaining Loans. Whenever the
Borrower desires to receive a Loan, the Borrower will furnish to the Lender a
written or telephonic request therefor which shall (1) be received by the
Lender not less than two and not more than ten Business Days prior to the
date of such Loan, (2) state the amount of such Loan, (3) state the bank
account of the Borrower to which payment of the proceeds of such Loan is to
be made. Any telephonic application made by the Borrower pursuant to the
provisions of this Section 3 shall be promptly confirmed in writing.
Section 4. Conditions to each Loan. The obligation of Lender
to make each Loan hereunder shall be subject to the satisfaction, prior
thereto or concurrently therewith, of each of the following conditions
precedent:
(a) Request. Lender shall have received the request therefor as
provided in Section 3 hereof;
(b) No Defaults. There does not exist any Event of Default or any
condition which would or would with the passage of time or lapse of any cure
period constitute an Event of Default, nor shall there exist any "Event of
Default" or any condition which would or would with the passage of time or
lapse of any cure period constitute an "Event of Default" under any debt
instrument of Borrower pursuant to which $10,000,000 or more is outstanding
at the time of default; and
<PAGE>
(c) Accuracy. The representations, covenants and warranties
contained in this Credit Agreement are true in all material respects, and the
Borrower has complied in all material respects with all of the covenants
contained in this Credit Agreement.
Section 5. Principal/Interest Payable on Note.
(a) The principal of each Loan shall be repaid according to the
schedule set forth in the Note. Notwithstanding, in the case of an Event of
Default hereunder, the entire principal of the Note may become or be declared
due and payable as provided herein.
(b) Interest shall be paid on the outstanding principal amount of
the Note quarterly on each Interest Payment Date (as defined below) until the
principal sum or the unpaid portion thereof shall have been fully paid as
hereinafter provided. The applicable interest rate shall be 11-5/8% per
annum.
The Borrower will pay interest quarterly on April 1, July 1, October 1
and January 1 of each year or if such date is not a Business Day, on the next
succeeding Business Day (each an "Interest Payment Date"). Interest on
amounts outstanding under the Credit Agreement will accrue from the most
recent date to which interest has been paid; provided that the first Interest
Payment Date shall be July 1, 1995. Interest will be computed on the basis
of a 365 or 366-day year, as appropriate, and actual number of days elapsed.
(c) Each overdue amount payable by the Borrower under this Credit
Agreement shall (to the extent permitted by applicable law) bear interest,
from the date on which such amount shall have first become due and payable by
the Borrower to the date on which such amount shall be paid (whether before
or after judgment), at the lesser of the prime rate announced from time to
time by The Provident Bank in Cincinnati, Ohio plus 4% or the maximum
interest rate permitted by law. The unpaid interest accrued on any overdue
amount in accordance with this subsection (c) shall become and be absolutely
due and payable by the Borrower on demand by the Lender at any time.
Interest on each overdue amount will continue to accrue and will (to the
extent permitted by applicable law) be compounded daily until the obligations
of the Borrower in respect of the payment of such overdue amount are
discharged (whether before or after judgment).
Section 6. Representations and Warranties. To induce the
Lender to make the Loans herein contemplated, the Borrower hereby represents
and warrants as follows:
<PAGE>
(a) Organization. The Borrower is a corporation duly organized
and in good standing under the laws of the State of Ohio and has the power
and authority to own and operate its assets and to conduct its business as is
now done.
(b) Litigation, etc. As of the date hereof, there are no
actions, suits, proceedings or governmental investigations pending or, to the
knowledge of the Borrower, its shareholders, directors or officers,
threatened against the Borrower which, if adversely determined could result
in a material adverse change in the financial condition, business or assets
of the Borrower and there is no basis known to the Borrower, its officers,
directors or shareholders for any such actions, suits, proceedings or
investigations.
(c) Taxes. As of the date hereof, the Borrower has filed all
returns and reports that are now required to be filed by it in connection
with any federal, state or local tax, duty or charge levied, assessed or
imposed upon it, or its property, including unemployment, social security and
similar taxes; and all of such taxes have been either paid or adequate
reserves or other provisions have been made therefor.
(d) Authority. The Borrower has full corporate power and
authority to enter into the transactions provided for in this Credit
Agreement and has been duly authorized to do so by appropriate action of its
board of directors. This Credit Agreement, when executed and delivered by
the Borrower, will constitute the legal, valid and binding obligations of the
Borrower enforceable in accordance with their respective terms except as such
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws in effect from time to time affecting
the rights of creditors generally and except as such enforceability may be
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in law or in equity).
(e) Other Defaults. There does not now exist any default or
violation by the Borrower of or under any of the terms, conditions or
obligations of: (i) its Articles of Incorporation or Code of Regulations;
(ii) any indenture, mortgage, or deed of trust, and (iii) any law,
regulation, ruling, order, injunction, decree, condition or other requirement
applicable to or imposed upon it by any law or by any governmental authority,
court or agency; and the consummation of this Credit Agreement and of the
transactions set forth herein will not result in any such default or
violation.
<PAGE>
Section 7. Covenants. The Borrower agrees that from the date
of execution of this Credit Agreement until all Loans to the Lender have been
fully paid it will:
(a) Books and Records. Maintain proper books of account
and other records and enter therein complete and accurate entries and records
of all of its transactions in accordance with generally accepted accounting
principles and give representatives of the Lender access thereto at all
reasonable times, including permission to examine, copy and make abstracts
from any of such books and records and such other information which may be
helpful to the Lender in evaluating the status of the Loans as it may from
time to time reasonably request.
(b) Quarterly Statements. Furnish the Lender within 60
days after the end of each fiscal quarter with copies of its financial
statements.
(c) Annual Statements. Furnish the Lender within 120
days after the end of each fiscal year of the Borrower, annual financial
statements, a balance sheet as of the end of such year, a profit and loss
statement, a statement of stockholder equity, and a statement of cash flows
for such year.
(d) Taxes. Pay and discharge when due all tax
indebtedness and all taxes, assessments, charges, levies and other
liabilities imposed upon it, its income, profits, property or business,
except those which currently are being contested in good faith by appropriate
proceedings and for which the Borrower will have set aside adequate reserves
or made other adequate provision with respect thereto, but any such disputed
item will be paid forthwith upon the commencement of any proceeding for the
foreclosure of any lien which may have attached with respect thereto, unless
the Lender will have received an opinion in form and substance and from legal
counsel acceptable to it that such proceeding is without merit.
(e) Operations. Continue in operation in substantially
the same manner as at present, except where such operation is rendered
impossible by a fire, strike or other events beyond its control; keep its
real and personal properties in good operating condition and repair; make all
necessary and proper repairs, renewals, replacements, additions and
improvements thereto and comply with the provisions of all leases to which it
is party or under which it occupies or holds real or personal property so as
to prevent any loss or forfeiture thereof or thereunder.
<PAGE>
(f) Compliance with Laws. Comply with all laws and
regulations applicable to the Borrower and to the operation of its business,
including without limitation those relating to environmental and health
matters.
(g) Use of Proceeds. Use the proceeds of the Loans for
the following purposes and for no other purposes:
(1) repayment of outstanding indebtedness;
(2) working capital; and
(3) advances to affiliates.
(h) Maintenance of Existence. Take such action as may
be required to remain in good standing under the laws of the State of Ohio
and to become or remain, as the case may be (i) duly qualified in all
jurisdictions where required by the conduct of its business or ownership of
its assets and (ii) duly licensed to carry on such business in each
jurisdiction where it conducts such business; and
(i) Notice of Default. Notify the Lender in writing
within five days after the Borrower knows or has reason to know of the
occurrence of an Event of Default.
Section 8. Events of Default. The occurrence of any one or
more of the following events shall constitute an "Event of Default"
hereunder.
(a) Note. The non-payment of any principal amount of
the Note when due, whether by acceleration or otherwise, or the nonpayment of
any interest upon the Note within 5 days of when the same is due and payable;
(b) Other Indebtedness. The non-payment of any
principal amount of any indebtedness outstanding of more than $10,000,000
when due, whether by acceleration or otherwise, or the nonpayment of any
interest upon any such indebtedness within 5 days of when the same is due and
payable;
(c) Covenants. The default in the due observance of any
affirmative covenant or agreement to be kept or performed by the Borrower
under the terms of this Credit Agreement and the failure or inability of the
Borrower to cure such default within 30 days of the occurrence thereof;
provided that such 30 day grace period will not apply to any material default
which in the Lender's good faith determination is incapable of cure;
<PAGE>
(d) Representations and Warranties. Any representation
or warranty made by the Borrower in this Credit Agreement or in any report,
certificate, financial statement or other instrument furnished in connection
with the transactions contemplated hereby is false or erroneous in any
material respect or any material breach thereof has been committed.
(e) Obligations. Except as provided above, the default
by the Borrower in the due observance of any covenant, negative covenant or
agreement to be kept or performed by the Borrower under the terms of the Loan
and the lapse of any applicable cure period provided with respect to such
default, or, if so defined therein, the occurrence of any Event of Default or
Default under the Note;
(f) Judgments. Unless in the opinion of the Lender the
Borrower is adequately insured or bonded, the entry of a final judgment for
the payment of money involving more than $5,000,000 against the Borrower and
the failure by the Borrower to discharge the same, or cause it to be
discharged, within 10 days from the date of the order, decree or process
under which or pursuant to which such judgment was entered, or to secure a
stay of execution pending appeal of such judgment; the entry of one or more
final monetary or non-monetary judgment(s) or order(s) against the Borrower
which, singly or in the aggregate, does or could reasonably be expected to
(1) cause a material adverse change in the condition (financial or
otherwise), operations or properties of the Borrower, (2) have a material
adverse effect on the ability of the Borrower to perform its obligations
under this Credit Agreement, or (3) have a material adverse effect on the
rights and remedies of the Lender under this Credit Agreement or the Note;
and
(g) Bankruptcy, etc. Borrower dissolves or becomes the
subject of any dissolution, a winding up or liquidation, or the Borrower: (1)
makes a general assignment for the benefit of creditors; (2) files or has
filed against it a petition in bankruptcy, for a reorganization or an
arrangement, or for a receiver, trustee or similar creditors' representative
for the property or assets of the Borrower or any material part thereof, or
any other proceeding under any federal or state insolvency law, and the same
has not been dismissed or discharged within 60 days thereof.
Section 9. Termination of Commitments and Acceleration of
Loans. If any one or more of the Events of Default shall occur:
<PAGE>
(a) Lender's obligations to make any Loan hereunder shall be
suspended until such Event of Default is cured.
(b) Notwithstanding any other provision of this Section, Lender
may proceed to protect and enforce all or any of its rights, remedies, power
and privileges under this Credit Agreement or the Note by action at law, suit
in equity or other appropriate proceedings, whether for specific performance
of any covenant contained in this Credit Agreement or the Note.
If an Event of Default occurs and is continuing, the Lender may
declare the principal of and accrued interest on any Loan to be due and
payable. Upon such declaration the principal and interest shall be due and
payable. Upon payment of such principal amount and interest, any interest
payable on overdue payments of principal or interest hereunder, and all other
obligations under the Credit Agreement, all of the Borrower's obligations
under the Credit Agreement shall terminate.
Section 10. Binding Effect. This Credit Agreement shall be
binding upon and inure to the benefit of the Borrower and the Lender and
their respective successors and assigns. The Borrower shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Lender.
The Lender shall have the right to assign all or any part of its
obligations to make the loan to any affiliate or subsidiary; provided,
however, such Assignment shall not relieve the Lender of its obligations
hereunder. In the event of such Assignment by the Lender, the assignee, in
addition to the Lender, shall be deemed to have been named the "Lender" in
the first paragraph of this Credit Agreement and all representations,
warranties and covenants of the Borrower made herein shall be deemed to have
been made to and shall inure to the benefit of such assignee.
Section 11. Governing Law. The Loan Documents shall be deemed
to be contracts made under the laws of, executed and delivered in the State
of Ohio, and for all purposes shall be construed in accordance with the laws
of said State.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Credit
Agreement on the day and year first above written.
PENNSYLVANIA COMPANY
By: Robert W. Olson
-----------------------------
Senior Vice President
AMERICAN FINANCIAL CORPORATION
By: Fred J. Runk
----------------------------
Vice President & Treasurer
<PAGE>
SUBORDINATED PROMISSORY NOTE
As of April 3, 1995
1. FOR VALUE RECEIVED, the undersigned, AMERICAN FINANCIAL CORPORATION,
an Ohio corporation (the "Company"), hereby promises to pay Pennsylvania
Company (the "Lender"), the aggregate unpaid principal amount of the loans
made by the Lender to the Company pursuant to the Credit Agreement referred
to below. The Company promises to pay daily interest from the date hereof,
computed as provided in such Credit Agreement, on the aggregate principal
amount of such loans from time to time unpaid at the rate of 11-5/8% per
annum and to pay interest on overdue principal and, to the extent not
prohibited by applicable law, on overdue installments of interest and
principal and fees at the rate specified in such Credit Agreement, all such
interest being payable at the time specified in such Credit Agreement, except
that all accrued interest shall be paid at the stated or accelerated maturity
hereof or upon the prepayment in full hereof.
2. Payments hereunder shall be made to Pennsylvania Company at One East
Fourth Street, Cincinnati, Ohio 45202.
3. All Loans made by the Lender pursuant to the Credit Agreement
referred to below and all repayments of the principal thereof shall be
recorded by the Lender and, prior to any transfer hereof, appropriate
notations to evidence the foregoing information with respect to each such
loan then outstanding shall be endorsed by the Lender on the schedule
attached hereto or on a continuation of such schedule attached to and made
part hereof; provided, however, that the failure of the Lender to make any
such recordation or endorsement shall not affect the obligations of the
Company under this Subordinated Promissory Note ("Note") or the Credit
Agreement.
4. This Note evidences borrowings under and is entitled to the benefits
of and is subject to the provisions of the Credit Agreement dated as of April
3, 1995, as from time to time in effect (the "Credit Agreement"), among the
maker and the payee hereof. The principal of this Note is prepayable in any
amount and may be prepaid in whole or from time to time in part. Terms
defined in the Credit Agreement and not otherwise defined herein are used
herein with the meanings so defined.
5. In case an Event of Default shall occur, the entire principal of this
Note may become or be declared due and payable in the manner and
<PAGE>
with the effect provided in the Credit Agreement subject to the provisions of
paragraph 6 hereof.
6. The principal amount of and the interest on this Note are and shall
be subordinate and junior in right of payment to all principal of, premium,
if any, and interest on all Senior Debt (as hereinafter defined) of the
Company whether outstanding at the date of this Note or created or incurred
by the Company after the date of this Note but prior to the maturity of this
Note (whether such maturity occurs as a result of lapse of time, acceleration
or otherwise). As used herein, "Senior Debt" shall mean the principal of,
premium, if any, and interest owed by the Company on all present and future
(i) indebtedness of the Company for borrowed money (other than this Note),
whether short-term or long-term, including all indebtedness evidenced by
notes, bonds, debentures or other securities sold by the Company for money,
(ii) indebtedness incurred or assumed by the Company in connection with the
purchase or the acquisition of any property (including any securities of the
Company or any other entity), business or entity, (iii) guarantees by the
Company of indebtedness of others of the type referred to in (i) or (ii)
above, and (iv) renewals, extensions, refundings, deferrals, restructurings,
amendments and modifications of any such indebtedness, obligation or
guarantee, unless in each case by the terms of the instrument creating or
evidencing such indebtedness, obligation or guarantee or such renewals,
extension, refunding, deferral, restructuring, amendment or modification it
is provided that such indebtedness, obligation or guarantee is not superior
in right of payment to this Note. Specifically:
(a) Upon maturity of any Senior Debt by lapse of time,
acceleration or otherwise, then all principal of, premium, if any, and
interest on all such matured Senior Debt shall first be paid in full before
any payment on account of principal or interest is made upon this Note.
(b) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership proceedings
in connection therewith, relative to the Company or its creditors or its
property, and in the event of any proceedings for partial or total
liquidation, dissolution or other winding up of the Company, whether or not
involving insolvency or bankruptcy proceedings, then all principal, premium,
if any, and interest due on Senior Debt shall first be paid in full, or such
payment shall have been provided for, before any payment on account of
principal or interest is made upon this Note. In any of the proceedings
referred to in the first sentence of this subparagraph (b), any payment or
distribution of any kind or
<PAGE>
character, whether in cash, property, stock or obligations, which may be
payable or deliverable in respect of the principal amount of or interest on
this Note shall be paid or delivered directly to the holders of Senior Debt
(or to a banking institution selected by the court or person making the
payment or delivery or designated by any holder of Senior Debt) for
application in payment thereof, unless and until all principal of, premium,
if any, and interest on all Senior Debt shall have been paid in full, or such
payment shall have been provided for; provided, however, that in the event
that payment or delivery of such holder of this Note is authorized by an
order of decree giving effect, and stating in such order or decree that
effect is given, to the subordination of this Note to Senior Debt, and made
by a court of competent jurisdiction in a reorganization proceeding under any
applicable bankruptcy or reorganization law, no payment or delivery of such
cash, property, stock or obligations payable or deliverable with respect to
the principal amount of or interest on this Note shall be made to the holders
of Senior Debt.
(c) The Company shall not make any payment of principal of, or
purchase or acquire for value, this Note during the continuance of any
default in the payment of principal, premium, if any, or interest on any
Senior Debt.
(d) No right of any present or future holder of Senior Debt to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any good faith act or failure to act on the part of
the Company or by any good faith act or failure to act by such holders, or by
any non-compliance by the Company with the terms, provisions and covenants of
any agreement relating to Senior Debt, regardless of any knowledge thereof
any such holder may have or be otherwise charged with.
(e) Subject to the payment in full of all Senior Debt, the legal
holder of this Note shall be subrogated to the rights of the holders of
Senior Debt to receive payments or distributions of assets of the Company
payable or distributable to the holders of Senior Debt until this Note and
interest hereon shall be paid in full. As between the Company, its creditors
other than the holders of Senior Debt, and the legal holder of this Note (i)
no payments or distributions otherwise payable (or deliverable) in respect of
this Note but, by virtue of the subordination provisions hereof, paid (or
delivered) to the holders of Senior Debt shall be deemed to be a payment by
the Company on account of Senior Debt, and (ii) no payments paid to the legal
holder of this Note by virtue of the subrogation herein provided for shall be
deemed to be a payment by the Company on account of this Note.
<PAGE>
The provisions of this paragraph 6 are for the purpose of defining
the relative rights of the holders of the Senior Debt, on the one hand, and
the holder of this Note, on the other hand, and as between the Company and
the holder of this Note, nothing herein shall impair the obligation of the
Company, which is unconditional and absolute, to pay to the legal holder
hereof the principal hereof and interest hereon in accordance with its terms,
nor shall anything herein prevent the legal holder of this Note from
exercising all remedies otherwise permitted by applicable law upon default
hereunder, subject to the rights under this paragraph 6 of holders of Senior
Debt in respect of cash, property, stock or obligations received upon the
exercise of such remedies.
7. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE STATE OF OHIO.
8. The Company hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note, except as specifically otherwise
provided in the Credit Agreement, and assent to extensions of time of
payment, or forbearance or other indulgence without notice.
AMERICAN FINANCIAL CORPORATION
By: Fred J. Runk
-----------------------
Vice President & Treasurer
REDUCING REVOLVING CREDIT AGREEMENT
This Credit Agreement is made and entered into as of the 29th day of
March, 1996 by and between Pennsylvania Company, a Delaware corporation
("Lender"), and Great American Holding Corporation, an Ohio corporation
("Borrower").
WHEREAS, Borrower and Lender wish to enter into this Reducing
Revolving Credit Agreement pursuant to which Borrower may borrow from Lender
up to $150,000,000;
WHEREAS, Lender and The First National Bank of Boston, as Agent have
entered into a Credit Agreement dated as of December 29, 1995 ("Bank of
Boston Agreement") which provides that Lender may borrow up to $75,000,000
upon the terms and conditions set forth in the Bank of Boston Agreement;
WHEREAS, Lender and Borrower believe it to be mutually beneficial to
enter into an agreement similar to the Bank of Boston Agreement;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereby agree as follows:
Section 1. Revolving Loans. From and after the date hereof to
and including December 31, 2000, Lender will make available to the Borrower
loans as requested by Borrower
<PAGE>
pursuant to the provisions hereof. Each such loan shall be referred to
herein as a "Loan". Borrower may borrow and repay Loans hereunder from time
to time so long as the aggregate amount of Loans outstanding hereunder at any
one time does not exceed the amounts on and after each date set forth in the
following table:
Maximum Amount
Date of Loan Outstanding
- -----------------------------------------------------------------------
December 31, 1998 $150,000,000
March 31, 1999 140,000,000
June 30, 1999 120,000,000
September 30, 1999 100,000,000
December 31, 1999 80,000,000
March 31, 2000 60,000,000
June 30, 2000 40,000,000
September 30, 2000 20,000,000
December 31, 2000 - 0 -
The Lender shall, and is hereby irrevocably authorized by the Borrower to,
endorse on the schedule to the attached Promissory Note ("Note") or a
continuation of such schedule, an appropriate notation evidencing advances
and repayments of Loans pursuant to this Credit Agreement.
On December 31, 2000, the outstanding principal balance on the Loans
will be due and payable.
Borrower may pay any and all amounts outstanding hereunder at any time
without penalty.
Section 2. The Note. The absolute and unconditional obligation
of the Borrower to repay to Lender the principal amount of Loans pursuant to
this Credit Agreement shall be evidenced by a Note in the form attached. The
obligations of Borrower hereunder are not secured by any assets of Borrower.
Section 3. Procedure for Obtaining Loans. Whenever the
Borrower desires to receive a Loan, the Borrower will furnish to the Lender a
written or telephonic request therefor which shall (1) be received by the
Lender not less than one and not more than ten Business Days prior to the
date of such Loan, unless waived by Lender, (2) state the amount of such
Loan, (3) state the bank account of the Borrower to which payment of the
proceeds of such Loan is to be made. Any telephonic application made by the
Borrower pursuant to the provisions of this Section 3 shall be promptly
confirmed in writing.
Section 4. Interest Payable on Note.
<PAGE>
Interest shall be paid on the outstanding principal amount of the Note
until the principal sum or the unpaid portion thereof shall have been fully
paid. The applicable interest rate shall be the rate at which Borrower could
borrow under the Bank of Boston Agreement.
<PAGE>
Section 5. Term, Conditions, Covenants, Representations,
Warranties and Provisions of this Agreement. Other than as set forth in this
Credit Agreement and except for Sections 5 and 6 of the Bank of Boston
Agreement, all of the terms, conditions, covenants, representations,
warranties and provisions of the Bank of Boston Agreement are incorporated by
reference in this Agreement, including, without limitation, provisions
relating to default and events of default.
Section 6. Binding Effect. This Credit Agreement shall be
binding upon and inure to the benefit of the Borrower and the Lender and
their respective successors and assigns. The Borrower shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the Lender.
The Lender shall have the right to assign all or any part of its
obligations to make the loan to any affiliate or subsidiary; provided,
however, such Assignment shall not relieve the Lender of its obligations
hereunder. In the event of such Assignment by the Lender, the assignee, in
addition to the Lender, shall be deemed to have been named the "Lender" in
the first paragraph of this Credit Agreement and all representations,
warranties and covenants of the Borrower made herein shall be deemed to have
been made to and shall inure to the benefit of such assignee.
Section 7. Governing Law. The Loan Documents shall be deemed
to be contracts made under the laws of, executed and delivered in the State
of Ohio, and for all purposes shall be construed in accordance with the laws
of said State.
IN WITNESS WHEREOF, the parties hereto have executed this Credit
Agreement on the day and year first above written.
PENNSYLVANIA COMPANY
By: Fred J. Runk
-------------------------------
Sr. Vice President & Treasurer
GREAT AMERICAN HOLDING CORPORATION
By: James E. Evans
-----------------------------
Vice President
<PAGE>
PROMISSORY NOTE
As of March 29, 1996
1. FOR VALUE RECEIVED, the undersigned, GREAT AMERICAN HOLDING
CORPORATION (the "Company"), hereby promises to pay Pennsylvania Company (the
"Lender"), the aggregate unpaid principal amount of the loans made by the
Lender to the Company pursuant to the Credit Agreement referred to below.
The Company promises to pay daily interest from the date hereof, computed as
provided in such Credit Agreement, on the aggregate principal amount of such
loans from time to time unpaid at the rate determined as set forth in Section
4 of the Credit Agreement and to pay interest on overdue principal and, to
the extent not prohibited by applicable law, on overdue installments of
interest and principal and fees at the rate specified in such Credit
Agreement, all such interest being payable at the time specified in such
Credit Agreement, except that all accrued interest shall be paid at the
stated or accelerated maturity hereof or upon the prepayment in full hereof.
2. Payments hereunder shall be made to the Lender at One East Fourth
Street, Cincinnati, Ohio 45202.
3. All Loans made by the Lender pursuant to the Credit Agreement
referred to below and all repayments of the principal thereof shall be
recorded by the Lender and, prior to any transfer hereof, appropriate
notations to evidence the foregoing information with respect to each such
loan then outstanding shall be endorsed by the Lender on the schedule
attached hereto or on a continuation of such schedule attached to and made
part hereof; provided, however, that the failure of the Lender to make any
such recordation or endorsement shall not affect the obligations of the
Company under this Promissory Note ("Note") or the Credit Agreement.
4. This Note evidences borrowings under and is entitled to the benefits
of and is subject to the provisions of the Credit Agreement dated as of
December 29, 1995, as from time to time in effect (the "Credit Agreement"),
among the maker and the payee hereof. The principal of this Note is
prepayable in any amount and may be prepaid in whole or from time to time in
part. Terms defined in the Credit Agreement and not otherwise defined herein
are used herein with the meanings so defined.
5. In case an Event of Default shall occur, the entire principal of this
Note may become or be declared due and payable.
6. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS (OTHER THAN THE CONFLICT OF LAWS RULES) OF THE STATE OF OHIO.
7. The Company hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note, except as specifically otherwise
provided in the Credit Agreement, and assent to extensions of time of
payment, or forbearance or other indulgence without notice.
GREAT AMERICAN HOLDING CORPORATION
By: Fred J. Runk
---------------------------
Vice President & Treasurer
