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SCHEDULE 14C INFORMATION STATEMENT
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES
EXCHANGE ACT OF 1934
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(AMENDMENT NO. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X]Preliminary Information Statement
[_]Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2))
[_]Definitive Information Statement
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[_]Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1)Title of each class of securities to which transaction applies:
Common Stock, $1.00 par value per share
(2)Aggregate number of securities to which transaction applies:
24,225,806
(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 is determined):
$31.25
(4)Proposed maximum aggregate value of transaction:
$757,056,437.50
(5)Total fee paid:
$151,411.29
[X]Fee paid previously with preliminary materials.
The total fee of $151,411.29, computed pursuant to Rules 14c-5(g) and 0-11,
was previously paid in connection with the initial filing of the
preliminary information statement materials on April 1, 1997.
[_]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 is 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PRELIMINARY COPIES
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
INFORMATION STATEMENT
NOTICE OF ACTION TAKEN WITHOUT A MEETING
NOTICE OF APPRAISAL RIGHTS
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ALLMERICA FINANCIAL CORPORATION
PROSPECTUS
This Information Statement/Prospectus, Notice of Action Taken Without a
Meeting and Notice of Appraisal Rights (the "Information
Statement/Prospectus") is being furnished to holders of Common Stock, par
value $1.00 per share ("APY Common Stock") of Allmerica Property & Casualty
Companies, Inc., a Delaware corporation ("APY") in connection with the
proposed acquisition by Allmerica Financial Corporation, a Delaware
corporation ("AFC"), of the outstanding shares of APY Common Stock not held
directly or indirectly by AFC. Pursuant to an Agreement and Plan of Merger
dated as of February 19, 1997 (the "Merger Agreement") between AFC, APY and
APY Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of
AFC ("Merger Sub"), Merger Sub will merge with and into APY (the "Merger")
resulting in APY becoming a wholly owned subsidiary of AFC. Also, immediately
prior to the consummation of the Merger, the Certificate of Incorporation of
APY will be amended to authorize the Board of Directors of APY to issue a new
class of APY Common Stock (the "APY Class B Common Stock"), one share of which
will be exchanged for each share of APY Common Stock held directly or
indirectly by AFC (the "Recapitalization," and together with the Merger, the
"Merger Transactions"). After the effective date of the Merger, the APY Common
Stock will cease to be quoted on the New York Stock Exchange (the "NYSE").
Under the terms of the Merger Agreement, each outstanding share of APY
Common Stock, other than shares held directly or indirectly by AFC or by
stockholders who properly perfect their appraisal rights under the Delaware
General Corporation Law (the "DGCL"), will be converted into the right to
receive (x) 0.4 (the "Standard Exchange Ratio") of a share of the Common
Stock, $.01 par value per share, of AFC ("AFC Common Stock"), and (y) an
amount in cash, without interest, equal to $17.60 (the "Standard Cash
Consideration" and together with the shares of AFC Common Stock issued under
the Standard Exchange Ratio, the "Standard Consideration"); provided, however,
that (1) in the event the Average Stock Price (as defined below) is less than
$36.00, the Standard Cash Consideration shall be equal to (A) $32.00 less (B)
the Standard Exchange Ratio multiplied by the Average Stock Price and (2) in
the event the Average Stock Price is greater than $41.00, the Standard Cash
Consideration shall be equal to (A) $34.00 less (B) the Standard Exchange
Ratio multiplied by the Average Stock Price. Alternatively, an APY stockholder
may elect to receive merger consideration solely in AFC Common Stock or in
cash, subject to proration in the event that the election made by such
stockholder is oversubscribed. If an APY stockholder elects to receive merger
consideration in all stock, such holder will receive, for each share of APY
Common Stock, .85714 (the "Stock Exchange Ratio") of a share of AFC Common
Stock (the "Stock Consideration"); provided, however, that (1) in the event
the Average Stock Price is less than $36.00, the Stock Exchange Ratio shall be
equal to $32.00 divided by the Average Stock Price and (2) that in the event
the Average Stock Price is greater than $41.00, the Stock Exchange Ratio shall
be equal to $34.00 divided by the Average Stock Price. If such a stockholder
elects to receive their merger consideration in all cash, such holder will
receive, for each share of APY Common Stock, $33.00 in cash, without interest
(the "Cash Consideration"); provided, however, that (1) in the event the
Average Stock Price is less than $36.00, the Cash Consideration shall be equal
to $32.00 and (2) in the event the Average Stock Price is more than $41.00,
the Cash Consideration shall be equal to $34.00. The consideration to be
received by an APY Public Stockholder (as defined below) in connection with
the Merger, whether in the form of Standard Consideration, Stock Consideration
or Cash Consideration, shall be referred to herein as the "Merger
Consideration." The value of the per share Merger Consideration may vary
depending on, among other things, whether such holder receives Standard
Consideration or elects to receive Stock Consideration or Cash
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Consideration. See "The Merger Transactions--The Merger Agreement--APY Merger
Consideration." If an APY stockholder elects to receive the Stock
Consideration or the Cash Consideration, the application of the proration
procedures may cause the mix of cash and AFC Common Stock actually received by
such holder to differ from the election made; as a result, the value of the
consideration received may be less than if proration had not been applied.
"Average Stock Price" means the average of the Closing Market Prices (as
defined below) for the ten consecutive trading days ending on the fifth
trading day prior to the Effective Time (as defined below). The "Closing
Market Prices" for any trading day means the closing sales price of the AFC
Common Stock as reported in the New York Stock Exchange Composite Tape (as
reported by the Wall Street Journal) for that day.
On June , 1997, the closing prices per share of AFC Common Stock and APY
Common Stock on the NYSE Composite Tape were $ and $ , respectively. On
December 16, 1996, the last full trading day preceding public announcement of
the proposed Merger Transactions, the closing prices per share of AFC Common
Stock and APY Common Stock on the NYSE Composite Tape were $32 1/8 and $28
1/2, respectively. HOLDERS OF APY COMMON STOCK ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS PRIOR TO MAKING ANY DECISION WITH RESPECT TO THEIR ELECTION
OF A FORM OF MERGER CONSIDERATION OR THE EXERCISE OF ANY APPRAISAL RIGHTS.
YOU ARE URGED TO REVIEW THIS INFORMATION STATEMENT/PROSPECTUS CAREFULLY TO
DECIDE WHICH FORM OF MERGER CONSIDERATION TO ELECT OR WHETHER TO ACCEPT THE
MERGER CONSIDERATION OR TO EXERCISE APPRAISAL RIGHTS. HOLDERS OF APY COMMON
STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING APY COMMON STOCK TO APY AT
THIS TIME. A LETTER OF TRANSMITTAL AND AN ELECTION FORM WILL BE MAILED AFTER
THE EFFECTIVE TIME TO EACH PERSON WHO WAS A HOLDER OF OUTSTANDING APY COMMON
STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. APY STOCKHOLDERS SHOULD SEND
CERTIFICATES REPRESENTING APY COMMON STOCK TO FIRST CHICAGO TRUST COMPANY OF
NEW YORK, THE EXCHANGE AGENT, ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH,
THE INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL AND THE ELECTION FORM.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
This Information Statement/Prospectus also serves as a prospectus of AFC
with respect to the issuance of up to 9,690,323 shares of AFC Common Stock to
APY Public Stockholders in connection with the consummation of the Merger. See
"The Merger Transactions--The Merger Agreement--APY Merger Consideration."
The record date for stockholders entitled to notice of, vote on or consent
to the Merger Transactions was May 28, 1997 (the "Record Date"). As of the
Record Date, there were issued and outstanding 59,657,606 shares of APY Common
Stock, held by 1,051 owners of record. On the Record Date, AFC, through its
wholly owned subsidiary SMA Financial Corp. ("SMA"), owned 35,472,600, or
59.5%, of the outstanding shares of APY Common Stock. Pursuant to the DGCL and
APY's Certificate of Incorporation, SMA, as the owner of more than 50% of the
outstanding shares of APY Common Stock, approved the Merger Transactions by
written consent on June , 1997. Consequently, no meeting of stockholders of
APY is necessary to effect the Merger Transactions, and no action on the part
of any public stockholder is necessary to authorize or to consummate the
Merger Transactions. It is expected that the Merger Transactions will be
consummated on or about July , 1997.
Holders of APY Common Stock who make a demand in writing on or before July
, 1997 and who otherwise comply with the applicable provisions of the DGCL
are entitled to a judicial appraisal of the fair value of their shares of APY
Common Stock. See "The Merger Transactions--Appraisal Rights" and the text of
the applicable sections of the DGCL attached as Appendix D to this Information
Statement/Prospectus.
This Information Statement is being mailed on or about June , 1997 to APY
stockholders of record on the Record Date, and constitutes the notice of
appraisal rights required by Section 262 of the DGCL and the notice of
corporate action without meeting required by Section 228 of the DGCL.
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The principal executive offices of each of APY and AFC are located at 440
Lincoln Street, Worcester, Massachusetts 01653, and the telephone number of
each is (508) 855-1000.
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NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION. NEITHER THE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS INFORMATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Information Statement/Prospectus is June , 1997.
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TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
FORWARD LOOKING STATEMENTS................................................ 3
SUMMARY................................................................... 4
The Companies........................................................... 4
The Merger Transactions................................................. 4
The Charter Amendment................................................... 10
Comparative Rights of Stockholders...................................... 10
Comparative Market Prices and Dividends................................. 11
Selected Historical Consolidated Financial Information of Allmerica
Financial Corporation.................................................. 12
Selected Historical Consolidated Financial Information of Allmerica
Property & Casualty Companies, Inc..................................... 15
Unaudited Pro Forma Selected Condensed Consolidated Financial
Information of AFC..................................................... 17
Unaudited Comparative per Share Data.................................... 19
SPECIAL FACTORS........................................................... 20
Background of the Merger Transactions................................... 20
Purpose of and Reasons for the Merger Transactions...................... 24
Determination of the Special Committee; Approval of the APY Board of
Directors.............................................................. 24
Reasons for the Special Committee's Recommendation...................... 25
Approval of the AFC Board of Directors.................................. 27
Certain Projections..................................................... 28
Fairness Opinions....................................................... 29
No Action Required by Stockholders to Consummate the Merger
Transactions........................................................... 38
Certain Litigation...................................................... 39
Certain Effects of the Merger Transactions.............................. 40
Interests of Certain Persons in the Merger Transactions................. 40
Accounting Treatment.................................................... 41
Certain Federal Income Tax Consequences................................. 41
Federal Securities Laws Consequences.................................... 42
THE MERGER TRANSACTIONS................................................... 43
General................................................................. 43
The Merger Agreement.................................................... 44
APY Merger Consideration.............................................. 44
The Recapitalization.................................................. 47
Certain Representations and Warranties................................ 47
Certain Covenants..................................................... 47
Conditions to the Merger Transactions................................. 49
Termination of the Merger Agreement................................... 49
Payment to Stockholders; Election Procedures............................ 50
Regulatory Approvals.................................................... 51
Stock Exchange Listing.................................................. 52
Financing the Merger; Fees and Expenses................................. 52
Appraisal Rights........................................................ 52
THE CHARTER AMENDMENT..................................................... 55
CERTAIN TRANSACTIONS IN THE APY COMMON STOCK.............................. 55
</TABLE>
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<TABLE>
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THE COMPANIES.............................................................. 56
Business of AFC.......................................................... 56
Business of APY.......................................................... 57
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION........... 59
COMPARATIVE RIGHTS OF STOCKHOLDERS......................................... 66
PRINCIPAL AND OTHER STOCKHOLDERS OF APY.................................... 68
BUSINESS RELATIONSHIPS BETWEEN AFC AND APY................................. 70
REGULATORY MATTERS......................................................... 70
General.................................................................. 70
Holding Company Regulation............................................... 71
OTHER MATTERS.............................................................. 73
Directors and Executive Officers of AFC.................................. 74
Directors and Executive Officers of APY.................................. 77
Directors and Executive Officers of Merger Sub........................... 78
LEGAL MATTERS.............................................................. 78
EXPERTS.................................................................... 78
Appendix A-1
Agreement and Plan of Merger between AFC, Merger Sub and APY............. A1-1
Appendix A-2
Form of Charter Amendment................................................ A2-1
Appendix B
Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated... B-1
Appendix C
Fairness Opinion of Salomon Brothers Inc................................. C-1
Appendix D
Section 262 of the Delaware General Corporation Law...................... D-1
</TABLE>
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<PAGE>
AVAILABLE INFORMATION
AFC and APY are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the following Regional Offices of the Commission: Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements
and other materials that are filed through the Commission's Electronic Data
Gathering, Analysis, and Retrieval system. The Web site can be accessed at
http://www.sec.gov. AFC Common Stock and APY Common Stock are listed on the
NYSE and such material may also be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005. After consummation of the Merger, APY
will no longer file reports, proxy statements or other information with the
Commission.
AFC has filed with the Commission a registration statement on Form S-4
(together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), relating to shares of AFC Common Stock that are proposed to be issued
in connection with the Merger to certain holders of APY Common Stock and AFC
and APY jointly have filed with the Commission a Rule 13e-3 Transaction
Statement on Schedule 13E-3 (together with any amendments thereto, the
"Schedule 13E-3") under the Exchange Act. See "The Merger Transactions--The
Merger Agreement--APY Merger Consideration." This Information
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement or the Schedule 13E-3, certain portions of which are
omitted in accordance with the rules and regulations of the Commission. Such
additional information is available for inspection and copying at the offices
of the Commission. Statements contained in this Information
Statement/Prospectus or in any document incorporated into this Information
Statement/Prospectus by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, the Schedule 13E-3 or such
other document, each such statement being qualified in all respects by such
reference.
THIS INFORMATION STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS INFORMATION STATEMENT/PROSPECTUS
HAS BEEN DELIVERED TO ALLMERICA FINANCIAL CORPORATION, 440 LINCOLN STREET,
WORCESTER, MASSACHUSETTS 01653, ATTENTION: INVESTOR RELATIONS; TELEPHONE
NUMBER (508) 855-1000. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY SUCH REQUEST SHOULD BE MADE BEFORE JULY , 1997.
All information contained or incorporated by reference in this Information
Statement/Prospectus relating to AFC has been supplied by AFC and all such
information relating to APY has been supplied by APY.
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No person has been authorized to give any information or to make any
representation not contained or incorporated by reference in this Information
Statement/Prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This
Information Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than those to which it
relates or an offer to sell or a solicitation of an offer to buy any
securities, or the solicitation of a proxy in any jurisdiction in which, or to
any person to whom, it is unlawful to make such offer or solicitation. Neither
the delivery of this Information Statement/Prospectus nor the issuance or sale
of any securities hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of AFC or APY since
the date hereof or that the information herein is correct as of any time
subsequent to its date.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by AFC with the Commission under
the Act and the Exchange Act are incorporated herein by reference:
(a) AFC's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 (the "AFC Form 10-K");
(b) AFC's Annual Report on Form 10-K/A for the fiscal year ended December
31, 1996 (the "AFC Form 10-K/A");
(c) AFC's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1997 (the "AFC Form 10-Q");
(d) The description of AFC Common Stock contained in AFC's Registration
Statement on Form S-1 (File No. 33-91766) which the Commission declared
effective on October 10, 1995, and any amendment or report filed for the
purpose of updating any such description (the "AFC Common Stock Description");
(e) AFC's Current Reports on Form 8-K dated February 5, 1997, February 19,
1997 and April 15, 1997 (the "AFC Form 8-Ks"); and
(f) AFC's Annual Report to Stockholders for the fiscal year ended December
31, 1996 (collectively with the AFC Form 10-K, the AFC Form 10-K/A, the AFC
Form 10-Q, the AFC Common Stock Description and the AFC Form 8-Ks, the "AFC
Reports").
The following documents previously filed by APY with the Commission under
the Act and the Exchange Act are incorporated herein by reference:
(a) APY's Annual Report on Form 10-K for the year ended December 31, 1996
(the "APY Form 10-K");
(b) APY's Annual Report on Form 10-K/A for the year ended December 31, 1996
(the "APY Form 10-K/A");
(c) APY's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1997 (the "APY Form 10-Q");
(d) The description of APY Common Stock contained in APY's Registration
Statement on Form S-4 (File No. 33-51696) which the Commission declared
effective on September 4, 1992, and any amendment or report filed for the
purposes of updating any such description (the "APY Common Stock
Description"); and
(e) APY's Current Report on Form 8-K dated February 19, 1997 (collectively
with the APY Form 10-K, the APY Form 10-K/A, the APY Form 10-Q and the APY
Common Stock Description, the "APY Reports)."
All documents filed by AFC or APY pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Information
Statement/Prospectus and prior to the Effective Time shall be deemed to be
incorporated by reference into this Information Statement/Prospectus and to be
a part hereof from the date of filing of such documents. In addition, the
Merger Agreement, a copy of which is attached as Appendix A-1 to this
Information Statement/Prospectus, is incorporated herein by reference.
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 hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
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FOR NORTH CAROLINA INVESTORS: THESE SECURITIES AND THE MERGER TRANSACTIONS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE
STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS.
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STATE INSURANCE HOLDING COMPANY LAWS AND REGULATIONS APPLICABLE TO AFC AND
APY GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF AFC, AND THUS
INDIRECT CONTROL OF THEIR RESPECTIVE INSURANCE SUBSIDIARIES, UNLESS SUCH
PERSON HAS PROVIDED CERTAIN REQUIRED INFORMATION TO, AND SUCH ACQUISITION IS
APPROVED (OR NOT DISAPPROVED) BY THE APPROPRIATE INSURANCE REGULATORY
AUTHORITIES. GENERALLY, ANY PERSON WHO ACQUIRES BENEFICIAL
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OWNERSHIP OF 10% OR MORE OF THE OUTSTANDING SHARES OF THE COMMON STOCK OF AFC
OR APY WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL, UNLESS THE APPROPRIATE
INSURANCE REGULATORS UPON ADVANCE APPLICATION DETERMINE OTHERWISE.
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AFC'S DIRECT SUBSIDIARIES MAY EACH BE CONSIDERED A "PARTY IN INTEREST"
WITHIN THE MEANING OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED ("ERISA"), OR A "DISQUALIFIED PERSON" WITHIN THE MEANING OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), WITH RESPECT TO MANY
EMPLOYEE BENEFIT PLANS. PROHIBITED TRANSACTIONS WITHIN THE MEANING OF ERISA OR
THE CODE MAY ARISE, FOR EXAMPLE, IF THE SHARES OF AFC COMMON STOCK TO BE
EXCHANGED WITH SHARES OF APY COMMON STOCK HEREBY ARE HELD BY OR WITH THE
ASSETS OF A PENSION OR OTHER EMPLOYEE BENEFIT PLAN WITH RESPECT TO WHICH
EITHER SUBSIDIARY IS A SERVICE PROVIDER, UNLESS SUCH SHARES OF AFC COMMON
STOCK ARE ACQUIRED PURSUANT TO AN EXEMPTION FOR TRANSACTIONS EFFECTED ON
BEHALF OF SUCH PLAN BY A "QUALIFIED PROFESSIONAL ASSET MANAGER" OR PURSUANT TO
ANY OTHER AVAILABLE EXEMPTION. THE ASSETS OF A PENSION OR OTHER EMPLOYEE
BENEFIT PLAN MAY INCLUDE ASSETS HELD IN THE GENERAL ACCOUNT OF AN INSURANCE
COMPANY THAT ARE DEEMED TO BE "PLAN ASSETS" UNDER ERISA. ANY INSURANCE COMPANY
OR PENSION OR EMPLOYEE BENEFIT PLAN PROPOSING TO HOLD AFC COMMON STOCK SHOULD
CONSULT WITH ITS LEGAL COUNSEL.
----------------
FORWARD LOOKING STATEMENTS
Each of AFC and APY wish to caution readers that the following important
factors, among others, in some cases have affected and in the future could
affect, AFC and/or APY's actual results and could cause AFC and/or APY's
actual results for 1997 and beyond to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, AFC or APY. The
words "believes," "anticipated," "expects" and similar expressions are
intended to identify forward looking statements. See "Important Factors
Regarding Forward Looking Statements" filed as Exhibit 99-2 to the AFC Form
10-K and filed as Exhibit 99-1 to the APY Form 10-K, each of which is
incorporated herein by reference.
Factors that may cause AFC and/or APY's actual results to differ materially
from those contemplated or projected, forecast, estimated or budgeted in such
forward looking statements include among others, the following possibilities:
(i) adverse catastrophe experience and severe weather; (ii) adverse loss
development for events AFC or APY insured in prior years; (iii) heightened
competition, including the intensification of price competition, the entry of
new competitors, and the introduction of new products by new and existing
competitors; (iv) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates, limitations on the
ability to manage care and utilization, and tax treatment of insurance
products; (v) changes in interest rates causing a reduction of investment
income and in the market value of interest rate sensitive investments; (vi)
failure to obtain new customers, retain existing customers or reductions in
policies in force by existing customers; (vii) higher service, administrative,
or general expense due to the need for additional advertising, marketing,
administrative or management information systems expenditures, including year
2000 initiatives; (viii) loss or retirement of key executives; (ix) increases
in medical costs, including increases in utilization, costs of medical
services, pharmaceuticals, durable medical equipment and other covered items;
(x) termination of provider contracts or renegotiation at less cost-effective
rates or terms of payment; (xi) changes in AFC and/or APY's liquidity due to
changes in asset and liability matching; (xii) restrictions on insurance
underwriting, based on genetic testing and other criteria; (xiii) adverse
changes in the ratings obtained by independent rating agencies, such as
Moody's, Standard & Poors, A.M. Best Company, Inc. ("A.M. Best") and Duff &
Phelps; (xiv) adverse trends in mortality and morbidity; (xv) lower
appreciation on and decline in value of managed investments, resulting in
reduced variable products, assets and related fees; and (xvi) possible claims
relating to sales practices for insurance products.
3
<PAGE>
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Information Statement/Prospectus. This summary is
not intended to be complete and is qualified in its entirety by the more
detailed information contained elsewhere in this Information
Statement/Prospectus, the Appendices hereto and the documents incorporated by
reference or otherwise referred to herein. Stockholders of APY are urged to
review carefully this entire Information Statement/Prospectus, including the
Appendices hereto.
THE COMPANIES
ALLMERICA FINANCIAL CORPORATION
AFC is a holding company for a diversified group of insurance and financial
services companies with total assets, as of March 31, 1997, of $19.6 billion.
AFC, through its subsidiaries, operates in two fundamental areas: retirement
and asset management and risk management. AFC's retirement and asset management
segments offer annuities, variable life insurance, full-service retirement
savings products and investment management services to retail and institutional
clients. AFC's risk management operations are conducted through its
indirect subsidiary, APY. AFC indirectly holds approximately 59.5% of the
capital stock of APY. See "The Companies--Business of AFC."
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
APY, through its operating subsidiaries, underwrites personal and commercial
property and casualty insurance in five major lines of business: personal
automobile, homeowners, commercial automobile, workers' compensation and
commercial multiple peril. APY's principal operating subsidiaries are The
Hanover Insurance Company ("Hanover") and Citizens Corporation ("Citizens"),
the holding company for Citizens Insurance Company of America. Through Hanover,
APY holds approximately 82.5% of the outstanding common stock of Citizens. See
"The Companies--Business of APY."
The mailing address of the principal executive offices of each of AFC, APY
and Merger Sub is 440 Lincoln Street, Worcester, Massachusetts 01653 (telephone
number: (508) 855-1000).
THE MERGER TRANSACTIONS
THE MERGER
Pursuant to the Merger Agreement, (a) Merger Sub will merge with and into
APY, which will result in APY, as the surviving corporation of the Merger,
becoming a wholly owned subsidiary of AFC, and (b) each share of APY Common
Stock held by SMA will be exchanged for one share of APY Class B Common Stock
outstanding immediately prior to the consummation of the Merger.
Consideration to be Received by APY Public Stockholders. The Merger Agreement
provides that each outstanding share of APY Common Stock held by stockholders
other than persons who properly perfect their appraisal rights under the DGCL
(the "Dissenting APY Stockholders") or other than AFC or its wholly-owned
subsidiaries (the "APY Public Stockholders"), will be converted into the right
to receive (x) 0.4 of a share of AFC Common Stock, and (y) an amount in cash,
without interest, equal to $17.60; provided, however, that (1) in the event the
Average Stock Price is less than $36.00, the Standard Cash Consideration shall
be equal to (A) $32.00 less (B) the Standard Exchange Ratio multiplied by the
Average Stock Price and (2) in the event the Average Stock Price is greater
than $41.00, the Standard Cash Consideration shall be equal to (A) $34.00 less
(B) the Standard Exchange Ratio multiplied by the Average Stock Price. Any
election for Standard Consideration is referred to herein as a "Standard
Election." Alternatively, an APY Public Stockholder may elect to receive
4
<PAGE>
merger consideration solely in AFC Common Stock or in cash, subject to
proration in the event that the election made by such stockholder is
oversubscribed. If no election is made by an APY Public Stockholder, such
holder will be deemed to have made a Standard Election with respect to such
holder's shares of APY Common Stock. See "The Merger Transactions--Payment to
Stockholders; Election Procedures" and "The Merger Transactions--The Merger
Agreement--APY Merger Consideration."
If an APY Public Stockholder elects to receive the Stock Consideration in
lieu of the Standard Consideration, each share of APY Common Stock will be
converted into .85714 of a share of AFC Common Stock (any such election being
referred to herein as a "Stock Election"), subject to proration; provided,
however, that (1) in the event the Average Stock Price is less than $36.00, the
Stock Exchange Ratio shall be equal to $32.00 divided by the Average Stock
Price and (2) in the event the Average Stock Price is greater than $41.00, the
Stock Exchange Ratio shall be equal to $34.00 divided by the Average Stock
Price.
If an APY Public Stockholder elects to receive the Cash Consideration in lieu
of the Standard Consideration, each share of APY Common Stock will be converted
into $33.00 in cash, without interest (any such election being referred to
herein as a "Cash Election"), subject to proration; provided, however, that (1)
in the event the Average Stock Price is less than $36.00, the Cash
Consideration shall be equal to $32.00 and (2) in the event the Average Stock
Price is greater than $41.00, the Cash Consideration shall be equal to $34.00.
See "The Merger Transactions--Payment to Stockholders; Election Procedures" and
"The Merger Transactions--The Merger Agreement--APY Merger Consideration."
No fractional shares of AFC Common Stock will be issued pursuant to the
Merger. In lieu of the issuance of any fractional shares of AFC Common Stock,
cash will be paid to holders of such fractional share in the amount of the
product of such fractional share and the Average Stock Price. Each share of APY
Common Stock which is held in the treasury of APY (the "APY Treasury Stock")
will be cancelled and cease to exist. See "The Merger Transactions--The Merger
Agreement--APY Merger Consideration."
As more fully set forth below, the maximum number of shares of AFC Common
Stock issuable to APY Public Stockholders (the "Maximum Number of AFC Shares")
shall not exceed the product of (x) the Standard Exchange Ratio and (y) the
number of shares of APY Common Stock outstanding immediately prior to the
Effective Time excluding (A) APY Treasury Stock, (B) shares held by Dissenting
APY Stockholders, (C) shares exchanged in the Recapitalization and (D) shares
held directly or indirectly by AFC (the "Outstanding APY Shares"). As of June
4, 1997, the Maximum Number of AFC Shares was equal to 9,674,003. In addition,
as is more fully set forth below, the aggregate amount of cash to be paid to
APY Public Stockholders (the "Maximum Cash Amount") shall not exceed the
product of (i) the Standard Cash Consideration and (ii) the Outstanding APY
Shares.
The following table illustrates the different values of the Standard
Consideration, the Stock Consideration and the Cash Consideration at certain
assumed Average Stock Prices, and illustrates the effect of the collar
provisions, without the effect of the proration procedures described below. If
other than a Standard Election is made, the effect of the proration may cause
the mix of cash and AFC Common Stock actually received by an APY Public
Stockholder to differ from the election made by such holder; as a result the
value of consideration received would also vary accordingly.
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT OF AMOUNT OF
ASSUMED AVERAGE STANDARD STOCK CASH
STOCK PRICE(2) CONSIDERATION CONSIDERATION(4) CONSIDERATION
- - --------------- --------------------------- ---------------- -------------
CASH STOCK(3) TOTAL
------ -------- ------
<S> <C> <C> <C> <C> <C>
$32.00(1) $19.20 $12.80 $32.00 $32.00 $32.00
$36.00 $17.60 $14.40 $32.00 $30.86 $33.00
$38.50 $17.60 $15.40 $33.00 $33.00 $33.00
$41.00 $17.60 $16.40 $34.00 $35.14 $33.00
$45.00(1) $16.00 $18.00 $34.00 $34.00 $34.00
</TABLE>
5
<PAGE>
- - --------
(1) If the Average Stock Price is below $36.00 per share or above $41.00 per
share, the value of the per share consideration payable to each APY Public
Stockholder will be equivalent regardless of whether such holder makes a
Standard Election, a Cash Election or a Stock Election.
(2) To be determined based upon the average of the closing sales prices of AFC
Common Stock for the ten consecutive trading days ending on the fifth
trading day prior to the Effective Time.
(3) Based upon 0.4 shares of AFC Common Stock at the assumed Average Stock
Price indicated.
(4) When the Average Stock Price is equal to or greater than $36.00 and less
than or equal to $41.00, the amount is based upon .85714 shares of AFC
Common Stock at the assumed Average Stock Price indicated. When the
Average Stock Price is less than $36.00 or greater than $41.00, the amount
is determined by multiplying the Average Stock Price by the quotient
obtained by dividing $32.00 (if the Average Stock Price is less than
$36.00) or $34.00 (if the Average Stock Price is greater than $41.00) by
the Average Stock Price.
THE VALUE OF THE PER SHARE MERGER CONSIDERATION PAYABLE TO EACH APY PUBLIC
STOCKHOLDER MAY VARY DEPENDING ON (I) THE AVERAGE STOCK PRICE, (II) WHETHER
SUCH HOLDER MAKES A STANDARD ELECTION, A CASH ELECTION OR A STOCK ELECTION, AND
(III) THE PRORATION PROCEDURES DESCRIBED BELOW. SEE "THE MERGER--THE MERGER
AGREEMENT--APY MERGER CONSIDERATION" FOR A FURTHER DISCUSSION OF THE EFFECT OF
THE AVERAGE STOCK PRICE AND PRORATION ON THE VALUE OF THE MERGER CONSIDERATION.
In the event that the aggregate amount of cash payable pursuant to the Cash
Elections received by the Exchange Agent exceeds the Maximum Cash Amount minus
the aggregate amount of cash payable pursuant to Standard Elections (such
difference, the "Remaining Cash"), the Cash Election shall be oversubscribed.
In that event, a holder who has made a Cash Election shall receive, for each
share of APY Common Stock held by such holder (the "Cash Election APY Shares"),
(x) cash in an amount equal to the quotient obtained by dividing the (i)
Remaining Cash by (ii) the Cash Election APY Shares and (y) a number of shares
of AFC Common Stock equal to the quotient obtained by dividing (iii) the
Remaining Cash Election Shares (as defined below) by (iv) the Cash Election APY
Shares. The "Remaining Cash Election Shares" shall be the number of shares of
AFC Common Stock equal to the Maximum Number of AFC Shares minus the number of
shares of AFC Common Stock issuable pursuant to Standard Elections and Stock
Elections.
In the event that the aggregate number of shares of AFC Common Stock issuable
pursuant to the Stock Elections received by the Exchange Agent exceeds an
amount equal to the Maximum Number of AFC Shares minus the number of shares of
AFC Common Stock issuable pursuant to Standard Elections, including any
fractional shares for which a cash payment will be made (such difference, the
"Remaining Shares"), the Stock Election shall be oversubscribed. In that event,
a holder who has made a Stock Election shall receive, for each share of APY
Common held by such holder (the "Stock Election APY Shares"), (x) a number of
shares of AFC Common Stock equal to the quotient obtained by dividing (i) the
Remaining Shares by (ii) the Stock Election APY Shares and (y) cash in an
amount equal to the quotient obtained by dividing (iii) the Remaining Stock
Election Cash Amount (as defined below) by (iv) the Stock Election APY Shares.
The "Remaining Stock Election Cash Amount" shall be equal to the Maximum Cash
Amount minus the amount of cash payable pursuant to Standard Elections, and
Cash Elections.
Recapitalization. In connection with, and immediately prior to, the
consummation of the Merger, APY will issue one share of APY Class B Common
Stock as authorized by the Charter Amendment (as defined below) to SMA in
exchange for each share of APY Common Stock then held by SMA. See "The Merger
Transactions--The Merger Agreement--Recapitalization."
Conditions to the Merger. The obligations of AFC and APY to consummate the
Merger are subject to the fulfillment of various conditions, including, among
others: (i) the effectiveness of the Registration Statement and the absence of
any stop order suspending the effectiveness thereof and no proceeding for that
purpose having
6
<PAGE>
been initiated by the Commission; (ii) consummation of the Recapitalization;
(iii) receipt of all requisite orders and approvals of insurance regulatory
authorities; (iv) listing of the shares of AFC Common Stock to be issued to APY
stockholders on the NYSE, subject only to official notice of issuance; and (v)
the receipt of fairness opinions from the financial advisors to AFC and APY,
respectively, which have not been withdrawn as of the Effective Time. The
conditions to the obligation of AFC to consummate the Merger can be waived by
AFC and the conditions to the obligation of APY to consummate the Merger can be
waived by APY with the consent of the Special Committee. It is not anticipated
that APY or the Special Committee will waive any conditions, the failure of
which to be satisfied would have a material adverse effect on the Merger, AFC
or APY. See "The Merger Transactions--Conditions to the Merger."
Termination of the Merger Agreement. The Merger Agreement is subject to
termination at the option of either AFC or APY (with the consent of the Special
Committee of the Board of Directors of APY (the "Special Committee")) if the
Merger is not consummated on or before September 30, 1997, and prior to such
time by the mutual consent of AFC, Merger Sub and APY (with the consent of the
Special Committee), or upon the occurrence of certain events. The Merger
Agreement may be terminated by APY (with the consent of the Special Committee)
at any time prior to the Effective Time, if prior to the Effective Time, (i)
the Board of Directors of APY (the "APY Board") determines in good faith, based
on the advice of counsel, that the failure to terminate the Merger Agreement
would likely be a breach of their fiduciary duties, by reason of a proposal
with respect to a merger, acquisition or similar transaction involving the
purchase of the stock or assets of APY (an "Alternative Proposal") being made;
(ii) there has been a material breach by AFC of any of the covenants or
agreements in the Merger Agreement that is not curable or cured within 30 days
after written notice of the breach; or (iii) the Board of Directors of AFC (the
"AFC Board") shall have withdrawn or modified, in a manner materially adverse
to APY, its approval or recommendation of the Merger Agreement or the Merger.
The Merger Agreement may be terminated by the Special Committee if the Special
Committee withdraws or materially changes its recommendation of the Merger
Agreement and it determines, in good faith, based on the advice of counsel,
that the failure to terminate the Merger Agreement would likely be a breach of
their fiduciary duties, by reason of an Alternative Proposal being made. AFC
may terminate the Merger Agreement, at any time prior to the Effective Time,
if: (i) the APY Board and the Special Committee shall have withdrawn or
modified in a manner materially adverse to AFC their approval or recommendation
of the Merger Agreement or the Merger; (ii) there has been a breach by APY of
any representation or warranty in the Merger Agreement that would have, or that
would be reasonably likely to have, a material adverse effect on APY; or (iii)
there has been a material breach by APY of any of the covenants or agreements
in the Merger Agreement which is not curable or not cured within 30 days of
written notice of the breach. See "The Merger Transactions--The Merger
Agreement--Termination of the Merger Agreement."
Payment to Stockholders; Election Procedures. As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall mail to each APY
Public Stockholder of record immediately prior to the Effective Time (A) a
letter of transmittal (the "Letter of Transmittal"), (B) instructions for use
in effecting the surrender of the certificates representing APY Common Stock
(the "APY Stock Certificates") in exchange for the Merger Consideration, and
(C) an election form (the "Election Form") providing for such holders to make
the Standard Election, the Cash Election or the Stock Election. AS OF THE
ELECTION DEADLINE (AS HEREINAFTER DEFINED) ALL APY PUBLIC STOCKHOLDERS
IMMEDIATELY PRIOR TO THE EFFECTIVE TIME THAT SHALL NOT HAVE SUBMITTED TO THE
EXCHANGE AGENT, OR THAT SHALL HAVE PROPERLY REVOKED, AN EFFECTIVE, PROPERLY
COMPLETED ELECTION FORM SHALL BE DEEMED TO HAVE MADE A STANDARD ELECTION.
Upon surrender of an APY Stock Certificate for cancellation to the Exchange
Agent, together with the Letter of Transmittal, duly executed, and such other
documents as AFC or the Exchange Agent shall reasonably request, the holder of
such APY Stock Certificate shall be entitled to receive promptly after the
Election Deadline in exchange therefor (A) a check in the amount equal to the
cash, if any, which such holder has the right to receive (including any cash in
lieu of fractional shares of AFC Common Stock), and (B) an AFC Stock
Certificate representing that number of shares of AFC Common Stock, if any,
which such holder has the right to receive (in
7
<PAGE>
each case less the amount of any required withholding taxes), and the APY Stock
Certificate so surrendered shall forthwith be cancelled. If no election is made
by a holder of APY Common Stock, such holder will be deemed to have made a
Standard Election with respect to such holder's shares. See "The Merger
Transactions--Payment to Stockholders; Election Procedures."
DETERMINATION OF THE SPECIAL COMMITTEE; APPROVAL OF THE APY BOARD OF DIRECTORS
On February 19, 1997, the Special Committee, which was formed to review,
evaluate and negotiate the fairness of the Merger Transactions on behalf of APY
Public Stockholders, concluded that the Merger Transactions are fair to, and in
the best interests of, the holders of APY Common Stock other than AFC and its
wholly-owned subsidiaries, and recommended that the APY Board approve the
Merger Agreement and the Merger Transactions. Based on the recommendation and
report of the Special Committee, the APY Board approved the Merger Transactions
and the Merger Agreement. For a discussion of the factors the Special Committee
considered in reaching its decision, see "Special Factors--Determination of the
Special Committee; Approval of the APY Board of Directors" and "Special
Factors--Fairness Opinions--Opinion of APY's Financial Advisor."
APPROVAL OF THE AFC BOARD OF DIRECTORS
On February 19, 1997, the AFC Board approved the Merger Transactions and the
Merger Agreement. The Board's approval is based upon a number of factors,
including the fairness opinion of its financial advisor and the approval of the
APY Board based upon the recommendation and report of the Special Committee.
See "Approval of the AFC Board of Directors" and "Special Factors--Fairness
Opinions--Opinion of AFC's Financial Advisor."
OPINIONS OF FINANCIAL ADVISORS
On February 19, 1997, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") delivered to the AFC Board its oral opinion, which was
subsequently confirmed in writing, that as of such date and on the basis of and
subject to the matters set forth in its written opinion, the Merger
Consideration was fair from a financial point of view to AFC. Merrill Lynch
subsequently delivered its written opinion dated the date of this Information
Statement/Prospectus that, as of such date, the Merger Consideration is fair
from a financial point of view to AFC. The full text of the written opinion of
Merrill Lynch, dated as of the date of this Information Statement/Prospectus,
which sets forth assumptions made, matters considered and qualifications and
limitations on the review undertaken by Merrill Lynch, is included as Appendix
B to this Information Statement/Prospectus. Pursuant to Merrill Lynch's
engagement letter with AFC, AFC has agreed to pay Merrill Lynch a fee of
$1,000,000 upon consummation of the Merger Transactions. See "Special Factors--
Fairness Opinions--Opinion of AFC's Financial Advisor."
On February 19, 1997, Salomon Brothers Inc ("Salomon Brothers") rendered to
the Special Committee its written opinion to the effect that, as of such date,
the consideration to be received by the holders of APY Common Stock (other than
AFC and its subsidiaries) in the Merger was fair to such holders from a
financial point of view. The full text of the written opinion of Salomon
Brothers, dated February 19, 1997, which sets forth the assumptions made,
factors considered and limitations on the review undertaken by Salomon
Brothers, is included as Appendix C to this Information Statement/Prospectus.
APY stockholders are urged to read such opinion carefully in its entirety. See
"Special Factors--Fairness Opinions--Opinion of APY's Financial Advisor."
NO ACTION REQUIRED BY APY STOCKHOLDERS TO CONSUMMATE THE MERGER TRANSACTIONS
May 28, 1997 was the Record Date for determining the holders of record
entitled to notice of, vote on or consent to the Merger Transactions. On the
Record Date, SMA held 35,472,600 shares, or approximately 59.5%
8
<PAGE>
of the 59,657,606 outstanding shares of APY Common Stock. Pursuant to the DGCL
and APY's Certificate of Incorporation (the "APY Charter"), SMA, as holder of
more than 50% of the outstanding APY Common Stock, approved the Merger
Agreement and the Merger Transactions by written consent on June , 1997 (the
"Written Consent"). Consequently, no meeting of stockholders of APY is
necessary to effect the Merger Transactions, and no action on the part of any
APY Public Stockholder is necessary to authorize or to consummate the Merger
Transactions.
INTEREST OF CERTAIN PERSONS IN THE MERGER TRANSACTIONS
Certain members of the management of AFC and APY and the AFC Board and APY
Board have certain interests in the Merger Transactions that are different
from, or in addition to, the interests of stockholders of AFC and APY
generally. See "Special Factors--Interests of Certain Persons in the Merger
Transactions." In addition, seven of AFC's directors and virtually all of its
executive officers, including its Chief Executive Officer, occupy similar
positions with APY. See "Business Relationships Between AFC and APY."
At the Record Date, directors and executive officers of each of AFC and APY
and their respective affiliates (excluding SMA) owned in the aggregate 43,140
shares of APY Common Stock (including shares issuable on or before July , 1997
upon exercise of outstanding stock options) which represents less than one
percent of the outstanding shares of APY Common Stock. The directors and
executive officers of AFC and APY who own shares of APY Common Stock will have
the right to receive the Merger Consideration in exchange for such shares. In
addition, each outstanding option to purchase shares of APY Common Stock that
is held by a director or executive officer of AFC or APY at the Effective Time
will be converted into options to acquire shares of AFC as set forth in "The
Merger Transactions--The Merger Agreement--APY Merger Consideration." As of the
Record Date, AFC, through SMA, owned an aggregate of 35,472,600 shares,
representing 59.5%, of the outstanding APY Common Stock.
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting,
in accordance with generally accepted accounting principles. The
Recapitalization will not change the recorded amount of AFC's assets and
liabilities. See "Special Factors--Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Merger Consideration (including any cash amounts received
by any APY Public Stockholder pursuant to their exercise of appraisal rights)
will be a taxable transaction for federal income tax purposes (and also may be
a taxable transaction under applicable state, local and other income tax laws).
In general, for federal income tax purposes, an APY Public Stockholder will
recognize gain or loss equal to the difference between his or her adjusted tax
basis in the shares of APY Common Stock exchanged in the Merger Transactions,
and the amount of cash and the fair market value of the AFC Common Stock
received therefor. Such gain or loss will be capital gain or loss, and will be
long-term gain or loss if on the date of the Merger Transactions, the shares of
APY Common Stock were held for more than one year. The exchange of one share of
the APY Class B Common Stock for each share of APY Common Stock held by SMA
immediately prior to the Merger will be treated as a tax-free recapitalization
for federal income tax purposes. In addition, no gain or loss will be
recognized by AFC, Merger Sub or APY as a result of the Merger. See "Special
Factors--Certain Federal Income Tax Consequences."
REGULATORY APPROVALS
Consummation of the Merger Transactions is conditioned upon receipt of the
respective approvals or exemptions therefrom or other actions of all relevant
insurance regulatory authorities. See "The Merger Transactions--Regulatory
Approvals."
9
<PAGE>
APPRAISAL RIGHTS
Any APY Public Stockholder who desires to exercise his or her appraisal
rights should review carefully the text of Section 262 of the DGCL attached as
Appendix D to this Information Statement/Prospectus and is urged to consult his
or her legal advisor before electing or attempting to exercise such rights. See
"The Merger Transactions--Appraisal Rights."
THE CHARTER AMENDMENT
The APY Charter does not currently authorize the APY Board to issue more than
one class of APY Common Stock. In order to effect the Recapitalization, which
will result in SMA holding shares of APY Class B Common Stock and which is a
condition precedent to the consummation of the Merger, the APY Charter will be
amended to authorize the APY Board to issue APY Class B Common Stock, $5.00 par
value per share. See "The Charter Amendment." SMA, as holder of more than 50%
of the outstanding APY Common Stock, will approve the Charter Amendment by
written consent.
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of stockholders of APY currently are governed by Delaware law, the
APY Charter and APY's By-Laws. Upon consummation of the Merger, the
stockholders of APY who receive AFC Common Stock in the Merger will become
stockholders of AFC, which is also a Delaware corporation, and their rights as
stockholders of AFC will be governed by Delaware law, AFC's Certificate of
Incorporation and AFC's By-Laws. For a discussion of various differences
between the rights of stockholders of APY and AFC, see "Comparative Rights of
Stockholders."
10
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
AFC Common Stock is listed on the NYSE under the symbol AFC. APY Common Stock
is listed on the NYSE under the symbol APY.
The following table sets forth the high and low sales prices of AFC Common
Stock and APY Common Stock as reported on the NYSE Composite Tape and the
dividends declared per share of AFC Common Stock and APY Common Stock for each
quarterly period since October 16, 1995 (the date of its inception) with
respect to AFC and since January 1, 1994 with respect to APY.
<TABLE>
<CAPTION>
SALES PRICES PER SALES PRICES PER
SHARE OF AFC SHARE OF APY
COMMON STOCK COMMON STOCK DIVIDENDS DECLARED DIVIDENDS DECLARED
----------------- ----------------- PER SHARE OF AFC PER SHARE OF APY
HIGH LOW HIGH LOW COMMON STOCK COMMON STOCK
-------- -------- -------- -------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
1995
First Quarter......... N/A N/A $20 1/8 $ 16 3/4 N/A $ 0.04
Second Quarter........ N/A N/A $22 3/8 $ 18 1/2 N/A $ 0.04
Third Quarter......... N/A N/A $24 3/4 $22 N/A $ 0.04
Fourth Quarter........ $28 5/8 $23 3/8 $27 $21 7/8 $0.05 $ 0.04
1996
First Quarter......... $28 $ 24 3/4 $27 1/4 $ 24 1/4 $0.05 $ 0.04
Second Quarter........ $30 1/8 $ 25 1/4 $27 1/4 $25 $0.05 $ 0.04
Third Quarter......... $32 7/8 $ 27 1/2 $30 1/2 $25 5/8 $0.05 $ 0.04
Fourth Quarter........ $33 3/4 $30 1/8 $30 1/2 $ 27 1/4 $0.05 $ 0.04
1997
First Quarter ........ $ 39 7/8 $32 3/4 $ 31 7/8 $ 30 1/8 $0.05 $ 0.04
Second Quarter
(through June 4)..... $37 5/8 $33 5/8 $32 1/8 $31 1/4 $0.05 $ 0.04
</TABLE>
On December 16, 1996, the last full trading day preceding public announcement
of the proposed Merger Transactions, the closing price per share of AFC Common
Stock on the NYSE Composite Tape was $32 1/8 and the closing price per share of
APY Common Stock on the NYSE Composite Tape was $28 1/2. On June , 1997, the
most recent practicable date prior to the printing of this Information
Statement/Prospectus, the closing price per share of AFC Common Stock on the
NYSE Composite Tape was $ and the closing price per share of APY Common
Stock on the NYSE Composite Tape was $ .
Holders of APY Common Stock are urged to obtain current market quotations
prior to making any decision with respect to their election of a form of merger
consideration or the exercise of any appraisal rights.
The payment of future dividends, if any, on AFC Common Stock will be a
business decision to be made by the Board of Directors of AFC from time to time
based upon the results of operations and financial condition of AFC and such
other factors as the AFC Board of Directors considers relevant.
11
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
OF ALLMERICA FINANCIAL CORPORATION
The following selected historical consolidated balance sheet data as of
December 31, 1996, 1995, 1994 and 1993 and the statement of income data for
each of the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been
derived from the consolidated financial statements of AFC, which have been
audited by AFC's independent accountants, whose reports thereon for the years
ended December 31, 1996, 1995 and 1994 and as of December 31, 1996 and 1995 are
incorporated by reference in this Information Statement/Prospectus. The balance
sheet data as of March 31, 1997 and 1996 and December 31, 1992 and the
statement of income data for the three months ended March 31, 1997 and 1996 are
unaudited but, in the opinion of management, reflect all adjustments necessary
for the fair presentation of the results for such period. All adjustments are
of a normal, recurring nature, except as described in the accompanying notes.
The following data should be read in conjunction with the consolidated
financial statements of AFC and the notes thereto, which are incorporated by
reference in this Information Statement/Prospectus. See "Incorporation by
Reference" and "Available Information."
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues
Premiums............... $ 562.3 547.6 $ 2,236.3 $ 2,222.8 $ 2,181.8 $ 2,079.3 $ 2,172.4
Universal life and
investment product
policy fees........... 56.3 46.5 197.2 172.4 156.8 143.7 132.9
Net investment
income................ 163.4 161.1 672.6 710.5 743.1 782.8 823.7
Net realized
gains(1).............. 44.0 51.6 65.9 39.8 1.1 159.6 9.6
Other income(2)(3)..... 28.9 21.6 102.7 95.4 112.3 73.8 37.1
--------- -------- --------- --------- --------- --------- ---------
Total revenues....... 854.9 828.4 3,274.7 3,240.9 3,195.1 3,239.2 3,175.7
--------- -------- --------- --------- --------- --------- ---------
Benefits, Losses and
Expenses
Policy benefits,
claims, losses and
loss adjustment
expenses.............. 492.3 496.9 1,957.0 2,010.3 2,047.0 1,987.2 2,163.8
Policy acquisition
expenses.............. 119.8 119.7 483.5 470.3 475.7 435.8 424.1
Loss from cession of
disability income
business(4)........... 53.9 -- -- -- -- -- --
Other operating
expenses net(2)(5).... 134.9 115.6 502.5 458.5 518.9 421.3 373.5
--------- -------- --------- --------- --------- --------- ---------
Total benefits,
losses and
expenses............ 800.9 732.2 2,943.0 2,939.1 3,041.6 2,844.3 2,961.4
--------- -------- --------- --------- --------- --------- ---------
Income before federal
income taxes.......... 54.0 96.2 331.7 301.8 153.5 394.9 214.3
Federal income tax
expense............... 9.7 24.2 75.2 82.7 53.4 74.7 62.7
--------- -------- --------- --------- --------- --------- ---------
Income before minority
interest,
extraordinary item
and cumulative effect
of accounting
changes............... 44.3 72.0 256.5 219.1 100.1 320.2 151.6
Minority interest
Distributions on
Company-obligated
mandatorily
redeemable preferred
securities of
subsidiary trust...... (2.4) -- -- -- -- -- --
Equity in
earnings(6)........... (26.0) (24.7) (74.6) (73.1) (51.0) (122.8) (54.4)
--------- -------- --------- --------- --------- --------- ---------
(28.4) (24.7)
Income before
extraordinary item
and cumulative effect
of accounting
changes............... 15.9 47.3 181.9 146.0 49.1 197.4 97.2
Extraordinary item-
demutualization
expenses(7)........... -- -- -- (12.1) (9.2) (4.6) --
Cumulative effect of
accounting
changes(8)............ -- -- -- -- (1.9) (35.4) --
--------- -------- --------- --------- --------- --------- ---------
Net income............. $ 15.9 $ 47.3 $ 181.9 $ 133.9 $ 38.0 $ 157.4 $ 97.2
========= ======== ========= ========= ========= ========= =========
Net income per
share(9).............. $ 0.32 $ 0.94 $ 3.63 $ 2.61 $ -- $ -- $ --
========= ======== ========= ========= ========= ========= =========
Adjusted Net
Income(10)............. $ 33.2 $ 25.5 $ 137.9 $ 116.4 $ 90.4 $ 119.1 $ 109.9
========= ======== ========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............ $19,625.6 18,162.7 $18,997.7 $17,757.7 $15,921.5 $15,378.4 $14,083.1
Long-term debt.......... 202.2 202.2 202.2 202.3 2.7 -- --
Total liabilities....... 16,871.2 15,872.3 16,489.0 15,425.0 14,299.4 13,711.7 12,764.1
Minority interest:
Company obligated
mandatorily redeemable
securities of
subsidiary trust...... 300.0 -- -- -- -- -- --
Common Stock(6)........ 782.4 734.5 784.0 758.5 629.7 615.8 422.4
Equity.................. 1,672.0 1,555.9 1,724.7 1,574.2 992.4 1,050.9 896.6
ADDITIONAL DATA:
Book value per
share(9)............... $ 33.35 $ 31.03 $ 34.40 $ 31.40 -- -- --
Ratio of earnings to
fixed charges(11)...... 4.3x 8.5x 8.7x 13.4x 10.6x 33.4x 14.7x
Statutory combined
ratios(12)
Property and Casualty
Insurance
Subsidiaries.......... $ 105.2 $ 105.8 104.5 101.0 105.3 102.7 104.5
Property and Casualty
Industry.............. -- -- 107.0 106.5 108.5 106.9 115.8
Cash dividends declared
per share.............. $ 0.05 0.05 $ 0.20 $ 0.05 -- -- --
</TABLE>
- - --------
(1) Net realized gains include (benefits) provisions for investment losses of
$(0.3) million and $1.3 million for the first three months of 1997 and
1996, respectively, and $5.5 million, $2.5 million, $19.5 million, $19.8
million and $22.8 million, in 1996, 1995, 1994, 1993 and 1992,
respectively. These provisions were primarily related to reserves and
writedowns of mortgage loan and real estate investments. Also included in
this item in 1995 is a $20.7 million gain from the sale of the Company's
mutual fund servicing business. In addition, in 1993, a gain of $35.7
million from the sale of the Company's wholly owned subsidiary, Beacon
Insurance Company of America ("Beacon"), and a gain of $62.9 million from
an initial public offering of 19.4% of Citizens' Common Stock, is
included.
(2) Other income primarily includes fee income from AFC's non-insurance
businesses, such as mutual fund services, institutional 401(k)
recordkeeping services and other fee income from AFC's insurance segments,
such as administrative services fees in AFC's Corporate Risk Management
Services ("CRMS") segment. Also included in other income for the three
months ended March 31, 1997 and 1996 and the years ended December 31, 1996
and 1995 is income from the Closed Block totaling $5.5 million, $3.4
million, $8.6 million and $2.9 million, respectively.
(3) AFC sold its mutual fund servicing business during the first quarter of
1995, which represented $13.7 million, or 14.4%, of other income and $15.5
million in direct expenses during the year ended December 31, 1995 and
$42.5 million, or 37.8%, of other income and $49.3 million in direct
expenses during the year ended December 31, 1994.
(4) In April 1997, AFC, through its wholly owned subsidiary AFLIAC, entered
into a letter of intent for the 100% coinsurance of its disability income
line of business. The consummation of the transaction is subject to a
number of conditions, including the negotiation and execution of
definitive documentation and the receipt of regulatory approvals. The
proposed transaction has resulted in the recognition of a $53.9 million
pre-tax loss for the three months ended March 31, 1997.
(5) Other operating expenses include all general and administrative expenses,
as well as the operating expenses resulting from AFC's non-insurance
businesses, such as mutual fund services, institutional 401(k)
recordkeeping services and investment advisory services.
(6) AFC's interest in APY, through its wholly owned subsidiary SMA Financial
Corp., was represented by ownership of 59.5%, 59.5%, 59.2%, 58.3%, and
57.4% of the outstanding shares of APY common stock at March 31, 1997,
December 31, 1996, March 31, 1996, December 31, 1995 and 1994,
respectively. APY had ownership interests of 82.5%, 82.5%, 81.4%, 81.1%
and 80.6% in Citizens at March 31, 1997, December 31, 1996, March 31,
1996, December 31, 1995 and 1994, respectively. Earnings and stockholders'
equity attributable to minority shareholders are included in minority
interest in the consolidated financial statements.
(7) Demutualization expenses relate to costs associated with conversion from a
mutual life insurance company to a stock life insurance company. The
demutualization resulted in the issuance of 37.5 million shares of AFC
Common Stock. Concurrent with the demutualization was an initial public
offering which resulted in
13
<PAGE>
issuance of an additional 12.6 million shares of AFC Common Stock. The
demutualization and initial public offering occurred during the quarter
ended December 31, 1995.
(8) In 1993, AFC adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pension" ("SFAS No. 106"), which requires recognition
of a liability for health and life insurance benefits expected to be
provided to employees after retirement. Adoption of this statement
resulted in a charge to net income of $35.4 million, after taxes of $23.5
million and minority interest of $10.2 million, as a cumulative effect of
a change in accounting principle. In 1994, AFC adopted the provisions of
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS
No. 112"), which requires employers to recognize the costs of
postemployment benefits over the service period of the employees. Adoption
of this statement resulted in a charge to net income of $1.9 million,
after taxes of $1.5 million, and minority interest of $0.9 million, as a
cumulative effect of a change in accounting principle.
(9) Net income per share and book value per share for the three months ended
March 31, 1997 and 1996 and for the year ended December 31, 1996 are based
on a weighted average of the number of shares outstanding for the three
months ended March 31, 1997 and 1996 and for the year ended December 31,
1996, respectively. The net income per share and book value per share for
the year ended December 31, 1995 are unaudited and are pro forma based on
a weighted average of the number of shares that would have been
outstanding between January 1, 1995 and December 31, 1995 had the
demutualization transaction and the initial public offering of AFC Common
Stock occurred as of January 1, 1995, and does not represent a projection
or forecast of AFC's consolidated results of operations for any future
period.
(10) Adjusted net income represents net income adjusted to eliminate certain
items which management believes are not indicative of overall operating
trends, including net realized gains and losses on the sales of
investments, the cumulative effect of accounting changes, extraordinary
items, loss from the cession of the disability income business, gains on
sales of interests in subsidiaries and the differential earnings tax
adjustment. AFC management believes adjusted net income enhances an
investor's understanding of AFC's results of operations by highlighting
net income attributable to the normal, recurring operations of the
business. However, adjusted net income is not a substitute for net income
determined in accordance with generally accepted accounting principles
and should be considered together with AFC's financial statements.
(11) For purposes of determining the historical ratios of earnings to fixed
charges, earnings consists of earnings before federal income taxes and
minority interest plus interest expense on AFC indebtedness and the
portion of operating lease rentals representative of the interest factor.
Fixed charges consist of interest expense on AFC indebtedness, dividends
on AFC-obligated manditorily redeemable preferred securities of subsidiary
trust recorded as minority interest before provision for federal income
taxes, plus the portion of operating lease rentals representative of the
interest factor.
(12) The amounts presented reflect ratios after policyholder dividends. The
industry combined ratios are not available for the three months ended
March 31, 1997 and 1996. Industry combined ratios before policyholder
dividends were 105.0, 107.1, 105.7 and 114.6 for the years ended December
31, 1995, 1994, 1993 and 1992, respectively. Industry combined ratios
before policyholder dividends are not yet published for 1996. Industry
averages are from A.M. Best.
14
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
The following selected historical consolidated balance sheet data as of
December 31, 1996, 1995, 1994, 1993 and 1992 and the statement of income data
for each of the years then ended have been derived from the audited
consolidated financial statements of APY. APY's financial statements for the
years ended December 31, 1996, 1995, 1994 and 1993 have been audited by APY's
independent accountants, Price Waterhouse LLP, whose reports thereon for the
years ended December 31, 1996, 1995 and 1994 and as of December 31, 1996 and
1995 are incorporated by reference in this Information Statement/Prospectus.
APY's financial statements as of and for the year ended December 31, 1992 were
audited by independent accountants other than Price Waterhouse LLP. The balance
sheet data as of March 31, 1997 and 1996 and the statement of income data for
the three months ended March 31, 1997 and 1996 are unaudited but, in the
opinion of management, reflect all adjustments necessary for the fair
presentation of the results for such periods. All adjustments are of a normal,
recurring nature, except as described in the accompanying notes. The following
data should be read in conjunction with the consolidated financial statements
of APY and the notes thereto, which are incorporated by reference in this
Information Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS AT OR FOR THE
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Revenues
Premiums............... $ 475.1 $ 465.1 $1,898.3 $1,863.2 $1,791.3 $1,678.2 $1,678.1
Net investment
income................ 61.3 52.3 235.4 209.6 202.4 202.2 210.6
Net realized
gains(1).............. 37.8 45.5 48.1 14.6 3.5 165.9 28.7
Other income(2)........ 2.4 0.4 11.9 7.7 7.6 4.8 5.5
-------- -------- -------- -------- -------- -------- --------
Total revenues....... 576.6 563.3 2,193.7 2,095.1 2,004.8 2,051.1 1,922.9
-------- -------- -------- -------- -------- -------- --------
Benefits, Losses and
Expenses
Policy benefits,
claims, losses and
loss adjustment
expenses.............. 348.2 349.3 1,383.4 1,300.3 1,315.5 1,207.6 1,252.1
Policy acquisition
expenses.............. 103.2 103.7 422.6 409.1 390.3 370.1 370.1
Other operating
expenses(3)........... 53.5 42.8 190.0 179.4 185.9 146.2 135.8
-------- -------- -------- -------- -------- -------- --------
Total benefits,
losses and
expenses............ 504.9 495.8 1,996.0 1,888.8 1,891.7 1,723.9 1,758.0
-------- -------- -------- -------- -------- -------- --------
Income before federal
income taxes.......... 71.7 67.5 197.7 206.3 113.1 327.2 164.9
Federal income tax
expense............... 14.9 13.7 36.4 52.1 3.9 61.3 31.2
-------- -------- -------- -------- -------- -------- --------
Income before minority
interest and
cumulative effect of
accounting changes.... 56.8 53.8 161.3 154.2 109.2 265.9 133.7
Minority interest(4)... (5.0) (4.2) (14.9) (14.1) (8.0) (13.5) --
-------- -------- -------- -------- -------- -------- --------
Income before
cumulative effect of
accounting changes.... 51.8 49.6 146.4 140.1 101.2 252.4 133.7
Cumulative effect of
accounting
changes(5)............ -- -- -- -- (2.0) 4.0 --
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 51.8 $ 49.6 $ 146.4 $ 140.1 $ 99.2 $ 256.4 $ 133.7
======== ======== ======== ======== ======== ======== ========
Net income per share
before cumulative
effect of accounting
changes............... -- -- $ 2.44 $ 2.28 $ 1.64 $ 4.08 $ 2.16
======== ======== ======== ======== ======== ======== ========
Net income per
share(6).............. $ 0.87 $ 0.82 $ 2.44 $ 2.28 $ 1.61 $ 4.15 $ 2.16
======== ======== ======== ======== ======== ======== ========
Adjusted Net Income(7).. $ 29.5 $ 21.8 $ 117.6 $ 131.1 $ 98.7 $ 127.8 $ 114.8
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............ $5,663.7 $5,789.3 $5,703.9 $5,741.8 $5,408.7 $5,198.1 $4,693.5
Long-term debt.......... -- -- -- -- -- -- --
Total liabilities....... 3,927.1 4,176.8 3,963.3 4,103.6 4,073.1 3,890.4 3,725.0
Minority interest(4).... 132.1 127.8 132.1 128.9 105.9 104.7 --
Equity.................. 1,604.5 1,484.7 1,608.5 1,509.3 1,229.7 1,203.0 968.6
ADDITIONAL DATA:
Book value per
share(6)............... $ 26.88 $ 24.78 $ 26.99 $ 24.82 $ 19.91 $ 19.47 $ 15.65
Ratio of earnings to
fixed charges(8)....... 35.1x 30.3x 30.1x 27.1x 14.5x 39.0x 17.2x
Statutory combined
ratios (9)
Property and Casualty
Insurance
Subsidiaries.......... 105.2 105.8 104.5 101.0 105.3 102.7 104.5
Property and Casualty
Industry.............. -- -- 107.0 106.5 108.5 106.9 115.8
Cash dividends declared
per share.............. $ 0.04 $ 0.04 $ 0.16 $ 0.16 $ 0.16 $ 0.19 $ 0.15
</TABLE>
15
<PAGE>
- - --------
(1) Net realized gains include the 1993 gain of $35.7 million from the sale of
APY's wholly owned subsidiary, Beacon, and a gain of $62.9 million from an
initial public offering of 19.4% of Citizens' Common Stock.
(2) Other income primarily includes fee income from APY's non-insurance
businesses.
(3) Other operating expenses include all general and administrative expenses,
as well as the operating expenses resulting from the Company's non-
insurance businesses.
(4) APY had ownership interests of 82.5%, 82.5%, 81.4%, 81.1% and 80.6% in
Citizens at March 31, 1997, December 31, 1996, March 31, 1996, December 31,
1995 and December 31, 1994, respectively. Earnings and stockholders' equity
attributable to minority shareholders are included in minority interest in
the consolidated financial statements.
(5) In 1993, APY adopted the provisions of SFAS No. 106, which require
recognition of a liability for health and life insurance benefits expected
to be provided to employees after retirement. Adoption of this statement
resulted in a charge to net income of $22.0 million, after taxes of $11.3
million, recorded as a cumulative effect of a change in accounting
principle. APY also adopted the provisions of SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"), effective January 1, 1993. SFAS No. 109
changed APY's method of accounting for income taxes from the deferred
method to an asset and liability method, resulting in additional net income
of $23.7 million recorded as a cumulative effect of a change in accounting
principle. Additionally, APY changed its method of calculating deferred
policy acquisition expenses effective January 1, 1993. The cumulative
effect of this change in accounting principle was to increase net income by
$2.3 million, net of income taxes of $1.2 million. In 1994, APY adopted the
provisions of SFAS No. 112, which requires employers to recognize the costs
of postemployment benefits over the service period of the employees.
Adoption of this statement resulted in a charge to net income of $2.0
million, after taxes of $1.1 million, as a cumulative effect of a change in
accounting principle.
(6) In December 1993, APY's board of directors approved a three-for-one stock
split of APY Common Stock, effected in the form of a stock dividend. A
total of 41.3 million additional shares of APY Common Stock were issued in
connection with this split. All share amounts have been restated to reflect
the stock split on a retroactive basis. The weighted average shares
outstanding applicable to APY Common Stock were 59.7 million and 60.5
million for the three months ended March 31, 1997 and 1996, respectively,
and 59.9 million, 61.4 million, 61.8 million, 61.8 million and 61.9 million
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
(7) Adjusted net income represents net income adjusted to eliminate certain
items which management believes are not indicative of overall operating
trends, including net realized gains and losses on the sales of
investments, the cumulative effect of accounting changes and gains on sales
of interests in subsidiaries. APY management believes adjusted net income
enhances an investor's understanding of APY's results of operations by
highlighting net income attributable to the normal, recurring operations of
the business. However, adjusted net income is not a substitute for net
income determined in accordance with generally accepted accounting
principles and should be considered together with APY's financial
statements.
(8) For purposes of determining the historical ratios of earnings to fixed
charges, earnings consist of earnings before federal income taxes, minority
interest, extraordinary item and cumulative effect of accounting changes
plus fixed charges. Fixed charges consist of interest expense on APY
indebtedness plus the portion of operating lease rentals representative of
the interest factor.
(9) The amounts presented reflect ratios after policyholder dividends. The
industry combined ratios are not available for the three months ended March
31, 1997 and 1996. Industry combined ratios before policyholder dividends
were 105.0, 107.1, 105.7 and 114.6, for the years ended December 31, 1995,
1994, 1993 and 1992, respectively. Industry combined ratios before
policyholder dividends are not yet published for 1996. Industry averages
are from A.M. Best.
16
<PAGE>
UNAUDITED PRO FORMA SELECTED CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF AFC
The following unaudited pro forma selected condensed consolidated financial
information for AFC gives effect to the Merger Transactions and the Offering
(as defined herein), and is derived from the unaudited pro forma financial
information appearing elsewhere in this Information Statement/Prospectus. The
applicable transactions are reflected in the unaudited pro forma consolidated
balance sheet as if they occurred on March 31, 1997 and in the unaudited pro
forma consolidated statements of income as if they occurred January 1, 1997
(for the three months ended March 31, 1997) and January 1, 1996 (for the twelve
months ended December 31, 1996). The Merger will be accounted for under the
purchase method of accounting. The Recapitalization will be treated as a
reorganization with no change in the recorded amount of AFC's assets and
liabilities. See "Special Factors--Accounting Treatment." The unaudited pro
forma financial statements are prepared for illustrative purposes only and are
not necessarily indicative of the financial position or results of operations
that might have occurred had the applicable transactions actually taken place
on the dates indicated, or of future results of operations or of financial
position of the stand-alone or combined entities. The unaudited pro forma
financial statements are based on the historical consolidated financial
statements of AFC and APY and the unaudited selected pro forma financial
information should be read in conjunction with (i) such historical financial
statements and the notes thereto, which are incorporated by reference in this
Information Statement/Prospectus, (ii) the unaudited pro forma financial
information and unaudited comparative per share data, including the notes
thereto, appearing elsewhere in this Information Statement/Prospectus and (iii)
the selected historical financial information of AFC and APY appearing
elsewhere in this Information Statement/Prospectus. See "Incorporation of
Certain Documents by Reference," "Available Information," "Unaudited Pro Forma
Financial Information" and "Selected Historical Financial Information."
<TABLE>
<CAPTION>
AT OR FOR THE THREE
MONTHS ENDED FOR THE YEAR
MARCH 31, 1997 ENDED DECEMBER 31, 1996
---------------------- ------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Premiums.................. $ 562.3 $ 2,236.3
Universal life and
investment product
policy fees.............. 56.3 197.2
Net investment income..... 157.3 655.6
Net realized investment
gains.................... 44.0 65.9
Other income.............. 28.9 102.7
---------------------- ---------------------
Total revenues.......... 848.8 3,257.7
---------------------- ---------------------
Benefits, Losses and
Expenses
Policy benefits, claims,
losses and loss
adjustment expenses...... 492.4 1,957.4
Policy acquisition
expenses................. 119.8 483.5
Loss from cession of
disability income
business ................ 53.9 --
Other operating
expenses................. 136.1 507.9
---------------------- ---------------------
Total benefits, losses
and expenses........... 802.2 2,948.8
---------------------- ---------------------
Income before federal
income taxes............. 46.6 308.9
Federal income tax
expense.................. 7.7 69.9
---------------------- ---------------------
Income before minority
interest................. 38.9 239.0
Minority interest:
Dividends on Company-
obligated mandatorily
redeemable preferred
securities of
subsidiary trust........ (4.0) (16.0)
Equity in earnings....... (5.0) (14.9)
---------------------- ---------------------
Net income................ $ 29.9 $ 208.1
====================== =====================
Net income per share...... $ 0.50 $ 3.48
====================== =====================
BALANCE SHEET DATA (AT
PERIOD END):
Total assets............... $19,319.5
Long-term debt............. 202.2
Total liabilities.......... 16,843.1
Minority interest:
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trust......... 300.0
Common stock.............. 132.1
Equity..................... 2,044.3
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS AT OR FOR THE YEAR
ENDED MARCH 31, 1997 ENDED DECEMBER 31, 1996
-------------------------------------------- --------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
ADDITIONAL DATA:
Book value per share.... $ 34.13 $ 35.00
Cash dividends declared
per share(1)........... 0.05 0.20
Pro forma ratio of
earnings to fixed
charges(2)............. 3.3x 5.2x
</TABLE>
- - --------
(1) Pro forma cash dividends per share are assumed to be the same as
historically declared by AFC. The payment of future dividends, if any, on
AFC Common Stock will be a business decision to be made by the Board of
Directors of AFC from time to time based upon the results of operations and
financial condition of AFC and such other factors as the AFC Board of
Directors considers relevant.
(2) For purposes of determining the pro forma ratios of earnings to fixed
charges, earnings consist of pro forma earnings before federal income taxes
and minority interest plus interest expense on AFC indebtedness and the
portion of operating lease rentals representative of the interest factor.
Fixed charges consist of interest expense on AFC indebtedness, pro forma
dividends on AFC-obligated manditorily redeemable preferred securities of
subsidiary trust recorded as minority interest before provision for federal
income taxes, plus the portion of operating lease rentals representative of
the interest factor.
18
<PAGE>
UNAUDITED COMPARATIVE PER SHARE DATA
Set forth below are historical earnings per share, cash dividends per share
and book value per share data of AFC and APY, unaudited pro forma consolidated
per share data of AFC and pro forma equivalent per share data of APY. The data
set forth below should be read in conjunction with the AFC and APY audited
consolidated financial statements, including the notes thereto, which are
incorporated by reference in this Information Statement/Prospectus. The data
should also be read in conjunction with the unaudited pro forma condensed
consolidated financial statements, including the notes thereto, included
elsewhere in this Information Statement/Prospectus. See "Selected Historical
Financial Information" and "Selected Pro Forma Consolidated Financial
Information."
<TABLE>
<CAPTION>
AFC APY
------------------------------------ ------------------------------------
THREE MONTHS ENDED YEAR ENDED THREE MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF OR AS OF OR AS OF
MARCH 31, 1997 DECEMBER 31, 1996 MARCH 31, 1997 DECEMBER 31, 1996
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Historical:
Net income per share... $ 0.32 $ 3.63 $ 0.87 $ 2.44
Cash dividends per
share................. 0.05 0.20 0.04 0.16
Book value per share... 33.35 34.40 26.88 26.99
Pro Forma Consolidated:
Net income per share... $ 0.50 $ 3.48 N/A N/A
Cash dividends per
share(1).............. 0.05 0.20 N/A N/A
Book value per share... 34.13 35.00 N/A N/A
APY Pro Forma
Equivalents:(2)
Net income per share... N/A N/A 0.20 $ 1.39
Cash dividends per
share................. N/A N/A 0.02 0.08
Book value per share... N/A N/A 13.65 14.00
</TABLE>
- - --------
(1) Pro forma cash dividends per share are assumed to be the same as
historically declared by AFC. The payment of future dividends, if any, on
AFC Common Stock will be a business decision to be made by the Board of
Directors of AFC from time to time based upon the results of operations and
financial condition of AFC and such other factors as the AFC Board of
Directors considers relevant.
(2) The pro forma equivalents are calculated by multiplying the Standard
Exchange Ratio by AFC's pro forma earnings per share, cash dividends per
share and book value per share, which have been prepared using adjustments
consistent with those included in the Unaudited Pro Forma Financial
Information contained elsewhere in this Information Statement/Prospectus.
19
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER TRANSACTIONS
Preliminary Note. The following discussion of contacts among the parties to
the Merger Transactions and their affiliates and advisors does not describe
each and every of the many conversations and meetings among the parties
concerning the Merger Transactions and related transactions or the various
conversations they have had with their respective financial and legal
advisors. It is intended to provide a description of material events in
connection with the negotiation of the terms of the Merger Transactions.
Background. AFC and its wholly-owned subsidiaries have held over 50% of the
outstanding capital stock of APY or its predecessor since 1977. Until 1991,
APY was operated independently from AFC and its wholly-owned subsidiaries.
Since 1991, when certain directors of AFC were elected to the board of
directors of APY, the management and operations of AFC and its subsidiaries
and APY and its subsidiaries have been combined. In 1992, APY was formed to be
a holding company for Hanover. In 1995, in connection with the demutualization
of State Mutual Insurance Company of America ("State Mutual"), AFC was formed
as a holding company for First Allmerica Financial Life Insurance Company
("FAFLIC"), the successor to State Mutual. FAFLIC had from time to time
considered the possibility of a merger or consolidation with APY. In
connection with the demutualization, in July 1993 FAFLIC invited APY to enter
into discussions relating to such a possible merger and announced that a
preliminary alternative being considered was the creation of a public holding
company, having as its subsidiaries FAFLIC and the operating subsidiaries of
APY, which would have been owned by the former minority stockholders of APY
and the policyholders of FAFLIC. However, no specific transaction was proposed
by FAFLIC or considered by the respective boards of directors of APY and
FAFLIC at that time. In March 1994, FAFLIC's management decided to focus its
efforts solely on developing a plan of demutualization, independent of any
merger or consolidation with APY, in order to simplify the lengthy and
complicated process of demutualization. In October 1995, the demutualization
of FAFLIC was completed. Under FAFLIC's plan of demutualization, for one year
after the consummation of the demutualization, AFC and FAFLIC were prohibited
from entering into any merger, consolidation or other business combination
with any entity, and from issuing any shares of capital stock or securities
convertible into capital stock, without the prior approval of the Commissioner
of the Division of Insurance for the Commonwealth of Massachusetts. In June
1996, management of AFC engaged Merrill Lynch to assist in analyzing,
structuring, negotiating and effecting an acquisition transaction involving
APY.
In October 1996, management of AFC determined to consider a possible
transaction with APY. AFC management decided to consider developing a proposal
to acquire the shares of APY Common Stock held by the APY Public Stockholders
at such time because the restrictions imposed by regulatory authorities in
connection with FAFLIC's demutualization had lapsed and in order to obtain as
soon as possible the benefits of such a transaction, including an increase in
AFC's proportion of earnings from APY's property and casualty operations. AFC
management did not make a proposal to APY immediately but instead continued to
analyze possible alternatives to acquire the shares of the APY Public
Stockholders. AFC management considered a number of acquisition structures
including the merger of a wholly-owned acquisition subsidiary of AFC into APY
and the creation of a public holding company having AFC and APY as
subsidiaries. AFC management also analyzed the effect, including the Federal
tax consequences to the APY Public Stockholders, of using various forms of
consideration, including all cash, all AFC Common Stock or a combination of
cash and AFC Common Stock. On December 17, 1996 the AFC Board held a meeting
at which AFC management presented to the AFC Board a proposal (the "Initial
AFC Merger Proposal") to acquire all of the shares of APY Common Stock and to
merge a wholly-owned subsidiary of AFC into APY. The Initial AFC Merger
Proposal was delivered to the APY Board at the meeting of the APY Board which
followed the meeting of the AFC Board. Under the Initial AFC Merger Proposal,
each outstanding share of APY Common Stock held by the APY Public Stockholders
would be converted into the right to receive $16.59 in cash without interest
and 0.385 of a share of AFC Common Stock. In lieu of the combined cash and
stock consideration, a stockholder would be permitted to elect to receive
consideration all in cash or all in stock, subject to proration. The Initial
AFC Merger Proposal also proposed amending the APY Charter in order to effect
a Recapitalization pursuant to which immediately prior to the proposed Merger
each share of APY Common Stock held by AFC or SMA would be converted into one
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share of APY Class B Common Stock, which shares would remain outstanding
following the Merger. AFC management decided to structure the Merger
Transaction to include the Recapitalization in order to enable SMA to retain
its interest in APY through its ownership of shares of Class B Common Stock of
APY. The failure of SMA to retain its ownership interest in APY would have
certain adverse consequences to FAFLIC under applicable insurance statutes and
regulations. In determining the value of APY for purposes of determining the
proposed merger consideration, AFC management considered several factors
including the then current market price of APY and the trading performance of
APY stock, as well as the future earnings potential of APY. AFC management
with the advice of Merrill Lynch, also utilized several customary valuation
methods in determining the value of APY. Such techniques included comparable
public company analysis, acquisition premium analysis, comparable acquisition
transactions analysis, as well as discounted dividend analysis.
At the December 17th meeting, the APY Board (i) appointed James A. Cotter,
Jr., M Howard Jacobson and Dona Scott Laskey, who were the only APY directors
that were neither present or former directors, officers or employees of AFC,
as members of a Special Committee to review, evaluate, negotiate and make a
recommendation with respect to the proposed transactions, (ii) authorized the
Special Committee to hire its own legal and financial advisors to assist it in
considering the proposed Merger Transactions and (iii) authorized the Special
Committee to determine whether the terms of a proposed merger with AFC were
fair to, and in the best interests of, the APY Public Stockholders. For their
services as members of the Special Committee, Mr. Jacobson and Ms. Laskey each
will receive a quarterly fee of $10,000 plus out-of-pocket expenses, and Mr.
Cotter, who was appointed Chairman of the Special Committee, will receive a
quarterly fee of $16,000 plus out-of-pocket expenses.
Negotiations Between AFC and the Special Committee. On December 26, 1996 the
Special Committee interviewed investment banking firms and law firms and
retained Salomon Brothers as its financial advisor and LeBoeuf, Lamb, Greene &
MacRae, L.L.P. as its legal counsel.
The Special Committee requested that Salomon Brothers review the terms of
the Initial AFC Merger Proposal and assist the Special Committee in evaluating
the Initial AFC Merger Proposal, negotiating the terms of a merger with AFC
and determining whether the terms of a merger with AFC were fair to, and in
the best interests of, the APY Public Stockholders.
On behalf of the Special Committee, Salomon Brothers undertook a review of
the business and financial condition of APY, AFC and their subsidiaries. In
connection with this review, Salomon Brothers, among other things, (i)
reviewed historical financial information and 1997 projected financial
information for AFC, APY and their subsidiaries, (ii) conducted extensive
interviews with members of management of AFC, APY and their subsidiaries,
(iii) analyzed historical trading prices for AFC, APY and Citizens and (iv)
reviewed financial and market data for comparable companies and comparable
acquisition transactions, including acquisitions by controlling stockholders
of minority interests. The methodology Salomon Brothers used and the various
details of their analyses are summarized below under the caption "Special
Factors--Fairness Opinions--Opinion of APY's Financial Advisor."
From December 27, 1996 through February 19, 1997, the Special Committee met
eleven times with its financial and legal advisors both in person and by
telephone to discuss the proposed merger, including the Initial AFC Merger
Proposal, potential responses and negotiating strategies and the legal
standards and duties applicable to the Special Committee under Delaware law,
as well as other financial and legal matters relating to the Merger
Transactions.
At a meeting of the Special Committee on January 18, 1997, Salomon Brothers
discussed with the Special Committee its preliminary findings on the valuation
of APY, its analysis of the Initial AFC Merger Proposal, its consideration of
selected comparable companies and acquisition transactions, and its ongoing
due diligence review of APY, AFC and their subsidiaries. The Special Committee
also discussed with its advisors AFC's proposed timing and financing of the
Merger Transactions and trading values of APY and AFC Common Stock
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following announcement of the Initial AFC Merger Proposal. In addition, the
Special Committee discussed with its advisors a variety of issues and
alternatives to the Initial AFC Merger Proposal, including rejection of any
business combination between APY and AFC, the feasibility of seeking an
unaffiliated purchaser of APY given AFC's significant ownership position,
whether AFC would sell its approximately 59.5% ownership interest in APY, the
feasibility of seeking an all stock merger, conditioning the merger on the
approval of a majority of the APY Public Stockholders, and negotiating with
AFC to increase the price and improve the terms offered by AFC. As a result of
the Special Committee's deliberations and discussions with its advisors, the
Special Committee determined that the value and terms of the Initial AFC
Merger Proposal were not acceptable and determined to attempt to negotiate
terms for a possible transaction that would be more favorable to the APY
Public Stockholders.
On January 22, 1997, the Special Committee's legal and financial advisors
met with AFC's representatives and advisors and conveyed the Special
Committee's determination that the Initial AFC Merger Proposal was inadequate.
At the Special Committee's request, Salomon Brothers also inquired as to
whether AFC would be willing to sell its 59.5% ownership interest in APY to a
third party. AFC indicated that it would not consider such a sale. AFC and its
advisors requested that Salomon Brothers convey their view of the value of APY
in order to establish whether there would be a basis upon which to reach
agreement on a mutually acceptable price.
On January 23, 1997, the Special Committee met to discuss whether and how to
respond to AFC and to review the draft Merger Agreement proposed by AFC and
related issues. The Special Committee discussed with its advisors various
alternative responses and a range of valuations of APY. As a result of these
discussions, and at the request of the Special Committee, on January 24, 1997,
Salomon Brothers communicated to AFC and Merrill Lynch that the Special
Committee would consider accepting an offer pursuant to which each share of
APY Common Stock would be exchanged for .415 of a share of AFC Common Stock
and $19.45 in cash. As with each of its proposals, the Special Committee
determined the amount and form of consideration to be proposed after
discussing and analyzing AFC's then existing proposal and deliberating with
its financial and legal advisors as to how best to obtain for the APY Public
Stockholders the most favorable transaction available.
After discussions with Merrill Lynch, including consideration of the impact
of the increase in the trading prices of both AFC and APY since the
announcement of the Initial AFC Merger Proposal, AFC management instructed
Merrill Lynch to advise Salomon Brothers that AFC believed that merger
consideration in which each share of APY Common Stock held by the APY Public
Stockholders would be exchanged for 0.4 of a share of AFC Common Stock and
$16.30 in cash would be more appropriate.
On January 24, 1997, at a Special Meeting, the AFC Board approved the
issuance of certain capital securities issued by a subsidiary trust of AFC to
finance a portion of the merger consideration. At the meeting, AFC management
and Merrill Lynch summarized for the AFC Board the status of its negotiations
with the Special Committee. See "The Merger Transactions--Financing the
Merger; Fees and Expenses."
The Special Committee met several times between January 25th and 28th to
discuss the negotiations, including AFC's response and additional information
relating to the valuation of APY. The Special Committee and its advisors
reviewed a number of factors relating to the valuation of APY, including the
effect of recapitalizing APY, APY's 1997 projected pro forma earnings per
share, the proposed financing for the Merger Transactions, and the fourth
quarter and year-end results of operations for APY and AFC. The Special
Committee also discussed Salomon Brothers' assessment of various alternative
proposals that AFC might submit.
After considering the advice of Salomon Brothers, the Special Committee
concluded that merger consideration of 0.4 of a share of AFC Common Stock and
$16.30 in cash was not acceptable. The Special Committee and its advisors then
reviewed a range of options such as communicating only that AFC's proposed
valuation of APY was not acceptable, rejecting any business combination at
this time or proposing an increase in the cash portion of the merger
consideration. On January 29, 1997 Salomon Brothers met with Merrill Lynch and
indicated that the Special Committee did not consider the revised proposal of
AFC to be acceptable. Salomon Brothers also indicated that the Special
Committee had authorized a proposal pursuant to which each share of
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APY Common Stock held by the APY Public Stockholders would be exchanged for
.415 of a share of AFC Common Stock and $19.50 in cash.
AFC then met with its advisors and considered several alternatives,
including terminating merger discussions and increasing the cash portion of
the merger consideration. In determining how best to proceed, AFC considered
the impact of the Merger Transactions on AFC's earnings and the effect on the
valuation of APY of various alternative capital structures of APY. On February
4, 1997, representatives of AFC and Merrill Lynch spoke by telephone with
Salomon Brothers and proposed that each share of APY Common Stock held by the
APY Public Stockholders be exchanged for 0.3 of a share of AFC Common Stock
and $21.04 in cash.
On February 5th and 6th, the Special Committee met to consider AFC's latest
proposal and discuss the terms of the draft Merger Agreement. The Special
Committee also discussed with its advisors the possibility of including
warrants as a component of the merger consideration. Following these
discussions, on February 6, 1997 representatives of Salomon Brothers met with
Merrill Lynch to convey the Special Committee's proposal that each share of
APY Common Stock be exchanged for .25 of a share of AFC Common Stock, plus
$22.83 in cash and a warrant to purchase 0.17 of a share of AFC Common Stock
and that consummation of the merger be conditioned on the approval of the
merger by a majority of the APY Public Stockholders.
After discussion with AFC, Merrill Lynch, upon instruction from AFC,
responded to Salomon Brothers that AFC management had rejected the Special
Committee's proposal because the valuation of APY reflected by the proposal
was in excess of what AFC believed was an appropriate valuation for APY. AFC
management also indicated that AFC would not consider a transaction
conditioned on approval by a majority of the APY Public Stockholders because
such approval was not required under applicable law and that the interests of
the APY Public Stockholders were being represented by the Special Committee.
On February 7, 1997, after the Special Committee met with its advisors, Mr.
Cotter and representatives of Salomon Brothers telephoned Messrs. O'Brien and
Parry of AFC and representatives of Merrill Lynch to communicate the Special
Committee's latest proposal pursuant to which each share of APY Common Stock
would be exchanged for 0.4 of a share of AFC Common Stock plus $18.60 in cash,
with an asymmetrical collar on the price which would, between signing and
closing of the merger, protect APY Public Stockholders against a decline in
the price of AFC Common Stock of greater than 7.5% and allow APY Public
Stockholders to participate in any increase in AFC's stock price. During this
conversation Salomon Brothers recounted the Special Committee's good faith
deliberations and negotiations to date and the Special Committee's desire to
negotiate a transaction that was fair to the APY Public Stockholders. Later
that day, after discussions among AFC and its advisors, representatives of
Merrill Lynch, upon instruction from AFC management, spoke by telephone with
Mr. Cotter and representatives of Salomon Brothers and suggested 0.4 of a
share of AFC Common Stock and $17.47 cash as per share merger consideration,
with a 10% asymmetrical collar on the AFC Common Stock price which would,
between signing and closing of the merger, protect APY Public Stockholders
against a decline in AFC's stock price of greater than 10% and allow APY
Public Stockholders to participate in any appreciation in AFC's stock price.
On February 8, 1997, the Special Committee met with its advisors to discuss
AFC's latest offer. The Special Committee considered alternative responses to
AFC's offer, various conditions to signing a merger agreement with AFC and the
pending litigation. See "Special Factors--Certain Litigation." On the
following day, Salomon Brothers conveyed the Special Committee's proposal that
the merger consideration consist of 0.4 of a share of AFC Common Stock and
$17.47 in cash, with a similar asymmetrical collar of 6.5% instead of 10%.
After reviewing the proposal and considering the effect of the asymmetrical
collar, AFC management rejected the Special Committee's proposal. However, AFC
management indicated that it would, provided the parties could finalize the
terms of the Merger Agreement, consider a transaction consisting of the same
terms as the Special Committee's most recent proposal, but with a symmetrical
6.5% collar which would allow APY Public Stockholders to participate in up to
6.5% appreciation in AFC's stock price, while protecting the APY Public
Stockholders against a decline in AFC's stock price of more than 6.5%.
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The parties spent the next several days analyzing the most recent proposal
and negotiating the final terms and conditions of the Merger Agreement. As a
result of continued negotiations among AFC, the Special Committee, Merrill
Lynch and Salomon Brothers, the amount of the Standard Consideration for each
share of APY Common Stock exchanged in the Merger was increased to $17.60 in
cash and 0.4 of a share of AFC Common Stock. In addition, APY Public
Stockholders could elect, subject to proration, to receive the merger
consideration all in stock and receive 0.85714 of a share of AFC Common Stock
or all in cash at $33.00. Additionally, the Merger Agreement provided that if
AFC's 10-day average closing stock price on the date that ends five trading
days prior to the consummation of the merger is below $36.00 per share or
above $41.00 per share, the Merger Consideration would be adjusted. See "The
Merger Transactions--The Merger Agreement--APY Merger Consideration."
Counsel for AFC also met by telephone with attorneys for the plaintiffs in
the Delaware Actions (as defined below) to determine whether there was the
basis for a settlement. On February 19, 1997, the parties to the lawsuits
executed a Memorandum of Understanding (the "MOU") memorializing an agreement-
in-principle to settle the lawsuits. Under the terms of the MOU, the parties
to the lawsuits have agreed to use their best efforts to execute and present
to the Delaware Chancery Court on or before April 30, 1997, a formal
Stipulation of Settlement. See "Special Factors--Certain Litigation."
PURPOSE OF AND REASONS FOR THE MERGER TRANSACTIONS
AFC is pursuing the Merger Transactions in order to increase the proportion
of its earnings from APY's property and casualty operations, which are a key
element of AFC's future operations and strategy. Following the Merger, on a
pro forma basis as of the year ended December 31, 1997, approximately 54% of
AFC's earnings would have been derived from the operations of APY and its
subsidiaries had the Merger been consummated as of December 31, 1997.
Additionally, AFC believes that the Merger Transactions will result in a more
stable surplus position for FAFLIC, since the APY Common Stock and therefore
FAFLIC's surplus, would no longer be linked to a fluctuating market price.
Further, the Merger Transactions would create a simplified corporate structure
for AFC, allowing it greater efficiency and flexibility in its utilization of
capital. Lastly, the Merger Transactions would provide AFC with certain
administrative cost savings, primarily resulting from the elimination of
certain APY shareholder-related expenses and the elimination of taxes on APY
dividends to its direct shareholder, SMA Financial Corp.
Before deciding to proceed with the Merger Transactions by means of the
Merger and the Recapitalization, the AFC Board considered different structures
and alternatives to accomplishing its goal of holding, directly or indirectly,
all of the outstanding stock of APY. The AFC Board reviewed the different
types of consideration that could be offered to APY stockholders, including
all cash, all capital stock and various combinations of the components of cash
and capital stock offered. AFC determined, however, that the Merger
Consideration, which provides holders of APY Common Stock with the right to
make an election between different forms of consideration, subject to certain
limitations, provides it and the APY stockholders with the greatest
flexibility and benefit while considering the interests of the AFC
stockholders. The form of the Merger Consideration, which includes both cash
and stock components, will result in a capital structure for AFC and its
subsidiaries following the consummation of the Merger Transactions which will
permit AFC and its subsidiaries the flexibility to raise capital through the
issuance of debt or equity in order to pursue opportunities as they arise in
the future. AFC management determined that merger consideration consisting
entirely of cash would have resulted in a highly leveraged capital structure
for AFC as AFC would have been required to further increase its debt to
finance the Merger which would have limited AFC's ability to borrow additional
funds to grow its business in the future. AFC management was also concerned
about the increased dilutive effect of APY's earnings on AFC's financial
results in the event the merger consideration was comprised entirely of shares
of AFC Common Stock.
DETERMINATION OF THE SPECIAL COMMITTEE; APPROVAL OF THE APY BOARD OF DIRECTORS
On February 19, 1997, the Special Committee met with Salomon Brothers and
LeBoeuf, Lamb, Greene & MacRae, L.L.P. to discuss the terms and conditions of
the Merger. At this meeting Salomon Brothers made a
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presentation to the Special Committee of the terms of the proposed Merger and
delivered its written opinion to the Special Committee that, as of such date,
the consideration to be received by the APY Public Stockholders in the Merger
is fair to such holders from a financial point of view. After discussions
among the members of the Special Committee and its advisors, the members of
the Special Committee unanimously determined that the terms of the Merger and
the Merger Agreement were fair to, and in the best interests of, the APY
Public Stockholders and that it would recommend that the APY Board approve the
Merger and the Merger Agreement. Given that the Special Committee was
comprised of independent directors of APY and that the terms of the Merger
were the result of extensive arms' length negotiations between the Special
Committee, on behalf of the APY Public Stockholders, and AFC, the Special
Committee determined that the approval of the Merger by the majority of APY
Public Stockholders was not necessary for the Special Committee to make its
determination of fairness.
Based on the recommendation of the Special Committee, the APY Board
determined that the Merger Transactions are fair, to the APY Public
Stockholders, and in the best interests of APY and the APY Public Stockholders
and approved the Charter Amendment and the Merger Transactions. In so finding,
the APY Board relied on the recommendation and report of the Special
Committee.
REASONS FOR THE SPECIAL COMMITTEE'S RECOMMENDATION
The Merger Consideration per share of APY Common Stock to be received by APY
Public Stockholders under the terms of the Merger is the result of
negotiations between the Special Committee and AFC. The following are the
material factors upon which the Special Committee based its decision to
recommend that the APY Board approve the Merger and the Merger Agreement:
1. The assistance, advice and opinion of Salomon Brothers, including Salomon
Brothers' financial analysis and review of financial matters relating to APY
and AFC, and its written opinion that, as of the date of such opinion, the
Merger Consideration to be received in the Merger by APY Public Stockholders
was fair to such holders from a financial point of view. In connection with
its evaluation of the Merger Consideration, the Special Committee considered
favorably the fact that the Merger Consideration fell within the ranges of
implied valuations per share of APY Common Stock calculated by Salomon
Brothers using various analyses (comparable company, recapitalization,
discounted cash flow, dividend discount analysis, comparable transactions and
selected insurance company acquisitions) which are summarized below under "--
Fairness Opinions--Opinion of APY's Financial Advisor."
2. Information concerning the business, assets, financial condition,
operating results and prospects of AFC and APY, the risks involved in
achieving those prospects and the general condition, outlook and trends of the
property and casualty industry, including the trend towards consolidation in
the insurance industry. The Special Committee members reviewed these matters
with representatives of Salomon Brothers who had conducted a due diligence
review of APY, AFC and their affiliates. Review of these matters provided the
Special Committee with a better understanding of the business and prospects of
APY and AFC and formed, in part, the basis upon which the Special Committee
considered the proposed terms of the Merger and the various valuation analyses
of APY.
3. The current book values per share of AFC and APY and current and
historical market prices of AFC Common Stock and APY Common Stock. As of
December 31, 1996 the book value per share of AFC Common Stock and APY Common
Stock was, respectively, $34.40 and $26.99. The Special Committee noted that
the value of the Merger Consideration was in excess of the per share book
value of APY and that the market price of AFC was in excess of the per share
book value of AFC.
4. The Special Committee considered favorably the relative market value of
the shares of APY Common Stock and AFC Common Stock historically and on the
date of the Special Committee's action. The market price for AFC Common Stock
and APY Common Stock as of December 16, 1996 (the last full trading day
preceding public announcement of the proposed Merger) was $32 1/8 and $28 1/2,
respectively. The Special Committee considered the likelihood that the market
had anticipated a combination between AFC and APY and that the market price of
APY prior to the public announcement of the Merger reflected this expectation.
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5. The opportunity for APY Public Stockholders to receive a premium for
their shares over recent and current market prices for APY Common Stock. The
fact that the Merger Consideration represented a 10% premium over the market
price for APY Common Stock on December 16, 1996 and a 19% premium over the
market price of APY Common Stock on September 16, 1996, before a proposal for
a transaction was expected to be made was considered favorably by the Special
Committee. The Special Committee considered the premium to market price
represented by the Merger Consideration to be reasonably comparable to
premiums offered in a number of selected transactions analyzed by Salomon
Brothers involving acquisition of minority interests by controlling
stockholders. The Special Committee based this conclusion in part on the
likelihood that the market had anticipated a combination between AFC and APY
and that, prior to the public announcement of the Merger, the market price of
APY Common Stock reflected this expectation.
6. The proposed terms and structure of the Merger and the terms and
conditions of the Merger Agreement, which the Special Committee concluded were
favorable to the APY Public Stockholders, including the Standard Exchange
Ratio, the amount and mix of stock and cash, the right of APY Public
Stockholders to elect the Standard Consideration, the Cash Consideration or
the Stock Consideration, subject to proration, the collar provisions which
mitigate the effects of a decline in the market price of AFC Common Stock, the
nature of AFC's and APY's representations, warranties, covenants and
agreements in the Merger Agreement and the ability of the Special Committee to
terminate the Merger Agreement under certain circumstances. The Special
Committee also considered that one of the reasons that AFC had structured the
Merger Transactions to enable FAFLIC to retain its equity interest in APY was
that such a structure would result in a more stable surplus for FAFLIC. The
Special Committee concluded that such a structure was not likely to prejudice
the interests of the APY Public Stockholders and, therefore, did not alter the
Special Committee's analysis of the fairness of the Merger to the APY Public
Stockholders.
7. The Special Committee considered favorably the processes and procedures
undertaken in connection with the evaluation and negotiation of the Merger
Transactions, including the creation by APY of a Special Committee of
independent directors, the thorough review of APY and its business by the
Special Committee and its advisors and the nature and extent of the
negotiations relating to the Merger Transactions on behalf of the APY Public
Stockholders. The members of the Special Committee and representatives of AFC
negotiated the terms of the Merger with the assistance of each of their
respective legal and financial advisors. The $4.00 increase in the value of
the Merger Consideration compared to the value offered in the Initial AFC
Merger Proposal, based on the market price of AFC Common Stock at February 19,
1997. The Special Committee was of the view that, based on the discussions and
negotiations with representatives of AFC, the terms of the Merger reflected
the highest value that AFC was willing to pay as consideration and that the
value to be received by APY Public Stockholders in the Merger was superior to
that held by APY Public Stockholders prior to the announcement of the Merger.
8. The lack of any third party bidders for all or a portion of APY since the
announcement of the Initial AFC Merger Proposal. The fact that AFC controls
APY and had stated that it was not willing to sell its APY Common Stock. The
Special Committee concluded that a third party bid was unlikely and that, in
such context, the Committee viewed as favorable the opportunity for the APY
Public Stockholders to receive liquidity for their investment at a premium to
market. The Special Committee did not believe that there were any alternatives
to the merger with AFC that were as promising for the APY Public Stockholders.
Based on discussions with its advisors and on other factors, the Special
Committee concluded that it was unlikely that an unsolicited bid would result
in an offer to acquire APY or the shares held by the APY Public Stockholders
at a higher price or on better terms than pursuant to the Merger and that
pursuit of such bids would likely delay or possibly jeopardize a transaction
with AFC.
9. The fact that the plaintiffs in the Delaware Actions had indicated that
the payment of the Merger Consideration, which had been increased from the
Initial AFC Merger Proposal, was sufficient to settle the
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Delaware Actions; that a favorable settlement of the Massachusetts Action in
the context thereof was also likely and that the favorable settlements of such
actions would benefit the APY Public Stockholders by reducing the risk of
additional litigation and the risk that the Merger would not be consummated.
11. The opportunity, by virtue of the Merger, for APY Public Stockholders to
continue as stockholders in AFC following the Merger. The Special Committee
concluded that this opportunity was beneficial to the APY Public Stockholders
because the Special Committee believed that the overall prospects of AFC
following the Merger were favorable.
12. The Special Committee did not consider liquidation value as the holders
of APY Common Stock, without the approval of AFC and its wholly-owned
subsidiaries, do not have the power to liquidate APY.
The Special Committee based its assessment of the fairness of the Merger to
APY Public Stockholders and its recommendation to the APY Board on its
consideration of all material factors which are described above taken together
as a whole. The Special Committee did not analyze specific factors in
isolation and did not attempt to assign relative weights to the specific
factors considered in reaching its determination.
During negotiations on the proposed merger, the Special Committee proposed
that the Merger Transactions be conditioned on the approval of a majority of
the APY Public Stockholders. AFC management rejected such proposal because
such approval was not required under applicable law and because the interests
of the APY Public Stockholders were being represented by the Special Committee
which was composed of APY directors who were unaffiliated with AFC and who had
retained separate financial and legal advisors. Accordingly, no vote of the
APY Public Stockholders is required to approve the Merger. The terms of the
Merger and Merger Agreement were negotiated in good faith at arms' length and
were unanimously approved by the Special Committee.
APPROVAL OF THE AFC BOARD OF DIRECTORS
The AFC Board believes that the Merger is fair to the APY Public
Stockholders. The AFC Board concluded that the consideration to be received by
the APY Public Stockholders is fair by adopting all analyses and conclusions
of the Special Committee, including its analysis and conclusion with respect
to the fairness opinion of Salomon Brothers. The AFC Board also believes that
the Merger Transactions are procedurally fair because, in addition to the
appraisal rights granted to the APY Public Stockholders described below under
"Appraisal Rights," the final merger consideration and terms were negotiated
in good faith by AFC and its financial advisor and the Special Committee and
its financial advisor and the Merger Transactions were unanimously approved by
the members of the Special Committee and recommended to the full APY Board. In
addition, the Board considered the prospects of settling the Delaware Actions
and the Massachusetts Action. The AFC Board particularly considered the
fairness of the process undertaken in reaching agreement with the Special
Committee and the conclusions of the Special Committee as to fairness but did
not otherwise attach relative weights in reaching agreement with the Special
Committee but specific factors considered in reaching their conclusion as to
fairness to APY.
AFC retained Merrill Lynch as financial advisor to assist in analyzing,
structuring, negotiating and effecting an acquisition transaction involving
APY and, if requested by AFC, rendering an opinion as to whether the
consideration to be paid in such an acquisition transaction was fair to AFC
from a financial point of view. On February 19, 1997, the AFC Board met with
Merrill Lynch and AFC's legal counsel, Ropes & Gray, to discuss the terms and
conditions of the Merger Transactions. At this meeting Merrill Lynch delivered
its oral opinion, which was subsequently confirmed in writing, to the AFC
Board that the Merger Consideration was fair from a financial point of view to
AFC and made a presentation to the AFC Board of the financial analyses
performed by Merrill Lynch in connection with the preparation of such opinion.
After discussions among the members of the AFC Board and its advisors, the AFC
Board concluded that the Merger Transactions were fair to AFC and approved the
Merger Transactions. The AFC Board's approval is based upon the opinion of
Merrill Lynch and the fact that the Merger Consideration was agreed upon as a
result of arm's length negotiations with the independent Special Committee who
was represented by its own financial and legal advisors.
27
<PAGE>
CERTAIN PROJECTIONS FOR APY
The following sets forth certain financial information and projections (the
"projections") for APY for the fiscal year ending December 31, 1997. APY does
not in the ordinary course publicly disclose projections as to future revenues
or earnings and the projections were not prepared with a view to public
disclosure. These projections were not prepaid in accordance with generally
accepted accounting Principles and APY's independent accountants have not
examined or compiled any of the following projections or expressed any
conclusion or provided any other form of assurance with respect to such
projections and accordingly assume no responsibility for such projections.
These projections were delivered to Merrill Lynch and Salomon Brothers solely
in connection with their due diligence investigation of APY in order for them
to render their fairness opinions in connection with the Merger. The
projections were prepared with a limited degree of precision, and were not
prepared with a view to compliance with the guidelines established by the
American Institute of Certified Public Accountants regarding projections,
which would require a more complete presentation of data than as shown below.
While presented with numerical specificity, the projections were prepared in
December 1996, and are based upon a variety of estimates and hypothetical
assumptions, which, although considered reasonable by the Company at the time
the projections were prepared, may not or may no longer be accurate, may not
be realized, and are also inherently subject to significant business, economic
and competitive uncertainties, most of which are beyond the control of the
Company. Accordingly, there can be no assurance that any of the projections
will be realized and the actual results for 1997 may vary materially from
those shown. The inclusion of the projections herein should not be regarded as
a representation by APY, AFC, Merrill Lynch, Salomon Brothers or any other
person that the projected results will be achieved. The projections constitute
forward-looking information and for a discussion of factors regarding such
forward-looking information see "Forward Looking Statements."
The material assumptions underlying the following projections concern (i)
growth in written premium, (ii) growth in net investment income, (iii)
expected loss ratios and (iv) expected levels of underwriting expenses as a
percentage of written premium. The projections assume that the rate of overall
growth in the APY's property and casualty insurance business will improve
modestly in 1997, resulting in an increase in net written premium of 8.6% at
Hanover and 5.5% at Citizens. Net investment income is forecast to grow
modestly in 1997, resulting primarily from the investment of cash generated
from operations. Total statutory loss and LAE ratio for both companies is
forecast to be approximately 72%. Statutory underwriting expense ratios at
both companies are forecast to improve modestly, to 33.2% at Hanover and 26.9%
at Citizens.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1997 YEAR ENDING DECEMBER 31, 1996
ESTIMATED HISTORICAL
----------------------------- -----------------------------
<S> <C> <C>
Premiums................ $2,027.0 $1,898.3
Net investment income... 238.7 235.4
Fees and other income... 7.1 11.9
-------- --------
Operating revenue (non-
GAAP measure).......... 2,272.8 2,145.6
======== ========
Policy benefits, claims,
losses and loss
adjustment expenses.... 1,476.9 1,383.4
======== ========
Policy acquisition
expenses............... 442.0 422.6
======== ========
Federal income tax
expense................ 19.9 36.4
======== ========
Adjusted net income
before minority
interest............... 141.6 131.0
Minority interest....... (14.1) (13.4)
-------- --------
Adjusted net income..... 127.5 117.6
======== ========
Adjusted net income per
share.................. $ 2.14 $ 1.95
======== ========
</TABLE>
28
<PAGE>
FAIRNESS OPINIONS
Opinion of APY's Financial Advisor
APY retained Salomon Brothers pursuant to a letter agreement dated January
3, 1997 (the "Engagement Letter") to act as financial advisor to the Special
Committee in connection with its review of the proposed acquisition by AFC of
the shares of APY Common Stock it did not already own and to render an opinion
relating to the fairness, from a financial point of view, to the APY Public
Stockholders of the consideration to be received by such holders in such
proposed acquisition. Pursuant to the Engagement Letter, Salomon Brothers
rendered an opinion to the Special Committee on February 19, 1997 to the
effect that, based upon and subject to the considerations set forth in such
opinion, as of such date, the consideration to be received by the APY Public
Stockholders in the Merger was fair to such holders from a financial point of
view. No limitations were imposed by the Special Committee or the APY Board on
the investigations made or procedures followed by Salomon Brothers.
THE FULL TEXT OF SALOMON BROTHERS' FAIRNESS OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS
ON THE REVIEW UNDERTAKEN, IS INCLUDED AS APPENDIX C TO THIS INFORMATION
STATEMENT/PROSPECTUS. THE SUMMARY OF SALOMON BROTHERS' OPINION SET FORTH BELOW
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION
INCLUDED AS APPENDIX C. HOLDERS OF APY COMMON STOCK ARE URGED TO READ THE
OPINION IN ITS ENTIRETY.
In connection with rendering its opinion, Salomon Brothers reviewed and
analyzed material bearing upon the financial and operating conditions and
prospects of APY and AFC including, among other things, the following: (i) the
Schedule 13D filed by AFC with respect to its ownership of APY Common Stock,
as amended through the date of the opinion; (ii) the Merger Agreement; (iii)
certain publicly available information concerning APY and AFC, including the
Annual Reports on Form 10-K for each of APY and AFC for the years ended
December 31, 1995 and December 31, 1994 and the Quarterly Reports on Form 10-Q
for each of APY and AFC for the quarters ended March 31, June 30 and September
30, 1996; (iv) the statistical supplements containing certain financial
information for the year and the quarter ended December 31, 1996 for each of
APY and AFC; (v) certain internal information of APY and AFC, primarily
financial in nature, including projections for the fiscal year ending December
31, 1997 for APY and AFC prepared by AFC's and APY's managements (the "1997
Projections") and analyses prepared by or on behalf of APY's and AFC's
managements, concerning the business, assets, liabilities, operations and
prospects of APY and AFC furnished to Salomon Brothers by APY and AFC for
purposes of its analysis; (vi) statutory financial information of APY's and
AFC's insurance subsidiaries for the years ended December 31, 1995 and
December 31, 1994 and for the nine-month period ended September 30, 1996;
(vii) certain publicly available information concerning the trading of, and
the trading market for, APY Common Stock and AFC Common Stock; (viii) certain
publicly available information with respect to certain publicly traded
companies that Salomon Brothers believed to be comparable to APY and AFC and
the trading markets for certain of such other companies' securities; and (ix)
certain publicly available information concerning the nature and terms of
certain other acquisition transactions and certain transactions involving the
acquisition of minority interests by controlling stockholders that Salomon
Brothers considered relevant to its inquiry. Salomon Brothers also met with
certain officers and employees of APY and AFC to discuss matters Salomon
Brothers believed relevant to its inquiry including the past and current
business operations, financial condition and prospects of APY and AFC. Salomon
Brothers also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that it deemed
relevant. In rendering its opinion, Salomon Brothers was aware of the
structure of the Merger Transactions, including the implementation of the
Recapitalization, and Salomon Brothers determined that the Recapitalization
did not affect its view that the consideration to be received by the APY
Public Stockholders in the Merger was fair, from a financial point of view, to
the APY Public Stockholders.
In its review and analysis and in arriving at its opinion, Salomon Brothers
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information.
29
<PAGE>
With respect to financial projections and forecasts, Salomon Brothers assumed
that they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of APY and AFC as to the
future financial performance of APY and AFC. Salomon Brothers expressed no
view with respect to such projections or forecasts or the assumptions on which
they were based. Salomon Brothers did not make or assume any responsibility
for making any independent evaluations or appraisals of any of APY's or AFC's
assets, properties or facilities nor did Salomon Brothers rely on any
evaluations or appraisals of APY's or AFC's assets, properties or facilities.
In conducting its analysis and arriving at its opinion, Salomon Brothers
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of operations of APY and AFC; (ii) the
business prospects of APY and AFC; (iii) the historical and current market for
APY Common Stock and AFC Common Stock and for the equity securities of certain
other companies that Salomon Brothers believes to be comparable to APY and
AFC; and (iv) the nature and terms of certain other acquisition transactions
and acquisitions of minority interests by controlling stockholders that
Salomon Brothers believes to be relevant. Salomon Brothers took into
consideration the current ownership by AFC of approximately 60% of the
outstanding APY Common Stock and the fact that AFC had stated that it did not
intend to sell such stock. As a result of AFC's position, Salomon Brothers was
not requested to solicit third parties with respect to possible interest in
acquiring APY or any of its businesses, and did not attempt to do so. Salomon
Brothers also took into account its assessment of general economic, market and
financial conditions as well as its experience in connection with similar
transactions and securities valuation generally. Salomon Brothers' opinion
necessarily was based on conditions as they existed and could be evaluated on
the date thereof and Salomon Brothers assumed no responsibility to update or
revise its opinion based upon circumstances or events occurring after such
date. Salomon Brothers' opinion did not constitute an opinion or imply any
conclusion as to the likely trading range for AFC Common Stock following
consummation of the Merger. Salomon Brothers' opinion was for the sole benefit
of the Special Committee in its consideration of the Merger and was, in any
event, limited to the fairness, from a financial point of view, of the
consideration to be received by the APY Public Stockholders in the Merger and
did not address APY's underlying business decision to effect the Merger or
constitute a recommendation of the Merger to any holder of APY Common Stock or
as to what election any such holder should make with respect to the conversion
of such holder's shares of APY Common Stock.
Salomon Brothers has advised the Special Committee that, based on an express
disclaimer in the Engagement Letter, Salomon Brothers does not believe that
any person (including a stockholder of APY), other than APY or the APY Board
(including the Special Committee), has a legal right to rely upon its fairness
opinion to support any claims against Salomon Brothers arising under
applicable state law and that, should any such claims be brought against
Salomon Brothers by any such person, this assertion will be raised as a
defense. In the absence of applicable state law authority, the availability of
such a defense will be resolved by a court of competent jurisdiction.
Resolution of the question of the availability of such a defense, however,
will have no effect on the rights and responsibilities of the APY Board, or
the Special Committee, under applicable state law. Nor would the availability
of such a state law defense to Salomon Brothers have any effect on the rights
and responsibilities of either Salomon Brothers or the APY Board (including
the Special Committee) under the federal securities laws.
In connection with its opinion, Salomon Brothers made a presentation to the
Special Committee on February 19, 1997, with respect to certain analyses
performed by Salomon Brothers in evaluating the consideration to be received
in the Merger by the APY Public Stockholders and other considerations. The
following is a summary of such Salomon Brothers presentation. The following
quantitative information, to the extent it is based on market data, is based
on market data as it existed at February 18, 1997 and is not necessarily
indicative of current market conditions.
Overview of APY and Historical Trading Analysis. Salomon Brothers reviewed
certain aspects of the financial performance of APY, including, among other
things, net premiums earned, revenues, total expenses, net operating earnings,
net income, revenue growth, operating income growth, net income growth,
statutory ratios
30
<PAGE>
and statutory underwriting loss for fiscal years 1992 through 1996 and 1997
management estimates. Salomon Brothers also reviewed net premiums written,
assets, total assets, reserve for losses and loss adjustment expenses,
unearned premium, total shareholders' equity, book value per share and book
value per share excluding the effect of SFAS 115 for fiscal years 1992 through
1996. Salomon Brothers also reviewed certain of such GAAP financial
information and statutory ratios on a segment basis for APY's Citizens and
Hanover business segments for 1996 and estimated 1997. In addition, Salomon
Brothers reviewed with the Special Committee certain information concerning
the trading prices of APY Common Stock from January 1, 1996 through February
17, 1997. Salomon Brothers noted that APY Common Stock had outperformed an
index of selected peer companies, but had underperformed by comparison to AFC
Common Stock and the S&P 500 Composite Average over such period. The
cumulative appreciation of APY Common Stock, the index of selected peer
companies, AFC Common Stock and the S&P Composite Average over such period was
117.1%, 109.5%, 150.2% and 230.3%, respectively.
Overview of AFC and Historical Trading Analysis. Salomon Brothers also
reviewed certain aspects of the financial performance of AFC, including, among
other things, revenues, net operating income, net income, revenue growth and
net operating income growth for fiscal years 1992 through 1996 and 1997
management estimates. In addition, Salomon Brothers reviewed total
investments, separate account assets, total assets, total shareholders'
equity, book value per share and book value per share excluding the effect of
SFAS 115 for fiscal years 1992 through 1996. Salomon Brothers also reviewed
with the Special Committee certain information concerning the trading prices
of AFC Common Stock from October 11, 1995 (the date that AFC Common Stock
began trading, through February 17, 1997. Salomon Brothers noted that the
trading price of AFC Common Stock generally had outperformed an index of
selected peer companies and the S&P 500 Composite Average over such period.
The cumulative appreciation of AFC Common Stock, the index of selected peer
companies and the S&P 500 Composite Average over such period was 161.9%,
140.5%, and 139.5%, respectively.
Comparable Company Analysis. Salomon Brothers reviewed certain publicly
available financial, operating and stock market information for APY and
fifteen other publicly-traded property and casualty insurance companies
(Allied Group Inc., American States Financial Corp., Chubb, Cincinnati
Financial, Citizens (82.5% owned by APY), Commerce Group Inc., Harleysville
Group, Horace Mann Educators Corp., Ohio Casualty Corp., SAFECO Corp.,
Selective Insurance Group Inc., The St. Paul Companies, State Auto Financial
Corp., USF&G and W.R. Berkley Corp. (excluding APY, each of which is a
"Comparable Company" and collectively referred to as "Comparable Companies")).
Salomon Brothers considered the Comparable Companies to be reasonably similar
to APY, but none of these companies is identical to APY. Accordingly, the
analysis described below is not purely mathematical. Rather it involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of APY and the Comparable
Companies and other factors that could affect public trading value.
For APY and each of the Comparable Companies, Salomon Brothers reviewed,
among other things, its 1996 operating earnings per share ("EPS"), 1997
estimated operating EPS, book value (as of December 31, 1996), book value
excluding the effect of SFAS 115, dividend yield, 1997 implied return on
equity (based on 1997 estimated operating EPS and book value) and the ratio of
enterprise value (equity market capitalization plus total debt, preferred
stock and minority interests) to statutory surplus. (Estimated 1997 EPS was
based upon Institutional Brokers Estimate Systems reports.) In order to arrive
at an implied valuation for APY, Salomon Brothers calculated, for APY and each
of the Comparable Companies, multiples of price (market price as of February
18, 1997) to 1996 EPS, estimated 1997 EPS, book value and book value excluding
the effect of SFAS 115. An analysis of the multiples of price to 1996 EPS
yielded multiples ranging from 10.4x to 20.5x, with a median of 14.1x, for the
Comparable Companies. An analysis of the multiples of price to estimated 1997
EPS yielded multiples ranging from 8.9x to 16.4x, with a median of 11.9x, for
the Comparable Companies. An analysis of the multiples of price to book value
yielded multiples ranging from 1.16x to 2.09x, with a median of 1.36x, for the
Comparable Companies. An analysis of the multiples of price to book value
excluding the effect of SFAS 115 yielded multiples ranging from 1.26x to
2.14x, with a median of 1.64x, for the Comparable Companies. Salomon Brothers
noted that these multiples could be compared with the multiples of 16.8x,
14.3x, 1.22x and 1.33x that the Merger Consideration represented to APY's 1996
operating EPS, estimated 1997 operating EPS, book value and book value
excluding the effect of SFAS 115, respectively.
31
<PAGE>
Using each of the ranges of multiples for the Comparable Companies, Salomon
Brothers derived a valuation range for the implied value per share of APY
Common Stock as follows: $20.37 to $40.10, with a median of $27.64, based on
1996 EPS of $1.96; $20.50 to $37.76, with a median of $27.34, based on
estimated 1997 EPS of $2.30 ($19.07 to $35.13, with a median of $25.44, using
management's estimate of 1997 EPS of $2.14); $31.38 to $56.37, with a median
of $36.69, based on book value per share of $26.99; and $31.42 to $53.28, with
a median of $40.76, based on book value per share excluding the effect of SFAS
115 of $24.86.
Recapitalization Analysis. Salomon Brothers also performed an analysis of
the value of APY assuming a hypothetical recapitalization of APY involving the
distribution by APY of excess capital of $200 million in the form of a special
dividend to its stockholders followed by adding financial leverage so that the
pro forma debt/capitalization ratio would be 20%, which is approximately the
median rate for the Comparable Companies (with the proceeds of the additional
debt being distributed to APY stockholders as part of the special dividend).
Salomon Brothers performed a series of calculations, including the calculation
of pro forma book value per share of $19.30 and pro forma estimated 1997 EPS
of $1.74. Applying the ranges of multiples for the Comparable Companies
described above of price to book value and estimated 1997 EPS to these pro
forma estimates, and adding the total special dividend assumed to be
distributed to stockholders of $7.67 per share of APY Common Stock, Salomon
Brothers derived valuation ranges for the implied value per share of APY
Common Stock of and $23.22 to $36.31, with a median of $28.41, and $30.11 to
$47.97, with a median of $33.90, for estimated 1997 EPS and pro forma book
value, respectively.
Discounted Cash Flow Analysis. Salomon Brothers performed a discounted cash
flow analysis pursuant to which the value of APY was estimated by adding (i)
the estimated net present value of APY's future free cash flows from its
Hanover and Citizens businesses, assuming the maximum statutorily allowable
dividend stream from its Hanover business and a dividend stream of $7.1
million annually from its Citizens business (holding constant management's
projected dividend for 1997), plus (ii) the estimated net present value of the
terminal value of APY, based upon certain operating and financial assumptions,
the 1997 Projections and other information provided to Salomon Brothers by the
management of APY. Salomon Brothers based its dividend stream estimates upon
projected statutory results for the Hanover and Citizens businesses for the
five year period ended December 31, 2001. For purposes of such analysis,
Salomon Brothers utilized discount rates of 11% and 13%, and terminal values
based on multiples of 11x, 12x, 13x, 14x and 15x projected statutory earnings
for the year 2002. The discounted cash flow analysis was based on the 1997
Projections. Salomon Brothers performed the discounted cash analysis by
creating a "base case" scenario and an "upside" scenario. In the upside
scenario, Salomon Brothers assumed an annual reduction in Hanover's expense
ratio and in Hanover's loss ratio of .7 points and .3 points, respectively,
for 1998 through 2001. From these analyses, Salomon Brothers used the ranges
calculated from terminal value multiples 12x, 13x and 14x to derive reference
ranges for the implied value of the shares of APY Common Stock under the base
case and the upside scenario of $28.19 to $31.36, with a median of $29.77, and
$34.81 to $38.92, with a median of $36.86, respectively, using an 11% discount
rate, and $26.31 to $29.21, with a median of $27.76, and $32.38 to $36.14,
with a median of $34.26, respectively, using a 13% discount rate.
Dividend Discount Analysis. Salomon Brothers also performed a dividend
discount analysis pursuant to which the value of APY was estimated by adding
(i) the estimated net present value of APY's future stream of dividend
payments to APY's stockholders plus (ii) the estimated net present value of
the terminal value of APY, based upon certain operating and financial
assumptions, 1997 Projections and other information provided to Salomon
Brothers by the management of APY. Salomon Brothers assumed that dividends
would continue to be paid out through 2001 at the current level of 8.2% of
operating earnings per share and that operating earnings per share would grow
at a rate of 5% per year from management's estimate of $2.14 for 1997. For
purposes of such analysis, Salomon Brothers utilized discount rates of 10%,
11%, 12%, 13% and 14%, and terminal values based on multiples of 11x, 12x,
13x, 14x and 15x projected statutory earnings for the year 2002. From these
analyses, Salomon Brothers used the ranges calculated for terminal value
multiples 12x, 13x and 14x to derive reference ranges for the implied value of
the shares of APY Common Stock of $28.10 to $31.34, with a median of $29.72,
using an 11% discount rate, and $26.01 to $28.97, with a median of $27.49,
using a 13% discount rate.
32
<PAGE>
Comparable Transaction Analysis Involving Acquisition of Minority Interests
by Controlling Stockholders. Salomon Brothers reviewed the consideration paid
in certain transactions in which a controlling stockholder was seeking to
acquire substantial additional ownership of that company. Salomon Brothers
considered 54 such transactions since 1992 that it considered comparable to
the Merger. Using publicly available information, Salomon Brothers calculated
the premium represented by the highest price offered by the controlling
stockholder over the market price one week prior to, and four weeks prior to,
the announcement of the offer. Salomon Brothers determined that the median
premiums to market one week and four weeks prior to announcement for all
transactions were 21.3% and 22.8%, respectively. Of the 54 transactions, seven
had been withdrawn. The median premiums to market one week and four weeks
prior to the announcement for the 47 transactions that were consummated or
pending were 21.3% and 23.5%, respectively. Salomon Brothers also reviewed
separately the seven transactions included in the group of 54 that involved
insurance companies. In these seven transactions, Salomon Brothers determined
that the median premiums to market one week and four weeks prior to
announcement were 21.4% and 22.3%, respectively. Salomon Brothers noted that
these premiums could be compared with the 12.8% premium that the Merger
Consideration represented to the market price one week, and the 15.3% premium
to the market price four weeks, prior to the announcement of AFC's proposal.
Salomon Brothers used the range of the premiums in all 54 transactions to the
market price one week prior to the announcement of the offer to derive a range
between the 25th percentile and the 75th percentile of such premiums (Salomon
Brothers did not consider the high and low statistics outside that range to be
meaningful) of 15.4% to 38.1%, with a median of 21.3%. From this derived
range, Salomon Brothers derived a reference range for the implied value of the
shares of APY Common Stock of $33.76 to $40.40, with a median of $35.49.
Analysis of Selected Insurance Company Acquisitions. Salomon Brothers also
analyzed certain publicly available financial, operating and stock market
information for 29 selected merger or acquisition transactions in the
insurance industry over the past three and one-half years. Salomon Brothers
considered the precedent mergers and acquisition transactions to be reasonably
similar to the Merger, but none of these precedents is identical to the
Merger. For each such transaction, Salomon Brothers calculated the premium
represented by the highest price offered over the market price one month prior
to the announcement of the offer, and the multiples of, among other things,
offer price to latest twelve months ("LTM") GAAP net operating income, offer
price to LTM GAAP book value, offer price to LTM statutory net operating
income and offer price to LTM statutory capital and surplus. An analysis of
the premium to market price one month prior to announcement yielded a median
premium of 30.7%. An analysis of the multiples of offer price to LTM GAAP net
operating income, LTM GAAP book value, LTM statutory net operating income and
LTM statutory capital and surplus yield medians of 14.4x, 1.19x, 15.3x and
1.33x, respectively. Salomon Brothers used the range of premiums to market
price one month prior to announcement and the range of multiples of offer
price to LTM GAAP net operating income and LTM GAAP book value to derive a
range between the 25th percentile and the 75th percentile of such premiums and
multiples (Salomon Brothers did not consider the high and low statistics
outside that range to be meaningful) of 15.5% to 58.8%, with a median of
30.7%, 7.7x to 26.3x, with a median of 14.4x, and 1.03x to 1.38x, with a
median of 1.19x, respectively. Using such derived ranges of premiums and
multiples, Salomon Brothers derived a reference range for the implied value of
the shares of APY Common Stock of $33.07 to $45.46, with a median of $37.42,
$15.01 to $51.64, with a median of $28.16, and $27.82 to $37.37, with a median
of $32.17, respectively.
The foregoing summary does not purport to be a complete description of the
analyses performed by Salomon Brothers or of its presentations to the Special
Committee. The preparation of financial analyses and fairness opinions is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. Salomon Brothers made
no attempt to assign specific weights to particular analyses or factors
considered, but rather made qualitative judgments as to the significance and
relevance of the analyses and factors considered. Accordingly, Salomon
Brothers believes that its analyses (and the summary set forth above) must be
considered as a whole, and that selecting portions of such analyses and of the
factors considered by Salomon Brothers, without considering all of such
analyses and factors, could create a misleading or incomplete view of the
processes underlying the analyses conducted by Salomon Brothers and its
opinion. With regard to the comparable public company analysis and the
comparable transaction analysis summarized above, Salomon Brothers selected
comparable public companies on the basis of various factors, including the
33
<PAGE>
size of the public company and similarity of the line of business; however, no
public company or transaction utilized as a comparison is identical to APY,
any business segment of APY or the Merger. Accordingly, an analysis of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the transaction
or public trading value of the comparable companies and transactions to which
APY, the business segments of APY and the Merger are being compared. In its
analyses, Salomon Brothers made numerous assumptions with respect to APY,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of APY. Any
estimates contained in Salomon Brothers' analyses are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by such
analyses. Estimates of values of companies do not purport to be appraisals or
necessarily to reflect the prices at which companies may actually be sold.
Because such estimates are inherently subject to uncertainty, none of APY, the
Special Committee, Salomon Brothers or any other person assumes responsibility
for their accuracy.
Salomon Brothers is an internationally recognized investment banking firm
engaged, among other things, in the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The Special Committee
selected Salomon Brothers to act as its financial advisor on the basis of
Salomon Brothers' international reputation. Salomon Brothers acted as co-
manager for AFC's initial public offering of AFC Common Stock and its
contemporaneous offering of Senior Debentures in October 1995, for which it
received compensation consisting of customary underwriting discounts. In
addition, in the ordinary course of its business, Salomon Brothers may
actively trade the debt and equity securities of both APY and AFC for its own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
Pursuant to the Engagement Letter, APY will pay Salomon Brothers the
following fees: (a) $100,000, paid upon APY's execution of the Engagement
Letter; plus (b) an additional fee of $1,150,000, which became payable upon
completion of Salomon Brothers' work in preparation for the delivery of its
fairness opinion. APY has also agreed to reimburse Salomon Brothers for its
reasonable travel and other out-of-pocket expenses incurred in connection with
its engagement (including the reasonable fees and disbursements of its
counsel) and to indemnify Salomon Brothers against certain liabilities and
expenses relating to or arising out of its engagement, including certain
liabilities under the federal securities laws.
As noted under the caption "Special Factors--Determination of the Special
Committee; Approval of the APY Board of Directors," the fairness opinion of
Salomon Brothers was only one of the many factors considered by the Special
Committee in determining to approve the Merger Agreement and the Merger. The
amount of consideration payable in the Merger was determined by arms' length
negotiations between AFC and the Special Committee, in consultation with their
respective financial advisors and other representatives, and was not
established by such financial advisors.
Opinion of AFC's Financial Advisor
On February 19, 1997, Merrill Lynch delivered its oral opinion to the Board
of Directors of AFC, which was subsequently confirmed in writing (the
"Original Merrill Lynch Opinion") that, as of that date and on the basis of
and subject to the matters set forth therein, the Merger Consideration was
fair from a financial point of view to AFC. Merrill Lynch subsequently
delivered its written opinion dated the date hereof (the "Merrill Lynch
Opinion") that, as of the date hereof and on the basis of and subject to the
matters set forth therein, the Merger Consideration was fair from a financial
point of view to AFC.
A COPY OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED, QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED AS APPENDIX B TO THIS INFORMATION STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE MERRILL LYNCH OPINION SET
FORTH IN THIS INFORMATION STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE MERRILL LYNCH OPINION WAS
ADDRESSED TO THE BOARD OF DIRECTORS OF AFC AND DID NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER.
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In arriving at its opinion Merrill Lynch, among other things: (1) reviewed
AFC's Annual Reports, Forms 10-K and related financial information for the
four fiscal years ended December 31, 1996, AFC's Form 10-Q and related
unaudited financial information for the quarterly period ended March 31, 1997
and AFC's press release dated April 30, 1997 announcing results for the
quarterly period ended March 31, 1997 as well as AFC's statistical supplement
containing certain financial information for the quarter ended March 31, 1997;
(2) reviewed APY's Annual Reports for the three fiscal years ended December
31, 1995, APY's Forms 10-K and related financial information for the four
fiscal years ended December 31, 1996, APY's Form 10-Q and related unaudited
financial information for the quarterly period ended March 31, 1997 and APY's
press release dated April 30, 1997 announcing results for the quarterly period
ended March 31, 1997 as well as APY's statistical supplement containing
certain financial information for the quarter ended March 31, 1997; (3)
reviewed certain statutory financial statements of the insurance subsidiaries
of AFC and APY for the three fiscal years ended December 31, 1995 and for the
nine-month period ended September 30, 1996; (4) reviewed certain information,
including the 1997 Projections, relating to the business, earnings, cash flow,
assets and prospects of AFC and APY, furnished to Merrill Lynch by or on
behalf of AFC and APY; (5) reviewed certain information relating to the cost
savings expected to result from the Merger provided to Merrill Lynch by AFC
and APY and conducted discussions with members of senior management of AFC and
APY concerning their respective businesses and prospects as well as such
expected cost savings; (6) analyzed the pro forma effect of the Merger on AFC;
(7) reviewed the historical market prices and trading activity of the shares
of AFC Common Stock and the shares of APY Common Stock and compared them with
those of certain publicly traded companies which Merrill Lynch deemed to be
reasonably similar to AFC and APY, respectively; (8) compared the results of
operations of AFC and APY with those of certain companies which Merrill Lynch
deemed to be reasonably similar to AFC and APY, respectively; (9) compared the
proposed financial terms of the Merger with the financial terms of certain
other mergers and acquisitions which Merrill Lynch deemed to be relevant;
(10) reviewed the Merger Agreement; (11) reviewed an opinion dated February
19, 1997 of Latham & Watkins, counsel to AFC, with respect to certain tax
consequences of the Recapitalization; (12) reviewed a certificate dated
February 19, 1997 of Edward J. Parry III, Vice President and Chief Financial
Officer of AFC, with respect to the financial impact of the Recapitalization
on AFC and APY; and (13) reviewed such other financial studies and analyses
and performed such other investigations and took into account such other
matters as Merrill Lynch deemed necessary, including its assessment of general
economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by or on behalf of AFC and APY or made publicly available by AFC or APY, and
did not independently verify such information or undertake an independent
valuation or appraisal of the assets or liabilities of AFC or APY. With
respect to the 1997 Projections, Merrill Lynch assumed that they had been
reasonably prepared and reflected the best currently available estimates and
judgment of the management of AFC or APY as to the expected future financial
performance of AFC or APY, as the case might be. Merrill Lynch assumed that
the information relating to the cost savings expected to result from the
Merger provided to it by AFC and APY was reasonably prepared and represented
the best current estimates and judgments of the managements of AFC and APY as
to such cost savings. Merrill Lynch did not express any opinion as to the
prices at which the shares of AFC Common Stock would actually trade following
the consummation of the Merger or the prices at which the shares of AFC Common
Stock or the shares of APY Common Stock would trade between the announcement
and the consummation of the Merger. The Merrill Lynch Opinion was necessarily
based upon market, economic, financial and other conditions as they existed
and could be evaluated as of the date thereof.
The terms of the Merger Transactions, including the Merger Consideration,
were developed through a process of arm's-length negotiations between AFC and
the Special Committee and were approved by the Board of Directors of AFC and
by the Board of Directors of APY upon the recommendation of the Special
Committee. See "Special Factors--Background of the Merger Transactions."
The following is a summary of the analyses performed by Merrill Lynch in
connection with the preparation of the Original Merrill Lynch Opinion. Merrill
Lynch reviewed and updated such analyses in connection with its preparation of
the Merrill Lynch Opinion.
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Comparable Public Company Analysis. Using publicly available information
(including estimates by First Call Corporation), Merrill Lynch compared
certain financial and operating information and ratios (described below) for
APY with corresponding financial and operating information and ratios for a
group of publicly traded property and casualty insurance companies (including
certain companies in which publicly held shares of common stock constitute a
minority of all of the issued and outstanding shares of such common stock)
that Merrill Lynch deemed to be similar to APY. The comparable public
companies were ALFA Corporation, American States Financial Corporation, W.R.
Berkley Corporation, Cincinnati Financial Corporation, Harleysville Group
Inc., Ohio Casualty Corporation, SAFECO Corporation, St. Paul Companies, Inc.,
Selective Insurance Group, Inc. and State Auto Financial Corporation
(collectively, the "Public Comparables"). Merrill Lynch compared (1) the
closing price on February 14, 1997 (the "Price") of the common stock of each
of the Public Comparables as a multiple (the "P/E Multiple") of their
respective earnings per share (the "EPS") for the calendar year 1996 (the
"1996 P/E Multiple") and estimated EPS for the calendar year 1997 (the "1997
P/E Multiple") and (2) the Price of each of the Public Comparables as a
multiple of their respective book values per share (the "Price/Book
Multiple"). The following multiples were derived from such calculation: (1)
for the 1996 P/E Multiple, a range of 11.6x to 22.2x, within which Merrill
Lynch selected a narrower range of 13.0x to 14.0x as most representative of
appropriate equity value; for the 1997 P/E Multiple, a range of 8.7x to 15.8x,
within which Merrill Lynch selected a narrower range of 12.0x to 13.0x as most
representative of appropriate equity value; and (2) for the Price/Book
Multiple, a range of 1.1x to 1.9x, within which Merrill Lynch selected a
narrower range of 1.2x to 1.3x as most representative of appropriate equity
value. Narrower ranges selected by Merrill Lynch for each of the 1996 P/E
Multiple, the 1997 P/E Multiple and the Price/Book Multiple are most
representative of appropriate equity value because they take into account the
relative performance and ownership characteristics of the Public Comparables
as well as the variation of the Public Comparables from the average of the
group.
By applying its selected range of 1996 P/E Multiples to estimates of
earnings provided by APY's management (adjusted for the pro forma effect of a
dividend in an amount of $150 million assumed to be paid by APY immediately
prior to the Effective Time (the "Dividend")) (the "Adjusted Management
Earnings") for 1996 and adding thereto the Dividend, Merrill Lynch calculated
a range of equity value for APY of $1,605.7 million to $1,717.7 million (or
$26.92 to $28.80 on a per share basis). By applying its selected range of 1997
P/E Multiples to the Adjusted Management Earnings for 1997 and adding thereto
the Dividend, Merrill Lynch calculated a range of equity value for APY of
$1,598.1 million to $1,718.8 million (or $26.79 to $28.82 on a per share
basis). Merrill Lynch also reduced the Adjusted Management Earnings for 1997
to take into account additional debt (the "Additional Debt") to reflect how a
prospective third party acquirer might reasonably be expected to capitalize
APY (the "Levered 1997 Earnings") and applied its selected range of 1997 P/E
Multiples to the 1997 Levered Earnings and added thereto the Dividend and the
Additional Debt. Such analysis yielded a range of equity value for APY of
$1,683.9 million to $1,795.1 million (or $28.23 to $30.10 on a per share
basis). By applying its selected range of Price/Book Multiples to the book
value of APY as of December 31, 1996 (the "1996 Book Value") and adding
thereto the Dividend, Merrill Lynch calculated a range of equity value for APY
of $2,082.0 million to $2,243.0 million (or $34.91 to $37.61 on a per share
basis). Based on the foregoing, Merrill Lynch derived a public comparable
value range for APY under this methodology of $1,800.0 million to $2,000.0
million (or $30.18 to $33.53 on a per share basis) (the "Public Comparable
Range"). The Public Comparable Range (adjusted for the Dividend) represents
the following ranges of implied multiples: (i) for the Adjusted Management
Earnings for 1997, a range of 13.7x to 15.3x and (ii) for the 1996 Book Value,
a range of 1.0x to 1.1x.
No company utilized in the comparable public company analysis was identical
to APY. Accordingly, an analysis of the results of such a comparison is not
purely mathematical, but instead it involves complex considerations and
judgments concerning differences in historical and projected financial and
operating characteristics of the comparable companies and other factors that
could affect the public trading value of the comparable companies or company
to which they are being compared. In each applicable instance, Merrill Lynch
used the 1997 Projections and other information provided to Merrill Lynch by
the management of APY.
Acquisition Premium Analysis. Merrill Lynch calculated ranges of implied
equity values for APY based on assumed transaction premiums of 10% and 20%. In
selecting such assumed transaction premiums, Merrill
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Lynch reviewed the premiums paid in 33 minority buyout transactions completed
within the past five years and calculated that the median transaction premiums
paid in such transactions over the trading price of the acquired companies one
day and four weeks prior to announcement were 19% and 26%, respectively.
Merrill Lynch also considered the price to earnings ratios of the Public
Comparables over the past five years and, in so doing, determined that the
Public Comparables were then trading at price to earnings ratios that were
approximately 10% to 15% higher than historical norms. In light of the lower
historical price to earnings ratios of the Public Comparables, it was Merrill
Lynch's judgment that a premium range of 10% to 20% was appropriate in
analyzing the Merger Consideration on behalf of AFC. The application of a 10%
premium to the Public Comparable Range resulted in a range of $1,980.0 million
to $2,200.0 million (or $33.20 to $36.89 on a per share basis). The
application of a 20% premium to the Public Comparable Range resulted in a
range of $2,160.0 million to $2,400.0 million (or $36.22 to $40.24 on a per
share basis).
Comparable Acquisition Transactions Analysis. Merrill Lynch compared certain
financial and operating information and ratios (described below) for APY with
corresponding financial and operating information and ratios for a number of
acquisition transactions (the "Comparable Acquisition Transactions") involving
property and casualty insurance companies. The Comparable Acquisition
Transactions were: the acquisition by Orion Capital Corporation, a 49.5%
holder of common stock of Guaranty National Corporation ("Guaranty"), of
additional 30.8% of Guaranty's common stock, Ohio Farmers Insurance Co.'s
acquisition of Beacon Insurance Co. of America, Travelers Group Inc.'s
acquisition of the property and casualty business of Aetna Inc., Unitrin,
Inc.'s acquisition of Milwaukee Insurance Group, Inc., Guaranty's acquisition
of Viking Insurance Holdings, Inc., Anthem P&C Holdings, Inc.'s acquisition of
Federal Kemper Insurance Company, St. Paul Companies, Inc.'s acquisition of
Economy Fire and Casualty Co., Allianz AG Holding's acquisition of Fireman's
Fund Corp. and Zurich Versicherungsgessellschaft's acquisition of Maryland
Casualty Co. Merrill Lynch compared (1) the enterprise value of the acquired
company as a multiple of such company's (a) adjusted statutory net operating
income (the "Statutory Income Multiple") and (b) adjusted statutory capital
and surplus of such company (the "Statutory Capital & Surplus Multiple") and
(2) the price paid for the acquired company's equity in the Comparable
Acquisition Transaction as a multiple of such acquired company's book value
per share (the "Acquisition Price/Book Multiple"). The following multiples
were derived from such calculations: (1) for the Statutory Income Multiple, a
range of 10.1x to 18.8x, based on which Merrill Lynch selected a range of
14.0x to 19.0x as most representative of appropriate equity value, (2) for the
Statutory Capital & Surplus Multiple, a range of 1.1x to 2.6x, based on which
Merrill Lynch selected a range of 1.5x to 1.8x as most representative of
appropriate equity value and (3) for the Acquisition Price/Book Multiple, a
range of 0.6x to 1.4x, based on which Merrill Lynch selected a range of 1.2x
to 1.3x as most representative of appropriate equity value. The selected range
reflected consideration of the relative performance of each acquired company,
the situation under which each company was acquired, the date of each
transaction and the variation of the transactions from the average of the
group.
By applying its selected range of Statutory Income Multiples to the 1996
adjusted statutory net operating income of APY provided by APY's management,
adding thereto the Dividend and subtracting $26 million in debt owed to AFC
(the "Debt"), Merrill Lynch calculated a range of equity value for APY of
$1,583.3 million to $2,104.5 million (or $26.55 to $35.29 on a per share
basis). Merrill Lynch also applied the selected range of Statutory Capital &
Surplus Multiples to the 1996 adjusted capital and surplus of APY provided by
APY's management, added thereto the Dividend and subtracted the Debt. Such
analysis yielded a range of equity value for APY of $1,708.9 million to
$2,025.9 million (or $28.65 to $33.97 on a per share basis). By applying its
selected range of Acquisition Price/Book Multiples to the 1996 Book Value,
adding thereto the Dividend and subtracting the Debt, Merrill Lynch calculated
a range of equity value for APY of $2,056.0 million to $2,217.0 million (or
$34.47 to $37.17 on a per share basis). Based on the foregoing, Merrill Lynch
derived a comparable acquisition value range for APY under this methodology of
$1,800.0 million to $2,100.0 million (or $30.18 to $35.21 on a per share
basis) (the "Comparable Acquisition Value Range"). The Comparable Acquisition
Value Range (adjusted for the Dividend and the Debt) represents the following
ranges of implied multiples: (i) for the 1996 adjusted statutory net operating
income of APY, a range of 16.1x to 19.0x, (ii) for the 1996 adjusted capital
and surplus of APY, a range of 1.6x to 1.9x, and (iii) for the 1996 Book
Value, a range of 1.0x to 1.2x.
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Discounted Dividend Analysis. Merrill Lynch calculated ranges of equity
value for APY based upon the sum of the discounted present value of Hanover
plus 82.5% of the terminal value of Citizens Insurance Company of America, an
82.5% direct subsidiary of Hanover. The discounted present value of Hanover
was calculated based on the sum of (i) the discounted present value of the
stream of projected maximum dividends that could reasonably be paid by Hanover
on an after-tax basis for the five-year period from 1998 through 2002 and (ii)
the discounted present value of the projected terminal value. In each
applicable instance, Merrill Lynch based its analysis upon certain operating
and financial assumptions, the 1997 Projections and other information provided
to Merrill Lynch by the management of APY. Merrill Lynch utilized discount
rates reflecting a weighted average cost of capital of 9.5%, 10.5% and 11.5%
and terminal value multiples for forward earnings of 11.0x, 13.0x and 15.0x.
Based on such analyses, the implied values were estimated to range from $1,757
million to $2,324 million (or $29.46 to $38.97 based on a per share basis),
within which Merrill Lynch selected a range of $1,800.0 million to $2,100.0
million (or $30.18 to $35.21 on a per share basis).
Based on all of the foregoing analyses, Merrill Lynch selected the range of
$1,900.0 million to $2,300.0 million (or $31.86 to $38.56 on a per share
basis) as the overall equity transaction value range for APY.
The preparation of a fairness opinion is a complex analytic process
involving 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 readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Merrill Lynch did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. No
limitations were imposed by AFC's Board of Directors on the investigations
made or procedures followed by Merrill Lynch.
Pursuant to an engagement letter dated June 27, 1996, AFC engaged Merrill
Lynch as its exclusive financial advisor in connection with a possible
acquisition transaction involving APY. AFC agreed to pay Merrill Lynch fees of
(i) $200,000 on the date of such engagement letter, (ii) $300,000 on the
earlier of the date on which the Merger Agreement was executed and a fairness
opinion was delivered and (iii) $1,000,000 upon consummation of the Merger
Transactions. AFC also agreed to reimburse Merrill Lynch for its expenses,
including reasonable counsel fees, and to indemnify it against certain
liabilities and expenses, including certain liabilities under the federal
securities laws.
AFC retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm. Merrill Lynch, as part of its investment banking business,
is continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. On January 29, 1997, Merrill Lynch and AFC entered into a purchase
agreement pursuant to which Merrill Lynch and its affiliates purchased
$300,000,000 of Series A Capital Securities issued by AFC in a Rule 144A
private placement through a newly created subsidiary business trust. Merrill
Lynch has also provided financial advisory and financing services to AFC and
APY (including services as a lead manager of the initial public offering of
AFC Common Stock and Senior Debentures and as a dealer for AFC's commercial
paper program). Merrill Lynch has received fees for the rendering of such
services over the past two years in the aggregate amount of approximately $9
million. In addition, in the ordinary course of its business, Merrill Lynch
may actively trade the securities of AFC and APY for its own account and for
the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
NO ACTION REQUIRED BY STOCKHOLDERS TO CONSUMMATE THE MERGER TRANSACTIONS
The Record Date for determining stockholders entitled to notice of, vote on
or consent to the Merger Transactions was May 28, 1997. As of the Record Date,
there were 59,657,606 shares of APY Common Stock outstanding. Each holder of
record is entitled to one vote per share held. On the Record Date, SMA held
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approximately 59.5% of the outstanding APY Common Stock. Pursuant to the DGCL
and the APY Charter, the affirmative vote of a majority of the outstanding
Common Stock is necessary to approve the Merger Transactions, the Charter
Amendment and the Merger Agreement. The Merger Transactions, the Charter
Amendment and the Merger Agreement have been approved by the written consent
of SMA as holder of 35,472,600 shares of APY Common Stock. The approval of a
majority of the APY Public Stockholders is not required to approve the Merger
Transactions. Consequently, no meeting of APY stockholders is necessary to
effect the Merger Transactions, and none will be held. ACCORDINGLY, NO ACTION
ON THE PART OF ANY APY PUBLIC STOCKHOLDER IS NECESSARY TO AUTHORIZE OR
CONSUMMATE THE MERGER TRANSACTIONS.
CERTAIN LITIGATION
Shortly after AFC publicly disclosed its proposal regarding the Merger
Transactions, three separate stockholders of APY, Leslie Susser, Harbor
Finance Partners and William A. Kass, IRA-Simplified Employee Pension, filed
lawsuits in the Delaware Chancery Court against AFC, APY and the directors of
APY and the directors of AFC who are also on the board of directors of APY
(the "Delaware Actions"). An additional lawsuit challenging the Merger
Transactions was filed by another stockholder of APY, Daniel Bruno, in the
Worcester County (Massachusetts) Superior Court (the "Massachusetts Action"
and, together with the Delaware Actions, the "Actions"). The named plaintiff
in each of the Actions purports to maintain each individual action as a class
action on behalf of the APY Public Stockholders. In each of the Actions, the
plaintiff alleges that under the terms of the proposed Merger Transactions,
AFC would acquire the APY Common Stock at a price that is substantially below
the fair price of such stock and that certain officers and/or directors of AFC
and/or APY have breached fiduciary duties owed to APY and the Public
Stockholders in connection with the proposed Merger Transactions. The
plaintiffs sought injunctive relief prohibiting AFC from completing the Merger
Transactions or, in the alternative, compensatory damages. On February 19,
1997, the parties to the Delaware Actions executed an MOU memorializing an
agreement-in-principle to settle the Delaware Actions. An Order consolidating
the Delaware Actions was entered by the Delaware Chancery Court on February
26, 1997 (the "Consolidated Action"). On April 3, 1997, the plaintiff in the
Massachusetts Action voluntarily dismissed without prejudice his complaint in
that proceeding and, on March 26, 1997, he became a party to the Consolidated
Action. On May 8, 1997, the parties to the Consolidated Action executed a
Stipulation of Settlement (the "Settlement") which provides for the full
settlement and release of any and all claims that are or could have been
asserted in the Consolidated Action (the "Settled Claims"). The consideration
for the plaintiffs' agreement to such settlement and release is the right of
such plaintiffs to receive, along with each other APY Public Stockholder, the
Merger Consideration (the amount of which had been increased by AFC during
negotiations with the Special Committee from the merger consideration
initially proposed by AFC at the time the Actions were instituted). In
addition, the defendants in the Consolidated Action have agreed that they will
not oppose an application by plaintiffs' attorneys for attorneys' fees and
expenses in the amount of no more than $995,000. On May 13, 1997, the Delaware
Chancery Court entered an or order (the "Scheduling Order") determining
preliminarily and solely for the purposes of the Settlement, that the
Consolidated Action may be maintained as a class action by plaintiffs as
representatives of the class of APY Public Stockholders (the "Class") and
scheduling a hearing to determine whether the Settlement is fair to the Class.
On May 15, 1997, APY mailed a notice regarding the terms of the Settlement and
the scheduling of a hearing relating to the Settlement to all holders who
became record holders of APY Common Stock on or after December 17, 1996.
CERTAIN EFFECTS OF THE MERGER TRANSACTIONS
It is currently expected that, following the Effective Date, except as
described in this Prospectus/Information Statement, the business and
operations of APY and AFC will be continued substantially as they are
currently being conducted. Except for the Merger Transactions, and as
otherwise described in this Prospectus/Information Statement, AFC has no
current plans or proposals to enter into material corporate transactions or to
sell a substantial portion of APY's assets. After the Effective Date, APY and
AFC management will continue from time to time to evaluate the business and
operations of APY and may propose or develop new plans or proposals, and make
such changes, as are deemed appropriate.
If the Merger Transactions are consummated, except to the extent that
stockholders receive AFC Common Stock as a part of their Merger Consideration,
the APY Public Stockholders will no longer have any equity
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interest in APY, and, therefore, will not share in its future earnings (or
losses) and growth, if any, nor will they share as directly in the risks
associated with the continuing operations of APY. To the extent that APY
Public Stockholders receive AFC Common Stock as a part of their Merger
Consideration, such stockholders will have an indirect interest in APY, and,
therefore, its future earnings (or losses) and growth, and will be subject to
the risks associated with the continuing operations of AFC and its
subsidiaries, including APY and its subsidiaries. Following the consummation
of the Merger, as a result of the receipt of AFC Common Stock as Merger
Consideration, the APY Public Stockholders will hold approximately 16% of the
outstanding shares of AFC Common Stock. As a result of the consummation of the
Merger Transactions, APY will be wholly-owned by AFC and its wholly-owned
subsidiaries and AFC will have acquired the full interest in APY's net book
value, net tangible book value and net earnings, as well as the risks
associated with the continuing operations of APY.
The Merger Agreement provides that the certificate of incorporation of APY,
as amended by the Charter Amendment, and the by-laws of APY, each as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation and by-laws, respectively, of the surviving corporation after
the Effective Time. The Merger Agreement also provides that the directors of
Merger Sub and the officers of APY immediately prior to the Effective Time
shall be the initial directors and officers, respectively, of the surviving
corporation.
APY is currently subject to the informational filing requirements of the
Exchange Act, and in accordance therewith, is required to file reports and
other information with the Commission relating to its business, financial
statements and other matters. As a result of the Merger Transactions, there
will cease to be any public market for the APY Common Stock, and after the
Effective Time, the APY Common Stock will be delisted from the NYSE. Upon such
event, APY is expected to apply to the Commission for the deregistration of
the APY Common Stock under the Exchange Act. Upon deregistration, APY will no
longer be required to file reports and other information under the Exchange
Act. The termination of the registration of the APY Common Stock under the
Exchange Act would make the 1934 Act (including the proxy solicitation
provisions of Section 14(a), the periodic reporting requirements of Section 13
and the short swing trading provisions of Section 16(b)) no longer applicable
to APY. Additionally, upon the termination of the registration of the APY
Common Stock under the 1934 Act, the APY Common Stock will no longer
constitute "margin securities" under the regulations of the Board of Governors
of the Federal Reserve System.
INTERESTS OF CERTAIN PERSONS IN THE MERGER TRANSACTIONS
In considering the respective recommendations of the AFC Board and the APY
Board with respect to the Merger Agreement and the transactions contemplated
thereby, stockholders of APY should be aware that certain members of the
management of AFC and APY and the AFC Board and the APY Board have certain
interests in the Merger Transactions that are different from, or in addition
to, the interests of stockholders of AFC and APY generally.
At the Record Date, directors and executive officers of each of AFC and APY
and their respective affiliates (excluding SMA) owned in the aggregate 43,140
shares of APY Common Stock (including shares issuable on or before July ,
1997 upon exercise of outstanding stock options) which represents less than
one percent of the outstanding shares of APY Common Stock. Certain directors
and executive officers of AFC and APY own shares of APY Common Stock and
therefore will exchange such shares of APY Common Stock for Merger
Consideration in connection with the Merger. See "Principal and Other
Stockholders of APY." In addition, each outstanding option to purchase shares
of APY Common Stock that is held by a director or executive officer of AFC or
APY at the Effective Time will be converted into options to acquire shares of
AFC as set forth in "The Merger Transactions--The Merger Agreement--APY Merger
Consideration."
Also, following the Recapitalization, SMA, a wholly-owned subsidiary of AFC,
will continue to own 59.5% of the capital stock of APY through its ownership
of APY Class B Common Stock. At the conclusion of the Merger Transactions, the
equity ownership and percentage interest of AFC in the net earnings, net
tangible book value and net book value of APY will have increased from 59.5%
to 100%. Finally, following the consummation of the Merger Transactions, the
officers of APY will continue to serve in their respective positions with APY.
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ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting as
a step acquisition, in accordance with generally accepted accounting
principles. Under the purchase method of accounting, the purchase price of
APY, including direct costs of the Merger Transactions, will be allocated to
the assets acquired and liabilities assumed based upon their estimated
relative fair values, with the excess purchase consideration allocated to
goodwill. The Recapitalization will not change the recorded amount of AFC's
assets and liabilities.
The Unaudited Pro Forma Condensed Consolidated Financial Statements
appearing elsewhere in this Information Statement/Prospectus are based upon
certain assumptions and allocate the purchase price to assets and liabilities
based upon preliminary estimates of their respective fair values. The
unaudited pro forma adjustments and combined amounts are included for
informational purposes only. If the Merger Transactions are consummated, AFC's
financial statements will reflect the effects of acquisition adjustments which
correspond to the announcement of the Merger on February 19, 1997. The actual
allocation of the purchase price may differ from the allocation reflected in
the Unaudited Pro Forma Condensed Consolidated Financial Statements.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consequences to the APY Public Stockholders
The receipt of the Merger Consideration for shares of APY Common Stock
pursuant to the Merger will be a taxable transaction for Federal income tax
purposes and may also be a taxable transaction under applicable state, local,
foreign and other tax laws. In general, for Federal income tax purposes, an
APY stockholder will recognize gain or loss equal to the difference between
his or her adjusted tax basis for such shares and the amount of cash and the
fair market value of the AFC Common Stock received therefor. Such gain or loss
will be capital gain or loss if the shares of APY Common Stock are capital
assets in the hands of the APY stockholder, and will be long-term capital gain
or loss if the shares of APY Common Stock have been held by the APY
stockholders for more than one year.
Merger Consideration received by any APY stockholder exercising appraisal
rights will also result in gain or loss equal to the difference between the
cash received for his or her shares and such stockholder's adjusted basis for
such shares.
To prevent back-up withholding on payments of Merger Consideration in
exchange for APY Common Stock in the Merger, each APY stockholder will be
required to furnish, together with the certificates for his or her shares, a
properly completed substitute Form W-9. If back-up withholding applies, the
payor is required to withhold 31% from payments. This is not an additional
tax. Rather, the amount of back-up withholding can be credited against the tax
liability of the stockholder subject to back-up withholding. If withholding
results in overpayment of taxes, a refund may be obtained upon the filing of
an appropriate form with the Internal Revenue Service.
The foregoing summary of certain income tax consequences is included for
general information only and is not intended to and does not constitute a
complete description of all possible Federal, state, local, foreign or other
tax consequences to the holders of APY Common Stock. Also, the tax
consequences of the transaction may vary depending upon the particular facts
relating to each holder of APY Common Stock. ACCORDINGLY, EACH APY STOCKHOLDER
IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES OF THE TRANSACTION.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY
NOT APPLY TO ALL HOLDERS OF APY COMMON STOCK. SUCH HOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER.
Consequences to AFC
The exchange of one share of the APY Class B Common Stock for each share of
APY Common Stock held by SMA immediately prior to the Merger will be treated
as a tax-free recapitalization for federal income tax
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purposes. Accordingly, no gain or loss will be recognized by APY or SMA as a
result of such exchange. In addition, no gain or loss will be recognized by
AFC, Merger Sub or APY as a result of the Merger. For federal income tax
purposes, the existence of Merger Sub will be ignored and the Merger will be
treated as a taxable acquisition of APY Common Stock by AFC in exchange for
the Merger Consideration.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of AFC Common Stock received by APY stockholders in the Merger
will be freely transferable, except that shares of AFC Common Stock received
by persons who are deemed to be "affiliates" (as such term is defined under
the Act) of AFC or APY prior to the Merger may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Act (or Rule 144 in the case of such persons who become affiliates of AFC)
or as otherwise permitted under the Act. Persons who are deemed to be
affiliates of AFC or APY generally include individuals or entities that
control, are controlled by, or are under common control with, such party and
may include certain officers and directors of such party as well as principal
stockholders of such party.
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THE MERGER TRANSACTIONS
GENERAL
Pursuant to the Merger Agreement and subject to the terms and conditions
thereof, Merger Sub, a wholly-owned subsidiary of AFC formed for the purpose
of the Merger, will be merged with and into APY. As a result of the Merger
Transactions, APY will become a wholly owned subsidiary of AFC. As part of the
Merger Transactions, stockholders of APY, other than AFC and its wholly-owned
subsidiaries, will receive the consideration described below.
The following organizational chart illustrates the corporate structure of
AFC, APY and their principal subsidiaries assuming the consummation of the
Merger Transactions.
[ORGANIZATIONAL CHART]
Subject to the terms and conditions of the Merger Agreement, the closing of
the transactions contemplated thereby will take place on the later of (i) 20
business days following the date that this Information Statement/Prospectus is
first mailed to stockholders and (ii) the first business day following the day
on which all conditions to the Merger Agreement are satisfied or waived (such
later day, the "Closing Date"). The Merger will become effective upon the
filing of the certificate of merger with the Secretary of State of the State
of Delaware. The time at which the Merger becomes effective is referred to as
the Effective Time.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Appendix A-1 to this Information
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full and complete text of the
Merger Agreement.
APY MERGER CONSIDERATION
Standard Consideration. Pursuant to the Merger Agreement, upon consummation
of the Merger each share of APY Common Stock issued and outstanding
immediately prior to the Effective Time and held by an APY Public Stockholder
will be converted into the right to receive (x) a fraction of a share of AFC
Common Stock equal to the Standard Exchange Ratio, and (y) the Standard Cash
Consideration; provided, however, that (1) in the event the Average Stock
Price is less than $36.00, the Standard Cash Consideration shall be equal to
(A) $32.00 less (B) the Standard Exchange Ratio multiplied by the Average
Stock Price and (2) in the event the Average Stock Price is greater than
$41.00, the Standard Cash Consideration shall be equal to (A) $34.00 less (B)
the Standard Exchange Ratio multiplied by the Average Stock Price. Unless an
APY Public Stockholder makes an affirmative election to receive all stock or
all cash, such stockholder will receive the Standard Consideration.
Alternatively, an APY Public Stockholder may elect to receive their merger
consideration solely in stock or in cash, subject to proration in the event
that the election made by such stockholder is oversubscribed.
Stock Consideration. If an APY Public stockholder elects to receive stock in
lieu of the Standard Consideration, each share of APY Common Stock will be
converted into a fraction of a share of AFC Common Stock equal to the Stock
Exchange Ratio; provided, however, that (1) in the event the Average Stock
Price is less than $36.00, the Stock Exchange Ratio shall be equal to $32.00
divided by the Average Stock Price and (2) in the event the Average Stock
Price is greater than $41.00, the Stock Exchange Ratio shall be equal to
$34.00 divided by the Average Stock Price.
Cash Consideration. If an APY Public stockholder elects to receive cash in
lieu of the Standard Consideration, each share of APY Common Stock will be
converted into $33.00 in cash, without interest; provided, however, that (1)
in the event the Average Stock Price is less than $36.00, the Cash
Consideration shall be equal to $32.00 and (2) in the event the Average Stock
Price is more than $41.00, the Cash Consideration shall be equal to $34.00.
Effect of AFC Common Stock Price on Value of Merger Consideration. If the
Average Stock Price is below $36.00 per share or above $41.00 per share (any
such Average Stock Price being referred to herein as being "Outside the
Collar"), the value of the per share consideration payable to each APY Public
Stockholder will be equivalent regardless of whether such holder makes a
Standard Election, a Cash Election or a Stock Election. However, if the
Average Stock Price is greater than or equal to $36.00 and less than or equal
to $41.00, the value of the per share Merger Consideration payable to each APY
Public Stockholder may vary depending on (i) the Average Stock Price, (ii)
whether such holder makes a Standard Election, a Stock Election or a Cash
Election, and (iii) the combination of cash and AFC Common Stock actually
received by such holder as a result of the proration procedures described
below. The Standard Consideration, the Stock Consideration and the Cash
Consideration each are fixed in amount when the Average Stock Price is greater
than $41.00 and less than $36.00. However, the impact of the fluctuation in
value of AFC Common Stock varies depending upon the type of consideration
selected. Thus, the value of the per share consideration received by certain
holders may be greater or less than the consideration per share received by
other holders. The Letter of Transmittal, which will be distributed to APY
Public Stockholders promptly after the Effective Time, will provide such
holders with the actual Average Stock Price and holders should carefully
review the value of the consideration before making any election.
The following table illustrates the different values of the Standard
Consideration, the Stock Consideration and the Cash Consideration at certain
assumed Average Stock Prices, and illustrates the effect of the collar without
the effect of the proration procedures described below. If other than a
Standard Election is made, the
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effect of the proration may cause the mix of cash and AFC Common Stock
actually received by an APY Public Stockholder to differ from the election
made by such holder; as a result the value of consideration received would
also vary accordingly.
<TABLE>
<CAPTION>
AMOUNT OF
STANDARD CONSIDERATION
ASSUMED AVERAGE ---------------------- AMOUNT OF AMOUNT OF
STOCK PRICE(2) CASH STOCK(3) TOTAL STOCK CONSIDERATION(4) CASH CONSIDERATION
- - --------------- ------ -------- ------ ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
$32.00(1) $19.20 $12.80 $32.00 $32.00 $32.00
$33.00(1) $18.80 $13.20 $32.00 $32.00 $32.00
$34.00(1) $18.40 $13.60 $32.00 $32.00 $32.00
$35.00(1) $18.00 $14.00 $32.00 $32.00 $32.00
$36.00 $17.60 $14.40 $32.00 $30.86 $33.00
$36.50 $17.60 $14.60 $32.20 $31.29 $33.00
$37.00 $17.60 $14.80 $32.40 $31.71 $33.00
$37.50 $17.60 $15.00 $32.60 $32.14 $33.00
$38.00 $17.60 $15.20 $32.80 $32.57 $33.00
$38.50 $17.60 $15.40 $33.00 $33.00 $33.00
$39.00 $17.60 $15.60 $33.20 $33.43 $33.00
$39.50 $17.60 $15.80 $33.40 $33.86 $33.00
$40.00 $17.60 $16.00 $33.60 $34.29 $33.00
$40.50 $17.60 $16.20 $33.80 $34.71 $33.00
$41.00 $17.60 $16.40 $34.00 $35.14 $33.00
$42.00(1) $17.20 $16.80 $34.00 $34.00 $34.00
$43.00(1) $16.80 $17.20 $34.00 $34.00 $34.00
$44.00(1) $16.40 $17.60 $34.00 $34.00 $34.00
$45.00(1) $16.00 $18.00 $34.00 $34.00 $34.00
</TABLE>
- - --------
(1) Outside the Collar
(2) To be determined based upon the average of the closing sales prices of AFC
Common Stock for the ten consecutive trading days ending on the fifth
trading day prior to the Effective Time.
(3) Based upon 0.4 shares of AFC Common Stock at the assumed Average Stock
Price indicated.
(4) When the Average Stock Price is equal to or greater than $36.00 and less
than or equal to $41.00, the amount is based upon .85714 shares of AFC
Common Stock at the assumed Average Stock Price indicated. Where the
Average Stock Price is less than $36.00 or greater than $41.00, the amount
is determined by multiplying the Average Stock Price by the quotient
obtained by dividing $32.00 (if the Average Stock Price is less than
$36.00) or $34.00 (if the Average Stock Price is greater than $41.00) by
the Average Stock Price.
If an APY Public Stockholder makes a Standard Election or a Cash Election,
the Merger Consideration received by such holder will be a minimum of $32.00
per share. However, at an assumed Average Stock Price of $36.00, a Stock
Election could result in an APY Public Stockholder receiving $30.86 per share
subject to the effect of proration. Similarly, if the Average Stock Price is
between $36.00 and approximately $37.30, an APY Public Stockholder that makes
a Stock Election will receive less than $32.00 per share and if the Average
Stock Price is between approximately $39.80 and $41.00 per share, an APY
Stockholder that makes a Stock Election will receive more than $34.00 per
share. The proration procedures described below may, however, mitigate the
effect of these collar provisions.
Proration. Pursuant to the terms of the Merger Agreement, the Maximum Number
of AFC Shares issuable to holders of APY Common Stock will not exceed the
product of (x) the Standard Exchange Ratio and (y) the number of Outstanding
APY Shares. As of June 4, 1997, the Maximum Number of AFC Shares was 9,674,003
The Maximum Number of AFC Shares may increase, but not in excess of an
additional 50,000 shares, as a result of the exercise of outstanding APY stock
options. In addition, the Maximum Cash Amount to be paid to holders of APY
Common Stock will not exceed the product of the Standard Cash Consideration
and the number of Outstanding APY Shares.
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In the event that the aggregate amount of cash payable to holders of APY
Common Stock making Cash Elections received by the Exchange Agent exceeds the
Maximum Cash Amount minus the aggregate amount of cash payable pursuant to
Standard Elections, the Cash Election shall be oversubscribed. In that event,
a holder who has made a Cash Election shall receive cash and AFC Common Stock
in an amount equal to, for each share of APY Common Stock held by such holder,
(x) cash in an amount equal to the quotient obtained by dividing the (i)
Remaining Cash by (ii) the Cash Election APY Shares and (y) a number of shares
of AFC Common Stock equal to the quotient obtained by dividing (iii) the
Remaining Cash Election Shares by (iv) the Cash Election APY Shares.
In the event that the aggregate number of shares of AFC Common Stock
issuable to holders of APY Common Stock making Stock Elections exceeds the
Maximum Number of AFC Shares minus the number of shares issuable pursuant to
Standard Elections, including any fractional shares for which a cash payment
will be made, the Stock Election shall be oversubscribed. In that event, a
holder who has made a Stock Election shall receive AFC Common Stock and cash
in an amount equal to, for each share of APY Common Stock held by such holder,
(x) a number of shares of AFC Common Stock equal to the quotient obtained by
dividing (i) the Remaining Shares by (ii) the Stock Election APY Shares and
(y) cash in an amount equal to the quotient obtained by dividing (iii) the
Remaining Stock Election Cash Amount by (iv) the Stock Election APY Shares.
The following examples illustrate the effect of the proration procedures.
Example A: Assuming an Average Stock Price of $36.00 and assuming that
holders are indifferent to receiving cash or AFC Common Stock, each holder of
APY Common Stock would make a Cash Election, valued at $33.00, as opposed to a
Stock Election, valued at $30.56, or a Standard Election, valued at $32.00. If
a Cash Election was made for each of the outstanding shares of APY Common
Stock as of the date of this Information Statement/Prospectus, the cash
payable pursuant to such elections would exceed the Maximum Cash Amount.
Therefore, each holder would receive the Standard Consideration consisting of
$17.60 in cash, without interest, and 0.4 of a share of AFC Common Stock,
valued at $14.40, for a total value of $32.00.
Example B: Assuming an Average Stock Price of $41.00 and assuming that
holders are indifferent to receiving cash or AFC Common Stock, each holder of
APY Common Stock would make a Stock Election, valued at $35.14, as opposed to
a Cash Election, valued at $33.00, or a Standard Election, valued at $34.00.
If a Stock Election was made for each of the outstanding shares of APY Common
Stock as of the date of this Information Statement/Prospectus, the stock to be
issued pursuant to such elections would exceed the Maximum Number of AFC
Shares. Therefore, each holder would receive the Standard Consideration
consisting of $17.60 in cash, without interest, and 0.4 of a share of AFC
Common Stock, valued at $16.40 per share, for a total value of $34.00.
Example C: Assuming holders of 60% of the Outstanding APY Shares make a
Stock Election and the holders of the remaining Outstanding APY Shares make a
Standard Election, the shares of AFC Common Stock issuable pursuant to the
Stock Elections would exceed the Maximum Number of AFC Shares. In that
instance, (i) each holder making a Standard Election would receive the
Standard Consideration and (ii) each holder making a Stock Election would
receive, (a) a number of shares of AFC Common Stock equal to the Maximum
Number of AFC Shares, less the shares of AFC Common Stock issuable pursuant to
Standard Elections, divided by the number of shares of APY Common Stock held
by the holders making a Stock Election, and (b) cash in an amount equal to the
Maximum Cash Amount, less the cash payable pursuant to Standard Elections,
divided by the number of shares of APY Common Stock held by the holders making
a Stock Election.
APY Stock Options. As provided in the Merger Agreement, at the Effective
Time, each option or right to purchase shares of APY Common Stock (an "APY
Option") will be converted into an option to purchase AFC Common Stock.
Following the Effective Time, each such APY Option will be exercisable on the
same terms and conditions as are then applicable to such APY Option, except
that (i) each such APY Option will be exercisable for a number of shares of
AFC Common Stock equal to the product of (x) the number of shares of APY
Common Stock for which such APY Option was exercisable and (y) the Stock
Consideration and (ii) the
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exercise price of such option shall be equal to the exercise price of such
option as of the date of the Merger Agreement divided by the Stock
Consideration.
As of May 16, 1997, options to purchase 142,800 shares of APY Common Stock
were outstanding with exercise prices of $21.00, $25.50 and $26.625. The
exercise dates for these options range from May 17, 1996 through June 17, 2006
and the options expire between May 17, 2005 and June 17, 2006. Under the terms
of the Merger Agreement, AFC has agreed to file a registration statement on
Form S-8 to register the issuance of the shares of the AFC Common Stock
issuable upon the exercise of these options.
HOLDERS OF APY COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING
APY COMMON STOCK TO AFC OR APY AT THIS TIME. A LETTER OF TRANSMITTAL AND
ELECTION FORM WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH PERSON WHO WAS A
HOLDER OF OUTSTANDING APY COMMON STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE
TIME. APY STOCKHOLDERS SHOULD SEND CERTIFICATES REPRESENTING APY COMMON STOCK
TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH, THE
INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL AND ELECTION FORM.
Dividends. No dividends or other distributions declared after the Effective
Time on AFC Common Stock shall be paid with respect to any shares of AFC
Common Stock represented by an APY Stock Certificate until such APY Stock
Certificate is surrendered for exchange according to the procedures described
above.
No fractional shares of AFC Common Stock will be issued pursuant to the
Merger. In lieu of the issuance of any fractional shares of AFC Common Stock,
cash will be paid to holders of such fractional share in the amount of the
product of such fractional share multiplied by the Average Stock Price.
THE RECAPITALIZATION
APY is currently authorized to issue only one class of APY Common Stock. The
Board of Directors of APY has approved, and SMA, the holder of more than a
majority of the outstanding APY Common Stock, has approved by written consent,
an amendment to the APY Charter that would authorize the issuance of APY
Class B Common Stock. Immediately prior to and as a condition precedent to the
consummation of the Merger, APY will file such Amendment with the Secretary of
State of Delaware and will exchange one share of the APY Class B Common Stock
for each share of APY Common Stock held by SMA. Such shares of APY Class B
Common Stock shall remain outstanding after the Merger. See "The Charter
Amendment" and "Appendix A-2--Form of Charter Amendment."
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties by
AFC, Merger Sub and APY as to, among other things, (i) due organization, valid
existence and good standing; (ii) corporate authority to enter into the Merger
Agreement and related agreements; (iii) authorized capital stock; (iv)
ownership of subsidiaries; (v) the lack of conflict of the Merger Agreement
and related agreements and transactions with charters, bylaws, law and certain
agreements; (vi) consents, approvals and authorizations of governmental
entities; (vii) compliance with law and contract; (viii) the filing of certain
documents with the Commission; (ix) the accuracy of financial statements; (x)
the absence of certain litigation; (xi) the absence of certain changes
including those having a material adverse effect, the payment of dividends
other than regular quarterly cash dividends and a change in accounting policy;
(xii) the receipt of fairness opinions; and (xiii) the lack of any contract or
agreement obligating the payment of finder's fees, brokerage or agent's
commissions, other than agreements with Salomon Brothers and Merrill Lynch. In
addition, AFC represents that (i) immediately following the Effective Time, it
will have available funds to satisfy the cash portion of the Merger
Consideration; and (ii) to its knowledge, no event has occurred or condition
exists in connection with the Merger that would cause it to fail to satisfy
any material applicable statute or written regulation.
CERTAIN COVENANTS
Conduct of Business Pending the Reorganization. Pursuant to the Merger
Agreement, AFC and APY have made various customary covenants relating to the
Merger Transactions. APY has agreed that, prior to the
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Effective Time, APY and its significant subsidiaries will conduct their
operations according to their usual, regular and ordinary course of business.
Specifically, APY has agreed, among other things: (i) to preserve intact its
business organization, relationships and goodwill and to keep available the
services of its officers and employees; (ii) not to amend its certificate of
incorporation or bylaws (other than to permit the consummation of the
transactions contemplated by the Merger Agreement); (iii) not to adopt any new
employee benefit plan (including any stock option, stock benefit or stock
purchase plan) or amend any existing employee benefit plan in any material
respect; (iv) not to issue new APY capital stock (except pursuant to the
exercise of contractual rights existing prior to the execution of the Merger
Agreement), grant, confer, or award any option, warrant, conversion right, or
other right not existing on the date of the Merger Agreement, to acquire any
shares of its capital stock, effect a stock split or change its current
capitalization; (v) not to declare any dividends, other than regular quarterly
dividends not in excess of $.05 per share, or make any distributions with
respect to its capital stock or redeem any of its capital stock or stock of
its subsidiaries; (vi) not to dispose of or acquire (nor allow any subsidiary
to dispose of or acquire) any asset, in each case, for an amount exceeding
$25,000,000, except in the ordinary course of business and consistent with
past practice; (vii) not to incur material indebtedness for borrowed money, or
issue or sell any debt securities other than in the ordinary course of
business, in each case, in an amount exceeding $35,000,000 and (viii) not to
make any change to its accounting methods and principles or practices, with
certain limited exceptions.
AFC has agreed that, prior to the Effective Time, it will, among other
things: (i) not effect any stock split or issue any shares of its capital
stock at less than fair market value; (ii) deliver to APY copies of filings
made with the Commission and (iii) not declare any dividends or make any
distributions with respect to its capital stock other than regular quarterly
cash dividends including any increases thereof consistent with past practice.
Alternative Proposals. Pursuant to the Merger Agreement, APY has agreed that
neither it, nor any of its subsidiaries, will permit its respective officers,
directors, employees, agents or representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or
any of its subsidiaries) to (x) initiate, solicit or encourage, directly or
indirectly, any inquiries, or the making of implementation of any proposal or
offer (including, without limitation, any proposal or offer to its
stockholders), with respect to (i) a merger, acquisition, consolidation or
similar transaction involving the purchase of (A) any assets of APY and its
subsidiaries (other than purchases of securities and other investments from
APY's investment portfolio consistent with past practice) or (B) any
outstanding shares of APY Common Stock, including any shares not already owned
by AFC or its subsidiaries, (ii) any tender offer or exchange offer with
respect to shares of APY Common Stock, or (iii) any other transaction the
consummation of which could be reasonably expected to impede, interfere with,
prevent or materially delay the merger or which could reasonably be expected
to dilute materially the benefits to AFC of the transactions contemplated
under the Merger Agreement (any such proposal or offer being referred to as an
"Alternative Proposal") or (y) engage in any negotiations concerning, or
provide any confidential information or data to any person, relating to an
Alternative Proposal, or (z) agree to, recommend or approve any Alternative
Proposal. APY has further agreed that it will immediately notify AFC if any
such inquiries or proposals are received, any confidential information is
requested, or any negotiations or discussions are sought to be initiated with
APY. Neither the APY Board nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to AFC, the
approval or recommendation by such APY Board (or such committee) of the Merger
Agreement or the Merger, (ii) approve or recommend, or propose to approve or
recommend, any Alternative Proposal or (iii) cause APY to enter into any
agreement with respect to any Alternative Proposal; provided, however, in the
event that prior to the Effective Time the APY Board or the Special Committee
determines in good faith, upon advice of counsel, that failure to do so would
likely be a breach of its fiduciary duties, the APY Board or the Special
Committee, as the case may be, may withdraw or modify its approval or
recommendation of the Merger Agreement and the Merger as a result of an
Alternative Proposal. AFC is required to immediately advise APY and the
Special Committee orally and in writing of any Alternative Proposals and shall
describe the material terms and conditions of such Alternative Proposal and
the identity of the person making such Alternative Proposal.
Certain Other Covenants. Both AFC and APY have also agreed: (i) to promptly
make their respective filings and any other submissions and obtain all other
consents, approvals or permits from the necessary Federal
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and state governments and insurance regulatory agencies (including any
national securities exchange) prior to the Effective Time; (ii) to consult
with each other prior to issuing any press release or public statement with
respect to the Merger Transactions; (iii) to allow all designated officers,
attorneys, accountants and representatives of the other reasonable access to
offices, records and files (including information relating to commitments,
contracts, titles and financial position) and to instruct their respective
employees, counsel and financial advisors to cooperate with each other's
investigation; (iv) to cooperate in the filing of the Registration Statement
and a Schedule 13E-3 and obtain all necessary state securities laws permits or
approvals; (v) to use their best efforts to obtain comfort letters from Price
Waterhouse LLP; and (vi) to use their reasonable efforts to take, or cause to
be taken, all other action and to do, or cause to be done, all other things
necessary, proper or appropriate to consummate the transactions contemplated
by the Merger Agreement. In addition, AFC has agreed (i) to cause SMA to vote
the shares of APY Common Stock owned by it in favor of the adopting of the
Merger Agreement and the approval of the Merger and the Charter Amendment; and
(ii) to submit an additional listing application covering the shares of AFC
Common Stock issuable in the Merger to the NYSE and will use reasonable
efforts to obtain the approval of such application prior to the Effective
Time.
CONDITIONS TO THE MERGER TRANSACTIONS
The obligations of AFC and APY to consummate the Merger are conditions on
the fulfillment of the following: (i) approval of the Merger Agreement and the
transactions contemplated thereby in the manner required by law, the New York
Stock Exchange or other regulatory body; (ii) neither APY nor AFC shall be
subject to any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transaction contemplated in the Merger
Agreement, and in the event such order or injunction shall have been issued,
each party will use its reasonable efforts to have any such injunction lifted;
(iii) the effectiveness of the Registration Statement and the absence of any
stop order suspending the effectiveness thereof and no proceeding for that
purpose having been initiated by the Commission; (iv) all orders and approvals
of the insurance regulatory authorities required in connection with the
consummation of the transactions contemplated by the Merger Agreement shall
have been obtained or made; (v) the receipt of all consents, authorizations,
orders and approvals of (or filings or registrations with) any governmental
commission, board or other regulatory body required in connection with the
execution, delivery and performance of the Merger Agreement (except for those
documents required to be filed after the Effective Time and except where the
failure to obtain such approval or order would not have a material adverse
effect); (vi) the listing of the AFC Common Stock to be issued to APY
stockholders on the NYSE, subject only to official notice of issuance; and
(vii) consummation of the Recapitalization.
The obligation of APY to consummate the Merger Transactions is conditioned
on the fulfillment of the following conditions: (i) the performance by AFC and
Merger Sub, in all material respects, of their obligations pursuant to the
Merger Agreement which are required to be performed on or prior to the
Effective Date; (ii) the representations and warranties made by AFC and Merger
Sub in the Merger Agreement shall be true as of the Effective Date (except for
changes specifically permitted by the Merger Agreement); and (iii) that APY
shall have received a fairness opinion of Salomon Brothers that the Merger
Consideration is fair to the APY Public Stockholders from a financial point of
view and such fairness opinion shall not have been withdrawn.
The obligation of AFC to consummate the Merger Transactions is conditioned
on the fulfillment of the following conditions: (i) the performance by APY, in
all material respects, of its obligations pursuant to the Merger Agreement
which are required to be performed on or prior to the Effective Date; (ii) the
representations and warranties made by APY in the Merger Agreement shall be
true as of the Effective Date (except for changes specifically permitted by
the Merger Agreement); and (iii) that AFC shall have received a fairness
opinion of Merrill Lynch that the Merger is fair to AFC from a financial point
of view and such fairness opinion shall not have not been withdrawn.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement is subject to termination at the option of either AFC
or APY (with the consent of the Special Committee) if the Merger Transactions
are not consummated on or before September 30, 1997. In addition, prior to
such time, the Merger Agreement is subject to termination upon: (i) the
issuance by a United
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<PAGE>
States Federal court or Federal governmental, regulatory or administrative
agency, or a state court of competent jurisdiction or state governmental,
regulatory or administrative agency or commission, of any order, decree or
ruling permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger Transactions, and such order, decree or ruling
having become final and non-appealable, provided that the party seeking to
terminate the Merger Agreement shall have used all reasonable efforts to
remove such injunction, order or decree; (ii) insurance regulatory authorities
shall have issued an order or ruling or taken other action denying approval of
the transactions contemplated by the Merger Agreement; or (iii) the mutual
consent of AFC, Merger Sub and APY (with the consent of the Special
Committee).
The Merger Agreement may be terminated by the APY Board (with the consent of
the Special Committee) at any time prior to the Effective Time if: (i) the APY
Board determines in good faith, upon advice of counsel, that notwithstanding a
binding commitment to consummate the Merger pursuant to the Merger Agreement
entered into in the proper exercise of their fiduciary duties, failure to
terminate the Merger Agreement would likely be a breach of their fiduciary
duties by reason of an Alternative Proposal being made; (ii) there has been a
material breach of any of the covenants or agreements in the Merger Agreement
on the part of AFC which is not curable or not cured within 30 days after
written notice of the breach by APY; or (iii) the AFC Board shall have
withdrawn or modified, in a manner materially adverse to APY, its approval or
recommendation of the Merger Agreement or the Merger.
The Merger Agreement may be terminated by the Special Committee on behalf of
APY at any time prior to the Effective Time if the Special Committee withdraws
or materially modifies or changes its recommendation of the Merger Agreement
or the Merger and the Special Committee determines in good faith, upon advice
of counsel, that failure to terminate the Merger Agreement would likely be a
breach of such fiduciary duties by reason of an Alternative Proposal; provided
that the Special Committee shall notify APY and AFC promptly of its intention
to terminate the Merger Agreement, but in no event shall such notice be given
less than 48 hours prior to the public announcement of such termination.
The AFC Board may terminate the Merger Agreement at any time prior to the
Effective Time if: (i) the APY Board and the Special Committee shall have
withdrawn or modified in a manner materially adverse to AFC its approval or
recommendation of the Merger Agreement or the Merger; (ii) there has been a
breach by APY of any representation or warranty in the Merger Agreement which
would have, or which would be reasonably likely to have, a material adverse
effect on APY; or (iii) there has been a material breach by APY of any of the
covenants or agreements in the Merger Agreement on the part of APY which is
not curable or not cured within 30 days of written notice by AFC.
PAYMENT TO STOCKHOLDERS; ELECTION PROCEDURES
Each APY Public Stockholder of record at the Effective Time, other than a
Dissenting APY Stockholder, shall have the right to submit an Election Form
specifying whether such person desires to have all of the shares of APY Common
Stock owned by such person converted into the right to receive the Standard
Consideration, the Cash Consideration or the Stock Consideration. See "The
Merger Transactions--The Merger Agreement--APY Merger Consideration."
Promptly after the Allocation Determination (as defined below), AFC shall
deposit (or cause to be deposited) with the Exchange Agent, for the benefit of
the APY Public Stockholders, cash in an amount sufficient to pay the aggregate
cash portion of the Merger Consideration and certificates representing the
shares of AFC Common Stock ("AFC Stock Certificates") in an amount sufficient
to pay the aggregate stock portion of the Merger Consideration.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each APY Public Stockholder of record immediately prior to
the Effective Time (i) the Letter of Transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the APY Stock
Certificates shall pass, only upon delivery of such APY Stock Certificates to
the Exchange Agent and shall be in such form and have such other provisions as
AFC shall specify), (ii) instructions for use in effecting the surrender of
the APY Stock Certificates in exchange for the Merger Consideration with
respect to the shares of APY Common Stock formerly
50
<PAGE>
represented thereby, and (iii) the Election Form providing for such holders to
make the Standard Election, the Cash Election or the Stock Election. As of the
Election Deadline (as defined below) all holders of APY Common Stock
immediately prior to the Effective Time that shall not have submitted to the
Exchange Agent or shall have properly revoked an effective, properly completed
Election Form shall be deemed to have made a Standard Election.
Any Cash Election, Standard Election, or Stock Election shall have been
validly made only if the Exchange Agent shall have received by 5:00 p.m.
Boston, Massachusetts time on , 1997 (the "Election Deadline"), an Election
Form properly completed and executed (with the signature or signatures thereof
guaranteed to the extent required by the Election Form) by such holder
accompanied by such holder's APY Stock Certificates, or by an appropriate
guarantee of delivery of such APY Stock Certificates from a member of any
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company in the United
States as set forth in such Election Form. Any APY Public Stockholder that has
made an election by submitting an Election Form to the Exchange Agent may at
any time prior to the Election Deadline change such holder's election by
submitting a revised Election Form, properly completed and signed that is
received by the Exchange Agent prior to the Election Deadline. Any APY Public
Stockholder may at any time prior to the Election Deadline revoke such
holder's election and withdraw such holder's APY Stock Certificates deposited
with the Exchange Agent by written notice to the Exchange Agent received by
the close of business on the day prior to the Election Deadline. As soon as
practicable after the Election Deadline (but in no event later than ten
business days after the Election Deadline), the Exchange Agent shall determine
the allocation of the cash portion of the Merger Consideration and the stock
portion of the Merger Consideration and shall notify AFC of its determined
allocation (the "Allocation Determination").
THE VALUE OF THE PER SHARE MERGER CONSIDERATION PAYABLE TO EACH APY PUBLIC
STOCKHOLDER MAY VARY DEPENDING ON (I) THE AVERAGE STOCK PRICE, (II) WHETHER
SUCH HOLDER MAKES A STANDARD ELECTION, A CASH ELECTION OR A STOCK ELECTION,
AND (III) THE PRORATION PROCEDURES. SEE "THE MERGER TRANSACTIONS--THE MERGER
AGREEMENT--APY MERGER CONSIDERATION" FOR A FURTHER DISCUSSION OF THE EFFECT OF
THE AVERAGE STOCK PRICE AND PRORATION ON THE VALUE OF THE MERGER
CONSIDERATION.
Upon surrender of an APY Stock Certificate for cancellation to the Exchange
Agent, together with the Letter of Transmittal, duly executed, and such other
documents as AFC or the Exchange Agent shall reasonably request, the holder of
such APY Stock Certificate shall be entitled to receive promptly after the
Election Deadline in exchange therefor (i) a check in the amount equal to the
cash, if any, which such holder has the right to receive (including any cash
in lieu of fractional shares of AFC Common Stock), and (ii) an AFC Stock
Certificate representing that number of shares of AFC Common Stock, if any,
which such holder has the right to receive (in the case of each of clause (i)
and (ii) above, less the amount of any required withholding taxes), and the
APY Stock Certificate so surrendered shall forthwith be cancelled. Until
surrendered, each APY Stock Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive the Merger Consideration
with respect to the shares of APY Common Stock formerly represented thereby.
REGULATORY APPROVALS
Neither AFC nor APY is regulated as an insurance company but is, as the
owner of the capital stock of subsidiaries that are insurance companies (the
"Insurance Subsidiaries"), subject to the insurance holding company acts of
each of the states of domiciles of such subsidiaries. In Delaware, Illinois,
Indiana, Massachusetts, Michigan, New Hampshire, Ohio, Pennsylvania and Texas,
the Merger Transactions described herein require either (i) the notification
of the insurance department of such state, (ii) the prior approval of the
insurance department pursuant to the state's insurance holding company act or
(iii) the obtaining of an exemption from the prior approval requirements in
the change of control provisions of such act. In addition, if any of the
domiciliary states conclude that the Merger Transactions described herein
constitute a change in control of a domiciliary insurer, several state
insurance regulatory laws contain provisions that require pre-notification to
state agencies of a change in control of a non-domestic admitted insurance
company in that state. While such pre-notification statutes do not authorize
the state agency to disapprove the change of control, such statutes do
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<PAGE>
authorize issuance of a cease and desist order with respect to the non-
domestic admitted insurer if certain conditions exist, such as undue market
concentration. Therefore, the Merger Agreement provides that a condition to
AFC and APY consummating the Merger is the receipt of all orders and approvals
or exemptions therefrom required from regulatory authorities in connection
with the Transaction.
STOCK EXCHANGE LISTING
It is a condition to the Merger Transactions that the shares of AFC Common
Stock to be issued to the holders of APY Common Stock in connection with the
Merger shall have been approved for listing on the NYSE, subject only to
official notice of issuance. Application has been made to list such additional
shares of AFC Common Stock on the NYSE.
FINANCING THE MERGER; FEES AND EXPENSES
The total amount of funds required by AFC to pay the cash component of the
Merger Consideration is estimated to be approximately $425.5 million. AFC
currently expects to finance this cash payment and any costs relating to the
Merger from one or more of the following sources: (i) the $296.3 million of
proceeds received by AFC on February 3, 1997 from the sale of $300.0 million
of 8.207% Series A Capital Securities issued by AFC Capital Trust I, a
subsidiary business trust of AFC, and guaranteed by AFC; (ii) internally
available funds of AFC; and/or (iii) borrowings pursuant to a revolving bank
credit facility. AFC and The Chase Manhattan Bank ("Chase") have entered into
a commitment letter which provides for a $225 million revolving line of credit
that expires on December 15, 1997. Borrowings under the line of credit will be
unsecured and will bear interest at a rate per annum equal to, at AFC's
option, Chase's base rate or the eurodollar rate plus an applicable margin.
The commitment letter provides that the loan documentation relating to the
revolving line of credit will require AFC to provide Chase certain period
financial reports and comply with certain financial ratios. AFC expects to
enter into definitive documentation with respect to the revolving line of
credit on or prior to June 17, 1997. AFC expects to repay these borrowings
with cash from operations.
Other than the indenture relating to the Subordinated Debentures (as defined
below) issued in connection with the Series A Capital Securities and the
commitment letter with The Chase Manhattan Bank, AFC has not entered into any
agreements with respect to the borrowing of funds to pay the cash portion of
the Merger Consideration.
AFC has incurred and has agreed to pay all of the various fees and expenses
in connection with the Merger. Estimated costs and fees in connection with the
Merger and related transactions are as follows:
<TABLE>
<S> <C>
Legal Fees and Expenses....................................... $1,400,000
Accounting Fees and Expenses.................................. 300,000
Financial Advisors............................................ 3,100,000
Printing and Mailing.......................................... 250,000
Filing Fees................................................... 150,000
Miscellaneous................................................. 800,000
----------
$6,000,000
==========
</TABLE>
APPRAISAL RIGHTS
APY stockholders have the right to demand an appraisal of the fair value of
their APY Common Stock in accordance with the provisions of Section 262 of the
DGCL ("Section 262"), which section sets forth the rights and obligations of
APY stockholders demanding an appraisal and the procedures to be followed.
Stockholders who perfect such rights will not be entitled to surrender their
APY Common Stock for payment of the Merger Consideration in the manner
otherwise described in this Information Statement/Prospectus. Stockholders
should assume that APY will take no action to perfect any appraisal rights of
any stockholder. Therefore, to exercise his
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<PAGE>
or her appraisal rights, a stockholder should strictly comply with the
procedures set forth in Section 262 of the DGCL and is urged to consult his or
her legal advisor before electing or attempting to exercise such appraisal
rights.
The following is a summary of the procedures to be followed under Section
262, the text of which is attached to this Information Statement/Prospectus as
Appendix D. The summary does not purport to be a complete statement of, and is
qualified in its entirety by reference to, Section 262 and to any amendments
to such section after the date of this Information Statement/Prospectus.
Failure to follow any Section 262 procedures may result in termination or
waiver of appraisal rights under Section 262.
Only a holder of record of shares of APY Common Stock is entitled to seek
appraisal. The demand for appraisal must be executed by or for the holder of
record, fully and correctly, as such holder's name appears on the holder's APY
Stock Certificate. If the stock is owned of record in a fiduciary capacity,
such as by a trustee, guardian or custodian, the demand should be made in that
capacity, and if the stock is owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be made by or for all
owners of record. An authorized agent, including one or more joint owners, may
execute the demand for appraisal for a holder of record; however, such agent
must identify the record owner or owners and expressly disclose in such demand
that the agent is acting as agent for the record owner or owners of such
shares.
A record holder such as a broker who holds shares of APY Common Stock as a
nominee for beneficial owners, some of whom desire to demand appraisal, must
exercise appraisal rights on behalf of such beneficial owners with respect to
the shares held for such beneficial owners. In such case, the written demand
for appraisal should set forth the number of shares of APY Common Stock
covered by it. Unless a demand for appraisal specifies a number of shares,
such demand will be presumed to cover all shares of APY Common Stock held in
the name of such record owner.
Since the Merger Transactions have been approved by written consent without
a meeting, APY is mailing by certified or registered mail return receipt
requested to each stockholder of record on May 28, 1997 who did not consent to
the Merger Transactions this Information Statement/Prospectus which
constitutes the notice required under Section 262. Included with this notice
is a copy of Section 262. Any stockholder entitled to appraisal rights may, by
July , 1997 [20 days following the date of mailing of the notice] demand in
writing from APY an appraisal of his or her shares. Such demand will be
sufficient if it reasonably informs APY of the identity of the stockholder and
that the stockholder intends to demand an appraisal of his or her shares.
Failure to make such a demand on or before July , 1997 [20 days following the
date of mailing of the notice] will foreclose a stockholder's right to
appraisal.
For purposes of making an appraisal demand, the address of APY is:
Allmerica Property & Casualty Companies, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: John F. Kelly, Vice President and General Counsel
A stockholder may withdraw his demand for appraisal by written request
within 60 days after the Effective Date of the Merger but thereafter the
approval of APY is needed for such a withdrawal. Upon withdrawal of an
appraisal demand, an APY stockholder will be entitled to receive the Merger
Consideration.
Within 120 days after the Effective Date (the "120-Day Period"), in
compliance with Section 262, any APY stockholder who has properly demanded an
appraisal and who has not withdrawn his demand as provided above (such
stockholders being referred to collectively as the "Dissenting Stockholders")
and APY each has the right to file in the Delaware Court of Chancery (the
"Delaware Court") a petition (the "Petition") demanding a determination of the
value of the APY Common Stock held by all of the Dissenting Stockholders. If,
within the 120-Day Period, no Petition shall have been filed as provided
above, all rights to appraisal will
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<PAGE>
cease and all of the Dissenting Stockholders who owned APY Common Stock will
become entitled to receive the Merger Consideration. APY is not obligated and
does not intend to file such a Petition. Any Dissenting Stockholder is
entitled, within the 120-Day Period and upon written request to APY, to
receive from APY a statement setting forth the aggregate number of shares of
APY Common Stock with respect to which demands for appraisal have been
received and the aggregate number of Dissenting Stockholders.
Such written statement must be mailed within 10 days after a written request
therefor has been received by APY or within 10 days after expiration of the
period for delivery of appraisal demands, whichever is later. Upon the filing
of a Petition by a Dissenting Stockholder in the Court, service of a copy
thereof must be made upon APY, and APY must, within 20 days after such
service, file in the office of the Register in Chancery of the State of
Delaware (the "Register in Chancery") in which the petition was filed a duly
verified list containing the names and addresses of all Dissenting
Stockholders and with whom agreements as to the value of their APY Common
Stock have not been reached by APY. If a Petition for appraisal by a
Dissenting Stockholder is timely filed, the Delaware Court may order that
notice of the time and place fixed for the hearing on the Petition be mailed
to APY and all of the Dissenting Stockholders and be published at least one
week before the day of the hearing in a newspaper of general circulation
published in the City of Wilmington, Delaware or in another publication
determined by the Delaware Court. The costs relating to these notices will be
borne by APY. If a hearing on the Petition is held, the Delaware Court is
empowered to determine which Dissenting Stockholders have complied with the
provisions of Section 262 and are entitled to an appraisal of their Common
Stock. The Delaware Court may require that Dissenting Stockholders submit
their APY Stock Certificates for notation thereon of the pendency of the
appraisal proceedings. The Delaware Court is empowered to dismiss the
proceedings as to any Dissenting Stockholder who does not comply with such
requirement. Accordingly, Dissenting Stockholders are cautioned to retain
their APY Stock Certificates pending resolution of the appraisal proceedings.
The APY Common Stock will be appraised by the Delaware Court at its fair
value as of the Effective Date exclusive of any element of value arising from
the accomplishment or expectation of the Merger. In determining the value, the
court is to take into account all relevant factors. In Weinberger v. UOP,
Inc., et al., decided February 1, 1983, the Delaware Supreme Court expanded
the considerations that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that ".........fair
price obviously requires consideration of all relevant factors involving the
value of a company.........'' The Delaware Supreme Court stated, in making this
determination of fair value, that the court must consider market value, asset
value, dividends, earnings, prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the merger which
throw any light on future prospects of the merged corporation. Section 262
provides that fair value is to be ""exclusive of any element of value arising
from the accomplishment or expectation of the merger.'' In Weinberger, the
Delaware Supreme Court held that ""elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the
date of the merger and not the product of speculation, may be considered."
Stockholders considering seeking appraisal should have in mind that the fair
value of their shares determined under Section 262 could be more, the same, or
less than the Merger Consideration and that investment banking opinions as to
fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262.
The Delaware Court may also, on application, (i) determine a fair rate of
interest, simple or compound, if any, to be paid to Dissenting Stockholders in
addition to the value of the APY Common Stock for the period from the
Effective Date to the date of payment, (ii) assess costs among the parties as
the Delaware Court deems equitable and (iii) order all or a portion of the
expenses incurred by any Dissenting Stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorney's
fees and fees and expenses of experts, to be charged pro rata against the
value of all shares entitled to appraisal. Determinations by the Delaware
Court are subject to appellate review by the Delaware Supreme Court.
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<PAGE>
Dissenting Stockholders are generally permitted to participate in the
appraisal proceedings. No appraisal proceeding in the Delaware Court shall be
dismissed as to any Dissenting Stockholder without the approval of the
Delaware Court, and this approval may be conditioned upon terms which the
Delaware Court deems just.
From and after the Effective Date, Dissenting Stockholders will not be
entitled to vote their APY Common Stock for any purpose and will not be
entitled to receive payment of dividends or other distributions in respect of
such APY Common Stock payable to stockholders of record thereafter.
If any holder of APY Common Stock who demands appraisal of shares under
Section 262 fails to perfect, or effectively withdraws or loses, the right of
appraisal, as provided in the DGCL, the shares of APY Common Stock will be
converted into the right to receive the Merger Consideration in accordance
with the Merger Agreement.
THE CHARTER AMENDMENT
The APY Charter does not currently authorize the APY Board to issue more
than one class of APY Common Stock. In order to effect the Recapitalization,
in which SMA will exchange each share of APY Common Stock held by it for one
share of APY Class B Common Stock of APY, the APY Charter will be amended to
authorize the APY Board to issue two classes of common stock. The APY Class B
Common Stock will remain outstanding following the consummation of the Merger.
The Charter Amendment will authorize the APY Board to issue 40,000,000
shares of APY Class B Common Stock, par value $5.00 per share. Holders of
Class B Common Stock will be entitled to one vote for each share held and will
not have any preemptive, conversion or other rights to subscribe for
additional shares of APY. Holders of record of the Class B Common Stock are
entitled to such dividends as may be declared the APY Board out of funds
legally available therefor. On liquidation, dissolution or winding up of APY,
the holders of Class B Common Stock are entitled to receive pro rata with the
holders of APY Common Stock the net assets of APY remaining after the payment
of all creditors and liquidation preferences, if any. See "Appendix A-2--Form
of Charter Amendment."
CERTAIN TRANSACTIONS IN THE APY COMMON STOCK
Since January 1, 1995, APY has repurchased an aggregate of 2,111,600 shares
of APY Common Stock at the times and in the amounts summarized in the
following schedule:
<TABLE>
<CAPTION>
RANGE OF
NUMBER OF PER SHARE
SHARES OF APY PURCHASE PRICE AVERAGE
COMMON STOCK --------------- PER SHARE
PURCHASED HIGH LOW PURCHASE PRICE
------------- ------- ------- --------------
<S> <C> <C> <C> <C>
1995
First Quarter........... 67,500 $19 $18 3/8 $18.877
Second Quarter.......... 487,600 $20 7/8 $19 $20.045
Third Quarter........... 44,200 $23 3/4 $22 1/2 $23.284
Fourth Quarter.......... 341,300 $26 1/4 $22 $25.723
1996
First Quarter........... 892,200 $26 7/8 $24 1/2 $26.475
Second Quarter.......... 278,800 $26 3/4 $26 $26.646
Third Quarter........... -- -- -- --
Fourth Quarter.......... -- -- -- --
1997
First Quarter -- -- -- --
Second Quarter (through
June 4)................ -- -- -- --
</TABLE>
55
<PAGE>
THE COMPANIES
BUSINESS OF AFC
AFC is a non-insurance holding company for a group of insurance and
financial services companies and, through its subsidiaries, offers financial
products and services in two major areas: Risk Management and Retirement and
Asset Management. Within these broad areas, AFC operates principally in five
operating segments: Regional Property & Casualty; Corporate Risk Management
Services; Retail Financial Services; Institutional Services and Allmerica
Asset Management.
The Regional Property and Casualty segment of AFC's business consists of its
approximately 59.5% ownership of APY. See "The Companies--Business of APY".
AFC's Corporate Risk Management Services segment provides managed care
medical group insurance products and administrative services as well as other
group insurance coverages, such as group life, dental and disability products,
to corporate employers. As of March 31, 1997, this segment insured and/or
provided administrative services to the employee benefit plans of over 2,700
employers covering 606,835 employee lives. AFC's strategy in this segment
emphasizes risk sharing arrangements rather than traditional indemnity medical
insurance products. AFC's risk sharing arrangements consist of providing stop-
loss indemnity insurance coverage for self-insured employers with 100 to 5,000
employees together with managed care and administrative services for coverage
provided by the employer and AFC. This risk sharing approach enables AFC to
provide more managed care, administrative and other services with less
exposure to losses than traditional indemnity medical insurance.
AFC's Retail Financial Services segment includes the individual financial
products businesses of FAFLIC and its wholly owned subsidiary Allmerica
Financial Life and Annuity Insurance ("AFLIAC"), as well as AFC's registered
investment advisor and broker-dealer affiliates. Through this segment,
according to Variable Annuity Research Data Services, AFC is a leading
provider of investment-oriented life insurance and annuities as determined by
sales to upper income individuals and small businesses throughout the United
States. These products are marketed through AFC's career agency force of 574
agents and on a wholesale basis to financial planners and broker/dealers. AFC
offers a diverse line of products tailored to its customer market, including
variable universal life, variable annuities, universal life and retirement
plan funding products. The main components of AFC's current strategy in this
segment are to: (i) emphasize investment-oriented insurance products,
particularly variable annuities and variable universal life insurance, (ii)
improve the productivity of the career agency distribution system, (iii)
implement a targeted marketing approach emphasizing value-added service, (iv)
leverage AFC's technological resources to support marketing and client service
initiatives and (v) continue to develop new distribution systems.
AFC's Institutional Services segment has historically offered plan design,
investment and participant recordkeeping services to defined benefit and
defined contribution retirement plans of corporate employers and sold
guaranteed investment contracts and annuities to corporate retirement plans.
AFC conducts its operations in this segment through FAFLIC and its
subsidiaries. AFC also offers participant recordkeeping and administrative
services to defined benefit retirement plans. AFC provides administration and
recordkeeping for approximately 561 qualified pension and profit sharing plans
which have assets totaling $2.5 billion and cover approximately 105,000
participants. To address the decrease in the market for defined benefit plans
sponsored by employers, AFC has focused on increasing sales to defined
contribution plans, targeting plans with 25 to 1,500 participants. Based upon
internal studies, management believes the size of this market provides the
greatest opportunity in this line of business. In addition, AFC provides
investment only plan services to approximately 201 plans with aggregate assets
under management of $1.0 billion.
Since late 1995, AFC has offered its products for sale directly at the
worksite through trained and licensed sales representatives. By using
education and personalized consulting to increase employee purchases, AFC
seeks to lower acquisition costs and increase employee participation levels.
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<PAGE>
At March 31, 1997, AFC managed $10.1 billion of investment assets, including
$766.2 million of investment assets in the "closed block" of certain
individual participating life insurance policies and contracts of FAFLIC in
effect as of the effective date of the demutualization of FAFLIC (the "Closed
Block"). These investments are generally of high quality and broadly
diversified across asset classes and individual investment risks. The major
categories of investment assets are: fixed maturities, which includes both
investment grade and below investment grade public and private debt
securities; equity securities; mortgage loans, principally on commercial
properties; policy loans; real estate, which consists primarily of investments
in commercial properties and other long-term investments. The remainder of the
investment assets is comprised of cash and cash equivalents.
Since 1994, the Company has provided investment advisory and sub-advisory
services, primarily to affiliates, through its registered investment advisor,
Allmerica Asset Management.
In October 1995, AFC conducted an initial public offering of 12.6 million
shares of its common stock at a price of $21 per share and an initial public
offering of $200.0 million Aggregate Principal Amount of 7 5/8% Senior
Debentures due 2025 (the "Senior Debentures"). AFC's initial public offering
occurred concurrently with the conversion of State Mutual from a mutual life
insurance company to a subsidiary of AFC, a stockholder-owned life insurance
holding company. The aggregate net proceeds of the Common Stock and Senior
Debenture Offerings to AFC were approximately $445.2 million.
On February 3, 1997, AFC Capital Trust, a subsidiary business trust of AFC,
issued $300.0 million Series A Capital Securities, which pay cumulative
dividends at a rate of 8.207% semiannually commencing August 15, 1997. The
Trust exists for the sole purpose of issuing the Capital Securities and
investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally
guaranteed the obligations of the Trust under the Capital Securities. Net
proceeds from the offering of approximately $296.3 million are intended to
fund a portion of the cash portion of the Merger Consideration.
Additional information concerning AFC is included in the AFC Reports
incorporated by reference in this Information Statement/Prospectus. See
"Available Information" and "Incorporation of Certain Documents by Reference."
BUSINESS OF APY
APY is a non-insurance holding company organized as a Delaware corporation
in 1992 to hold all of the outstanding shares of Hanover. APY, through its
primary insurance operating subsidiaries, Hanover and Citizens Insurance
Company of America ("Citizens Insurance"), is engaged in the business of
underwriting personal and commercial property and casualty insurance.
Personal automobile coverage insures individuals against losses incurred
from personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Homeowners coverage insures individuals for losses to their residences and
personal property, such as those caused by fire, wind, hail, water damage
(except for flooding), theft and vandalism, and against third party liability
claims.
Commercial automobile coverage insures businesses against losses incurred
form personal bodily injury, bodily injury to third parties, property damage
to an insured's vehicle, and property damage to other vehicles and other
property.
Workers' compensation coverage insures employers against employee medical
and indemnity claims resulting from injuries related to work. Workers'
compensation policies are often written in conjunction with other commercial
policies.
57
<PAGE>
Commercial multiple peril coverage insures businesses against third party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water
damage (except for flooding), theft and vandalism.
Both Hanover and Citizens Insurance also offer a variety of other products,
such as inland marine, fire, and fidelity and surety insurance. APY provides
self-insurance administration services for individual and group risks and
writes excess reinsurance coverage for the self-insurance programs it
administers through its wholly-owned subsidiary, Citizens Management, Inc.
Through its insurance subsidiaries, the Company is licensed to sell property
and casualty insurance in all fifty states in the United States, as well as
the District of Columbia and all provinces of Canada, except Prince Edward
Island. Hanover's business is concentrated in the Northeast, primarily
Massachusetts, New York, New Jersey and Maine. Citizens' business is
predominantly in Michigan and has recently expanded into Indiana and Ohio.
Additional information concerning APY is included in the APY Reports
incorporated by reference in this Information Statement/Prospectus. See
"Available Information" and "Incorporation of Certain Documents by Reference."
58
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
---------- ----------------------------------------
ADJUSTMENTS
RELATING TO THE ADJUSTMENTS
CAPITAL RELATING TO THE ADJUSTED
AFC SECURITIES MERGER BALANCE
---------- --------------- --------------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Premiums................. $562.3 $562.3
Universal life and
investment product
policy fees............. 56.3 56.3
Net investment income.... 163.4 (1.6)(2)
(4.5)(10) 157.3
Net realized investment
gains................... 44.0 44.0
Other income............. 28.9 28.9
------ ----- ------
Total revenues......... 854.9 (6.1) 848.8
------ ----- ------
BENEFITS, LOSSES AND
EXPENSES
Policy benefits, claims,
losses and loss
adjustment expenses..... 492.3 0.1 (3) 492.4
Policy acquisition
expenses................ 119.8 119.8
Loss from cession of
disability income
business................ 53.9 53.9
Other operating
expenses................ 134.9 1.2 (4) 136.1
------ ----- ------
Total benefits, losses
and expenses.......... 800.9 1.3 802.2
------ ----- ------
Income before federal
income taxes.............. 54.0 (7.4) 46.6
Federal income tax expense
(benefit)................. 9.7 (2.0)(5) 7.7
------ ----- ------
Income before minority
interest.................. 44.3 (5.4) 38.9
------ ----- ------
Minority interest
Dividends on Company-
obligated mandatorily
redeemable preferred
securities of subsidiary
trust................... (2.4) (1.6)(6) (4.0)
Equity in earnings....... (26.0) 21.0 (7) (5.0)
------ ----- ----- ------
Total minority
interest.............. (28.4) (1.6) 21.0 (9.0)
------ ----- ----- ------
Net income(8).............. $ 15.9 $(1.6) $15.6 $ 29.9
====== ===== ===== ======
PER SHARE DATA
Net income............... $ 0.32 $ 0.50
------ ------
Shares used in calculating
per common share
amounts(9)................ 50.2 59.9
------ ------
</TABLE>
59
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
---------- ----------------------------------------
ADJUSTMENTS
RELATING TO THE ADJUSTMENTS
CAPITAL RELATING TO THE ADJUSTED
AFC SECURITIES MERGER BALANCE
---------- --------------- --------------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Premiums................. $562.3 $562.3
Universal life and
investment product
policy fees............. 56.3 56.3
Net investment income.... 163.4 (1.6)(2)
(4.5)(10) 157.3
Net realized investment
gains................... 44.0 44.0
Other income............. 28.9 28.9
------ ----- ------
Total revenues......... 854.9 (6.1) 848.8
------ ----- ------
BENEFITS, LOSSES AND
EXPENSES
Policy benefits, claims,
losses and loss
adjustment expenses..... 492.3 0.1 (3) 492.4
Policy acquisition
expenses................ 119.8 119.8
Loss from cession of
disability income
business................ 53.9 53.9
Other operating
expenses................ 134.9 1.2 (4) 136.1
------ ----- ------
Total benefits, losses
and expenses.......... 800.9 1.3 802.2
------ ----- ------
Income before federal
income taxes.............. 54.0 (7.4) 46.6
Federal income tax expense
(benefit)................. 9.7 (2.0)(5) 7.7
------ ----- ------
Income before minority
interest.................. 44.3 (5.4) 38.9
------ ----- ------
Minority interest
Dividends on Company-
obligated mandatorily
redeemable preferred
securities of subsidiary
trust................... (2.4) (1.6)(6) (4.0)
Equity in earnings....... (26.0) 21.0 (7) (5.0)
------ ----- ----- ------
Total minority
interest.............. (28.4) (1.6) 21.0 (9.0)
------ ----- ----- ------
Net income(8).............. $ 15.9 $(1.6) $15.6 $ 29.9
====== ===== ===== ======
PER SHARE DATA
Net income............... $ 0.32 $ 0.50
------ ------
Shares used in calculating
per common share
amounts(9)................ 50.2 59.9
------ ------
</TABLE>
60
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
---------- ----------------------------------------
ADJUSTMENTS
RELATING TO THE ADJUSTMENTS
CAPITAL RELATING TO THE ADJUSTED
AFC SECURITIES MERGER BALANCE
---------- --------------- --------------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Premiums................ $2,236.3 $2,236.3
Universal life and
investment product
policy fees............ 197.2 197.2
Net investment income... 672.6 (9.0)(2) 655.6
(8.0)(10)
Net realized investment
gains.................. 65.9 65.9
Other income............ 102.7 102.7
-------- ----- --------
Total revenues........ 3,274.7 (17.0) 3,257.7
-------- ----- --------
BENEFITS, LOSSES AND
EXPENSES
Policy benefits, claims,
losses and loss
adjustment expenses.... 1,957.0 0.4 (3) 1,957.4
Policy acquisition
expenses............... 483.5 483.5
Other operating
expenses............... 502.5 5.4 (4) 507.9
-------- ----- --------
Total benefits, losses
and expenses......... 2,943.0 5.8 2,948.8
-------- ----- --------
Income before federal
income taxes............. 331.7 (22.8) 308.9
Federal income tax expense
(benefit)................ 75.2 (5.3)(5) 69.9
-------- ----- --------
Income before minority
interest................. 256.5 (17.5) 239.0
-------- ----- --------
Minority interest
Dividends on Company-
obligated mandatorily
redeemable preferred
securities of
subsidiary trust....... -- (16.0)(6) (16.0)
Equity in earnings...... (74.6) 59.7 (7) (14.9)
-------- ------ ----- --------
Total minority
interest............. (74.6) (16.0) 59.7 (30.9)
-------- ------ ----- --------
Net income(8)............. $ 181.9 $(16.0) $42.2 $ 208.1
======== ====== ===== ========
PER SHARE DATA
Net income.............. $ 3.63 $ 3.48
-------- --------
Shares used in calculating
per common share
amounts(9)............... 50.1 59.8
-------- --------
</TABLE>
61
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA(1)
--------------------------
ADJUSTMENTS
HISTORICAL RELATING TO THE ADJUSTED
AFC MERGER BALANCE
---------- --------------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value..... $ 7,358.2 $ 7,358.2
Equity securities, at fair value.... 381.6 381.6
Mortgage loans...................... 646.5 646.5
Real estate......................... 100.9 100.9
Policy loans........................ 135.8 135.8
Other long-term investments......... 135.3 135.3
--------- ---------
Total investments................. 8,758.3 8,758.3
Cash and cash equivalents........... 553.3 (425.5)(10) 127.8
Accrued investment income........... 151.8 151.8
Deferred policy acquisition costs... 831.4 831.4
Reinsurance receivables............. 841.4 841.4
Deferred federal income taxes....... 122.6 (24.4)(11) 98.2
Premiums, accounts and notes
receivable......................... 542.5 542.5
Goodwill............................ -- 143.8 (12) 143.8
Other assets........................ 314.8 314.8
Closed Block assets................. 803.7 803.7
Separate account assets............. 6,705.8 6,705.8
--------- ------- ---------
Total assets...................... $19,625.6 $(306.1) $19,319.5
--------- ------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............. $ 2,610.7 $ 2,610.7
Outstanding claims, losses and loss
adjustment expenses................ 2,890.0 2,890.0
Unearned premiums................... 828.0 828.0
Contractholder deposit funds and
other policy liabilities........... 1,926.9 1,926.9
--------- ---------
Total policy liabilities and
accruals......................... 8,255.6 8,255.6
Expenses and taxes payable.......... 712.5 (9.0)(13) 703.5
Reinsurance premiums payable........ 30.1 30.1
Short-term debt..................... 67.6 67.6
Deferred federal income taxes....... 19.1 (19.1)(11) --
Long-term debt...................... 202.2 202.2
Closed Block liabilities............ 883.9 883.9
Separate account liabilities........ 6,700.2 6,700.2
--------- ------- ---------
Total liabilities................. 16,871.2 (28.1) 16,843.1
--------- ------- ---------
MINORITY INTEREST
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust................... 300.0 300.0
Common stock........................ 782.4 (650.3)(14) 132.1
--------- ------- ---------
Total minority interest........... 1,082.4 (650.3) 432.1
--------- ------- ---------
SHAREHOLDERS' EQUITY
Preferred stock..................... -- --
Common stock........................ 0.5 0.1 (15) 0.6
Additional paid-in capital.......... 1,378.8 372.2 (15) 1,751.0
Unrealized appreciation on
investments, net................... 69.2 69.2
Retained earnings................... 223.5 223.5
--------- ------- ---------
Total shareholders' equity........ 1,672.0 372.3 2,044.3
--------- ------- ---------
Total liabilities and
shareholders' equity........... $19,625.6 $(306.1) $19,319.5
========= ======= =========
</TABLE>
62
<PAGE>
(1) The unaudited pro forma condensed consolidated balance sheet consolidates
the historical balance sheet of AFC, which includes the accounts of APY
and the interest of APY Public Stockholders, as if the Merger
Transactions had been consummated on March 31, 1997. The pro forma
condensed consolidated statements of income for the three months ended
March 31, 1997 and for the year ended December 31, 1996 consolidate the
historical statements of income of AFC, which include the accounts of APY
and the interest of APY Public Stockholders, as if the Merger
Transactions had been consummated on January 1, 1997 and January 1, 1996,
respectively.
The Merger will be accounted for by the purchase method of accounting as a
step purchase. Accordingly, AFC's cost to acquire the minority interest in
APY, calculated to be $797.8 million based on an AFC average Common Stock
price of $38.50 per share, will be allocated to the assets acquired and
liabilities assumed according to their respective fair values, with the
excess Merger Consideration being allocated to goodwill. Applicable income
tax effects of such adjustments are included as a component of AFC's net
deferred tax asset. Certain transactions conducted in the ordinary course
of business between AFC and APY are immaterial and, accordingly, have not
been eliminated.
Notwithstanding that the Merger Consideration is subject to change to the
extent of fluctuations in the Average Stock Price, subsequent changes in
AFC's market share price will not affect the measurement of the cost of
the transaction for accounting purposes. The unaudited pro forma condensed
consolidated financial information has been prepared based on an AFC
average market price of $38.50, corresponding to the announcement of the
Merger on February 19, 1997. The final allocation of the Merger
Consideration is dependent upon certain valuations and other studies that
have not progressed to a stage where there is sufficient information to
make such an allocation in the accompanying unaudited pro forma condensed
consolidated financial statements. Accordingly, the purchase allocation
adjustments made in connection with the development of the unaudited pro
forma condensed consolidated financial statements are preliminary and have
been made solely for the purpose of developing such unaudited pro forma
consolidated financial statements.
The $143.8 million pro forma excess of Merger Consideration over net
tangible assets acquired as of March 31, 1997 would be amortized over 40
years at a rate of $3.6 million per year, in accordance with generally
accepted accounting principles, which require that acquired intangible
assets be amortized over lives not to exceed 40 years. After consummation
of the Merger Transactions, AFC anticipates completion of the valuations
and other studies of the significant assets, liabilities and business
operations of APY. These valuations and other studies include
determination of the fair value of APY's pension plans and investment
portfolio, as well as the final determination of AFC's acquisition costs
resulting from the Merger. Using this information, AFC will make a final
allocation of the Merger Consideration, including allocation to tangible
assets and liabilities, identifiable intangible assets and goodwill. AFC
believes that any significant allocation of excess Merger Consideration to
assets other than goodwill will be amortized over periods approximating
the assets' remaining useful lives. The amortization periods used in
preparing the unaudited pro forma consolidated financial statements are
not expected to change materially at the consummation of the Merger
Transactions.
The future results of operations of AFC will reflect increased
amortization of intangible assets which are non-deductible for tax
purposes. The future financial position of AFC will reflect increased
intangible assets as described above and increased shareholders' equity
resulting from the issuance of approximately 9.7 million shares of AFC
Common Stock to APY Public Stockholders.
(2) Represents amortization or accretion of purchased premium or discount,
respectively, on fixed maturities over the estimated remaining life of
the securities. Net investment income is adjusted to include the effect
of restating the historical yield on fixed maturity securities to the
estimated market yield as of the beginning of the period. The change to a
market yield is estimated by referencing Hanover's and Citizens'
unrealized gain or loss on fixed maturities at the beginning of the
period, amortized over the estimated life of the portfolio (5 years).
(3) Represents 40% of the elimination of the amortization of unrecognized
transition, prior service and other costs recognized in fair value
purchase accounting adjustment for Hanover's and Citizens' pension plans.
The remaining 60% of the elimination is an adjustment to other operating
expense. The 40%-60%
63
<PAGE>
allocation is based on the percentage of total salary expense charged to
losses and loss adjustment expenses and other operating expenses.
(4) Represents (i) amortization over 40 years of goodwill resulting from this
transaction of $0.9 million for the three months ended March 31, 1997 and
$4.1 million for the year ended December 31, 1996 and (ii) 60% of the
elimination of the amortization of unrecognized transition, prior service
and other costs recognized in fair value purchase accounting adjustments
for Hanover's and Citizens' pension plans of $0.1 million for the three
months ended March 31, 1997 and $0.6 million for the year ended December
31, 1996 (the remaining 40% of the elimination is an adjustment to policy
benefits, claims, losses and loss adjustment expenses) and (iii)
elimination of the amortization of unrecognized transition, prior service
and other costs recognized in fair value purchase accounting adjustments
for Hanover and Citizens post-retirement benefit plans of $0.2 million
for the three months ended March 31, 1997 and $0.7 million for the year
ended December 31, 1996. The 60%- 40% allocation is based on the
percentage of total salary expense charged to adjustment policy benefits,
claims, losses and loss adjustment expenses and other operating expenses.
(5) Represents the income tax benefit of the above adjustments except
amortization of goodwill, which is non-deductible for tax purposes. The
income tax benefits of adjustments to net investment income discussed in
Note (10) which relate to reduced cash at APY are at 18.5% for the three
months ended March 31, 1997 and 19.4% for the year ended December 31,
1996, respectively, which represents the effective tax rate on APY's
investment portfolio. The income tax benefit of all other adjustments,
except goodwill, is at 35%.
(6) AFC, through a subsidiary trust, on February 3, 1997, issued mandatorily
redeemable preferred securities with a liquidation amount totaling $300.0
million due 2027, which accrue dividends at an annual rate of 8.207%.
Adjustments represent accrued dividends on these securities of a
subsidiary trust, net of federal income taxes at 35%, as if such
securities had been issued at the beginning of each period presented.
Distributions are payable on these securities on February 15 and August
15 of each year.
(7) Represents elimination of the minority interest expense associated with
AFC's interest in APY on AFC's consolidated statement of income.
(8) The following ratios of earnings to fixed charges are derived from the
historical Consolidated Statements of Income and the Unaudited Pro Forma
Condensed Consolidated Statements of Income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Historical Ratio of Earnings to
Fixed Charges(a)................... 4.3x 8.5x
Pro Forma Ratio of Earnings to Fixed
Charges(b)......................... 3.3x 5.2x
</TABLE>
(a) For purposes of determining the historical ratios of earnings to fixed
charges, earnings consist of earnings before federal income taxes and
minority interest plus interest expense on AFC indebtedness and the
portion of operating lease rentals representative of the interest
factor. Fixed charges consist of interest expense on AFC indebtedness,
dividends on AFC-obligated manditorily redeemable preferred securities
of subsidiary trust recorded as minority interest before provision for
federal income taxes, plus the portion of operating lease rentals
representative of the interest factor.
(b) For purposes of determining the pro forma ratios of earnings to fixed
charges, earnings consist of pro forma earnings before federal income
taxes and minority interest plus interest expense on AFC indebtedness
and the portion of operating lease rentals representative of the
interest factor. Fixed charges consist of interest expense on AFC
indebtedness, pro forma dividends on AFC-obligated manditorily
redeemable preferred securities of subsidiary trust recorded as
minority interest before provision for federal income taxes, plus the
portion of operating lease rentals representative of the interest
factor.
(9) The unaudited pro forma condensed consolidated financial statements
reflect the conversion of each share held by an APY Public Stockholder
(24.2 million minority-owned shares at March 31, 1997) to 0.4 shares of
AFC Common Stock (50.2 million weighted average shares outstanding at
March 31, 1997), resulting in 59.9 million pro forma shares of AFC Common
Stock outstanding.
64
<PAGE>
The total market value of the AFC Common Stock to be issued in connection
with the Merger, is calculated as follows (in thousands, except the
Standard Exchange Ratio and per share data):
<TABLE>
<S> <C>
APY minority-owned common shares outstanding on March 31, 1997.. 24,177
Standard Exchange Ratio......................................... 0.4
--------
Shares of AFC Common Stock to be issued......................... 9,671
Average market price per share of AFC Common Stock at February
19, 1997 $ 38.50
--------
Total market value of AFC Common Stock to be issued........... $372,334
========
</TABLE>
(10) Reflects cash paid to APY minority shareholders at $17.60 per
approximately 24.2 million shares. Net investment income is decreased to
reflect the lower level of cash and cash equivalents at APY, based on
$129.2 million of cash utilized in the Merger Transactions and APY's
average portfolio yield of 6.11% and 6.19% for the three months ended
March 31, 1997 and the year ended December 31, 1996, respectively. In
addition, net investment income is reduced by $2.5 million for the three
months ended March 31, 1997 for the actual net investment income earned
on the proceeds from the mandatorily redeemable preferred securities in
the Merger Transactions.
(11) Reflects the deferred tax effect of adjusting certain pension and post
retirement benefit liabilities to fair value. Additionally, AFC and APY
will become a single taxable entity as a result of the Merger
Transactions. Accordingly, the historical deferred tax liability of $19.1
million, which is related to the Life Insurance Subsidiaries, has been
netted against the historical deferred tax asset as part of the pro forma
adjustments.
(12) Consists of the excess of purchase price over the fair value of net
assets acquired, calculated as follows (in millions):
<TABLE>
<S> <C>
Purchase price.................................................. $ 797.8
Book value of minority interest in APY.......................... (650.3)
Fair market value adjustments on
Reserve for acquisition costs................................. 6.0
Accrued pension and post-retirement benefits (net of taxes)... (9.7)
-------
Net goodwill.................................................. $ 143.8
=======
</TABLE>
(13) Consists of a $6.0 million increase resulting from the establishment of a
reserve for acquisition costs and a $15.0 million decrease resulting from
adjusting certain pension and postretirement benefit liabilities to fair
value.
(14) Represents elimination of AFC historical minority interest related to
APY.
(15) Reflects issuance of 9.7 million shares of AFC Common Stock exchanged for
100% of the minority shares of APY Common Stock, as described in Note 9
above.
65
<PAGE>
COMPARATIVE RIGHTS OF STOCKHOLDERS
At the Effective Time, the stockholders of APY who receive AFC Common Stock
as Merger Consideration will become stockholders of AFC. As stockholders of
AFC, their rights will be governed by the DGCL and the Certificate of
Incorporation of AFC (the "AFC Charter") and Bylaws (the "AFC Bylaws").
Following are summaries of certain differences between the rights of APY
stockholders and AFC stockholders.
AFC and APY are both organized under the laws of the State of Delaware. Any
differences, therefore, in the rights of holders of APY Common Stock and AFC
Common Stock arise solely from the differences in their respective
certificates of incorporation and bylaws. The AFC Charter and AFC Bylaws are
substantially similar to the APY Charter and the APY Bylaws, respectively,
except for certain matters as described herein.
Authorized Capital. The total number of authorized shares of capital stock
of APY is 110,000,000, consisting of 90,000,000 shares of APY Common Stock and
20,000,000 shares of preferred stock, par value, $1.00 per share (the "APY
Preferred Stock"). Immediately prior to the Merger and as a result of the
approval of the Charter Amendment, APY will have authorized 120,000,000 shares
of capital stock, of which 60,000,000 are shares of APY Common Stock,
40,000,000 are shares of Class B Common Stock, par value $5.00 per share, and
20,000,000 are shares of APY Preferred Stock. The total number of authorized
shares of capital stock of AFC is 320,000,000 consisting of 300,000,000 shares
of AFC Common Stock and 20,000,000 shares of preferred stock, par value $0.01
per share (the "AFC Preferred Stock").
Directors. The AFC Board of Directors is divided into three separate
classes, consisting, as nearly as possible, of equal number of directors. At
each annual meeting of stockholders, successors to the class of directors
whose term expires at that annual meeting shall be elected for a three-year
term. The APY Board is not divided into separate classes.
Amendment of Bylaws. Under the AFC Charter and the AFC Bylaws, the AFC
Bylaws may be altered, amended or repealed or new bylaws may be adopted either
by a vote of a majority of the AFC Board or by the holders of two-thirds of
the outstanding capital stock entitled to vote thereon. The APY Charter and
APY Bylaws provide that the APY Bylaws may be adopted, altered, amended or
repealed by either a vote by the majority of the APY Board or by a vote of a
majority of the outstanding capital stock entitled to vote thereon.
Amendment of Charter. Under the DGCL, the affirmative vote of a majority of
the outstanding shares entitled to vote is required to amend the AFC Charter.
In addition, amendments which make changes relating to the capital stock by
increasing or decreasing the par value or the aggregate number of authorized
shares of a class, or otherwise adversely affecting the rights of such class,
must be approved by the majority vote of each class or series of stock
affected, even if such stock would not otherwise have such voting rights. The
AFC Charter, but not the APY Charter, requires a vote of two-thirds of the
outstanding shares of capital stock entitled to vote generally in the election
of directors to amend certain provisions thereof, including the provisions
relating to the classification of the Board, evaluation of certain
transactions and regulation of nominations of directors and of business to be
conducted at meetings of stockholders.
Removal of Directors. Under the AFC Charter, any or all directors may be
removed from office at any time, but only for cause and only by either the
affirmative vote of the holders of two-thirds of the outstanding shares then
entitled to vote generally in the election of directors, or the affirmative
vote of two-thirds of the directors then in office. The APY Bylaws allow for
the removal of any or all directors, with or without cause, by the vote of the
holders of a majority of the outstanding shares then entitled to vote to
remove directors.
Filling Vacancies on the Board of Directors. Pursuant to the AFC Bylaws, any
vacancies on the Board of Directors may be filled upon the affirmative vote of
a majority of the remaining directors then in office. Newly created
directorships resulting from any increase in the number of directors may be
filled by a vote of the stockholders but only if such positions are not first
filled by the AFC Board. In contrast, under the APY Bylaws, vacancies and any
newly created directorships resulting from any increase in the number of
directors may be filled by either a vote of stockholders or by a majority of
the directors then in office.
66
<PAGE>
Notice of Director Nominations and New Business. The AFC Charter authorizes
and the AFC Bylaws establish procedures, including advance notice procedures,
with regard to the nomination, other than by or at the direction of the AFC
Board of Directors, of candidates for election as directors to be brought
before meetings of stockholders of AFC. In general, notice must be received by
AFC not less than 60 days nor more than 90 days prior to the meeting and must
contain certain specified information concerning the persons to be nominated
and concerning the stockholder submitting the nomination proposal. In
addition, the Bylaws require that any such nomination of candidates for
election as a director be accompanied by a petition signed by at least 100
record holders of capital stock entitled to vote in the election of directors,
representing in the aggregate 1% of the outstanding capital stock entitled to
vote thereon. In contrast, the APY Charter and By-laws do not contain such a
restriction.
Stockholder Action Without a Meeting. Under the AFC Charter, as permitted by
the DGCL, no action may be taken by the stockholders except at a meeting. The
APY Charter does not contain such a restriction.
Section 203 of the DGCL. Under Section 203 of the DGCL (the "Delaware anti-
takeover law"), certain "business combinations" between a Delaware corporation
whose stock generally is publicly traded or held of record by more than 2,000
stockholders and an "interested stockholder" are prohibited for a three-year
period following the date such stockholder became an interested stockholder,
unless (i) the corporation has elected in its certificate of incorporation not
to be governed by the Delaware anti-takeover law, (ii) the business
combination was approved by the board of directors of the corporation before
the other party to the business combination became an interested stockholder,
(iii) upon consummation of the transaction that made it an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the commencement of the transaction
(excluding voting stock owned by directors who are also officers or held in
employee benefit plans in which the employees do not have a confidential right
to tender or vote stock held by the plan), or (iv) the business combination
was approved by the board of directors of the corporation and ratified by 66
2/3% of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an "interested stockholder," transactions with an "interested
stockholder" involving the assets or stock of the corporation or its majority-
owned subsidiaries and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as those stockholders who become beneficial owners of 15% or more of
a Delaware corporation's voting stock. APY elected in its certificate of
incorporation not to be governed by the Delaware anti-takeover law. AFC made
no such election and therefore remains subject to the provisions of Section
203 of the DGCL.
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<PAGE>
PRINCIPAL AND OTHER STOCKHOLDERS OF APY
The following table sets forth certain information regarding the beneficial
ownership of APY Common Stock, as of the Record Date (unless otherwise noted),
by (i) each director and executive officer of APY and AFC; (ii) stockholders
holding 5% or more of APY Common Stock and (iii) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
APY COMMON STOCK
BENEFICIALLY OWNED
-------------------------
PERCENT OF
NUMBER OF OUTSTANDING
SHARES(1) SHARES
---------- -----------
<S> <C> <C>
SMA Financial Corp. .................................. 35,472,600(2) 59.5%
440 Lincoln Street
Worcester, MA 01653
John F. O'Brien....................................... 16,000 *
(Director, President and Chief
Executive Officer of AFC and APY)
Bruce C. Anderson..................................... 1,000 *
(Vice President of AFC and APY)
Michael P. Angelini................................... 3,000 *
(Director of AFC and APY)
Richard J. Baker...................................... 4,200(3) *
(Vice President of AFC and APY)
David A. Barrett...................................... 600 *
(Director of AFC and APY)
James A. Cotter, Jr................................... 1,700(4) *
(Director of APY)
Gail L. Harrison...................................... 450 *
(Director of AFC and APY)
Robert P. Henderson................................... -- *
(Director of AFC)
M Howard Jacobsen..................................... -- *
(Director of APY)
John P. Kavanaugh..................................... -- *
(Vice President of AFC and APY)
John F. Kelly......................................... 450(5) *
(Vice President of AFC and APY)
Dona Scott Laskey..................................... 1,040 *
(Director of APY)
J. Barry May.......................................... 3,200 *
(Vice President of AFC and APY)
James R. McAuliffe.................................... 1,600 *
(Vice President of AFC and APY)
J. Terrence Murray.................................... -- *
(Director of AFC)
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
APY COMMON STOCK
BENEFICIALLY OWNED
-----------------------
PERCENT OF
NUMBER OF OUTSTANDING
SHARES(1) SHARES
---------- -----------
<S> <C> <C>
Robert J. Murray................................... -- *
(Director of AFC)
Edward J. Parry III................................ -- *
(Vice President and Chief Financial Officer
of AFC and APY)
Richard M. Reilly.................................. -- *
(Vice President of AFC and APY)
Larry C. Renfro.................................... -- *
(Vice President of AFC and APY)
Eric A. Simonsen................................... 9,000(6) *
(Director of APY and
Vice President of AFC and APY)
Philip E. Soule.................................... 300 *
(Vice President of FAFLIC and APY)
John L. Sprague.................................... -- *
(Director of AFC)
Robert G. Stachler................................. -- *
(Director of AFC and APY)
Herbert M. Varnum.................................. 600 *
(Director of AFC and APY)
Richard M. Wall.................................... -- *
(Director or AFC and APY)
Directors and executive officers of APY and AFC
as a group (26 persons)..............................43,140 *
</TABLE>
- - --------
* Each of the amounts represents less than 1% of the outstanding shares of
APY Common Stock as of the Record Date. As to shares beneficially owned,
each person has sole voting and investment power, except as indicated in
other footnotes to this table.
(1) Represents shares beneficially owned and shares that the beneficial owner
named above has the right to acquire within 60 days of June 4, 1997, upon
exercise of outstanding stock options.
(2) All of the outstanding capital stock of SMA Financial Corp. is owned by
FAFLIC, a wholly-owned direct subsidiary of AFC.
(3) Includes 2,700 shares held by Mr. Baker's wife, who has the sole power to
vote, dispose of, receive dividends and proceeds from such shares.
(4) Includes 100 shares owned by Mr. Cotter's spouse.
(5) Includes 150 shares Mr. Kelly holds as custodian under the Uniform Gifts
to Minors Act.
(6) Includes an aggregate of 3,000 shares held in trusts for the benefit of
Mr. Simonsen's children. Mr. Simonsen is trustee of the trusts and he
disclaims beneficial ownership of the shares held in the trusts.
69
<PAGE>
BUSINESS RELATIONSHIPS BETWEEN AFC AND APY
Prior to the consummation of the Merger Transactions, AFC indirectly owned
approximately 59.5% of the capital stock of APY. This 59.5% interest is held
directly by SMA Financial Corp., a Massachusetts corporation, which is a
wholly owned direct subsidiary of FAFLIC. FAFLIC is a wholly owned direct
subsidiary of AFC. In addition, seven of AFC's directors and virtually all of
its executive officers, including its Chief Executive Officer, occupy similar
positions with APY.
AFC's subsidiary FAFLIC currently provides various centralized
administrative and management services, operating support and office space to
APY and its subsidiaries, as well as to other FAFLIC subsidiaries. Effective
in 1970, APY's predecessor entered into an agreement with FAFLIC pursuant to
which FAFLIC agreed to provide services to APY in accordance with FAFLIC's
cost allocation policy. FAFLIC's cost allocation policy is based on state
insurance law requirements that all cost allocations be on a fair and
reasonable basis between entities and product lines within FAFLIC's holding
company structure and also are designed to meet regulations imposed by taxing
authorities. Services provided by FAFLIC include investment services,
portfolio management, and a certain amount of accounting, financial, legal and
administrative services, operations relating to servicing and underwriting of
policies and information and data systems. FAFLIC's cost allocation and
distribution policies are subject to review by various state and federal
regulatory agencies. AFC intends to continue to provide such services on the
same cost allocation basis to APY and its subsidiaries immediately following
the Merger Transactions.
Administrative charges (excluding rental charges) incurred by FAFLIC and
charged to APY were $12.6 million, $58.0 million and $50.8 million for the
three months ended March 31, 1997 and for the years ended December 31, 1996
and 1995, respectively. APY leases its principal office from FAFLIC, with
which it shares most of the facility. Rental charges were $0.3 million for the
three months ended March 31, 1997 and $1.3 million for the years ended
December 31, 1996 and 1995, respectively. The rent is triple net, with rent
based on cost using a fluctuating interest rate. FAFLIC believes that such
terms are no less favorable to APY than if the property was leased to a non-
affiliate.
See also "Special Factors--Interests of Certain Persons in the Merger
Transactions;" "Certain Other Matters--Directors and Executive Officers of
AFC;" and "--Directors and Executive Officers of APY."
REGULATORY MATTERS
GENERAL
Insurance companies are subject to supervision and regulation by the state
insurance authorities in each state in which they transact business. Such
supervision and regulation relate to numerous aspects of an insurance
company's business and financial condition and, in certain states,
significantly affect the pricing and types of business an insurance company
may write. The extent of state regulation varies, but most jurisdictions have
laws and regulations governing standards of solvency, levels of reserves,
limitations on the authorization of an insurer's lines of business,
underwriting limits, the licensing to do business of insurers and agents, the
nature and concentration of investments by insurers, the setting of premium
rates, the payment of dividends, an insurer's transactions with its
affiliates, the change of control of an insurer and the approval of policy
forms. State insurance departments also conduct periodic financial condition
and market conduct examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of insurance companies, including the filing of detailed annual
financial statements, prepared on the basis of statutory accounting practices
and valuation of assets rules, in each of the jurisdictions in which the
insurance companies are licensed.
AFC is subject to regulation under the insurance holding company statutes of
Delaware, Illinois, Indiana, Massachusetts, Michigan, New Hampshire, Ohio,
Pennsylvania and Texas, the domiciliary states of the Insurance Subsidiaries.
APY is subject to regulation under the insurance holding company statutes of
Illinois, Indiana,
70
<PAGE>
Michigan, New Hampshire, Ohio, Pennsylvania and Texas, the domiciliary states
of APY's subsidiaries that are insurance companies. The Insurance Subsidiaries
are regulated under the statutes of their domiciliary states and the other
states in which they are licensed to transact insurance business. The
Insurance Subsidiaries are collectively licensed to transact business in, and
are subject to regulation and supervision by, all fifty states, the U.S.
Virgin Islands, Puerto Rico, the District of Columbia and Canada. In addition,
as a result of the nature of AFC's business, certain of its Insurance
Subsidiaries are subject to regulation under the federal securities laws,
including the Securities Act and the Investment Advisors Act of 1940, as
amended (the "Investment Advisors Act"), and under ERISA.
The National Association of Insurance Commissioners ("NAIC") and state
insurance regulators continue to reexamine existing insurance laws and
regulations, and as a condition to accreditation have required the adoption of
certain model laws which specifically focus on insurance company investments,
issues relating to the solvency of insurance companies, risk-based capital
("RBC") guidelines, interpretation of existing laws, the development on new
laws and the definition of extraordinary dividends.
The Insurance Subsidiaries are subject to various state statutory and
regulatory restrictions which limit the amount of dividends or distributions
by an insurance company to its stockholders. The restrictions are generally
based (i) on certain levels of statutory surplus and net income, as determined
under statutory accounting principles "SAP," and (ii) the type of insurance
the insurer is licensed to sell. Massachusetts, the domiciliary state of
FAFLIC, requires that statutory surplus following any dividend or distribution
be reasonable in relation to its outstanding liabilities and adequate to its
financial needs and permits the payment of dividends only from statutory
earned surplus (unassigned funds) unless payment out of other funds is
approved by the Commissioner of the Division of Insurance of Massachusetts.
Delaware and Michigan, the domiciliary states of Allmerica Financial Life
Insurance and Annuity Company and Citizens, respectively, have substantially
similar dividend restrictions as Massachusetts. New Hampshire, Hanover's
domiciliary state, provides that the maximum dividends and other distributions
that an insurer may pay in any twelve-month period, without prior 30-day
notice to and approval of the New Hampshire Commissioner of Insurance, is
limited to 10% of its statutory policyholders' surplus as of the preceding
December 31.
State regulators also have the discretionary authority, in connection with
the ongoing licensing of the Insurance Subsidiaries, to limit or prohibit new
issuance of business to policy owners when, in their judgment, such regulators
determine that such insurer is not maintaining minimum surplus or is in
hazardous financial conditions. Failure to maintain certain levels of
statutory surplus could result in increased regulatory scrutiny, action by
state regulatory authorities or a downgrade by private rating agencies. As of
December 31, 1996, all of the Insurance Subsidiaries were in compliance with
state requirements with respect to statutory surplus.
The NAIC has created a system for assessing the adequacy of statutory
capital for life and health insurers and property and casualty insurers. This
system, known as risk-based capital ("RBC"), is in addition to the states'
fixed dollar minimum capital and other requirements. The system is based on
risk-based formulas (separately defined for life and health insurers and
property and casualty insurers) that apply prescribed factors to the various
risk elements in an insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer. Under the model
law, if an insurer's RBC, as determined under the RBC formula, falls below
specified RBC levels, the insurer would be subject to different degrees of
regulatory action depending upon the RBC level. These actions range from
requiring the insurer to propose actions to correct the risk-based capital
deficiency to placing the insurer under regulatory control. Based on
computations made by AFC and APY in accordance with the prescribed formulas,
each of the Insurance Subsidiaries exceeded the minimum RBC requirements at
December 31, 1996.
HOLDING COMPANY REGULATION
As indicated above, neither AFC nor APY is regulated as an insurance company
but is, as the owner of the capital stock of subsidiaries that are insurance
companies, subject to the insurance holding company acts of each of the states
of domicile of such subsidiaries. These acts contain certain reporting
requirements as well as restrictions on transactions between an insurer and
its affiliates.
71
<PAGE>
The insurance codes of the domiciliary states of the Insurance Subsidiaries
contain similar provisions (subject to certain variations) to the effect that
the acquisition or change of "control" of a domestic insurer or of any person
that controls a domestic insurer cannot be consummated without the prior
approval of the relevant insurance regulator. In general, a presumption of
"control" arises from the ownership, control, possession with the power to
vote or possession of proxies with respect to 10% or more of the voting
securities of a domestic insurer or of a person that controls a domestic
insurer. A person seeking to acquire control, directly or indirectly, of a
domestic insurance company or of any person controlling a domestic insurance
company must generally file with the relevant insurance regulatory authority
an application for change of control (commonly known as a "Form A") containing
certain information required by statute and published regulations and provide
a copy of such Form A to the domestic insurer.
In Delaware, Illinois, Indiana, Massachusetts, Michigan, New Hampshire,
Ohio, Pennsylvania and Texas, the Merger Transactions described herein require
either (i) the notification of the insurance department of such state; (ii)
the prior approval of the insurance department pursuant to the state's
insurance holding company act or (iii) the obtaining of an exemption from the
prior approval requirements in the change of control provisions of such act.
AFC and APY do not believe that the Merger Transactions constitute a change
in control of APY and its insurance subsidiaries because, among other reasons,
(i) the Merger is not being pursued for the purpose and will not have the
effect of changing or influencing the control of APY or its subsidiaries,
since SMA already holds 59.5% of the APY Common Stock; and (ii) the Merger is
not within the purpose of the change of control provisions of state insurance
statutes, which are designed to protect against detrimental takeovers of
insurance companies, since the Merger is neither a takeover nor detrimental.
On this basis, AFC and APY have applied for, and received, exemptive orders
from the prior approval requirements of statutory change of control provisions
in Illinois, Indiana, Michigan, New Hampshire, Ohio, Pennsylvania and Texas
(the states in which APY's insurance subsidiaries are domiciled).
Any future transactions that would constitute a change in control of AFC
would also generally require prior approval by and/or notice filings with the
state insurance departments of at least Delaware, Illinois, Indiana,
Massachusetts, Michigan, New Hampshire, Ohio, Pennsylvania and Texas and would
require the pre-acquisition notification in those states which have adopted
pre-acquisition notification provisions and wherein the Insurance Subsidiaries
are admitted to transact business. Such requirements may deter, delay or
prevent certain transactions affecting the control of AFC or the ownership of
AFC Common Stock, including transactions that could be advantageous to the
stockholders of AFC.
72
<PAGE>
OTHER MATTERS
DIRECTORS AND EXECUTIVE OFFICERS OF AFC
Below is information with respect to those individuals who serve as
directors and executive officers of AFC.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John F. O'Brien...... 54 Director, Chief Executive Officer and President
Bruce C. Anderson.... 53 Vice President
Richard J. Baker..... 66 Vice President and Secretary
John P. Kavanaugh.... 42 Vice President and Chief Investment Officer
John F. Kelly........ 58 Vice President and General Counsel
J. Barry May......... 49 Vice President
James R. McAuliffe... 52 Vice President
Edward J. Parry III.. 37 Vice President, Chief Financial Officer and Treasurer
Richard M. Reilly.... 59 Vice President
Larry C. Renfro...... 46 Vice President
Eric A. Simonsen..... 51 Vice President
Phillip E. Soule..... 47 Vice President
Michael P. Angelini.. 54 Director
David A. Barrett..... 69 Director
Gail L. Harrison..... 49 Director
Robert P. Henderson.. 66 Director
J. Terrence Murray... 57 Director
Robert J. Murray..... 55 Director
John L. Sprague...... 67 Director
Robert G. Stachler... 67 Director
Herbert M. Varnum.... 60 Director
Richard M. Wall...... 68 Director
</TABLE>
JOHN O'BRIEN has been a Director, Chief Executive Officer and President of
AFC since February 1995. He has also served as a Director, Chief Executive
Officer and President of FAFLIC since August 1989. In addition to his
positions with AFC and FAFLIC, Mr. O'Brien has served as a Director, President
and Chief Executive Officer of APY since August 1992, and has been a Director
of Hanover since September 1989, Citizens Insurance since March 1992 and
Citizens, for which he also serves as Chief Executive Officer, since December
1992. Mr. O'Brien is also a trustee or director and executive officer of
Allmerica Investment Trust, Allmerica Securities Trust, and Allmerica Funds.
Additionally, Mr. O'Brien is a director and/or holds offices at various other
non-public FAFLIC affiliates including SMA Financial Corp. and AFLIAC. Mr.
O'Brien also currently serves as a Director of The TJX Companies, Inc., an
off-price family apparel retailer, ABIOMED, Inc., a medical device company,
Cabot Corporation, a diversified specialty chemicals and materials and energy
company and The Life Insurance Association of Massachusetts. He also currently
serves as a member of the executive committee of the Mass Capital Resource
Company, a Massachusetts investment partnership. Prior to joining FAFLIC, Mr.
O'Brien
73
<PAGE>
served as an officer of FMR Corp., the parent company of various financial
services companies in the Fidelity Group, and a director and/or an executive
officer at various other of FMR Corp.'s affiliates. Mr. O'Brien's term of
office as a Director of AFC expires in 1998.
BRUCE ANDERSON has been Vice President of AFC since February 1995 and Vice
President of APY and Citizens since March 1997. Mr. Anderson has been employed
by FAFLIC since 1967 and has been Vice President of FAFLIC since October 1984.
RICHARD BAKER has been Vice President and Secretary of AFC since February
1995, Vice President and Assistant Secretary of FAFLIC since 1973 and April
1996, respectively, and has been employed by FAFLIC since 1959. He has served
as Assistant Secretary of APY since October 1992, Vice President and Secretary
of APY since May 1995, and as Vice President and Secretary of Citizens since
September 1993 and January 1993, respectively. Mr. Baker has also served as
Vice President of AFLIAC since January 1982, and as a Director from June 1993
to April 1996. In addition, Mr. Baker is a director and/or executive officer
at various other non-public affiliates.
JOHN KAVANAUGH has been Vice President and Chief Investment Officer of AFC
since September 1996, has been employed by FAFLIC since 1983, and has been
Vice President of FAFLIC since December 1991 and Vice President of AFLIAC
since January 1992. Mr. Kavanaugh has also served as Director and Chief
Investment Officer of FAFLIC, Hanover, Citizens Insurance and AFLIAC since
August 1996, and Vice President and Chief Investment Officer of APY and
Citizens since September 1996. Mr. Kavanaugh is also a director and/or
executive officer at various other non-public affiliates.
JOHN KELLY has been Vice President, General Counsel and Assistant Secretary
of AFC since February 1995, has been employed by FAFLIC since July 1968, and
has been Senior Vice President and General Counsel of FAFLIC since February
1986. In addition to his positions with AFC and FAFLIC, Mr. Kelly has been
Vice President and General Counsel of APY since August 1992, Assistant
Secretary of APY since May 1995, Assistant Secretary of Citizens since
December 1992, and Vice President, General Counsel and Assistant Secretary of
Citizens since September 1993. Mr. Kelly was Secretary of APY from August 1992
to May 1995. Mr. Kelly has been a Director of AFLIAC since October 1982 and is
a director and/or executive officer at various other non-public affiliates.
J. BARRY MAY has been Vice President of AFC since February 1997, Vice
President of APY and President of Hanover since September 1996 and Vice
President of Citizens since March 1997. He has been a Director of Hanover and
Citizens Insurance since September 1996. Mr. May served as Vice President of
Hanover from May 1995 to September 1996, as Regional Vice President from
February 1993 to May 1995 and as a General Manager of Hanover from June 1989
to May 1995. Mr. May has been employed by Hanover since 1985.
JAMES MCAULIFFE has been Vice President of AFC from February 1995 through
December 1995 and since February 1997, Vice President of APY since August
1992, a Director of APY from August 1992 through December 1994, a Director and
Vice President of Citizens since December 1992, and a Director of AFLIAC from
April 1987 through May 1995 and since May 1996. Mr. McAuliffe has been
President of Citizens Insurance since December 1994. Mr. McAuliffe has been
employed by FAFLIC since 1968, and served as Vice President and Chief
Investment Officer of FAFLIC from November 1986 through December 1994. Mr.
McAuliffe has served as Vice President and Chief Investment Officer of APY
from August 1992 through December 1994, and Vice President and Chief
Investment Officer of AFLIAC from December 1986 through May 1995.
Additionally, Mr. McAuliffe is a director and/or executive officer at various
other non-public affiliates.
EDWARD PARRY has been Chief Financial Officer of AFC since December 1996. He
has also been Vice President and Treasurer of AFC since February 1995. He has
served as Chief Financial Officer of FAFLIC, AFLIAC, APY, Hanover, Citizens
and Citizens Insurance since December 1996 and as Vice President and Treasurer
of FAFLIC, AFLIAC, APY and Hanover since February 1993 and of Citizens since
September 1993 and December 1992, respectively. Mr. Parry is also a director
and/or executive officer at various other non-public affiliates. Prior to
joining FAFLIC in July 1992, Mr. Parry was employed by the accounting firm of
Price Waterhouse from July 1987 through July 1992.
74
<PAGE>
RICHARD REILLY has been Vice President of AFC and FAFLIC since February 1997
and November 1990, respectively, and Vice President of APY and Citizens since
March 1997. He has also been a Director and Vice President of AFLIAC since
November 1990 and President and Chief Executive Officer of AFLIAC since August
1995. Mr. Reilly was Vice President of AFC from February 1995 through December
1995. Additionally, Mr. Reilly has been the President of Allmerica Investment
Trust, Allmerica Funds, and Allmerica Securities Trust, each a registered
investment company, since February 1991, April 1991 and February 1991,
respectively. Mr. Reilly is also a director and/or holds an executive office
at various other non-public affiliates. Prior to his affiliation with FAFLIC,
he was an executive officer of Fidelity Management and Research Company from
1969 to 1987 and Oppenheimer Capital from 1987 to 1990.
LARRY RENFRO has been a Vice President of AFC and FAFLIC since February 1997
and April 1990, respectively, and Vice President of APY and Citizens since
March 1997. He has served as Director, President and Chief Executive Officer
of 440 Financial Group of Worcester, Inc. (a former subsidiary of FAFLIC) from
May 1990 to March 1995. Mr. Renfro has also served as Vice President of APY
from October 1992 through December 1995 and as Vice President of AFC from
February 1995 through December 1995. From August 1989 through March 1990, Mr.
Renfro was an Executive Vice President at State Street Bank & Trust Company.
From March 1988 through July 1989, Mr. Renfro served as President and Chief
Executive Officer of Boston Financial Data Services, Incorporated, a
subsidiary of State Street Bank & Trust Company. From April 1981 through March
1988, Mr. Renfro held various executive offices at Fidelity Investments,
including Managing Director of Fidelity Management & Research Company. Mr.
Renfro is currently a Director of LoJack Corporation, a manufacturer of anti-
theft systems.
ERIC SIMONSEN has been Vice President of AFC since February 1995. He has
been a Director and Vice President of APY since August 1992, of Citizens since
December 1992 and of AFLIAC since September 1990. He has served as Vice
President and as a Director of FAFLIC since September 1990 and April 1996,
respectively. Mr. Simonsen has been President of Allmerica Service Company,
Inc. since December 1996. Mr. Simonsen was Chief Financial Officer of AFC from
February 1995 to December 1996, of FAFLIC and AFLIAC from September 1990 to
December 1996, of APY from August 1992 to December 1996 and of Citizens from
December 1992 to December 1996. Mr. Simonsen is also a director and/or
executive officer at various other non-public affiliates. From April 1987 to
September 1990, Mr. Simonsen served as a Principal and Chief Financial Officer
of The Lincoln Group, Inc., a privately owned group of manufacturing
companies.
PHILLIP SOULE has been Vice President of AFC, Citizens and FAFLIC since
February 1997, March 1997 and February 1987, respectively, and of APY since
September 1996. He was a Vice President of AFC from February 1995 through
December 1995. Mr. Soule has been employed by FAFLIC since 1972 in various
capacities.
MICHAEL ANGELINI has been a Director of AFC since February 1995, of FAFLIC
from August 1984 to April 1996, and of APY since August 1992. He served as a
Director of Hanover from December 1991 through December 1992. Mr. Angelini is
a partner at the law firm of Bowditch & Dewey, with which he has been
associated since 1968, and is a Director of Flagship Bank & Trust Company.
Mr. Angelini is Chairman of the Audit Committee of AFC's Board of Directors.
His term of office as a Director of AFC expires in 1998.
DAVID BARRETT has been a Director of AFC since February 1995, of FAFLIC from
March 1976 to April 1996, of APY since August 1992 and of Hanover from
December 1991 to December 1992. Mr. Barrett was executive director of
Worcester Memorial Hospital, Inc. from 1968 until January 1983, and served as
President and Chief Executive Officer of that organization until October 1988.
Mr. Barrett served as President and Chief Executive Officer of Medical Center
of Central Mass., Inc. from October 1988 to April 1992, and currently is a
consultant to that organization, now known as Memorial Health Care.
Mr. Barrett is a member of the Audit Committee of AFC's Board of Directors.
His term of office as a Director of AFC expires in 1998.
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<PAGE>
GAIL HARRISON has been a Director of AFC since February 1995, of FAFLIC from
March 1986 to April 1996, of APY since August 1992, and of Hanover from
December 1991 to December 1992. Since February 1981, Ms. Harrison has been
affiliated with The Wexler Group (formerly Wexler, Reynolds, Harrison & Shule,
Inc.), a government relations consulting firm.
Ms. Harrison's term of office as a Director of AFC expires in 2000.
ROBERT P. HENDERSON has been a Director of AFC since September 1996. Mr.
Henderson has been the Chairman of Greylock Management Corporation, a venture
capital firm, since 1983. Mr. Henderson is also a Director of Cabot
Corporation and Filenes Basement, a Trustee of the Museum of Fine Arts in
Boston, Massachusetts, and a Member of Corporation of the New England
Deaconess Hospital. Mr. Henderson is a former Chairman of the Federal Reserve
Bank of Boston.
Mr. Henderson's term of office as a Director of AFC expires in 1999.
J. TERRENCE MURRAY has been a Director of AFC since February 1995 and of
FAFLIC from January 1992 to April 1996. Mr. Murray is the Chairman, President
and Chief Executive Officer of Fleet Financial Group, Inc., a bank holding
company, where he has been employed since July 1962. Mr. Murray is also a
Director of A.T. Cross Co., a writing instrument company, and CVS Corporation,
a drugstore chain.
Mr. Murray's term of office as a Director of AFC expires in 1998.
ROBERT MURRAY has been a Director of AFC since May 1996. Mr. Murray has been
Chairman, President and Chief Executive Officer of New England Business
Service, Inc. ("NEBS"), a supplier of business forms, since December 1995 and
has served on the Board of Directors of NEBS since 1991. Prior to joining
NEBS, Mr. Murray was employed by The Gillette Company, Inc. ("Gillette"), a
manufacturing company, beginning in 1961. He served as a Corporate Vice
President of Gillette beginning in 1987 and as the Executive Vice President of
Gillette's North Atlantic Group from January 1991 to December 1995. Mr. Murray
is also a Director of North American Mortgage Company, LoJack Corporation and
Fleet National Bank, as well as a Trustee of Boston College.
Mr. Murray's term of office as a Director of AFC expires in 1999.
JOHN SPRAGUE has been a Director of AFC since February 1995 and of FAFLIC
from September 1972 to April 1996. Mr. Sprague has been President of John L.
Sprague Associates, Inc., a consulting company for technology companies, since
January 1988. He served as President and Chief Executive Officer of Sprague
Electric Company, a semiconductor company, from December 1980 to January 1988.
Mr. Sprague is also a Director of Aerovox Corp., a manufacturing company,
Sipex Corporation and California Micro Devices Corporation, an electronic
components manufacturer.
Mr. Sprague is a member of the Audit Committee of AFC's Board of Directors.
Mr. Sprague's term of office as a Director of AFC expires in 1999.
ROBERT STACHLER has been a Director of AFC since February 1995, of FAFLIC
from March 1978 to April 1996, of APY since August 1992, and of Hanover from
April 1990 to December 1992. Mr. Stachler has been a partner at the law firm
of Taft, Stettinius & Hollister since 1964.
Mr. Stachler is a member of the Compensation Committee of AFC's Board of
Directors. His term of office as a Director of AFC expires in 2000.
HERBERT VARNUM has been a Director of AFC since February 1995, of FAFLIC
from March 1979 to April 1996, of APY since August 1992, and of Hanover from
December 1991 through December 1992. Mr. Varnum was employed by Quabaug
Corporation, a manufacturing company, beginning in 1960 and served as
President and Chief Executive Officer from 1982 to 1989, and as Chairman and
Chief Executive Officer from January 1990 until his retirement in June 1995.
76
<PAGE>
Mr. Varnum is a member of the Compensation Committee of AFC's Board of
Directors. His term of office as a Director of AFC expires in 1998.
RICHARD WALL has been a Director of AFC since February 1995, of FAFLIC from
March 1986 to April 1996, of APY since August 1992, and of Hanover from
December 1991 through December 1992. Mr. Wall has been General Counsel and
assistant to the Chairman and Chief Executive Officer of FLEXcon Company,
Inc., a plastics manufacturing company, since November 1985.
Mr. Wall is a member of the Compensation Committee of AFC's Board of
Directors. His term of office as a Director of AFC expires in 1999.
DIRECTORS AND EXECUTIVE OFFICERS OF APY
Below is information with respect to those individuals who serve as
directors and executive officers of APY.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John F. O'Brien...... 54 Director, Chief Executive Officer and President
Bruce C. Anderson.... 53 Vice President
Richard J. Baker..... 66 Vice President and Secretary
John P. Kavanaugh.... 42 Vice President and Chief Investment Officer
John F. Kelly........ 58 Vice President and General Counsel
J. Barry May......... 49 Vice President
James R. McAuliffe... 52 Vice President
Edward J. Parry III.. 37 Vice President, Chief Financial Officer and Treasurer
Richard M. Reilly.... 59 Vice President
Larry C. Renfro...... 46 Vice President
Eric A. Simonsen..... 51 Vice President and Director
Phillip E. Soule..... 47 Vice President
Michael P. Angelini.. 54 Director
David A. Barrett..... 69 Director
James A. Cotter, 57 Director
Jr..................
Gail L. Harrison..... 49 Director
M Howard Jacobson.... 64 Director
Dona Scott Laskey.... 53 Director
Robert G. Stachler... 67 Director
Herbert M. Varnum.... 60 Director
Richard M. Wall...... 68 Director
</TABLE>
JAMES COTTER, JR. has been a Director of APY since February 1996. Mr. Cotter
is also a Director of Citizens Corporation. Mr. Cotter has been a broker with
the firm of H.C. Wainwright & Co. since January 1994, and previously was a
broker with the firm of Gruntal & Co. (June 1993-January 1994). He previously
served as a Managing Director and Treasurer of Schooner Trading Company. Mr.
Cotter is also Chairman of Olde Port Bank and Trust of Portsmouth, New
Hampshire and a Director of Citizens Corporation, a subsidiary of the Company.
77
<PAGE>
M HOWARD JACOBSON has been a Director of APY since 1992. Mr. Jacobson has
been a Senior Advisor of, and consultant to, Bankers Trust, Private Bank, New
York, New York since 1991. From August 1989 to August 1991, he was Senior
Advisor to Prudential-Bache Capital Funding. Mr. Jacobson is also a Director
of Boston Chicken, Inc. and Wyman-Gordon Co.
DONA SCOTT LASKEY has been a Director of APY since 1992. Ms. Laskey is an
attorney in private practice. From 1989 until December 1996, she practiced law
with the firm of Tillman, McTier, Coleman, Talley, Newbern & Kurrie, in
Valdosta, Georgia. She is also a Director of APY's subsidiary, Citizens
Corporation, and of FNB Bancorp, Inc.
For information with respect to John F. O'Brien, Bruce C. Anderson, Richard
J. Baker, John P. Kavanaugh, John F. Kelly, J. Barry May, James R. McAuliffe,
Edward J. Parry III, Richard M. Reilly, Larry C. Renfro, Eric A. Simonsen,
Phillip E. Soule, Michael P. Angelini, David A. Barrett, Gail L. Harrison,
Robert G. Stachler, Herbert M. Varnum and Richard M. Wall, see "--Directors
and Executive Officers of AFC" above.
DIRECTORS AND EXECUTIVE OFFICERS OF MERGER SUB
John F. Kelly, 58, serves as a Director and as Secretary of Merger Sub.
Edward J. Parry III, 37, serves as a Director and as President and Treasurer
of Merger Sub. For information with respect to John F. Kelly and Edward J.
Parry III, see "Directors and Executive Officers of AFC" above.
All the directors and executive officers of AFC, APY and Merger Sub are
United States citizens.
LEGAL MATTERS
The validity of the AFC Common Stock to be issued in connection with the
Merger Transactions will be passed upon for AFC by Ropes & Gray, One
International Place, Boston, Massachusetts. Certain federal income tax
consequences of the Merger Transactions will be passed upon for AFC by Latham
& Watkins, 885 Third Avenue, New York, New York.
EXPERTS
The consolidated financial statements of AFC as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
incorporated in this Information Statement/Prospectus by reference to its
Annual Report on Form 10-K for the year ended December 31, 1996, have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of APY as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
incorporated in this Information Statement/Prospectus by reference to its
Annual Report on Form 10-K for the year ended December 31, 1996, have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
78
<PAGE>
APPENDIX A-1
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ALLMERICA FINANCIAL CORPORATION
APY ACQUISITION, INC.
AND
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
DATED AS OF FEBRUARY 19, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1 THE MERGER................................................... 1
1.1. The Merger................................................... 1
1.2. Effective Time............................................... 2
1.3. Effect of the Merger......................................... 2
1.4. Certificate of Incorporation, By-Laws........................ 3
1.5. Directors and Officers....................................... 3
ARTICLE 2 EFFECT OF THE MERGER ON SECURITIES OF THE COMPANY AND MERGER
SUB.......................................................... 3
2.1. Merger Sub Stock............................................. 3
2.2. Conversion of Company Common Stock; Recapitalization......... 3
2.3. Company Common Stock Elections............................... 4
2.4. Proration.................................................... 5
2.5. Dividends, Fractional Shares, Etc. .......................... 6
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF COMPANY.................... 7
3.1. Existence; Good Standing; Corporate Authority................ 7
3.2. Authorization, Validity and Effects of Agreements............ 7
3.3. Capitalization............................................... 8
3.4. Subsidiaries................................................. 8
3.5. No Conflict; Required Filings and Consents................... 8
3.6. Compliance................................................... 9
3.7. SEC Documents................................................ 9
3.8. Litigation................................................... 10
3.9. Absence of Certain Changes................................... 10
3.10. No Brokers................................................... 10
3.11. Opinion of Financial Advisor................................. 10
3.12. DGCL Section 203............................................. 10
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB... 10
4.1. Existence; Good Standing; Corporate Authority................ 10
4.2. Authorization; Validity and Effect of Agreements............. 11
4.3. Capitalization............................................... 11
4.4. Subsidiaries................................................. 11
4.5. No Conflict; Required Filings and Consents................... 11
4.6. Compliance................................................... 12
4.7. SEC Documents................................................ 12
4.8. Litigation................................................... 13
4.9. Absence of Certain Changes................................... 13
4.10. No Brokers................................................... 13
4.11. Opinion of Financial Advisor................................. 13
4.12. Financing.................................................... 13
4.13. No Regulatory Disqualifiers.................................. 13
4.14. DGCL Section 203............................................. 13
4.15. Interim Operations of the Sub................................ 13
ARTICLE 5 COVENANTS.................................................... 13
5.1. Alternative Proposals........................................ 13
5.2. Interim Operations........................................... 14
5.3. Filings; Other Action........................................ 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
5.4. Inspection of Records......................................... 15
5.5. Publicity..................................................... 16
5.6. Registration Statement........................................ 16
5.7. Written Consent............................................... 17
5.8. Listing Application........................................... 17
5.9. Further Action................................................ 17
5.10. Expenses...................................................... 17
5.11. Takeover Statute.............................................. 17
5.12. Indemnification............................................... 17
5.13. Cooperation of the Purchaser.................................. 18
5.14. Letter of Purchaser's Accountants............................. 18
5.15. Letter of Company's Accountants............................... 18
ARTICLE 6 CONDITIONS.................................................... 19
6.1. Conditions to Each Party's Obligation to Effect the Merger.... 19
6.2. Conditions to Obligation of Company to Effect the Merger...... 19
6.3. Conditions to Obligation of Purchaser to Effect the Merger.... 20
ARTICLE 7 TERMINATION................................................... 20
7.1. Termination by Mutual Consent................................. 20
7.2. Termination by Either Purchaser or Company.................... 20
7.3. Termination by Company........................................ 20
7.4. Termination by Special Committee.............................. 21
7.5. Termination by Purchaser...................................... 21
7.6. Effect of Termination and Abandonment......................... 21
7.7. Extension; Waiver............................................. 21
ARTICLE 8 GENERAL PROVISIONS............................................ 22
8.1. Nonsurvival of Representations, Warranties and Agreements..... 22
8.2. Notices....................................................... 22
8.3. Assignment, Binding Effect.................................... 22
8.4. Entire Agreement.............................................. 22
8.5. Amendment..................................................... 22
8.6. Governing Law................................................. 23
8.7. Counterparts.................................................. 23
8.8. Headings...................................................... 23
8.9. Interpretation................................................ 23
8.10. Waivers....................................................... 23
8.11. Incorporation of Exhibits..................................... 23
8.12. Severability.................................................. 23
8.13. Enforcement of Agreement...................................... 23
8.14. Subsidiaries.................................................. 23
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of February 19,
1997, by and among Allmerica Financial Corporation, a Delaware corporation
(the "Purchaser"), APY Acquisition, Inc., a Delaware corporation and a wholly
owned subsidiary of the Purchaser ("Merger Sub") and Allmerica Property &
Casualty Companies, Inc., a Delaware corporation (the "Company").
RECITALS
1. WHEREAS, the Boards of Directors of each of the Purchaser, Merger Sub and
the Company have approved and deem it advisable and in the best interest of
their respective companies and stockholders to consummate the merger provided
for herein, pursuant to which Merger Sub shall be merged with and into the
Company (the "Merger") in accordance with the Delaware General Corporation Law
(the "DGCL") and upon the terms and subject to the conditions set forth
herein;
2. WHEREAS, the Company has duly constituted and authorized a special
committee (the "Special Committee") of the Board of Directors of the Company,
consisting of James A. Cotter, Jr. (Chairman), Dona Scott Laskey and M Howard
Jacobson, each an independent director the Company; and
3. WHEREAS, immediately prior to the Merger, each share of Company Common
Stock (as defined in Section 2.2(a)) held by the Purchaser and its wholly-
owned subsidiaries shall be exchanged for one share of Class B Common Stock
(as defined in Section 2.2(d)) of the Company; and
4. WHEREAS, the Purchaser, Merger Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated hereby;
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
The Merger
1.1 The Merger.
(a) At the Effective Time (as defined in Section 1.2), and subject to and
upon the terms and conditions of this Agreement and the DGCL, Merger Sub shall
be merged with and into the Company, the separate corporate existence of
Merger Sub shall cease, and the Company shall continue as the surviving
corporation. The Company after the Effective Time is hereinafter sometimes
referred to as the "Surviving Corporation" and sometimes referred to as "the
Company."
(b) Unless this Agreement shall have been terminated and the transactions
herein contemplated shall have been abandoned pursuant to Article 7 and
subject to the satisfaction or waiver of the conditions set forth in Article 6
(other than those conditions that by their nature are to be satisfied at the
Effective Time), the consummation of the Merger shall take place as promptly
as practicable (and in any event within five business days) after satisfaction
or waiver of the conditions set forth in Article 6, at the offices of Ropes &
Gray, One International Place, Boston, Massachusetts, unless another date,
time or place is agreed to in writing by the parties hereto.
1.2 Effective Time. As promptly as practicable after the satisfaction or
waiver of the conditions set forth in Article 6, the Company shall file a duly
executed certificate of merger in form mutually satisfactory to the parties
hereto as contemplated by the DGCL (the "Certificate of Merger"), with the
Secretary of State of the State of Delaware, in such form as required by, and
executed in accordance with the relevant provisions of, the DGCL (the time of
such filing being the "Effective Time").
A1-1
<PAGE>
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the rights,
privileges, powers and franchises of the Company and Merger Sub shall vest in
the Surviving Corporation. Moreover, at the Effective Time, all of the estate,
property, rights, privileges, powers and franchises of each of the Company and
Merger Sub, and all their property, real, personal and mixed, and all the
debts on whatever account to any of them, as well as all stock subscriptions
and other choses in action, belonging to any of them, shall be transferred to,
and shall be vested in, the Surviving Corporation without further act or deed;
and the Surviving Corporation shall be deemed to have assumed, and shall be
liable for, all debts, liabilities and obligations of each of the Company and
Merger Sub in the same manner and to the same extent as if the Surviving
Corporation had itself incurred such debts, liabilities and obligations.
1.4 Certificate of Incorporation, By-Laws.
(a) At the Effective Time the certificate of incorporation of the Company,
as in effect immediately prior to the Effective Time (as amended as provided
for in Section 3.3), shall be the certificate of incorporation of the
Surviving Corporation until thereafter amended as provided by law and such
certificate of incorporation.
(b) The by-laws of the Company, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until
thereinafter amended as provided by the certificate of incorporation, the
Surviving Corporation and such by-laws.
1.5 Directors and Officers. The directors of Merger Sub immediately prior to
the Effective Time shall be the initial directors of the Surviving Corporation
and the officers of the Company immediately prior to the Effective Time shall
be the initial officers of the Surviving Corporation, in each case to hold
office in accordance with the certificate of incorporation and by-laws of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified.
ARTICLE 2
Effect of the Merger on Securities of the Company and Merger Sub;
Recapitalization
2.1 Merger Sub Stock. At the Effective Time, each share of the Common Stock,
$.01 par value, of Merger Sub outstanding immediately prior to the Effective
Time shall be converted into and shall become one share of common stock, $.01
par value per share, of the Surviving Corporation.
2.2 Conversion of Company Common Stock; Recapitalization.
(a) Except as otherwise provided in Section 2.5 and subject to Sections
2.2(c), (d) and (e), and Section 2.4, at the Effective Time each issued and
outstanding share of Common Stock, $1.00 par value, of the Company (the
"Company Common Stock"), shall be converted into, at the election of the
holder thereof, one of the following (as adjusted pursuant to Section 2.5 the
"Merger Consideration"):
(i) for each such share of Company Common Stock (other than shares as to
which a Stock Election or Cash Election (each as defined below) has been
made), the right to receive (x) 0.4 (the "Standard Exchange Ratio") of a
share of the Common Stock, $.01 par value per share, of the Purchaser
("Purchaser Common Stock"), and (y) an amount in cash, without interest,
equal to $17.60 (the "Standard Cash Consideration"); provided, however,
that (1) in the event the Average Stock Price is less than $36.00, the
Standard Cash Consideration shall be equal to (A) $32.00 less (B) the
Standard Exchange Ratio multiplied by the Average Stock Price and (2) in
the event the Average Stock Price is greater than $41.00, the Standard Cash
Consideration shall be equal to (A) $34.00 less (B) the Standard Exchange
Ratio multiplied by the Average Stock Price (collectively, the "Standard
Consideration");
(ii) for each such share of Company Common Stock with respect to which an
election to receive solely Purchaser Common Stock has been effectively made
and not revoked or lost pursuant to Section 2.3(c), (d)
A1-2
<PAGE>
and (e), the right to receive 0.85714 (the "Stock Exchange Ratio") of a
share of Purchaser Common Stock (the "Stock Consideration"); provided,
however, that (1) in the event the Average Stock Price is less than $36.00,
the Stock Exchange Ratio shall be equal to $32.00 divided by the Average
Stock Price and (2) that in the event the Average Stock Price is greater
than $41.00, the Stock Exchange Ratio shall be equal to $34.00 divided by
the Average Stock Price; or
(iii) for each such share of Company Common Stock with respect to which
an election to receive solely cash has been effectively made and not
revoked or lost pursuant to Section 2.3(c), (d) or (e), the right to
receive in cash, without interest, an amount equal to $33.00 (the "Cash
Consideration"); provided, however, that (1) in the event the Average Stock
Price is less than $36.00, the Cash Consideration shall be equal to $32.00
and (2) in the event the Average Stock Price is more than $41.00, the Cash
Consideration shall be equal to $34.00.
"Average Stock Price" means the average of the Closing Market Prices (as
hereinafter defined) for the ten consecutive trading days ending on the fifth
trading day prior to the Effective Time. The "Closing Market Prices" for any
trading day means the closing sales price of the Purchaser Common Stock as
reported in the New York Stock Exchange Composite Tape (as reported by the
Wall Street Journal or, if not reported thereby, as reported by another source
as mutually agreed by the Purchaser and, with the consent of the Special
Committee, the Company) for that day.
(b) As a result of the Merger and without any action on the part of the
holder thereof, at the Effective Time and except as provided in Sections
2.2(d) and 2.2(e), all shares of Company Common Stock shall cease to be
outstanding and shall be cancelled and retired and shall cease to exist, and
each holder of such shares of Company Common Stock shall thereafter cease to
have any rights with respect to such shares of Company Common Stock, except
the right to receive, without interest, the Merger Consideration and cash for
fractional shares of Purchaser Common Stock in accordance with Section 2.5(c)
upon the surrender of a certificate representing such shares of Company Common
Stock (a "Company Certificate").
(c) Notwithstanding anything contained in this Section 2.2 to the contrary,
each share of Company Common Stock issued and held in the Company's treasury
or any wholly owned subsidiary thereof or by any wholly owned subsidiary of
the Purchaser other than SMA Financial Corp. ("SMA") immediately prior to the
Effective Time shall, by virtue of the Merger, be cancelled and retired and
shall cease to exist without payment of any consideration therefor.
(d) Notwithstanding anything contained in this Section 2.2, immediately
prior to the Effective Time, each share of Company Common Stock held by SMA,
shall be exchanged for one share of Class B Common Stock, $5.00 par value per
share, of the Company ("Class B Common Stock") (the "Recapitalization"). Such
shares of Class B Common Stock shall remain outstanding after the Merger.
(e) Notwithstanding anything in this Agreement to the contrary, holders of
Company Common Stock that have, as of the Effective Time, complied with all
procedures necessary to assert appraisal rights in accordance with Section 262
of the DGCL, if applicable, shall have such rights, if any, as they may have
pursuant to Section 262 of the DGCL and such Company Common Stock shall not be
converted or be exchangeable as provided in this Section 2.2, but such holders
shall be entitled to receive such payment as may be determined to be due to
such holders pursuant to the DGCL; provided, however, that, if such holder
shall have failed to perfect or shall have effectively withdrawn or lost his
right to appraisal and payment under the DGCL, such holder's Company Common
Stock shall thereupon be deemed to have been converted and to have become
exchangeable, as of the Effective Time, into the Merger Consideration. The
Company Common Stock described in this Section 2.2(e) held by holders who
exercise and perfect appraisal rights are referred to herein as "Dissenting
Shares." The Company shall give the Purchaser prompt notice of any demands for
appraisal of shares received by the Company (and shall also give the Purchaser
prompt notice of any withdrawals of such demands for appraisal rights) and
(ii) the Purchaser shall have the opportunity and right to participate in and
direct all negotiations and proceedings with respect to any such demands.
Neither the Company nor the Surviving Corporation, shall, except with the
prior written consent of the Purchaser, make any payment with respect to, or
settle, offer to settle or otherwise negotiate any such demand for appraisal
rights.
A1-3
<PAGE>
(f) At the Effective Time, each outstanding option or right to purchase
shares of Company Common Stock (a "Company Option") shall be converted into an
option to purchase shares of Purchaser Common Stock, as provided below.
Following the Effective Time, each such Company Option shall be exercisable
upon the same terms and conditions as then are applicable to such Company
Option, except that (i) each such Company Option shall be exercisable for that
number of shares of Purchaser Common Stock equal to the product of (x) the
number of shares of Company Common Stock for which such Company Option was
exercisable and (y) the Stock Consideration specified in Section 2.2(a)(ii)
and (ii) the exercise price of such option shall be equal to the exercise
price per share of such option as of the date hereof divided by the Stock
Consideration. It is the intention of the parties that, to the extent that any
such Company Option constituted an "incentive stock option"(within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
immediately prior to the Effective Time, such option continue to qualify as an
incentive stock option to the maximum extent permitted by Section 422 of the
Code, and that the assumption of the Company Stock Options provided by this
Section 2.2(f) satisfy the conditions of Section 424(a) of the Code. From and
after the date of this Agreement, no additional options to purchase shares of
Company Common Stock shall be granted under the Company stock option plans or
otherwise. Except as otherwise agreed to by the parties, no person shall have
any right under any stock option plan (or any option granted thereunder) or
other plan, program or arrangement with respect to, including any right to
acquire, equity securities of the Company following the Effective Time.
2.3 Company Common Stock Elections.
(a) Each person who, at the Effective Time, is a record holder of shares of
Company Common Stock (other than holders of shares of Company Common Stock to
be cancelled as set forth in Section 2.2(c) or of Dissenting Shares, or as
provided in Section 2.2(d)) shall have the right to submit an Election Form
(as defined in Section 2.3(c)) specifying that such person desires to have all
of the shares of Company Common Stock owned by such person converted into the
right to receive either (i) the Standard Consideration (a "Standard Election")
(ii) the Stock Consideration (a "Stock Election"), or (iii) the Cash
Consideration (a "Cash Election").
(b) Promptly after the Allocation Determination (as defined in Section
2.3(d)), (i) the Purchaser shall deposit (or cause to be deposited) with a
bank or trust company to be designated by the Purchaser and reasonably
acceptable to the Company (the "Exchange Agent"), for the benefit of the
holders of shares of Company Common Stock, for exchange in accordance with
this Article 2, cash in an amount sufficient to pay the aggregate cash portion
of the Merger Consideration pursuant to Section 2.2(a) and (ii) the Purchaser
shall deposit (or cause to be deposited) with the Exchange Agent, for the
benefit of the holders of shares of Company Common Stock, certificates
representing the shares of Purchaser Common Stock ("Purchaser Certificates")
for exchange in accordance with this Article 2 (the cash and certificates
deposited pursuant to clauses (i) and (ii) being hereinafter referred to as
the "Exchange Fund").
(c) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of Company Common Stock immediately
prior to the Effective Time (excluding any shares of Company Common Stock
which (i) are cancelled pursuant to Section 2.2(c), (ii) are Dissenting Shares
or (iii) are exchanged in the Recapitalization) (A) a letter of transmittal
(the "Company Letter of Transmittal") (which shall specify that delivery shall
be effected, and risk of loss and title to the Company Certificates shall
pass, only upon delivery of such Company Certificates to the Exchange Agent
and shall be in such form and have such other provisions as the Purchaser
shall specify), (B) instructions for use in effecting the surrender of the
Company Certificates in exchange for the Merger Consideration with respect to
the shares of Company Common Stock formerly represented thereby, and (C) an
election form (the "Election Form") providing for such holders to make the
Standard Election, the Cash Election or the Stock Election. As of the Election
Deadline (as defined in Section 2.3(d)) all holders of Company Common Stock
immediately prior to the Effective Time (excluding any shares of Company
Common Stock that (i) are cancelled pursuant to Section 2.2(c) or (ii) are
exchanged in the Recapitalization) that shall not have properly submitted to
the Exchange Agent, or that shall have properly revoked, an effective,
properly completed Election Form shall be deemed to have made a Standard
Election (each a "Deemed Standard Election").
A1-4
<PAGE>
(d) Any Cash Election, Standard Election, or Stock Election shall have been
validly made only if the Exchange Agent shall have received by 5:00 p.m.
Boston, Massachusetts time on a date (the "Election Deadline") to be mutually
agreed upon by the Purchaser and the Company (with the consent of the Special
Committee) (which date shall not be later than the twentieth business day
after the Effective Time), an Election Form properly completed and executed
(with the signature or signatures thereof guaranteed to the extent required by
the Election Form) by such holder accompanied by such holder's Company
Certificates, or by an appropriate guarantee of delivery of such Company
Certificates from a member of any registered national securities exchange or
of the National Association of Securities Dealers, Inc. or a commercial bank
or trust company in the United States as set forth in such Election Form. Any
holder of Company Common Stock that has made an election by submitting an
Election Form to the Exchange Agent may at any time prior to the Election
Deadline change such holder's election by submitting a revised Election Form,
properly completed and signed that is received by the Exchange Agent prior to
the Election Deadline. Any holder of Company Common Stock may at any time
prior to the Election Deadline revoke such holder's election and withdraw such
holder's Company Certificates deposited with the Exchange Agent by written
notice to the Exchange Agent received by the close of business on the day
prior to the Election Deadline. As soon as practicable after the Election
Deadline (but in no event later than ten business days after the Election
Deadline), the Exchange Agent shall determine the allocation of the cash
portion of the Merger Consideration and the stock portion of the Merger
Consideration and shall notify the Purchaser of its determined allocation (the
"Allocation Determination").
(e) From and after the Effective Time, each holder of a certificate that
immediately after the Recapitalization and immediately prior to the Effective
Time represented outstanding shares of Company Common Stock shall, upon
surrender of such certificate for cancellation to the Exchange Agent, together
with the Company Letter of Transmittal, duly executed, and such other
documents as the Purchaser or the Exchange Agent shall reasonably request, be
entitled to receive promptly after the Election Deadline in exchange therefor
(A) a check in the amount equal to the cash, if any, which such holder has the
right to receive pursuant to the provisions of this Article 2 (including any
cash in lieu of fractional shares of Purchaser Common Stock pursuant to
Section 2.5(c)), and (B) a Purchaser Certificate representing that number of
shares of Purchaser Common Stock, if any, which such holder has the right to
receive pursuant to this Article 2 (in each case less the amount of any
required withholding taxes), and the Company Certificate so surrendered shall
forthwith be cancelled. Until surrendered as contemplated by this Section 2.3,
each Company Certificate shall be deemed at any time after the Effective Time
to represent only the right to receive the Merger Consideration with respect
to the shares of Company Common Stock formerly represented thereby. If any
certificate for shares of Purchaser Common Stock to be issued in the Merger is
to be issued in a name other than that in which the certificate for shares of
Company Common Stock 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 Purchaser Common Stock in a name other than
that of the registered holder of the certificate surrendered, or shall
establish to the satisfaction of the Purchaser or its agent that such tax has
been paid or is not applicable.
(f) The Purchaser shall have the right to make rules, not inconsistent with
the terms of this Agreement, governing the validity of the Election Forms, the
manner and extent to which Standard Elections, Cash Elections or Stock
Elections are to be taken into account in making the determinations prescribed
by Section 2.4, the issuance and delivery of certificates for Purchaser Common
Stock into which shares of Company Common Stock are converted in the Merger,
and the payment of cash for shares of Company Common Stock converted into the
right to receive cash in the Merger.
2.4 Proration.
(a) As is more fully set forth below, the maximum number of shares of
Purchaser Common Stock issuable to holders of Company Common Stock (the
"Maximum Number of Purchaser Shares") shall not exceed the product of (x) 0.4
and (y) the number of Outstanding Company Shares (as defined below).
(b) As is more fully set forth below, the aggregate amount of cash to be
paid to holders of Outstanding Company Shares (as defined below) (the "Maximum
Cash Amount") shall not exceed the product of (x) the
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Standard Cash Election and (y) the number of Outstanding Company Shares.
"Outstanding Company Shares" shall mean those shares of Company Common Stock
outstanding immediately prior to the Effective Time excluding (a) shares of
Company Common Stock that are cancelled pursuant to Section 2.2(c), (b)
Dissenting Shares (but only for so long as such shares remain Dissenting
Shares), (c) shares exchanged in the Recapitalization and (d) any other shares
of Company Common Stock owned directly or indirectly by the Purchaser.
(c) In the event that the aggregate number of shares of Purchaser Common
Stock issuable pursuant to the Stock Elections received by the Exchange Agent
exceeds an amount equal to the Maximum Number of Purchaser Shares minus the
number of shares of Purchaser Common Stock issuable pursuant to Standard
Elections and Deemed Standard Elections, including any fractional shares of
Purchaser Common Stock for which a cash adjustment shall be paid pursuant to
Section 2.5(c) (such difference, the "Remaining Purchaser Shares"), each
holder making a Stock Election shall receive, for each share of Company Common
Stock held by such holder, (x) a number of shares of Purchaser Common Stock
equal to the quotient obtained by dividing (i) the Remaining Purchaser Shares
by (ii) the aggregate number of shares of Company Common Stock held by holders
making Stock Elections (the "Stock Election Company Shares"), plus (y) cash in
an amount equal to the quotient obtained by dividing (iii) the Remaining Stock
Election Cash Amount (as defined below) by (iv) the Stock Election Company
Shares. The "Remaining Stock Election Cash Amount" shall be equal to the
Maximum Cash Amount minus the amount of cash payable pursuant to Standard
Elections, Deemed Standard Elections and Cash Elections.
(d) In the event that the aggregate amount of cash payable pursuant to Cash
Elections received by the Exchange Agent exceeds the Maximum Cash Amount minus
the aggregate amount of cash payable pursuant to Standard Elections and Deemed
Standard Elections (such difference, the "Remaining Cash"), each holder making
a Cash Election shall receive, for each share of Company Common Stock held by
such holder, (x) cash in an amount equal to the quotient obtained by dividing
the (i) Remaining Cash by (ii) the aggregate number of shares of Company
Common Stock held by holders making Cash Elections (the "Cash Election Company
Shares"), plus (y) a number of shares of Purchaser Common Stock equal to the
quotient obtained by dividing (iii) the Remaining Cash Election Purchaser
Shares (as defined below) by (iv) the Cash Election Company Shares. The
"Remaining Cash Election Purchaser Shares" shall be the number of shares of
Purchaser Common Stock equal to the Maximum Number of Purchaser Shares minus
the number of shares of Purchaser Common Stock issuable pursuant to Standard
Elections, Deemed Standard Elections and Stock Elections (including any
fractional shares of Purchaser Common Stock for which a cash adjustment shall
be paid pursuant to Section 2.5(c) in respect of such Standard Elections,
Deemed Standard Elections and Stock Elections).
2.5 Dividends, Fractional Shares, Etc.
(a) Notwithstanding any other provisions of this Agreement, no dividends or
other distributions declared after the Effective Time on Purchaser Common
Stock shall be paid with respect to any shares of Company Common Stock
represented by a Company Certificate, until such Company Certificate is
surrendered for exchange as provided herein. Subject to the effect of
applicable laws, following surrender of any such Company Certificate, there
shall be paid to the holder of the Purchaser Certificates issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Purchaser Common
Stock and not paid, less the amount of any withholding taxes that may be
required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Purchaser Common Stock, less the amount of any
withholding taxes that may be required thereon.
(b) At or after the Effective Time, there shall be no transfer on the stock
transfer books of the Company of the shares of Company Common Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing any such shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for the Merger
Consideration, if any, deliverable in respect thereof pursuant to this
Agreement.
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(c) No fractional shares of Purchaser Common Stock shall be issued pursuant
to the Merger. In lieu of the issuance of any fractional share of Purchaser
Common Stock pursuant to the Merger, cash adjustments shall be paid to holders
in respect of any fractional share of Purchaser Common Stock that would
otherwise be issuable, and the amount of such cash adjustment shall be equal
to the product of such fractional amount and the Average Stock Price.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Purchaser Common Stock) that remains
unclaimed by the former stockholders of the Company one year after the
Effective Time shall be delivered to the Purchaser. Any former stockholder of
the Company who has not theretofore complied with this Article 2 shall
thereafter look only to the Surviving Corporation and the Purchaser for
payment of the applicable Merger Consideration, cash in lieu of fractional
shares and unpaid dividends and distributions on the Purchaser Common Stock
deliverable in respect of each share of Company Common Stock such stockholder
holds as determined pursuant to this Agreement, in each case without any
interest thereon.
(e) None of the Purchaser, the Company, Merger Sub, the Surviving
Corporation, the Exchange Agent or any other person shall be liable to any
former holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned or unclaimed
property, escheat or similar laws.
(f) In the event that any Company Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Company Certificate to be lost, stolen or destroyed and, if
required by the Purchaser, the posting by such person of a bond in such
reasonable amount as the Purchaser may direct as indemnity against any claim
that may be made against it with respect to such Company Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of
Purchaser Common Stock, as provided in this Section 2.5, deliverable in
respect thereof pursuant to this Agreement.
ARTICLE 3
Representations and Warranties of Company
Except as set forth in the disclosure letter delivered at or prior to the
execution hereof to the Purchaser (the "Company Disclosure Letter") or in the
Company Reports (as defined below), the Company represents and warrants to the
Purchaser and Merger Sub as of the date of this Agreement as follows:
3.1 Existence; Good Standing; Corporate Authority. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation. The Company is duly licensed or
qualified to do business as a foreign corporation and is in good standing
under the laws of any other state of the United States in which the character
of the properties owned or leased by it or in which the transaction of its
business makes such qualification necessary, except where the failure to be so
qualified or to be in good standing would not have a material adverse effect
on the business, results of operations or financial condition or prospects of
the Company and its Subsidiaries taken as a whole (a "Company Material Adverse
Effect"). The Company has all requisite corporate power and authority to own,
operate and lease its properties and carry on its business as now conducted.
Each of the Company's Significant Subsidiaries (as defined in Section 8.14) is
a corporation or partnership duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization,
has the corporate or partnership power and authority to own its properties and
to carry on its business as it is now being conducted, and is duly qualified
to do business and is in good standing in each jurisdiction in which the
ownership of its property or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so
qualified or to be in good standing would not individually or in the
aggregate, have a Company Material Adverse Effect.
3.2 Authorization, Validity and Effects of Agreements. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and all agreements and documents contemplated hereby.
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Subject only to the approval of this Agreement, the Merger and the
transactions contemplated hereby by the holders of a majority of the
outstanding shares of Company Common Stock, the consummation by the Company of
the transactions contemplated hereby has been duly authorized by all requisite
corporate action. This Agreement constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received) will constitute, valid and legally binding obligations of the
Company, enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating
to creditors' rights and general principles of equity.
3.3 Capitalization. The authorized capital stock of the Company consists of
90,000,000 shares of Company Common Stock and 20,000,000 shares of preferred
stock, $1.00 par value (the "Company Preferred Stock"). Immediately prior to
the Effective Time and after any action required to be taken by Company
stockholders with respect to the Merger and the Recapitalization, the
authorized capital stock of the Company will be 60,000,000 shares of Company
Common Stock 40,000,000 shares of Class B Common Stock and 20,000,000 shares
of Company Preferred Stock. As of December 31, 1996, there were 59,649,406
shares of Company Common Stock, and no shares of Company Preferred Stock,
issued and outstanding and 2,246,600 shares of Company Common Stock held in
the Company's treasury. Since such date, (i) no additional shares of capital
stock of the Company have been issued, except pursuant to (a) the
Recapitalization or (b) the terms existing on the date hereof of the Company's
stock option and employee stock purchase plans, pension plans and other
similar employee benefit plans (the "Company Stock Plans") and (ii) no options
or other rights to acquire shares of the Company's capital stock have been
granted. The Company has no outstanding bonds, debentures, notes or other
obligations, the holders of which have the right to vote (or that are
convertible into or exercisable for securities having the right to vote) with
the stockholders of the Company on any matter. All issued and outstanding
shares of Company Common Stock are duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights. Except for the transactions
contemplated by this Agreement, there are not on the date hereof any existing
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements or commitments that obligate the Company or any of its
Subsidiaries to issue, transfer or sell any shares of capital stock of the
Company or any of its Subsidiaries (other than under the Company Stock Plans).
3.4 Subsidiaries. The Company owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such Company Significant
Subsidiary) of each of the Company's Significant Subsidiaries other than
Citizens Corporation. Each of the outstanding shares of capital stock of each
of the Company's Significant Subsidiaries is duly authorized, validly issued,
fully paid and nonassessable, and other than Citizens Corporation is owned,
directly or indirectly, by the Company. Each of the outstanding shares of
capital stock of each Significant Subsidiary of the Company other than
Citizens Corporation is owned, directly or indirectly, by the Company free and
clear of all liens, pledges, security interests, claims or other encumbrances
other than liens imposed by law which are not material. As of December 31,
1996, there were outstanding 35,267,300 shares of capital stock of Citizens
Corporation. The Company owns indirectly 29,093,500 shares of capital stock of
Citizens Corporation and such shares are held indirectly by the Company free
and clear of all liens, pledges, security interests, claims or other
encumbrances other than liens imposed by law that are not material.
3.5 No Conflict; Required Filings and Consents. (a) The execution and
delivery of this Agreement by the Company do not, and the consummation by the
Company of the transactions contemplated hereby will not, (i) conflict with or
violate the certificate of incorporation or by-laws or equivalent
organizational documents of (x) the Company or (y) any Significant Subsidiary,
(ii) subject to making the filings and obtaining the approvals identified in
Section 3.5(b), conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to the Company or any Company Subsidiary (as
defined in Section 8.14) or by which any property or asset of the Company or
any Company Subsidiary is bound or affected, or (iii) subject to making the
filings and obtaining the approvals identified in Section 3.5(b), result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, result in the loss of a
material benefit under, or
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give to others any right of purchase or sale, or any right of termination,
amendment, acceleration, increased payments or cancellation of, or result in
the creation of a lien or other encumbrance on any property or asset of the
Company or any Company Subsidiary pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any Company Subsidiary is a
party or by which the Company or any Company Subsidiary or any property or
asset of the Company or any Company Subsidiary is bound or affected, except,
in the case of clauses (i)(y), (ii) and (iii), for any such conflicts,
violations, breaches, defaults or other occurrences that would not prevent or
delay consummation of any of the transactions contemplated hereby in any
material respect, or otherwise prevent the Company from performing its
obligations hereunder in any material respect, and would not, individually or
in the aggregate, have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do not, and
the performance of this Agreement and the consummation by the Company of the
transactions contemplated hereby will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any
governmental or regulatory commission, board or other authority, domestic or
foreign (each a "Governmental Entity"), except (i) for (A) applicable
requirements, if any, of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Securities Act of 1933, as amended (the "Securities
Act"), state securities or "blue sky" laws ("Blue Sky Laws") and state
takeover laws, (B) applicable approvals of the state insurance commissioners
of the States of Delaware, Illinois, Indiana, Massachusetts, Michigan, New
Hampshire, Ohio, Pennsylvania and Texas, (C) filing and recordation of
appropriate merger and similar documents as required by Delaware law and (D)
applicable requirements, if any, of the Code and state, local and foreign tax
laws, and (ii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay consummation of any of the transactions contemplated hereby
in any material respect, or otherwise prevent the Company from performing its
obligations under this Agreement in any material respect, and would not,
individually or in the aggregate, have a Company Material Adverse Effect.
3.6 Compliance. Neither the Company nor any Company Subsidiary is in
conflict with, or in default or violation of, (i) any law, rule, regulation,
order, judgment or decree applicable to the Company or any Company Subsidiary
or by which any property or asset of the Company or any Company Subsidiary is
bound or affected, or (ii) any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any Company Subsidiary is a party or by which the
Company or any Company Subsidiary or any property or asset of the Company or
any Company Subsidiary is bound or affected, in each case except for any
conflicts, defaults or violations that would not, individually or in the
aggregate, have a Company Material Adverse Effect. The Company and its
Subsidiaries have obtained all licenses, permits and other authorizations and
have taken all actions required by applicable law or governmental regulations
in connection with their business as now conducted, where the failure to
obtain any such item or to take any such action would have, individually or in
the aggregate, a Company Material Adverse Effect.
3.7 SEC Documents. (a) The Company has filed all forms, reports and
documents required to be filed by it with the Securities and Exchange
Commission ("SEC") since December 31, 1993 (collectively, the "Company
Reports"). As of their respective dates, the Company Reports and any such
reports, forms and other documents filed by the Company with the SEC after the
date of this Agreement (i) complied, or will comply, as to form in all
material respects with the applicable requirements of the Securities Act, the
Exchange Act, and the rules and regulations thereunder and (ii) did not, or
will not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they
were made, not misleading. The representation in clause (ii) of the preceding
sentence shall not apply to any misstatement or omission in any Company Report
filed prior to the date of this Agreement which was superseded by a subsequent
Company Report filed prior to the date of this Agreement.
(b) Each of the consolidated balance sheets of the Company included in or
incorporated by reference into the Company Reports (including the related
notes and schedules) fairly presents the consolidated financial
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position of the Company and the Company Subsidiaries as of its date, and each
of the consolidated statements of income, retained earnings and cash flows of
the Company included in or incorporated by reference into the Company Reports
(including any related notes and schedules) fairly presents the results of
operations, retained earnings or cash flows, as the case may be, of the
Company and the Company Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end audit
adjustments that would not be material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein.
3.8 Litigation. There are no actions, suits or proceedings pending against
the Company or the Company Subsidiaries or, to the knowledge of the Company,
threatened against the Company or the Company Subsidiaries, at law or in
equity, or before or by any federal or state commission, board, bureau, agency
or instrumentality, that are reasonably likely, individually or in the
aggregate, to have a Company Material Adverse Effect.
3.9 Absence of Certain Changes. Except as specifically contemplated by this
Agreement or as disclosed in the Company Reports or the Company Disclosure
Letter, since December 31, 1995, (i) no events or series of events have
occurred, and no circumstances have arisen, that are reasonably likely,
individually or in the aggregate, to result in a Company Material Adverse
Effect, (ii) there has not been any declaration, setting aside or payment of
any dividend or other distribution with respect to its capital stock (other
than regular quarterly cash dividends not in excess of $.05 per share), and
(iii) there has not been any material change in its accounting principles,
practices or methods.
3.10 No Brokers. The Company has not entered into any contract, arrangement
or understanding with any person or firm that may result in the obligation of
the Company or the Purchaser to pay any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby
except that the Company has retained Salomon Brothers Inc as its financial
advisor, the arrangements with which have been disclosed in writing to the
Purchaser prior to the date hereof. Other than the foregoing arrangements, the
Company is not aware of any claim for payment of any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby.
3.11 Opinion of Financial Advisor. The Special Committee of the Board of
Directors of the Company has received the opinion of Salomon Brothers Inc to
the effect that, as of the date hereof, the Merger Consideration is fair to
the holders of the Company Common Stock (other than the Purchaser and its
Subsidiaries) from a financial point of view.
3.12 DGCL Section 203. The business combination restrictions of Section 203
of the DGCL are not applicable to the transactions contemplated by this
Agreement.
ARTICLE 4
Representations and Warranties of Purchaser and Merger Sub
Except as set forth in the disclosure letter delivered at or prior to the
execution hereof to the Company (the "Purchaser Disclosure Letter") or in the
Purchaser Reports (as defined below), each of the Purchaser and Merger Sub
represents and warrants to the Company as of the date of this Agreement as
follows:
4.1 Existence; Good Standing; Corporate Authority. Each of the Purchaser and
Merger Sub is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation. Each of the
Purchaser and Merger Sub is duly licensed or qualified to do business as a
foreign corporation and is in good standing under the laws of any other state
of the United States in which the character of the properties owned or leased
by it or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified or to be in good
standing would not have a material adverse
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effect on the business, results of operations or financial condition or
prospects of the Purchaser and its Subsidiaries taken as a whole (a "Purchaser
Material Adverse Effect"). The Purchaser has all requisite corporate power and
authority to own, operate and lease its properties and carry on its business
as now conducted. Each of the Purchaser's Significant Subsidiaries is a
corporation or partnership duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization,
has the corporate or partnership power and authority to own its properties and
to carry on its business as it is now being conducted, and is duly qualified
to do business and is in good standing in each jurisdiction in which the
ownership of its property or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so
qualified or to be in good standing would not, individually or in the
aggregate, have a Purchaser Material Adverse Effect. The copies of the
Purchaser's and Merger Sub's certificates of incorporation and Bylaws
previously made available to the Company are true and correct.
4.2 Authorization; Validity and Effect of Agreements. Each of the Purchaser
and Merger Sub has the requisite corporate power and authority to execute and
deliver this Agreement and all agreements and documents contemplated hereby.
The consummation by the Purchaser and Merger Sub of the transactions
contemplated hereby when executed and delivered pursuant hereto for value
received) will constitute, the valid and legally binding obligations of the
Purchaser and Merger Sub, enforceable in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
4.3 Capitalization. The authorized capital stock of the Purchaser consists
of 300,000,000 shares of Purchaser Common Stock, and 20,000,000 shares of
preferred stock, $0.01 par value (the "Purchaser Preferred Stock"). As of
December 31, 1996, there were 50,134,651 shares of Purchaser Common Stock, and
no shares of Purchaser Preferred Stock, issued and outstanding and no shares
of Purchaser Common Stock held in the Purchaser's treasury. Since such date,
no additional shares of capital stock of the Purchaser have been issued except
pursuant to the Purchaser's stock option and employee stock purchase plans,
pension plans and other similar employee benefit plans (the "Purchaser Stock
Plans"). The Purchaser has no outstanding bonds, debentures, notes or other
obligations, the holders of which have the right to vote (or which are
convertible into or exercisable for securities having the right to vote) with
the stockholders of the Purchaser or any matter. All issued and outstanding
shares of Purchaser Common Stock are duly authorized, validly issued, fully
paid, nonassessable and free of preemptive rights. Except for (i) Company
Options that will be converted into options to purchase Purchaser Common Stock
pursuant to Section 2.2(f) and (ii) options and securities issued pursuant to
Purchaser Stock Plans, there are not on the date hereof any existing options,
warrants, calls, subscriptions, convertible securities, or other rights,
agreements or commitments that obligate the Purchaser or any of its
Subsidiaries to issue, transfer or sell any shares of capital stock of the
Purchaser or any of its Subsidiaries.
4.4 Subsidiaries. The Purchaser owns directly or indirectly each of the
outstanding shares of capital stock (or other ownership interests having by
their terms ordinary voting power to elect a majority of directors or others
performing similar functions with respect to such Purchaser Significant
Subsidiary) of each of the Purchaser's Significant Subsidiaries and Merger
Sub. Each of the outstanding shares of capital stock of each of the
Purchaser's Significant Subsidiaries and Merger Sub is duly authorized,
validly issued, fully paid and nonassessable and is owned, directly or
indirectly, by the Purchaser. Each of the outstanding shares of capital stock
of each Significant Subsidiary of the Purchaser and Merger Sub is owned,
directly or indirectly, by the Purchaser free and clear of all liens, pledges,
security interests, claims or other encumbrances other than liens imposed by
law that are not material.
4.5 No Conflict; Required Filings and Consents. (a) The execution and
delivery of this Agreement by the Purchaser and Merger Sub do not, and the
consummation by the Purchaser and Merger Sub of the transactions contemplated
hereby will not, (i) conflict with or violate the certificate of incorporation
or by-laws or equivalent organizational documents of the Purchaser, Merger
Sub, or any Significant Subsidiary, (ii) subject to making the filings and
obtaining the approvals identified in Section 4.5(b), conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to the
Purchaser or any Purchaser Subsidiary or by which
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any property or asset of the Purchaser or any Purchaser Subsidiary is bound or
affected, or (iii) subject to making the filings and obtaining the approvals
identified in Section 4.5(b), result in any breach of or constitute a default
(or an event which with notice or lapse of time or both would become a
default) under, result in the loss of a material benefit under, or give to
others any right of purchase or sale, or any right of termination, amendment,
acceleration, increased payments or cancellation of, or result in the creation
of a lien or other encumbrance on any property or asset of the Purchaser or
any Purchaser Subsidiary pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Purchaser or any Purchaser Subsidiary is a party or by
which the Purchaser or any Purchaser Subsidiary or any property or asset of
the Purchaser or any Purchaser Subsidiary is bound or affected, except, in the
case of clauses (i), (ii) and (iii), for any such conflicts, violations,
breaches, defaults or other occurrences that would not prevent or delay
consummation of any of the transactions contemplated hereby in any material
respect, or otherwise prevent the Purchaser or Merger Sub from performing its
obligations hereunder in any material respect, and would not, individually or
in the aggregate, have a Purchaser Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Purchaser and Merger
Sub do not, and the performance by the Purchaser and Merger Sub of this
Agreement and the consummation of the transactions contemplated hereby will
not, require any consent, approval, authorization or permit of, or filing with
or notification to, any Governmental Entity, except (i) for (A) applicable
requirements, if any, of the Exchange Act, the Securities Act, Blue Sky Laws
and state takeover laws, (B) applicable approvals of the state insurance
commissioners of the States of Delaware, Illinois, Indiana, Massachusetts,
Michigan, New Hampshire, Ohio, Pennsylvania and Texas, (C) filing and
recordation of appropriate merger and similar documents as required by
Delaware law and (D) applicable requirements, if any, of the Code and state,
local and foreign tax laws, and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not prevent or delay consummation of any of the
transactions contemplated hereby in any material respect, or otherwise prevent
the Purchaser or Merger Sub from performing its obligations hereunder in any
material respect, and would not, individually or in the aggregate, have a
Purchaser Material Adverse Effect.
4.6 Compliance. Neither the Purchaser nor any Purchaser Subsidiary is in
conflict with, or in default or violation of, (i) any law, rule, regulation,
order, judgment or decree applicable to the Purchaser or any Purchaser
Subsidiary or by which any property or asset of the Purchaser or any Purchaser
Subsidiary is bound or affected, or (ii) any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Purchaser or any Purchaser Subsidiary is a party or by
which the Purchaser or any Purchaser Subsidiary or any property or asset of
the Purchaser or any Purchaser Subsidiary is bound or affected, in each case
except for any conflicts, defaults or violations that would not, individually
or in the aggregate, have a Purchaser Material Adverse Effect. The Purchaser
and its Subsidiaries have obtained all licenses, permits and other
authorizations and have taken all actions required by applicable law or
governmental regulations in connection with their business as now conducted,
where the failure to obtain any such item or to take any such action would
have, individually or in the aggregate, a Purchaser Material Adverse Effect.
4.7 SEC Documents. (a) The Purchaser has filed all forms, reports and
documents required to be filed by it with the SEC since October 16, 1995
(collectively, the "Purchaser Reports"). As of their respective dates, the
Purchaser Reports and any such reports, forms and other documents filed by the
Purchaser with the SEC after the date of this Agreement (i) complied, or will
comply, as to form in all material respects with the applicable requirements
of the Securities Act, the Exchange Act, and the rules and regulations
thereunder and (ii) did not, or will not, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. The representation
in clause (ii) of the preceding sentence shall not apply to any misstatement
or omission in any Purchaser Report filed prior to the date of this Agreement
which was superseded by a subsequent Purchaser Report filed prior to the date
of this Agreement.
(b) Each of the consolidated balance sheets included in or incorporated by
reference into the Purchaser Reports (including the related notes and
schedules) fairly presents the consolidated financial position of the
Purchaser and the Purchaser Subsidiaries as of its date, and each of the
consolidated statements of income,
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retained earnings and cash flows included in or incorporated by reference into
the Purchaser Reports (including any related notes and schedules) fairly
presents the results of operations, retained earnings or cash flows, as the
case may be, of the Purchaser and the Purchaser Subsidiaries for the periods
set forth therein (subject, in the case of unaudited statements, to normal
year-end audit adjustments that would not be material in amount or effect), in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except as may be noted
therein.
4.8 Litigation. There are no actions, suits or proceedings pending against
the Purchaser or the Purchaser Subsidiaries or, to the knowledge of the
Purchaser, threatened against the Purchaser or the Purchaser Subsidiaries, at
law or in equity, or before or by any federal or state commission, board,
bureau, agency or instrumentality, that are reasonably likely, individually or
in the aggregate, to have a Purchaser Material Adverse Effect.
4.9 Absence of Certain Changes. Except as specifically contemplated by this
Agreement or as disclosed in the Purchaser Reports or the Purchaser Disclosure
Letter, since December 31, 1995, (i) no event or series of events have
occurred, and no circumstances have arisen, that are reasonably likely,
individually or in the aggregate, to result in a Purchaser Material Adverse
Effect, (ii) there has not been any declaration, setting aside or payment of
any dividend or other distribution with respect to its capital stock (other
than regular quarterly cash dividends not in excess of $.05 per share), and
(iii) there has not been any material change in its accounting principles,
practices or methods.
4.10 No Brokers. The Purchaser has not entered into any contract,
arrangement or understanding with any person or firm that may result in the
obligation of the Company or the Purchaser to pay any finder's fees, brokerage
or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby except that the Purchaser has retained Merrill Lynch & Co.
as its financial advisor, the arrangements with which have been disclosed in
writing to the Company prior to the date hereof. Other than the foregoing
arrangements, the Company is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.11 Opinion of Financial Advisor. The Purchaser has received the opinion of
Merrill, Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") to the
effect that, as of the date hereof, the Merger is fair to the Purchaser from a
financial point of view.
4.12 Financing. Immediately following the Effective Time, the Purchaser will
have available all of the funds required to satisfy the portion of the Merger
Consideration to be paid in cash pursuant to the terms hereof.
4.13 No Regulatory Disqualifiers. To the knowledge of the Purchaser, as of
the date hereof, no event has occurred or condition exists in connection with
the Merger that would cause the Purchaser to fail to satisfy any material
applicable statute or written regulation of any applicable insurance
regulatory authority.
4.14 DGCL Section 203. The business combination restrictions of Section 203
of the DGCL are not applicable to the transactions contemplated by this
Agreement.
4.15 Interim Operations of the Sub. The Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities, had conducted its operations only as contemplated
hereby and will not have a negative net worth as of the Effective Time.
ARTICLE 5
Covenants
5.1 Alternative Proposals. Prior to the Effective Time, the Company agrees
(a) that neither it nor any of its Subsidiaries shall, nor shall it or any of
its Subsidiaries permit their respective officers, directors, employees,
agents and representatives (including, without limitation, any investment
banker, attorney or accountant retained
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by it or any of its Subsidiaries) to, (x) initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to (i) a merger, acquisition, consolidation or
similar transaction involving, or purchase of (A) any assets of the Company
and its Subsidiaries (other than purchases of securities and other investments
from the Company's investment portfolio consistent with past practice) or (B)
any outstanding shares of Company Common Stock, including any shares not
already owned by the Purchaser or the Purchaser Subsidiaries, (ii) any tender
offer or exchange offer with respect to shares of Company Common Stock, or
(iii) any other transaction the consummation of which could be reasonably
expected to impede, interfere with, prevent or materially delay the merger or
which could reasonably be expected to dilute materially the benefits to the
Purchaser of the transactions contemplated under this Agreement (any such
proposal or offer being hereinafter referred to as an "Alternative Proposal")
or (y) engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to
an Alternative Proposal (excluding the Merger and the Recapitalization
contemplated by this Agreement), or (z) agree to, recommend or approve any
Alternative Proposal, and (b) that it will notify the Purchaser immediately if
any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or any discussions are sought to be
initiated or continued with, it. Nothing contained in this Section 5.1 shall
prevent the Company or the Special Committee from discussing, for the purpose
of determining the terms and conditions of a bona fide Alternative Proposal
not solicited in violation of this Agreement provided that the Special
Committee determines in good faith, upon the advice of outside counsel, that
failure to do so would likely be a breach of its fiduciary duties.
(b) Except as set forth in this Section 5.2(b), neither the Board of
Directors of the Company nor any committee thereof shall (i) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to the
Purchaser, the approval or recommendation by such Board of Directors (or such
committee) of this Agreement or the Merger, (ii) approve or recommend, or
propose to approve or recommend, any Alternative Proposal or (iii) cause the
Company to enter into any agreement with respect to any Alternative Proposal;
provided, however, in the event that prior to the Effective Time the Board of
Directors of the Company or the Special Committee determines in good faith,
upon advice of counsel, that failure to do so would likely be a breach of its
fiduciary duties, the Board of Directors of the Company or the Special
Committee, as the case may be, may withdraw or modify its approval or
recommendation of this Agreement and the Merger as a result of an Alternative
Proposal. The Purchaser shall immediately advise the Company and the Special
Committee orally and in writing of any Alternative Proposals and shall
describe the material terms and conditions of such Alternative Proposal and
the identity of the person making such Alternative Proposal.
5.2 Interim Operations. (a) Prior to the Effective Time, except as set forth
in the Company Disclosure Letter or as contemplated by any other provision of
this Agreement, unless the Purchaser has consented in writing thereto, the
Company:
(i) shall, and shall cause each of its Significant Subsidiaries to,
conduct its operations according to their usual, regular and ordinary
course in substantially the same manner as heretofore conducted;
(ii) shall not amend its Certificate of Incorporation or Bylaws or
comparable governing instruments (other than to permit the consummation of
the transactions contemplated by this Agreement);
(iii) shall promptly notify the Purchaser of any breach of any
representation or warranty contained herein or any Company Material Adverse
Effect;
(iv) shall promptly deliver to the Purchaser true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the date
of this Agreement;
(v) shall not (x) except pursuant to the exercise of options, warrants,
conversion rights and other contractual rights existing on the date hereof
and disclosed pursuant to this Agreement, or pursuant to the
Recapitalization issue any shares of its capital stock, effect any stock
split or otherwise change its capitalization as it existed on the date
hereof, (y) grant, confer or award any option, warrant, conversion right or
other right not existing on the date hereof to acquire any shares of its
capital stock, or (z) adopt any
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<PAGE>
new employee benefit plan (including any stock option, stock benefit or
stock purchase plan) or amend any existing employee benefit plan in any
material respect;
(vi) shall not (i) declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital
stock or other ownership interests (other than regular quarterly cash
dividends not in excess of $.05 per share) or (ii) directly or indirectly
redeem, purchase or otherwise acquire any shares of its capital stock or
capital stock of any of its Subsidiaries, or make any commitment for any
such action;
(vii) shall not, and shall not permit any of its Subsidiaries to, sell,
lease or otherwise dispose of any of its assets (including capital stock of
Subsidiaries) except in the ordinary course of business and consistent with
past practice, or to acquire any business or assets, in each case for an
amount exceeding $25,000,000.
(viii) shall not incur any material amount of indebtedness for borrowed
money or make any loans, advances or capital contributions to, or
investments (other than noncontrolling investments in the ordinary course
of business) in any other person other than a wholly owned Company
Subsidiary, or issue or sell any debt securities, other than borrowings
under existing lines of credit in the ordinary course of business, in each
case in an amount exceeding $35,000,000; and
(ix) shall not make any change to its accounting (including tax
accounting) methods, principles or practices, except as may be required by
generally accepted accounting principles and except, in the case of tax
accounting methods, principles or practices, in the ordinary course of
business of the Company or any of its Subsidiaries.
(b) Prior to the Effective Time, except as set forth in the Purchaser
Disclosure Letter or as contemplated by this Agreement, unless the Company and
the Special Committee have consented in writing thereto, the Purchaser:
(i) shall not issue any shares of its capital stock at less than fair
market value (other than pursuant to any Purchaser Stock Plans) or effect
any stock split of its capital stock;
(ii) shall promptly notify the Company of any breach of any
representation or warranty contained herein or any Purchaser Material
Adverse Effect;
(iii) shall promptly deliver to the Company true and correct copies of
any report, statement or schedule filed with the SEC subsequent to the date
of this Agreement; and
(iv) shall not declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or
other ownership interests (other than regular quarterly cash dividends not
to exceed $0.05 per share).
5.3 Filings; Other Action. Subject to the terms and conditions herein
provided, the Company and the Purchaser shall: (a) promptly make their
respectively filings and thereafter make any other required submissions under
applicable state insurance laws; (b) use all reasonable efforts to cooperate
with one another in (i) determining which filings are required to be made
prior to the Effective Time with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Effective Time from,
Governmental Entities in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and
(ii) timely making all such filings and timely seeking all such consents,
approvals, permits or authorizations; and (c) use all reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other things necessary, proper or appropriate to consummate and make effective
the transactions contemplated by this Agreement.
5.4 Inspection of Records. From the date hereof to the Effective Time, each
of the Company and the Purchaser shall: (i) allow all designated officers,
attorneys, accountants and other representatives of the other reasonable
access at all reasonable times to the offices, records and files,
correspondence, audits and properties, as well as to all information relating
to commitments, contracts, titles and financial position, or otherwise
pertaining to the business and affairs, of the Company and the Purchaser and
their respective Subsidiaries, as the case may be, (ii) furnish to the other,
the other's counsel, financial advisors, auditors and other authorized
representatives such financial and operating data and other information as
such persons may reasonably request
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<PAGE>
and (iii) instruct the employees, counsel and financial advisors of the
Company or the Purchaser, as the case may be, to cooperate with the other in
the other's investigation of the business of it and its Subsidiaries.
5.5 Publicity. At all times at or before the Effective Time, the Company,
the Purchaser and the Special Committee shall consult with one another before
issuing or making any reports, statements, or release to the public with
respect to this Agreement or the transactions contemplated hereby and shall
use good faith efforts to agree on the text of a joint public report,
statement, or release or shall use good faith efforts to obtain the others'
approval of the text of any public report, statement, or release to be made
solely on behalf of any of the other. If the Company, the Purchaser and the
Special Committee are unable to agree on or approve any such public report,
statement, or release and such report, statement, or release is, in the
judgment of legal counsel to the Company, the Purchaser or the Special
Committee, required by or advisable in connection with applicable law or the
rules and regulations of any applicable stock exchange or may be appropriate
in order to discharge its disclosure obligations, then the Company, the
Purchaser or the Special Committee, as the case may be, may make or issue such
report, statement, or release, provided that such report, statement or release
is provided to the others a reasonable period prior to issuance and reasonable
good faith efforts are made to obtain the consent of the others to such
report, statement or release.
5.6 Registration Statement. The Purchaser and the Company shall cooperate
and promptly prepare and the Purchaser shall file with the SEC as soon as
practicable (i) a Schedule 13E-3 Transaction Statement (the "Transaction
Statement") under the Exchange Act with respect to the transactions
contemplated by this Agreement and (ii) a Registration Statement on Form S-4
(the "Form S-4) under the Securities Act, with respect to the Purchaser Common
Stock issuable in the Merger. A portion of such Registration Statement shall
also serve as an information statement with respect to the transactions
contemplated by this Agreement, including the Merger (the "Information
Statement/Prospectus"). Each of the respective parties will cause the
information required to be supplied by such party for inclusion in the
Information Statement/Prospectus, the Form S-4 and the Transaction Statement
to (a) be supplied as promptly as practicable and (b) not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The
respective parties shall cause each of the Information Statement/Prospectus,
the Form S-4 and the Transaction Statement to comply as to form in all
material respects with the applicable rules and regulations prescribed by the
SEC. If at any time prior to the Effective Time, any event with respect to a
party should occur that is required to be described in an amendment or, or a
supplement to, the Transaction Statement, the Form S-4 or the Information
Statement/Prospectus, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of the Company. Any statement that is made or
incorporated by reference in the Transaction Statement, the Form S-4 or the
Information Statement/Prospectus shall be deemed modified or superseded to the
extent any later filed document incorporated by reference in the Transaction
Statement, Form S-4 or Information Statement/Prospectus or any statement
included in the Transaction Statement, the Form S-4 or the Information
Statement/Prospectus modifies or supersedes such earlier statement. As
promptly as practicable, the Purchaser shall use all reasonable efforts, and
the Company shall cooperate with the Purchaser, to (w) file the Information
Statement/Prospectus, the Form S-4 and the Transaction Statement with the
applicable regulatory authorities, (x) respond to any comments made by such
regulatory authorities with respect to the Information Statement/Prospectus,
the Form S-4 and the Transaction Statement, (y) have the Form S-4 declared
effective by the SEC and kept effective as long as is necessary to consummate
the Merger and (z) mail the Information Statement/Prospectus to the
stockholders of the Company. The Purchaser shall use its best efforts to
obtain prior to the effective date of the Form S-4, all necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and shall pay all expenses
incident thereto. The Purchaser shall advise the Company and the Special
Committee, promptly after it receives notice thereof, of the time when the
Form S-4 has become effective or any supplement or amendment has been filed,
the issuance of any stop order, the suspension of the qualification of the
Purchaser Common Stock issuable in connection with the Merger for offering or
sale in any jurisdiction, or any request by the SEC for amendment of the
Information
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<PAGE>
Statement/Prospectus or the Form S-4 or comments thereon and responses thereto
or requests by the SEC for additional information.
5.7 Written Consent. The Purchaser shall cause SMA to execute, as
Stockholder of the Company, a written consent of shareholders (a) adopting of
this Agreement and approving the Merger and (b) approving the amendment to the
certificate of incorporation of the Company to authorize the issuance of the
Class B Common Stock pursuant to the Recapitalization (the "Written Consent").
5.8 Listing Application. The Purchaser shall promptly prepare and submit to
the New York Stock Exchange, (the "NYSE") listing applications covering the
shares of Purchaser Common Stock issuable in the Merger, and shall use
reasonable efforts to obtain, prior to the Effective Time, approval for the
listing of such Purchaser Common Stock, subject to official notice of
issuance.
5.9 Further Action. Each party hereto shall, subject to the fulfillment of
or before the Effective Time of each of the conditions or performance set
forth herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the Merger and the
Recapitalization.
5.10 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except
as expressly provided herein and except that (a) the filing fee in connection
with the filing of the Form S-4, the Transaction Statement and the Information
Statement/Prospectus with the SEC and (b) the expenses incurred in connection
with printing and mailing the Form S-4 and the Information
Statement/Prospectus shall be shared equally by the Company and the Purchaser.
5.11 Takeover Statute. If any "fair price," "moratorium," "control share
acquisition" or other form of anti-takeover statute or regulation shall become
applicable to the transactions contemplated hereby, the Company and the
members of the Special Committee of the Board of Directors of the Company and
the Board of Directors of the Company shall grant such approvals and take such
actions as are reasonably necessary so that the transactions contemplated
hereby may be consummated as promptly as practicable on the terms contemplated
hereby and thereby and otherwise act to eliminate or minimize the effects of
such statute or regulation on the transactions contemplated hereby and
thereby.
5.12 Indemnification.
(a) In the event of any threatened or actual claim, suit, proceeding or
investigation, whether civil, criminal or administrative (each, a "Claim"), in
which any of the present or former directors or officers (the "Indemnified
Parties") of the Company or any of its Subsidiaries is, or is threatened to
be, made a party by reason of the fact that he or she is or was a director,
officer, employee or agent of the Company or any of its Subsidiaries, or is or
was serving at the request of the Company or any of its Subsidiaries as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, whether before the Effective Time,
or arising out of or related to the transactions contemplated by this
Agreement, the Surviving Corporation and the Purchaser shall, jointly and
severally, indemnify and hold harmless to the fullest extent permitted under
applicable law (and shall also advance expenses incurred to the fullest extent
permitted under applicable law) each such Indemnified Party against any
losses, claims, damages, liabilities, costs, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement in connection with any
such Claim. In the event of any such Claim, the Purchaser and the Surviving
Corporation shall proceed at their own expense to defend and dispose of such
Claim in the manner they deem appropriate, provided that the Indemnified Party
shall have the right to employ separate legal counsel and participate in the
defense of such Claim at his or her own expense, unless the interests of such
Indemnified Party in such Claim are materially different from and in conflict
with those of the Purchaser and the Surviving Corporation or that he or she
may have defenses that are different from or in addition to and in conflict
with those of the Purchaser and the Surviving Corporation, in which case the
fees and expenses of such counsel shall be paid by the Purchaser and the
Surviving Corporation. Neither the Company, the Purchaser nor the Surviving
Corporation shall (i) be liable for any settlement effected without its
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prior written consent (which consent shall not be unreasonably withheld), (ii)
have any obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such determination
shall have become final and nonappealable, that indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by
applicable law. Any Indemnified Party wishing to claim indemnification under
this Section 5.12(a), upon learning of any such claim, action, suit,
proceeding or investigation, shall promptly notify the Surviving Corporation,
although the failure to so notify shall not relieve the Surviving Corporation
from any liability, except to the extent that such failure prejudices the
Surviving Corporation.
(b) All rights to indemnification (including with respect to the advancement
of expenses) for acts or omissions occurring prior to the Effective Time now
existing in favor of the Indemnified Parties as provided in the certificates
of incorporation or by-laws of the Company or its Subsidiaries shall survive
the Merger and shall continue in full force and effect in accordance with
their terms for a period of six years following the Effective Time (or if the
Merger is not consummated, six years from the date of this Agreement);
provided, however, that all rights to indemnification in respect to any claim
asserted or made within such period shall continue until disposition of such
claim.
(c) The provisions of this Section 5.12 are intended to be for the benefit
of, and shall be enforceable by, each such Indemnified Party and each such
Indemnified Party's heirs and representatives.
(d) The Company shall maintain its existing officers' and directors'
liability insurance or reasonably comparable liability insurance ("D&O
Insurance") for a period of six years following the Effective Time (or if the
Merger is not consummated, six years from the date of this Agreement); so long
as the annual premium therefor is not more than 200% in excess of the last
annual premium paid prior to the date hereof (the "Current Premium");
provided, however, that if the existing D&O Insurance expires, is terminated
or cancelled during such six-year period, the Surviving Corporation shall use
its best efforts to obtain as much D&O Insurance as can be obtained for the
remainder of such period for a premium not in excess (on an annualized basis)
of 200% of the Current Premium.
5.13 Cooperation of the Purchaser. The Purchaser shall take all actions
reasonably necessary to permit the Company to fulfill its obligations under
this Agreement, including using reasonable efforts to cause directors,
officers or employees of the Company who are directors, officers or employees
of the Purchaser or any of its Subsidiaries to approve or take or refrain from
taking any actions by the Company required (or prohibited, as the case may be)
by this Agreement. The Purchaser shall not willfully interfere with the
Company's performance of its obligations under this Agreement. Notwithstanding
any other provision of this Agreement, any actions or omissions of the Company
that result from a violation by the Purchaser of the preceding sentence shall
not be deemed a breach of this Agreement by the Company.
5.14 Letter of Purchaser's Accountants. Following receipt by Price
Waterhouse LLP, the Purchaser's independent auditors, of (i) an appropriate
request from the Company pursuant to SAS No. 72 and (ii) such additional
information or representations reasonably required by Price Waterhouse LLP,
the Purchaser shall use best efforts to cause to be delivered to the Company a
letter of Price Waterhouse LLP, dated a date within two business days before
the effective date of the S-4, and addressed to the Company, in form and
substance reasonably satisfactory to the Company and customary in scope and
substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements and disclosure
statements similar to this S-4 and the Information Statement/Prospectus.
5.15 Letter of Company's Accountants. Following receipt by Price Waterhouse
LLP, the Company's independent auditors, of an appropriate request from the
Purchaser pursuant to SAS No. 72, the Company shall use best efforts to cause
to be delivered to the Purchaser a letter of Price Waterhouse LLP, dated a
date within two business days before the effective date of the S-4, and
addressed to the Purchaser, in form and substance satisfactory to the
Purchaser and customary in scope and substance for "cold comfort" letters
delivered by independent public accountants in connection with registration
statements and disclosure statements similar to the S-4 and the Information
Statement/Prospectus.
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ARTICLE 6
Conditions
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have
been approved in the manner required by applicable law or by the applicable
regulations of any stock exchange or other regulatory body, as the case may
be, by the holders of the issued and outstanding shares of capital stock of
the Company.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(c) The Form S-4 shall have become effective and shall be effective at
the Effective Time, and no stop order suspending effectiveness of the Form
S-4 shall have been issued, and the SEC shall not have initiated, or, to
the knowledge of the Purchaser or the Company, threatened to initiate, any
action, suit, proceeding or investigation to suspend the effectiveness
thereof, and all necessary approvals under state securities laws relating
to the issuance or trading of the Purchaser Common Stock to be issued to
the Company stockholders in connection with the Merger shall have been
received.
(d) All orders and approvals of the insurance regulatory authorities
required in connection with the consummation of the transactions
contemplated hereby shall have been obtained or made, whether or not any
appeal or request for reconsideration of such order is pending, or whether
the time for filing any appeal or request for reconsideration or for any
action by the insurance regulatory authorities has expired.
(e) All consents, authorizations, orders and approvals of filings or
registrations with) any Governmental Entity (other than the insurance
regulatory authorities) required in connection with the execution, delivery
and performance of this Agreement shall have been obtained or made, except
for any documents required to be filed after the Effective Time and except
where the failure to have obtained or made any such consent, authorization,
order, approval, filing or registration would not have a material adverse
effect on the business, results of operations or financial condition of the
Purchaser and the Company (and their respective Subsidiaries), taken as a
whole, following the Effective Time.
(f) The Purchaser Common Stock to be issued in the Company stockholders
in connection with the Merger shall have been approved for listing on the
NYSE, subject only to official notice of issuance.
(g) The Recapitalization shall have been completed.
6.2 Conditions to Obligation of Company to Effect the Merger. The obligation
of the Company to effect the Merger shall be subject to the fulfillment at or
prior to the Effective Time of the condition that:
(a) each of the Purchaser and Merger Sub shall have performed in all
material respects its agreements contained in this Agreement required to be
performed on or prior to the Effective Time, the representations and
warranties of the Purchaser and Merger Sub contained in this Agreement and
in any document delivered in connection herewith shall be true and correct
as of the Effective Time, except (i) for changes specifically permitted by
this Agreement and (ii) that those representations and warranties that
address matters only as of a particular date shall remain true and correct
as of such date, and the Company shall have received a certificate of the
President or a Vice President of the Purchaser, dated the Effective Time,
certifying to such effect.
(b) the Company shall have received the fairness opinion of Salomon
Brothers Inc to the effect that, as of the date hereof, the Merger
Consideration is fair to the holders of the Company Common Stock (other
than the Purchaser and its Subsidiaries) from a financial point of view and
such fairness opinion shall not have been withdrawn.
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6.3 Conditions to Obligation of Purchaser to Effect the Merger. The
obligation of the Purchaser to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the condition that:
(a) the Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed on or prior
to the Effective Time, the representations and warranties of the Company
contained in this Agreement and in any document delivered in connection
herewith shall be true and correct as of the Effective Time, except (i) for
changes specifically permitted by this Agreement and (ii) that those
representations and warranties that address matters only as of a particular
date shall remain true and correct as of such date, and the Purchaser shall
have received a certificate of the President or a Vice President of the
Company, dated the Effective Time, certifying to such effect; provided,
however, that the existence of any facts, conditions or circumstances that
the Purchaser, in light of its ownership of Company Common Stock and
representation on the Board of Directors of the Company, knew as of the
date hereof shall not be a basis for or give rise to any claim or assertion
that the representations and warranties of the Company are not true and
correct as of the Effective Time.
(b) Purchaser shall have received a fairness opinion of Merrill Lynch to
the effect that, as of the date hereof, the Merger is fair to the Purchaser
from a financial point of view and such fairness opinion shall not have
been withdrawn.
ARTICLE 7
Termination
7.1 Termination by Mutual Consent. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of the Company, by
the mutual consent of the Purchaser, Merger Sub and, with the consent of the
Special Committee, the Company.
7.2 Termination by Either Purchaser or Company. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either the Purchaser or (with the consent of the Special Committee of the
Board of Directors of the Company) the Company if (a) the Merger shall not
have been consummated by September 30, 1997, or (b) a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action 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; provided that the party seeking to terminate
this Agreement pursuant to this clause (b) shall have used all reasonable
efforts to remove such injunction, order or decree, and provided, in the case
of a termination pursuant to clause (a) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the failure
to consummate the Merger by September 30, 1997, or (c) insurance regulatory
authorities shall have issued an order or ruling or taken other action denying
approval of the transactions contemplated by this Agreement, and such order,
ruling or other action shall have become final and nonappealable.
7.3 Termination by Company. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, by action of the
Board of Directors of the Company (with the consent of the Special Committee)
if, prior to the Effective Time, (a) the Board of Directors determines in good
faith, upon advice of counsel, that notwithstanding a binding commitment to
consummate the Merger pursuant to the Merger Agreement entered into in the
proper exercise of their fiduciary duties, failure to terminate this Agreement
would likely be a breach of such fiduciary duties by reason of an Alternative
Proposal being made; provided that the Company shall notify the Purchaser
promptly of its intention to terminate this Agreement or to enter into a
definitive agreement with respect to any Alternative Proposal, but in no event
shall such notice be given less than 48 hours prior to the public announcement
of the Company's termination of this Agreement, or (b) there has been a
material breach of any of the covenants or agreements set forth in this
Agreement on the part of the
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<PAGE>
Purchaser, which breach is not curable or, if curable, is not cured within 30
days after written notice of such breach is given by the Company to the
Purchaser, or (c) the Board of Directors of the Purchaser shall have withdrawn
or modified in a manner materially adverse to the Company its approval or
recommendation of this Agreement or the Merger.
7.4 Termination by Special Committee. This Agreement may be terminated and
the Merger may be abandoned by the Special Committee on behalf of the Company
at any time prior to the Effective Time if the Special Committee withdraws or
materially modifies or changes its recommendation of this Agreement or the
Merger and the Special Committee determines in good faith, upon advice of
counsel, that notwithstanding a binding commitment to consummate the Merger
pursuant to the Merger Agreement entered into in the proper exercise of their
fiduciary duties, failure to terminate this Agreement would likely be a breach
of such fiduciary duties by reason of an Alternative Proposal; provided that
the Special Committee shall notify the Company and the Purchaser promptly of
its intention to terminate this Agreement, but in no event shall such notice
be given less than 48 hours prior to the public announcement of such
termination.
7.5 Termination by Purchaser. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of the Company, by action of the Board
of Directors of the Purchaser, if (a) the Board of Directors of the Company
and the Special Committee shall have withdrawn or modified in a manner
materially adverse to the Purchaser its approval or recommendation of this
Agreement or the Merger, or (b) there has been a breach by the Company of any
representation or warranty contained in this Agreement which would have or
would be reasonably likely to have a Company Material Adverse Effect, or (c)
there has been a material breach of any of the covenants or agreements set
forth in this Agreement on the part of the Company, which breach is not
curable or, if curable, is not cured within 30 days after written notice of
such breach is given by the Purchaser to the Company; provided, however, that
the existence of any facts, conditions or circumstances that the Purchaser, in
light of its ownership of Company Common Stock and representation on the Board
of Directors of the Company, knew as of the date hereof shall not be a basis
for or give rise to any right of Purchaser to terminate this Agreement
pursuant to (b) above due to a breach of a representation or warranty of the
Company.
7.6 Effect of Termination and Abandonment. (a) In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article
7, all obligations of the parties hereto shall terminate, except the
obligations of the parties pursuant to this Sections 5.10 and 5.12 and except
for the provisions of Article 8. Moreover, in the event of termination of this
Agreement pursuant to Section 7.3 or Section 7.5, nothing herein shall
prejudice the ability of the nonbreaching party from seeking damages from any
other party for any willful breach of this Agreement, including, without
limitation, attorneys' fees and the right to pursue any remedy at law or in
equity.
7.7 Extension; Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto or (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein;
provided, however, that any such action taken by the Board of Directors of the
Company shall require the consent of the Special Committee. Any term or
condition of this Agreement may be waived at any time by the party that is
entitled to the benefit thereof; such waiver must be in writing and must be
executed by the President, chief executive officer, chief financial officer,
general counsel, or chief operating officer of such party; provided, however,
that the waiver of any of the terms or conditions by the Company shall require
the consent of the Special Committee. Any agreement on the part of a 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.
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ARTICLE 8
General Provisions
8.1 Nonsurvival of Representations, Warranties and Agreements. All
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall be deemed to the extent
expressly provided herein to be conditions to the Merger and shall not survive
the Merger; provided, however, that the agreements contained in Article 2,
Sections 5.10 and 5.12 and this Article 8 shall survive the Merger and Section
7.6 shall survive termination.
8.2 Notices. Any notice required to be given hereunder shall be sufficient
if in writing, and sent by facsimile transmission and by courier service (with
proof of service), hand delivery or certified or registered mail (return
receipt requested and first-class postage prepaid), addressed as follows:
If to the Purchaser: If to the Company:
Allmerica Financial Corporation Allmerica Property & Casualty
440 Lincoln Street Companies, Inc
Worcester, MA 01653 440 Lincoln Street
Attention: Edward J. Parry III Worcester, MA 01653
Telecopier No.: (508) 855-4640 Attention: James A. Cotter, Jr.
Telecopier No.: [(508) 855-7588]
With copies to:
With copies to:
Ropes & Gray
One International Place LeBoeuf, Lamb, Greene & MacRae,
Boston, MA 02110 L.L.P.
Attention: Lauren I. Norton, Esq. 125 West 55th Street
Telecopier No.: (617) 951-7050 New York, NY 10019
Attention: William S. Lamb, Esq.
Telecopier No.: (212) 424-8500
or to such other address as any party shall specify by written notice so
given, and such notice shall be deemed to have been delivered as of the date
so telecommunicated, personally delivered or mailed.
8.3 Assignment, Binding Effect. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; provided, however, that any assignment
of this Agreement shall require the consent of the Special Committee. Subject
to the preceding sentence, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns. Except as specifically provided in this Agreement to the contrary,
nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
8.4 Entire Agreement. This Agreement, the Exhibits, the Company Disclosure
Letter and the Purchaser Disclosure Letter between the Company and the
Purchaser and any documents delivered by the parties in connection herewith
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings among the
parties with respect thereto. No addition to or modification of any provision
of this Agreement shall be binding upon any party hereto unless made in
writing and signed by all parties hereto.
8.5 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the
A1-22
<PAGE>
Merger by the stockholders of the Company, but after any such stockholder
approval, no amendment shall be made which by law requires the further
approval of stockholders without obtaining such further approval; provided,
however, that any amendment to this Agreement shall require the consent of the
Special Committee. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
8.6 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules
of conflict of laws.
8.7 Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof
each signed by less than all, but together signed by all of the parties
hereto.
8.8 Headings. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
8.9 Interpretation. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and
vice versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
8.10 Waivers. Except as provided in this Agreement, no action taken pursuant
to this Agreement, including, without limitation, any investigation by or on
behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by any party
hereto of a breach of any provision hereunder shall not operate or be
construed as a waiver of any prior or subsequent breach of the same or any
other provision hereunder.
8.11 Incorporation of Exhibits. The Company Disclosure Letter, the Purchaser
Disclosure Letter and all Exhibits attached hereto and referred to herein are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein.
8.12 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only as broad as is enforceable.
8.13 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that any party hereto shall be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any Delaware Court,
this being in addition to any other remedy to which such party may be entitled
to at law or in equity.
8.14 Subsidiaries. As used in this Agreement, the word "Subsidiary" or in
the plural "Subsidiaries" when used with respect to any party means any
corporation or other organization, whether incorporated or unincorporated, of
which such party directly or indirectly owns or controls at least a majority
of the securities or other interests having by their terms ordinary voting
power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization, or
any organization of which such party is a general partner. When a reference is
made in this Agreement to Significant Subsidiaries, the words "Significant
Subsidiaries" shall refer to Subsidiaries (as defined above) which constitute
"significant
A1-23
<PAGE>
subsidiaries" under Rule 405 promulgated by the SEC under the Securities Act.
For purposes of this Agreement, each of the Company and each Subsidiary of the
Company shall be deemed not to be a Subsidiary of the Purchaser.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
ATTEST: ALLMERICA FINANCIAL CORPORATION
/s/ John F. Kelly /s/ John F. O'Brien
By: _________________________________ By: _________________________________
Title: Chief Executive Officer
ATTEST: ALLMERICA PROPERTY & CASUALTY
COMPANIES, INC.
/s/ John F. Kelly /s/ John F. O'Brien
By: _________________________________ By: _________________________________
Title: Chief Executive Officer
ATTEST: APY ACQUISITION, INC.
/s/ John F. Kelly /s/ Edward J. Parry III
By: _________________________________ By: _________________________________
Title: President
A1-24
<PAGE>
APPENDIX A-2
FORM OF CHARTER AMENDMENT
RESTATED CERTIFICATE OF INCORPORATION
OF
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
Allmerica Property & Casualty Companies, Inc., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Allmerica Property & Casualty Companies,
Inc. The date of filing of its original Certificate of Incorporation with the
Secretary of State was . A Restated Certificate of Incorporation was filed
on August 17, 1992.
2. This Amended and Restated Certificate of Incorporation amends and
restates the Certificate of Incorporation of this corporation. The foregoing
amendments have been duly adopted by the Board of Directors of the corporation
at a meeting held on February 19, 1997 and by the holders of at least a
majority of the shares of outstanding Common Stock of the corporation by
written consent dated , 1997, in accordance with the provisions of
Sections 242 and 245 of the Delaware General Corporation Law.
3. The text of the Restated Certificate of Incorporation is as follows:
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<PAGE>
1. The name of this corporation is ALLMERICA PROPERTY & CASUALTY
COMPANIES, INC.
2. The registered office of this corporation in the State of Delaware is
located at Corporation Trust Center, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The purpose of this corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
4. The total number of shares of stock that this corporation shall have
authority to issue is (i) 100,000,000 shares of common stock, of which (A)
60,000,000 shares shall be Common Stock, par value $1.00 per share ("Common
Stock"), and (B) 40,000,000 shares shall be Class B Common Stock, par value
$5.00 per share ("Class B Common Stock") and (ii) 20,000,000 shares of
preferred stock, par value $1.00 per share (the "Preferred Stock").
5. The board of directors is authorized to issue the Preferred Stock from
time to time in one or more classes or series thereof, each such class or
series to have such voting powers (if any), designations, preferences and
relative, participating, optional or other special rights, and such
qualifications, limitations or restrictions thereof, as shall be determined
by the board of directors and stated and expressed in a resolution thereof
providing for the issue of such Preferred Stock.
6. Subject to the powers, preferences and rights of any Preferred Stock,
including any class or series thereof, having any preference or priority
over, or rights superior to, the Common Stock and Class B Common Stock and
except as otherwise provided by law, the holders of the Common Stock and
Class B Common Stock shall have and possess all powers and voting and other
rights pertaining to the stock of this corporation and each share of Common
Stock and Class B Common Stock shall be entitled to one vote. Except as
otherwise provided by law which cannot be superseded by the provisions of
this Certificate of Incorporation, the holders of the shares of Common
Stock and the holders of the shares of Class B Common Stock shall vote
together as a single class on all matters to be voted on by stockholders of
the corporation. Except as required by law which cannot be superseded by
the provisions of this Certificate of Incorporation, all shares of Common
Stock and Class B Common Stock shall be identical and shall entitle the
holders thereof to the same powers, participating, optional, special or
other rights, preferences and privileges. The holders of Common Stock and
Class B Common Stock shall be entitled to receive such dividends as from
time to time may be declared by the board of directors.
7. Except as provided to the contrary in the provisions establishing a
class or series of stock, the amount of the authorized stock of this
corporation of any class or classes may be increased or decreased by the
affirmative vote of the holders of a majority of the stock of this
corporation entitled to vote.
8. The election of directors need not be by ballot unless the by-laws
shall so require.
9. In furtherance and not in limitation of the power conferred upon the
board of directors by law, the board of directors shall have power to make,
adopt, alter, amend and repeal from time to time by-laws of this
corporation, subject to the right of the stockholders entitled to vote with
respect thereto to alter and repeal by-laws made by the board of directors.
10. A director of this corporation shall not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent that exculpation from liability is not
permitted under the General Corporation Law of the State of Delaware as in
effect at the time such liability is determined. No amendment or repeal of
this paragraph 10 shall apply to or have any effect on the liability or
alleged liability of any director of the corporation for or with respect to
any acts or omissions of such director occurring prior to such amendment or
repeal.
11. This corporation shall, to the maximum extent permitted from time to
time under the law of the State of Delaware, indemnify and upon request
shall advance expenses to any person who is or was a party or is threatened
to be made a party to any threatened, pending or completed action, suit,
proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was or has
agreed to be a director or officer, partner, trustee, employee or agent of
any corporation, partnership, joint
A2-2
<PAGE>
venture, trust or other enterprise, including service with respect to
employee benefit plans, against expenses (including attorney's fees and
expenses), judgments, fines, penalties and amounts paid in settlement
incurred in connection with the investigation, preparation to defend or
defense of such action, suit, proceeding or claim; provided, however, that
the foregoing shall not require this corporation to indemnify or advance
expenses to any person in connection with any action, suit, proceeding,
claim or counterclaim initiated by or on behalf of such person. Such
indemnification shall not be exclusive of other indemnification rights
arising under any by-law, agreement, vote of directors or stockholders or
otherwise and shall insure to the benefit of the heirs and legal
representatives of such person. Any person seeking indemnification under
this paragraph 11 shall be deemed to have met the standard of conduct
required for such indemnification unless the contrary shall be established.
Any repeal or modification of the foregoing provisions of this paragraph 11
shall not adversely affect any right or protection of a director or officer
of this corporation with respect to any acts or omissions of such director
or officer occurring prior to such repeal or modification.
12. The books of this corporation may (subject to any statutory
requirements) be kept outside the State of Delaware as may be designated by
the board of directors or in the by-laws of this corporation.
13. The provisions of Section 203 of the Delaware Corporation Law shall
not apply to this corporation.
IN WITNESS WHEREOF, ALLMERICA PROPERTY & CASUALTY COMPANIES, INC. has caused
this Certificate to be signed on this day of , 1997 in its name and on its
behalf by its President and attested by its Secretary, pursuant to Section
103(a) of the General Corporation Law of the State of Delaware.
_____________________________________
John F. O'Brien
President
ATTEST:
_____________________________________
Richard Baker
Secretary
A2-3
<PAGE>
APPENDIX B
June , 1997
Board of Directors
Allmerica Financial Corporation
440 Lincoln Street
Worcester, Massachusetts 01653
Members of the Board:
Allmerica Financial Corporation (the "Company"), APY Acquisition, Inc., a
wholly owned subsidiary of the Company (the "Merger Sub"), and Allmerica
Property & Casualty Companies, Inc. (the "Subject Company") have entered into
an agreement and plan of merger dated as of February 19, 1997 (the "Merger
Agreement") pursuant to which (1) each share of the Subject Company's common
stock, par value $1.00 per share (each a "Share" and, collectively, the
"Shares"), held by SMA Financial Corp. (the "Exchange Shares") will be
exchanged (the "Exchange") for one share of the Subject Company's Class B
Common Stock, par value $5.00 per share; and (2) immediately thereafter, the
Merger Sub will be merged with and into the Subject Company in a transaction
(the "Merger") in which each remaining Share will be converted into the right
to receive, at the election of the holder thereof, either (a) 0.40 shares (the
"Option One Exchange Ratio") of the Company's common stock, par value $0.01
per share (the "Company Shares"), and $17.60 in cash (the "Option One Cash
Consideration"); provided, however, that (i) in the event that the average
daily closing sales price (the "Average Price") of the Company Shares as
reported on the New York Stock Exchange Composite Tape for the ten consecutive
trading days ending on the fifth trading day prior to the date on which the
Merger is consummated (the "Effective Time") is less than $36.00, the Option
One Cash Consideration will be an amount equal to (A) $32.00 less (B) the
Option One Exchange Ratio multiplied by the Average Price and (ii) in the
event that the Average Price is greater than $41.00, the Option One Cash
Consideration will be an amount equal to (A) $34.00 less (B) the Option One
Exchange Ratio multiplied by the Average Price; (b) 0.85714 Company Shares
(the "Option Two Exchange Ratio") (subject to proration, as more fully
described in the Merger Agreement); provided, however, that (i) in the event
that the Average Price is less than $36.00, the Option Two Exchange Ratio will
be equal to $32.00 divided by the Average Price and (ii) in the event that the
Average Price is greater than $41.00, the Option Two Exchange Ratio will be
equal to $34.00 divided by the Average Price; or (c) $33.00 in cash (the
"Option Three Cash Consideration") (subject to proration, as more fully
described in the Merger Agreement); provided, however, that (i) in the event
that the Average Price is less than $36.00, the Option Three Cash
Consideration will be $32.00 and (ii) in the event the Average Price is
greater than $41.00, the Option Three Cash Consideration will be $34.00. The
Merger Agreement provides that the maximum number of the Company Shares that
may be issued pursuant to the Merger will not exceed the product of (x) 0.40
and (y) the number of Shares outstanding immediately prior to the Effective
Time excluding (A) the Shares that will be cancelled in accordance with the
Merger Agreement, (B) the Shares with respect to which appraisal rights will
have been exercised, (C) the Exchange Shares and (D) any other Shares owned
directly or indirectly by the Company (the "Outstanding Shares"). The Merger
Agreement also provides that the aggregate amount of cash to be paid by the
Company pursuant to the Merger will not exceed the product of (x) the Option
One Cash Consideration and (y) the number of the Outstanding Shares. The
aggregate consideration payable by the Company pursuant to the elections
described above is hereinafter referred to as the "Consideration".
You have asked us whether, in our opinion, the Consideration is fair from a
financial point of view to the Company.
In arriving at the opinion set forth below, we have, among other things:
1. Reviewed the Company's Annual Reports, Forms 10-K and related financial
information for the four fiscal years ended December 31, 1996, the
Company's Form 10-Q and related unaudited financial information for the
quarterly period ended March 31, 1997 and the Company's press release
dated April 30, 1997 announcing results for the quarterly period ended
March 31, 1997 as well as the Company's statistical supplement
containing certain financial information for the quarter ended March
31, 1997;
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<PAGE>
2. Reviewed the Subject Company's Annual Reports for the three fiscal
years ended December 31, 1995, the Subject Company's Forms 10-K and
related financial information for the four fiscal years ended December
31, 1996, the Subject Company's Form 10-Q and related unaudited
financial information for the quarterly period ended March 31, 1997 and
the Subject Company's press release dated April 30, 1997 announcing
results for the quarterly period ended March 31, 1997 as well as the
Subject Company's statistical supplement containing certain financial
information for the quarter ended March 31, 1997;
3. Reviewed certain statutory financial statements of the insurance
subsidiaries of the Company and the Subject Company for the three
fiscal years ended December 31, 1995 and for the nine-month period
ended September 30, 1996;
4. Reviewed certain information, including financial forecasts for the
fiscal year ending December 31, 1997, relating to the business,
earnings, cash flow, assets and prospects of the Company and the
Subject Company, furnished to us by or on behalf of the Company and the
Subject Company;
5. Reviewed certain information relating to the cost savings expected to
result from the Merger provided to us by the Company and the Subject
Company and conducted discussions with members of senior management of
the Company and the Subject Company concerning their respective
businesses and prospects as well as such expected cost savings;
6. Analyzed the pro forma effect of the Merger on the Company;
7. Reviewed the historical market prices and trading activity of the
Company Shares and the Shares and compared them with those of certain
publicly traded companies which we deemed to be reasonably similar to
the Company and the Subject Company, respectively;
8. Compared the results of operations of the Company and the Subject
Company with those of certain companies which we deemed to be
reasonably similar to the Company and the Subject Company,
respectively;
9. Compared the proposed financial terms of the Merger with the financial
terms of certain other mergers and acquisitions which we deemed to be
relevant;
10. Reviewed the Merger Agreement;
11. Reviewed an opinion dated February 19, 1997 of Latham & Watkins,
counsel to the Company, with respect to certain tax consequences of the
Exchange;
12. Reviewed a certificate dated February 19, 1997 of Edward J. Parry III,
Vice President and Chief Financial Officer of the Company, with respect
to the financial impact of the Exchange on the Company and the Subject
Company; and
13. Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us by
or on behalf of the Company and the Subject Company or made publicly available
by the Company or the Subject Company, and we have not independently verified
such information or undertaken an independent valuation or appraisal of the
assets or liabilities of the Company or the Subject Company. With respect to
the 1997 financial forecasts furnished to us by or on behalf of the Company
and the Subject Company, we have assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgment of
the management of the Company or the Subject Company as to the expected future
financial performance of the Company or the Subject Company, as the case may
be. We have assumed that the information relating to the cost savings expected
to result from the Merger provided to us
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by the Company and the Subject Company has been reasonably prepared and
represents the best current estimates and judgments of the managements of the
Company and the Subject Company as to such cost savings. We are not expressing
any opinion as to the prices at which the Company Shares will actually trade
following the consummation of the Merger or the prices at which the Company
Shares or the Shares will trade between the announcement and the consummation
of the Merger. Our opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the
date hereof.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. We have
also, in the past, provided financial advisory and financing services to the
Company and the Subject Company and have received fees for the rendering of
such services. In addition, in the ordinary course of our business, we may
actively trade the securities of the Company and the Subject Company for our
own account and for the accounts of customers and, accordingly, may at any
time hold a long or short position in such securities.
This opinion is addressed to the Board of Directors of the Company and does
not constitute a recommendation to any shareholder.
On the basis of, and subject to the foregoing, we are of the opinion that
the Consideration is fair from a financial point of view to the Company.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
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APPENDIX C
February 19, 1997
Special Committee of the Board of Directors
Allmerica Property & Casualty Companies, Inc.
440 Lincoln Street
Worcester, MA 01653
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of common stock, par value
$1.00 per share ("Company Common Stock"), of Allmerica Property & Casualty
Companies, Inc. ("Allmerica P&C" or the "Company"), other than Allmerica
Financial Corporation ("AFC") and its subsidiaries, of the consideration to be
received by such stockholders (the "Non-AFC Stockholders") in the proposed
acquisition by AFC of the outstanding shares of Company Common Stock owned by
the Non-AFC Stockholders (the "Proposed Merger") pursuant to the Agreement and
Plan of Merger dated as of February 19, 1997 by and among AFC, APY
Acquisition, Inc. and the Company (the "Agreement").
As set forth more fully in the Agreement, APY Acquisition, Inc., a wholly-
owned subsidiary of AFC, will be merged with and into Allmerica P&C and each
issued and outstanding share of Company Common Stock owned by the Non-AFC
Stockholders will be converted into the right to receive 0.4 shares of common
stock, par value $0.01 per share ("AFC Common Stock"), of AFC and, subject to
adjustment in the event the average closing sales price of the AFC Common
Stock for the ten consecutive trading days ending on the fifth trading day
prior to the consummation of the Proposed Merger (the "Average Stock Price")
is less than $36.00 or greater than $41.00, $17.60 in cash (together, the
"Standard Consideration"). In addition, as set forth more fully in the
Agreement, each Non-AFC Stockholder shall have the right to elect to have all
of such holder's shares converted into (i) all cash at a conversion ratio of
$33.00 for each share of Company Common Stock or (ii) all AFC Common Stock at
an exchange ratio of .85714 of a share of AFC Common Stock for each share of
Company Common Stock, subject in the case of both (i) and (ii) to adjustment
in the event the Average Stock Price is less than $36.00 or greater than
$41.00, and subject in the case of both (i) and (ii) to proration and
substitution of cash or AFC Common Stock, as the case may be, so that the
average per share consideration received by all Non-AFC Stockholders is equal
to the Standard Consideration. As you are aware, we have acted as financial
advisor to the Special Committee of the Board of Directors of the Company in
connection with its review of the Proposed Merger. We also acted as co-manager
for AFC's initial public offering of common stock and a companion bond
offering in October 1995. In addition, in the ordinary course of our business,
we may actively trade the debt and equity securities of both the Company and
AFC for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
In connection with rendering our opinion, we have reviewed and analyzed
material bearing upon the financial and operating condition and prospects of
the Company and AFC including, among other things, the following: (i) the
Schedule 13D filed by AFC with respect to its ownership of Company Common
Stock, as amended through the date hereof; (ii) the Agreement; (iii) certain
publicly available information concerning the Company and AFC, including the
Annual Reports on Form 10-K for each of the Company and AFC for the years
ended December 31, 1995 and December 31, 1994 and the Quarterly Report on Form
10-Q for each of the Company and AFC for the quarter ended September 30, 1996;
(iv) the statistical supplements dated December 31, 1996 for each of the
Company and AFC; (v) certain internal information of the Company and AFC,
primarily financial in nature (including projections, and analyses prepared by
or on behalf of the Company's and AFC's managements), concerning the business,
assets, liabilities, operations and prospects of the Company and AFC that were
furnished to us by the Company and AFC for purposes of our analysis; (vi)
statutory financial information of the Company's and AFC's insurance
subsidiaries for the years ended December 31, 1995 and December 31, 1994 and
for the nine-month period ended September 30, 1996; (vii) certain publicly
available information concerning the trading of, and the trading market for,
the Company Common Stock and AFC Common Stock; (viii) certain publicly
available information with respect to certain publicly traded companies that
we believe to be comparable to the Company and AFC and the trading markets for
certain of such other
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companies' securities; and (ix) certain publicly available information
concerning the nature and terms of certain other acquisition transactions and
certain transactions involving the acquisition of minority interests by
controlling stockholders that we consider relevant to our inquiry. We have
also met with certain officers and employees of the Company and AFC to discuss
matters we believe relevant to our inquiry including the past and current
business operations, financial condition and prospects of the Company and AFC.
We have also considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that we deemed
relevant.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and
other information provided to us or publicly available and have neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information. With respect to financial projections and forecasts,
we have assumed that they were reasonably prepared and reflect the best
currently available estimates and judgment of the Company's and AFC's
managements as to the future financial performance of the Company and AFC and
we express no view with respect to such projections or forecasts or the
assumptions on which they are based. We have not made or obtained or assumed
any responsibility for making or obtaining any independent evaluations or
appraisals of any of the Company's or AFC's assets, properties or facilities,
nor have we been furnished with any such evaluations or appraisals.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following:
(i) the historical and current financial position and results of operations of
the Company and AFC; (ii) the business prospects of the Company and AFC; (iii)
the historical and current market for the Company Common Stock and the AFC
Common Stock and for the equity securities of certain other companies that we
believe to be comparable to the Company and AFC; and (iv) the nature and terms
of certain other acquisition transactions and acquisitions of minority
interests by controlling shareholders that we believe to be relevant. We have
taken into consideration the current ownership by AFC of approximately 60% of
the outstanding Company Common Stock and the fact that AFC has stated that it
does not intend to sell such stock. As a result of AFC's position, we have not
been requested to solicit third parties with respect to possible interest in
acquiring the Company or any of its businesses, and we have not attempted to
do so. We have also taken into account our assessment of general economic,
market and financial conditions as well as our experience in connection with
similar transactions and securities valuation generally. Our opinion
necessarily is based upon conditions as they exist and can be evaluated on the
date hereof and we assume no responsibility to update or revise our opinion
based upon circumstances or events occurring after the date hereof. Our
opinion as expressed below does not constitute an opinion or imply any
conclusion as to the likely trading range for the AFC Common Stock following
consummation of the Proposed Merger. Our opinion is for the sole benefit of
the Special Committee in its consideration of the Proposed Merger and is, in
any event, limited to the fairness, from a financial point of view, of the
consideration to be received by the Non-AFC Stockholders in the Proposed
Merger and does not address the Company's underlying business decision to
effect the Proposed Merger or constitute a recommendation of the Proposed
Merger to any holder of Company Common Stock or as to what election any such
holder should make with respect to the conversion of such holder's shares of
Company Common Stock.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that as of the date hereof, the consideration to be received by the
Non-AFC Stockholders in the Proposed Merger is fair, from a financial point of
view, to the Non-AFC Stockholders.
Very truly yours,
Salomon Brothers Inc
/s/ Salomon Brothers Inc
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APPENDIX D
SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW
APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to the provisions of subsection
(d) of this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section 228 of this Chapter shall be entitled
to an appraisal by the Court of Chancery of the fair value of his shares of
stock under the circumstances described in subsections (b) and (c) of this
Section. As used in this Section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a non-
stock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest of
a member of a non-stock corporation; and the words "depository receipt" mean a
receipt of other instrument issued by a depository representing an interest in
one or more shares, or fractions thereof, solely of stock of a corporation,
which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this
Chapter.
(1) Provided, however, that no appraisal rights under this Section shall
be available for the shares of any class or series of stock which stock, or
depositary receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsections (f) or (g) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this Section,
appraisal rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of
this Chapter to accept for such stock anything except: (i) shares of stock
of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof; (ii) shares of
stock of any other corporation, or depository receipts in respect thereof,
which at the effective date of the merger or consolidation will be either
listed on a national securities exchange or designated as a market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 stockholders;
(iii) cash in lieu of fractional shares or fractional depository receipts
described in the foregoing clauses (i) and (ii); or (iv) any combination of
the shares of stock, depository receipts and cash in lieu of fractional
shares, or fractional depository receipts described in the foregoing
clauses (i), (ii) and (iii) of this subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this Section, including those set forth in
subsections (d) and (e), shall apply as nearly as is practicable.
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(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this Section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this Section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or, within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addressed therein stated. Such notice shall also be given by one or more
publications at least one week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington,
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Delaware or such publication as the Court deems advisable. The forms of the
notices by mail and by publication shall be approved by the Court, and the
costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who
have become entitled to appraisal rights. The Court may require the
stockholders who have demanded an appraisal for their shares and who hold
stock represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this Section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and in the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
of the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this Section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this Section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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