<PAGE> 1
================================================================================
SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
AMERICAN FINANCIAL CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Series
F Preferred Stock; Series G Preferred Stock
(2) Aggregate number of securities to which transaction applies: Series F
- -- 11,900,725 shares; Series G -- 1,964,158 shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Series F --
$24.00; Series G -- $10.50
(4) Proposed maximum aggregate value of transaction: $306,241,059
(5) Total fee paid: $61,248
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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<PAGE> 2
AMERICAN FINANCIAL CORPORATION
One East Fourth Street
Cincinnati, Ohio 45202
------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------------------------
To be held on December 2, 1997
To our Shareholders:
The Annual Meeting of Shareholders of American Financial Corporation
("AFC") will be held on December 2, 1997, at 11:00 a.m., Eastern Time, at The
Cincinnatian Hotel, 601 Vine Street, Cincinnati, Ohio. The purposes of the
meeting are:
1. To consider and act upon a proposal to approve an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which
all of the AFC Series F and G Preferred Stock would be converted into
cash or shares of a new AFC Series J Preferred Stock;
2. To elect eleven directors;
3. To grant authority to the Company to adjourn the meeting from time to
time to solicit additional votes on Proposal No. 1; and
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Holders of American Financial Corporation voting securities of record at
the close of business on October 10, 1997 are entitled to receive notice of and
to vote at the meeting or any adjournment thereof. Approximately 63% of the
shares of Series F Preferred Stock and 85% of the shares of Series G Preferred
Stock are held by the American Financial Group, Inc. Retirement and Savings Plan
(the "RASP"), and participants in the RASP have been afforded the right to
direct the voting of the shares of Preferred Stock held in the RASP on Proposal
No. 1.
You are invited to be present at the meeting so that you can vote in
person. Whether or not you plan to attend the meeting, please date, sign and
return the accompanying proxy form in the enclosed, postage-paid envelope. If
you do attend the meeting, you may either vote by proxy or revoke your proxy and
vote in person. You may also revoke your proxy at any time before the vote is
taken at the meeting by written revocation or by submitting a later-dated proxy
form.
Sincerely,
James C. Kennedy
Secretary
Cincinnati, Ohio
October 31, 1997
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 3
AMERICAN FINANCIAL CORPORATION
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of AFC for use at the Annual Meeting of
Shareholders to be held on Tuesday, December 2, 1997; at 11:00 a.m., Eastern
Time, and any adjournment thereof. The approximate mailing date of this Proxy
Statement, accompanying proxy form and Annual Report to Shareholders is October
31, 1997.
PROPOSAL NO. 1 ADOPTION OF THE MERGER AGREEMENT
As the first item on the agenda, shareholders will be asked to adopt the
Merger Agreement (a complete copy of which is appended hereto as Exhibit A)
pursuant to which AFC Acquisition Corp., a wholly-owned subsidiary of AFC, would
merge with and into AFC (the "Merger").
In the Merger, each share of Series F Preferred Stock would be converted
into the right to receive merger consideration equal to the greater of (i)
$23.75 or (ii) a Fixed Spread Price which represents an amount which would
provide a current yield of 140 basis points (1.40%) over the yield on a
reference security (the 6 5/8% U.S. Treasury Bond due February 2027), plus
$0.75. Each share of Series G Preferred Stock would be converted into the right
to receive merger consideration equal to $10.50, plus accrued dividends.
The aggregate merger consideration to be received by an AFC preferred
shareholder would be payable, at the holder's election, either in shares of a
new AFC Series J Preferred Stock (having a liquidation value of $25.00 and
paying an annual dividend of $2.00 per share), in cash, or in a combination of
the two. No fractional shares will be paid, but cash in lieu thereof will be
paid at the rate of $25.00 per share of Series J Preferred Stock.
The Fixed Spread Price for the Series F Preferred Stock would be calculated
in accordance with the following formula and example.
FORMULA
<TABLE>
<S> <C> <C>
Stated Annual Dividend
Fixed Spread Price = ----------------------- + $0.75
Reference Yield
</TABLE>
EXAMPLE
<TABLE>
<S> <C> <C> <C>
Stated Annual Dividend = $1.80
Reference Yield = 7.74% = 6.34% (yield on Reference Security(1) on October 3,
1997) + 1.40%
$1.80
Fixed Spread Price = ----- + $0.75
7.74%
= $23.256 + $0.75
= $24.01
</TABLE>
(1)The closing yield on the Reference Security for the prior trading day may be
found in The Wall Street Journal and other major newspapers. In addition,
shareholders may from time to time obtain quotes of the yield on the
Reference Security, the Reference Yield and the resulting Fixed Spread Price
for the Series F Preferred Stock by contacting Securities Transfer Company
toll-free at (800) 368-3417.
Unless otherwise indicated, the information in this Proxy Statement assumes
that the merger consideration for the Series F Preferred Stock is $24.00 per
share.
<PAGE> 4
As an example, assuming a price for Series F Preferred Stock of $24.00 per
share, a holder of ten shares of Series F Preferred Stock may elect to receive
either (i) nine shares of Series J Preferred Stock and $15.00 in cash, (ii)
$240.00 in cash, or (iii) any number of shares of Series J Preferred Stock, plus
cash, such that the number of shares of Series J Preferred Stock multiplied by
$25.00, plus the amount of cash received, will equal $240.00. On the other hand,
a holder of ten shares of Series G Preferred Stock may elect to receive either
(i) four shares of Series J Preferred Stock and $5.00 in cash (plus accrued
dividends), (ii) $105.00 in cash (plus accrued dividends), or (iii) any number
of shares of Series J Preferred Stock, plus cash, such that the number of shares
of Series J Preferred Stock multiplied by $25.00, plus the amount of cash
received, will equal $105.00.
There are approximately 11.9 million shares of Series F Preferred Stock and
2.0 million shares of Series G Preferred Stock outstanding. According to their
terms, these shares have an aggregate liquidation value of approximately $259
million. It is a condition to the Merger that the shares of Series J Preferred
Stock issued have a liquidation value of at least $70.4 million (approximately
2,816,000 shares). Accordingly, either as a result of a shareholder's election
or pro-rata issuance of Series J Preferred Stock, approximately three-fourths of
the Series F and Series G Preferred Stock will be exchanged for cash in the
Merger. AFC has been advised that, in the event the Merger Agreement is adopted,
the RASP Administrative Plan Committee, due to its determination that the Merger
is in the best interest of the RASP, intends to elect to convert at least that
number of the RASP's Series F and Series G Preferred Stock into Series J
Preferred Stock which will result in at least $70.4 million liquidation amount
of Series J Preferred Stock being issued.
If holders of Series F and Series G Preferred Stock elect to receive more
than $70.4 million liquidation amount of Series J Preferred Stock, the number of
shares elected by each holder may be reduced pro rata and replaced by the
designated cash payment of $25.00 per share of Series J Preferred Stock. AFC has
reserved the right to waive the proration requirement to permit the issuance of
a non-material increase in shares of Series J Preferred Stock.
The Merger Agreement also provides for certain amendments to AFC's Articles
of Incorporation and Code of Regulations and for a reduction in the number of
shares of AFC common stock outstanding. Copies of the Restated Articles of
Incorporation and new Code of Regulations which will become AFC's governing
documents at the Effective Time (as defined herein) if the Merger is approved
are included as exhibits to the Merger Agreement.
PROPOSAL NO. 2 ELECTION OF DIRECTORS
The Board of Directors has nominated eleven persons as directors to hold
office until the next Annual Meeting of Shareholders and until their successors
are elected and qualified. If any of the nominees should become unable to serve
as a director, the proxies will be voted for any substitute nominee designated
by the Board of Directors but, in any event, no proxy may be voted for more than
eleven nominees. The eleven nominees who receive the greatest number of votes
will be elected.
The nominees for election to the Board of Directors are CARL H. LINDNER,
CARL H. LINDNER III, S. CRAIG LINDNER, KEITH E. LINDNER, THEODORE H. EMMERICH,
JAMES E. EVANS, THOMAS M. HUNT, WILLIAM R. MARTIN, ALFRED W. MARTINELLI, GREGORY
C. THOMAS and WILLIAM W. VERITY. All of these nominees were elected directors at
AFC's last Annual Meeting of Shareholders held on June 4, 1996, other than
Messrs. Martinelli, Thomas and Verity. These directors were appointed to the
Board in April 1997 to act as a special committee of independent directors to
consider the Merger proposal from AFG, replacing Messrs. Emmerich, Hunt and
Martin. See "Management" below for information concerning the background,
securities holdings, remuneration and certain other matters relating to the
nominees.
PROPOSAL NO. 3 ADJOURNMENT OF THE MEETING
Although no adjournment of the Meeting is contemplated, shareholders are
being asked to grant authority to the Company to adjourn the Meeting from time
to time to solicit additional votes on Proposal No. 1. Any adjournment requires
the affirmative vote of a majority of shares represented at the Meeting in
2
<PAGE> 5
person or by proxy. For purposes of approving an adjournment, all shares voted
at the Meeting will be counted. A majority of the shares voted is also required
for any other business that may properly be brought before the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR PROPOSALS 1, 2 AND
3.
The agenda for the Meeting will also include transacting any other business
that comes before the Meeting or any adjournment of the Meeting.
VOTING AT THE MEETING
RECORD DATE; SHARES OUTSTANDING
As of October 10, 1997, the record date for determining shareholders
entitled to notice of and to vote at the Meeting (the "Record Date"), AFC had
outstanding two classes of voting securities, common stock and voting preferred
stock consisting of Series F Voting Cumulative Preferred Stock and Series G
Voting Cumulative Preferred Stock. At the Record Date, 45,000,000 shares of
Common Stock were outstanding, all of which were owned by AFG, and 11,900,725
shares of Series F Preferred Stock and 1,964,158 shares of Series G Preferred
Stock were outstanding. Each share of Common Stock and Preferred Stock is
entitled to one vote on each matter to be presented at the Meeting. In light of
the importance to the RASP of the Merger proposal, the AFG Board of Directors
amended the RASP plan documents to afford RASP participants the right to direct
the voting of certain of the Preferred Stock held in the RASP on Proposal No. 1.
The RASP provides that participants may vote shares allocated to their accounts
in certain circumstances but does not provide that participants may determine
the nature of any investment assets that are allocated to their retirement plan
accounts. Accordingly, RASP participants will have no right to vote with respect
to the election to be made by the RASP Administrative Plan Committee to receive
either cash or Series J Preferred Stock in the Merger.
RASP participants, by voting to approve the Merger, are effectively giving
authority to the members of the Administrative Plan Committee to do all things
necessary to exchange the Series F and Series G Preferred Stock for cash or
Series J Preferred Stock, including determining the number of shares of Series J
Preferred Stock which will be received in the Merger.
PROXIES
If a choice is specified on a properly executed proxy form, the shares will
be voted accordingly. If a proxy form is signed without a preference indicated,
those shares will be voted FOR adoption of the Merger Agreement and the election
of the eleven nominees proposed by the Board of Directors. If any other matters
come before the Meeting or any adjournment, each properly executed proxy form
will be voted in the discretion of the proxies named on the form. Shareholders
may vote in person or by proxy at the Meeting. Shareholders may revoke any proxy
given at any time prior to the taking of the vote on the proposals presented at
the meeting by either (i) appearing at the meeting and voting in person, (ii)
filing a written revocation with the Secretary of AFC at its corporate offices
or (iii) executing a proxy form bearing a later date than the proxy to be
revoked. Attendance at the Meeting will not in and of itself revoke a proxy.
Solicitation of proxies will be made by management, without additional
compensation, by mail and telephone. AFC will request brokers and other
custodians, nominees and fiduciaries to forward proxy solicitation material to
the beneficial owners of shares held of record by such persons. AFC will bear
all costs of solicitation but no payments will be made for soliciting votes on
any matter to be acted on at the meeting.
THE MERGER
SUMMARY
The following is a summary of the more detailed information concerning the
Merger included in this Proxy Statement. The material concerning other matters
to be acted on at the meeting is stated separately.
3
<PAGE> 6
THE MERGER
The Board of Directors of AFC is proposing that a newly organized
wholly-owned subsidiary of AFC merge with and into AFC, with AFC being the
surviving corporation. The purpose of the Merger is to cause all shares of the
Series F and Series G Preferred Stock to be converted into the right to receive
either cash or, at the election of the holder, shares of Series J Preferred
Stock. Also as a result of the Merger, the 45 million shares of AFC Common Stock
outstanding, all of which are held by AFG, will be converted into 10,593,000
shares of AFC Common Stock. As a result, holders of Series J Preferred Stock
will be entitled to vote shares representing approximately 21% of all shares
outstanding, ensuring the continued existence of the AFC affiliated group for
federal tax purposes. Currently, holders of Series F and Series G Preferred
Stock exercise approximately 24% of the voting power of AFC.
TERMS OF THE EXCHANGE
When the Merger becomes effective upon filing of a certificate of merger
with the Ohio Secretary of State (the "Effective Time"), each share of Series F
Preferred Stock will be converted into the right to receive merger consideration
equal to the greater of $23.75 or the Fixed Spread Price and each share of
Series G Preferred Stock will be converted into the right to receive merger
consideration equal to $10.50 plus accrued dividends. The Fixed Spread Price
will be determined using the yield of the Reference Security on November 25,
1997 (the date of the Annual Meeting). The closing yield on the Reference
Security for the prior trading day may be found in The Wall Street Journal and
other major newspapers. In addition, shareholders may from time to time obtain
quotes of the yield on the Reference Security, the Reference Yield and the
resulting Fixed Spread Price for the Series F Preferred Stock by contacting
Securities Transfer Company toll-free at (800) 368-3417. The aggregate merger
consideration to be received by a holder will be payable, at the holder's
election, in shares of new Series J Preferred Stock, in cash, or in a
combination of the two. The maximum number of shares of Series J Preferred Stock
which a holder may elect to receive will be equal to the aggregate merger
consideration to which the holder is entitled, divided by $25.00 (the
liquidation value of the Series J Preferred Stock). If holders of Series F and
Series G Preferred Stock elect to receive more than $70.4 million in liquidation
value of Series J Preferred Stock, the number elected for each holder may be
reduced pro rata and replaced by the designated cash payment of $25.00 per share
of Series J Preferred Stock. No fractional shares will be paid, but cash in lieu
thereof will be paid at the rate of $25.00 per share of Series J Preferred
Stock.
The regular semi-annual dividend was paid on shares of Series F Preferred
Stock in June 1997. The semi-annual dividend on shares of Series G Preferred
Stock was paid on September 3, 1997 to holders of record as of August 15, 1997.
In the Merger, holders of Series G Preferred Stock will also receive cash
dividends accrued from September 3, 1997 to the Effective Time. Accrued
dividends ($.0049 per share per day) will be paid on Series F Preferred Stock
from November 1, 1997 to the Effective Time.
COMPARISON OF PREFERRED SHARES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SERIES F SERIES G SERIES J
-------- -------------- ----------------------------
<S> <C> <C> <C>
Annual Dividend....................... $ 1.80 $1.05 $2.00
Liquidation Price..................... $20.00 $10.50 $25.00
Redeemable by Company................. No At $10.50 At $25.75 beginning eight
years after issuance;
$25.375 beginning nine years
after issuance; and $25.00
beginning ten years after
issuance.
- ------------------------------------------------------------------------------------------------------
</TABLE>
The holders of Series J Preferred Stock will exercise approximately the
same voting power of AFC following the Merger as held by the holders of the
Series F and Series G Preferred Stock prior to the Merger. Holders of Series F
Preferred Stock would be exchanging a non-redeemable preferred stock for one
that is redeemable beginning eight years after issuance, whereas holders of
Series G Preferred Stock would be
4
<PAGE> 7
exchanging preferred shares presently redeemable at par for preferred shares not
redeemable until eight years after issuance. Assuming a price for Series F
Preferred Stock of $24.00 per share, the dividends received by a holder of 100
shares of Series F Preferred Stock (electing to receive all Series J Preferred
Stock) would increase from $180.00 to $192.00 per year. The dividends received
by a holder of 100 shares of Series G Preferred Stock electing to receive all
Series J Preferred Stock would decrease from $105.00 to $84.00 per year. Since
the total number of shares of Series F Preferred Stock would decrease from 11.9
million to no more than 2.816 million shares of Series J Preferred Stock,
trading liquidity would likely be reduced. To the extent cash is received,
holders of Series F and G Preferred Stock, other than the RASP, would be
required to pay applicable federal, state and local taxes. Due to the nature of
the RASP, cash received in exchange for Series F and G Preferred Stock would be
invested in other securities of AFG and its affiliates with a substantial
portion expected to be invested in AFG Common Stock which historically has had a
lower dividend rate than is present in the Series F and G Preferred Stock.
VOTE REQUIRED; CERTAIN EXPECTED VOTING
The affirmative vote of two-thirds of all outstanding shares of Common
Stock and Series F and Series G Preferred Stock voting together, and a separate
affirmative vote of two-thirds of all outstanding shares of Series F and Series
G Preferred Stock voting together, is required to approve the Merger.
Abstentions and broker non-votes will have the same effect as a negative vote on
the Merger proposal but will have no effect on any other item voted on at the
Meeting. AFC management presently intends that the Merger will be abandoned if
it is not approved by the required vote.
The first of these votes is assured since AFG, through its ownership of all
of the shares of AFC Common Stock, holds approximately 76% of all votes which
may be cast and has indicated that it will vote all of the shares it holds in
favor of the Merger.
Approximately 63% of the shares of Series F and 85% of the Series G
Preferred Stock are held by the RASP. Participants in the RASP will be able to
direct the voting of certain of the Preferred Stock held in the RASP but will
not be entitled to vote on whether the RASP will receive cash or Series J
Preferred Stock. The RASP Administrative Plan Committee will vote shares not
allocated to the account of a RASP participant or beneficiary, as well as those
shares for which it has not received instructions from RASP participants at
least two business days prior to the Meeting Date. The RASP Administrative Plan
Committee, after due consideration of the relevant facts and circumstances,
including the receipt of the advice of the Special Committee (as defined herein)
and its own financial advisor, has indicated that it will vote all such shares
in favor of the Merger, based on its conclusion that the Merger is in the best
interest of the RASP. See "Special Factors." Accordingly, while holders of
shares of Series F and Series G Preferred Stock who fail to vote their shares
are, in effect, voting against the Merger, participants in the RASP who fail to
vote are, in effect, voting in favor of the Merger.
CONDITIONS
The respective obligations of AFC, AFC Acquisition Corp. and AFG to effect
the Merger are subject to the satisfaction of certain conditions, including,
among others: (i) the affirmative vote of two-thirds of all outstanding shares
of (a) Common and Preferred Stock, voting as a group, and (b) Series F and
Series G Preferred Stock, voting as a group, (ii) the receipt by AFC of an
opinion from its special tax counsel to the effect that no gain or loss will be
recognized by (a) AFC shareholders who receive solely Series J Preferred Stock
and (b) AFC or AFC Acquisition Corp. as a result of the Merger, and (iii) the
aggregate liquidation value of the Series J Preferred Stock to be issued in the
Merger being at least $70.4 million. In addition, the obligation of AFC to
effect the Merger is subject to the satisfaction, or waiver by AFC acting
through its Special Committee, of certain other conditions, including (iv) the
receipt by the Special Committee of an opinion from Libra Investments, Inc.,
dated the day of mailing of this Proxy Statement, that the terms of the Merger
are fair from a financial point of view to holders of the Preferred Stock, and
(v) the receipt by the Special Committee of a copy of the opinion of Houlihan,
Lokey, Howard & Zukin, Inc. to the RASP Administrative Plan Committee with
respect to the Merger consideration for the Preferred Shares held by the RASP.
See "The Merger Agreement -- Conditions to the Merger."
5
<PAGE> 8
DISSENTERS' RIGHTS
A record holder of shares not voted in favor of the Merger may seek the
rights of a dissenting shareholder by complying with Ohio law. Dissenters'
rights entitle such holders to receive the fair cash value of their shares in
the form of a cash payment under the circumstances provided by Ohio law. In
order to initiate the process, a written demand must be served upon AFC by the
record owner of such shares on or before the tenth day after the shareholder
vote. Beneficial owners of shares must contact the record owner of the shares,
such as a bank or broker, to exercise this right. See "The Merger
Agreement -- Dissenters' Rights" on page 33. While participants in the RASP
possess the right to vote with respect to the Merger, participants in the RASP
are not record holders of shares, and therefore have no rights as dissenting
shareholders even if they vote against the Merger.
EXPECTED TAX EFFECT
Based upon an opinion of its tax counsel, AFC believes that (i) no gain or
loss will be recognized by AFC, AFC Acquisition Corp., AFG or the RASP as a
result of the Merger; (ii) no gain or loss will be recognized by an AFC
shareholder who receives solely shares of Series J Preferred Stock pursuant to
the Merger; (iii) the tax basis of an AFC shareholder receiving solely Series J
Preferred Stock will be the same as such shareholder's tax basis in the shares
surrendered, (iv) taxable income may be recognized by an AFC shareholder that
receives solely cash, or cash in addition to Series J Preferred Stock, but not
in an amount in excess of the amount of cash received, and (v) the holding
period of an AFC shareholder in shares of Series J Preferred Stock received in
the Merger will include the period during which such shareholder held the shares
surrendered, provided such shares were held as capital assets immediately prior
to the Effective Time. Additional tax considerations are discussed below under
"Certain United States Federal Income Tax Consequences."
ELECTION OF CONSIDERATION; PRORATION
HOLDERS OF SHARES OF SERIES F AND SERIES G PREFERRED STOCK ARE RECEIVING
WITH THIS PROXY STATEMENT A LETTER OF TRANSMITTAL FORM WHICH THEY MUST FILL OUT
AND RETURN PRIOR TO DECEMBER 2, 1997, THE MEETING DATE, IF THEY DESIRE TO
RECEIVE SHARES OF SERIES J PREFERRED STOCK. If the Merger is consummated, those
persons not returning the Letter of Transmittal will receive their merger
consideration (the greater of $23.75 or the Fixed Spread Price for each share of
Series F Preferred Stock and $10.50 for each share of Series G Preferred Stock)
entirely in cash. If holders of Series F and Series G Preferred Stock elect to
receive more than $70.4 million in liquidation value of Series J Preferred
Stock, the number elected for each holder may be reduced pro rata and replaced
by the designated cash payment of $25.00 per share of Series J Preferred Stock.
AFC has reserved the right to waive the proration requirement to permit the
issuance of a non-material increase in shares of Series J Preferred Stock.
BACKGROUND OF SERIES F AND SERIES G PREFERRED STOCK
The Series F Preferred Stock was originally issued in late 1977 and early
1978 in exchange offers for AFC common stock and warrants. In the next several
years, shares of Series F Preferred Stock were issued in acquisitions and to an
AFC defined contribution plan ("AFC ESORP") that is a predecessor to the RASP.
Series G Preferred Stock was originally issued in the fall of 1979 in an
exchange offer for AFC common stock and to the AFC ESORP.
AFC no longer needs to have the Series F and Series G Preferred Stock
outstanding as a capital-raising alternative. Since April 1995, when AFC's
common stock became 100%-owned by AFG, AFC has substantially reduced its debt,
increase its equity and is now an investment-grade issuer, as is AFG. AFG can
(and has) raised capital from the sale of common stock and trust originated
preferred securities. The annual dividend requirement of the Series F and Series
G Preferred Stock is approximately $23.5 million, as opposed to approximately
$5.6 million for the Series J Preferred Stock assuming the Merger is approved. A
merger or similar transaction is required to assure that all shares of the
presently non-callable Series F Preferred Stock are retired.
6
<PAGE> 9
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Merger is being effected pursuant to Ohio Revised Code Section
1701.78(C)(3) which, among other things, provides that the Agreement of Merger
may set forth amendments to the Articles of Incorporation of the surviving
corporation. As the Agreement of Merger will be approved by the Company's
shareholders, a separate vote by shareholders on amendments to the Articles of
Incorporation is not required.
CONFLICTS OF INTEREST
AFG owns all of the AFC Common Stock (representing approximately 76% of the
voting power of AFC). While persons serving as directors of AFC own some
preferred shares, their primary interest is as common shareholders of AFG, which
expects to achieve cost savings as a result of reduced subsidiary preferred
share dividend requirements. Therefore, the Board of Directors delegated to a
special committee of non-employee directors, none of whom is a director of AFG,
authority to negotiate the terms of the Merger and make recommendations to
preferred shareholders.
ACTIONS OF THE SPECIAL COMMITTEE
The Special Committee retained its own legal and financial advisor and has
determined that the Merger is fair to holders of Preferred Stock not affiliated
with AFC and to the RASP participants and recommends that all persons voting on
the matter vote in favor of the Merger. The Special Committee makes no
recommendation as to whether holders of shares of Series F Preferred Stock or
Series G Preferred Stock should elect to take cash or shares of Series J
Preferred Stock. See "Special Factors."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF AFC AND AFG
The Board of Directors of AFC, based solely upon the favorable
determination of the Special Committee, unanimously recommends adoption of the
Merger Agreement. See "Special Factors -- The Special Committee."
The Board of Directors of AFG did not make any independent analysis with
respect to the merger proposal, but, relying upon and accepting the conclusions,
determinations and findings of the Board of Directors of AFC and the Special
Committee, determined that the Merger is fair to the holders of Series F and
Series G Preferred Stock not affiliated with AFC and unanimously recommends
adoption of the Merger Agreement.
Neither the Board of Directors of AFC, the Special Committee nor the Board
of Directors of AFG make any recommendation as to whether individual holders of
Preferred Stock should elect to take cash or Series J Preferred Stock in the
Merger. See "Special Factors -- Recommendations of the Special Committee and
the Board of Directors of AFC; Recommendation of the Board of Directors of AFG;
Reasons for Recommendations."
MARKET PRICE AND DIVIDEND DATA
The following are the high and low sales prices on the Pacific Stock
Exchange for the Preferred Shares. Due to the limited number of trades (a total
of 63 transactions involving an aggregate of 34,200 shares from
7
<PAGE> 10
January 1, 1995 through June 30, 1997), the prices listed for the Series G
Preferred Stock may not be meaningful.
<TABLE>
<CAPTION>
SERIES F SERIES G
-------------- --------------
HIGH LOW HIGH LOW
----- ---- ----- ----
<S> <C> <C> <C> <C>
1995
First Quarter.............................................. $17 1/2 $16 $ 9 1/8 $ 8 1/2
Second Quarter............................................. 18 1/4 16 1/2 10 9
Third Quarter.............................................. 18 7/8 17 1/2 10 1/2 10 1/2
Fourth Quarter............................................. 20 1/8 18 3/4 11 10
1996
First Quarter.............................................. 20 1/4 19 11 9
Second Quarter............................................. 21 1/2 19 3/8 10 1/2 10 3/8
Third Quarter.............................................. 20 3/8 19 1/4 10 7/8 10 1/2
Fourth Quarter............................................. 21 1/4 19 1/4 11 1/2 10 1/2
1997
First Quarter.............................................. 23 20 1/8 11 10 3/8
Second Quarter............................................. 23 21 1/8 11 1/2 10 3/4
Third Quarter.............................................. 22 1/4 21 1/2 10 1/2 10 1/2
Fourth Quarter (Through October 28)........................ 233/4 22 1/16 10 1/2 10 1/2
</TABLE>
On April 22, 1997, the last trading day prior to announcement of the
proposed Merger, the closing bid prices per share were $21 3/4 for the Series F
Preferred Stock and $10 3/8 for the Series G Preferred Stock.
A $.90 dividend was paid in June and December of each of these years on the
Series F Preferred Stock and a $.525 dividend was paid in March and September of
each of these years on the Series G Preferred Stock.
THE AFG AND AFEI REORGANIZATIONS
AFG and American Financial Enterprises, Inc. ("AFEI") have entered into an
agreement pursuant to which AFG will acquire all of the shares of AFEI common
stock (approximately 20% of those outstanding) which AFG does not currently
beneficially own. If that agreement is approved by AFEI Shareholders, all
publicly-held shares of AFEI will be exchanged for (i) shares of common stock of
a new holding company, on a one-for-one basis, or (ii) $37.00 per share in cash,
at the option of AFEI shareholders. There are approximately 2.7 million shares
of AFEI common stock outstanding (including yet-unexercised employee stock
options) which are not beneficially owned by AFG. This transaction has been
structured so that it will be tax-free to AFEI shareholders receiving shares of
new AFG common stock.
In connection with the AFEI transaction, AFG shareholders are being asked
to approve an AFG reorganization that provides that a new holding company be
formed which would be the ultimate parent entity of AFG and all of its
subsidiaries, including AFC, and which would be the issuer of the new common
stock issued in exchange for AFEI common stock.
Neither the AFEI nor AFG reorganizations is conditioned upon the completion
of the Merger and the Merger is not conditioned upon completion of these
reorganizations.
8
<PAGE> 11
OWNERSHIP OF PREFERRED STOCK
At September 1, 1997, ownership of Series F and G Preferred Stock by
directors and executive officers of AFC and AFG and benefit plans of AFC and its
affiliates was as follows:
<TABLE>
<CAPTION>
SERIES F PREFERRED
STOCK SERIES G PREFERRED STOCK
----------------------- ------------------------
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
--------------------------------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
AFG RASP............................... 7,531,752(a) 63% 1,677,100(a) 85%
Sandra W. Heimann...................... 1,110 * -- --
Fred J. Runk........................... 4,841 * 543 *
Thomas E. Mischell..................... 13,791 * 2,100 *
William R. Martin...................... 40,483 * -- --
Robert D. Lindner...................... 122,400 1% -- --
</TABLE>
- ---------------
* Less than 1%.
(a) Of the total of 9,208,852 shares of Series F and Series G Preferred Stock
held by the RASP, the following directors, and executive officers of AFC or
AFG may direct the voting of the indicated number of shares: Carl H. Lindner
III, 53,539; S. Craig Lindner, 44,015; Keith E. Lindner, 15,125; James E.
Evans, 56,548; William R. Martin, 40,791; Thomas E. Mischell, 40,790; and
Fred J. Runk, 73,333.
The individuals listed in the preceding table have all determined to vote in
favor of the Merger.
The RASP will pass through voting rights on the Proposal No. 1 (the Merger)
to participants. The shares not voted by participants or beneficiaries at least
two business days before the Meeting will be voted by the RASP Administrative
Plan Committee. The RASP Administrative Plan Committee consists of Sandra W.
Heimann and Thomas E. Mischell, each an executive officer of AFC. Based on the
consideration of the relevant facts and circumstances, including the receipt of
the recommendation of the Special Committee and Houlihan, Lokey, Howard & Zukin,
Inc., an independent investment advisor retained by the RASP Administrative Plan
Committee that the Merger is fair, from a financial point of view, the RASP
Administrative Plan Committee has determined that the Merger is in the best
interest of the RASP and will vote all shares which it is entitled to vote in
favor of the Merger. As a result, RASP participants whose proxy form is not
received by AFC at least two business days prior to the Meeting will have, in
effect, voted in favor of the Merger. The RASP Administrative Plan Committee has
determined that the Merger is in the best interest of the RASP for several
reasons. The Series F and Series G Preferred Stock are held in a fund within the
RASP which is invested in qualifying securities of AFC, AFG and their
affiliates. Consummation of the Merger will allow liquidation of the Series F
and Series G Preferred Stock at prices in excess of what the RASP could expect
to realize if such shares were to be sold on the open market. To the extent the
RASP holds AFG Common Stock and perhaps acquires additional shares of AFG Common
Stock with the cash proceeds received in the Merger, the savings to be realized
by AFC from consummation of the Merger should accrue to the benefit of the RASP
as a holder of the Common Stock of AFG. In making its determination, the
Administrative Plan Committee was provided financial analysis and advice by
Houlihan, Lokey, Howard & Zukin, Inc. Upon completion of its analysis of the
proposed Merger, Houlihan, Lokey, Howard & Zukin, Inc., concluded that
consummation of the Merger would improve the financial posture of the RASP and
generally would be advantageous to the RASP from a financial point of view. A
copy of the opinion of Houlihan, Lokey, Howard & Zukin, Inc., to the RASP
Administrative Plan Committee is appended hereto as Exhibit D.
If the Merger is approved, the RASP Administrative Plan Committee intends
to elect to receive at least that number of shares of Series F and Series G
Preferred Stock into Series J Preferred Stock which will result in approximately
2,816,000 shares ($70.4 million in liquidation value) of Series J Preferred
Stock being issued.
In December 1996, the RASP purchased 1.6 million shares of Series G
Preferred Stock from AFC at $10.50 per share. Also in December 1996, AFC
redeemed 1,594,029 shares of Series F Preferred Stock pursuant to its terms.
None of the persons or entities listed in the table had any transactions in
Series F and G Preferred Stock within the last 60 days.
9
<PAGE> 12
As of the Record Date, there were approximately 3,000 record holders of
Series F Preferred Stock and 250 record holders of Series G Preferred Stock.
SPECIAL FACTORS
AFG and AFC are proposing the Merger to simplify AFC's capital structure,
reduce administrative expenses (estimated to be approximately $150,000 annually)
and realize savings through lower preferred dividend payments. Presently AFC's
outstanding Preferred Stock consists of two series of voting Preferred Stock. If
the Merger is adopted, these two series, which require dividend payments of
approximately $23.5 million annually, will be reduced to one series of Preferred
Stock requiring dividend payments of approximately $5.6 million annually.
Earnings available to AFC Common Stock would increase by approximately $7
million based on 1996 operating results.
The Series F and G Preferred Stock are listed on the Pacific Stock Exchange
and eligible as a margin security. AFC intends to list the Series J Preferred
Stock on the Pacific Stock Exchange.
Holders of Series F Preferred Stock will receive the greater of $23.75 or
the Fixed Spread Price, and holders of Series G Preferred Stock will receive
$10.50 (plus accrued dividends), for each of their shares unless they elect to
receive the Series J Preferred Stock. A Letter of Transmittal providing for
election is supplied with this Proxy Statement. The Letter of Transmittal must
be returned to AFC prior to the Meeting Date (November , 1997) or the
shareholder will be deemed to have elected to receive solely cash. If holders of
Series F and Series G Preferred Stock elect to receive more than $70.4 million
in liquidation value (2,816,000 shares) of Series J Preferred Shares, the number
elected for each holder may be reduced pro rata and replaced by the designated
cash payment of $25.00 per share of Series J Preferred Stock. Shareholders who
desire to receive the Series J Preferred Stock must complete this form even if
they vote against the Merger.
The Series F and G Preferred Shares will be deemed canceled as of the
Effective Date. Semi-annual dividends on the Series J Preferred Stock of $1.00
will be paid May 1 and November 1 commencing May 1998. The Merger is expected to
become effective as soon as practicable following the Meeting.
On April 23, 1997, AFG made a proposal to AFC, subject to certain
shareholder approvals, to exchange all of the outstanding shares of Series F and
Series G Preferred Stock of AFC in return for, at the option of each holder,
either cash or a new series of Series J Preferred Stock. The terms of the
Merger, as originally proposed, stipulated that no more and no less than $70
million of Series J Preferred Stock would be issued. Therefore, to the extent
the holders of shares of Series F and Series G Preferred Stock opting to receive
shares of Series J Preferred Stock oversubscribed that series, cash would be
distributed ratably among such holders. Conversely, to the extent the holders of
shares of Series F and Series G Preferred Stock undersubscribed Series J
Preferred Stock, AFC considered privately placing the remainder of the new
preferred stock with third party investors. As proposed, the terms of the Merger
contemplated exchanging each share of Series F and Series G Preferred Stock
outstanding for either cash equaling $21.50 or $10.50, respectively, or one
share or one-half share of Series J Preferred Stock, respectively, at the option
of each holder plus, in the case of the Series G Preferred Stock, accrued
dividends to the date of exchange. Under the original proposal, the Series J
Preferred Stock would pay an annual dividend per share equal to 8.5% of par
value. The terms originally proposed by AFC were determined by AFC management to
provide holders of Series F and Series G Preferred Stock with a new security
which would have a dividend rate and trading range which would be comparable to
those of the securities surrendered. AFC Management did not retain an
independent financial advisor with respect to the terms of the initial proposal,
but rather relied on its review of the terms and historical trading prices of
the Series F and Series G Preferred Stock. In addition, AFC management sought to
maintain the percentage of voting rights of the preferred stock relative to AFC
common stock. The announced terms of the Series J Preferred Stock were
substantially similar to the terms of the Series F Preferred Stock except that
Series J provided for redemption beginning eight years after original issue
while Series F shares are no longer redeemable by AFC and the yield on the
Series J Preferred Stock would be slightly lower than the yield on the Series F
Preferred Stock. AFC anticipated financing the Merger through cash on hand and
bank borrowings.
10
<PAGE> 13
THE SPECIAL COMMITTEE
AFC then convened a meeting of its Board of Directors. At the meeting,
Messrs. Emmerich, Hunt and Martin resigned, and Alfred W. Martinelli, Gregory C.
Thomas and William W. Verity were elected to the Board to replace them. In order
to protect the interests of the holders of shares of Series F and Series G
Preferred Stock with respect to the Merger, the Board of Directors of AFC
appointed these three new directors to a special committee, who then elected Mr.
Martinelli as Chairman (the "Special Committee"). The Special Committee was
charged with evaluating and negotiating the terms of the Merger on behalf of the
holders of AFC's Series F and Series G Preferred Stock. The Special Committee
was authorized to engage, at AFC's expense, independent legal counsel and
financial advisors and such other experts as it deemed necessary. The members of
AFC's Board of Directors, other than the members of the Special Committee, are
also members of AFG's Board of Directors and beneficial owners of significant
amounts of AFG Common Stock. The Merger, if approved, would reduce significantly
AFG's operating and general expenses because of the reduction in subsidiary
preferred dividends. As a result, the members of AFC's Board other than the
members of the Special Committee may be deemed to have an interest in the Merger
adverse to the interests of Series F and Series G Preferred Stockholders.
Between April 23, 1997, and October 3, 1997, the Special Committee held a
total of 12 meetings. At these meetings, the Special Committee engaged legal and
financial advisors and reviewed and negotiated the proposed terms of the Merger.
The first meeting of the Special Committee was held on April 23, 1997. All
members of the Special Committee participated in this meeting. The members of
the Special Committee first considered the engagement of independent counsel
and, based on their familiarity with the expertise of Taft, Stettinius &
Hollister of Cincinnati with respect to advising special board committees,
selected that firm as its legal counsel. From time to time, Taft, Stettinius &
Hollister performs legal services for AFC and certain of its affiliates. The
Special Committee was advised that, recently, these services involved primarily
one concluded litigation matter and various state tax matters for AFC, and
miscellaneous specialized corporate and securities matters for AFC's
publicly-held affiliates. Fees charged by such counsel to AFC and its affiliates
constituted less than 3% of such counsel's total billings for its most recent
fiscal year. The Special Committee was also advised that Taft, Stettinius &
Hollister has in the past acted as counsel to the underwriters in connection
with two securities offerings by AFC and advised a Special Committee of
Directors of American Premier Underwriters in connection with its combination
with AFC. The Special Committee decided that, since these matters were specific
in nature rather than involving general representation of AFC and because they
constituted such a small percentage of such counsel's billings, they would not
inhibit such counsel from providing independent advice to the Special Committee.
The Special Committee, therefore, determined that such services did not affect
adversely the ability of Taft, Stettinius & Hollister to serve as its legal
counsel.
The Special Committee held a second meeting on April 24, 1997. All members
were present. The Special Committee, together with legal counsel, reviewed its
specific duties and responsibilities as set forth by the Board of Directors of
AFC. Legal counsel to the Special Committee advised the Special Committee
regarding the fiduciary duties of the Special Committee. The Special Committee
then discussed the engagement of an independent financial advisor and determined
to seek proposals from one or more nationally recognized firms to assist the
Special Committee in its evaluation of the fairness of the Merger and the
negotiation of the terms thereof.
The Special Committee then considered certain issues raised by the
significant ownership interests of the RASP in AFC's Series F and Series G
Preferred Stock. The Special Committee was advised that the participants in the
RASP would possess "pass-through voting rights" to direct individually the
voting with respect to approval of the Merger. Assuming approval of the Merger,
however, the Special Committee was advised that the Administrative Plan
Committee of the RASP would determine the allocation between the cash and the
shares of Series J Preferred Stock to be received in exchange for the shares of
Series F and Series G Preferred Stock held by the RASP.
The Special Committee noted that the Merger might have different effects on
the public holders of the Series F and Series G Preferred Stock than on a
participant in the RASP. For example, the Merger would not
11
<PAGE> 14
result in a taxable event with respect to securities held by the RASP, while it
could trigger significant tax consequences to other holders of Series F and
Series G Preferred Stock. The Special Committee was advised that the
Administrative Plan Committee of the RASP would seek professional independent
advice to help them discharge their fiduciary duties to the participants in the
RASP. Such an advisor would be expected to have specialized expertise in
employee benefit matters. The Special Committee instructed its legal counsel to
request that the Administrative Plan Committee of the RASP share the advice
provided to it by such financial advisor with the Special Committee so that the
Special Committee would be better able to make a recommendation with respect to
the Merger.
Following the April 24 meeting of the Special Committee, its legal counsel
contacted three separate nationally recognized investment banking firms and
invited them to submit proposals to the Special Committee. Two of the three
firms contacted declined to submit proposals for conflict and staffing reasons.
A proposal was received from Libra Investments, Inc. ("Libra"). The next meeting
of the Special Committee was held on May 15, 1997. At this meeting, all members
of the Special Committee, together with legal counsel, were present. The Special
Committee was briefed regarding the financial advisor selection process. The
Special Committee reviewed the proposal submitted by Libra. The Committee also
considered whether to seek proposals from additional possible financial
advisors. After review of the Libra proposal, and also in reliance on the
experience of the members of the Special Committee with respect to previous
financial advisor engagements, the Special Committee concluded that the Libra
proposal was acceptable and that it was not necessary to solicit additional
proposals from other financial advisory firms. Accordingly, the Special
Committee resolved to seek the engagement of Libra to advise the Special
Committee and ultimately to deliver to the Special Committee an opinion
regarding the fairness of the Merger consideration to holders of outstanding
shares of Series F and Series G Preferred Stock from a financial point of view.
Specifically, Libra was engaged to evaluate the fairness, from a financial point
of view, of the $21.50 and $10.50 cash and the as-yet-unauthorized shares of
Series J Preferred Stock consideration being offered for the outstanding shares
of Series F and Series G, respectively. The Special Committee directed its legal
counsel to negotiate an appropriate engagement letter with Libra. An engagement
letter was negotiated and subsequently executed on June 2, 1997. See "Special
Factors -- Opinion of Financial Advisor."
On May 29, 1997, the Special Committee, together with its legal counsel and
financial advisor and the financial advisor to the RASP, attended due diligence
meetings in which the financial affairs and operations of AFC and its affiliates
were reviewed by senior management of AFC and its affiliates. At these meetings,
senior management of AFC and its affiliates discussed AFC's financial condition
and performance on a divisional basis, focusing on factors such as combined
ratios, changes in aggregate underwriting premiums, recorded losses and
reserves, adequacy of environmental and asbestos reserves and recent
catastrophic losses affecting AFC's insurance subsidiaries. The Special
Committee inquired whether there were any regulatory initiatives, either current
or impending, that might materially adversely effect the operations of AFC's
insurance subsidiaries or the ability of such subsidiaries to pay dividends to
AFC, and was told that AFC and its affiliates were not aware of any such
restrictions. Management of AFC further reviewed the overall regulatory
environment in the insurance industry and the status of significant litigation,
both claim-related and non-claim-related, relating to AFC, and discussed the
procedures used by AFC and its subsidiaries to manage such litigation. Further,
the Special Committee reviewed in detail the investment portfolio of AFC and its
affiliates, focusing on the major categories of investments held by AFC and its
affiliates and the attempts of such entities to emphasize investment grade
securities in their portfolios.
Also on May 29, 1997, the Special Committee held its fourth meeting. All
three members of the Special Committee were present along with the Special
Committee's legal counsel and financial advisor. It was agreed that, on June 4,
1997, the Special Committee would receive a preliminary report from its
financial advisor and a preliminary form of legal due diligence report from its
legal counsel, at which time the Special Committee, together with its legal
counsel and financial advisors, would meet to discuss the contents of each
preliminary report. The Special Committee further agreed, assuming the
suitability of each form of report, to meet on June 11, 1997, to accept and
review more complete reports of its financial and legal advisors.
Chairman Martinelli observed that the Special Committee had been authorized
and directed, among other things, to negotiate with AFC regarding the terms of
the Merger. Chairman Martinelli requested, in
12
<PAGE> 15
view of that duty, that the Special Committee's financial advisor explore fully
the range of valuation of shares of the Series F Preferred Stock to be exchanged
and to advise the Special Committee as fully as possible concerning the
equivalency of the as-yet-unauthorized Series J Preferred Stock to be offered in
exchange for the outstanding shares of Series F and Series G Preferred Stock.
The Special Committee was advised by its legal counsel that its ultimate
recommendation to the holders of the outstanding shares of Series F and Series G
Preferred Stock should be made on the basis of a number of factors, including:
(i) the report of the Special Committee's financial advisor with respect to the
fairness of the cash and Series J Preferred Stock offered in exchange for shares
of Series F and Series G Preferred Stock; (ii) the review of this report by the
Special Committee, and (iii) the legal due diligence procedures to be conducted
by the Special Committee's legal counsel. The Special Committee's legal counsel
noted that the charge of the Special Committee did not require the rendering by
the Special Committee of a recommendation to the holders of shares of Series F
and Series G Preferred Stock as between the transaction alternatives of
receiving cash or exchanging their existing preferred shares for shares of
Series J Preferred Stock, other than to opine that both the cash exchange price
and shares of Series J Preferred Stock were fair consideration for the existing
preferred shares.
On June 3, 1997, the legal counsel and financial advisor to the Special
Committee, together with the financial advisor to the RASP, participated in a
conference with senior financial management of AFC in which the financial
posture of AFC and the rationale underlying the Merger were discussed. The legal
counsel and financial advisor to the Special Committee were advised that (i)
apart from a planned consolidation of the bank borrowings of AFC and its
affiliates, there were no impending corporate financings; (ii) AFC did not
intend to list the as-yet-unauthorized Series J Preferred Stock on any public
exchange; (iii) unless the number of record holders of Series J Preferred Stock
required otherwise, AFC did not intend to register the Series J Preferred Stock
under the Securities Exchange Act of 1934; (iv) AFC would continue to file
reports pursuant to that act because AFC had publicly held debt outstanding; (v)
AFC had determined the exchange price for the shares of Series F Preferred Stock
based on its current trading price; and (vi) the Merger, as proposed, would
result in annual additional pre-tax earnings applicable to AFC Common Stock of
approximately $8 million.
On June 4, 1997, the Special Committee, together with its legal counsel and
financial advisor, met once again. All members of the Special Committee were
present, except for Mr. William W. Verity, who was out of the country. Libra
summarized the June 3, 1997 due diligence conference among Libra, the legal
counsel to the Special Committee, the financial advisor to the RASP and senior
financial management of AFC. Legal counsel to the Special Committee then
presented the results of their legal due diligence review of AFC in a draft
report. The Special Committee was advised that the legal due diligence review of
AFC had not disclosed any material non-public information which would indicate a
greater value for securities of AFC or which would have an adverse effect on the
value of securities to be issued by AFC.
Libra then reviewed with the Special Committee its proposed methodologies
for valuing the shares of Series F Preferred Stock. These proposed methodologies
included an analysis of: (i) the public trading price for the Series F shares,
(ii) yields and trading prices of comparable securities, (iii) the terms of
recent tender offers for similar non-callable securities and (iv) a discounted
cash flow analysis. Libra indicated that it proposed to determine a range of
value for the Series F shares to be exchanged and the estimated initial trading
range of the shares of Series J Preferred Stock to be issued in connection with
the Merger. Libra noted that the value of the Series G Preferred Stock,
effectively, was fixed by its certificate of designation since Series G shares
were redeemable at a price of $10.50 per share plus any accrued dividends. The
Special Committee's legal counsel then inquired of Libra whether Libra's
valuation would give effect to (i) the redeemability of the Series J Preferred
Stock as compared to the Series F Preferred Stock which cannot be redeemed and
(ii) the likely absence of a public market for Series J as compared to the
publicly listed Series F and Series G. Libra indicated that its valuation would
incorporate those differences between the Series F and Series G Preferred Stock,
on the one hand, and the as-yet-unauthorized Series J Preferred Stock. The
Special Committee, after discussion, stated that it was comfortable with Libra's
proposed methodologies of valuation.
13
<PAGE> 16
The Special Committee resolved to meet on June 11, 1997, in order to
receive Libra's initial preliminary report. The Special Committee further
determined to deliberate and then apprise the financial advisor to the
Administrative Plan Committee of the RASP regarding the preliminary conclusions
of the Special Committee.
On June 11, 1997, the Special Committee and its legal counsel and financial
advisors met. All members of the Special Committee were present. Legal counsel
to the Special Committee delivered its final Legal Due Diligence Report dated
June 11, 1997, reaffirming the previously discussed preliminary due diligence
review. The Special Committee was further advised that, as a result of the
Merger, holders of shares of Series F and Series G Preferred Stock of AFC would
possess statutory dissenters' rights of appraisal with respect to their shares.
Such rights, if perfected properly under Ohio law, entitle each holder of such
shares to a judicial determination of the fair cash value of their shares.
According to Ohio law, the fair cash value of shares actively traded on a public
market is the price of the shares on the day prior to the shareholders' vote on
the particular transaction giving rise to dissenters' rights, minus any
appreciation or depreciation resulting from the transaction itself.
The Special Committee and its financial advisors were further advised of
the Special Committee's task to articulate in the proxy statement circulated
among the shareholders of AFC the methods and rationale utilized to evaluate the
fairness of the Merger. Legal counsel stated that the criteria set forth in Rule
13e-3 promulgated pursuant to the Securities Exchange Act of 1934 regarding the
valuation of securities in connection with a merger or other business
combination with a related party would be of particular relevance in this
regard.
Libra then addressed the Special Committee and outlined the financial
ramifications of the Merger. Libra reviewed the terms of the Series F and Series
G Preferred Stock of AFC and the proposed terms of the Series J Preferred Stock.
Libra then presented its preliminary evaluation of the fairness of the $21.50
and $10.50 exchange prices of the Series F and Series G Preferred Stock, which
took into account the necessary ratios of conversion into Series J and the
acceptance of cash as set forth in the announced terms of the Merger. Because
the redemption price of the Series G is prescribed in the terms of designation
for that series in AFC's Articles of Incorporation, analysis of the exchange
price for shares of Series G was deemed not to be necessary. In valuing the
shares of Series F Preferred Stock, Libra discussed analyses based upon the
following methodologies: (i) recent public trading prices and corresponding
yields of shares of Series F Preferred Stock; (ii) trading prices of similar
securities; (iii) terms of recent tender offers for similar non-callable
securities, particularly the terms of the tender offers for the non-callable
securities of an affiliate of AFC; and (iv) a discounted cash flow analysis.
Libra's application of these methodologies provided the following ranges of per
share values for the Series F Preferred Stock: for the recent trading prices
analysis, $20 to $22; for the comparable security analysis, $19.90 to $21.50;
for the tender offer analysis, $21.50 to $24.00; and for the discounted cash
flow analysis, $20.90 to $22.15. Libra's overall preliminary evaluation of the
Series F Preferred Stock resulted in a range of value per share of $19.90 to
$24.00. The Special Committee noted that the terms of the Merger called for the
payment of accrued dividends on the Series G Preferred Stock since AFC had fixed
this proposed exchange price based upon the designated terms of the Series G
Preferred Stock, while the exchange price for the Series F Preferred Stock did
not include a provision for the payment of accrued dividends. The Special
Committee was advised by Libra that while the trading prices of the Series F
Preferred Stock did not reflect directly an increase or decrease in market price
due to accrued dividends from time to time, the trading prices did, to some
extent, reflect accrued dividends. Therefore, Libra suggested that it was
appropriate for the Special Committee to review the exchange price to be offered
for the shares of Series F Preferred Stock both on the basis of $21.50 per share
and also on a hypothetical "strip price" basis, which eliminates completely the
value of any accrued dividends. Libra noted that if the Merger is completed in
early September, approximately $.45 per share in dividends would have accrued
with respect to the Series F Preferred Stock which would not be paid, resulting
in a hypothetical "strip price" of $21.05.
The Special Committee reviewed these matters further with Libra. Following
this review, it was agreed that Chairman Martinelli would contact
representatives of AFC in order to explore the possibility of an increase in the
exchange price for shares of Series F Preferred Stock to an amount greater than
$21.50 per share. Mr. Martinelli was also asked to explore the possibility of a
change in the terms of the Series J
14
<PAGE> 17
Preferred Stock, which would be designed to provide that those shares would
trade, at least initially, at a price equal to their per share liquidation value
and, therefore, be viewed as equivalent to the cash consideration being offered
in the Merger.
The Special Committee then contacted the financial advisor to the
Administrative Plan Committee of the RASP. The financial advisor to the
Administrative Plan Committee of the RASP was advised that the Special Committee
had received a preliminary report of its financial advisor, and that it was the
Special Committee's intention to negotiate with AFC regarding the possibility of
increasing the exchange price of the Series F Preferred Stock and changing the
terms of the Series J Preferred Stock. The Special Committee noted specifically
that it was not, at that time, reaching any conclusion with respect to the
fairness of the terms of the Merger. The financial advisor to the Administrative
Plan Committee of the RASP requested that the Special Committee notify it when
the Special Committee reached its final determinations.
The meeting was adjourned briefly in order to permit Chairman Martinelli to
contact representatives of AFC. Shortly thereafter the meeting was reconvened.
Chairman Martinelli reported that he had spoken with Mr. James E. Evans, Senior
Vice President and General Counsel of AFC. Chairman Martinelli indicated that he
had presented the Special Committee's current position regarding the terms of
the Merger and that Mr. Evans had responded by requesting that a representative
of Libra review with Mr. Evans the preliminary valuation of the shares of Series
F and the proposed terms of Series J Preferred Stock. Libra agreed to present
its preliminary report to Mr. Evans later that day.
Legal counsel to the Special Committee then reviewed with the Special
Committee the current draft of the proposed Merger Agreement and discussed with
the Special Committee certain legal issues arising therefrom. These issues
included but were not limited to the voting requirements of the Merger and the
method of providing the holders of shares of Series F and Series G Preferred
Stock accurate information regarding the likely election between cash or an
exchange of securities prior to their approving the Merger.
During the afternoon of June 11, 1997, a representative of Libra and legal
counsel to the Special Committee met with Mr. Evans and other representatives of
AFC to review the conclusions reached by the Special Committee at its meeting
earlier that day.
Between June 11 and June 20, 1997, various discussions were held, primarily
between Chairman Martinelli and Mr. Evans, but also involving representatives of
Libra and legal counsel to the Special Committee. With respect to the shares of
Series F Preferred Stock, these discussions involved the possibility of
increasing the exchange price and/or paying accrued dividends to the date of the
Merger. With respect to the shares of Series J Preferred Stock these discussions
involved a possible increase in the dividend rate or an increase in the initial
redemption price. Following these discussions, and after consideration of a
number of proposals and counter-proposals, on June 20, 1997, AFC, through Mr.
Evans, proposed that the shares of Series F Preferred Stock be exchanged for
$22.35 in cash, or one share of Series J Preferred Stock. No accrued dividends
would be paid on the shares of Series F Preferred Stock, but if the Merger is
not completed by November 1, 1997, the exchange price would be renegotiated. Mr.
Evans further proposed that the dividend rate on the shares of Series J
Preferred Stock remain at 8.5%, but that the shares would be redeemable at the
option of AFC in the eighth year following their issuance at an amount equal to
103% of the liquidation value, declining to 101.5% in the ninth year and 100% in
years thereafter. The liquidation value would be $22.35 per share of Series J
Preferred Stock. The number of shares of Series J Preferred Stock to be received
by a holder of shares of Series F or Series G Preferred Stock would be
determined by dividing $22.35 into the exchange value of such number of shares
of Series F or Series G Preferred Stock that the holder elects to have converted
into shares of Series J Preferred Stock. Dividends on the Series J Preferred
Stock would begin to accrue on August 15, 1997, if the Merger is consummated
before September 1, 1997, and on September 1, 1997 if the Merger is consummated
after that date.
The Special Committee met again on June 25, 1997. All members of the
Special Committee were present, as were representatives of Libra and legal
counsel to the Special Committee. Chairman Martinelli reviewed with the members
of the Special Committee the events since the last meeting of the Special
Committee on June 11, 1997, including specifically the various discussions and
negotiations with AFC. Libra then presented to the Committee a written report
with respect to valuation of Series F Preferred Stock and the
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<PAGE> 18
cash equivalence of the proposed Series J Preferred Stock. Libra noted that the
proposed exchange price of $22.35 equated to a hypothetical approximate "strip
price" of $21.90, assuming consummation of the Merger and payment of the
applicable Merger consideration in early September of 1997. The possibility that
the Merger may not be consummated until October 1997, led the Special Committee
to seek payment of acrued dividends on the Series F preferred Stock.
Representatives of AFC did not acquiesce to this request, but a termination date
of November 1, 1997 was negotiated, reflecting the Special Committee's belief
that the Merger consideration for the Series F Preferred Stock if the Merger was
consummated on November 1, 1997 or after, would not be equivalent to such Merger
consideration if the Merger were consummated prior to November 1, 1997. If the
Merger is consummated and the Merger consideration paid in October 1997, the
hypothetical "strip price" would be reduced by up to thirty cents, to $21.60.
The Libra report consisted of the same analyses reviewed with the Special
Committee at the meeting held on June 11, 1997, revised to reflect the new
proposed terms for the Merger and the Series J Preferred Stock.
This report presented an overall range of value per share of Series F
Preferred Stock of $20.00 to $24.50. Libra noted that AFC had indicated that it
did not intend to register the shares of Series J Preferred Stock under the
Securities Exchange Act of 1934, nor to list such shares on any exchange. Libra
recommended that the Committee request that such actions be taken to improve the
liquidity of the Series J Preferred Stock. Counsel for the Special Committee
then contacted and discussed this matter with Mr. Evans. After discussion, Mr.
Evans stated that AFC would agree to register the shares of Series J Preferred
Stock under the Securities Exchange Act of 1934 and to list the shares on the
Pacific Exchange. Libra then continued the presentation of its report. Following
this presentation and questions from the members of the Special Committee, Libra
stated that it believed that the consideration to be received by holders of
shares of Series F Preferred Stock and shares of Series G Preferred Stock in the
Merger was fair to the holders of such shares from a financial point of view,
regardless of whether such holders received cash, shares of Series J Preferred
Stock or a combination thereof. Libra noted that its conclusion did not take
into account the specific tax effects on any shareholder resulting from the
Merger, and it did not express any opinion as to whether a shareholder should
elect to receive cash, shares of Series J Preferred Stock or a combination
thereof in the Merger. Libra also indicated that it was prepared, subject to the
non-occurrence of unforeseen conditions, including material changes in the
general level of interest rates or significant delays in the closing of the
Merger, to deliver its written opinion to such effect at the time of execution
of the proposed Merger Agreement and again at the time of mailing of the proxy
statement to AFC's shareholders. The Special Committee then reviewed with its
legal counsel the proposed form of the Merger Agreement.
The Special Committee then reviewed and considered various factors
concerning the fairness of the Merger. At the conclusion of the meeting on June
25, 1997, the Special Committee unanimously adopted resolutions finding that the
Merger was fair to the holders of shares of Series F Preferred Stock and Series
G Preferred Stock not affiliated with AFC, recommending that the Board of
Directors of AFC approve the Merger Agreement and cause it to be presented to
the holders of the shares of the Series F Preferred Stock and Series G Preferred
Stock of AFC for their consideration and recommending that such shareholders
approve the Merger Agreement. The Special Committee did not express any opinion
as to whether a holder of shares of Series F Preferred Stock or shares of Series
G Preferred Stock should elect to receive cash, shares of Series J Preferred
Stock, or a combination thereof in the Merger. The Committee noted, instead,
that it believed that any of these various alternatives would be fair from a
financial point of view. In reaching this decision, the Special Committee
expressly adopted the conclusions of Libra but did not attempt to analyze the
specific tax effects on a particular shareholder.
In addition, the Special Committee noted that the Administrative Plan
Committee of the RASP owed specific fiduciary duties to the participants in the
RASP, and that the Administrative Plan Committee was receiving independent
advice from its financial advisor. The report and analyses of Libra, Libra's
advice concerning its opinion as to the fairness of the consideration to be
received in the Merger, and the history of the negotiations between the Special
Committee and its advisors and AFC were then shared by the Special Committee
with the Administrative Plan Committee of the RASP and its financial advisor.
On July 2, 1997, the Special Committee held another meeting and was advised
of the report and opinion provided to the Administrative Plan Committee by its
financial advisor, to the effect that the Merger is fair to
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<PAGE> 19
the RASP from a financial point of view. All members of the Special Committee
and its legal and financial advisors were present. The Special Committee
discussed this report and opinion and related matters concerning the RASP and
its participants with the Administrative Plan Committee and its financial
advisor, as well as with the Special Committee's own financial and legal
advisors. Following this meeting, the members of the Special Committee were
given a copy of the RASP financial advisor's report and opinion for the sole and
limited purpose of determining whether they were inconsistent with the Libra
Report or with the conclusions of the Special Committee.
The Special Committee met again on July 9, 1997. All members of the Special
Committee and its legal and financial advisors were present. The Special
Committee was advised by its legal counsel that the Administrative Plan
Committee had accepted formally the report and opinion of its financial advisor
and had determined that the Merger was fair to the RASP from a financial point
of view.
The Special Committee then discussed the report and opinion and the action
of the Administrative Plan Committee with its legal and financial advisors.
Following this discussion, and in view of its earlier determination that the
Merger is fair to the holders of the shares of Series F Preferred Stock and
Series G Preferred Stock not affiliated with AFC, the Special Committee
concluded that it saw no reason to believe that the interests of the
participants in the RASP differed in any material respect from those of the
direct holders of shares of Series F or Series G Preferred Stock and decided to
recommend that individual participants in the RASP exercise their "pass-through"
voting rights in favor of approval of the Merger Agreement.
The Board of Directors of AFC, on July 9, 1997, received the report and
recommendation from the Special Committee. The Board, relying exclusively on the
Special Committee's analysis, then determined that, in light of and subject to
the terms and conditions set forth in the Merger Agreement, it was in the best
interests of the holder of AFC Common Stock, and the holders of AFC's Series F
Preferred Stock and Series G Preferred Stock not affiliated with AFC and to the
RASP participants, for AFC to enter into the Merger Agreement, and that the
Merger would be fair to, and in the best interest of, such holders and the RASP
participants. The AFC Board, without taking any separate action to formally
adopt the Special Committee's analysis, then determined to recommend to such
holders and the RASP participants that the Merger Agreement be approved. At the
meeting, the actions taken were approved by a unanimous affirmative vote.
On September 9, 1997, Libra advised the Special Committee through its
counsel that, as a result of changes in interest rates and the terms of more
recent tender offers for debt securities, it did not believe that it would be
able to confirm its earlier belief that the Merger consideration was fair to the
holders of Series F Preferred Stock from a financial point of view. On September
11, 1997, a meeting of the Special Committee was held. All members of the
Special Committee and its legal and financial advisors were present. Libra
reminded the members of the Special Committee that at the meetings of the
Special Committee held on June 11, 1997 and June 25, 1997, Libra had reviewed
with the Special Committee analyses based upon four different methodologies,
namely: (i) recent public trading prices and corresponding yields of shares of
Series F Preferred Stock; (ii) trading prices of similar securities; (iii) terms
of recent tender offers for similar noncallable securities; and (iv) a
discounted cash flow analysis. Libra added that these analyses, when applied to
current market conditions, indicate that the proposed Merger consideration for
the Series F Preferred Stock was no longer within an appropriate range of values
per share. Libra reported that it believed that the Merger consideration for the
Series F Preferred Stock of $21.60 per share on a hypothetical "strip price"
basis was still within the ranges of values per share based upon analysis (i),
(ii) and (iv). However, Libra added that it believed the Merger consideration
was below the range of values indicated by analysis (iii). Specific ranges of
values for each analysis were not provided by Libra to the Special Committee at
the meeting on September 11, 1997. However, such information was provided at the
meeting of the Special Committee held on October 3, 1997. As described on page
18, the final Libra analyses confirmed the preliminary advice provided at the
September 11, 1997 meeting, namely that the original Merger consideration of
$21.60 per share on a hypothetical "strip price" basis for the Series F
Preferred Stock was within the range of values estimated by the recent trading
prices analysis of $20.00 to $22.00; was within the range of values estimated by
the comparable security analysis of $21.20 to $24.00; was within the range of
values estimated by the
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<PAGE> 20
discounted cash flow analysis of $21.00 to $23.50; and was lower than the range
of values estimated by the tender offer analysis of $22.75 to $26.00. The
Special Committee concluded that, based upon this information, it would not be
able to recommend approval of the Merger unless the terms of the Merger were
changed.
Subsequently, Mr. Martinelli advised AFC of these developments. Between
that time and October 3, 1997, various discussions were held, primarily between
Mr. Martinelli and Mr. Evans, but also involving representatives of Libra and
other personnel of AFC. The Special Committee met again on September 29, 1997.
All members of the Special Committee were present, as were representatives of
Libra and counsel to the Special Committee. Mr. Martinelli described the
discussions with AFC and stated that he expected that the Special Committee
would receive a formal revised proposal in the near future.
Another meeting of the Special Committee was held on October 3, 1997. All
members of the Special Committee were present, as were representatives of Libra
and counsel to the Special Committee. Mr. Martinelli advised the other members
of the Special Committee that AFC now proposed that holders of Series F
Preferred Stock receive the greater of $23.75 or the Fixed Spread Price per
share. Dividends on the Series F Preferred Stock would begin to accrue on
November 1, 1997. A holder of shares of Series F Preferred Stock could elect to
receive shares of Series J Preferred Stock which would bear a dividend equal to
8.0% of its liquidation value. The redemption feature of the Series J Preferred
Stock would remain the same, but its dividends would begin to accrue from
November 1, 1997. The number of shares of Series J Preferred Stock to be
received by a holder of shares of Series F Preferred Stock or Series G Preferred
Stock would be determined by dividing the liquidation value into the exchange
value of such number of shares of Series F Preferred Stock or Series G Preferred
Stock that the holder elects to have converted into shares of Series J Preferred
Stock. Libra then presented to the Special Committee a written report (the
"Libra Report") with respect to the valuation under current market conditions of
the Series F Preferred Stock. Libra noted that the proposed revised minimum
exchange price of $23.75 per share of Series F Preferred Stock equated to a
hypothetical approximate "strip price" of $23.00. The Libra Report consisted of
the same analyses reviewed with the Special Committee at the meetings held on
June 11, 1997, and June 25, 1997, revised to reflect the new proposed terms for
the Merger and the Series J Preferred Stock, as well as current market
conditions. Libra's application of the methodologies included in the Libra
Report provided the following ranges of per share values for the Series F
Preferred Stock: for the recent trading prices analysis, $20.00 to $22.00; for
the comparable security analysis, $21.20 to $24.00; for the tender offer
analysis, $22.75 to $26.00; and for the discounted cash flow analysis, $21.00 to
$23.50. Libra's overall evaluation of the Series F Preferred Stock based upon
current market conditions resulted in a range of values per share of $20.00 to
$26.00. The analyses included in the Libra Report are described under "Special
Factors -- Valuation Methodologies." The Libra Report has been filed as an
exhibit to the Schedule 13E-3 filed by AFC and AFG with the Securities and
Exchange Commission. Copies thereof will be made available for inspection and
copying at the principal executive offices of AFC during regular business hours
by any RASP participant, interested holder of Series F Preferred Stock or Series
G Preferred Stock, or such stockholder's representative who has been so
designated in writing, and may be inspected and copied, and obtained by mail, in
the manner specified in "Available Information."
The members of the Special Committee then reviewed the terms of the
proposed Amended and Restated Merger Agreement with the Committee's legal
counsel. It was noted that the Agreement provides for an updated opinion from
Libra at the time of the mailing of the Proxy Statement, but does not provide
for an updated opinion from Libra at the time of Closing as a condition to
Closing, as did the original Merger Agreement. However, the Special Committee
was advised by its counsel that the Committee could change its recommendation
that holders of Series F Preferred Stock and Series G Preferred Stock vote in
favor of the Merger in the event that the Special Committee should conclude, for
any reason, that such action was warranted. After discussion, the Special
Committee concluded that this right, coupled with the fact that the Merger
consideration for the Series F Preferred Stock could increase with market
conditions for U.S. Treasury securities, but could not decrease below $23.75 per
share, provided adequate protection to shareholders with respect to changes that
might occur after the date of the Proxy Statement. Libra then stated that it
believed that the consideration to be received by holders of Series F Preferred
Stock and Series G Preferred Stock in the Merger was fair to the holders of such
shares from a financial point of view, regardless of whether such
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<PAGE> 21
holders receive cash, shares of Series J Preferred Stock, or a combination
thereof. As before, Libra noted that its conclusion did not take into account
the specific tax effects on any shareholder resulting from the Merger, and it
did not express any opinion as to whether a shareholder should elect to receive
cash, shares of Series J Preferred Stock, or a combination thereof in the
Merger. Libra also indicated that it was prepared, subject to the non-occurrence
of unforeseen conditions, including material changes in the general level of
interest rates, to deliver its written opinion to such effect at the time of
mailing of the Proxy Statement to AFC's shareholders.
The Special Committee then reviewed and considered various factors
concerning the fairness of the Merger, including specifically those set forth
under "Special Factors -- Recommendations of the Special Committee and the Board
of Directors of AFC." At the conclusion of the meeting on October 3, 1997, the
Special Committee unanimously adopted resolutions, finding that the Merger was
fair to the holders of shares of Series F Preferred Stock and Series G Preferred
Stock not affiliated with AFC, recommending that the Board of Directors of AFC
approve the Merger Agreement and cause it to be presented to the holders of
shares of Series F Preferred Stock and Series G Preferred Stock of AFC for their
consideration, and recommending that such shareholders approve the revised
Merger Agreement. Again, the Special Committee did not express any opinion as to
whether a holder of shares of Series F Preferred Stock should elect to receive
cash, shares of Series J Preferred Stock, or a combination thereof in the
Merger. The Committee noted, instead, that it believed that any of these various
alternatives would be fair from a financial point of view. In reaching this
decision, the Special Committee expressly adopted the conclusions of Libra, but
did not attempt to analyze the specific tax effects on a particular shareholder.
After receiving the report and recommendation from the Special Committee on
October 3, 1997, the Board, relying exclusively on the Special Committee's
analysis, took actions stating that, in light of and subject to the terms and
conditions set forth in the Merger Agreement, it was in the best interests of
the holder of AFC Common Stock, and the holders of AFC's Series F Preferred
Stock and Series G Preferred Stock not affiliated with AFC and to the RASP
participants, for AFC to enter into the Merger Agreement, and that the Merger
would be fair to, and in the best interest of, such holders and the RASP
participants. The Board, without taking any separate action to formally adopt
the Special Committee's analysis, also took action to recommend to such holders
and the RASP participants that the Merger Agreement be approved. All of the
October 3, 1997 actions taken were approved unanimously.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS OF AFC;
RECOMMENDATION OF THE BOARD OF DIRECTORS OF AFG; REASONS FOR RECOMMENDATIONS.
As noted above, the Board of Directors of AFC and the Special Committee
have determined that the Merger is fair to the holders of the shares of AFC's
Series F Preferred Stock and Series G Preferred Stock not affiliated with AFC
and the RASP participants, and recommend that such holders and the RASP
participants approve the Merger Agreement. The Board of Directors of AFG did not
make any independent analysis with respect to the merger proposal, but, relying
upon and accepting the conclusions, determinations and findings of the Board of
Directors of AFC and the Special Committee, took actions stating that the Merger
is fair to the holders of Series F and Series G Preferred Stock not affiliated
with AFC and to the RASP participants and unanimously recommends adoption of the
Merger Agreement.
In reaching its determination, the Special Committee considered a number of
factors. Set forth below are all of the material factors which were considered
by the Special Committee.
The following factors were considered positive in nature and thereby to be
favorable as to the fairness of the Merger:
(i) the lack of liquidity for the shares of Series F and Series G
Preferred Stock which, in the view of the Special Committee and the Board,
makes it difficult for shareholders to sell their shares for cash and
diversify their holdings without affecting adversely the trading price of
the shares of Series F or Series G Preferred Stock;
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(ii) the fact that the terms of the Merger permit holders of shares of
Series F Preferred Stock or Series G Preferred Stock to elect to receive
shares of Series J Preferred Stock in a tax-free transaction, or to receive
cash in a taxable transaction, depending upon their particular tax
situation;
(iii) with respect to the Series G Preferred Stock, the fact that the
shares of Series G Preferred Stock are currently redeemable at, and have a
liquidation value equal to, $10.50 per share, plus accrued dividends,
pursuant to their terms of designation and that while the Merger does not
provide a premium over this amount, it does provide eight years of call
protection as a result of the terms of the Series J Preferred Stock;
(iv) with respect to the Series F Preferred Stock, the various
analyses and other information presented to the Special Committee by Libra,
including those described under "Special Factors -- Background," and
"Special Factors -- Opinion of Financial Advisor;"
(v) with respect to the Series F Preferred Stock, that the proposed
minimum exchange price of $23.75 and the hypothetical "strip price" of
$23.00 exceed the liquidation value of the Series F Preferred Stock of
$20.00 per share;
(vi) the opinion of Libra described below under "Special
Factors -- Opinion of Financial Advisor" to the effect that the
consideration to be received by holders of shares of Series F Preferred
Stock and Series G Preferred Stock in the Merger, is fair, from a financial
point of view, to the holders of such shares;
(vii) the terms of the Merger Agreement, including particularly the
requirement that the Merger be approved by the vote of holders of
two-thirds of the outstanding shares of Series F Preferred Stock and Series
G Preferred Stock voting as a class, and that certain of the voting rights
of the RASP will be "passed through" to the individual RASP participants;
(viii) with respect to the Series F Preferred Stock, that the proposed
minimum exchange value of $23.75 and the hypothetical "strip price" of
$23.00 per share exceed the price paid by AFC for purchases of such shares
during at least the past three years.;
(ix) the fact that holders of shares of Series F Preferred Stock and
Series G Preferred Stock will be entitled to exercise "dissenters' rights"
under Ohio law.; and
(x) with respect to the Series F Preferred Stock, that the minimum
exchange price of $23.75 and the hypothetical "strip price" of $23.00 are
each higher than the average trading price of the Series F Preferred Stock
of $18.16 over the past five years and exceed the closing price of $21.75
on April 22, 1997, the day preceding the announcement of the proposed
recapitalization, and at least equal to $23.00, the highest per share price
at which the Series F Preferred Stock traded during 1997.
The following factors were considered by the Special Committee to be
negative in nature and thereby to be unfavorable as to the fairness of the
Merger:
(xi) the fact that, while the shares of Series J Preferred Stock will
be registered under the Securities Exchange Act of 1934 and registered on
the Pacific Stock Exchange, such shares are likely to be illiquid, making
it difficult for a holder of such shares who wishes to sell his or her
shares to do so;
(xii) the fact that the Series J Preferred Stock, unlike the Series F
Preferred Stock, is redeemable at the option of AFC after eight years; and
(xiii) the possibility that if all of the shares of Series J Preferred
Stock are subscribed, a holder who wishes to receive only shares of Series
J Preferred Stock in exchange for his or her shares of Series F or G
Preferred Stock will receive a portion of the consideration in cash,
resulting in a taxable event to such holder.
Each of the factors cited above was considered by the Special Committee at
one or more of its meetings, described under "Special Factors -- The Special
Committee."
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The consideration of factors (iii), (iv), (v), (vi), (vii), (viii) and (x)
involved primarily discussions among the members of the Special Committee and
its legal and financial advisors and was based upon information and advice
received by the Special Committee with respect to each factor from management of
AFC and the Special Committee's legal and financial advisors, as well as its
members' own knowledge about the matters involved in the Merger. The
consideration of factors (iv), (v) and (x) involved detailed reviews by the
Special Committee of factual, financial and numerical information presented to
the Special Committee by its financial advisor, as described under "Special
Factors -- The Special Committee," and "Special Factors -- Valuation
Methodologies." With respect to factor (iv), the Special Committee noted
particularly that the analyses of Libra indicated (a) a valuation for the shares
of Series G Preferred Stock of $10.50 per share plus accrued dividends based
upon the terms of such shares; and (b) an implied valuation range for shares of
Series F Preferred Stock of $20.00 to $26.00 per share. Taking all of the
factors into consideration, the Special Committee concluded that the Merger was
fair to and in the best interests of the holders of shares of Series F Preferred
Stock and Series G Preferred Stock. The Special Committee reviewed with its
legal counsel and its financial advisor, and also the Administrative Plan
Committee and its financial advisor, the question of whether the interests of
participants in the RASP differ in any material respect from those of direct
holders of shares of Series F Preferred Stock or Series G Preferred Stock. Based
upon this review, the Special Committee concluded that there were no such
material differences and, accordingly, determined to recommend that RASP
participants exercise their "pass-through" voting rights in favor of the Merger.
The Special Committee noted that the Merger is not conditioned expressly
upon approval of holders of a majority of those shares of Series F and Series G
Preferred Stock who are not affiliates of AFC. However, there are 13,864,883
Series F and Series G shares outstanding and a favorable vote of two-thirds, or
9,243,256 shares, is required for approval of the Merger. Directors, executive
officers and affiliates of AFC and AFG hold directly 185,218 shares and have
"pass-through" voting rights to approximately an additional 325,000 shares held
by the RASP. Therefore, even if all of these shares are voted for the Merger, as
a practical matter, approval of the Merger will be determined by the action of
non-affiliated holders and non-affiliated RASP participants. See "Ownership of
Preferred Stock." For this reason, and in view of the various procedural steps
taken by the Special Committee as outlined above, the Special Committee believes
that the Merger is fair to holders of Series F Preferred Stock and Series G
Preferred Stock from a procedural, as well as a financial, point of view.
The Merger is subject to Rule 13e-3 promulgated by the Securities and
Exchange Commission which deals with certain "going private" transactions. Rule
13e-3 notes eight specific factors which normally are deemed important in
determining the fairness of a transaction and requires disclosure of the
consideration and the weight given to each such factor. The Special Committee
considered the applicability of each of these eight factors. "Current Market
Prices" and "Historical Market Prices" were considered as noted in (xiii) above.
"Net Book Value" was felt by the Special Committee to be generally more
applicable to a common stock transaction. However, the Special Committee did
consider the liquidation values of the Series F Preferred Stock in (v) above and
of the Series G Preferred Stock in (iii) above. The Special Committee felt that
these liquidation values were, in effect, the equivalent of the "Net Book Value"
per share. "Going Concern Value," was considered by the Special Committee
through a discounted cash flow analysis, which the Special Committee believes is
analogous to "Going Concern Value." This consideration was part of (iv) and (vi)
above and is discussed at page 23 of this Proxy Statement. "Liquidation Value"
was considered in (iii) and (v) above. "The Purchase Price Paid in Previous
Purchases" was considered in (viii) above. Any "Report, Opinion or Appraisal"
relevant to the Merger was considered under (iv) and (vi) above. Any other "Firm
Offers" with respect to the Series F and Series G Preferred Stock was deemed not
relevant since there were no such offers.
In reaching its determination that the Merger is fair to the holders of
shares of Series F Preferred Stock and Series G Preferred Stock not affiliated
with AFC and to RASP participants, the Special Committee considered solely the
interests of such holders and did not consider the interests of other parties or
of officers or directors of AFC. In view of the wide variety of factors
considered in connection with its review of the Merger, neither the Special
Committee nor the Board found it practical to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors considered
in reaching its respective determinations, except that the Special Committee and
the Board placed special emphasis on the nature of the consideration to be
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received in the Merger and on the matters set forth in items (iii), (iv), (vi)
and (vii). In reaching this decision, the Special Committee did not attempt to
analyze the specific tax effects on a particular shareholder. Because of the
appointment of the Special Committee and the engagement of Libra and special
counsel by the Special Committee, neither the Board nor the Special Committee
considered it necessary to retain an unaffiliated representative to act solely
on behalf of the holders of shares of Series F Preferred Stock or Series G
Preferred Stock for the purpose of negotiating the terms of the Merger
Agreement.
The Board of Directors of AFG did not make any independent analysis with
respect to the merger proposal, but is relying upon and accepting the
conclusions, determinations and findings of the Board of Directors of AFC and
the Special Committee, determined that the Merger is fair to the holders of
Series F and Series G Preferred Stock not affiliated with AFC.
OPINION OF SPECIAL COMMITTEE'S FINANCIAL ADVISOR
Libra Investments, Inc., the financial advisor to the Special Committee,
has delivered its opinion that the consideration to be issued in exchange for
shares of Series F and G Preferred Stock in the form of cash or Series J
Preferred Stock is in each case fair from a financial point of view to holders
of shares of Series F and Series G Preferred Stock.
VALUATION METHODOLOGIES
As described above under "Special Factors," at the meeting of the Special
Committee held on October 3, 1997, Libra stated its opinion that the
consideration to be received by holders of shares of Series F Preferred Stock
and shares of Series G Preferred Stock in the Merger was fair to the holders of
such shares from a financial point of view, regardless of whether such holders
received cash, shares of Series J Preferred Stock or a combination thereof.
The full text of Libra's written opinion, dated October 3, 1997, is
appended hereto as Exhibit B. Holders of Series F and Series G Preferred Stock
are urged to read the opinion in its entirety for the assumptions made, matters
considered and limits of the review undertaken by Libra. Libra's opinion is
directed only to the fairness of the consideration to be received and does not
constitute a recommendation to any holder of Preferred Stock as to whether such
shareholder should elect to receive cash, shares of Series J Preferred Stock, or
a combination thereof in the Merger.
In arriving at its opinion, Libra has reviewed the following: (i) the
Amended and Restated Agreement and Plan of Merger among American Financial
Corporation, AFC Acquisition Corp. and American Financial Group, Inc. dated
October 3, 1997, (ii) the Certificate of Designation for the Series F and Series
G Preferred Stock, (iii) the Company's audited financial statements for the
fiscal year ended December 31, 1996 and unaudited financial statements for the
six months ended June 30, 1997 as set forth in its public filings with the SEC
and (iv) pro forma financial statements prepared by AFC reflecting the effect of
the Merger on AFC's financial statements. Libra held discussions with certain
senior officers of AFC concerning the business, operations and prospects of AFC.
In arriving at its opinion relating to the Series G Preferred Stock, Libra noted
that the value of the Series G Preferred Stock, effectively, was fixed by its
certificate of designation since Series G shares are redeemable at a price of
$10.50 per share plus any accrued dividends. In arriving at its opinion relating
to the Series F Preferred Stock, Libra considered the recent trading prices of
the Series F Preferred Stock, the trading prices and yields of comparable
securities, the terms of recent tender offers for similar non-callable
securities, a discounted cash flow analysis and the potential trading price and
liquidity for the Series J Preferred Stock. Libra also conducted such other
financial studies, analyses and investigations as it deemed appropriate for the
purposes of its opinion.
In rendering its opinion, Libra has assumed and relied upon, without
independent verification, the accuracy, completeness and fairness of all
financial and other information which was publicly available or furnished to or
discussed with Libra by AFC. With respect to pro forma financial information,
forward looking statements and other information and data provided to, or
otherwise reviewed by or discussed with Libra, Libra has been advised by the
management of AFC that such pro forma information and other information and data
were reasonably prepared on a basis reflecting the best currently available
estimates and judgments of
22
<PAGE> 25
the management of AFC as to the future financial performance of AFC and Libra
assumed in arriving at its opinion that AFC will perform in accordance with such
estimates. Libra has not conducted any independent evaluation or appraisal of
the properties, assets, liabilities or reserves of AFC, nor has Libra conducted
any independent actuarial or physical inspections. Libra has also taken into
account its assessment of general economic, market and financial conditions and
its experience in similar transactions, as well as its experience as an
investment banker generally. Libra's opinion necessarily is based upon
regulatory, economic, market and other conditions as they exist on, and the
information made available to Libra as of, the date of its opinion.
In arriving at its opinion and making its presentation to the Special
Committee, Libra performed a variety of financial analyses, including those
summarized below. The summary set forth below includes the material financial
analyses discussed by Libra with the Special Committee, but does not purport to
be a complete description of the analyses performed by Libra in arriving at its
opinion. Arriving at a fairness opinion is a complex process that involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not necessarily susceptible to
partial analysis or summary description. Libra believes that its analyses must
be considered as a whole and that selecting portions of its analyses or portions
of the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying its
opinion. Additionally, estimates of the value of securities neither purport to
be appraisals nor necessarily reflect the prices at which securities may
actually be sold. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty.
The following is a summary of the analyses performed by Libra in connection
with the portion of its fairness opinion dealing with the Series F Preferred
Stock:
RECENT TRADING PRICES: Libra generated information relating to the trading
price of Series F Preferred Stock (i) for the period from September of 1992
until September of 1997 and (ii) weekly for the period from January 1, 1997 to
September 26, 1997 on a "strip price" basis (using the week-end closing price).
During the period in (i) the Series F traded from a low of $13.13 per share to a
high of $23.00 per share and at an average price of $18.16. This analysis was
performed without adjusting the trading prices for any impact of accrued
dividends. Libra advised the Special Committee that while the trading price of
the Series F Preferred Stock did not reflect directly an increase or decrease in
market price due to accrued dividends from time to time, the trading price did,
to some extent, reflect accrued dividends. Thus for the period in (ii) above,
Libra eliminated the accrued dividend from the trading price to create an
estimated "strip price". Based on this analysis the Series F Preferred Stock
traded from a low of $20.00 per share to a high of $22.00 per share. Libra
believes this is the more appropriate range to consider for purposes of its
recent trading prices analysis.
COMPARABLE SECURITY ANALYSIS: Libra analyzed the trading prices and
related yields for comparable preferred stock securities based on credit rating,
industry and size of issue. These comparable securities were grouped into three
general categories: (i) preferred stock securities of other subsidiaries of AFG,
(ii) preferred stock securities with a rating of Ba1 from Moody's Investor
Service and BBB- from Standard & Poor's (this is the implied-credit rating of
the Series F Preferred Stock based on the ratings assigned to AFC's debt
securities) and (iii) preferred stock securities with a rating of Baa3 from
Moody's Investor Service and BBB- from Standard & Poor's. The yields were
analyzed on a current yield basis as well as various yields to call. It is
important to note that all of these comparable securities have optional call
features (in most cases after an extended non-call period) whereas the Series F
Preferred Stock is non-call. Yields for the securities in (i) above ranged from
150 basis points to 240 basis points over the relevant treasury yield; they
ranged from 95 basis points to 290 basis points over the relevant treasury yield
for the securities in (ii) above and they ranged from 130 basis points to 180
basis points over the relevant treasury yield for the securities in (iii) above.
Libra believed the most appropriate range was 120 to 220 basis points over the
relevant treasury for this analysis. Libra selected the 30 year Treasury yield
of 6.29% as the most appropriate yield due to the non-call feature on the Series
F Preferred Stock. This analysis yielded a range of $21.20 to $24.00 per share.
TENDER OFFER ANALYSIS: Due to the non-call feature of the Series F
Preferred Stock, Libra analyzed various tender offers for securities during
their non-call period. Libra was unable to identify any tenders for non-call
perpetual preferred stocks with similar characteristics to the Series F and
Series G Preferred Stock
23
<PAGE> 26
and consequently analyzed tenders for debt securities in their non-call period.
American Premier Underwriters (a company wholly-owned by AFG and AFC; "APU")
completed a tender offer in January 1997 for three of its debt securities that
were in their non-call period. The pricing on these tender offers ranged from 67
basis points to 155 basis points over the relevant treasury security. AFC
announced a tender offer in August 1997 for its 9 3/4% debentures due 2004 at a
price of 50 basis points over the relevant treasury security. Other tender
offers ranged from 25 basis points to 175 basis points over the relevant
treasury security. Based on this analysis, Libra applied a range of 50 basis
points to 150 basis points over the 30 year treasury. This analysis yielded a
price range of $22.75 to $26.00 per share.
DISCOUNTED CASH FLOW: Libra performed a discounted cash flow analysis on
the Series F Preferred Stock by discounting, at various discount rates, the
anticipated cash flows from the Series F Preferred Stock including dividends and
liquidation preference. Libra selected a range of discount rates from 7.5% to
8.5% based on existing yields for comparable securities with comparable risk
profiles and assumed that the liquidation preference of $20.00 per share was
received in 30 years. This analysis yielded a price range of $21.00 to $23.50
per share.
Taken together, these four analyses yielded a range of value for the Series
F Preferred Stock of $20.00 to $26.00 per share.
Pursuant to an engagement letter dated June 2, 1997, AFC has agreed to pay
Libra $200,000, payable upon delivery of the Opinion (whether favorable or
unfavorable) to the Special Committee. AFC has also agreed to reimburse Libra
for its reasonable out of pocket expenses, including the fees and disbursements
of its counsel, and to indemnify Libra and certain related entities and persons
against certain liabilities in connection with its engagement, including certain
liabilities under the federal securities laws.
In the ordinary course of its business, Libra and its affiliates may trade
the debt and equity securities of AFC and AFG and certain of AFG's affiliates
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities. Libra has provided
financial advisory and investment banking services to AFC and its affiliates in
the past, for which services it has received customary fees.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., in its
capacity as tax counsel to AFC, the following are the material U.S. federal
income tax consequences relevant to holders of shares of Preferred Stock of AFC
whose shares of either Series F or Series G Preferred Stock would be exchanged
for shares of Series J Preferred Stock of AFC and/or cash (collectively, the
"Exchanging Shareholders"). This summary does not purport to be a complete
analysis of all potential tax considerations relevant to the Exchanging
Shareholders. The summary is limited solely to U.S. federal income tax matters.
The discussion is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, administrative rulings and pronouncements of the
Internal Revenue Service ("IRS"), and judicial decisions, all as of the date
hereof and all of which are subject to change at any time, possibly with
retroactive effect.
The summary of certain tax consequences to Exchanging Shareholders is
limited to those Exchanging Shareholders that hold shares of Preferred Stock in
AFC (and that will hold Series J Preferred Stock) as capital assets, for U.S.
federal income tax purposes. This summary does not purport to address U.S.
federal income tax consequences that may be applicable to particular categories
of shareholders, including banks, thrifts, real estate investment trusts,
regulated investment companies, insurance companies, tax-exempt persons, dealers
in securities or currencies, persons holding Preferred Stock as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, non-United States
persons, including foreign corporations and nonresident alien individuals, and
shareholders, partners or beneficiaries of holders of AFC Common Stock. This
summary does not address any tax considerations under the laws of any state,
locality, or foreign country.
THE UNITED STATES FEDERAL INCOME TAX SUMMARY SET FORTH BELOW IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN
EXCHANGING SHAREHOLDER'S PARTICULAR SITUATION. EXCHANGING
24
<PAGE> 27
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE EXCHANGE OF SHARES OF SERIES F OR G PREFERRED STOCK
OF AFC FOR SHARES OF AFC SERIES J PREFERRED STOCK, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
TAX TREATMENT OF THE MERGER
No gain or loss will be recognized by shareholders who exchange shares of
Series F or Series G Preferred Stock solely for shares of Series J Preferred
Stock pursuant to the Merger. However, any amount received as a dividend on
Series F or Series G Preferred Stock will be taxable as ordinary income. Taxable
gain (if any), but not loss, will be recognized by a shareholder, other than the
RASP, that receives cash in addition to Series J Preferred Stock, generally in
an amount equal to the lesser of (i) the excess of the cash plus the fair market
value of the stock received over the tax basis of the stock surrendered, and
(ii) the amount of cash received. Also, taxable gain (or loss) will generally be
recognized by a shareholder that receives solely cash. Exchanging Shareholders
should consult their own tax advisors with respect to the tax character (e.g.,
capital gain or ordinary income) of any taxable gain (or loss) recognized in
connection with the Merger. No gain or loss will be recognized as a result of
the Merger by AFC, AFC Acquisition Corp. or the RASP.
RECENTLY ENACTED LEGISLATION REQUIRES THE RECOGNITION OF GAIN IN
TRANSACTIONS INVOLVING THE RECEIPT OF CERTAIN TYPES OF PREFERRED STOCK IN
EXCHANGE FOR OTHER STOCK. THIS LEGISLATION GENERALLY IS EFFECTIVE FOR
TRANSACTIONS COMPLETED AFTER JUNE 8, 1997, BUT DOES NOT APPLY TO TRANSACTIONS
DESCRIBED IN A PUBLIC ANNOUNCEMENT MADE ON OR BEFORE JUNE 8, 1997. THE PROPOSED
EXCHANGE OF SERIES F AND SERIES G PREFERRED STOCK FOR CASH OR SHARES OF A NEW
ISSUE OF PREFERRED STOCK WAS DESCRIBED IN A PUBLIC ANNOUNCEMENT MADE ON APRIL
23, 1997.
TAX BASIS OF SERIES J PREFERRED STOCK
The tax basis of Series J Preferred Stock to an Exchanging Shareholder
receiving solely Series J Preferred Stock in the Merger will be the same as such
Exchanging Shareholder's tax basis in the Series F and/or Series G Preferred
Stock surrendered for such shares of Series J Preferred Stock. An Exchanging
Shareholder receiving both Series J Preferred Stock and cash in the Merger will
generally have a basis in Series J Preferred Stock equal to the basis in the
Series F and/or Series G Preferred Stock surrendered minus the cash received
plus the gain recognized in the merger.
HOLDING PERIOD OF SERIES J PREFERRED STOCK
An Exchanging Shareholder's holding period in Series J Preferred Stock
received in the exchange will include the period during which such Exchanging
Shareholder held the Series F or Series G Preferred Stock surrendered.
REDEMPTION PREMIUM
AFC is required to pay a redemption premium in the event that it redeems
the Series J Preferred Stock within the first two years during which redemption
is permitted. Under Section 305(c) of the Code and the applicable Treasury
Regulations, a redemption premium on preferred stock is deemed, under certain
circumstances, to be a constructive distribution (treated as a dividend to the
extent of the issuer's current and accumulated earnings and profits) which is
taxable to the holder at a constant yield (as if it was original issue discount
on a debt instrument) over the period, generally, during which the preferred
stock cannot be redeemed. In the case of stock that is redeemable at the
issuer's option, however, the constructive distribution rule is potentially
applicable only if, at the time of issue and based on all the facts and
circumstances, it is more likely than not that the issuer will exercise such
option. The Treasury Regulations provide a safe harbor under which an issuer's
right to redeem is not treated as more likely than not to occur if three
conditions are satisfied. AFC believes that each of these three conditions will
be satisfied, so that the redemption premium will not result in constructive
distribution treatment under Section 305.
25
<PAGE> 28
BACKUP WITHHOLDING ON CASH PAYMENTS
Federal income tax backup withholding at a rate of 31 percent on dividends
and proceeds from a sale, exchange, or redemption of Series J Preferred Stock
may apply unless the holder (i) is a corporation or comes within certain other
exempt categories (and, when required, demonstrates this fact) or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. The amount of any backup withholding from a payment to
a holder will be allowed as a credit against the holder's federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Financial Statements are
unaudited and have been derived from AFC's historical financial statements which
are incorporated herein by reference. The Pro Forma Condensed Consolidated
Balance Sheet at June 30, 1997, assumes the AFC Merger was consummated at that
date. The Pro Forma Condensed Consolidated Statements of Earnings for the six
months ended June 30, 1997, and the year ended December 31, 1996, assume the
Merger was consummated on January 1, 1996. These statements give effect to the
acquisition of all outstanding shares of AFC Series F and Series G Preferred
Stock in exchange for $235.8 million in cash and $70.4 million in a new issue of
AFC Series J Preferred Stock.
The pro forma statements of earnings do not necessarily reflect the results
of operations of AFC which would have actually resulted had the AFC Merger
occurred as of the dates indicated, nor should they be taken as indicative of
AFC's future results of operations. The Pro Forma Condensed Consolidated
Financial Statements should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in AFC's quarterly report on Form 10-Q for the six months ended June
30, 1997, and Annual Report on Form 10-K for the year ended December 31, 1996,
which are incorporated herein by reference.
26
<PAGE> 29
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and investments................................... $ 11,988.1 $(235.8)(a) $11,752.3
Recoverables from reinsurers and prepaid reinsurance
premiums............................................ 951.5 -- 951.5
Agents balances and premiums receivable................ 676.7 -- 676.7
Other assets........................................... 1,731.9 -- 1,731.9
---------- ------- ---------
$ 15,348.2 $(235.8) $15,112.4
========== ======= =========
LIABILITIES AND CAPITAL
Unpaid losses and loss adjustment expenses............. $ 4,086.0 $ -- $ 4,086.0
Unearned premiums...................................... 1,336.8 -- 1,336.8
Annuity benefits accumulated........................... 5,469.5 -- 5,469.5
Life, accident and health benefit reserves............. 589.5 -- 589.5
Payable to American Financial Group.................... 351.8 -- 351.8
Long-term debt......................................... 470.1 -- 470.1
Other liabilities...................................... 1,122.8 -- 1,122.8
---------- ------- ---------
Total liabilities.............................. 13,426.5 -- 13,426.5
Minority interest...................................... 476.4 -- 476.4
Preferred Stock........................................ 162.8 (92.4)(b) 70.4
Common Stock and capital surplus(c).................... 937.6 (31.2)(a) 906.4
Retained earnings...................................... 112.2 (112.2)(a) --
Net unrealized gains on marketable securities, net of
deferred income taxes............................... 232.7 -- 232.7
---------- ------- ---------
Total shareholders' equity..................... 1,445.3 (235.8) 1,209.5
---------- ------- ---------
$ 15,348.2 $(235.8) $15,112.4
========== ======= =========
</TABLE>
27
<PAGE> 30
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
INCOME
Insurance premiums....................................... $ 1,414.8 $ -- $1,414.8
Investment income........................................ 427.3 --(d) 427.3
Other income............................................. 91.1 -- 91.1
--------- ----- --------
1,933.2 -- 1,933.2
COSTS AND EXPENSES
Property and casualty insurance:
Losses and loss adjustment expenses................... 964.5 -- 964.5
Commissions and other underwriting expenses........... 377.6 -- 377.6
Annuity, life, accident and health benefits.............. 189.4 -- 189.4
Interest charges on borrowed money....................... 46.1 --(d) 46.1
Other operating and general expenses..................... 163.9 -- 163.9
--------- ----- --------
1,741.5 -- 1,741.5
--------- ----- --------
Earnings before income taxes and extraordinary items....... 191.7 -- 191.7
Provision for income taxes................................. 69.0 -- 69.0
--------- ----- --------
EARNINGS BEFORE EXTRAORDINARY ITEMS........................ $ 122.7 -- $ 122.7
========= ===== ========
Preferred dividend requirement............................. 11.7 (8.9)(e) 2.8
EARNINGS BEFORE EXTRAORDINARY ITEMS APPLICABLE TO COMMON
SHAREHOLDER.............................................. $ 111.0 $ 8.9 $ 119.9
========= ===== ========
</TABLE>
28
<PAGE> 31
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
INCOME
Insurance premiums....................................... $ 2,948.1 $ -- $2,948.1
Investment income........................................ 845.3 --(d) 845.3
Other income............................................. 320.4 -- 320.4
--------- ------- --------
4,113.8 -- 4,113.8
COSTS AND EXPENSES
Property and casualty insurance:
Losses and loss adjustment expenses................... 2,131.4 -- 2,131.4
Commissions and other underwriting expenses........... 793.8 -- 793.8
Annuity, life, accident and health benefits.............. 364.1 -- 364.1
Interest charges on borrowed money....................... 86.1 --(d) 86.1
Other operating and general expenses..................... 400.4 -- 400.4
--------- ------- --------
3,775.8 -- 3,775.8
--------- ------- --------
Earnings before income taxes and extraordinary items....... 338.0 -- 338.0
Provision for income taxes................................. 89.7 -- 89.7
--------- ------- --------
EARNINGS BEFORE EXTRAORDINARY ITEMS........................ $ 248.3 $ -- $ 248.3
========= ======= ========
Preferred dividend requirement............................. 24.9 (17.8)(e) 7.1
EARNINGS BEFORE EXTRAORDINARY ITEMS APPLICABLE TO COMMON
SHAREHOLDER.............................................. $ 223.4 $ 17.8 $ 241.2
========= ======= ========
</TABLE>
29
<PAGE> 32
AMERICAN FINANCIAL CORPORATION
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(a) Represents exchange of Series F Preferred Stock and Series G Preferred Stock
for cash and issuance of Series J Preferred Stock as follows:
<TABLE>
<S> <C>
11,900,725 shares of Series F Preferred Stock at $24.00 per share.......... $285.6
1,964,158 shares of Series G Preferred Stock at $10.50 per share........... 20.6
Less shares exchanged for Series J Preferred Stock......................... (70.4)
------
Total cash assumed used to retire Preferred Stock.......................... 235.8
Series J Preferred Stock assumed issued in exchange for Preferred Stock.... 70.4
------
306.2
Stated value of Series F and G Preferred Stock............................. 162.8
------
Charge to retained earnings ($112.2) and capital surplus ($31.2)........... $143.4
======
</TABLE>
(b) Represents excess of stated value of Series F Preferred Stock and Series G
Preferred Stock assumed retired ($162.8 million) over the estimated fair
value of Series J Preferred Stock assumed issued ($70.4 million).
(c) There were 45 million shares of AFC Common Stock outstanding at June 30,
1997, all of which were owned by AFG. As a result of the Merger, these
shares will be converted into 10,593,000 shares of AFC Common Stock. The
conversion of shares will have no effect on amounts stated in AFC's balance
sheet.
(d) In accordance with SEC guidelines, the pro forma Statements of Earnings do
not include adjustments for the cost of funds assumed used to finance the
AFC Merger. At a rate of 7%, interest expense would increase, or investment
income would decrease, annually by $16.5 million ($10.7 million after tax).
(e) Represents the net reduction in AFC's preferred dividend requirement from
the assumed retirement of the Series F and Series G Preferred Stock and
issuance of the Series J Preferred Stock.
30
<PAGE> 33
THE MERGER AGREEMENT
The following description of the Merger Agreement relates to the material
terms of the document and is, consequently, not complete and is qualified in its
entirety by reference to the Merger Agreement which is attached as Exhibit A as
a part of this Proxy Statement.
TERMS OF THE MERGER
AFC, AFC Acquisition Corp. (a wholly-owned subsidiary of AFC formed for
purposes of the Merger) and AFG entered into the Merger Agreement on July 11,
1997. The Merger Agreement was amended and restated on October 3, 1997. If the
Merger is approved by the required vote of AFC shareholders, AFC Acquisition
Corp. will merge with and into AFC with AFC being the surviving corporation. As
a result of the Merger, the 45 million shares of AFC Common Stock held by AFG
will be converted into 10,593,000 shares of AFC Common Stock and all of the
outstanding Preferred Stock of AFC, consisting of its Series F and Series G
Preferred Stock, will be converted into the right to receive cash, or at the
election of the holder, shares of a new Series J Preferred Stock.
In the Merger, each share of Series F Preferred Stock would be converted
into the right to receive merger consideration equal to the greater of (i)
$23.75 or (ii) a Fixed Spread Price which represents an amount which would
provide a current yield of 140 basis points (1.40%) over the yield on a
reference security (the 6 5/8% U.S. Treasury Bond due February 2027), plus
$0.75, plus accrued dividends from November 1, 1997. The Fixed Spread Price will
be determined using the yield of the Reference Security on the Meeting Date. The
closing yield on the Reference Security for the prior trading day may be found
in The Wall Street Journal and other major newspapers. In addition, shareholders
may from time to time obtain quotes of the yield on the Reference Security, the
Reference Yield and the resulting Fixed Spread Price for the Series F Preferred
Stock by contacting Securities Transfer Company toll-free at (800) 368-3417.
Each share of Series G Preferred Stock would be converted into the right to
receive merger consideration equal to $10.50, plus accrued dividends.
The aggregate merger consideration to be received by an AFC preferred
shareholder would be payable, at the holder's election, either in shares of a
new AFC Series J Preferred Stock (having a liquidation value of $25.00 per share
and paying an annual dividend of $2.00 per share), in cash, or in a combination
of the two. No fractional shares will be paid, but cash in lieu thereof will be
paid at the rate of $25.00 per share of Series J Preferred Stock.
The Fixed Spread Price for the Series F Preferred Stock would be calculated
in accordance with the following formula and example.
FORMULA
<TABLE>
<S> <C> <C>
Stated Annual Dividend
Fixed Spread Price = ----------------------- + $0.75
Reference Yield
</TABLE>
EXAMPLE
<TABLE>
<S> <C> <C> <C>
Stated Annual Dividend = $1.80
Reference Yield = 7.74% = 6.34% (yield on Reference Security on October 3, 1997) + 1.40%
$1.80
Fixed Spread Price = ----- + $0.75
7.74%
= $23.256 + $0.75
= $24.01
</TABLE>
If holders of Series F and Series G Preferred Stock elect to receive more
than $70.4 million in liquidation amount of Series J Preferred Shares, the
number elected for each holder may be reduced pro rata and replaced by the
designated cash payment of $25.00 per share of Series J Preferred Stock.
The Merger Agreement also provides for certain amendments to AFC's Articles
of Incorporation and Code of Regulations. As the Agreement of Merger will be
approved by the Company's shareholders, a separate vote by shareholders on the
Amendment to the Articles is not required.
A Letter of Transmittal providing for election is supplied with this Proxy
Statement to holders of AFC Common Stock and AFC Preferred Stock. The Letter of
Transmittal must be returned to AFC prior to the
31
<PAGE> 34
Meeting Date (December 2, 1997) or the shareholder will be deemed to have
elected to receive solely cash. After the Merger becomes effective, shareholders
will receive cash or shares of Series J Preferred Stock as they have determined
(subject to a pro rata reduction in the stock consideration, as described below)
only in exchange for their certificates for shares of Series F or Series G
Preferred Stock. Upon surrender of those certificates, those shareholders who
are receiving cash will receive that cash without interest. Persons who receive
Series J Preferred Stock will be treated as having been Series J shareholders
from the date of effectiveness of the Merger and will receive any dividends or
other distributions payable since the Effective Time of the Merger but also
without interest.
CONDITIONS TO THE MERGER
The respective obligations of AFC, AFG and AFC Acquisition to effect the
Merger are subject to the satisfaction, at or prior to the Effective Time, of
the following conditions:
(i) The Merger must have received the affirmative vote of two-thirds
of all outstanding shares of Common and Preferred Stock, voting as a group;
(ii) The Merger must have received the affirmative vote of two-thirds
of all outstanding shares of Series F and Series G Preferred Stock, voting
as a group;
(iii) There shall not be in effect any judgment, injunction, decree or
order issued by any court or any statute, rule or regulation enacted which
would prohibit consummation of the Merger;
(iv) AFC shall have received an opinion of its special tax counsel to
the effect that, among other things, no gain or loss will be recognized by
AFC shareholders who receive solely Series J Preferred Stock;
(v) AFC shall have received an opinion of its special tax counsel to
the effect that neither AFC nor AFC Acquisition Corp. will recognize gain
as a result of the Merger;
(vi) The liquidation value of all the Series J Preferred Stock issued,
$25.00 per share, will be at least $70.4 million.
In addition, the obligation of AFC to effect the Merger is subject to the
satisfaction (or waiver by AFC acting through its Special Committee) of the
following conditions:
(i) The Special Committee must have determined that the terms of the
merger are fair from a financial point of view to the holders of the Series
F and G Preferred Stock not affiliated with AFC; and
(ii) The Special Committee shall have received an opinion from Libra
Investments, Inc., dated the day of mailing of this Proxy Statement that
the terms of the merger are fair from a financial point of view to holders
of the Series F and Series G Preferred Stock not affiliated with AFC; and
(iii) The Special Committee shall have received from the
Administrative Plan Committee of the RASP a copy of Houlihan Lokey Howard &
Zukin's opinion with respect to the Merger Consideration for those
Preferred Shares held in the RASP.
AFC intends to resolicit shareholder proxies with respect to approval of
the Merger if any material condition is waived.
TERMINATION
The Merger Agreement may be terminated at any time before its effectiveness
by the mutual agreement of the parties. Either AFC or AFG may terminate it if
the other materially breaches any warranty, representation or covenant.
32
<PAGE> 35
EFFECTIVENESS OF THE MERGER
The Merger will become effective when a Certificate of Merger is filed with
the Secretary of State of Ohio.
OTHER PROVISIONS
The Merger Agreement also provides that the Articles of Incorporation and
Code of Regulations of AFC will be modified in certain respects to bring them
into line with current law, to provide the fullest indemnity permitted by Ohio
law to executive officers and directors, to eliminate the provisions relating to
Series F and Series G Preferred Stock, and to create the Series J Preferred
Stock.
The full text of the Merger Agreement, which includes the new Articles of
Incorporation and Code of Regulations, is appended hereto as Exhibit A.
DISSENTERS' RIGHTS
The following is a summary of the principal steps which a shareholder must
take to perfect dissenters' rights under Section 1701.85 of the Ohio Revised
Code (the "ORC"). The summary is qualified in its entirety by Section 1701.85 of
the ORC, a copy of which is appended hereto as Exhibit C. Failure to take any
one of the required steps may result in termination of the rights of the
shareholder under the ORC.
Exercise of dissenters' rights under the ORC may result in a judicial
determination that the "fair cash value" of the dissenting shareholder's shares
is higher or lower than the cash or the value of the Series J Preferred Stock to
be paid for each share of Series F and Series G Preferred Stock in the Merger.
Any shareholder of record whose shares are not voted for adoption of the
Merger Agreement may be entitled, if the Merger is consummated, to be paid the
"fair cash value" of such shares held of record on the record date. While
participants in the RASP possess the right to vote with respect to the Merger,
participants in the RASP are not record holders of shares, and therefore have no
rights of dissenting shareholders. To be entitled to such payment, such
shareholder must serve a written demand therefor upon AFC at One East Fourth
Street, Cincinnati, Ohio, 45202 on or before the tenth day after the shareholder
vote adopting the Merger Agreement and must otherwise comply with Section
1701.85 of the ORC. AFC will not inform shareholders of the expiration of the
ten-day period and therefore dissenting shareholders are advised to retain this
Proxy Statement. A vote for adoption of the Merger Agreement constitutes a
waiver of dissenters' rights. Submission of a properly executed proxy without a
designation of "against" or "abstain" will constitute a vote for the Merger
proposal. Failure to vote does not constitute a waiver of dissenters' rights.
The required written demand must specify the shareholder's name and address, the
number of shares and series of AFC Preferred Stock held of record on the record
date and the amount claimed as the "fair cash value" of the shares. Voting
against adoption of the Merger Agreement will not of itself constitute a written
demand as required by Section 1701.85 of the ORC.
The election to receive either cash or Series J Preferred Stock by a holder
of Preferred Stock, however, will not by itself prevent a holder from exercising
dissenters' rights.
If AFC requests, dissenting shareholders must submit their share
certificates to AFC within 15 days after the making of such request for
endorsement thereon by AFC of a legend that demand for appraisal has been made.
Such certificates will be returned promptly to the dissenting shareholder by
AFC. AFC intends to make such a request to dissenting shareholders.
If AFC and any dissenting shareholder cannot agree on the "fair cash value"
of the shares of AFC Preferred Stock, either may within three months after
service of the demand by the shareholder file a complaint in the Court of Common
Pleas of Hamilton County, Ohio, for a determination of the "fair cash value" of
such shareholder's AFC Preferred Stock. The Court, if it determines that the
dissenting shareholder is entitled to be paid the "fair cash value" of the AFC
Preferred Stock, may appoint one or more appraisers to determine its value. If
the Court approves the appraisers' report, judgment will be entered therefor,
and the costs of the proceeding, including reasonable compensation to the
appraisers, shall be assessed or apportioned
33
<PAGE> 36
as the Court considers equitable. "Fair cash value" is the amount which a
willing seller, under no compulsion to sell, would be willing to accept, and
which a willing buyer, under no compulsion to purchase, would be willing to pay,
but in no event in excess of the amount specified in the shareholder's demand.
"Fair cash value" would be determined as of the day prior to that on which the
shareholder vote is taken at the Special Meeting and would exclude any
appreciation or depreciation in market value of AFC Preferred Stock resulting
from the proposal of the Merger. AFC does not intend to file such a complaint.
Therefore, a dissenting shareholder must timely file such a complaint to protect
his rights to a judicial determination under the ORC.
The right of any dissenting shareholder to be paid the "fair cash value" of
the AFC Preferred Stock will terminate if: (i) for any reason the Merger,
although adopted by shareholder vote, does not become effective; (ii) the
dissenting shareholder fails to serve an appropriate timely written demand upon
AFC; (iii) the dissenting shareholder does not, upon request of AFC, timely
surrender certificates for an endorsement thereon of a legend to the effect that
demand for the "fair cash value" of such AFC Preferred Stock has been made; (iv)
the demand is withdrawn by the dissenting shareholder, with the consent of the
Board of Directors of AFC; (v) AFC and the dissenting shareholder shall not have
come to an agreement as to the "fair cash value" of the AFC Preferred Stock and
neither shall have filed a complaint in the Court as described above or (vi) the
dissenting shareholder has otherwise not complied with the requirements of
Section 1701.85 of the ORC.
From the time a dissenting shareholder's demand is made until the
termination of the right arising from that demand, all rights accruing from such
AFC Preferred Stock, including dividend and voting rights, shall be suspended.
If the right to receive "fair cash value" is terminated other than by purchase
of the dissenting shareholder's AFC Preferred Stock by AFC, all such
shareholder's rights with respect to AFC Preferred Stock shall be restored to
the shareholder; if the Merger has then been consummated, such rights shall
consist solely of the right to receive cash or, if set forth in a Letter of
Transmittal by such holder, shares of Series J Preferred Stock. No interest or
accrued dividends would be paid on the cash or Series J Preferred Stock.
EXPENSES
Estimated expenses of the transaction are as follows: legal and
accounting -- $275,000; fees and expenses of investment advisors -- $475,000;
filing fees -- $60,000; printing and mailing costs -- $100,000; and other
expenses -- $30,000. AFC estimates that the cash payments in the Merger will be
approximately $235.8 million, which will be provided through cash on hand and
bank borrowings under existing lines of credit.
DESCRIPTION OF PREFERRED STOCK
The following is a summary of the terms of the Preferred Stock. The
complete terms of the different series of Preferred Stock are contained in AFC's
Articles of Incorporation.
SERIES F PREFERRED STOCK
Dividends
Each share has a fixed annual dividend rate of $1.80 per share. The
dividend is payable, as declared, in semi-annual installments of $.90 per share
on the 3rd day of June and December in each year, to holders of record as of the
15th day of the preceding month. The right to payment of dividends is cumulative
to the extent that the dividends not paid must be paid in full before dividends
can be paid on Common Stock.
Preference
In the event of an arrearage in payment of dividends, AFC cannot purchase
any Common Stock or Preferred Stock or pay any dividends on Common Stock. On
liquidation, the holder of each share of Series F Preferred Stock would be
entitled to $20.00, plus declared or accumulated but unpaid dividends in
preference to distributions to holders of Common Stock.
34
<PAGE> 37
Voting Rights
Each share has one vote in all matters voted upon by shareholders and votes
with shares of Common Stock on such matters. In addition, holders of Series F
and G Preferred Stock, voting as a class, have the right to elect two directors
at any time that three semi-annual dividend installments are unpaid. Ohio law
requires that the rights of the holders may not be modified without a vote of
two-thirds of the Series F and Series G Preferred Stock outstanding, voting as a
class. Holders of Series F Preferred Stock have no rights to vote cumulatively
in the election of directors.
Optional Redemption
After December 3, 1996, shares of Series F Preferred Stock are not
redeemable.
Miscellaneous
Holders of Series F Preferred Stock have no preemptive or other rights to
subscribe for or purchase additional shares of any class and the Preferred Stock
is not convertible into any other security.
SERIES G PREFERRED STOCK
Dividends
Each share has a fixed annual dividend rate of $1.05 per share. The
dividend is payable, as declared, in semi-annual installments of $.525 per share
on the 3rd day of March and September in each year, to holders of record as of
the 15th day of the preceding month. The right to payment of dividends is
cumulative to the extent that the dividends not paid must be paid in full before
dividends can be paid on Common Stock.
Preference
In the event of an arrearage in payment of dividends, AFC cannot purchase
any Common Stock or Preferred Stock or pay any dividends on Common Stock. On
liquidation, the holder of each Preferred Share would be entitled to $10.50,
plus accrued dividends, in preference to distributions to holders of Common
Stock.
Voting Rights
Each share has one vote in all matters voted upon by shareholders and vote
with Common Shareholders on such matters. In addition, holders of Series F and G
Preferred Stock, voting as a class, have the right to elect two directors at any
time that three semi-annual dividend installments are unpaid. The rights of the
holders may not be modified without a vote of two-thirds of the Series F and
Series G Preferred Stock outstanding, voting as a class. Holders of Series G
Preferred Stock have no rights to vote cumulatively in the election of
directors.
Optional Redemption
AFC may, at its option, redeem all or any part of the Series G Preferred
Stock at a redemption price of $10.50 per share, plus accrued dividends.
Miscellaneous
Holders of shares of Series G Preferred Stock have no preemptive right to
subscribe for or purchase additional shares of any class and the Preferred Stock
is not convertible into any other security.
SERIES J PREFERRED STOCK
Dividends
Each share has a fixed annual dividend rate of $2.00 per share. The
dividend is payable, as declared, in semi-annual installments of $1.00 per share
on the first day of May and November in each year, to holders of
35
<PAGE> 38
record as of the 15th day of the preceding month. The right to payment of
dividends is cumulative to the extent that the dividends not paid must be paid
in full before dividends can be paid on Common Stock.
Preference
In the event of an arrearage in payment of dividends, AFC cannot purchase
any Common Stock or Preferred Stock or pay any dividends on Common Stock. On
liquidation, the holder of each Preferred Share would be entitled to $25.00,
plus accrued dividends, in preference to distributions to holders of Common
Stock.
Voting Rights
Each share is entitled to one vote on all matters voted upon by
shareholders and the Preferred Shares vote with the Common Shareholders on all
matters presented to shareholders. As a class, the Series J Preferred Stock will
possess at least 21% of the voting power of AFC, voting one vote per share. In
addition, if there is an arrearage in the payment of dividends for each of four
or more consecutive semi-annual payments, the number of directors of AFC shall
be increased by two and the holders of the Series J Preferred Stock shall have
the right, voting as a class, to elect directors to fill the newly created
directorships. The rights of the holders may not be modified without a vote of a
majority of the outstanding shares of Series J Preferred Stock outstanding.
Holders of Series J Preferred Stock have no rights to vote cumulatively in the
election of directors.
Optional Redemption
AFC may, at its option, call for redemption all or part of the Series J
Preferred Stock on the following terms:
<TABLE>
<CAPTION>
WHEN REDEEMED REDEMPTION PRICE
- ----------------------------------------------------- ---------------------------------------
<S> <C>
During the ninth year after the Effective Date $25.75 per share plus accrued dividends
During the tenth year after the Effective Date $25.375 per share plus accrued
dividends
After the tenth anniversary of the Effective Date $25.00 per share plus accrued dividends
</TABLE>
MISCELLANEOUS
Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class and the Preferred Stock is not
convertible into any other security.
36
<PAGE> 39
MANAGEMENT
The directors, nominees for director and executive officers of the Company
are:
<TABLE>
<CAPTION>
DIRECTOR OR
EXECUTIVE
AGE* POSITION SINCE
---- ------------------------------------------ -----------
<S> <C> <C> <C>
Carl H. Lindner.......... 78 Chairman of the Board and Chief Executive 1959
Officer
Carl H. Lindner III...... 43 Co-President and a Director 1980
S. Craig Lindner......... 42 Co-President and a Director 1979
Keith E. Lindner......... 37 Co-President and a Director 1981
James E. Evans........... 51 Senior Vice President, General Counsel and 1976
a Director
Alfred W. Martinelli..... 69 Director 1997
Gregory C. Thomas........ 49 Director 1997
William W. Verity........ 38 Director 1997
Theodore H. Emmerich..... 71 Nominee for Director 1995
Thomas M. Hunt........... 74 Nominee for Director 1995
William R. Martin........ 68 Nominee for Director 1995
Sandra W. Heimann........ 54 Vice President 1984
Robert C. Lintz.......... 63 Vice President 1979
Thomas E. Mischell....... 49 Senior Vice President -- Taxes 1985
Fred J. Runk............. 54 Senior Vice President and Treasurer 1978
</TABLE>
- ---------------
*As of June 30, 1997
CARL H. LINDNER (Chairman of the Board and Chief Executive Officer; Chairman of
the Executive Committee) Mr. Lindner has been Chairman of the Board and Chief
Executive Officer of the AFG for more than five years. During the past five
years, Mr. Lindner has also been Chairman of the Board and Chief Executive
Officer of AFC and American Premier Underwriters, Inc. ("APU"), diversified
financial services companies which became subsidiaries of AFG as a result of
Mergers occurring in April 1995. He is Chairman of the Board of Directors of
American Annuity Group, Inc. ("AAG"), American Financial Enterprises, Inc.
("AFEI") and Chiquita Brands International, Inc. ("Chiquita"). Mr. Lindner is
the father of Carl H. Lindner III, S. Craig Lindner and Keith E. Lindner.
CARL H. LINDNER III (Co-President; Member of the Executive Committee) Mr.
Lindner was President of AFG from February 1992 until he became Co-President in
March 1996. For more than five years, Mr. Lindner has been President of Great
American Insurance Company ("Great American") and has been principally
responsible for AFG's property and casualty insurance operations. Mr. Lindner is
a director of AFG, AFC and APU.
S. CRAIG LINDNER (Co-President; Member of the Executive Committee) Since March
1993, Mr. Lindner has been President of AAG, an 81%-owned subsidiary of AFC that
markets tax-deferred annuities principally to employees of educational
institutions. Mr. Lindner is also President of American Money Management
Corporation ("AMMC"), a subsidiary of AFC which provides investment services for
AFG and its affiliated companies. For over five years prior thereto, he had
served as Senior Executive Vice President of AMMC. Mr. Lindner is a director of
AFG, AAG, AFC and APU.
KEITH E. LINDNER (Co-President; Member of the Executive Committee) In March
1997, Mr. Lindner was named Vice Chairman of the Board of Directors of Chiquita,
a worldwide marketer and producer of bananas and other food products in which
AFG has a 43% ownership interest. For more than five years prior to that
37
<PAGE> 40
time, Mr. Lindner had been President and Chief Operating Officer and a director
of Chiquita. Mr. Lindner is also a director of AFG, AFC and APU.
JAMES E. EVANS (Senior Vice President and General Counsel) Mr. Evans is Senior
Vice President and General Counsel of AFG. He has served as Vice President and
General Counsel of AFC for more than five years. Mr. Evans is a director of AFG,
AFC, AFEI and APU.
THEODORE H. EMMERICH Until his retirement in 1986, Mr. Emmerich was managing
partner of the Cincinnati office of the independent accounting firm of Ernst &
Whinney. He is also a director of AFG, APU, Carillon Fund, Inc., Carillon
Investment Trust, Gradison Custodial Trust, Gradison-McDonald Municipal
Custodial Trust, Gradison-McDonald Cash Reserve Trust and Summit Investment
Trust. From 1995 until April 1997, Mr. Emmerich was also a director of AFC.
THOMAS M. HUNT During the past five years, Mr. Hunt has been Chairman of the
Board of Hunt Petroleum Corporation, an oil and gas production company. He is a
director of AFG and APU. From 1995 until April 1997, Mr. Hunt was also a
director of AFC.
WILLIAM R. MARTIN During the past five years, Mr. Martin has been Chairman of
the Board (since 1993) and President and Chief Executive Officer (until 1993) of
MB Computing, Inc., a computer software and services company. Mr. Martin is a
director of AAG, AFG and APU. From 1995 until April 1997, Mr. Martin was also a
director of AFC.
WILLIAM W. VERITY Mr. Verity has served as Chairman and Chief Executive Officer
of ENCOR Holdings, Inc. ("ENCOR") since 1991. ENCOR develops and manufactures
plastic molded components through two subsidiaries, ENCOR Technologies, Inc. and
Compression, Inc. ENCOR is a subsidiary of Leaver Corp., an investment holding
company, of which Mr. Verity also serves as Chairman. He served as President of
Leaver Corp. from 1987 through 1993. He is also a director of Chiquita.
GREGORY C. THOMAS, for more than five years prior to his retirement in September
1996, was Executive Vice President and Chief Financial Officer of Citicasters
Inc. (formerly Great American Communications Company).
ALFRED W. MARTINELLI was President and Chief Executive Officer of AFG's
predecessor from 1982 until 1987. He is Chairman of the Board and Chief
Executive Officer of Buckeye Management Company, which is the sole general
partner of Buckeye Partners, L.P., a limited partnership principally engaged in
pipeline transportation of refined petroleum products, and is a consultant to
the Company. He is also a director of AAG.
SANDRA W. HEIMANN has served as a Vice President of AFC for more than five
years.
ROBERT C. LINTZ has served as a Vice President of AFC for more than five years.
THOMAS E. MISCHELL is a Senior Vice President -- Taxes of AFG. He has served as
a Vice President of AFC for more than five years.
FRED J. RUNK is Senior Vice President and Treasurer of AFG. He has served as
Vice President and Treasurer of AFC for more than five years.
In December 1993, Great American Communications Company, which subsequently
changed its name to Citicasters Inc. and has since been sold by AFC, completed a
comprehensive financial restructuring that included a prepackaged plan of
reorganization filed in November of that year under Chapter 11 of the Bankruptcy
Code. Carl H. Lindner, Fred J. Runk, Thomas E. Mischell and Gregory C. Thomas
had been executive officers of that company within two years before its
bankruptcy reorganization.
38
<PAGE> 41
PRINCIPAL SHAREHOLDERS
The following shareholders are the only persons known to own beneficially
5% or more of AFC's outstanding voting securities as of September 30, 1997:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
OF OF
NAME AND ADDRESS OF VOTING SECURITIES VOTING
BENEFICIAL OWNER HELD SECURITIES
- --------------------------------- ----------------- --------
<S> <C> <C>
American Financial Group, Inc.(a) 45,000,000(b) 76.4%
One East Fourth Street
Cincinnati, Ohio 45202
AFG RASP 9,208,852(c) 15.6%
One East Fourth Street
Cincinnati, Ohio 45202
</TABLE>
- ---------------
(a) Carl H. Lindner, Carl H. Lindner III, S. Craig Lindner, Keith E. Lindner,
members of their family and trusts for their benefit (collectively the
"Lindner Family") are the beneficial owners of approximately 45% of AFG's
common stock. AFG and the Lindner Family may be deemed to be controlling
persons of AFC.
(b) Shares of Common Stock.
(c) Consists of 7,531,752 shares of Series F Preferred and 1,677,100 shares of
Series G Preferred. This represented approximately 63% and 85% of these
Series, respectively, at September 30, 1997.
SECURITIES OWNERSHIP
The voting equity securities of AFC consist of its Common Stock and
Preferred Stock. All of AFC's Common Stock is owned by AFG. The beneficial
ownership of AFC Preferred Stock and the equity securities of AFC's parent and
subsidiaries by each director, nominee for director, the executive officers
named in the Summary Compensation Table and by all directors and executive
officers as a group as of June 1, 1997 is set forth below. Mr. Martin and all
directors and executive officers as a group beneficially owned 40,483 and 62,220
shares of AFC Preferred Stock, respectively. Messrs. Emmerich, Evans, Hunt, S.C.
Lindner, Martin, Martinelli and all directors and executive officers as a group
beneficially owned 1,561; 19,638; 382; 69,308; 1; and 161,163 shares,
respectively, of the common stock of AFG. Mr. Evans and all directors and
executive officers as a group beneficially own 116,000 and 414,209 (3%) shares,
respectively, of the common stock of AFEI. Beneficial ownership of shares of
common stock of AFG was as follows: Carl H. Lindner -- 11,635,872 (20.2%); Carl
H. Lindner III -- 5,119,929 (8.8%); S. Craig Lindner -- 4,887,322 (8.5%); Keith
E. Lindner -- 4,880,231 (8.5%); Mr. Evans -- 78,525; Mr. Emmerich -- 17,899; Mr.
Hunt -- 17,371; Mr. Martin -- 41,280; and all directors and executive officers
as a group -- 27,123,583 (47%). In addition, Messrs. Emmerich, C. H. Lindner, K.
E. Lindner and all directors and executive officers as a group beneficially
owned 1,000; 43,134; 11,887; and 246,844 shares, respectively, of the common
stock of Chiquita.
COMPENSATION
The following table summarizes the aggregate cash compensation for 1996,
1995 and 1994 of the Chairman of the Board and Chief Executive Officer and the
four other most highly compensated executive officers during 1996 (such five
executive officers being herein referred to as the "Named Executive Officers").
Such compensation includes amounts paid by AFG, AFC, APU and their subsidiaries
and certain affiliates during 1995 and 1996.
39
<PAGE> 42
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS
NAME AND COMPENSATION GRANTED ALL OTHER
PRINCIPAL POSITION (a) YEAR SALARY (b) BONUS (c) (d) (# OF SHARES) (e) COMPENSATION (f)
- ------------------------ ---- ---------- --------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Lindner 1996 $ 913,000 $ 900,000 $156,000 -- $ 70,900
Chairman of the Board 1995 1,364,000 900,000 254,000 -- 169,000
and Chief Executive 1994 1,129,000 2,050,000 143,000 -- 108,000
Officer
Carl H. Lindner III 1996 $ 917,000 $ 900,000 $174,000 -- $ 39,500
Co-President 1995 1,076,000 900,000 223,000 -- 103,000
1994 1,011,000 800,000 13,000 -- 83,000
S. Craig Lindner 1996 $ 917,000 $ 900,000 $137,000 -- $ 32,000
Co-President 1995 1,121,000 900,000 142,000 $ 388,181 83,000
1994 1,570,000 1,350,000 106,000 -- 95,000
Keith E. Lindner 1996 $ 917,000 $ 900,000 $ 28,000 -- $ 31,000
Co-President 1995 935,000 900,000 -- $ 400,000 30,000
James E. Evans 1996 $ 917,000 $ 639,000 $ 14,000 -- $ 49,500
Senior Vice President 1995 948,000 850,000 10,000 $ 150,000 58,000
and General Counsel 1994 1,019,000 850,000 1,000 -- 50,000
</TABLE>
- ---------------
(a) Keith E. Lindner became an executive officer of AFC in April 1995.
(b) This column includes $200,000 (1996) and $269,000 (1995) with respect to
Carl H. Lindner and $900,000 (1996) and $935,000 (1995) with respect to
Keith E. Lindner, representing salary paid by Chiquita.
(c) Approximately one-quarter of the 1996 bonus for each individual was paid in
shares of AFG Common Stock.
(d) This column includes amounts for (i) personal homeowners and automobile
insurance coverage and (ii) the use of corporate aircraft and value of
automobiles as follows:
<TABLE>
<CAPTION>
AIRCRAFT &
NAME YEAR INSURANCE AUTOMOBILE
- -------------------------------------------------------------- ---- --------- ----------
<S> <C> <C> <C>
Carl H. Lindner............................................... 1996 $16,000 $ 140,000
1995 18,000 236,000
1994 10,000 133,000
Keith E. Lindner.............................................. 1996 $12,000 $ 16,000
1995 -- --
Carl H. Lindner III........................................... 1996 $19,000 $ 155,000
1995 17,000 206,000
1994 13,000 --
S. Craig Lindner.............................................. 1996 $23,000 $ 114,000
1995 20,000 122,000
1994 -- 106,000
James E. Evans................................................ 1996 -- $ 14,000
1995 -- 10,000
1994 -- 1,000
</TABLE>
40
<PAGE> 43
- ---------------
(e) Represents options granted by AFG. In addition, payments of $5,950,000 were
made to each of K. E. Lindner, C. H. Lindner III and S. C. Lindner, and a
payment of $1,480,000 was made to J. E. Evans, upon termination of the AFC
Book Value Incentive Plan in March 1995.
(f) Consists of company contributions or allocations under the (i) defined
contribution retirement plans and (ii) employee savings plan in which the
following Named Executive Officers participate (and related accruals for
their benefit under a benefit equalization plan which generally makes up
certain reductions caused by Internal Revenue Code limitations in
contributions to certain retirement plans), directors' fees and company paid
group life insurance, as follows:
<TABLE>
<CAPTION>
AFC AUXILIARY SAVINGS AND DIRECTORS'
NAME YEAR ESORP RETIREMENT PLANS FEES TERM LIFE
- ------------------------------------------ ---- ------------- ---------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Carl H. Lindner........................... 1996 $21,400 $ 12,000 $ 14,500 $23,000
1995 30,000 74,000 25,000 40,000
1994 30,000 49,000 -- 38,000
Carl H. Lindner III....................... 1996 $30,000 $ 7,500 -- $ 2,000
1995 30,000 67,000 -- 6,000
1994 30,000 51,000 -- 2,000
S. Craig Lindner.......................... 1996 $30,000 -- -- $ 2,000
1995 30,000 -- $ 51,000 2,000
1994 30,000 -- 64,000 1,000
Keith E. Lindner.......................... 1996 $30,000 -- -- $ 1,000
1995 30,000 -- -- --
James E. Evans............................ 1996 $30,000 -- $ 14,500 $ 5,000
1995 30,000 -- 25,000 3,000
1994 30,000 -- 19,000 1,000
</TABLE>
OPTION INFORMATION
No AFC stock options were granted to, or exercised by, the Named Executive
Officers during 1996. Certain executive officers of AFC also serve as executive
officers of AFG and certain AFC subsidiaries and may be granted employee stock
options by such companies. The table set forth below discloses the number and
value of unexercised affiliated company stock options held by the Named
Executive Officers at December 31, 1996.
AGGREGATED OPTION EXERCISES IN 1996 AND 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED ON AT YEAR END AT YEAR END(a)
EXERCISE --------------------------- ---------------------------
NAME COMPANY (# OF SHARES) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carl H. Lindner AFG -- 31,818 20,000 $ 500,429 $ 191,200
S. Craig Lindner AFG -- 89,455 310,545 1,246,981 4,279,310
Keith E. Lindner AFG -- 80,000 320,000 1,102,400 4,409,600
Carl H. Lindner III AFG -- 400,000 0 5,511,883 0
James E. Evans AFG -- 31,000 120,000 237,070 922,800
AFEI(b) -- 115,000 0 812,500 0
</TABLE>
- ---------------
(a) The value of unexercised in-the-money options is calculated based on the
closing market price on December 29, 1996 for AFG's Common Stock on the New
York Stock Exchange of $37.75 per share and AFEI's common stock on the
Pacific Stock Exchange of $28.25 per share.
(b) American Financial Enterprises, Inc., an 83%-owned subsidiary of AFG at
December 31, 1996.
41
<PAGE> 44
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors of each of AFG, AFC
and APU consists of three directors, none of whom is an employee of any of these
companies or any of their subsidiaries. The Committee's functions include
reviewing and making recommendations to the Board of Directors with respect to
the compensation of the senior executive officers of AFG, AFC and APU, as
defined from time to time by the Board of each such company. The term senior
executive offers includes the Chairman of the Board and Chief Executive Officer
(the "CEO"), the Co-Presidents and each other executive officer whose annual
base salary exceeds $500,000. The Compensation Committee has the exclusive
authority to grant stock options under AFG's Stock Option Plan to employees of
AFC and its subsidiaries, including senior executive officers.
As the senior executive officers of AFG, AFC and APU are the same, the
following discussion has been taken from AFG's proxy statement for use in its
1997 Annual Meeting of Shareholders. References to the "Company" below refer to
AFG, unless the context requires otherwise.
The Company's compensation policy for all executive officers of the Company
has three principal components: annual base salary, annual incentive bonuses and
stock option grants.
Before decisions were made regarding 1996 compensation for senior
executives, the Committee first had discussions with senior executives to
solicit their thoughts regarding compensation. Based in part on such discussions
as well as the Company's financial results for the preceding year, the Committee
deliberated and formed its recommendations, and presented its determinations
regarding salary and bonus to the full Board for its review and approval. The
compensation decisions discussed in this report conformed with recommendations
made by the Committee, the CEO, and the Co-Presidents.
Annual Base Salaries. The Committee approved annual base salaries and
salary increases for senior executive officers that we appropriate, in the
Committee's subjective judgment, for their respective positions and levels of
responsibilities. In December 1995, the Committee approved the 1996 salaries of
the CEO, the Co-Presidents and certain other senior executive officers, noting
that such salaries would be virtually the same in 1996 and 1995.
Annual Bonuses. In 1996 the Committee developed an annual bonus system for
the CEO, the Co-Presidents and the senior executive officers that would make a
substantial portion of their total compensation dependent on the Company's
performance, including achievement of pre-established earnings per share
targets.
The annual bonus system for 1996 made 60% of each participant's annual
bonus dependent on the Company attaining certain earnings per share targets and
40% on the Company's overall performance, as determined by the Committee. A
significant aspect of the 1996 annual bonus system is discussed below. The
Committee believes that payment of a substantial portion of annual bonuses in
Common Stock align further the interests of the Company's senior executives with
those of its shareholders. The Committee also selected the executives whose 1996
bonus would be subject to this system, including the CEO, the Co-Presidents and
the Senior Vice Presidents. The Committee recommended to the Board the earnings
per share targets that were the measure for the greater part of such bonus
payments.
The Board adopted all of the Committee's recommendations with respect to
the annual bonus system for 1996. Under the 1996 annual bonus system, the bonus
target amount for the CEO and each of the Co-Presidents was $925,000, with 0% to
150% of $555,000 (60% of $925,000) to be paid depending on the Company's
earnings per share for 1996 (as determined pursuant to the Committee's annual
bonus system guidelines) and 0% to 150% of $370,000 (40% of $925,000) to be paid
based on the Company's performance, as determined by the Committee. The
Company's earnings per share target was adjusted pursuant to the annual bonus
system to negate the effects of certain extraordinary and non-recurring items
including the loss on repayment of subsidiary debt, strengthening of asbestos
and other environmental reserves, and Chiquita losses on repayment of debt and
non-recurring items. The Committee determined that under the 1996 annual bonus
system the CEO and the Co-Presidents would receive $520,000 attributable to the
earnings per share component.
42
<PAGE> 45
The Committee then evaluated the Company's relative overall performance for
1996. The factors considered by the Committee, with no relative weight being
given to any specific performance factor, were the Company's return on equity of
14.3%, the increase in per share price of the Company's Common Stock relative to
comparable companies, the upgrade of the debt ratings of certain Company
subsidiaries to investment grade, improvement in the debt-to-total capital ratio
from 33.5% to 20.2%, investment portfolio performance including realized gains
and losses, and other operating criteria. The Committee concluded that the CEO
and the Co-Presidents should receive $389,000 each under the Company performance
component of the 1996 annual bonus payment. The Board adopted all of the
Committee's recommendations with respect to the determination of amounts paid
under the annual bonus system for 1996.
The annual base salary and bonuses received by the CEO and the
Co-Presidents from the Company and its affiliates are virtually identical
because the Committee views them as working as a management team whose skills
and areas of expertise complement each other. In 1993, Congress enacted a $1
million ceiling on tax-deductible remuneration paid after January 1, 1994 to the
first most highly compensated executive officers of a publicly held corporation.
The limitation does not apply to remuneration payable solely on account of the
attainment of one or more performance goals pursuant to a plan approved by the
compensation committee of outside directors and by shareholders. The Company
does not anticipate that this limitation will apply to the compensation paid to
any of its employees in 1996.
Stock Option Grants. Stock options represent an important part of the
Company's performance-based compensation system. The Committee believes that
Company shareholders' interests are well served by aligning the Company's senior
executives' interests with those of its shareholders through the grant of stock
options. Options under the Company's Stock Option Plan are granted at exercise
prices equal to the fair market value of Common Stock on the date of grant and
vest at the rate of 20% per year. The Committee believes that these features
provide an optionee with substantial incentive to maximize the Company's long-
term success. No options were granted to the CEO, the Co-Presidents or any
senior executives of the Company in 1996.
Other Information. In March 1997, the Committee discussed the 1997
salaries, bonuses and stock option grants of the CEO, the Co-Presidents and
certain other senior executives. The Committee approved the 1997 salaries for
such persons which included an increase of $50,000 for the CEO and each of the
Co-Presidents and the same bonus target amounts for them for 1997 and 1996. At
the same time, the Committee granted each of the Co-Presidents options to
purchase 50,000 shares.
Members of the Compensation Committee
for 1996:
William R. Martin, Chairman
Theodore H. Emmerich
Thomas H. Hunt
PERFORMANCE GRAPH
No performance graph is included as AFC's Common Stock is not publicly
traded.
DIRECTORS' COMPENSATION
The Company's Board of Directors receives no annual compensation from the
Company. However, they are paid as directors of AFG. In addition, each member of
the AFC Special Committee will receive a fee of $35,000 and $1,000 per Special
Committee meeting, and the Chairman of the Special Committee will receive an
additional $15,000 for such service.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Company's Board of Directors held four meetings in 1996. The Company's
Board of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. There is no Nominating Committee.
43
<PAGE> 46
Executive Committee. The Executive Committee consists of Carl H. Lindner
(Chairman), Carl H. Lindner III, S. Craig Lindner and Keith E. Lindner. The
Committee's functions include analyzing the future development of the business
affairs and operations of the Company, including further expansion of businesses
in which the Company is engaged and acquisitions and dispositions of businesses.
With certain exceptions, the Executive Committee is generally authorized to
exercise the powers of the Board of Directors between meetings of the Board of
Directors. The Executive Committee consulted among themselves informally many
times throughout the year and took action in writing on 24 occasions in 1996.
Audit Committee. During 1996, the Audit Committee consisted of Messrs.
Emmerich (Chairman) and Martin. Neither was an officer or employee of the
Company or any of its subsidiaries during the year. The Committee's functions
include recommending to the Board of Directors the engagement of independent
accounting firms to audit the financial statements of the Company and its
subsidiaries and to provide other audit-related services and recommending the
terms of such firms' engagements; reviewing the engagement of independent
accounting firms to provide non-audit services, including the terms of their
engagements; reviewing the adequacy and implementation of the Company's internal
audit function; reviewing the policies, procedures and principles of the
management of the Company for purposes of conformity to the standards required
by the Foreign Corrupt Practices Act; establishing procedures designed to
provide and encourage timely access to the Committee by the independent
accounting firm engaged by the Company, its internal audit department and its
principal financial officers; and conducting such investigations relating to the
Company's financial affairs as the Committee or the Board of Directors deems
desirable. The Committee's functions also include supervising, reviewing and
reporting to the Board of Directors on the performance of management committees
of the Company responsible for the administration and the management of the
investments of the employee benefits plans of the Company and its subsidiaries.
The Audit Committee met three times and took action in writing on two occasions
in 1996.
Compensation Committee. The Compensation Committee consisted of Messrs.
Martin (Chairman), Emmerich and Hunt in 1996. The functions of the Compensation
Committee are discussed under "Compensation -- Compensation Committee Report."
The Compensation Committee took action in writing on one occasion in 1996.
CERTAIN TRANSACTIONS
Various business has been transacted between AFC and certain affiliates,
including rentals, investment management services, insurance and sales of
assets. The financial terms (costs, interest rates, collateral, risks of
collectibility and other) of these transactions are comparable to those
prevailing at the time of consummation which would apply to unrelated parties,
unless noted otherwise.
AFC provides security guard and surveillance services at the main office of
Provident Financial Group, Inc. ("Provident") for which Provident paid $100,000
in 1996. Members of the Lindner family are the majority owners of Provident.
Provident leases its main banking and corporate office from AFC. Provident paid
rent under the leases of $2,131,000 in 1996.
At the close of business on December 31, 1996, AFG contributed to AFC 81%
of the Common Stock of APU. As APU was an affiliate of AFC prior to December 31,
1996, certain transactions between AFC and APU are disclosed below.
Asset Transactions
Following the April 1995 mergers creating AFG, AFC and APU agreed that APU
would make loans available to AFC of up to $675 million under a line of credit.
Loans under the credit line bear interest at 11-5/8% and convert to a four-year
term loan in March 2005. On December 27, 1996, APU paid a dividend to AFG which
consisted of a $675 million note receivable from AFC, plus approximately $18.1
million of accrued interest, representing amounts outstanding at that date under
the credit line with AFC.
44
<PAGE> 47
During 1996, two AFC subsidiaries entered into separate revolving credit
agreements with APU and Pennsylvania Company ("Pennco"), a wholly-owned
subsidiary of APU, under which aggregate loans are available to those
subsidiaries of up to $170 million. Loans made under the credit lines bear
interest at floating rates based on prime or LIBOR. At December 31, 1996,
aggregate amounts outstanding under the credit lines totaled $96.5 million (plus
$1.0 million of accrued interest).
During 1996, subsidiaries of AFC sold marketable securities to APU for $627
million. During the fourth quarter of 1996, APU sold (i) marketable securities
to subsidiaries of AFC for aggregate proceeds of $566 million; and (ii) certain
coal properties and other real estate to AFC in return for promissory notes
totaling $54.1 million. The notes each bear interest at prime plus 2%. Notes
totaling $40.0 million are due on December 23, 1997 and the remaining notes are
due on December 31, 1997.
In 1988, APU's workers' compensation insurance operations ("Republic
Indemnity") entered into a reinsurance contract with Great American Insurance
Company ("GAI"), a subsidiary of AFC, to cover the aggregate losses on workers'
compensation coverage for the accident years 1980-1987, inclusive. The contract
provides for coverage by GAI of net aggregate paid losses of Republic Indemnity
in excess of a certain threshold, up to a maximum of $35.1 million. Cumulative
paid losses at December 31, 1996 pertaining to claims during this period
exceeded the threshold amount by approximately $3 million. In addition, GAI has
agreed to reimburse Republic Indemnity for its loss adjustment expenses
pertaining to this period up to a maximum of $4.9 million.
Operations (Income/Expense) Transactions
The respective investment portfolios of APU's non-standard automobile and
workers' compensation insurance subsidiaries have been managed by AMMC for an
aggregate annual management fee equal to 0.20% of that portion of the aggregate
value of such companies' investment portfolios which is less than $500 million
and 0.10% of that portion which exceeds $500 million. The aggregate market value
at December 31, 1996 of APU's insurance company portfolios managed by AMMC was
approximately $1.8 billion. AMMC has also managed APU's fixed income investment
portfolio for an annual fee equal to .025% of the aggregate value of the
portfolio, subject to a $125,000 annual minimum fee. The aggregate market value
of the fixed income investment portfolio at December 31, 1996 was approximately
$7 million. Each of the foregoing fees has been payable in quarterly
installments based on asset values measured as of the end of the preceding
calendar quarter. AMMC was paid an aggregate of approximately $2.4 million under
the foregoing agreements for 1996.
GAI and its insurance company subsidiaries paid APU's insurance
subsidiaries an aggregate of approximately $68.8 million in premiums under
various reinsurance arrangements in 1996. APU's subsidiaries paid GAI insurance
companies an aggregate of approximately $73,000 in premiums for 1996 for general
liability and other insurance coverage, and paid approximately $183,000 in
commissions for 1996 to insurance agencies owned by GAI.
AFC leases office space in Cincinnati, Ohio to APU. Rental amounts paid to
AFC under the lease for 1996, including APU's proportionate share of operating
and tax expense increases, were approximately $400,000.
In 1996, APU utilized the services of Provident Travel Corporation (an AFC
subsidiary sold in 1997) to facilitate business travel by its employees on terms
and conditions customarily offered by commercial travel agencies in the area.
During 1996, APU purchased approximately $258,000 of travel related services
through Provident Travel. This amount includes the portion ultimately paid to
the airlines or other service providers.
INDEPENDENT AUDITORS
The accounting firm of Ernst & Young LLP served as the Company's
independent auditors for the fiscal year ended December 31, 1996.
Representatives of that firm will attend the Meeting and will be given the
opportunity to comment, if they so desire, and to respond to appropriate
questions that may be asked by
45
<PAGE> 48
shareholders. No auditor has yet been selected for the current year because it
is generally the practice of the Company not to select independent auditors
prior to the annual shareholders meeting.
SHAREHOLDER PROPOSALS
If a shareholder desires to have a proposal included in the proxy statement
for the 1998 annual shareholders meeting, such proposal must be received by the
Company's Secretary at his office by December 31, 1997 in order to be considered
for inclusion.
AVAILABLE INFORMATION
AFC is subject to the informational requirements of the Securities Exchange
Act of 1934 and files reports, proxy statements and other information with the
Securities and Exchange Commission. These items may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, and at Seven World Trade Center, Suite 1300, New York, New York.
Copies can also be obtained, at prescribed rates, by mail from the Public
Reference Section of the Commission at its Washington, D.C. address set forth
above. In addition, copies can be obtained and inspected at the offices of The
Pacific Exchange, Inc., 301 Pine Street, San Francisco, California 94104, on
which AFC's Series F and G Preferred Stock is listed. AFC is an electronic
filer, and the Commission maintains a Web site (located at http://www.sec.gov)
that contains these reports and proxy statements.
Statements contained in this Proxy Statement or in any document
incorporated by reference in this Proxy Statement as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT INCORPORATES BY REFERENCE CERTAIN DOCUMENTS RELATING
TO AFC WHICH ARE NOT INCLUDED HEREIN. THESE DOCUMENTS, OTHER THAN THE EXHIBITS
TO SUCH DOCUMENTS INCORPORATED BY REFERENCE, ARE AVAILABLE UPON REQUEST FROM
FRED J. RUNK, SENIOR VICE PRESIDENT AND TREASURER, AMERICAN FINANCIAL
CORPORATION, ONE EAST FOURTH STREET, CINCINNATI, OHIO 45202. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE
BUSINESS DAYS PRIOR TO THE MEETING.
AFC's Annual Report on Form 10-K for 1996, as amended on April 30, 1997 and
on October 29, 1997, its Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1997 and its Current Report on Form 8-K dated July 11,
1997, which have been filed by AFC (File No. 1-7361) with the Commission, are
incorporated by reference in this Proxy Statement. All documents filed by AFC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement and prior to the Annual Meeting shall be deemed to
be incorporated by reference in this Proxy Statement from the date of filing.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF
PROXIES AND THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY AFC.
46
<PAGE> 49
REQUESTS FOR FORM 10-K
The Company will send, upon written request, without charge, a copy of the
Company's most current Annual Report on Form 10-K to any shareholder who writes
to Fred J. Runk, Senior Vice President and Treasurer, American Financial
Corporation, One East Fourth Street, Cincinnati, Ohio 45202.
By order of the Board of Directors,
James C. Kennedy
Secretary
Cincinnati, Ohio
October 31, 1997
47
<PAGE> 50
The information contained on pages F-1 to F-32 has been taken from AFC's
Annual Report on Form 10-K for the year ended December 31, 1996, as amended.
Certain defined terms and cross references in these pages refer to other terms,
pages and sections in the Form 10-K, which has been incorporated herein by
reference.
BUSINESS
American Financial Corporation is a holding company which, through its
subsidiaries, is engaged primarily in specialty and multi-line property and
casualty insurance businesses and in the sale of tax-deferred annuities. AFC's
property and casualty operations originated in 1872 and are the seventeenth
largest property and casualty group in the United States based on 1995 statutory
net premiums written of $3.1 billion.
SELECTED FINANCIAL DATA
The following table sets forth certain data for the periods indicated
(dollars in millions).
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Total Revenues........................... $ 4,114 $ 3,628 $ 2,104 $ 2,721 $ 3,929
Earnings (Loss) From Continuing
Operations Before Income Taxes......... 338 252 44 262 (145)
Earnings (Loss) From:
Continuing Operations.................. 248 195 19 225 (162)
Extraordinary Items.................... (26) 2 (17) (5) --
Cumulative Effect of Accounting
Change.............................. -- -- -- -- 85
Net Earnings (Loss).................... 222 197 2 220 (77)
Ratio of Earnings to Fixed Charges (a)... 4.99 3.10 1.69 2.62 2.15
Ratio of Earnings to Fixed Charges and
Preferred Dividends (a)................ 3.96 2.60 1.40 2.26 1.94
BALANCE SHEET DATA:
Total Assets............................. $14,999 $14,851 $10,593 $10,077 $12,389
Long-term Debt:
Parent Company......................... 173 311 490 572 557
American Premier (parent only)......... 167 337 -- -- 650
Great American Holding Corp............ -- -- 359 199 299
Other Subsidiaries..................... 178 234 258 283 503
Minority Interest........................ 307 327 106 109 813
Capital Subject to Mandatory
Redemption............................. -- -- 3 49 28
Other Capital............................ 1,277 1,248 396 537 280
</TABLE>
- ---------------
(a) Fixed charges are computed on a "total enterprise" basis. For purposes of
calculating the ratios, "earnings" have been computed by adding to pretax
earnings (excluding discontinued operations) the fixed charges and the
minority interest in earnings of subsidiaries having fixed charges and
deducting (adding) the undistributed equity in earnings (losses) of
investees. Fixed charges include interest (excluding interest on annuity
benefits), amortization of debt discount and expense, preferred dividend and
distribution requirements of subsidiaries and a portion of rental expense
deemed to be representative of the interest factor.
F-1
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Following is a discussion and analysis of the financial statements and
other statistical data that management believes will enhance the understanding
of AFC's financial condition and results of operations. This discussion should
be read in conjunction with the financial statements.
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 cash needs for administrative expenses, 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 many of its businesses are
financial in nature, AFC does not prepare its balance sheet using a current-
noncurrent format. Consequently, certain traditional ratios and financial
analysis tests are not meaningful.
As discussed in Note A to the financial statements, at the close of
business on December 31, 1996, AFG contributed to AFC 81% of the common stock of
American Premier. Since AFC and American Premier are under the common control of
AFG, the acquisition of American Premier has been recorded by AFC at AFG's
historical cost in a manner similar to a pooling of interests. Accordingly, the
historical consolidated financial statements of AFC for periods subsequent to
the April 3, 1995 Mergers have been restated to include the accounts of American
Premier.
LIQUIDITY AND CAPITAL RESOURCES
RATIOS From the date of the Mergers to the end of 1996, approximately $1.1
billion of AFC and American Premier debt was retired or replaced with lower cost
debt, resulting in a net reduction of aggregate debt by approximately 75%.
Consequently, AFC's debt to total capital ratio at the parent holding company
level improved from approximately 60% at the date of the Mergers to just over
20% at December 31, 1996. These debt reductions and replacements will also
reduce AFC's interest expense by over $100 million annually.
AFC's ratio of earnings to fixed charges, excluding and including preferred
dividends, on a total enterprise basis for the three years ended December 31,
1996, are shown below.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earnings to fixed charges.............................................. 4.99 3.10 1.69
Earnings to fixed charges plus preferred dividends..................... 3.96 2.60 1.40
</TABLE>
The National Association of Insurance Commissioners' model law for risk
based capital ("RBC") applies to both life and property and casualty companies.
RBC formulas determine the amount of capital that an insurance company needs to
ensure that it has an acceptable expectation of not becoming financially
impaired. At December 31, 1996, the capital ratios of all AFC insurance
companies substantially exceeded the RBC requirements (the lowest capital ratio
of any AFC subsidiary was 2.8 times its authorized control level RBC; weighted
average of all AFC subsidiaries was 5.0 times).
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.
Prior to the Mergers, American Premier had substantial cash and short-term
investments at the parent company level. Subsequent to the Mergers, AFC and two
of its subsidiaries entered into separate credit agreements with American
Premier. Funds borrowed from American Premier under these agreements were used
for debt retirements, capital contributions to subsidiaries, and other corporate
purposes. In December 1996, American Premier paid a dividend to AFG in the form
of a $675 million note receivable from AFC
F-2
<PAGE> 52
under the credit agreement plus $18.7 million of related accrued interest. AFG
then contributed $450 million of the note (without accrued interest) to the
capital of AFC. At December 31, 1996, the remaining $225 million is included in
payable to AFG on AFC's balance sheet.
Subsequent to the Mergers, American Premier entered into a credit agreement
with AFG under which American Premier and AFG will make loans of up to $200
million available to each other. Principal amounts payable to AFG under the
credit agreement totaled $175.5 million and $84.0 million at December 31, 1996
and 1995, respectively.
In September and October of 1996, three nationally recognized rating
agencies issued or upgraded ratings on AFC, American Premier and AAG public
debentures. All of the AFC debentures and the AAG senior debentures are now
rated investment grade; the APU and AAG subordinated debentures are rated
investment grade by two of the agencies. Generally, the upgrades reflect the
expectation that consolidated debt to total capital will remain conservative and
that coverage ratios will benefit from higher subsidiary earnings and a lower
level of fixed charges at AFG's subsidiaries.
Bank credit lines at several subsidiary holding companies provide ample
liquidity and 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, a maximum of
$510 million is available under these bank facilities, $45 million of which was
borrowed at December 31, 1996.
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, AFC believes
it may be prudent and advisable to borrow up to $200 million of bank debt in the
normal course in order to retire public or privately held fixed rate obligations
over the next year or two.
Funds to meet the parent company's expenditures have been provided from a
variety of sources within the holding company, from subsidiaries and directly
from outside sources, as detailed in the following table (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
CASH PROVIDED BY:
Operations:
Dividends from subsidiaries................................. $105.3 $165.3 $ 17.3
Dividends from AFG.......................................... 8.7 4.3 --
Tax allocation payments from subsidiaries................... 102.5 73.9 65.9
Interest and dividends from others.......................... 1.4 2.8 4.4
Federal income tax refunds.................................. 0.1 9.5 0.3
------ ------ ------
From operations........................................... 218.0 255.8 87.9
Other transactions:
Net advances from affiliates................................ 45.7 162.0 135.8
Sales of assets to non-affiliates........................... 59.3 3.1 15.0
Sales of assets to affiliates............................... 1.7 43.7 --
Sales of affiliates......................................... 44.0 -- 6.0
Issuance of Preferred Stock................................. 16.8 -- --
Exercise of stock options................................... -- 8.7 --
Additional borrowings....................................... 0.1 98.8 0.7
Other....................................................... 13.9 8.6 10.7
------ ------ ------
Total cash provided.................................... 399.5 580.7 256.1
CASH UTILIZED FOR:
Operations:
Interest payments........................................... 22.7 47.9 61.8
Dividend payments........................................... 24.9 25.4 29.5
</TABLE>
F-3
<PAGE> 53
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal income tax payments................................. 31.0 23.0 28.6
BVIP payments............................................... -- 48.9 0.7
Other holding company costs................................. 30.4 29.3 35.3
------ ------ ------
For operations............................................ 109.0 174.5 155.9
Other transactions:
Purchases of affiliates and other investments............... 33.6 149.4 --
Principal payments on debt.................................. 177.9 252.9 89.9
Repurchases of Preferred Stock.............................. 36.9 2.9 6.7
Other....................................................... 0.7 0.8 1.4
------ ------ ------
Total cash utilized.................................... 358.1 580.5 253.9
------ ------ ------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS.................. 41.4 0.2 2.2
Cash and short-term investments at beginning of period........... 5.1 4.9 2.7
------ ------ ------
Cash and short-term investments at end of period................. $ 46.5 $ 5.1 $ 4.9
====== ====== ======
</TABLE>
Payments of dividends by AFC's insurance subsidiaries are subject to
various laws and regulations which limit the amount of dividends that can be
paid without regulatory approval. Under Ohio law, the maximum amount of
dividends which may be paid without (i) prior approval or (ii) expiration of a
30 day waiting period without disapproval is the greater of statutory net income
or 10% of policyholders' surplus as of the preceding December 31, but only to
the extent of earned surplus as of the preceding December 31. The maximum amount
of dividends payable (without prior approval) to AFC in 1997 from its insurance
subsidiaries is approximately $225 million.
For statutory accounting purposes, equity securities are generally carried
at market value. At December 31, 1996, AFC's insurance subsidiaries owned
publicly traded equity securities with a market value of $1.3 billion, including
equity securities of AFC affiliates (including subsidiaries) of $1.0 billion.
Since significant amounts of these are concentrated in a relatively small number
of companies, decreases in the market prices could adversely affect the
insurance group's capital, potentially impacting the amount of dividends
available or necessitating a capital contribution. Conversely, increases in the
market prices could have a favorable impact on the group's dividend-paying
capability.
Under tax allocation agreements with AFC, its 80%-owned U.S. subsidiaries
generally compute tax provisions as if filing separate returns based on book
taxable income computed in accordance with generally accepted accounting
principles. The resulting provision (or credit) is currently payable to (or
receivable from) AFC. Beginning with the 1997 federal tax return, American
Premier and its 80%-owned U.S. subsidiaries will join AFC's consolidated return.
UNCERTAINTIES Two lawsuits were filed in 1994 against American Premier by
USX Corporation ("USX") and a former USX subsidiary. The lawsuits seek
contribution from American Premier for all or a portion of a $600 million final
antitrust judgment entered against a USX subsidiary in 1994. The lawsuits argue
that USX's liability for that judgment is attributable to the alleged activities
of American Premier's predecessor in an unlawful antitrust conspiracy among
certain railroad companies. American Premier and its outside counsel believe
that American Premier has substantial defenses and should not suffer a material
loss as a result of this litigation.
Great American's liability for unpaid losses and loss adjustment expenses
includes amounts for various liability coverages related to environmental and
hazardous product claims. The insurance industry typically includes only claims
relating to polluted waste sites and asbestos in defining environmental
exposures, whereas Great American extends this definition to include claims
relating to breast implants, repetitive stress on keyboards, DES (a drug used in
pregnancies years ago alleged to cause cancer and birth defects), and other
latent injuries. At December 31, 1996, Great American had recorded $343 million
(net of reinsurance recoverables of $163 million) for environmental pollution
and hazardous products claims on policies written
F-4
<PAGE> 54
many years ago where, in most cases, coverage was never intended. Due to
inconsistent court decisions on many coverage issues and the difficulty in
determining standards acceptable for cleaning up pollution sites, significant
uncertainties exist which are not likely to be resolved in the near future.
AFC's subsidiaries are parties in a number of proceedings relating to
former operations. See Note N to the financial statements.
While the results of all such uncertainties cannot be predicted, based upon
its knowledge of the facts, circumstances and applicable laws, management
believes that sufficient reserves have been provided.
INVESTMENTS Approximately 70% of AFC's consolidated assets are invested in
marketable securities. A diverse portfolio of bonds and redeemable preferred
stocks accounts for 95% of these securities. AFC attempts to optimize investment
income while building the value of its portfolio, placing emphasis upon
long-term performance. AFC's goal is to maximize return on an ongoing basis
rather than focusing on short-term performance.
Fixed income investment funds are generally invested in securities with
short-term and intermediate-term maturities with an objective of optimizing
total return while allowing flexibility to react to changes in market
conditions. At December 31, 1996, the average life of AFC's bonds and redeemable
preferred stocks was just over 6 years.
Approximately 93% 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 December 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.
Investments in mortgage-backed securities ("MBSs") represented
approximately one-fourth of AFC's bonds and redeemable preferred stocks at
December 31, 1996. AFC invests primarily in MBSs which have a reduced risk of
prepayment. Interest only (I/Os), principal only (P/Os) and other "high risk"
MBSs represented approximately two percent of AFC's total mortgage-backed
securities portfolio. In addition, the majority of MBSs held by AFC were
purchased at a discount. Management believes that the structure and discounted
nature of the MBSs will minimize the effect of prepayments on earnings over the
anticipated life of the MBSs portfolio. More than 90% of AFC's MBSs are rated
"AAA" with substantially all being of investment grade quality. The majority are
collateralized by GNMA, FNMA and FHLMC single-family residential pass-through
certificates. The market in which these securities trade is highly liquid. Aside
from interest rate risk, AFC does not believe a material risk (relative to
earnings and liquidity) is inherent in holding such investments.
Because most income of the property and casualty insurance subsidiaries
have been sheltered from income taxes through 1996, non-taxable municipal bonds
represent only a small portion (approximately 1%) of the portfolio.
AFC's equity securities are concentrated in a relatively limited number of
major positions. This approach allows management to more closely monitor the
companies and industries in which they operate.
The realization of capital gains, primarily through sales of equity
securities, was an integral part of AFC's investment program. Individual
securities are sold creating gains or losses as market opportunities exist.
Pretax capital gains recognized upon disposition of securities, including
investees, during the past five years have been: 1996 -- $166 million; 1995 -$84
million; 1994 -- $50 million; 1993 -- $165 million and 1992 -- $104 million. At
December 31, 1996, the net unrealized gain on AFC's bonds and redeemable
preferred stocks was $169 million; the net unrealized gain on equity securities
was $185 million.
F-5
<PAGE> 55
RESULTS OF OPERATIONS -- THREE YEARS ENDED DECEMBER 31, 1996
GENERAL As previously noted, financial statements for periods subsequent
to April 1995 have been restated to include the accounts of American Premier.
AFC had accounted for American Premier as an investee from the second quarter of
1993 through the first quarter of 1995. As a result of these changes, current
year income statement components are not comparable to prior years.
Pretax earnings before extraordinary items were $338 million in 1996, $252
million in 1995 and $44 million in 1994.
Results for 1996 include $203 million in pretax gains primarily on the
sales of Citicasters and Buckeye Management Company, reduced by a charge of
$80 million resulting from a decision to strengthen insurance reserves
relating to asbestos and other environmental matters ("A&E").
In addition to the earnings contribution resulting from the Mergers,
results for 1995 include $84 million in pretax gains on the sale of
securities.
Results for 1994 include AFC's share ($28 million) of American
Premier's loss on the sale of General Cable securities, Great American's
$19 million charge relating to a rate rollback liability in California and
a $35 million charge related to payments under AFC's Book Value Incentive
Plan.
PROPERTY AND CASUALTY INSURANCE -- UNDERWRITING AFC manages and operates
its property and casualty business as three major sectors. The nonstandard
automobile insurance companies (the "NSA Group") insure risks not typically
accepted for standard automobile coverage because of the applicant's driving
record, type of vehicle, age or other criteria. 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
California workers' compensation, 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.
To understand the overall profitability of particular lines, timing of
claims payments and the related impact of investment income must be considered.
Certain "short-tail" lines of business (primarily property coverages) have quick
loss payouts which reduce the time funds are held, thereby limiting investment
income earned thereon. On the other hand, "long-tail" lines of business
(primarily liability coverages and workers' compensation) have payouts that are
either structured over many years or take many years to settle, thereby
significantly increasing investment income earned on related premiums received.
Underwriting profitability is measured by the combined ratio which is a sum
of the ratios of underwriting losses, loss adjustment expenses, underwriting
expenses and policyholder dividends 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.
For certain lines of business and products where the credibility of the
range of loss projections is less certain (primarily the various specialty lines
listed above), management believes that it is prudent and appropriate to use
conservative assumptions until such time as the data, experience and projections
have more credibility, as evidenced by data volume, consistency and maturity of
the data. While this practice mitigates the risk of adverse development on this
business, it does not eliminate it.
While AFC desires and seeks to earn an underwriting profit on all of its
business, it is not always possible to do so. As a result, AFC attempts to
expand in the most profitable areas and control growth or even reduce its
involvement in the least profitable ones.
Comparisons made in the following discussion of AFC's insurance operations
include American Premier's insurance operations even though they were not
consolidated in the financial statements prior to the Mergers.
F-6
<PAGE> 56
Net written premiums and combined ratios for AFC's property and casualty
insurance subsidiaries were as follows (dollars in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
NET WRITTEN PREMIUMS (GAAP)
NSA Group........................................................ $1,135 $1,277 $1,186
Specialty Operations............................................. 993 1,097 1,250
Commercial and Personal Operations............................... 660 717 683
Other Lines...................................................... -- 1 5
------ ------ ------
$2,788 $3,092 $3,124
====== ====== ======
COMBINED RATIOS (GAAP)
NSA Group........................................................ 99.9% 105.2% 100.0%
Specialty Operations............................................. 84.1 94.8 97.2
Commercial and Personal Operations............................... 110.6 99.1 98.9
Aggregate (including A&E and other lines)........................ 102.9 101.2 99.4
</TABLE>
Operating results for 1996 were adversely impacted by two unusual items:
(i) higher than normal catastrophe losses including approximately $30 million in
losses due to Hurricane Fran and (ii) the strengthening of A&E reserves
(exposures for which AFC may be liable under general liability policies written
years ago). A standard insurance measure used in analyzing the adequacy of A&E
reserves is the "survival ratio" (reserves divided by three-year average annual
paid losses). Due in part to the greater uncertainties inherent in estimating
A&E claims, management evaluates its survival ratio in relation to those
published for the industry. Based primarily on industry survival ratios
published in mid-1996, AFC increased A&E reserves of its discontinued insurance
lines by $120 million by recording a third quarter, non-cash pretax charge of
$80 million and reallocating $40 million or approximately 2% of reserves from
its Specialty Operations. Reserves for unpaid losses and loss adjustment
expenses of the Specialty Lines were approximately $2.1 billion, $2.2 billion
and $1.5 billion at December 31, 1996, 1995 and 1994, respectively. Following a
detailed analysis of overall reserves, the reallocation was made based on
available data, experience and projections. A&E reserves at December 31, 1996,
were approximately $343 million, an amount equal to approximately 10.5 times the
preceding three years' average claim payments.
In 1996, underwriting results of AFC's insurance operations significantly
outperformed the industry average for the eleventh consecutive year. AFC's
insurance operations have been able to exceed the industry's results by focusing
on highly specialized niche products, supplemented by commercial lines coverages
and personal automobile products.
NSA GROUP The NSA Group has implemented premium rate increases in various
states over the last three years. The higher rate levels along with competitive
pressures in the nonstandard automobile insurance industry resulted in an 11%
decline in net written premiums in 1996 and adversely impacted premium growth
during 1995. These rate increases contributed to an improvement, however, in the
combined ratio for 1996. The increase in the combined ratio for 1995 was due
primarily to inadequate rate levels in certain markets and weather-related
losses (principally from hailstorms in Texas) which more than offset a reduction
in underwriting expenses due largely to cost control measures.
SPECIALTY OPERATIONS Net written premiums for the specialty operations
declined 9% and 12% during 1996 and 1995, respectively, due primarily to a
decrease in the California workers' compensation business in both years and
withdrawal from an unprofitable pool at the end of 1995, partially offset by
increases in other specialty niche lines. The decline in California workers'
compensation premiums reflects (i) extremely competitive pricing in the
marketplace as a result of the repeal of the California workers' compensation
minimum rate law effective January 1, 1995 and (ii) the impact of mandatory
premium rate reductions which took effect a year earlier.
F-7
<PAGE> 57
Excluding the impact of the decreases in the California workers'
compensation business and the withdrawal from the voluntary pool, specialty net
written premiums increased $16 million (2%) in 1996. The increase is due in part
to increases in specialized coverages for fidelity and surety bonds, executive
liability, animal mortality and collateral protection exposures.
The improvement in the combined ratio of the Specialty Lines for 1996
includes 4.1 percentage points attributable to a reallocation of loss reserves
in connection with the strengthening of A&E reserves. Further improvement is
attributable to (i) improved results in certain niche businesses, (ii)
reductions in loss, loss adjustment expense and policyholder dividend reserves
prompted by the fundamental changes in the California workers' compensation
market and actuarial evaluations, and (iii) losses in 1995 from participation in
the voluntary pool.
The combined ratio of the specialty operations in 1995 reflects improved
results experienced in the crop hail and farm lines as well as coverages of U.S.
operations of Japanese companies. The 1995 combined ratio also includes losses
resulting from participation in a voluntary pool from which AFC withdrew.
COMMERCIAL AND PERSONAL OPERATIONS Net written premiums for the commercial
and personal operations decreased 8% in 1996. The decrease is due primarily to
significant reductions in homeowners coverages in certain states as well as
competitive pricing conditions in the commercial casualty market, partially
offset by increases in writings of workers' compensation coverages. The
profitability of the commercial and personal operations declined in 1996 due
primarily to deterioration in personal lines operations as well as weather-
related losses, including losses from Hurricane Fran.
Net written premiums increased 5% in 1995 due primarily to increased
writing of workers' compensation and commercial umbrella insurance. The
profitability of both of these lines improved in 1995. These profitable results
were offset by unfavorable results in the personal lines operations from
weather-related losses, start-up costs related to a direct-to-consumer operation
and deteriorating automobile loss experience.
INVESTMENT INCOME Changes in investment income reflect fluctuations in
market rates and changes in average invested assets.
1996 COMPARED TO 1995 Investment income increased $96 million (13%) from
1995; adjusting for the effects of the Mergers retroactively to January 1, 1995,
investment income increased $55 million (7%) from 1995 due primarily to an
increase in the average amount of investments held.
1995 COMPARED TO 1994 AFC's investment income increased $50 million (9%)
from 1994 due to an increase in the average amount of investments held. For the
period following the Mergers, investment income includes $117 million
attributable to American Premier.
INVESTEE CORPORATIONS Equity in net earnings of investee corporations
(companies in which AFC owns a significant portion of the voting stock)
represents AFC's proportionate share of the investees' earnings and losses.
1996 COMPARED TO 1995 AFC's equity in net earnings of investee
corporations decreased $32 million compared to 1995. Chiquita reported a
decrease in operating income in 1996 of $92 million. Chiquita recorded
writedowns and costs of $70 million resulting from (i) industry-wide flooding in
Costa Rica, Guatemala and Honduras, (ii) certain strategic undertakings designed
to achieve further long-term reductions in the delivered product cost of
Chiquita bananas and (iii) certain claims relating to prior European Union quota
restructuring actions. Aside from the effects described above, operating income
from remaining core operations improved in 1996 primarily as a result of lower
delivered product cost for bananas. This improvement in core operating results
substantially offset the elimination of earnings from Chiquita's Costa Rican
edible oils operations which were sold in December 1995.
1995 COMPARED TO 1994 AFC's equity in net earnings of investee
corporations increased $32 million in 1995. Chiquita reported a $105 million
improvement in operating income primarily due to net gains from the
F-8
<PAGE> 58
sale of non-core assets, higher banana prices outside the European Union, the
favorable effect of foreign exchange rates on European sales, and earnings
improvements from other food products.
GAINS ON SALES OF INVESTEES The gains on sales of investees in 1996
represent pretax gains, before $6.5 million of minority interest, on the sale of
Citicasters common stock. The gains on sales of investees in 1994 represent
pretax gains on the sale of General Cable common stock.
GAINS ON SALES OF SUBSIDIARIES The gains on sales of subsidiaries in 1996
include a pretax gain of $33.9 million on the sale of Buckeye and the settlement
of litigation related to a subsidiary sold in 1993.
ANNUITY BENEFITS For GAAP financial reporting purposes, annuity receipts
are accounted for as interest-bearing deposits ("annuity benefits accumulated")
rather than as revenues. Under these contracts, policyholders' funds are
credited with interest on a tax-deferred basis until withdrawn by the
policyholder. Annuity benefits represent primarily interest related to annuity
policyholders' funds held. The rate at which GALIC credits interest on annuity
policyholders' funds is subject to change based on management's judgment of
market conditions.
Annuity receipts totaled approximately $570 million in 1996, $460 million
in 1995 and $440 million in 1994. Annuity receipts have increased over the last
few years due to sales of newly introduced single premium products and, in 1995,
the development of new distribution channels.
Annuity benefits increased $17 million (7%) in 1996 and $13 million (5%) in
1995 primarily due to an increase in average annuity benefits accumulated.
INTEREST ON BORROWED MONEY Changes in interest expense result from
fluctuations in market rates as well as changes in borrowings. AFC has generally
financed its borrowings on a long-term basis which has resulted in higher
current costs.
1996 COMPARED TO 1995 Interest expense for 1996 was $86.1 million and
interest expense for 1995, adjusted to reflect the effect of the Mergers
retroactively to January 1, 1995, was $116.3 million. The $30 million (26%)
decrease reflects significant debt retirements during both 1995 and 1996.
1995 COMPARED TO 1994 Excluding $29 million attributable to American
Premier, interest expense decreased by $22 million (19%) due primarily to
repayments of borrowings by AFC and certain subsidiaries and the AFC debt
exchange in 1994.
OTHER OPERATING AND GENERAL EXPENSES Operating and general expenses in
1994 included a charge of $18 million for allowance for bad debts and a charge
of $19 million for a California insurance reform measure.
INCOME TAXES See Note L to the Financial Statements for an analysis of
items affecting AFC's effective tax rate.
F-9
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
AMERICAN FINANCIAL CORPORATION
We have audited the accompanying consolidated balance sheets of American
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, changes in capital accounts, and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Financial Corporation and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
March 25, 1997
F-10
<PAGE> 60
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and short-term investments............................ $ 404,831 $ 448,201
Investments:
Bonds and redeemable preferred stocks:
Held to maturity -- at amortized cost
(market -- $3,528,100 and $3,729,300)............... 3,491,126 3,588,943
Available for sale -- at market (amortized
cost -- $6,362,597 and $5,648,060).................. 6,494,597 5,949,260
Other stocks -- principally at market (cost -- $142,364
and $136,944)......................................... 327,664 252,244
Investment in investee corporations...................... 199,651 306,545
Loans receivable......................................... 568,055 630,084
Real estate and other investments........................ 205,021 216,460
----------- -----------
Total investments................................... 11,286,114 10,943,536
Recoverables from reinsurers and prepaid reinsurance
premiums................................................. 942,450 923,080
Agents' balances and premiums receivable................... 609,403 703,274
Deferred acquisition costs................................. 452,041 419,919
Other receivables.......................................... 272,766 269,600
Deferred tax asset......................................... 137,284 200,434
Assets held in separate accounts........................... 247,579 238,524
Prepaid expenses, deferred charges and other assets........ 368,114 390,750
Cost in excess of net assets acquired...................... 278,581 314,136
----------- -----------
$14,999,163 $14,851,454
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses................. $ 4,123,701 $ 4,096,703
Unearned premiums.......................................... 1,247,806 1,294,054
Annuity benefits accumulated............................... 5,365,612 5,051,959
Life, accident and health reserves......................... 575,380 538,274
Payable to American Financial Group, Inc................... 422,015 85,056
Other long-term debt:
Direct obligations of AFC Parent Company................. 172,809 311,202
Obligations of AFC subsidiaries:
American Premier Underwriters (parent only)........... 166,695 337,334
American Annuity Group................................ 114,900 167,734
Other subsidiaries.................................... 63,515 65,793
Liabilities related to separate accounts................... 247,579 238,524
Accounts payable, accrued expenses and other liabilities... 915,398 1,089,741
----------- -----------
Total liabilities................................... 13,415,410 13,276,374
Minority interest.......................................... 306,858 326,979
Shareholders' Equity:
Preferred Stock (liquidation value -- $258,638 and
$278,719)............................................. 162,760 168,484
Common Stock without par value (45,000,000 shares
outstanding).......................................... 9,625 9,625
Capital Surplus.......................................... 919,746 464,366
Retained earnings........................................ 1,364 365,126
Net unrealized gain on marketable securities, net of
deferred income taxes................................. 183,400 240,500
----------- -----------
Total shareholders' equity.......................... 1,276,895 1,248,101
----------- -----------
$14,999,163 $14,851,454
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 61
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Property and casualty insurance premiums....... $2,844,512 $2,648,703 $1,378,628
Life, accident and health premiums............. 103,552 15,691 2,231
Investment income.............................. 845,330 749,510 582,931
Realized gains (losses) on sales of
securities.................................. (3,470) 84,028 48,342
Equity in net earnings (losses) of investee
corporations................................ (16,955) 15,237 (16,573)
Gains on sales of investee corporations........ 169,138 335 1,694
Gains on sales of subsidiaries................. 36,837 -- --
Other income................................... 134,904 114,602 107,051
---------- ---------- ----------
4,113,848 3,628,106 2,104,304
COSTS AND EXPENSES:
Property and casualty insurance:
Losses and loss adjustment expenses......... 2,131,421 1,977,395 986,996
Commissions and other underwriting
expenses.................................. 793,800 707,340 428,590
Annuity benefits............................... 271,821 254,650 241,811
Life, accident and health benefits............. 92,315 13,202 1,524
Interest charges on borrowed money............. 86,148 122,568 115,162
Minority interest expense...................... 56,309 28,165 8,903
Book Value Incentive Plan...................... -- -- 34,740
Other operating and general expenses........... 344,052 272,888 243,010
---------- ---------- ----------
3,775,866 3,376,208 2,060,736
---------- ---------- ----------
Earnings before income taxes and extraordinary
items.......................................... 337,982 251,898 43,568
Provision for income taxes....................... 89,658 56,447 24,650
---------- ---------- ----------
Earnings before extraordinary items.............. 248,324 195,451 18,918
Extraordinary items -- gain (loss) on prepayment
of debt........................................ (26,328) 1,832 (16,818)
---------- ---------- ----------
NET EARNINGS..................................... $ 221,996 $ 197,283 $ 2,100
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 62
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL OTHER NET
SUBJECT TO PREFERRED COMMON CAPITAL RETAINED UNREALIZED
REDEMPTION STOCK STOCK SURPLUS EARNINGS GAIN
---------- --------- ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993..................... $ 49,232 $168,588 $ 904 $ -- $210,846 $156,900
Net earnings..................................... -- -- -- -- 2,100 --
Change in unrealized............................. -- -- -- -- -- (153,400)
Dividends on:
Preferred Stock................................ -- -- -- -- (25,728) --
Common Stock................................... -- -- -- -- (3,794) --
Purchases and redemptions........................ (6,625) (104) -- -- (56) --
Decrease in capital subject to put option........ (7,225) -- -- -- 7,225 --
Transfer from capital subject to put option...... (32,502) -- -- -- 32,502 --
-------- -------- ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1994..................... 2,880 168,484 904 -- 223,095 3,500
Adjustment for pooling of interests at April 3,
1995........................................... -- -- -- 454,969 -- 2,400
Net earnings..................................... -- -- -- -- 197,283 --
Change in unrealized............................. -- -- -- -- -- 234,600
Exercise of stock options........................ -- -- 8,721 -- -- --
Dividends on:
Preferred Stock................................ -- -- -- -- (25,397) --
Common Stock................................... -- -- -- -- (29,855) --
Purchases and redemptions........................ (2,880) -- -- -- -- --
Capital contribution from parent................. -- -- -- 9,333 -- --
Change in foreign currency translation........... -- -- -- 64 -- --
-------- -------- ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1995..................... -- 168,484 9,625 464,366 365,126 240,500
Net earnings..................................... -- -- -- -- 221,996 --
Change in unrealized............................. -- -- -- -- -- (57,100)
Dividends on:
Preferred Stock................................ -- -- -- -- (24,898) --
Common Stock................................... -- -- -- -- (560,860) --
Purchases and redemptions........................ -- (22,524) -- (14,388) -- --
Sale of preferred shares to employee benefit
plan........................................... -- 16,800 -- -- -- --
Capital contribution from parent................. -- -- -- 468,666 -- --
Change in foreign currency translation........... -- -- -- 1,102 -- --
-------- -------- ------ -------- ------- --------
BALANCE AT DECEMBER 31, 1996..................... $ -- $162,760 $9,625 $919,746 $ 1,364 $183,400
======== ======== ====== ======== ======= ========
</TABLE>
F-13
<PAGE> 63
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings......................................... $ 221,996 $ 197,283 $ 2,100
Adjustments:
Extraordinary items............................... 26,328 (1,832) 16,818
Depreciation and amortization..................... 79,425 47,760 30,729
Annuity benefits.................................. 271,821 254,650 241,811
Equity in net (earnings) losses of investee
corporations.................................... 16,955 (15,237) 16,573
Changes in reserves on assets..................... 5,656 2,302 17,094
Realized gains on investing activities............ (198,676) (84,995) (59,609)
Decrease (increase) in reinsurance and other
receivables..................................... 95,553 25,781 (223,113)
Decrease (increase) in other assets............... 23,665 (10,955) (96,596)
Increase in insurance claims and reserves......... 9,171 137,180 345,542
Increase (decrease) in other liabilities.......... (211,697) (255,404) 67,799
Increase in minority interest..................... 53,894 18,989 6,773
Dividends from investees.......................... 4,799 9,568 21,567
Other, net........................................ (3,989) (1,233) (1,488)
---------- ---------- ----------
394,901 323,857 386,000
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of and additional investments in:
Fixed maturity investments........................ (2,128,015) (2,378,427) (1,726,318)
Equity securities................................. (10,528) (1,034) (7,315)
Investees and subsidiaries........................ -- (68,591) (29,306)
Real estate, property and equipment............... (38,035) (42,579) (27,185)
Maturities and redemptions of fixed maturity
investments....................................... 615,849 308,526 420,945
Sales of:
Fixed maturity investments........................ 881,114 2,310,837 694,947
Equity securities................................. 53,195 17,379 127,181
Investees and subsidiaries........................ 284,277 -- 27,621
Real estate, property and equipment............... 7,981 27,759 6,151
Cash and short-term investments of acquired (former)
subsidiary........................................ (4,589) 392,100 --
Decrease (increase) in other investments............. 594 (7,326) (5,571)
---------- ---------- ----------
(338,157) 558,644 (518,850)
---------- ---------- ----------
FINANCING ACTIVITIES:
Annuity receipts..................................... 573,741 457,525 442,703
Annuity payments..................................... (517,881) (412,854) (321,038)
Additional long-term borrowings...................... 288,775 337,076 244,311
Reductions of long-term debt......................... (582,288) (1,061,187) (193,481)
Borrowings from AFG.................................. 152,471 102,202 --
Payments to AFG...................................... (61,000) (18,174) --
Issuance of preferred stock.......................... 16,800 -- --
Repurchases of preferred stock....................... (36,912) (2,880) (6,738)
Exercise of stock options............................ -- 8,721 --
Issuance of trust originated preferred securities.... 72,412 -- --
Capital contribution................................. 18,666 9,333 --
Cash dividends paid.................................. (24,898) (25,397) (29,522)
---------- ---------- ----------
(100,114) (605,635) 136,235
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS.......................................... (43,370) 276,866 3,385
Cash and short-term investments at beginning of
period............................................... 448,201 171,335 167,950
---------- ---------- ----------
Cash and short-term investments at end of period....... $ 404,831 $ 448,201 $ 171,335
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE> 64
AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO NOTES
<TABLE>
<S> <C> <C> <C>
A. MERGERS I. OTHER LONG-TERM DEBT
B. ACCOUNTING POLICIES J. PREFERRED STOCK
C. ACQUISITIONS AND SALES OF K. COMMON STOCK
SUBSIDIARIES AND INVESTEES L. INCOME TAXES
D. SEGMENTS OF OPERATIONS M. EXTRAORDINARY ITEMS
E. INVESTMENTS N. COMMITMENTS AND CONTINGENCIES
F. INVESTMENT IN INVESTEE CORPORATIONS O. QUARTERLY OPERATING RESULTS
G. COST IN EXCESS OF NET ASSETS ACQUIRED P. INSURANCE
H. PAYABLE TO AMERICAN FINANCIAL GROUP, INC. Q. ADDITIONAL INFORMATION
</TABLE>
A. MERGERS
On April 3, 1995, American Financial Corporation ("AFC") merged with a
newly formed 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 American Financial Group voting
common stock. Former shareholders of American Premier, including AFC and its
subsidiaries, received shares of American Financial Group stock on a one-for-one
basis. No gain or loss was recorded on the exchange of shares.
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.
At the close of business on December 31, 1996, AFG contributed to AFC 81%
of the common stock of American Premier. Since AFC and American Premier are
under the common control of AFG, the acquisition of American Premier has been
recorded by AFC at AFG's historical cost in a manner similar to a pooling of
interests. Accordingly, the historical consolidated financial statements of AFC
for periods subsequent to the April 3, 1995 Mergers have been restated to
include the accounts of American Premier. The following table (in millions)
reconciles revenue and net earnings previously reported by AFC and American
Premier to those reported in AFC's Statement of Earnings.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31,
(UNAUDITED) 1995
------------------ -------------
<S> <C> <C>
Revenues as previously reported:
AFC................................................ $2,096 $ 2,384
American Premier................................... 1,236 1,736
------ -------
3,332 4,120
Eliminations(*)...................................... (106) (492)
------ -------
Restated revenues.................................... $3,226 $ 3,628
====== =======
Net earnings as previously reported:
AFC................................................ $ 142 $ 138
American Premier................................... 122 62
------ -------
264 200
Eliminations(*)...................................... (33) (3)
------ -------
Restated net earnings................................ $ 231 $ 197
====== =======
</TABLE>
- ---------------
(*) Represents adjustments to (i) eliminate intercompany transactions
between AFC and American Premier, (ii) eliminate American Premier's
first quarter 1995 results prior to the Mergers and (iii) reflect
American Premier's results on AFG's basis.
F-15
<PAGE> 65
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of AFC and its subsidiaries. Mergers and changes in ownership levels of
subsidiaries and affiliates have resulted in certain differences in the
financial statements and have affected comparability between years. 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 in conformity with generally
accepted accounting principles 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.
AFC's ownership of subsidiaries and significant affiliates with publicly
traded shares at December 31, was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
American Annuity Group, Inc. ("AAG").............................. 81% 81% 80%
American Financial Enterprises, Inc. ("AFEI")..................... 83% 83% 83%
American Premier Underwriters, Inc................................ 81% (a) 42%
Chiquita Brands International, Inc................................ 43% 44% 46%
Citicasters Inc................................................... (b) 38% 37%
</TABLE>
--------------------
(a) Exchanged for shares of American Financial Group in April 1995.
(b) Sold in September 1996.
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.
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 INVESTEE CORPORATIONS 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.
F-16
<PAGE> 66
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 business 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.
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)
estimates 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
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
yield (primarily 7%), 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 primarily 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; if depositors
elect to purchase an annuity from AAG, funds are transferred to AAG.
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 applicable 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.
Policyholder Dividends Dividends payable to policyholders are included in
"Accounts payable, accrued expenses and other liabilities" and represent
estimates of amounts payable on participating policies which share in favorable
underwriting results. The estimate is accrued during the period in which the
related
F-17
<PAGE> 67
premium is earned. Changes in estimates are included in income in the period
determined. Policyholder dividends do not become legal liabilities unless and
until declared by the boards of directors of the insurance companies.
INCOME TAXES AFC and American Premier have each filed consolidated federal
income tax returns which include all 80%-owned U.S. subsidiaries, except for
certain life insurance subsidiaries and their subsidiaries. Because voting
rights aggregating 21% were extended to holders of AFC Series F and G Preferred
Stock in connection with the Mergers, AFC filed a separate consolidated return
for 1995 and will again for 1996. At the close of business on December 31, 1996,
AFG contributed 81% of the common stock of American Premier to AFC. Accordingly,
AFC and American Premier will file a consolidated return for 1997.
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.
BENEFIT PLANS AFC provides retirement benefits, to qualified employees of
participating companies through contributory and noncontributory defined
contribution plans. Contributions to benefit plans are charged against earnings
in the year for which they are declared. Both AFC and American Premier had
contributory employee savings plans and noncontributory Employee Stock Ownership
Retirement Plans ("ESORP"). Under one of the savings plans, American Premier
matched a specified portion of employee contributions. Under the ESORP plans,
contributions are invested in securities of AFG and affiliates for the benefit
of their employees. In 1997, these ESORP plans were combined into a new plan.
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.
In connection with the Mergers, full vesting was granted to holders of
units under AFC's Book Value Incentive Plan and the plan was terminated. Cash
payments, which were made in April 1995 to holders of the units, were accrued at
December 31, 1994.
MINORITY INTEREST For balance sheet purposes, minority interest represents
(i) the interests of noncontrolling shareholders in AFC subsidiaries including
$75 million of trust originated preferred securities ("TOPrS") issued by a trust
subsidiary of AAG and (ii) AFG's direct ownership interest in American Premier.
For income statement purposes, minority interest expense represents those
shareholders' interest in the earnings of AFC subsidiaries as well as accrued
distributions on the TOPrS.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS Methods and assumptions used in
estimating fair values are described in Note Q to the financial statements.
These fair values represent point-in-time estimates of value that might not be
particularly relevant in predicting AFC's future earnings or cash flows.
C. ACQUISITIONS AND SALES OF SUBSIDIARIES AND INVESTEES
CITICASTERS In September 1996, AFC sold its investment in Citicasters to
Jacor Communications for approximately $220 million in cash plus warrants to
purchase Jacor common stock. AFC realized a pretax gain of approximately $169
million, before minority interest of $6.5 million, on the sale. In 1994, AFEI
F-18
<PAGE> 68
purchased approximately 10% of Citicasters common stock from an unaffiliated
company for $23.9 million in cash.
BUCKEYE In March 1996, American Premier sold Buckeye Management Company to
Buckeye's management (including an AFG director who resigned in March 1996) and
employees for $60 million in cash, net of transaction costs. AFC recognized a
$33.9 million pretax gain on the sale.
GENERAL CABLE In 1994, AFC sold its investment in General Cable common
stock to an unaffiliated company for $27.6 million in cash. AFC realized a $1.7
million pretax gain on the sale (excluding its share of American Premier's loss
on its sale of General Cable securities).
D. SEGMENTS OF OPERATIONS
AFC operates its property and casualty insurance business in three major
segments: nonstandard automobile, specialty lines, and commercial and personal
lines. AFC's annuity and life business primarily sells tax-deferred annuities to
employees of primary and secondary educational institutions and hospitals. These
insurance businesses operate throughout the United States. In addition, AFC has
owned significant portions of the voting equity securities of certain companies
(investee corporations -- see Note F).
The following tables (in thousands) show AFC's assets, revenues and
operating profit (loss) by significant business segment. Capital expenditures,
depreciation and amortization are not significant. Operating profit (loss)
represents total revenues less operating expenses. Goodwill and its amortization
have been allocated to the various segments to which they apply. General
corporate assets and expenses have not been identified or allocated by segment.
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Property and casualty insurance (a)................. $ 7,116,088 $ 7,443,115 $ 4,576,591
Annuities and life.................................. 7,009,127 6,600,377 5,078,928
Other............................................... 674,297 501,417 104,495
----------- ----------- -----------
14,799,512 14,544,909 9,760,014
Investment in investee corporations................. 199,651 306,545 832,637
----------- ----------- -----------
$14,999,163 $14,851,454 $10,592,651
=========== =========== ===========
REVENUES (b)
Property and casualty insurance:
Premiums earned:
Nonstandard automobile......................... $ 1,183,098 $ 954,210 $ 24,974
Specialty lines................................ 976,150 995,528 698,365
Commercial and personal lines.................. 684,776 697,512 648,222
Other lines.................................... 488 1,453 7,067
----------- ----------- -----------
2,844,512 2,648,703 1,378,628
Investment and other income....................... 500,897 465,998 314,731
----------- ----------- -----------
3,345,409 3,114,701 1,693,359
Annuities and life (c).............................. 585,079 444,082 379,534
Other............................................... 200,315 54,086 47,984
----------- ----------- -----------
4,130,803 3,612,869 2,120,877
Equity in net earnings (losses) of investee
corporations...................................... (16,955) 15,237 (16,573)
----------- ----------- -----------
$ 4,113,848 $ 3,628,106 $ 2,104,304
=========== =========== ===========
OPERATING PROFIT (LOSS)
Property and casualty insurance:
Underwriting:
Nonstandard automobile......................... $ 1,015 $ (60,316) $ (3,080)
</TABLE>
F-19
<PAGE> 69
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Specialty lines................................ 154,329 50,690 (12,598)
Commercial and personal lines.................. (72,513) 5,315 7,087
Other lines (d)................................ (163,540) (31,721) (24,914)
----------- ----------- -----------
(80,709) (36,032) (33,505)
Investment and other income....................... 359,002 357,617 199,292
----------- ----------- -----------
278,293 321,585 165,787
Annuities and life.................................. 77,119 79,579 58,748
Other (e)........................................... (475) (164,503) (164,394)
----------- ----------- -----------
354,937 236,661 60,141
Equity in net earnings (losses) of investee
corporations...................................... (16,955) 15,237 (16,573)
----------- ----------- -----------
$ 337,982 $ 251,898 $ 43,568
=========== =========== ===========
</TABLE>
- ---------------
(a) Not allocable to segments.
(b) Revenues include sales of products and services as well as other income
earned by the respective segments.
(c) Represents primarily investment income.
(d) Represents primarily losses related to asbestos and other environmental
matters ("A&E").
(e) Includes holding company expenses.
E. INVESTMENTS
Bonds, redeemable preferred stocks and other stocks at December 31,
consisted of the following (in millions):
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------- GROSS -------------------- GROSS
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED
COST VALUE GAINS LOSSES COST VALUE GAINS LOSSES
--------- -------- ------ ------ --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and redeemable preferred
stocks:
United States Government and
government agencies and
authorities................... $ -- $ -- $ -- $ -- $ 472.2 $ 475.7 $ 7.3 $ (3.8)
States, municipalities and
political subdivisions........ 80.0 79.9 1.1 (1.2) 39.6 39.7 .5 (.4)
Foreign government.............. 8.5 9.0 .5 -- 94.5 94.3 .8 (1.0)
Public utilities................ 501.4 501.4 6.4 (6.4) 443.8 453.6 13.1 (3.3)
Mortgage-backed securities...... 935.9 949.0 18.8 (5.7) 1,626.3 1,637.9 28.1 (16.5)
All other corporate............. 1,965.3 1,988.8 34.8 (11.3) 3,624.4 3,733.0 122.2 (13.6)
Redeemable preferred stocks..... -- -- -- -- 61.8 60.4 1.5 (2.9)
-------- -------- ----- ------ -------- -------- ------ ------
$3,491.1 $3,528.1 $ 61.6 $(24.6) $6,362.6 $6,494.6 $173.5 $(41.5)
======== ======== ===== ====== ======== ======== ====== ======
Other stocks...................... $ 142.4 $ 327.7 $191.6 $ (6.3)
======== ======== ====== ======
</TABLE>
F-20
<PAGE> 70
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------- GROSS -------------------- GROSS
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED
COST VALUE GAINS LOSSES COST VALUE GAINS LOSSES
--------- -------- ------ ------ --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bonds and redeemable preferred
stocks:
United States Government and
government agencies and
authorities................... $ -- $ -- $ -- $ -- $ 413.9 $ 431.3 $ 17.5 $ (.1)
States, municipalities and
political subdivisions........ 55.0 56.6 1.7 (.1) 20.6 20.3 .3 (.6)
Foreign government.............. 13.1 12.8 1.0 (1.3) 87.5 89.9 2.4 --
Public utilities................ 528.8 545.3 17.7 (1.2) 561.3 591.0 32.3 (2.6)
Mortgage-backed securities...... 945.7 980.3 35.3 (.7) 1,373.2 1,407.8 40.7 (6.1)
All other corporate............. 2,042.1 2,129.8 87.8 (.1) 3,087.1 3,304.3 219.8 (2.6)
Redeemable preferred stocks..... 4.2 4.5 .3 -- 104.5 104.7 1.9 (1.7)
-------- -------- ----- ------ -------- -------- ------ ------
$3,588.9 $3,729.3 $143.8 $ (3.4) $5,648.1 $5,949.3 $314.9 $(13.7)
======== ======== ===== ====== ======== ======== ====== ======
Other stocks...................... $ 136.9 $ 252.2 $115.9 $ (.6)
======== ======== ====== ======
</TABLE>
The table below sets forth the scheduled maturities of bonds and redeemable
preferred stocks based on carrying value as of December 31, 1996. Data based on
market value is generally the same. Mortgage-backed securities had an average
life of approximately 7.5 years at December 31, 1996.
<TABLE>
<CAPTION>
HELD TO AVAILABLE
MATURITY MATURITY FOR SALE
---------------------------------------------------------------- -------- ---------
<S> <C> <C>
One year or less................................................ 6% 2%
After one year through five years............................... 27 17
After five years through ten years.............................. 36 41
After ten years................................................. 4 15
--- ---
73 75
Mortgage-backed securities...................................... 27 25
--- ---
100% 100%
=== ===
</TABLE>
Certain risks are inherent in connection with fixed maturity securities,
including loss upon default, price volatility in reaction to changes in interest
rates, and general market factors and risks associated with reinvestment of
proceeds due to prepayments or redemptions in a period of declining interest
rates.
Realized gains (losses) and changes in unrealized appreciation
(depreciation) on fixed maturity and equity security investments are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
FIXED EQUITY TAX
MATURITIES SECURITIES EFFECTS TOTAL
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
1996
Realized............................. $ (16,545) $ 13,075 $ 8,199 $ 4,729
Change in Unrealized................. (272,583) 70,000 70,904 (131,679)
1995
Realized............................. 77,963 6,065 (13,915) 70,113
Change in Unrealized................. 810,690 43,700 (288,001) 566,389
1994
Realized............................. (1,107) 49,449 30 48,372
Change in Unrealized................. (673,001) (60,500) 256,725 (476,776)
</TABLE>
F-21
<PAGE> 71
Transactions in fixed maturity investments included in the Statement of
Cash Flows consisted of the following (in millions):
<TABLE>
<CAPTION>
MATURITIES AND GROSS GROSS
PURCHASES REDEMPTIONS SALES GAINS LOSSES
--------- -------------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
1996
Held to Maturity.................... $ 202.2 $ 331.0 $ 9.3 $ 2.4 $ (1.2)
Available for Sale.................. 1,925.8 284.8 871.8 29.6 (47.3)
--------- -------- -------- ------ ------
Total....................... $ 2,128.0 $ 615.8 $ 881.1 $ 32.0 $(48.5)
========= ======== ======== ====== ======
1995
Held to Maturity.................... $ 774.8 $ 175.2 $ 12.9 $ 1.9 $ (2.3)
Available for Sale.................. 1,603.6 133.3 2,297.9 88.0 (9.6)
--------- -------- -------- ------ ------
Total....................... $ 2,378.4 $ 308.5 $2,310.8 $ 89.9 $(11.9)
========= ======== ======== ====== ======
1994
Held to Maturity.................... $ 1,090.0 $ 216.0 $ 8.0 $ 3.3 $ (2.5)
Available for Sale.................. 636.3 204.9 686.9 9.4 (11.3)
--------- -------- -------- ------ ------
Total....................... $ 1,726.3 $ 420.9 $ 694.9 $ 12.7 $(13.8)
========= ======== ======== ====== ======
</TABLE>
Securities classified as "held to maturity" having an amortized cost of
$9.5 million, $14.7 million and $8.7 million were sold for a loss of $159,000,
$1.8 million and $712,000 in 1996, 1995 and 1994, respectively, due to
significant deterioration in the issuers' creditworthiness.
F. INVESTMENT IN INVESTEE CORPORATIONS
The companies in the following table are subject to the rules and
regulations of the SEC. The market value of the investments was approximately
$306 million and $509 million at December 31, 1996 and 1995, respectively. AFC's
investment (and common stock ownership percentage) and equity in net earnings
and losses of investees are stated below (dollars in thousands):
<TABLE>
<CAPTION>
INVESTMENT (OWNERSHIP %) EQUITY IN NET EARNINGS (LOSSES)
------------------------------- ---------------------------------
12/31/96 12/31/95 1996 1995 1994
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Chiquita (a)............... $199,651 (43%) $232,466 (44%) (18,415) $ 3,628 $(26,670)
Citicasters (b)............ -- 74,079 (38%) 1,460 4,702 8,950
American Premier (c)....... -- -- -- 6,907 1,147
-------- -------- -------- ------- --------
$199,651 $306,545 $(16,955) $15,237 $(16,573)
======== ======== ======== ======= ========
</TABLE>
- ---------------
(a) Equity in net earnings (losses) excludes AFC's share of extraordinary
losses.
(b) Sold in September 1996.
(c) Accounted for as an 81% subsidiary beginning on April 3, 1995.
Chiquita is a leading international marketer, producer and distributor of
bananas and other quality fresh and processed food products. Citicasters owned
and operated radio and television stations in major markets throughout the
country.
F-22
<PAGE> 72
Summarized financial information for Chiquita at December 31, is shown
below (in millions). See "Investee Corporations" in Management's Discussion and
Analysis.
<TABLE>
<CAPTION>
CHIQUITA BRANDS
INTERNATIONAL, INC.
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Current Assets................................................... $ 844 $ 877
Non-current Assets............................................... 1,623 1,747
Current Liabilities.............................................. 464 510
Non-current Liabilities.......................................... 1,279 1,442
Shareholders' Equity............................................. 724 672
Net Sales of Continuing Operations............................... $2,435 $2,566 $2,506
Operating Income................................................. 84 176 71
Income (Loss) from Continuing Operations......................... (28) 28 (84)
Discontinued Operations.......................................... -- (11) 35
Extraordinary Loss from Debt Refinancings........................ (23) (8) (23)
Net Income (Loss)................................................ (51) 9 (72)
</TABLE>
G. COST IN EXCESS OF NET ASSETS ACQUIRED
At December 31, 1996 and 1995, accumulated amortization of the excess of
cost over net assets of purchased subsidiaries amounted to approximately $121
million and $110 million, respectively. Amortization expense was $10.8 million
in 1996, $9.2 million in 1995 and $6.1 million in 1994.
H. PAYABLE TO AMERICAN FINANCIAL GROUP, INC.
Following the Mergers, American Premier agreed to lend up to $675 million
to AFC under a line of credit. Borrowings under the credit line bear interest at
11-5/8%. On December 27, 1996, American Premier paid a dividend to AFG which
consisted of the $675 million note receivable plus accrued interest.
Subsequently, AFG contributed $450 million of the note to AFC. At December 31,
1996, AFC had outstanding borrowings under the note of $225.0 million, plus
accrued interest of $19.1 million.
Also subsequent to the Mergers, American Premier entered into a credit
agreement with AFG under which American Premier and AFG may make loans of up to
$200 million available to each other. The balance outstanding under the credit
line bears interest at a variable rate of one percent over LIBOR and is payable
on December 31, 2010. At December 31, 1996, American Premier had outstanding
borrowings under the credit agreement of $175.5 million, plus accrued interest
of $2.5 million.
I. OTHER LONG-TERM DEBT
Long-term debt consisted of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
AMERICAN FINANCIAL CORPORATION (PARENT COMPANY):
9 3/4% Debentures due April 2004, less discount of $1,146 and
$1,249 (imputed rate -- 9.8%)............................. $164,368 $302,510
Other........................................................ 8,441 8,692
-------- --------
$172,809 $311,202
======== ========
</TABLE>
F-23
<PAGE> 73
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
AMERICAN PREMIER UNDERWRITERS, INC. (PARENT COMPANY):
9 3/4% Subordinated Notes due August 1999, including premium
of $1,912 and $4,403 (imputed rate -- 8.8%)............... $ 93,604 $161,531
10 5/8% Subordinated Notes due April 2000, including premium
of $2,629 and $7,210 (imputed rate -- 8.8%)............... 54,595 120,222
10 7/8% Subordinated Notes due May 2011, including premium of
$1,642 and $5,082 (imputed rate -- 9.6%).................. 18,496 55,581
-------- --------
$166,695 $337,334
======== ========
AMERICAN ANNUITY GROUP, INC.:
Notes payable under bank line due September 1999............. $ 44,700 $ 20,500
9 1/2% Senior Notes due August 2001.......................... 40,845 41,490
11 1/8% Senior Subordinated Notes due February 2003.......... 24,080 101,443
Other........................................................ 5,275 4,301
-------- --------
$114,900 $167,734
======== ========
OTHER SUBSIDIARIES:
Notes payable secured by real estate......................... $ 52,543 $ 53,066
Other........................................................ 10,972 12,727
-------- --------
$ 63,515 $ 65,793
======== ========
</TABLE>
At December 31, 1996, sinking fund and other scheduled principal payments
on debt for the subsequent five years were as follows (in thousands):
<TABLE>
<CAPTION>
AMERICAN
PARENT PREMIER OTHER
COMPANY (PARENT) SUBSIDIARIES TOTAL
------- -------- ------------ --------
<S> <C> <C> <C> <C>
1997......................................... $5,616 $ -- $ 2,533 $ 8,149
1998......................................... -- -- 2,846 2,846
1999......................................... -- 91,692 47,137 138,829
2000......................................... -- 51,966 8,735 60,701
2001......................................... -- -- 42,304 42,304
</TABLE>
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.
Great American Holding Company ("GAHC"), a wholly-owned subsidiary of AFC,
and Pennsylvania Company ("Pennco"), a wholly-owned subsidiary of American
Premier have revolving loan agreements with groups of banks under which they can
borrow up to $300 million and $75 million, respectively. Borrowings bear
interest at floating rates based on prime or LIBOR and are collateralized by
certain stock of operating subsidiaries. Each facility is guaranteed by the
respective immediate parent company. At December 31, 1996 and 1995, there were
no outstanding borrowings under either of these credit lines.
AAG and AFEI have revolving credit agreements with banks under which they
can borrow up to $115 million and $20 million, respectively. Borrowings bear
interest at floating rates based on prime or LIBOR and are collateralized. At
December 31, 1996 and 1995, the weighted average interest rate on amounts
borrowed under AAG's bank credit lines was 6.7% and 6.8%, respectively. At
December 31, 1996 and 1995, there were no outstanding borrowings under the AFEI
credit line.
During 1995, AFC redeemed $279 million of its various debentures, repaid
$187 million of GAHC's bank debt, and redeemed $200 million of GAHC's Notes
using funds borrowed under the AFG line of credit. Also during 1995, AFC sold an
aggregate of $100 million of its 9-3/4% debentures due 2004 for cash. During
1996, AFC repurchased $138.2 million of its 9-3/4% debentures for $147.9 million
in cash.
F-24
<PAGE> 74
As the result of the Mergers and a subsequent ratings downgrade, holders of
American Premier's Notes had the right to "put" their Notes to American Premier
at face amount. Approximately $44 million of the Notes were tendered under the
put right in 1995. In addition, American Premier repurchased $136 million of the
Notes during 1995 for $142.7 million in cash.
In a December 1996 tender offer, American Premier retired $95.3 million of
its Notes for $105.6 million. In addition, American Premier repurchased $64.8
million of its Notes for $71.6 million in cash during 1996.
During 1995, AAG repurchased $4.9 million of its Notes for $5.0 million in
cash. During 1996, AAG repurchased $78 million of its Notes for $84.2 million in
cash.
Cash interest payments of $83 million, $137 million and $115 million were
made on long-term borrowings in 1996, 1995 and 1994, respectively.
J. PREFERRED STOCK
Under provisions of both the Nonvoting (21.1 million shares authorized,
including the Mandatory Redeemable Preferred Stock) and Voting (17.0 million
shares authorized, 13.9 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. The outstanding shares of
preferred stock consisted of the following:
SERIES F, $1 par value -- authorized 15,000,000 shares; $20.00
liquidating value per share; annual dividends per share $1.80;
nonredeemable after 1996; 11,900,725 and 13,744,754 shares (stated value
$145.4 million and $167.9 million) outstanding at December 31, 1996 and
1995, respectively.
SERIES G, $1 par value -- authorized 2,000,000 shares; annual dividends
per share $1.05; redeemable at $10.50 per share; 1,964,158 and 364,158
shares (stated value $17.4 million and $600,000) outstanding at December
31, 1996 and 1995, respectively.
In December 1996, AFC redeemed 1.6 million shares of its Series F Preferred
Stock for $31.9 million and, in October, AFC purchased 250,000 shares of Series
F from AFC's ESORP for $5.0 million. In December 1996, AFC issued 1.6 million
shares of its Series G Preferred Stock to AFC's ESORP for $16.8 million.
During 1995 and 1994, AFC retired issues of its mandatorily redeemable
preferred stock for an aggregate of $2.9 million and $6.6 million, respectively.
K. COMMON STOCK
At December 31, 1996, American Financial Group owned all of the outstanding
shares of AFC's Common Stock.
F-25
<PAGE> 75
L. INCOME TAXES
The following is a reconciliation of income taxes at the statutory rate of
35% and income taxes as shown in the Statement of Earnings (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Earnings before income taxes and extraordinary
items............................................ $337,982 $251,898 $ 43,568
Extraordinary items before income taxes............. (33,331) 1,551 (17,192)
-------- -------- --------
Adjusted earnings before income taxes............... $304,651 $253,449 $ 26,376
======== ======== ========
Income taxes at statutory rate...................... $106,628 $ 88,707 $ 9,232
Effect of:
Losses (utilized) not utilized................... (43,789) (40,292) 19,267
Dividends received deduction..................... (7,450) (7,823) (8,528)
Minority interest................................ 18,507 9,533 2,998
Amortization of intangibles...................... 3,065 3,015 1,987
Tax exempt interest.............................. (597) (897) (689)
Foreign income taxes............................. 3,474 359 6
State income taxes............................... 4,140 81 149
Other............................................ (1,323) 3,483 (146)
-------- -------- --------
Total provision..................................... 82,655 56,166 24,276
Amounts applicable to extraordinary items........... 7,003 281 374
-------- -------- --------
Provision for income taxes as shown on the Statement
of Earnings...................................... $ 89,658 $ 56,447 $ 24,650
======== ======== ========
</TABLE>
Adjusted earnings before income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Subject to tax in:
United States.................................... $318,919 $256,417 $ 28,422
Foreign jurisdictions............................ (14,268) (2,968) (2,046)
-------- -------- --------
$304,651 $253,449 $ 26,376
======== ======== ========
</TABLE>
The total income tax provision consists of (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current taxes:
Federal............................................ $ 22,450 $38,512 $21,028
Foreign............................................ (1,735) (1,213) --
State.............................................. 6,369 124 226
Deferred taxes:
Federal............................................ 55,250 18,191 3,012
Foreign............................................ 321 552 10
-------- ------- -------
$ 82,655 $56,166 $24,276
======== ======= =======
</TABLE>
F-26
<PAGE> 76
For income tax purposes, certain members of the AFC consolidated tax group,
including American Premier as of December 31, 1996, had the following
carryforwards available at December 31, 1996 (in millions):
<TABLE>
<CAPTION>
EXPIRING AMOUNT
------------ ------
<S> <C> <C>
1997 -- 2001 $ 20
Operating Loss............................................... 2002 -- 2006 126
2007 -- 2011 93
Capital Loss................................................. 1997 -- 1999 195
Other -- Tax Credits......................................... 23
</TABLE>
Deferred income tax assets and liabilities reflect the impact of temporary
differences between the carrying amounts of assets and liabilities recognized
for financial reporting purposes and the amounts recognized for tax purposes.
The significant components of deferred tax assets and liabilities for AFC's tax
group included in the Balance Sheet at December 31, were as follows (in
millions):
<TABLE>
<CAPTION>
1995
1996 -----------------------
------------ AMERICAN
AFC AFC PREMIER
TAX GROUP(*) TAX GROUP TAX GROUP
------------ --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 83.7 $ 93.8 $ 166.5
Capital loss carryforwards..................... 68.2 -- 108.7
Insurance claims and reserves.................. 289.8 195.9 102.9
Other, net..................................... 142.2 41.2 91.3
-------- ------- -------
583.9 330.9 469.4
Valuation allowance for deferred tax assets.... (131.9) (91.9) (214.0)
-------- ------- -------
452.0 239.0 255.4
Deferred tax liabilities:
Deferred acquisition costs..................... (124.9) (89.8) (31.2)
Investment securities.......................... (189.8) (210.8) (23.8)
-------- ------- -------
(314.7) (300.6) (55.0)
-------- ------- -------
Net deferred tax asset (liability)............... $ 137.3 ($ 61.6) $ 200.4
======== ======= =======
</TABLE>
- ---------------
(*) Includes American Premier.
The gross deferred tax asset has been reduced by a valuation allowance
based on an analysis of the likelihood of realization. Factors considered in
assessing the need for a valuation allowance include: (i) recent tax returns,
which show neither a history of large amounts of taxable income nor cumulative
losses in recent years, (ii) opportunities to generate taxable income from sales
of appreciated assets, and (iii) the likelihood of generating larger amounts of
taxable income in the future. The likelihood of realizing this asset will be
reviewed periodically; any adjustments required to the valuation allowance will
be made in the period in which the developments on which they are based become
known. The aggregate valuation allowance decreased by $174 million in 1996 due
primarily to the expiration of American Premier's loss carryforwards.
Cash payments for income taxes, net of refunds, were $40.2 million, $14.8
million and $30.0 million for 1996, 1995 and 1994, respectively.
F-27
<PAGE> 77
M. EXTRAORDINARY ITEMS
Extraordinary items represent AFC's proportionate share of gains and losses
related to debt retirements by the following companies. Amounts shown are net of
minority interest and income tax benefits (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
AFC (parent)........................................ $ (9,672) $(1,713) $ (6,454)
Subsidiaries:
APU (parent)...................................... (1,075) 7,102 --
AAG............................................... (7,159) (201) (1,328)
GAHC.............................................. -- (611) --
Other............................................. 57 -- --
Investee:
Chiquita.......................................... (8,479) (2,745) (9,036)
-------- ------- --------
$(26,328) $ 1,832 $(16,818)
======== ======= ========
</TABLE>
N. COMMITMENTS AND CONTINGENCIES
Loss accruals have been recorded for various environmental and occupational
injury and disease claims and other contingencies arising out of the railroad
operations disposed of by American Premier's predecessor, Penn Central
Transportation Company ("PCTC"), prior to its bankruptcy reorganization in 1978.
Any ultimate liability arising therefrom in excess of previously established
loss accruals would normally be attributable to pre-reorganization events and
circumstances and accounted for as a reduction in capital surplus. However,
under purchase accounting in connection with the Mergers, any such excess
liability will be charged to earnings in AFC's financial statements.
American Premier's liability for environmental claims ($50.1 million at
December 31, 1996) consists of a number of proceedings and claims seeking to
impose responsibility for hazardous waste remediation costs at certain railroad
sites formerly owned by PCTC and certain other sites where hazardous waste was
allegedly generated by PCTC's railroad operation. It is difficult to estimate
remediation costs for a number of reasons, including the number and financial
resources of other potentially responsible parties, the range of costs for
remediation alternatives, changing technology and the time period over which
these matters develop. American Premier's liability is based on information
currently available and is subject to change as additional information becomes
available.
American Premier's liability for occupational injury and disease claims of
$70.1 million (included in other liabilities) at December 31, 1996 includes
pending and expected claims by former employees of PCTC for injury or disease
allegedly caused by exposure to excessive noise, asbestos or other substances in
the railroad workplace. Anticipated recoveries of $54.1 million on these
liabilities are included in other assets. Recorded amounts are based on the
accumulation of estimates of reported and unreported claims and related expenses
and estimates of probable recoveries from insurance carriers.
AFC has accrued approximately $41 million at December 31, 1996, for
environmental costs and certain other matters associated with the sales of
former operations.
In management's opinion, the outcome of the items discussed under
"Uncertainties" in Management's Discussion and Analysis of this Form 10-K, and
the above claims and contingencies will not, individually or in the aggregate,
have a material adverse effect on AFC's financial condition or results of
operations.
O. QUARTERLY OPERATING RESULTS (UNAUDITED)
The operations of certain of AFC's business segments are seasonal in
nature. While insurance premiums are recognized on a relatively level basis,
claim losses related to adverse weather (snow, hail, hurricanes, tornadoes,
etc.) may be seasonal. Quarterly results necessarily rely heavily on estimates.
These estimates and
F-28
<PAGE> 78
certain other factors, such as the nature of investees' operations and
discretionary sales of assets, cause the quarterly results not to be necessarily
indicative of results for longer periods of time. See Notes A and C for changes
in ownership of companies whose revenues are included in the consolidated
operating results and for the effects of gains on sales of subsidiaries and
investees in individual quarters. The following are quarterly results of
consolidated operations for the two years ended December 31, 1996 (in millions).
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1996
Revenues............................. $1,030.2 $1,032.8 $1,163.5 $ 887.3 $4,113.8
Earnings (loss) before extraordinary
items.............................. 78.5 57.8 119.2 (7.2) 248.3
Extraordinary items.................. (7.3) (9.3) (8.3) (1.4) (26.3)
Net earnings (loss).................. 71.2 48.5 110.9 (8.6) 222.0
1995
Revenues............................. $ 553.6 $1,006.0 $1,001.8 $1,066.7 $3,628.1
Earnings before extraordinary
items.............................. 29.9 34.1 53.3 78.2 195.5
Extraordinary items.................. -- 1.3 2.1 (1.6) 1.8
Net earnings......................... 29.9 35.4 55.4 76.6 197.3
</TABLE>
In the third quarter of 1996, AFC increased A&E reserves by recording a
non-cash pretax charge of $80 million. Realized gains (losses) on sales of
securities amounted to (in millions):
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1996.......................................... $18.7 $ 2.7 $ 3.2 $ (28.1) $(3.5)
1995.......................................... 3.5 7.9 23.6 49.0 84.0
</TABLE>
P. INSURANCE
Securities owned by insurance subsidiaries having a carrying value of
approximately $1.5 billion at December 31, 1996, were on deposit as required by
regulatory authorities.
GAI recorded a charge of $19 million (included in "Other operating and
general expenses") in 1994 in response to the California court decision
upholding an insurance reform measure passed by California voters which led to
rate rollbacks for most lines of property and casualty insurance.
Several proposals have been made in recent years to change the federal
income tax system. Some proposals included changes in the method of treating
investment income and tax deferred income. To the extent a new tax law reduces
or eliminates the tax deferred status of AFC's annuity products, that segment
could be materially affected.
INSURANCE RESERVES The liability for losses and loss adjustment expenses
for certain long-term scheduled payments under workers' compensation, auto
liability and other liability insurance has been discounted at rates ranging
from 4% to 8%. As a result, the total liability for losses and loss adjustment
expenses at December 31, 1996, has been reduced by $64 million.
The following table provides an analysis of changes in the liability for
losses and loss adjustment expenses, net of reinsurance (and grossed up), over
the past three years on a GAAP basis (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period.............................. $3,393 $2,187 $2,113
Reserves of American Premier at date of the Mergers......... -- 1,090 --
Provision for losses and loss adjustment expenses occurring
in the current year....................................... 2,179 2,116 1,027
Net decrease in provision for claims occurring in prior
years..................................................... (48) (139) (40)
------ ------ ------
2,131 1,977 987
</TABLE>
F-29
<PAGE> 79
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Payments for losses and loss adjustment expenses occurring
during:
Current year.............................................. (999) (987) (381)
Prior years............................................... (1,121) (874) (532)
------ ------ ------
(2,120) (1,861) (913)
------ ------ ------
Balance at end of period.................................... $3,404 $3,393 $2,187
------ ------ ------
Add back reinsurance recoverables........................... 720 704 730
------ ------ ------
Unpaid losses and loss adjustment expenses included in
Balance Sheet, gross of reinsurance....................... $4,124 $4,097 $2,917
====== ====== ======
</TABLE>
NET INVESTMENT INCOME The following table shows (in millions) investment
income earned and investment expenses incurred by AFC's insurance companies.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Insurance group investment income:
Fixed maturities.......................................... $817.8 $727.3 $560.6
Equity securities......................................... 8.2 5.3 8.3
Other..................................................... 13.5 7.9 6.7
------ ------ ------
839.5 740.5 575.6
Insurance group investment expenses(*)...................... (38.5) (33.8) (32.0)
------ ------ ------
$801.0 $706.7 $543.6
====== ====== ======
</TABLE>
- ---------------
(*) Included primarily in "Other operating and general expenses" in the
Statement of Earnings.
STATUTORY INFORMATION AFC's insurance subsidiaries are required to file
financial statements with state insurance regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities (statutory basis).
Net earnings and policyholders' surplus on a statutory basis for the insurance
subsidiaries were as follows (in millions):
<TABLE>
<CAPTION>
POLICYHOLDERS'
NET EARNINGS SURPLUS
--------------------- -----------------
1996 1995 1994 1996 1995
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Property and casualty companies.............. $ 276 $ 200 $ 63 $ 1,659 $ 1,595
Life insurance companies..................... 67 76 54 287 273
</TABLE>
REINSURANCE In the normal course of business, AFC's insurance subsidiaries
assume and cede reinsurance with other insurance companies. The following table
shows (in millions) (i) amounts deducted from property and casualty premiums in
connection with reinsurance ceded, (ii) amounts included in income for
reinsurance assumed and (iii) reinsurance recoveries deducted from losses and
loss adjustment expenses.
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Reinsurance ceded to:
Non-affiliates............................................. $ 518 $ 476 $ 402
Affiliates................................................. -- 33 161
Reinsurance assumed -- including involuntary pools and
associations............................................... 58 93 83
Reinsurance recoveries....................................... 306 304 429
</TABLE>
Q. ADDITIONAL INFORMATION
Total rental expense for various leases of office space, data processing
equipment and railroad rolling stock was $34 million, $35 million and $22
million for 1996, 1995 and 1994, respectively. Sublease rental income related to
these leases totaled $6.1 million in 1996, $6.2 million in 1995 and $6.4 million
in 1994.
F-30
<PAGE> 80
Future minimum rentals, related principally to office space and railroad
rolling stock, required under operating leases having initial or remaining
noncancelable lease terms in excess of one year at December 31, 1996, were as
follows: 1997 -- $39 million, 1998 -- $32 million, 1999 -- $24 million,
2000 -- $15 million, 2001 -- $11 million and $18 million thereafter. At December
31, 1996, minimum sublease rentals to be received through the expiration of the
leases aggregated $21 million.
Other operating and general expenses included charges for possible losses
on agents' balances, reinsurance recoverables and other receivables in the
following amounts: 1996 -- $0, 1995 -- $0 and 1994 -- $18 million. The aggregate
allowance for such losses amounted to approximately $123 million and $127
million at December 31, 1996 and 1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents (in
millions) the carrying value and estimated fair value of AFC's financial
instruments at December 31.
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- -------
<S> <C> <C> <C> <C>
ASSETS:
Bonds and redeemable preferred stocks......... $ 9,986 $ 10,023 $ 9,538 $ 9,679
Other stocks.................................. 328 328 252 252
Investment in investee corporations........... 200 306 307 509
LIABILITIES:
Annuity benefits accumulated.................. $ 5,366 $ 5,180 $ 5,052 $ 4,887
Long-term debt:
Parent company.............................. 173 188 311 325
APU (parent company)........................ 167 174 337 344
Other subsidiaries.......................... 178 183 234 243
TOPrS......................................... 75 77 -- --
</TABLE>
When available, fair values are based on prices quoted in the most active
market for each security. If quoted prices are not available, fair value is
estimated based on present values, discounted cash flows, fair value of
comparable securities, or similar methods. The fair value of the liability for
annuities in the payout phase is assumed to be the present value of the
anticipated cash flows, discounted at current interest rates. Fair value of
annuities in the accumulation phase is assumed to be the policyholders' cash
surrender amount.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK On occasion, AFC and its
subsidiaries have entered into financial instrument transactions which may
present off-balance-sheet risks of both credit and market risk nature. These
transactions include commitments to fund loans, loan guarantees and commitments
to purchase and sell securities or loans. At December 31, 1996, AFC and its
subsidiaries had commitments to fund credit facilities and contribute limited
partnership capital totaling $16 million.
RESTRICTIONS ON TRANSFER OF FUNDS AND ASSETS OF SUBSIDIARIES Payments of
dividends, loans and advances by AFC's subsidiaries are subject to various state
laws, federal regulations and debt covenants which limit the amount of
dividends, loans and advances that can be paid. Under applicable restrictions
the maximum amount of dividends available to AFC in 1997 from its insurance
subsidiaries without seeking regulatory clearance is approximately $225 million.
Total "restrictions" on intercompany transfers from AFC's subsidiaries cannot be
quantified due to the discretionary nature of the restrictions.
BENEFIT PLANS AFC expensed $16.3 million in 1996, $16.5 million in 1995
and $6.2 million in 1994 for contributions to its ESORP and employee savings
plans.
TRANSACTIONS WITH AFFILIATES In 1995, a subsidiary of AFC sold a house to
its Chairman for its appraised value of $1.8 million.
F-31
<PAGE> 81
EXHIBIT A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
AMERICAN FINANCIAL CORPORATION,
AFC ACQUISITION CORP.,
AND
AMERICAN FINANCIAL GROUP, INC.
------------------------------------------------------
DATED AS OF OCTOBER 3, 1997
------------------------------------------------------
<PAGE> 82
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 THE MERGER................................................................ A-1
Section 1.1 The Merger............................................................. A-1
Section 1.2 Effects of Merger...................................................... A-2
Section 1.3 Exchange of Certificates............................................... A-2
Section 1.4 Effective Time......................................................... A-3
Section 1.5 Surviving Corporation Officers; Directors; Articles of Incorporation
and Code of Regulations......................................................... A-3
ARTICLE 2 SHAREHOLDER APPROVAL...................................................... A-3
Section 2.1 Shareholders Meeting................................................... A-3
Section 2.2 Proxy Statement........................................................ A-4
Section 2.3 Correction of Statements............................................... A-4
ARTICLE 3 THE MERGER CLOSING........................................................ A-4
Section 3.1 Time and Place......................................................... A-4
Section 3.2 Filing of Certificate of Merger........................................ A-5
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF AFC AND AFC ACQUISITION................. A-5
Section 4.1 Authority Relative to this Agreement................................... A-5
Section 4.2 Consents and Approvals; No Violation................................... A-5
Section 4.3 Capitalization of AFC Acquisition...................................... A-6
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF AFG..................................... A-6
Section 5.1 Organization and Qualification; Active Subsidiaries.................... A-6
Section 5.2 Authority Relative to this Agreement................................... A-6
Section 5.3 Consents and Approvals; No Violation................................... A-6
Section 5.4 SEC Reports and Financial Statements................................... A-7
ARTICLE 6 ADDITIONAL AGREEMENTS..................................................... A-7
Section 6.1 Best Efforts........................................................... A-7
Section 6.2 Post-Merger Matters.................................................... A-7
Section 6.3 Dissenters' Rights..................................................... A-7
Section 6.4 Listing of Shares...................................................... A-7
ARTICLE 7 CONDITIONS TO CONSUMMATION OF THE MERGER.................................. A-8
Section 7.1 Conditions to the Obligations of Each Party............................ A-8
Section 7.2 Additional Conditions to the Obligations of AFC........................ A-8
Section 7.3 Additional Conditions to the Obligations of AFG........................ A-9
ARTICLE 8 TERMINATION; AMENDMENTS; WAIVER........................................... A-9
Section 8.1 Termination............................................................ A-9
Section 8.2 Amendment.............................................................. A-10
Section 8.3 Extension; Waiver...................................................... A-10
ARTICLE 9 MISCELLANEOUS............................................................. A-10
Section 9.1 Survival of Representations, Warranties, Covenants and Agreements...... A-10
Section 9.2 Entire Agreement; Assignment........................................... A-10
Section 9.3 Validity............................................................... A-10
Section 9.4 Notices................................................................ A-10
Section 9.5 Governing Law.......................................................... A-11
Section 9.6 Expenses............................................................... A-11
Section 9.7 Interpretation......................................................... A-11
Section 9.8 Counterparts........................................................... A-12
Section 9.9 Parties in Interest.................................................... A-12
ANNEX I CERTIFICATE OF DESIGNATION
SCHEDULE 1.5(a) OFFICERS AND DIRECTORS OF SURVIVING CORPORATION..................... S-1
SCHEDULE 1.5(b) ARTICLES OF INCORPORATION AND CODE OF REGULATIONS................... S-2
</TABLE>
i
<PAGE> 83
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER ("Agreement") dated
as of October 3, 1997, is made by and among AMERICAN FINANCIAL CORPORATION, an
Ohio corporation ("AFC"), AFC ACQUISITION CORP., an Ohio corporation ("AFC
Acquisition"), and AMERICAN FINANCIAL GROUP, INC., an Ohio corporation ("AFG").
RECITALS:
WHEREAS, the Board of Directors of each of AFC, AFC Acquisition and AFG
have determined that it is advisable and in the best interests of their
respective shareholders that AFC Acquisition, a wholly-owned subsidiary of AFC
formed solely to effect the transactions contemplated herein, be merged with and
into AFC pursuant to the merger hereinafter provided for; and
WHEREAS, AFC, AFC Acquisition and AFG desire to make certain
representations, warranties and agreements in connection with such merger; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 THE MERGER.
(a) AFC Acquisition and AFC shall execute and deliver a Certificate of
Merger and any other documents required under the laws of Ohio to effect the
merger of AFC Acquisition with and into AFC (the "Merger") consistent with this
Agreement. The closing and consummation of the Merger shall be governed by the
provisions of Article 3.
(b) In the Merger:
(i) Each share of Series F and Series G Voting Cumulative Preferred
Stock of AFC issued and outstanding immediately prior to the Effective Time
(individually the "Series F Stock," and the "Series G Stock," or
collectively, the "AFC Preferred Shares"), shall be converted, by virtue of
the Merger and without the need for any further action on the part of the
holder thereof, into the right to receive either: (x) with respect to
Series F Stock, the greater of $23.75 in cash, or the Fixed Spread Price,
rounded to the nearest cent, which is the price set at 4:30 p.m. Eastern
time on the date of the meeting of shareholders at which the Merger is
considered, based on the fixed spread of 140 basis points over the yield
(determined in accordance with standard market practice as described below)
on the 6 5/8% United States Treasury Bond due February 15, 2027; and with
respect to the Series G Stock, $10.50 in cash (the "Cash Consideration") or
(y) shares of Series J Voting Preferred Stock (the "Series J Shares") of
AFC having an aggregate liquidation value equal to the Cash Consideration
which the holder would otherwise be entitled to receive (the "Stock
Consideration") or (z) any combination of the Cash Consideration and Stock
Consideration. The Series J Shares shall have the terms set forth in the
Certificate of Designation attached hereto as Annex I and shall accrue
dividends at the rate set forth in the Certificate of Designation from
November 1, 1997. Holders shall be entitled to accrued dividends on the
Series F Shares from and including November 1, 1997 to the Effective Time
at a rate per diem of $.0049 per share. Holders shall be entitled to
accrued dividends on the Series G Shares from the last semi-annual dividend
payment date to the Effective Time at a rate per diem of $.0029 per share.
A-1
<PAGE> 84
The following is the formula to determine the Fixed Spread Price for
Series F Stock:
<TABLE>
<S> <C> <C> <C> <C>
Stated Annual Accrued
Fixed Spread Price = Dividend + Dividend
-------------------- Amount
Reference Yield
Stated Annual Dividend = $1.80
Reference Yield = Yield on Reference Security plus 140 basis points
(1.40%)
Accrued Dividend Amount = $.75
Reference Security = 6 5/8% U.S. Treasury Bond due February 15, 2027
</TABLE>
(ii) Each share of common stock, no par value per share, of AFC
Acquisition issued and outstanding immediately prior to the Effective Time
("AFC Acquisition Common Stock") shall be cancelled, by virtue of the
Merger and without the need for any action on the part of the holder
thereof, and AFC shall be the corporation surviving the Merger (the
"Surviving Corporation").
(iii) The aggregate of all shares of common stock, no par value per
share, of AFC issued and outstanding immediately prior to the Effective
Time (the "AFC Common Shares") shall be converted into 10,593,000 shares of
common stock of the Surviving Corporation.
(c) AFC shall promptly submit to its shareholders a proposal for adoption
and approval of this Agreement and the Merger, in accordance with Article 2
hereof.
Section 1.2 EFFECTS OF MERGER.
When the Merger has been effected, the separate existence of AFC and AFC
Acquisition shall cease and AFC Acquisition shall be merged with and into AFC
(AFC Acquisition and AFC are sometimes referred to herein as the "Constituent
Corporations"), with AFC being the Surviving Corporation. At and after the
Effective Time, the Merger shall have the effect provided in Section 1701.82 of
the Ohio General Corporation Law. Without limiting the foregoing, the Surviving
Corporation shall thereupon and thereafter possess all the rights, privileges,
powers, immunities, purposes and franchises, of a public as well as of a private
nature, of the Constituent Corporations, and, all and singular, the rights,
privileges, powers, immunities, purposes and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, tangible
and intangible, and all debts due to either of said Constituent Corporations, on
whatever account, as well as for stock subscriptions and all other things in
action or belonging to each of such corporations, shall be vested in the
Surviving Corporation without further act or deed; and all property, rights,
privileges, powers, immunities, purposes and franchises, and all and every other
interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the Constituent Corporations; and the title to any
real estate vested by deed or otherwise or any other interest in real estate
vested by any instrument or otherwise in either of such Constituent Corporations
shall not revert or become in any way impaired by reason of the Merger, but all
rights of creditors and all liens upon any property of either of the Constituent
Corporations shall be preserved unimpaired, and all debts, liabilities and
duties of the Constituent Corporations shall thenceforth attach to the Surviving
Corporation, and shall be enforceable against it to the same extent as if said
debts, liabilities and duties had been incurred or contracted by it; all of the
foregoing in accordance with the applicable provisions of the Ohio General
Corporation Law.
Section 1.3 EXCHANGE OF CERTIFICATES.
(a) After the Effective Time, each holder of an outstanding certificate
which immediately prior to the Effective Time represented outstanding AFC
Preferred Shares shall be entitled to receive in exchange therefor, upon
surrender thereof to Securities Transfer Company, One East Fourth Street,
Cincinnati, Ohio 45202: (i) Cash Consideration, without interest thereon; and if
the holder thereof has elected to receive Cash Consideration for any Preferred
Shares or there is a proration of the Series J Shares pursuant to Section
7.1(d); and (ii) a certificate or certificates representing the number of whole
shares of Series J Shares into which such holder's shares were converted in
accordance with Section 1.1(b)(i). No holder of a certificate or
A-2
<PAGE> 85
certificates which immediately prior to the Effective Time represented AFC
Preferred Shares and who has elected to receive the Stock Consideration shall be
entitled to receive any dividend or other distribution from AFC until surrender
of such holder's certificate or certificates for a certificate or certificates
representing shares of Series J Shares. Upon such surrender, each holder who has
so surrendered such holder's certificate or certificates shall be deemed
retroactively to have been a holder of record of Series J Shares as of the
Effective Time. Accordingly, there shall be paid to the holder the amount of any
dividends or other distributions (without interest) which became payable at any
time on or after the Effective Time to holders of record of Series J Shares, but
which were not paid by reason of the foregoing, with respect to the number of
whole shares of Series J Shares represented by the certificates issued upon such
surrender. After the Effective Time, there shall be no further registration of
transfers of AFC Preferred Shares. If, after the Effective Time, certificates
representing AFC Preferred Shares are presented to AFC, they shall be cancelled
and exchanged for the Cash Consideration. From and after the Effective Time, AFC
shall, however, be entitled to treat certificates for AFC Preferred Shares which
have not yet been surrendered for exchange as evidencing solely the right to
receive the Cash Consideration for such certificates, notwithstanding any
failure to surrender such certificates in exchange therefor.
(b) If any certificate for shares of Series J Shares is to be issued in a
name other than that in which the certificate for AFC Preferred Shares
surrendered in exchange therefor is registered, it shall be a condition of such
issuance that the person requesting such issuance shall pay any transfer or
other tax required by reason of the issuance of certificates for such shares of
Series J Shares in a name other than that of the registered holder of the
certificate surrendered, or shall establish to the satisfaction of AFC or its
agent that such tax has been paid or is not applicable. Notwithstanding the
foregoing, AFC shall not be liable to any holder of AFC Preferred Shares for any
shares of Series J Shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(c) Notwithstanding any other provision of this Agreement, no certificates
or scrip representing fractional shares shall be issued upon the surrender for
exchange of Certificates. Any holder of AFC Preferred Shares who would otherwise
have been entitled to a fractional Series J Share shall be entitled to receive a
cash payment in lieu of such fractional share in an amount equal to the product
of such fraction multiplied by $25.00.
Section 1.4 EFFECTIVE TIME.
The term "Effective Time" shall mean the date and time at which the Merger
shall have become effective pursuant to the laws of the State of Ohio.
Section 1.5 SURVIVING CORPORATION OFFICERS; DIRECTORS; ARTICLES OF
INCORPORATION AND CODE OF REGULATIONS.
The officers and directors of the Surviving Corporation immediately
following the Effective Time shall be as set forth on Schedule 1.5(a) attached
hereto. The Articles of Incorporation and Code of Regulations of the Surviving
Corporation shall be as set forth in Schedule 1.5(b) attached hereto and shall
be deemed effective simultaneous with the Effective Time. Nothing in this
Section 1.5 shall be construed to grant to any person any contractual or other
right to hold office or a directorship in the Surviving Corporation or to
preclude the shareholders or Board of Directors of the Surviving Corporation
from further amending or modifying the Articles of Incorporation or Code of
Regulations of the Surviving Corporation.
ARTICLE 2
SHAREHOLDER APPROVAL
Section 2.1 SHAREHOLDERS MEETING.
(a) This Agreement shall be submitted for adoption and approval to the
holders of AFC Common Shares and Preferred Shares, including participants in
AFG's Retirement and Savings Plan (collectively, "AFC Shareholders") at a
meeting to be duly held for this purpose by AFC (the "AFC Shareholders'
Meeting").
A-3
<PAGE> 86
AFC shall endeavor to hold the AFC Shareholders' Meeting as soon as practicable
after the date hereof. AFC, acting through its Board of Directors, shall, in
accordance with applicable law:
(i) duly call, give notice of, convene and hold the AFC Shareholders'
Meeting;
(ii) include in the Proxy Statement (as defined in Section 2.2 hereof)
the recommendation of its Special Committee (as hereinafter defined) that
holders of AFC Preferred Shares vote in favor of the approval and adoption
of this Agreement and the transactions contemplated hereby; and
(iii) use its best efforts to solicit from the AFC Shareholders
proxies in favor of the approval and adoption of this Agreement and the
transactions contemplated hereby, and take all other actions necessary or
advisable to secure the required approval and adoption by AFC Shareholders
of this Agreement and the transactions contemplated hereby.
Section 2.2 PROXY STATEMENT.
In connection with: (i) any solicitations of approval by AFC Shareholders
of this Agreement and the transactions contemplated hereby, AFC shall file with
the Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and with the appropriate
state governmental offices under the securities or "blue sky" laws of such
states, shall use all reasonable efforts to respond to the comments of the staff
of the Commission (the "Staff") or such state governmental offices and have
cleared by the Commission under the Exchange Act and shall promptly thereafter
mail to its shareholders, proxy solicitation materials, including a letter to
shareholders, notice of meeting, proxy statement and appropriate related forms
of proxies with respect to the AFC Shareholders' Meeting (the "Proxy Statement")
and, except as to participants in AFG's Retirement and Savings Plan, a form of
election and a related letter of transmittal to enable them to elect as to each
AFC Preferred Share held the Cash Consideration or the Stock Consideration. In
the event that a holder of AFC Preferred Shares fails to make an election
hereunder with respect to any or all of such shares on or before the AFC
Shareholders' Meeting, such holder shall be deemed for all purposes of this
Agreement to have elected to receive Cash Consideration with respect to those
AFC Preferred Shares as to which no election was made. A holder shall be deemed
to have made the requisite election when the properly completed forms of
election, including a letter of transmittal accompanied by the certificates
representing the AFC Preferred Shares (or with an appropriate guarantee of
delivery by a commercial bank, trust company or a registered broker), are mailed
by such holder in the United States by certified or registered mail, return
receipt requested, when given to a commercial overnight delivery or courier
service of nationally recognized standing or when delivered to AFC or its agent
designated for such purpose;
Section 2.3 CORRECTION OF STATEMENTS.
AFC shall correct promptly any information specifically provided by it for
inclusion in the Proxy Statement which shall have become false or misleading in
any material respect. AFC shall take all steps necessary to file or to cause to
be filed with the Commission and have declared effective or cleared by the
Commission any amendment or supplement to the Proxy Statement so as to correct
the same and to cause the Proxy Statement as so corrected to be disseminated to
AFC Shareholders, in each case as and to the extent required by applicable law.
The Proxy Statement shall comply as to form in all material respects with the
provisions of the Exchange Act and other applicable law.
ARTICLE 3
THE MERGER CLOSING
Section 3.1 TIME AND PLACE.
The consummation of the Merger (the "Closing") shall take place at the
offices of Keating, Muething & Klekamp, P.L.L., 1800 Provident Tower, One East
Fourth Street, Cincinnati, Ohio 45202, at 10:00 a.m.
A-4
<PAGE> 87
Eastern time on the date of the satisfaction or waiver of all conditions set
forth in Article 7 of this Agreement, or at such other place and time as the
parties hereto may agree.
Section 3.2 FILING OF CERTIFICATE OF MERGER.
At the Closing, AFC and AFC Acquisition shall cause agents acceptable to
both parties to deliver to the Secretary of State of the State of Ohio for
filing a Certificate of Merger duly executed by AFC and AFC Acquisition and
shall make all other deliveries, filings or recordings required by applicable
law to consummate the Merger.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF AFC AND AFC ACQUISITION
AFC and AFC Acquisition represent and warrant to AFG as follows:
Section 4.1 AUTHORITY RELATIVE TO THIS AGREEMENT.
(a) AFC has the corporate power and authority to execute and deliver
this Agreement and to carry out its obligations hereunder. The execution
and delivery by AFC of this Agreement and the consummation by AFC of the
transactions contemplated hereby have been duly approved and validly
authorized by the Board of Directors and by an independent committee of the
Board of Directors of AFC (the "Special Committee"). The Board of
Directors, upon recommendation of the Special Committee, has directed that
this Agreement be submitted to the shareholders of AFC for approval at a
meeting of such shareholders and, except for such approval, no other
corporate proceedings on the part of AFC are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered by AFC and, assuming the due
authorization, execution and delivery of this Agreement by AFG and AFC
Acquisition, constitutes a legal, valid and binding agreement of AFC,
enforceable against AFC in accordance with its terms.
(b) AFC Acquisition has the corporate power and authority to execute
and deliver this Agreement and to carry out its obligations hereunder. The
execution and delivery by AFC Acquisition of this Agreement and the
consummation by AFC Acquisition of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of AFC
Acquisition and shall be duly and validly authorized by AFC as the sole
shareholder of AFC Acquisition, and no other corporate proceedings on the
part of AFC Acquisition are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by AFC Acquisition and, assuming the due
authorization, execution and delivery of this Agreement by AFC and AFG,
constitutes a legal, valid and binding agreement of AFC Acquisition,
enforceable against AFC Acquisition in accordance with its terms.
Section 4.2 CONSENTS AND APPROVALS; NO VIOLATION.
Except in the case of clause (ii) below and for such failures to obtain
consents, approvals, authorizations or permits for, or make filings with or
notifications to, or such violations, conflicts, breaches, defaults,
terminations, accelerations and rights of termination, cancellation, amendment
or acceleration which, individually or in the aggregate, would not have a
material adverse effect on the business, operations or financial condition of
AFC, none of the execution and delivery of this Agreement by AFC, the
consummation by AFC of the transactions contemplated hereby, or compliance by
AFC with any of the provisions hereof will: (i) conflict with or result in a
breach of any provision of the charter or bylaws (or other organizational or
governing documents) of AFC; (ii) require any consent, approval, authorization
or permit of, or filing with or notification to, any governmental or regulatory
authority, except (A) pursuant to the Exchange Act, the Securities Act, the
securities or "blue sky" laws of certain states, (B) for filing a Certificate of
Merger pursuant to the applicable provisions of the Ohio General Corporation
Law; (iii) violate or conflict with any
A-5
<PAGE> 88
judgment, order, writ, injunction, decree, statute, rule or regulation
applicable to AFC; or (iv) conflict with, result in a breach of any provisions
of, constitute a default (or an event which with notice or lapse of time or both
would become a default) under, result in a termination of, accelerate the
performance required by, give to any third party any right of termination,
cancellation, amendment or acceleration under, or result in the creation of a
lien, security interest, charge or other encumbrance on any of the assets of AFC
pursuant to any note, bond, mortgage, indenture, license, lease, agreement or
other instrument or obligation to which AFC is a party or by which AFC may be
bound or affected.
Section 4.3 CAPITALIZATION OF AFC ACQUISITION.
The authorized capital stock of AFC Acquisition consists of 1,000 shares of
common stock, no par value ("AFC Acquisition Common Stock"). As of the date of
this Agreement, 100 shares of AFC Acquisition Common Stock were issuable and
outstanding, all of which were held directly by AFC. All of the issued and
outstanding shares are validly issued, fully paid and non-assessable and are not
subject to, nor were they issued in violation of, any preemptive rights.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF AFG
AFG represents and warrants to AFC and AFC Acquisition as follows:
Section 5.1 ORGANIZATION AND QUALIFICATION; ACTIVE SUBSIDIARIES.
AFG and each Subsidiary of AFG is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and each has all requisite corporate power and authority to own,
lease or operate the properties that it purports to own, lease or operate and to
carry on its business as it is now being conducted. Each of AFG and each of its
material Subsidiaries is duly qualified or licensed as a foreign corporation to
do business and is in good standing in each jurisdiction where the property
owned, leased or operated by it or the nature of its activities makes such
qualification or licensing necessary, except for such failures to be so duly
qualified or licensed and in good standing which would not have a material
adverse effect on the business, operations or financial condition of AFG and its
Subsidiaries, taken as a whole.
Section 5.2 AUTHORITY RELATIVE TO THIS AGREEMENT.
AFG has the corporate power and authority to execute and deliver this
Agreement and to carry out its obligations hereunder. The execution and delivery
of this Agreement by AFG and the consummation by AFG of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of AFG. No other corporate proceedings on the part of AFG are
necessary to consummate the transactions contemplated hereby. This Agreement has
been duly executed and delivered by AFG and, assuming the due authorization,
execution and delivery of this Agreement by AFC and AFC Acquisition, constitutes
a legal, valid and binding agreement of AFG, enforceable against AFG in
accordance with its terms.
Section 5.3 CONSENTS AND APPROVALS; NO VIOLATION.
Except in the case of clause 5.3(b) below, and for such failure to obtain
consents, approvals, authorizations or permits for, or make filings with or
notifications to, or such violations, conflicts, breaches, defaults,
terminations, accelerations and rights of termination, cancellation, amendment
or acceleration which, individually or in the aggregate, would not have a
material adverse effect on the business, operations or financial condition of
AFG and its Subsidiaries, taken as a whole, none of the execution and delivery
of this Agreement by AFG, the consummation by AFG of the transactions
contemplated hereby or compliance by AFG or any of its Subsidiaries with any of
the provisions hereof will: (a) conflict with or result in a breach of any
provision of the charter or by-laws of AFG or any Subsidiary of AFG; (b) require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, except (i)
A-6
<PAGE> 89
pursuant to the Exchange Act, the Securities Act, the securities or "blue sky"
laws of certain states, and (ii) for filing a certificate of merger under the
Ohio General Corporation Law; (c) violate or conflict with any judgment, order,
writ, injunction, decree, statute, rule or regulation applicable to AFG or any
of its Subsidiaries or any of their respective assets; or (d) conflict with,
result in a breach of any provisions of, constitute a default (or an event which
with notice or lapse of time or both would become a default) under, result in a
termination of, accelerate the performance required by, give to any third party
any right of termination, cancellation, amendment or acceleration under, or
result in the creation of a lien, security interest, charge or other encumbrance
on any of the assets of AFG or any of its Subsidiaries pursuant to, any note,
bond, mortgage, indenture, license, lease, agreement or other instrument or
obligation to which AFG or any of its Subsidiaries is a party or by which AFG or
any of its Subsidiaries or any of their respective assets may be bound or
affected.
Section 5.4 SEC REPORTS AND FINANCIAL STATEMENTS.
AFG has previously delivered or made available to AFC true and complete
copies of its (i) Annual Report on Form 10-K for the year ended December 31,
1996, as filed with the Commission, and all amendments thereto; and (ii) all
other reports, statements, proxies and registration statements (including
Current Reports on Form 8-K) filed by it with the Commission since December 31,
1996 (collectively, the "Commission Filings"). As of their respective dates, the
Commission Filings did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of AFG included in the Commission
Filings (the "Financial Statements") present fairly, in all material respects,
the financial condition, results of operations and changes in financial position
of AFG as at the dates or for the periods indicated therein in conformity with
generally accepted accounting principles applied on a consistent basis (except
as otherwise indicated in such financial statements or the notes thereto),
subject, in the case of unaudited interim financial statements, to normal
recurring year-end adjustments ("GAAP").
ARTICLE 6
ADDITIONAL AGREEMENTS
Section 6.1 BEST EFFORTS.
Subject to the terms and conditions herein provided, each of the parties
hereto shall use its best efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement and to obtain in a timely manner all waivers,
consents and approvals of, and to make all filings with and notifications to,
any third parties as are necessary in order to consummate the transactions
contemplated by this Agreement.
Section 6.2 POST-MERGER MATTERS.
If at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
Section 6.3 DISSENTERS' RIGHTS.
Holders of Preferred Shares shall be entitled to dissenters' rights as
provided under Section 1701.84 of the Ohio General Corporation Law.
Section 6.4 LISTING OF SHARES.
AFC shall use its best efforts to list the Series J Shares on the Pacific
Stock Exchange.
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ARTICLE 7
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 7.1 CONDITIONS TO THE OBLIGATIONS OF EACH PARTY.
The respective obligations of AFC, AFG and AFC Acquisition to effect the
Merger are subject to the satisfaction, at or prior to the Effective Time, of
the following conditions:
(a) There shall not be in effect: (i) any judgment, injunction, decree
or order issued by any federal, state or local court or arbitrator of
competent jurisdiction; or (ii) any statute, rule, regulation or order
enacted or promulgated by any federal, state or local, legislative,
administrative or regulatory body of competent jurisdiction, that in either
of cases (i) or (ii) prohibits or restricts or diminishes the benefits to
AFC and its affiliates of the consummation of the transactions contemplated
hereby or makes such consummation illegal or restricts in any material
respect or prohibits the effective operation of the business of AFC and its
Subsidiaries or AFG and its Subsidiaries after the consummation of the
transactions contemplated hereby;
(b) This Agreement and the Merger hereby contemplated shall have been
adopted and/or approved by the affirmative vote of (i) holders representing
two-thirds of the outstanding AFC Common Shares and Preferred Shares,
voting as one class, and (ii) holders representing two-thirds of the
outstanding AFC Preferred Shares;
(c) Special tax counsel to AFC shall have delivered to the Special
Committee and to AFG an opinion (dated the date of the Effective Time and
based on facts and subject to representations, assumptions, and
qualifications set forth in such opinion which are consistent with the
state of facts existing at the Effective Time), substantially to the effect
that: (i) no gain or loss will be recognized by AFC, AFC Acquisition or AFG
as a result of the Merger; (ii) no gain or loss will be recognized by an
AFC shareholder who receives solely shares of Series J Shares pursuant to
the Merger; (iii) the tax basis of the Series J Shares to an AFC
shareholder receiving solely Series J Shares will be the same as the tax
basis in the Preferred Shares surrendered; and (iv) the holding period of
an AFC shareholder in Series J Shares received in the Merger will include
the period during which such shareholder held the Preferred Shares
surrendered, provided such shares were held as capital assets immediately
prior to the Effective Time. In rendering such opinion, counsel may require
and rely upon representations contained in certificates of officers of AFC;
(d) The aggregate liquidation value of the Series J Shares to be
issued at the Effective Time, whether as a result of elections by holders
of Preferred Shares or stand-by commitments entered into with third
parties, shall be at least $70.4 million. If the aggregate liquidation
value of Series J Shares elected by holders of Preferred Shares exceeds
$70.4 million, then such holders shall be allocated Series J Shares on a
pro-rata basis.
Section 7.2 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF AFC.
The obligation of AFC to consummate the Merger is further subject to the
satisfaction (or waiver by AFC acting through its Special Committee), at or
prior to the Effective Time, of the following conditions:
(a) The representations and warranties of AFG contained in this
Agreement and in any certificate or other writing delivered by AFG pursuant
hereto shall be true and correct in all material respects, at and as of the
date of this Agreement and at and as of the Closing as if made at and as of
such time (except as to any representation or warranty which specifically
relates to an earlier date);
(b) Any and all material permits, consents, waivers, clearances,
approvals and authorizations of and filings with all third parties and
governmental bodies shall have been obtained which are required to
consummate the transactions contemplated hereby;
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(c) The Special Committee shall have received from Libra Investments,
Inc., an opinion dated the date of the mailing of the Proxy Statement, in
customary form, to the effect that the consideration for the Merger is fair
to holders of AFC Preferred Shares from a financial point of view;
(d) The Special Committee, at or prior to the time of mailing the
Proxy Statement, shall have received from the Administration Plan Committee
of AFG's Retirement and Savings Plan (the "RASP") a copy of the opinion of
Houlihan Lokey Howard & Zukin to the Administration Plan Committee with
respect to the Merger Consideration for those Preferred Shares held in the
RASP;
(e) All shares of Series J Shares to be issued to the holders of AFC
Preferred Shares pursuant to this Agreement at Closing shall, when issued,
be duly authorized, validly issued, fully paid and non-assessable.
Section 7.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF AFG.
The obligation of AFG to consummate the Merger is further subject to the
satisfaction, at or prior to the Effective Time, of the following conditions:
(a) AFC shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Closing;
(b) The representations and warranties of AFC contained in this
Agreement and in any certificate or other writing delivered by AFC pursuant
hereto shall be true and correct in all material respects, at and as of the
date of this Agreement and at and as of the Closing as if made at and as of
such time (except as to any representation or warranty which specifically
relates to an earlier date);
(c) Any and all material permits, consents, waivers, clearances,
approvals and authorizations of and filings with all third parties and
governmental bodies shall have been obtained which are required (i) to
consummate the transactions contemplated hereby or (ii) to prevent a
breach, default or right of termination under any agreement to which AFC is
a party or by which it is bound caused by consummation of the transactions
contemplated hereby.
ARTICLE 8
TERMINATION; AMENDMENTS; WAIVER
Section 8.1 TERMINATION.
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned at any time notwithstanding approval thereof by the AFC
Shareholders, but prior to the Effective Time:
(a) By the mutual written consent of the Board of Directors of each of
AFC (acting through its Special Committee) and AFG; or
(b) By either AFC (acting through its Special Committee), on the one
hand, or AFG, on the other, if a court of competent jurisdiction in the
United States or any state thereof or other United States governmental,
regulatory or administrative body shall have issued an order, decree or
ruling or taken any other action (which order, decree, ruling or other
action the parties agree to use their best efforts through appeals and
otherwise to vacate) permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling or other action shall have become final and nonappealable;
or
(c) By either AFC or AFG if, in the case of AFC, AFG materially
breaches a warranty, representation or covenant contained herein, or, in
the case of AFG, AFC materially breaches a warranty, representation or
covenant contained herein.
In the event of the termination of this Agreement pursuant to the terms of
this Section 8.1, this Agreement shall forthwith become void and have no effect,
without any liability on the part of either party
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hereto, except that: (A) the provisions of this Section 8.1 and Section 9.6
hereof shall survive any such termination and shall continue to be binding on
the parties hereto; and (B) nothing contained in this Section 8.1 shall relieve
any party from any liability, if any, for any termination of this Agreement
under paragraph (d) above.
Section 8.2 AMENDMENT.
This Agreement may be amended by the parties hereto at any time before or
after adoption of this Agreement by the shareholders of AFC but, after any such
shareholder approval, no amendment shall be made which adversely affects the
rights of the shareholders of AFC hereunder without the approval of the Special
Committee and the affected shareholders. This Agreement may not be amended,
modified or supplemented except by an instrument in writing signed by all the
parties hereto that expressly states that it amends, modifies or supplements
this Agreement.
Section 8.3 EXTENSION; WAIVER.
At any time prior to the Effective Time, any party hereto may: (i) extend
the time for the performance of any of the obligations or other acts of any
other party hereto; (ii) waive any inaccuracies in the representations and
warranties contained herein by any other party or in any document or writing
delivered pursuant hereto by such other party; or (iii) waive compliance with
any of the agreements of any other party or with any conditions to its own
obligations. Any agreement on the part of any party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE 9
MISCELLANEOUS
Section 9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.
Other than any covenant or agreement herein, the nature of which is to be
performed after the Closing, the representations, warranties, covenants and
agreements made in this Agreement shall only survive until the Effective Time.
Section 9.2 ENTIRE AGREEMENT; ASSIGNMENT.
This Agreement (including the Schedules, Exhibits and Annexes hereto)
constitutes the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all other prior or contemporaneous
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof. This Agreement may not be assigned, by
operation of law or otherwise, by any of the parties hereto without the prior
written consent of each of the other parties hereto. Any such purported
assignment undertaken or occurring without such consent shall be null and void
and of no legal force and effect.
Section 9.3 VALIDITY.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any of the other provisions of this
Agreement, each of which shall remain in full force and effect.
Section 9.4 NOTICES.
All notices, requests, claims, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by cable, telecopy or telex, or by registered or certified mail
(postage prepaid, return receipt requested) to the respective parties as
follows:
If to AFG:
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One East Fourth Street, Suite 919
Cincinnati, Ohio 45202
Attention: James E. Evans, Esq.
Telephone: (513) 579-2536
Facsimile: (513) 579-0108
with copies to:
Keating, Muething & Klekamp, P.L.L.
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Edward E. Steiner, Esq.
Telephone: (513) 579-6467
Facsimile: (513) 579-6957
If to AFC or AFC Acquisition:
One East Fourth Street, Suite 919
Cincinnati, Ohio 45202
Attention: James C. Kennedy, Esq.
Telephone: (513) 579-2538
Facsimile: (513) 579-0108
with copies to:
Taft, Stettinius & Hollister
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202-3957
Attention: Timothy E. Hoberg, Esq.
Telephone: (513) 357-9308
Facsimile: (513) 381-0205
or to such other address as the person to whom notice is given may have
previously furnished to the other in writing in the manner set forth above
(provided, that notice of any change of address shall be effective only upon
receipt thereof).
Section 9.5 GOVERNING LAW.
This Agreement shall in all respects be governed by and construed in
accordance with the laws of Ohio.
Section 9.6 EXPENSES.
All expenses incurred by any party hereto in connection with this Agreement
and the consummation of the transactions contemplated hereby shall be paid by
the party incurring such expenses.
Section 9.7 INTERPRETATION.
(a) The descriptive headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
(b) The term "Subsidiary" when used herein with respect to any person
means: (i) any corporation, partnership or other business association or entity
which meets the definition of "Significant Subsidiary" as set forth in Rule
12b-2 of the Securities Exchange Act of 1934. The term "person" when used herein
means any individual, corporation, partnership, joint venture, trust,
unincorporated association or other entity of any nature whatsoever. The term
"knowledge" when used herein with respect to AFG or AFC means actual knowledge
or actually knowing after due inquiry within AFG or AFC, as the case may be, and
their respective Subsidiaries (which due inquiry each party undertakes to make).
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Section 9.8 COUNTERPARTS.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement.
Section 9.9 PARTIES IN INTEREST.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
THIS SPACE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officer thereunto duly authorized on the day and
year first above written.
AMERICAN FINANCIAL CORPORATION
By: /s/ Karl J. Grafe
------------------------------------
Karl J. Grafe
Assistant Secretary
AFC ACQUISITION CORP.
By: /s/ Karl J. Grafe
------------------------------------
Karl J. Grafe
Assistant Secretary
AMERICAN FINANCIAL GROUP, INC.
By: /s/ James C. Kennedy
------------------------------------
James C. Kennedy
Secretary
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ANNEX I TO AGREEMENT
AND PLAN OF MERGER
AMERICAN FINANCIAL CORPORATION
CERTIFICATE OF DESIGNATION, PREFERENCE AND
RIGHTS OF SERIES J PREFERRED STOCK
Certificate of Designation, Preferences and Rights of Preferred Stock by
Resolution of the Board of Directors providing for an issue of 2,816,000 shares
from a class of voting preferred stock, without par value, such series
designated "Series J Preferred Stock".
- --------------------------------------------------------------------------------
Pursuant to the Amended and Restated Agreement and Plan of Merger dated
October 3, 1997 pursuant to which AFC Acquisition Corp., a wholly-owned
subsidiary of the Company, would merge with and into the Company ("Merger"), the
Articles of Incorporation of the Company are amended and restated as of the
Effective Time of the Merger, thereby providing, among other things, for the
issue of a series of Preferred Stock of the Company from the Company's class of
4,000,000 shares of Voting Preferred Shares, without par value, to be designated
"Series J Preferred Stock" ("Series J Preferred Stock"), such issue to consist
of 2,816,000 shares, which number of shares may be increased or decreased (but
not below the number of shares thereof then outstanding) from time to time by
the Board of Directors, and to the extent that the voting rights, designations,
powers, preferences and relative participating, optional or other special rights
and the qualifications, limitations or restrictions of the Series J Preferred
Stock are not stated and expressed in the Articles of Incorporation, does hereby
fix and herein state and express the voting rights, designations, powers,
preferences and relative participating, optional or other special rights and the
qualifications, limitations or restrictions thereof, as follows (all terms used
herein which are defined in the Articles of Incorporation shall be deemed to
have the meanings provided therein):
1. VOTING. Except as provided below in paragraph 5, holders of shares of
Series J Preferred Stock are entitled to one vote per share on all matters to be
voted upon by shareholders of the Company, with holders of the Company's Common
Stock, and not as a separate class.
2. DIVIDENDS. The holders of the Series J Preferred Stock shall be
entitled to receive, when, as, and if declared by the Board of Directors and out
of the assets of the Company which are by law available for the payment of
dividends, cumulative preferential dividends in the manner and at the rates set
forth below. Each of said shares shall have an annual dividend rate of $2.00 and
no more. Dividends shall be payable in equal payments of $1.00 semi-annually on
May 1 and November 1 of each year to holders of record as of the preceding April
15 and October 15.
Dividends on shares of Series J Preferred Sock shall be paid in cash.
No dividend or other distribution whatsoever shall be declared or paid upon
or set apart for any class of stock or series thereof ranking junior to the
Series J Preferred Stock as to the payment of dividends, nor shall any shares of
any class of stock or series thereof ranking junior to the Series J Preferred
Stock as to payment of dividends be redeemed or purchased by the Company or any
subsidiary thereof, nor shall any moneys be paid to or made available for a
sinking fund for the redemption or purchase of any shares of any class of stock
or series thereof ranking junior to the Series J Preferred Stock as to payment
of dividends, unless in each instance, full dividends on all outstanding shares
of Series J Preferred Stock for all past dividend periods shall have been paid
at the rate fixed therefor.
Dividends upon shares of the Series J Preferred Stock shall be payable by
check to the registered holders of Series J Preferred Stock at the address set
forth in the books and records of the Company or any transfer agent and/or
registrar appointed for the Series J Preferred Stock and shall commence to
accrue and be cumulative from their respective dates of issuance.
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3. RIGHTS ON LIQUIDATION OR CASH-OUT MERGER.
A. (1) Upon the liquidation, dissolution or winding up of the affairs of
the Company, whether voluntary or involuntary, holders of shares of Series J
Preferred Stock shall be entitled to receive, out of assets of the Company
available for distribution to stockholders after satisfying claims of creditors,
a liquidating distribution in the amount of $25.00 per share, which shall be the
liquidation preference of such shares, plus an amount equal to accrued dividends
on each such share to and including the date fixed for payment of Series J
Preferred Stock, and no more.
(2) Such amount shall be paid to the holders of the Series J Preferred
Stock prior to any distribution or payment to the holders of any class of stock
or series thereof ranking junior to the Series J Preferred Stock in the payment
of dividends or distributions of assets on liquidation, dissolution or winding
up of the affairs of the Company.
(3) After the payment to holders of shares of Series J Preferred Stock
of the full amount of the liquidating distributions to which they are entitled
pursuant to the second next preceding sentence, holders of the shares of Series
J Preferred Stock (in their capacity as such holders) shall have no right or
claim to any of the remaining assets of the Company.
B. In any merger or consolidation of the Company with or into any other
corporation, including any person (including any individual, partnership,
corporation, trust, unincorporated association, joint venture or other entity)
controlled by, in control of, or under common control with the Company
("Affiliate"), or a merger or consolidation of any other corporation, including
any Affiliate, with or into the Company, which merger or consolidation by its
terms provides for the payment of only cash to holders of the Series J Preferred
Stock, each holder of Series J Preferred Stock shall be entitled to receive an
amount equal to the liquidation preference of the shares of Series J Preferred
Stock held by such holder, plus an amount equal to accrued dividends on such
shares to and including the date of payment thereof, and no more, in exchange
for such shares of Series J Preferred Stock (a "Cash-Out Merger").
C. Neither the sale, lease or exchange (for cash, stock, securities or
other consideration) of all or substantially all of the property and assets of
the Company, nor the merger or consolidation of any other corporation with or
into the Company, nor the merger or consolidation of the Company with or into
any other corporation, shall be deemed to be a dissolution, liquidation or
winding up of the affairs of the Company, voluntary or involuntary, for the
purposes of this Paragraph 3; provided, however, that any Cash-Out Merger shall
be deemed to be a liquidation of the Company solely for purposes of determining
the rights of the holders of shares of Series J Preferred Stock in respect of
such Cash-Out Merger.
D. If upon liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary, the assets of the Company available
for distribution to the holders of Series J Preferred Stock and any other
preferred stock of the Company, ranking upon liquidation on a parity with the
Series J Preferred Stock (the "Liquidation Preferred"), shall be insufficient to
pay the full amount of the liquidating distributions to which holders of Series
J Preferred Stock are entitled pursuant to Paragraph 3. A. and liquidating
distributions to which holders of the Liquidation Preferred are entitled, then
such assets shall be distributed among the holders of Series J Preferred Stock
and Liquidation Preferred ratably in proportion to the full amount of
distributions to which each holder of Series J Preferred Stock and Liquidation
Preferred would have been entitled.
4. REDEMPTION.
A. OPTIONAL REDEMPTION. The Company shall not have the right to redeem any
shares of Series J Preferred Stock until [EIGHTH ANNIVERSARY OF ISSUANCE, 2005].
Thereafter, the Company shall have the right, at its option, and by resolution
of its Board of Directors, upon notice as required by Paragraph 4.B., to redeem
the Series J Preferred Stock out of funds legally available therefor, as a whole
or in part, at the redemption prices set forth below, plus all accrued dividends
thereon to the date fixed for redemption (against receipt of
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certificates evidencing the shares redeemed), if redeemed during the twelve
month period beginning on November 1 of the years indicated:
<TABLE>
<CAPTION>
YEAR AMOUNT PER SHARE
- ------------------------------ ----------------
<S> <C>
2005.......................... $ 25.75
2006.......................... $ 25.375
2007 and thereafter........... $ 25.00
</TABLE>
B. NOTICE OF REDEMPTION. Notice of any redemption specifying the date
fixed for said redemption shall be mailed, postage prepaid, at least 25 days but
not more than 60 days prior to said redemption date to the holders of record of
the Series J Preferred Stock to be redeemed at their respective addresses as the
same shall appear on the books and records of the Company or any transfer agent
and/or registrar for the Series J Preferred Stock. If less than all of the
Series J Preferred Stock outstanding is to be redeemed, the Company shall select
by lot those shares which are to be redeemed. If such notice of redemption shall
have been mailed, and if on or before the redemption date specified in such
notice all funds necessary for such redemption shall have been set aside by the
Company separate and apart from its other funds, in trust for the account of the
holders of the shares so to be redeemed, so as to be and continue to be
available therefor, then, on and after said redemption date, notwithstanding
that any certificate for shares of the Series J Preferred Stock so called for
redemption shall not have been surrendered for cancellation, the shares
represented thereby so called for redemption shall be deemed to be no longer
outstanding, the right to receive dividends thereon shall cease to accrue, and
all rights with respect to such shares of the Series J Preferred Stock so called
for redemption shall forthwith cease and terminate, except for the right to
receive the amount set aside in trust for redemption thereof, but without
interest.
5. RIGHTS IN THE EVENT OF DIVIDEND ARREARAGE; CLASS VOTING RIGHTS. In
addition to the voting rights set forth in paragraph 1 hereof, holders of Series
J Preferred Stock shall have the voting rights set forth below:
A. If at any time the Company shall not have paid full dividends for each
of four or more consecutive semi-annual dividends payable on the Series J
Preferred Stock pursuant to paragraph 2 hereof, the number of directors
constituting the Board of Directors of the Company shall be increased by two and
the holders of the Series J Preferred Stock shall have the right, voting as one
class, to elect the directors to fill such newly created directorships. This
right shall remain vested until all accrued dividends on any Series J Preferred
Stock have been paid, or declared and set apart for payment, at which time (i)
the right to so elect directors shall terminate (subject to revesting in the
case of any subsequent default of the kind described above); (ii) the term of
the directors then in office elected by such holders shall terminate; and (iii)
the number of directors constituting the Board of Directors of the Company shall
be reduced by the number of directors by which it was increased pursuant to this
subparagraph.
Whenever such right shall vest, it may be exercised initially either at a
special meeting of holders of such preferred stock or at any annual
stockholders' meeting, but thereafter it may be exercised at stockholders'
meetings called for the purpose of electing directors. A special meeting for the
exercise of such right shall be called by the Secretary of the Company as
promptly as possible, and in any event within 10 days after receipt of a written
request signed by the holders of record of at least 50% of the outstanding
shares of such preferred stock. Notwithstanding the provisions of this
subparagraph, 5A, no such special meeting shall be held during the 90-day period
preceding the date regularly fixed for the annual meeting of stockholders.
Any director who shall have been elected by the holders of Series J
Preferred Stock shall hold office for a term expiring (subject to the earlier
termination of the arrearage in dividends) at the next annual meeting of
stockholders. During such term such directors may be removed at any time,
without cause, by, and only by, the affirmative votes of the holders of record
of a majority of the outstanding shares of Series J Preferred Stock given at a
special meeting of such stockholders called for the purpose, except as otherwise
provided by Ohio law with respect to cumulative voting rights. Any vacancy
created by such removal may also be filled at such meeting. A meeting for the
removal of a director elected by the holders of Series J Preferred Stock and the
filling of the vacancy created thereby shall be called by the Secretary of the
Company within 10 days after
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receipt of a written request signed by the holders of record of at least 50% of
the outstanding shares of such preferred stock.
Any vacancy caused by the death or resignation of a director who shall have
been elected by the holders of the Series J Preferred Stock may be filled by the
remaining director elected under these provisions, or if none, by the holders of
Series J Preferred Stock at a meeting called for such purpose. Such meeting
shall be called by the Secretary of the Company at the earliest practicable date
after any such death or resignation and in any event within 10 days after
receipt of a written request signed by the holders of record of at least 50% of
the outstanding shares of such preferred stock.
At such meeting, the presence in person or by proxy of the holders of a
majority of the outstanding shares of the Series J Preferred Stock, as the case
may be, shall be required to constitute a quorum; in the absence of a quorum, a
majority of the holders of the Series J Preferred Stock present in person or by
proxy shall have the power to adjourn the meeting from time to time without
notice, other than announcement at the meeting, until a quorum shall be present.
B. Any action requiring the vote of the Series J Preferred Stock voting
separately as a class under Ohio law shall be taken by the affirmative vote of
the holders of a majority of such class or, if permitted by Ohio law, by the
affirmative consent of such majority.
Signed this day of , 1997.
--------------------------------------
Carl H. Lindner, Chief Executive
Officer
--------------------------------------
James C. Kennedy, Secretary
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SCHEDULE 1.5(b) TO
AGREEMENT AND PLAN OF MERGER
AMENDED ARTICLES OF INCORPORATION
OF
AMERICAN FINANCIAL CORPORATION
(Adopted , 1997 pursuant to Ohio Revised Code Section 1701.78(c)(3);
Shareholder vote separate from a vote on the Merger is not required)
FIRST. The name of the corporation shall be American Financial Corporation
(the "Corporation").
SECOND. The place in Ohio where its principal office is to be located is
the City of Cincinnati in Hamilton County, Ohio 45202.
THIRD. The purpose for which the Corporation is organized shall be to
engage in any lawful act or acts for which corporations may be formed under the
Ohio General Corporation Law, Ohio Revised Code sec.1701.01 et seq.
FOURTH. The aggregate number of shares of stock which the Corporation shall
have authority to issue is Twenty-Eight Million (28,000,000) shares, which shall
be divided into two classes, consisting of:
(a) Eight Million (8,000,000) shares of preferred stock ("Preferred
Shares") without par value; and
(b) Twenty Million (20,000,000) shares of common stock ("Common Shares")
without par value.
PART ONE: PREFERRED STOCK
Clause 1. Except as otherwise provided by this Article Fourth or by the
amendment or amendments adopted by the Board of Directors provided for the issue
of any series of Preferred Shares, the Preferred Shares may be issued at any
time or from time to time in any amount, not exceeding the aggregate, including
all shares of any and all series thereof theretofore issued, the Eight Million
(8,000,000) Preferred Shares hereinabove authorized, as Preferred Shares of one
or more series, as hereinafter provided, and for such lawful consideration as
shall be fixed from time to time by the Board of Directors.
Four Million (4,000,000) Preferred Shares shall have voting rights as
provided in and pursuant to Clause 2 of this Part One of Article Fourth
(collectively, "Voting Preferred Shares").
Four Million (4,000,000) Preferred Shares shall have no voting power
whatsoever, except as may be otherwise provided by law or except as may arise
upon a default, failure or other contingency (collectively, "Non-Voting
Preferred Shares").
All shares of any one series of Preferred Shares shall be alike in every
particular, each series thereof shall be distinctively designated by letter or
descriptive words, and all series of Preferred Shares shall rank equally and be
identical in all respects except as provided above with respect to Voting
Preferred Shares and Non-Voting Preferred Shares or as permitted by the
provisions of Clause 2 of this Part One of Article Fourth.
Clause 2. Authority is hereby expressly granted to the Board of Directors
from time to time to adopt amendments to these Articles of Incorporation
providing for the issue in one or more series of any unissued or treasury
Preferred Shares, and providing, to the fullest extent now or hereafter
permitted by the laws of the State of Ohio and notwithstanding the provisions of
any other Article of these Articles of Incorporation of the Corporation, in
respect of the matters set forth in the following subdivisions (i) to (x),
inclusive, as well as any other rights or matters pertaining to such series:
(i) The designation and number of shares of such series;
(ii) With respect to the Voting Preferred Shares only, voting rights
(to the fullest extent now or hereafter permitted by the laws of the State
of Ohio);
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(iii) With respect to the Non-Voting Shares only, voting rights upon a
default, failure or other contingency;
(iv) The dividend rate or rates of such series (which may be variable
or adjustable rate and which may be cumulative);
(v) The dividend payment date or dates of such series;
(vi) The price or prices at which shares of such series may be
redeemed;
(vii) The amount of the sinking fund, if any, to be applied to the
purchase or redemption of shares of such series and the manner of its
application;
(viii) The liquidation price or prices of such series;
(ix) Whether or not the shares of such series shall be made
convertible into, or exchangeable for, shares of any other class or classes
or of any other series of the same class of stock of the Corporation or any
other property, and if made so convertible or exchangeable, the conversion
price or prices, or the rates of exchange at which such conversion or
exchange may be made and the adjustments thereto, if any; and
(x) Whether or not the issue of any additional shares of such series
or any future series in addition to such series shall be subject to any
restrictions and, if so, the nature of such restrictions.
Any of the voting rights (with respect to the Voting Preferred Shares only),
voting rights upon a default, failure or other contingency (with respect to the
Non-Voting Preferred Shares only), dividend rate or rates, dividend payment date
or dates, redemption rights and price or prices, sinking fund requirements,
liquidation price or prices, conversion or exchange rights and restrictions on
issuance of shares of any such series of Preferred Shares may, to the fullest
extent now or hereafter permitted by the laws of the State of Ohio, be made
dependent upon facts ascertainable outside these Articles of Incorporation or
outside the amendment or amendments providing for the issue of such Preferred
Shares adopted by the Board of Directors pursuant to authority expressly vested
in it by this Article Fourth. If the then-applicable laws of the State of Ohio
do not permit the Board of Directors to fix, by the amendment creating a series
of Voting Preferred Shares, the voting rights of shares of such series, each
holder of a share of such series of Voting Preferred Shares shall, except as may
be otherwise provided by law, be entitled to one (1) vote for each share of
Voting Preferred Shares of such series held by such holder.
Clause 3. Before any dividends shall be declared or paid upon or set apart
for, or distribution made on, the Common Shares and before any sum shall be paid
or set apart for the purchase or redemption of Preferred Shares of any series,
except for any series that may be established as senior to or having preference
over the terms of any other series, whether or not outstanding at the time of
adoption of the amendment creating such Preferred Series by the Board of
Directors, or for the purchase of the Common Shares, the holders of Preferred
Shares of each series shall be entitled to receive, if and when declared by the
Board of Directors, dividends at the rate or rates fixed for such series in
accordance with the provisions of this Article Fourth, and no more, from the
dividend payment date of, or next preceding the date of, issue thereof, payable
on the payment date or dates fixed from time to time by the Board of Directors.
Clause 4. After full dividends as aforesaid upon the Preferred Shares of
all series then outstanding shall have been paid for all past dividend periods,
and after or concurrently with making payment of or provision for full dividends
on the Preferred Shares of all series then outstanding for the current dividend
period, then and not otherwise dividends may be declared upon the Common Shares
at such rate as the Board of Directors may determine and no holders of any
series of the Preferred Shares, as such, shall be entitled to share therein.
Clause 5. If upon any dissolution, liquidation or winding up of the
Corporation or reduction of its capital stock, the assets so to be distributed
among the holders of the Preferred Shares pursuant to the provisions of this
Article Fourth or of the amendment or amendments providing for the issue of such
Preferred Shares adopted by the Board of Directors pursuant to authority
expressly vested in it by this Article Fourth shall be insufficient to permit
the payment to such holders of the full preferential amounts aforesaid, the
entire assets of the Corporation shall be distributed ratably among the holders
of the Preferred Shares in proportion to the
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full preferential amounts to which they are respectively entitled as in
proportion to the full preferential amounts to which they are respectively
entitled as aforesaid. After payment to the holders of the Preferred Shares of
the full preferential amounts hereinbefore provided for, the holders of the
Preferred Shares, as such, shall have no right or claim to any of the remaining
assets of the Corporation and the remaining assets to be distributed, if any,
shall be distributed to the holders of the Common Shares.
Clause 6. The term "accrued dividends", whenever used in these Amended
Articles of Incorporation or any amendment concerning the terms of Preferred
Shares, or otherwise with respect to the Preferred Shares of any series, means
those amounts which would have been paid as dividends on the Preferred Shares of
such series to date had full dividends been paid thereon at the rate and on the
dates fixed for payment for such series in accordance with the provisions of
this Article Fourth, less in each case the amount of all dividends paid upon the
shares of such series and the dividends deemed to have been paid as provided in
Clause 3 of Article Fourth.
Clause 7. Preferred Shares of any series redeemed or purchased by the
Corporation shall be retired and cancelled and shall not be reissued by the
Board of Directors of the Corporation and shall be restored to the status of
authorized but unissued Preferred Shares. The Board of Directors shall, upon the
redemption or repurchase of all the outstanding shares of any series of
Preferred Shares, adopt an amendment to these Articles of Incorporation to
eliminate all references to the shares of such series of Preferred Shares and to
make such other appropriate changes as are required by such elimination.
FIFTH. No holder of any shares of this Corporation shall have any
preemptive rights to subscribe for or to purchase any shares of this Corporation
of any class, whether such shares or such class be now or hereafter authorized,
or to purchase or subscribe for securities convertible into, or exchangeable
for, shares of any class or to which shall be attached or appertained any
warrants or rights entitling the holder thereof to purchase or subscribe for
shares of any class.
SIXTH. This Corporation, through its Board of Directors, shall have the
right and power to purchase any of its outstanding shares at such price and upon
such terms as may be agreed upon between the Corporation and any selling
shareholder.
SEVENTH. The affirmative vote of shareholders entitled to exercise a
majority of the voting power of this Corporation shall be required to amend
these Articles of Incorporation, approve mergers and to take any other action
which by law must be approved by a specified percentage of the voting power of
the Corporation or all outstanding shares entitled to vote.
EIGHTH. The provisions of Ohio Revised Code sec.1701.831 or any successor
provisions relating to control share acquisitions shall not be applicable to
this Corporation.
NINTH. The provisions of Ohio Revised Code Chapter 1704 or any successor
provisions relating to the transactions involving interested shareholders shall
not be applicable to this Corporation.
TENTH. No shareholder shall have the right to vote cumulatively in the
election of directors.
ELEVENTH. These Amended Articles of Incorporation take the place of and
supercede the existing Articles of Incorporation as heretofore amended and
restated.
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AMENDED CODE OF REGULATIONS
OF
AMERICAN FINANCIAL CORPORATION
(Adopted , 1997)
ARTICLE I
FISCAL YEAR
Unless otherwise designated by the Board of Directors, the fiscal year of
the Corporation after the adoption of this Code of Regulations shall end each
December 31.
ARTICLE II
SHAREHOLDERS
Section 1. MEETINGS OF THE SHAREHOLDERS.
1.1 Annual Meetings. The Annual Meeting of the Shareholders of this
Corporation, for the election of the Board of Directors and the transaction of
such other business as may properly be brought before such meeting, shall be
held at 10:00 a.m. on the third Monday in May each year or such other time and
at such place as designated by the Board of Directors. If the Annual Meeting is
not held or if Directors are not elected thereat, a Special Meeting may be
called and held for that purpose.
1.2 Special Meetings. Special meetings of the Shareholders may be held on
any business day when called by the Chairman of the Board, the President, a
majority of Directors, or persons holding twenty-five percent of all voting
power of the Corporation and entitled to vote. Calls for special business shall
be considered at any such meeting other than that specified in the call
therefor.
1.3 Place of Meetings. Any meeting of Shareholders may be held at such
place within or without the State of Ohio as may be designated in the Notice of
said meeting.
1.4 Notice of Meeting and Waiver of Notice
1.4.1 Notice. Written notice of the time, place and purposes of any
meeting of Shareholders shall be given to each Shareholder entitled thereto
not less than seven (7) days nor more than sixty (60) days before the date
fixed for the meeting and as prescribed by law. Such notice shall be given
either by personal delivery or mail to the Shareholders at their respective
addresses as they appear upon the records of the Corporation. Notice shall
be deemed to have been given on the day mailed. If any meeting is adjourned
to another time or place, no notice as to such adjourned meeting need be
given other than by announcement at the meeting at which such an
adjournment is taken. No business shall be transacted at any such adjourned
meeting except as might have been lawfully transacted at the meeting at
which such adjournment was taken.
1.4.2 Notice to Joint Owners. All notices with respect to any shares
to which persons are entitled by joint or common ownership may be given to
that one of such persons who is named first upon the books of this
Corporation, and notice so given shall be sufficient notice to all the
holders of such shares.
1.4.3 Waiver. Notice of any meeting may be waived in writing by any
Shareholder either before or after any meeting, or by attendance at such
meeting without protest to its commencement.
1.5 Shareholders Entitled to Notice and to Vote. If a record date shall not
be fixed, the record date for the determination of Shareholders entitled to
notice of or to vote at any meeting of Shareholders shall be the close of
business on the forty-fifth prior to the date of the meeting and only
Shareholders of record at such record date shall be entitled to notice of and to
vote at such meeting.
1.6 Quorum and Voting. The holders of shares entitling them to exercise a
majority of the voting power of the Corporation, present in person or by proxy,
shall constitute a quorum for any meeting. The Shareholders
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present in person or by proxy, whether or not a quorum be present, may adjourn
the meeting from time to time without notice other than by announcement at the
meeting.
Except as provided by statute or in the Articles, every Shareholder
entitled to vote shall be entitled to cast one vote on each proposal submitted
to the meeting for each share held of record on the record date for the
determination of the Shareholders entitled to vote at the meeting. At any
meeting at which a quorum is present, all questions and business which may come
before the meeting shall be determined by a majority of votes cast, except when
a greater proportion is required by law, the Articles, or these Regulations.
1.7 Organization of Meetings.
1.7.1 Presiding Officer. The Chairman of the Board, or in his absence,
the President, or in the absence of both of them, a Vice President of the
Corporation, shall call all meetings of the Shareholders to order and shall
act as Chairman thereof; if all are absent, the Shareholders shall elect a
Chairman.
1.7.2 Minutes. The Secretary of the Corporation, or in his absence, an
Assistant Secretary, or, in the absence of both, a person appointed by the
Chairman of the meeting, shall act as Secretary of the meeting and shall
keep and make a record of the proceedings thereat.
1.8 Order of Business. The order of business shall be as established by the
Chairman or by a majority of the directors.
1.9 Proxies. A person who is entitled to attend a Shareholders' meeting, to
vote thereat, or to execute consents, waivers and releases, may be represented
at such meeting or vote thereat, and execute consents, waivers, and releases and
exercise any of his rights, by proxy or proxies appointed by a writing signed by
such person, or by his duly authorized attorney which may be transmitted
physically, or by mail, by facsimile or other electronic medium.
1.10 List of Shareholders. At any meeting of Shareholders a list of
Shareholders, alphabetically arranged, showing the number and classes of shares
held by each on the record date applicable to such meeting, shall be produced on
the request of any Shareholder.
Section 2. NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS.
2.1 Annual Meetings of Shareholders. Nominations of persons for election to
the Board of Directors and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders pursuant to the
Corporation's notice of the meeting, by or at the direction of the Board of
Directors or by any shareholder of the Corporation who was a shareholder of
record at the time of giving of notice provided for in this Regulation, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth herein.
For nominations or other business properly to be brought before an annual
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for shareholder action. To be timely, a
shareholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that if the date of the annual meeting is more than 30 days before or more than
60 days after such anniversary date, notice must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the Corporation. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of notice. Such notice shall set forth as to each person
whom the shareholder proposes to nominate for election as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 14a-11
thereunder including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected. As to any other
business that the shareholder
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proposes to bring before the meeting, such notice shall include a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made. The shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
shall state the name and address of such shareholder, as they appear on the
Corporation's books, and of such beneficial owner and the class and number of
shares of the Corporation which are owned beneficially and of record by such
shareholder and such beneficial owner.
If the number of directors to be elected is increased and there is no
public announcement by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice required by this Regulation shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
Corporation.
2.2 Special Meetings of Shareholders. Only such business shall be conducted
at a special meeting of shareholders as shall have been brought before the
meeting pursuant to the Corporation's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
shareholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (a) by or at the direction of the Board of Directors or (b)
provided that the Board of Directors has determined that directors shall be
elected at such meeting, by any shareholder of the Corporation who is a
shareholder of record at the time of giving notice provided for in this
Regulation, who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in this Regulation. If the Corporation calls a
special meeting of shareholders for the purpose of electing one or more
directors to the Board of Directors, any such shareholder may nominate a person
or persons for election to such position(s) as specified in the Corporation's
notice of meeting, if the shareholder's notice required by this Regulation shall
be delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the close of business on the 90th day prior to such
special meeting and not later than the close of business on the later of the
60th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such
meeting. In no event shall the public announcement of an adjournment of a
special meeting commence a new time period for the giving of a shareholder's
notice as described above.
2.3 General. Only such persons who are nominated in accordance with the
procedures set forth in this Regulation shall be eligible to serve as directors
and only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Regulation. Except as otherwise provided by law, the Articles of
Incorporation or these Code of Regulations, the Chairman of the meeting shall
have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Regulation and, if any
proposed nomination or business is not in compliance with this Regulation, to
declare that such defective proposal or nomination shall be disregarded.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS.
The authority of this Corporation shall be exercised by or under the
direction of the Board of Directors, except where the law, the Articles or these
Regulations require action to be authorized or taken by the Shareholders.
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Section 2. ELECTION, NUMBER AND QUALIFICATION OF DIRECTORS.
2.1 Election. The Directors shall be elected at the annual meeting of the
Shareholders, or if not so elected, at a special meeting of Shareholders called
for that purpose.
2.2 Number. The number of Directors, which shall not be less than the
lesser of three or the number of Shareholders of record, may be fixed or changed
at a meeting of the Shareholders called for the purpose of electing Directors at
which a quorum is present, by a majority of votes cast at the meeting. In
addition, the number of Directors may be fixed or changed by action of the
Directors at a meeting called for that purpose at which a quorum is present by a
majority vote of the Directors present at the meeting. The Directors then in
office may fill any Director's office that is created by an increase in the
number of Directors. The number of Directors elected shall be deemed to be the
number of Directors fixed unless otherwise fixed by resolution adopted at the
meeting at which such Directors are elected.
2.3 Qualifications. Directors need not be Shareholders of the Corporation.
Section 3. TERM OF OFFICE OF DIRECTORS.
3.1 Term. Each Director shall hold office until the next annual meeting of
the Shareholders and until his successor has been elected or until his earlier
resignation, removal from office, or death. Directors shall be subject to
removal as provided by statute or by other lawful procedures and nothing herein
shall be construed to prevent the removal of any or all Directors in accordance
therewith.
3.2 Resignation. A resignation from the Board of Directors shall be deemed
to take effect immediately upon its being received by any incumbent corporate
officer other than an officer who is also the resigning Director, unless some
other time is specified therein.
3.3 Vacancy. In the event of any vacancy in the Board of Directors for any
cause, the remaining Directors, though less than a majority of the whole Board,
may fill any such vacancy for the unexpired term.
Section 4. MEETINGS OF DIRECTORS.
4.1 Regular Meetings. A regular meeting of the Board of Directors shall be
held immediately following the adjournment of the meeting of Shareholders at
which Directors are elected. The holding of such Shareholders' meeting shall
constitute notice of such Directors' meeting and such meeting shall be held
without further notice. Other regular meetings shall be held at such other times
and places as may be fixed by the Directors.
4.2 Special Meetings. Special Meetings of the Board of Directors may be
held at any time upon call of the Chairman of the Board, the President, any Vice
President, or any two Directors.
4.3 Place of Meeting. Any meeting of Directors may be held at such place
within or without the State of Ohio as may be designated in the notice of said
meeting.
4.4 Notice of Meeting and Waiver of Notice. Notice of the time and place of
any regular or special meeting of the Board of Directors shall be given to each
Director by personal delivery, telephone, facsimile transmission or mail at
least forty-eight hours before the meeting, which notice need not specify the
purpose of the meeting.
Section 5. QUORUM AND VOTING.
At any meeting of Directors, not less than one-half of the whole authorized
number of Directors is necessary to constitute a quorum for such meeting, except
that a majority of the remaining Directors in office constitutes a quorum for
filling a vacancy in the Board. At any meeting at which a quorum is present, all
acts, questions, and business which may come before the meeting shall be
determined by a majority of votes cast by the Directors present at such meeting,
unless the vote of a greater number is required by the Articles, Regulations or
By-Laws.
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Section 6. COMMITTEES.
6.1 Appointment. The Board of Directors may from time to time appoint
certain of its members to act as a committee or committees in the intervals
between meetings of the Board and may delegate to such committee or committees
power to be exercised under the control and direction of the Board. Each
committee shall be composed of at least three directors unless a lesser number
is allowed by law. Each such committee and each member thereof shall serve at
the pleasure of the Board.
6.2 Executive Committee. In particular, the Board of Directors may create
from its membership and define the powers and duties of an Executive Committee.
During the intervals between meetings of the Board of Directors, the Executive
Committee shall possess and may exercise all of the powers of the Board of
Directors in the management and control and the business of the Corporation to
the extent permitted by law.
6.3 Committee Action. Unless otherwise provided by the Board of Directors,
a majority of the members of any committee appointed by the Board of Directors
pursuant to this Section shall constitute a quorum at any meeting thereof and
the act of a majority of the members present at a meeting at which a quorum is
present shall be the act of such committee. Action may be taken by any such
committee without a meeting by a writing signed by all its members. Any such
committee shall prescribe its own rules for calling and holding meetings and its
method of procedure, subject to any rules prescribed by the Board of Directors,
and shall keep a written record of all action taken by it.
Section 7. ACTION OF DIRECTORS WITHOUT A MEETING.
Any action which may be taken at a meeting of Directors or any committee
thereof may be taken without a meeting if authorized by a writing or writings
signed by all the Directors or all of the members of the particular committee,
which writing or writings shall be filed or entered upon the records of the
Corporation.
Section 8. COMPENSATION OF DIRECTORS.
The Board of Directors may allow compensation to directors for performance
of their duties and for attendance at meetings or for any special services, may
allow compensation to members of any committee, and may reimburse any Director
for his expenses in connection with attending any Board or committee meeting.
Section 9. RELATIONSHIP WITH CORPORATION.
Directors shall not be barred from providing professional or other services
to the Corporation. No contract, action or transaction shall be void or voidable
with respect to the Corporation for the reason that it is between or affects the
Corporation and one or more of its Directors, or between or affects the
Corporation and any other person in which one or more of its Directors are
directors, trustees or officers or have a financial or personal interest, or for
the reason that one or more interested Directors participate in or vote at the
meeting of the Directors or committee thereof that authorizes such contract,
action or transaction, if in any such case any of the following apply:
9.1 the material facts as to the Director's relationship or interest and as
to the contract, action or transaction are disclosed or are known to the
Directors or the committee and the Directors or committee, in good faith,
reasonably justified by such facts, authorize the contract, action or
transaction by the affirmative vote of a majority of the disinterested
Directors, even though the disinterested Directors constitute less than a
quorum;
9.2 the material facts as to the Director's relationship or interest and as
to the contract, action or transaction are disclosed or are known to the
shareholders entitled to vote thereon and the contract, action or transaction is
specifically approved at a meeting of the shareholders held for such purpose by
the affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Corporation held by persons not interested
in the contract, action or transaction; or
9.3 the contract, action or transaction is fair as to the Corporation as of
the time it is authorized or approved by the Directors, a committee thereof or
the shareholders.
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Section 10. ATTENDANCE AT MEETINGS OF PERSONS WHO ARE NOT DIRECTORS
Unless waived by the Chairman, any Director who desires the presence at any
regular or special meeting of the Board of Directors of a person who is not a
Director, shall notify all other Directors, not less than twenty-four hours
before such meeting, request the presence of such person and state the reason in
writing. Such person will not be permitted to attend the Directors' meeting
unless a majority of the Directors in attendance vote to admit such person to
the meeting. Such vote shall constitute the first order of business for any such
meeting of the Board of Directors. Such right to attend, whether granted by
waiver or vote, may be revoked at any time during any such meeting by the vote
of a majority of the Directors in attendance.
ARTICLE IV
OFFICERS
Section 1. GENERAL PROVISIONS.
The Board of Directors shall elect a President, a Secretary and a
Treasurer, and may elect a Chairman of the Board, one or more Vice Presidents,
and such other officers and assistant officers as the Board may from
time-to-time deem necessary. The Chairman of the Board, if any, shall be a
Director, but none of the other officers need be a Director. Any two or more
offices may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument is required to be executed, acknowledged or verified by two or more
officers.
Section 2. POWERS AND DUTIES.
All officers, as between themselves and the Corporation, shall respectively
have such authority and perform such duties as are customarily incident to their
respective offices, and as may be specified from time to time by the Board of
Directors, regardless of whether such authority and duties are customarily
incident to such office. In the absence of any officer of the Corporation, or
for any other reason the Board of Directors may deem sufficient, the powers or
duties of such officer, or any of them may be delegated, to any other officer or
to any Director. The Board of Directors may from time to time delegate to any
officer authority to appoint and remove subordinate officers and to prescribe
their authority and duties.
Section 3. TERM OF OFFICE AND REMOVAL.
3.1 Term. Each officer of the Corporation shall hold office at the pleasure
of the Board of Directors, and unless sooner removed by the Board of Directors,
until the meeting of the Board of Directors following the date of election of
Directors and until his successor is elected and qualified.
3.2 Removal. The Board of Directors may remove any officer at any time with
or without cause by the affirmative vote of a majority of Directors in office.
Section 4. COMPENSATION OF OFFICERS.
Unless compensation is otherwise determined by a majority of the Directors
at a regular or special meeting of the Board of Directors or unless such
determination is delegated by the Board of Directors to a committee of
directors, the President, or a Chief Executive Officer, if one has been elected,
of the Corporation from time to time shall determine the compensation to be paid
to all officers and other employees for services rendered to the Corporation.
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ARTICLE V
INDEMNIFICATION
Section 1. RIGHT TO INDEMNIFICATION.
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved (including, without limitation, as a witness) in any
actual or threatened action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a director or officer of the Corporation or that,
being or having been such a director or officer of the Corporation, he or she is
or was serving at the request of an executive officer of the Corporation as a
director, officer, partner, employee, or agent of another corporation,
partnership, joint venture, trust, limited liability company, or other enter
prise, including service with respect to an employee benefit plan (hereinafter
an "indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as such a director, officer, partner, employee, or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by the General Corporation Law of Ohio, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), or by other applicable law as then in
effect, against all expense, liability, and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the indemnitee's heirs, executors, and administrators. Except as
provided in Section 2 with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized or ratified by the Board of
Directors of the Corporation.
The right to indemnification conferred in this Section 1 shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"). An advancement of
expenses incurred by an indemnitee in his or her capacity as a director, officer
or employee (and not in any other capacity in which service was or is rendered
by such indemnitee including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking, by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under this Section 1 or otherwise. An advancement of expenses
shall not be made if the Corporation's Board of Directors makes a good faith
determination that such payment would violate law or public policy.
Section 2. RIGHT OF INDEMNITEE TO BRING SUIT.
If a claim under Section 1 is not paid in full by the Corporation within
sixty days after a written claim has been received by the Corporation, except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty days, the indemnitee may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim. If
successful in whole or in part in any such suit, or in a suit brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall also be entitled to be paid the expense of
prosecuting or defending such suit. The indemnitee shall be presumed to be
entitled to indemnification under this Article V upon submission of a written
claim (and, in an action brought to enforce a claim for an advancement of
expenses, where the required undertaking has been tendered to the Corporation),
and thereafter the Corporation shall have the burden of proof to overcome the
presumption that the indemnitee is not so entitled. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances, nor
an actual determination by the Corporation (including its Board of Directors,
independent
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legal counsel, or its shareholders) that the indemnitee is not entitled to
indemnification shall be a defense to the suit or create a presumption that the
indemnitee is not so entitled.
Section 3. NONEXCLUSIVITY AND SURVIVAL OF RIGHTS.
The rights to indemnification and to the advancement of expenses conferred
in this Article V shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provisions of the Articles of
Incorporation, Code of Regulation, agreement, vote of shareholders or
disinterested directors, or otherwise.
Notwithstanding any amendment to or repeal of this Article V, or of any of
the procedures established by the Board of Directors pursuant to Section 7, any
indemnitee shall be entitled to indemnification in accordance with the
provisions hereof and thereof with respect to any acts or omissions of such
indemnitee occurring prior to such amendment or repeal.
Without limiting the generality of the foregoing paragraph, the rights to
indemnification and to the advancement of expenses conferred in this Article V
shall, notwithstanding any amendment to or repeal of this Article V, inure to
the benefit of any person who otherwise may be entitled to be indemnified
pursuant to this Article V (or the estate or personal representative of such
person) for a period of six years after the date such person's service to or in
behalf of the Corporation shall have terminated or for such longer period as may
be required in the event of a lengthening in the applicable statute of
limitations.
Section 4. INSURANCE, CONTRACTS, AND FUNDING.
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee, or agent of the Corporation or another
corporation, partnership, joint venture, trust, or other enterprise against any
expense, liability, or loss, whether or not the Corporation would have the power
to indemnify such person against such expense, liability, or loss under the
General Corporation Law of Ohio. The Corporation may enter into contracts with
any indemnitee in furtherance of the provisions of this Article V and may create
a trust fund, grant a security interest, or use other means (including, without
limitation, a letter of credit) to ensure the payment of such amounts as may be
necessary to effect indemnification as provided in this Article V.
Section 5. PERSONS SERVING OTHER ENTITIES.
Any person who is or was a director, officer, or employee of the
Corporation who is or was serving (i) as a director or officer of another
corporation of which a majority of the shares entitled to vote in the election
of its directors is held by the Corporation or (ii) in an executive or
management capacity in a partnership, joint venture, trust, limited liability
company or other enterprise of which the Corporation or a wholly-owned
subsidiary of the Corporation is a general partner or member or has a majority
ownership shall be deemed to be so serving at the request of an executive
officer of the Corporation and entitled to indemnification and advancement of
expenses under Section 1.
Section 6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION.
The Corporation may, by action of its Board of Directors, authorize one or
more executive officers to grant rights to advancement of expenses to employees
or agents of the Corporation on such terms and conditions no less stringent than
provided in Section 1 hereof as such officer or officers deem appropriate under
the circumstances. The Corporation may, by action of its Board of Directors,
grant rights to indemnification and advancement of expenses to employees or
agents or groups of employees or agents of the Corporation with the same scope
and effect as the provisions of this Article V with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation; provided, however, that an undertaking shall be made by an employee
or agent only if required by the Board of Directors.
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Section 7. PROCEDURES FOR THE SUBMISSION OF CLAIMS.
The Board of Directors may establish reasonable procedures for the
submission of claims for indemnification pursuant to this Article V,
determination of the entitlement of any person thereto, and review of any such
determination. Such procedures shall be set forth in an appendix to these Code
of Regulations and shall be deemed for all purposes to be a part hereof.
ARTICLE VI
AMENDMENTS
This Code of Regulations may be amended by the affirmative vote or the
written consent of the Shareholders entitled to exercise a majority of the
voting power on such proposal. If an amendment is adopted by written consent the
Secretary shall mail a copy of such amendment to each Shareholder who would be
entitled to vote thereon and did not participate in the adoption thereof. This
Code of Regulations may also be amended by the affirmative vote of a majority of
the directors to the extent permitted by Ohio law at the time of such amendment.
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EXHIBIT B
LIBRA INVESTMENTS, INC.
October 31, 1997
Special Committee of the Board of Directors
American Financial Corporation
c/o Taft, Stettinius & Hollister
1800 Star Bank Center
425 Walnut Street
Cincinnati, OH 45202-3957
Gentlemen:
We understand that American Financial Corporation, an Ohio corporation
("AFC") and AFC Acquisition Corp., an Ohio corporation ("AFC Acquisition") have
proposed a merger of AFC Acquisition with and into AFC (the "Merger"). In
conjunction with the Merger, we further understand that the AFC Series F and
Series G Preferred Stock would be converted into cash or, at the option of the
holders of Series F and Series G Preferred Stock (the "AFC Preferred
Shareholders"), equivalent liquidation preference of a new issue of AFC Series J
voting preferred stock (the "Transaction Consideration"). In the Merger, the
cash portion of the Transaction Consideration would be $10.50 for the Series G
Preferred Stock and would be determined by a formula for the Series F Preferred
Stock (the "Series F Consideration"). The Series F Consideration will be equal
to the greater of (i) $23.75 or (ii) a Fixed Spread Price which represents an
amount which would provide a current yield of 140 basis points (1.40%) over the
yield on a reference security (the 6 5/8% U.S. Treasury Bond due February 2027),
plus $0.75. The Series F shareholders would, in addition, be entitled to accrued
dividends from November 1, 1997 through the date of the Merger. It is a
condition of the merger agreement that AFC issue approximately $70.4 million of
the Series J Preferred Stock. This new issue of Series J Preferred Stock will
represent 21% of the voting interest in AFC and we understand that AFC has
committed to register the Series J Preferred Stock pursuant to the Securities
Act of 1934 as well as list these securities on the Pacific Stock Exchange. We
understand that accrued dividends will be paid through the date of the Merger on
the Series G Preferred Stock, but cash payments on the Series F Preferred Stock
would be governed by the formula outlined above. We further understand that 63%
and 85% of the Series F and Series G Preferred Stock, respectively, is owned by
AFG's Retirement and Savings Plan (the "RASP").
You have requested our opinion, as investment bankers, as to whether in our
opinion the Transaction Consideration is fair, from a financial point of view to
the AFC Preferred Shareholders. Our opinion is being delivered to you as
directors of AFC who are not officers or employees of AFC or any of its
affiliates.
In arriving at our opinion, we have reviewed financial and other
information about AFC that was publicly available or furnished to us by AFC,
including but not limited to the Certificate of Designation for the Series F and
Series G Preferred Stock; the Company's audited financial statements for the
fiscal year ended December 31, 1996 and unaudited financial statements for the
six months ended June 30, 1997 as set forth in its public filings with the
Securities and Exchange Commission; and pro forma financial statements
reflecting the effect of the Merger on AFC's financial statements. We also have
held discussions with certain senior officers of AFC concerning the business,
operations and prospects of AFC. In addition, we have considered the following:
(i) The terms and structure of the Merger
(ii) The effect of the Merger on the earnings, financial strength and
tax position of AFC
(iii) The potential for a credit rating upgrade for AFC and its
affiliates
(iv) The recent trading prices and yields of Series F and Series G
Preferred Stock
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(v) The recent trading prices and yields of AFC's and its affiliate's
other securities and comparable securities in general
(vi) General market conditions including prevailing yields in the
market relative to historical levels
(vii) Tender offers and other transactions involving non-call
securities
(viii) The illiquidity of the Series F and Series G Preferred Stock
(ix) The potential illiquidity of the new issue of Series J Preferred
Stock and issues pertaining to registration under the Securities Act of
1934
(x) The potential trading price of the Series J Preferred Stock
subsequent to the Merger
(xi) Proposed terms of the Series J Preferred Stock including but not
limited to liquidation preference, dividend yield, call protection and
voting rights
(xii) Dissenters' rights under Ohio law for both the Series F and
Series G Preferred Shareholders
(xiii) Particular features of each Series of existing Preferred Stock
such as call protection, maturity dates and the tax treatment of dividends
and the valuation of such features
(xiv) The fact that the RASP is the owner of a majority of each issue
We have also conducted such other financial studies, analyses and
investigations as we deemed appropriate for the purposes of this opinion. In
rendering this opinion, we have assumed and relied upon, without independent
verification, the accuracy, completeness and fairness of all financial and other
information which was publicly available or furnished to or discussed with us by
AFC. With respect to financial pro forma information, forward looking statements
and other information and data provided to, or otherwise reviewed by or
discussed with us, we have been advised by the management of AFC that such pro
forma information and other information and data were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of AFC as to the future financial performance of AFC and that we may
assume in arriving at our opinion that AFC will perform in accordance with such
estimates. We have not conducted any independent evaluation or appraisal of the
properties, assets, liabilities or reserves of AFC, nor have we conducted any
independent actuarial or physical inspections.
We have also taken into account our assessment of general economic, market
and financial conditions and our experience in similar transactions, as well as
our experience as investment bankers generally. Our opinion necessarily is based
upon regulatory, economic, market and other conditions as they exist on, and the
information made available to us as of, the date hereof.
We have not analyzed the specific tax effects on shareholders resulting
from the Merger, and we do not express any opinion as to whether a shareholder
should elect to receive cash, shares of Series J Preferred Stock or a
combination thereof in the Merger.
We have been engaged to deliver our opinion by the Special Committee and
AFC, and AFC will pay us a fee for our services irrespective of whether or not
the Merger is consummated. In addition, (i) in the ordinary course of our
business, we may actively trade and hold securities of AFC and its affiliates,
for our own account and for the account of our customers and, accordingly, may
at any time hold a long or short position in such securities, (ii) in 1995 we
were engaged by AFC as financial advisor for the private placement of $50
million of debt securities and accordingly were paid a fee by AFC, and (iii) we
have from time to time been engaged by affiliates of AFC to act as financial
advisor and/or placement agent, for which services we have received
compensation.
Our advisor services and the opinion expressed herein are provided at the
request and for the information of the Special Committee in their evaluation of
the Transaction Consideration. Except as provided for in our engagement letter
dated June 2, 1997, neither our opinion nor our advice may be published or
otherwise used or referred to, in whole or in part, in any registration
statement, prospectus, proxy or information statement, or in any other written
document, nor shall our opinion or our advice be used for any other purpose, nor
shall any public reference to us be made, in each case, without our prior
written consent.
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Based upon and subject to the foregoing, it is our opinion, as investment
bankers, that as of the date hereof the Transaction Consideration is fair to the
AFC Preferred Shareholders from a financial point of view.
Very Truly Yours,
LIBRA INVESTMENTS, INC.
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<PAGE> 115
EXHIBIT C
OHIO DISSENTERS' RIGHTS STATUTE
1701.85 QUALIFICATIONS OF AND PROCEDURES FOR DISSENTING SHAREHOLDERS
(A)(1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 of the Revised Code shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date on
which the agreement of merger was adopted by the directors of that corporation.
Within twenty days after he has been sent the notice provided in section 1701.80
or 1701.801 of the Revised Code, the dissenting shareholder shall deliver to the
corporation a written demand for payment with the same information as that
provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to the dissenting shareholder
within twenty days after the lapse of the fifteen-day period, unless a court for
good cause shown otherwise directs. If shares represented by a certificate on
which such a legend has been endorsed are transferred, each new certificate
issued for them shall bear a similar legend, together with the name of the
original dissenting holder of such shares. Upon receiving a demand for payment
from a dissenting shareholder who is the record holder of uncertificated
securities, the corporation shall make an appropriate notation of the demand for
payment in its shareholder records. If uncertificated shares for which payment
has been demanded are to be transferred, any new certificate issued for the
shares shall bear the legend required for certificated securities as provided in
this paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
A request under this paragraph by the corporation is not an admission by the
corporation that the shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of
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common pleas of the county in which the principal office of the corporation that
issued the shares is located or was located when the proposal was adopted by the
shareholders of the corporation or, if the proposal was not required to be
submitted to the shareholders, was approved by the directors. Other dissenting
shareholders, within that three-month period, may join as plaintiffs or may be
joined as defendants in any such proceeding, and any two or more such
proceedings may be consolidated. The complaint shall contain a brief statement
of the facts, including the vote and the facts entitling the dissenting
shareholder to the relief demanded. No answer to such a complaint is required.
Upon the filing of such a complaint, the court, on motion of the petitioner,
shall enter an order fixing a date for a hearing on the complaint and requiring
that a copy of the complaint and a notice of the filing and of the date for
hearing be given to the respondent or defendant in the manner in which summons
is required to be served or substituted service is required to be made in other
cases. On the day fixed for the hearing on the complaint or any adjournment of
it, the court shall determine from the complaint and from such evidence as is
submitted by either party whether the dissenting shareholder is entitled to be
paid the fair cash value of any shares and, if so, the number and class of such
shares. If the court finds that the dissenting shareholder is so entitled, the
court may appoint one or more persons as appraisers to receive evidence and to
recommend a decision on the amount of the fair cash value. The appraisers have
such power and authority as is specified in the order of their appointment. The
court thereupon shall make a finding as to the fair cash value of a share and
shall render judgment against the corporation for the payment of it, with
interest at such rate and from such date as the court considers equitable. The
costs of the proceeding, including reasonable compensation to the appraisers to
be fixed by the court, shall be assessed or apportioned as the court considers
equitable. The proceeding is a special proceeding and final orders in it may be
vacated, modified, or reversed on appeal pursuant to the Rules of Appellate
Procedure and, to the extent not in conflict with those rules, Chapter 2505, of
the Revised Code. If, during the pendency of any proceeding instituted under
this section, a suit or proceeding is or has been instituted to enjoin or
otherwise to prevent the carrying out of the action as to which the shareholder
has dissented, the proceeding instituted under this section shall be stayed
until the final determination of the other suit or proceeding. Unless any
provision in division (D) of this section is applicable, the fair cash value of
the shares that is agreed upon by the parties or fixed under this section shall
be paid within thirty days after the date of final determination of such value
under this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of the agreement of merger
by the directors of the particular subsidiary corporation. The fair cash value
of a share for the purposes of this section is the amount that a seller who is
under no compulsion to sell would be willing to accept and that a willing buyer
who is under no compulsion to purchase would be willing to pay, but in no event
shall the fair cash value of a share exceed the amount specified in the demand
of the particular shareholder. In computing such fair cash value, any
appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D)(1) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section, unless
the corporation by its directors waives such failure:
(b) The corporation abandons the action involved or is finally enjoined or
prevented from carrying it out, or the shareholders rescind their adoption of
the action involved:
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(c) The dissenting shareholder withdraws his demand, with the consent of
the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable repesentatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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EXHIBIT D
HOULIHAN LOKEY HOWARD & ZUKIN
-------------------------------------------------------
FINANCIAL ADVISORS
October 31, 1997
To the Administrative Plan Committee
of the American Financial Group
Retirement and Savings Plan
One East Fourth Street
Cincinnati, Ohio 45202
Gentlemen:
We understand that American Financial Group, Inc., ("AFG") has proposed a
transaction whereby American Financial Corporation ("AFC") Series F Preferred
Stock would be converted into the right to receive: (i) the greater of $23.75 in
cash, or the Fixed Spread Price(1), rounded to the nearest cent, which is the
price set at 4:30 p.m. Eastern time on the date of the meeting of shareholders
at which the Merger is considered, based on the fixed spread of 140 basis points
over the yield on the 6 5/8% United States Treasury Bond due February 15, 2027
("Reference Yield"); and with respect to the Series G Preferred Stock, $10.50 in
cash; or, (ii) at the option of the holders of Series F and Series G Preferred
Stock, a new issue of AFC Series J Preferred Stock; or, (iii) a combination of
the two. The cash offer for the Series F Preferred Stock includes the payment of
five months of accrued dividends in the formula, and thus, holders are not
expected to forego accrued dividends. Holders of the Series F Preferred Stock
will be entitled to accrued dividends from November 1, 1997, to the effective
date of the Transaction at a per diem rate of $.0049 per share. Holders of the
Series G Preferred Stock will receive the cash consideration plus accrued
dividends from the last semi-annual dividend payment date to the effective date
of the Transaction at the per diem rate of $.0029 per share. Dividends on the
Series J Preferred Stock will begin to accrue on November 1, 1997.
It is our further understanding that all shareholders will be asked to
adopt an Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") whereby all of the outstanding AFC Series F and Series G Preferred
Stock would be converted into cash or shares of the new AFC Series J Preferred
Stock. The American Financial Group Retirement and Savings Plan ("RASP") is the
holder of approximately 63 percent and 85 percent of the Series F and Series G
Preferred Stock, respectively. The conversion and related transactions are
referred to collectively herein as the "Transaction." The RASP is represented by
the Committee (the "Committee") and RASP participants will be enabled to vote
Series F and Series G Preferred Stock allocated to their accounts for this
purpose.
The aggregate merger consideration to be received by the RASP would be
payable, at the RASP's election, either in shares of new Series J Preferred
Stock, in cash, or a combination of the two. The maximum number of shares of
Series J Preferred Stock which the RASP may elect to receive will be equal to
the aggregate merger consideration to which the RASP is entitled, divided by
$25.00 (the liquidation value of the
- ---------------
1Fixed Spread Price = stated annual dividend / Reference Yield + $0.75
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Series J Preferred Stock) up to a limit of approximately $70.4 million. No
fractional shares will be paid, but cash in lieu thereof will be paid at the
rate of $25.00 per share of Series J Preferred Stock. If the RASP, together with
other holders of the Series F and Series G Preferred Stock elect to receive more
than 2,816,000 Series J Preferred shares, the number elected for each holder
will be reduced pro rata and replaced by the designated cash payment of $25.00
per share of Series J Preferred Stock.
The purpose of our engagement was to conduct a valuation analysis to
determine the reasonableness of the Transaction and report our findings to the
Committee. The Committee has requested that Houlihan Lokey render a written
opinion (the "Opinion") as to the matters set forth below, concurrent with the
mailing of the definitive proxy materials. We have not been engaged to give
advice as to whether the RASP should engage in the Transaction, nor have we been
requested to seek or identify alternatives or to advise the Committee with
respect to its duties generally.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed AFC's, AFG's, American Financial Enterprises, Inc.,
American Premier Underwriters, Inc., and American Annuity Group, Inc., Form
10-K for the year ending December 31, 1996, and Form 10-Q for the quarter
ended June 30, 1997; which management has identified as the most current
financial statements available;
2. reviewed copies of the following documents:
- the American Financial Group Retirement and Savings Plan (effective
as of January 1, 1997);
- the draft copy of the AFC Notice of Annual Meeting of Shareholders
and Proxy Statement filed with the Securities and Exchange
Commission on October 24, 1997;
- the Amended and Restated Agreement and Plan of Merger among AFC, AFC
Acquisition Corp., and AFG dated October 3, 1997;
- the AFC Certificate of Incorporation dated April 10, 1995, together
with the Restated and Amended Articles of Incorporation (as amended
through March 31, 1995);
- a copy (as of October 3, 1997) of the Certificate of Designation,
Preference and Rights of Series J Preferred Stock.
3. met with certain members of the senior management of AFC and AFG
to discuss the operations, financial condition, future prospects and
projected operations and performance of AFC and AFG, and conducted
discussions with representatives of AFC's counsel to discuss certain legal
matters;
4. visited certain facilities and business offices of AFC and AFG;
5. reviewed the historical market prices and trading volume for AFC's
and AFG's publicly traded securities;
6. reviewed certain other publicly available financial data for
certain companies that we deem comparable to AFG;
7. reviewed drafts of certain documents to be delivered at the
closing of the Transaction;
8. conducted such other studies, analyses and inquiries as we have
deemed appropriate, and;
9. reviewed, but have not relied upon for purposes of our opinion,
the Libra Investments, Inc. presentation delivered to the Special Committee
on October 3, 1997.
Our analysis of the Series F and Series G Preferred Stock is predicated
upon the rights and privileges of the security, as described in the Offering
Circulars dated December 7, 1977 and August 3, 1979, respectively, and as
described in the Restated and Amended Articles of Incorporation of AFC (as
amended through
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March 31, 1995). These documents indicate that the Series F and Series G
Preferred Stock have, among other things, the following summary rights,
privileges, provisos and limitations:
1. Stated par value $1.00, for both the Series F and Series G
Preferred Stock;
2. Liquidation preference equal to $20.00 and $10.50 per share,
respectively, plus an amount equal to all accrued but unpaid dividends;
3. Annual cumulative cash dividends of $1.80 and $1.05 per share,
respectively, payable in equal semi-annual installments;
4. Voting power equal to the Common Stock of AFC plus the additional
voting rights to elect two Directors out of the then number of Directors of
AFC whenever AFC shall be in arrears on the payment of dividends in an
amount equivalent to six (6) full semi-annual dividends;
5. AFC has no obligation to retire its Series F Preferred Stock and
has no call provisions to redeem any part of the shares after December 3,
1996. The Series G Preferred Stock may be redeemed at any time, in whole or
in part, at a redemption price of $10.50 per share plus accrued or declared
but unpaid dividends; and
6. Payment of dividends and liquidating distributions on Preferred
Stock are subordinate to AFC's debt payment obligations but superior to the
rights of holders of Common Stock to receive dividends or payments on
liquidation.
Our analysis of the Series J Preferred Stock is predicated upon the rights
and privileges of the security, as described in the Certificate of Amendment to
the Articles of Incorporation of AFC; Certificate of Designation, Preference and
Rights of Series J Preferred Stock dated October 3, 1997. These documents
indicate that the Series J Preferred Stock has, among other things, the
following summary rights, privileges, provisos and limitations:
1. Without stated par value;
2. Liquidation preference equal to $25.00 per share, plus an amount
equal to accumulated and unpaid dividends;
3. Annual cumulative cash dividends of $2.00 per share, payable in
equal semi-annual installments on May 1 and November 1 of each year;
4. Voting power equal to the Common Stock of AFC plus the additional
voting rights to elect two Directors (to fill such newly created
directorships) to the Directors of AFC whenever AFC shall be in arrears on
the payment of dividends in an amount equivalent to four (4) full
semi-annual dividends payable;
5. AFC will not have the right to redeem any shares of the Series J
Preferred Stock until the eighth anniversary of issuance in year 2005.
Thereafter, AFC has the right to redeem at any time, in whole or in part,
the Series J Preferred Stock at a redemption price of $25.75 per share in
year 8, $25.375 per share in year 9, and $25.00 in years 10 and beyond,
plus all accumulated and unpaid dividends; and
6. Payment of dividends and liquidating distributions on Preferred
Stock are subordinate to AFC's debt payment obligations but superior to the
rights of holders of Common Stock to receive dividends or payments on
liquidation.
We have relied upon and assumed, without independent verification, that
there has been no material change in the assets, financial condition, business
or prospects of AFC or AFG since the date of the most recent financial
statements made available to us. We have not independently verified the accuracy
and completeness of the data, material, and other information (the
"Information") supplied to us with respect to AFC and do not assume any
responsibility with respect to it. In the course of our review of the
aforementioned information, nothing has come to our attention that would
indicate that it is unreasonable to utilize and rely on the Information taken as
a whole. We have not made any physical inspection or independent appraisal of
any
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of the properties or assets of AFC or AFG. Our opinion is necessarily based on
business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
All valuation methodologies that estimate the worth of an enterprise as a
going-concern are predicated on numerous assumptions pertaining to prospective
economic and operating conditions. Unanticipated events and circumstances may
occur and actual results may vary from those assumed. The variations may be
material.
Furthermore, we evaluated the creditworthiness of AFC as a going-concern,
meaning that the underlying tangible assets of AFC are presumed, in the absence
of a qualified appraisal of such assets, to attain their highest values as
integral components of a business entity in continued operation and that
liquidation of said assets would likely diminish the value of the whole to the
shareholders and creditors of AFC.
Based upon the foregoing, and in reliance thereon, it is our Opinion as of
the date of this letter that:
I. The Transaction (whether the Committee elects for the RASP to
receive cash or the new AFC Series J Preferred Stock, or any combination
thereof) is fair to the RASP from a financial point of view;
II. The consideration to be received pursuant to the Transaction by
the RASP (whether the Committee elects for the RASP to receive cash or the
new AFC Series J Preferred Stock, or any combination thereof) for the AFC
Series F and Series G Preferred Stock equals or exceeds the fair market
value of such stock as the term fair market value is used in the definition
of "adequate consideration" under Section 3(18) (B) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"); and
III. To the extent the RASP elects to receive the new AFC Series J
Preferred Stock in the Transaction, the consideration to be paid by the
RASP for such stock does not exceed the fair market value of such stock and
does not exceed "adequate consideration" as defined under ERISA.
This Opinion is furnished for the Committee's benefit and for that of the
RASP and may not be relied upon by any other person or for any other purpose
without our express, prior written consent. This Opinion is delivered to each
recipient subject to the conditions, scope of engagement, limitations and
understandings set forth in this Opinion and our engagement letter, and subject
to the understanding that the obligations of Houlihan Lokey in the Transaction
are solely corporate obligations, and no officer, director, employee, agent,
stockholder or controlling person of Houlihan Lokey shall be subjected to any
personal liability whatsoever to any person, nor will any such claim be asserted
by or on behalf of you or your affiliates. Houlihan Lokey has been retained on
behalf of and has delivered this Opinion solely to the Committee,
notwithstanding that Houlihan Lokey's fees and expenses are being paid by AFC
and that certain covenants and representations have been made by AFC.
In accordance with recognized professional ethics, our fees for this
service are not contingent upon the opinion expressed herein, and neither
Houlihan Lokey nor any of its employees have any relationship with AFC or AFG or
any other party (with respect to any matter relating to the Transaction) who
could have interests in the Transaction different from the interests of the
RASP.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
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<PAGE> 122
[CAPTION]
AMERICAN FINANCIAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING ON
OCTOBER , 1997
FROM HOLDERS OF
VOTING STOCK
[S] [C] [C]
Registration Name and Address
The undersigned hereby appoints James C. Kennedy and Karl J. Grafe, and either
of them, proxies, with the power of substitution to each, to vote all shares of
Voting Stock (including Common Stock and Series F and Series G Preferred Stock)
of American Financial Corporation (the "Company") that the undersigned may be
entitled to vote at the Annual Meeting of Shareholders of the Company to be held
on October , 1997, at 11:00A.M., local time, at The Cincinnatian Hotel,
601 Vine Street, Cincinnati, Ohio, on the matters set forth below and on such
other matters as may properly come before the meeting or any adjournment
thereof.
THE PROXY HOLDERS WILL VOTE THE SHARES REPRESENTED BY THIS PROXY IN THE MANNER
INDICATED BELOW. UNLESS A CONTRARY DIRECTION IS INDICATED, THE PROXY HOLDERS
WILL VOTE SUCH SHARES "FOR" THE PROPOSALS SET FORTH BELOW. IF ANY FURTHER
MATTERS PROPERLY COME BEFORE THE MEETING, SUCH SHARES SHALL BE VOTED ON SUCH
MATTERS IN ACCORDANCE WITH THE BEST JUDGMENT OF THE PROXY HOLDERS NAMED ABOVE.
The Board of Directors recommends a vote FOR the following Proposals.
1. To adopt an Agreement and Plan of Merger pursuant to which all of the AFC
Series F and G Preferred Stock would be converted into cash or shares of a
new AFC Series J Preferred Stock:
[ ] FOR THE MERGER [ ] AGAINST THE MERGER [ ] ABSTAIN
2. Election of directors:
[ ] FOR AUTHORITY to elect the [ ] WITHHOLD AUTHORITY to vote for
nominees listed below (except every nominees listed below
those whose names have been
crossed out)
THEODORE H. EMMERICH CARL H. LINDNER S. CRAIG LINDNER
JAMES E. EVANS CARL H. LINDNER III WILLIAM R. MARTIN
THOMAS M. HUNT KEITH E. LINDNER ALFRED W. MARTINELLI
GREGORY C. THOMAS WILLIAM W. VERITY
3. To grant authority to the Company to adjourn the Annual Meeting from time
to time to solicit additional votes on Proposal No. 1:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Date:__________, 1997 Signature_______________________________________
Signature_______________________________________
(if held jointly) IMPORTANT: Please sign as name
appears hereon indicating, where
proper, official position or
representative capacity. In case of
joint holders, all should sign.
To vote your shares, please mark, sign, date and return this proxy
form using the enclosed envelope.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
------------------------------------------------------------
<PAGE> 123
<TABLE>
<CAPTION>
AMERICAN FINANCIAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR ANNUAL MEETING ON
OCTOBER , 1997
FROM
PARTICIPANTS IN THE
AMERICAN FINANCIAL GROUP, INC. RETIREMENT AND SAVINGS PLAN
<S> <C> <C>
Participant Name and Address
The undersigned hereby appoints Thomas E. Mischell and Sandra W. Heimann, and
either of them, proxies, with the power of substitution to each, to vote all
shares of Series F and Series G Preferred Stock of American Financial
Corporation (the "Company") which are held in the American Financial Group,
Inc. Retirement and Savings Plan that the undersigned has been granted the
right to vote at the Annual Meeting of Shareholders of the Company to be held
on October , 1997, at 11:00 A.M., local time, at The Cincinnatian Hotel, 601
Vine Street, Cincinnati, Ohio, on the single matter set forth below.
THE PROXY HOLDERS WILL VOTE THE SHARES REPRESENTED BY THIS PROXY IN THE MANNER
INDICATED BELOW. UNLESS A CONTRARY DIRECTION IS INDICATED, THE PROXY HOLDERS
WILL VOTE SUCH SHARES "FOR" THE PROPOSAL SET FORTH BELOW.
The Board of Directors recommends a vote FOR the Proposal.
1. To adopt an Agreement and Plan of Merger pursuant to which all of the AFC
Series F and G Preferred Stock would be converted into cash or shares of a
new AFC Series J Preferred Stock:
[ ] FOR THE MERGER [ ] AGAINST THE MERGER [ ] ABSTAIN
DATE:_________________, 1997 Signature______________________________________________________________
Signature______________________________________________________________
(if held jointly) IMPORTANT: Please sign as name appears hereon
indicating, where proper, official position or
representative capacity. In case of joint holders, all
should sign.
To vote your shares, please mark, sign, date and return this proxy form using the enclosed envelope.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
------------------------------------------------------------
</TABLE>
