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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
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CITIZENS CORPORATION
(NAME OF SUBJECT COMPANY)
CITIZENS CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS OF SECURITIES)
01-174533 10 9
(CUSIP NUMBER OF CLASS OF SECURITIES)
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JAMES A. COTTER, JR.
CHAIRMAN OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS
CITIZENS CORPORATION
440 LINCOLN STREET
WORCESTER, MASSACHUSETTS 01653
(508) 855-1000
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATIONS
ON BEHALF OF THE PERSON(S) FILING STATEMENT)
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WITH A COPY TO:
DANIEL S. STERNBERG, ESQ.
CLEARY, GOTTLIEB, STEEN & HAMILTON
ONE LIBERTY PLAZA
NEW YORK, NEW YORK 10006
(212) 225-2000
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company to which this Solicitation/Recommendation
Statement on Schedule 14D-9 (the "Schedule 14D-9") relates is Citizens
Corporation, a Delaware corporation (the "Company"), and the address of its
principal executive offices is 440 Lincoln Street, Worcester, Massachusetts
01653. The title of the class of equity securities to which this Schedule 14D-
9 relates is the Company's common stock, par value $0.01 per share (shares of
such common stock are referred to herein as the "Shares"). The Shares are
listed on the New York Stock Exchange under the symbol "CZC."
Since January 1996, the Company has repurchased an aggregate of 896,500
Shares at the times and in the amounts set forth in the Offer to Purchase
under the caption "Transactions Concerning the Shares." Such information from
the Offer to Purchase has been filed with the Commission as Exhibit 16 hereto
and is incorporated herein by reference.
ITEM 2. TENDER OFFER OF THE BIDDER.
This Schedule 14D-9 relates to a tender offer by Citizens Acquisition
Corporation, a Delaware corporation (the "Purchaser") and a wholly owned
subsidiary of Allmerica Financial Corporation, a Delaware corporation ("AFC"),
to purchase all of the outstanding Shares not owned by AFC or its subsidiaries
(the "Public Shares"). The offer is being made at a price of $33.25 per Share,
net to the seller in cash, without interest (the "Revised Offer Price"), upon
the terms and subject to the conditions set forth in the Offer to Purchase,
dated November 2, 1998, as amended by a press release issued on November 16,
1998 and a supplement dated November 17, 1998 (the "Offer to Purchase"), and
the related Letter of Transmittal (which together constitute the "Offer").
According to the Offer to Purchase, immediately prior to making the Offer,
AFC, through certain of its wholly owned subsidiaries, owned approximately 83%
of the outstanding Shares.
The Purchaser and AFC filed a Rule 13e-3 Transaction Statement and a related
Tender Offer Statement on Schedule 14D-1 on November 2, 1998. The Rule 13e-3
Transaction Statement is being adopted by the Company, and the Company is
being added as one of the filing parties thereto. According to the Offer to
Purchase, the Purchaser is making the Offer for the purpose of acquiring at
least that number of Shares (the "Minimum Number") which, together with the
Shares already owned by AFC or its subsidiaries, would constitute at least 90%
of the outstanding Shares. The consummation of the Offer is conditioned,
subject to waiver, on at least the Minimum Number of Shares being validly
tendered and not withdrawn in the Offer. Consummation of the Offer is not
conditioned on the approval or recommendation of the Offer by the Board of
Directors of the Company (the "Board of Directors") or the Special Committee
(as defined below).
The Offer to Purchase states that following acquisition of at least the
Minimum Number of Shares pursuant to the Offer, the Purchaser and AFC plan to
effect a "short-form merger" under Section 253 of the General Corporation Law
of the State of Delaware (the "DGCL"), pursuant to which the Purchaser will be
merged with and into the Company without any action by the Board of Directors
or its stockholders (the "Merger," and together with the Offer, the
"Transaction"). According to the Offer to Purchase, the Purchaser has approved
the consummation of the Merger subject to certain conditions, including the
acquisition of at least the Minimum Number of Shares. The Offer to Purchase
states that at the effective time of the Merger (the "Effective Time"), each
Share that is issued and outstanding immediately prior to the Effective Time
(other than Shares held in the treasury of the Company, by AFC or its
subsidiaries, or by stockholders who shall have demanded and perfected
appraisal rights under Section 262 of the DGCL) would be canceled and
converted automatically into the right to receive the Revised Offer Price in
cash, or any higher price paid per Share pursuant to the Offer, without
interest.
According to the Offer to Purchase, following consummation of the Merger,
the Purchaser would cease to exist and the Company would continue as the
surviving corporation and a wholly owned subsidiary of AFC. The address of the
principal executive offices of the Purchaser and AFC, as set forth in the
Offer to Purchase, is 440 Lincoln Street, Worcester, Massachusetts 01653.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and business address of the Company, which is the person filing
this Schedule 14D-9, are set forth in Item 1 above. Pursuant to resolutions of
the Board of Directors, dated October 27, 1998, a special committee of the
Board of Directors, consisting of James A. Cotter, Jr., Neal J. Curtin and
Dona Scott Laskey (the "Special Committee"), was established to review,
evaluate, and, if advisable, negotiate on behalf of the Company with respect
to, the Offer. The Board of Directors authorized the Special Committee to make
a
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recommendation with respect to the Offer and to file this Schedule 14D-9 on
behalf of the Company. The views and recommendation of the Special Committee
set forth herein are made on behalf of, and constitute the views and
recommendation of, the Company. The resolutions of the Board of Directors,
dated October 27, 1998, have been filed with the Securities and Exchange
Commission (the "Commission") as Exhibit 1 hereto.
(b) Except as described or incorporated by reference in this Item 3(b), to
the knowledge of the Special Committee, as of the date hereof, there are no
material contracts, agreements, arrangements or understandings, or any actual
or potential conflicts of interest, between the Company or its affiliates and
(1) the Company or its executive officers, directors or affiliates, or (2) the
Purchaser, AFC or their executive officers, directors or affiliates.
Agreements and Arrangements with Executive Officers and
Directors. Information with respect to certain contracts, agreements,
arrangements or understandings between the Company and its affiliates, on the
one hand, and certain of the Company's directors and executive officers, on
the other hand, is set forth in the Company's Proxy Statement, dated March 31,
1998, for its Annual Meeting of Stockholders held on May 12, 1998 (the "Proxy
Statement"). The Proxy Statement has been filed with the Commission as Exhibit
2 hereto, and pages one through nine thereof are incorporated herein by
reference.
AFC's Control of the Company. The Company was formed in 1993 by AFC as a
holding company for Citizens Insurance Company of America, a Michigan
insurance company. In March and April of 1993, the Company issued an aggregate
of 6,981,600 Shares in its initial public offering, as a result of which,
approximately 19% of the outstanding Shares became publicly held. Since 1991,
as described below, the management and operations of the Company and other
subsidiaries of AFC have been combined in part. According to the Offer to
Purchase, as a result of the repurchase of Shares by the Company, AFC, through
its wholly owned subsidiaries First Allmerica Financial Life Insurance Company
("FAFLIC"), SMA Financial Corp., Allmerica Property & Casualty, Inc. and the
Hanover Insurance Company, owned approximately 83% of the outstanding Shares
immediately prior to making the Offer.
Contracts, Agreements and Arrangements between the Company and AFC. As a
subsidiary of AFC, the Company has entered into various contracts, agreements
and arrangements with AFC and its subsidiaries. The Special Committee has been
informed by AFC that certain employees of the Company have assisted AFC and
the Purchaser with respect to the Transaction, primarily by providing
information concerning the Company for the preparation of the Offer to
Purchase in compliance with the requirements of the Securities and Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
According to the Offer to Purchase, no employee of the Company has, or will,
receive any additional or separate compensation for such services.
The Company is a party to a Consolidated Service Agreement among AFC and its
subsidiaries under which FAFLIC and other AFC subsidiaries provide management,
technological, administrative and other services, as well as office space, to
the Company and its subsidiaries. The Company and its subsidiaries were
charged approximately $20.5 million, $13.3 million and $9.7 million by certain
affiliates of AFC for services rendered under this agreement during 1997, 1996
and 1995, respectively. These charges amounted to approximately $30.5 million
and $8.4 million for the six months ended June 30, 1998 and 1997,
respectively. Prior to 1998, services were charged to the Company under this
agreement based on either (1) the low end of market prices when reasonably
available, or (2) the "full cost" of providing those services plus 10%. "Full
cost" is defined as direct chargeable costs plus assigned overhead costs, as
determined in accordance with the agreement. The 10% surcharge was intended to
cover other direct and indirect costs that were not specifically identifiable
and were not cost-effective to measure. Since January 1, 1998, services
provided under the Consolidated Service Agreement have been charged to the
Company based on "full cost," without surcharge. The Board of Directors has
approved the Consolidated Service Agreement and periodically reviews the
dollar amount of charges from other subsidiaries of AFC. The Consolidated
Service Agreement has been filed with the Commission as Exhibit 14 hereto.
Beginning in 1996, AFC and the Company's computer data centers were
consolidated under FAFLIC. This resulted in the increase in total intercompany
charges to the Company from 1995 to 1996. Beginning in 1997,
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certain other functions, such as accounting, internal audit, tax management,
cash management, human resource management and facilities management, which
had been performed independently by the Company, were consolidated and managed
by AFC. This resulted in the increase in total intercompany charges to the
Company from 1996 to 1997.
On January 1, 1998, all employees of the Company became employees of FAFLIC
under a single employer arrangement for AFC and its subsidiaries. In
conjunction with this transition, AFC and the Company consolidated certain
additional functions which had been performed independently by the Company,
including technology, claims, customer service, premium billing, training,
printing and mail. Accordingly, these services are now charged to the Company
by FAFLIC in accordance with the Consolidated Service Agreement, resulting in
an increase in total charges from 1997 to 1998. However, under the single
employment arrangement, the costs related to the majority of former Company
employees are absorbed directly by the Company, and are not reflected in the
intercompany charges summarized above.
Additional Interests of Certain Directors and Executive Officers of the
Company. Certain members of the Board of Directors and certain senior
executive officers of the Company have additional interests which may present
them with actual or potential conflicts of interest in connection with the
Transaction. Four of the seven members of the Board of Directors, Messrs. May,
McAuliffe, O'Brien and Simonsen, are currently members of the Board of
Directors of AFC or are officers of AFC, and certain of the Company's senior
executive officers are also officers of AFC. Mr. O'Brien, Chairman of the
Board of Directors, President and Chief Executive Officer of the Company, is
Chief Executive Officer, President and a director of AFC. Such persons are
expected to retain their respective positions at AFC following consummation of
the Merger. For more information see pages one through four of the Proxy
Statement, which are incorporated herein by reference, and Appendix A to the
Offer to Purchase. The members of the Special Committee have no affiliation
with AFC, except as directors of the Company.
In addition, certain of the Company's directors and senior executive
officers own Shares and/or shares of AFC common stock. Information regarding
share ownership is set forth on page five of the Proxy Statement and is
incorporated herein by reference.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(A)(1) THE RECOMMENDATION OF THE SPECIAL COMMITTEE.
THE SPECIAL COMMITTEE ON BEHALF OF THE COMPANY HAS UNANIMOUSLY DETERMINED
THAT THE OFFER IS FAIR TO AND IN THE BEST INTERESTS OF THE HOLDERS OF PUBLIC
SHARES. ACCORDINGLY, THE SPECIAL COMMITTEE ON BEHALF OF THE COMPANY
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF PUBLIC SHARES ACCEPT THE OFFER AND
TENDER THEIR SHARES.
(A)(2) BACKGROUND OF THE RECOMMENDATION.
AFC issued a press release regarding its intention to commence the Offer at
the original offer price of $29.00 per Share (the "Initial Offer Price") on
October 27, 1998.
On October 27, 1998, at a regularly scheduled meeting of the Board of
Directors, executive officers of AFC advised the Board of Directors that AFC
intended to commence the Offer. In contemplation of the Offer, the Board of
Directors established the Special Committee, consisting of independent
directors James A. Cotter, Jr., Neal J. Curtin and Dona Scott Laskey, to
review, evaluate, and, if advisable, negotiate on behalf of the Company with
respect to, the Offer. The Board of Directors also authorized the Special
Committee to make a recommendation with respect to the Offer and to file this
Schedule 14D-9 on behalf of the Company. Ms. Laskey and Messrs. Cotter and
Curtin are the only members of the Board of Directors who have not served as
officers, directors or employees of AFC or any of its subsidiaries other than
the Company.
Following the October 27, 1998 meeting of the Board of Directors, the
Special Committee convened and elected Mr. Cotter as its Chairman. After
interviewing a number of law firms over several days, the Special Committee
unanimously decided to retain Cleary, Gottlieb, Steen & Hamilton as the legal
advisor to the Special Committee ("Cleary Gottlieb").
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On November 2, 1998, AFC and Purchaser commenced the Offer at the Initial
Offer Price.
The Special Committee met on November 2, 1998 to discuss their duties under
applicable law with Cleary Gottlieb and to select an investment banking firm
to serve as financial advisor to the Special Committee. After interviewing
four investment banking firms, the Special Committee unanimously decided to
retain Merrill Lynch & Co. ("Merrill Lynch") to provide financial advice to
the Special Committee in connection with the Offer and render its opinion (the
"Opinion") as to whether or not the consideration to be received by the
holders of Public Shares (the "Public Shareholders") in the Offer was adequate
or fair, as applicable, to the Public Shareholders from a financial point of
view. See Item 5 below for a description of the terms of Merrill Lynch's
engagement. During the week of November 2, 1998, Merrill Lynch conducted a due
diligence review with respect to the Company and the Offer. For further
information regarding Merrill Lynch's due diligence review, see Item 4(b)
below under the caption "Opinion of Financial Advisor to the Special
Committee."
On November 3, 1998, the Special Committee issued a press release urging
Public Shareholders to take no action with respect to the Offer. The press
release has been filed with the Commission as Exhibit 6 hereto.
On November 7, 1998, the Special Committee held a meeting attended by
representatives of Merrill Lynch and Cleary Gottlieb. At the meeting,
representatives of Merrill Lynch summarized the results of their due diligence
review and presented certain preliminary valuation and financial analyses they
had performed with respect to the Company and the Shares. The Merrill Lynch
representatives indicated that although they were not yet prepared to render a
formal opinion regarding the Initial Offer Price, and additional analyses
would be required before they were in a position to do so, they had reached a
preliminary conclusion, based on the valuation and financial analyses
performed to date, that the Initial Offer Price was inadequate from a
financial point of view. Representatives of Cleary Gottlieb then discussed the
duties of the Special Committee under applicable law in light of Merrill
Lynch's preliminary conclusion. Following further discussion of these matters,
the Special Committee came to a preliminary conclusion that the Initial Offer
Price was not fair to or in the best interests of the Public Shareholders and
requested that representatives of Merrill Lynch communicate the preliminary
conclusions of Merrill Lynch and the Special Committee to representatives of
AFC and Goldman, Sachs & Co. ("Goldman Sachs"), the financial advisor to AFC.
The Special Committee also requested that Merrill Lynch, on behalf of the
Special Committee, request that AFC consider increasing the offer price and
amending the Offer so that AFC's ability to consummate the Offer would be
conditioned on the valid tender of a majority of the Public Shares (the
"Majority of Minority Condition").
On November 8, 1998, representatives of Merrill Lynch contacted a
representative of AFC. The AFC representative indicated that AFC was unlikely
to amend the Offer to include the Majority of Minority Condition.
Representatives of Merrill Lynch and AFC agreed to exchange certain of their
valuation analyses and supporting data and to hold additional discussions in
the coming days.
On November 9, November 10, and November 11, 1998, representatives of
Merrill Lynch and Goldman Sachs exchanged information and discussed the
methodologies and assumptions underlying certain of their valuation and
financial analyses. During these conversations no specific revised offer price
or range of revised offer prices were proposed. Representatives of Merrill
Lynch reviewed the results of these conversations with the members of the
Special Committee and representatives of Cleary Gottlieb in several
conversations on those dates.
On November 11, 1998, the Special Committee held a meeting attended by
representatives of Merrill Lynch and Cleary Gottlieb. Representatives of
Merrill Lynch reviewed certain further preliminary valuation and financial
analyses they had performed taking into account certain information received
during conversations with AFC and Goldman Sachs. The Special Committee
requested that representatives of Merrill Lynch continue their discussions
with AFC and Goldman Sachs in order to communicate the results of these
additional analyses and to reiterate the request that AFC propose a higher
offer price.
On November 12, 1998, the Special Committee held a meeting attended by
representatives of Merrill Lynch and Cleary Gottlieb. Representatives of
Merrill Lynch stated that they had been informed by representatives of
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Goldman Sachs on behalf of AFC that "AFC is considering increasing its offer
to $30.25 per share subject to acceptance by the Special Committee as to the
fairness of the price offered to the unaffiliated stockholders." The Merrill
Lynch representatives indicated to the Special Committee that although they
were not yet prepared to render a formal opinion regarding a $30.25 price per
Public Share, it was their preliminary conclusion, based on the valuation and
financial analyses performed to date, that such a price, if offered, would be
inadequate from a financial point of view. After discussion, the Special
Committee concluded that a price of $30.25 per Public Share, if offered, would
not be fair to the Public Shareholders and asked that Merrill Lynch
communicate that view to Goldman Sachs.
On November 13, 1998, members of the Special Committee participated in a
teleconference with certain Public Shareholders who previously had requested
an opportunity to state their views regarding the Offer to the Special
Committee. In the course of the teleconference, several Public Shareholders
made statements to the effect that they did not believe that the Initial Offer
Price was fair to the Public Shareholders. The members of the Special
Committee did not make any statement during the teleconference.
On November 13, 1998, representatives of Merrill Lynch informed
representatives of Goldman Sachs that the Special Committee had concluded
that, if offered, a price of $30.25 per Public Share would not be fair to the
Public Shareholders.
On November 14, 1998, the Special Committee held a meeting attended by
representatives of Merrill Lynch and Cleary Gottlieb. Representatives of
Merrill Lynch stated that they had been informed by representatives of Goldman
Sachs on behalf of AFC that AFC may be prepared to increase the offer price to
$32.00 if the Special Committee would conclude that the Offer at such price
was fair to the Public Shareholders. The Merrill Lynch representatives
indicated to the Special Committee that although they were not yet prepared to
render a formal opinion regarding a $32.00 price, it was their preliminary
conclusion, based on the valuation and financial analyses performed to date,
that such a price, if offered, would be inadequate from a financial point of
view. After discussion, the Special Committee concluded that a price of $32.00
per Public Share, if offered, would be inadequate and asked that Merrill Lynch
communicate that view to Goldman Sachs.
Later on November 14, 1998, representatives of Merrill Lynch communicated
the views of the Special Committee and Merrill Lynch regarding a possible
increase in the offer price to $32.00 to representatives of Goldman Sachs.
During the course of the day on November 15 and continuing during November
16, 1998, representatives of Merrill Lynch and Cleary Gottlieb continued to
discuss the terms of the Offer with representatives of Goldman Sachs and Ropes
& Gray, counsel to AFC, and to review the substance of those discussions with
the members of the Special Committee. Such discussions resulted, on November
16, 1998, in an agreement between the Special Committee and AFC that AFC would
amend the Offer to increase the price to be paid in the Offer to $33.25 per
Public Share and the Special Committee would recommend acceptance of the Offer
as so amended to the Public Shareholders. In connection with the Special
Committee arriving at its agreement with AFC, at a meeting of the Special
Committee held on November 16, 1998 attended by representatives of Merrill
Lynch and Cleary Gottlieb, Merrill Lynch presented its financial and valuation
analyses, which had been updated to take into account the completion of its
due diligence investigation of the Company and recent market conditions, and
then rendered its oral opinion to the effect that the Revised Offer Price of
$33.25 per Public Share was fair, from a financial point of view, to the
Public Shareholders.
On November 16, 1998, a tentative settlement was reached in the litigation
brought with respect to the Offer on the assumption that the offer price would
be increased to $33.25. See Item 8 below for more information regarding the
litigation.
On November 16, 1998, AFC and the Company issued a joint press release
announcing the amendment of the Offer and the Special Committee's agreement to
recommend the Offer as so amended to the Public Shareholders. The press
release has been filed with the Commission as Exhibit 7 hereto.
Except for the recommendation made by the Special Committee on behalf of the
Company, no person or entity, including the legal or financial advisors to the
Special Committee, is making any recommendation to the Public Shareholders in
this Schedule 14D-9 as to whether they should tender Shares in the Offer.
Although the Special Committee has made a recommendation on behalf of the
Company, the adequacy, fairness and
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acceptability of the Offer is for each Public Shareholder to decide in light
of such Public Shareholder's particular circumstances. Consequently, the
Special Committee and the Company strongly urge each Public Shareholder to
consider all available information.
(B) REASONS FOR RECOMMENDATION OF THE SPECIAL COMMITTEE; OPINION OF MERRILL
LYNCH.
Reasons for Recommendation of the Special Committee.
AS NOTED ABOVE, THE SPECIAL COMMITTEE ON BEHALF OF THE COMPANY HAS
UNANIMOUSLY DETERMINED THAT THE OFFER IS FAIR TO AND IN THE BEST INTERESTS OF
THE HOLDERS OF PUBLIC SHARES. ACCORDINGLY, THE SPECIAL COMMITTEE ON BEHALF OF
THE COMPANY UNANIMOUSLY RECOMMENDS THAT HOLDERS OF PUBLIC SHARES ACCEPT THE
OFFER AND TENDER THEIR SHARES.
The primary factor considered by the Special Committee in making its
recommendation on behalf of the Company was the Opinion of Merrill Lynch, the
independent financial advisor to the Special Committee, to the effect that, as
of the date of such Opinion, the Revised Offer Price was fair to the Public
Shareholders from a financial point of view. Public Shareholders are urged to
read the Opinion in its entirety (the Opinion is attached as Annex A to this
Schedule 14D-9). In connection with the Opinion, the Special Committee
carefully considered the supporting financial and valuation analyses presented
by Merrill Lynch at the meeting of the Special Committee held on November 16,
1998. See information in this Item 4(b) under the caption "Opinion of
Financial Advisor to the Special Committee" for a description of the Opinion
and certain of the material analyses presented by Merrill Lynch. The written
materials distributed by Merrill Lynch in connection with the November 16,
1998 meeting of the Special Committee have been filed with the Commission as
Exhibit 5 hereto.
In determining that the Offer is fair to, and in the best interests of, the
Public Shareholders, and in making its recommendation on behalf of the
Company, the Special Committee also considered the following material factors
which taken as a whole supported the determination and recommendation:
(i) The Special Committee noted that the Revised Offer Price represented
(A) a premium of 20.6% to the closing price of the Shares on October 26,
1998, the last trading day prior to the announcement of the Offer, (B) a
premium of 9.5% to the closing price of the Shares on November 13, 1998,
the last trading day prior to the agreement of the Special Committee and
AFC with regard to the Revised Offer Price, (C) a premium of 11.5% to the
average closing price over the one-year period ended October 26, 1998 and
(D) a premium of 22.4% to the average closing price of the Shares over the
thirty-day period ended October 26, 1998. The Special Committee also noted
that the Revised Offer Price implied a value of the Company of 1.27x its
GAAP book value per share at September 30, 1998. The Special Committee also
noted that although the high closing sales prices of the Shares for the
first and second quarters of 1998 were $34.00 and $34.625, respectively,
and exceeded the Revised Offer Price, the average closing sales prices of
the Shares for the first and second quarters of 1998 were $30.33 and
$32.47, respectively, and were below the Revised Offer Price.
(ii) The Special Committee considered the fact that, in making the Offer,
AFC expressly stated its unwillingness to sell its Shares to a third-party,
thereby effectively precluding a sale of control of the Company.
(iii) The Special Committee considered the trading history of the Shares,
with particular emphasis on (A) the historical under-performance of the
Shares relative to the stock market as a whole, and (B) the relatively low
trading volume in the Shares.
(iv) The Special Committee considered the history of negotiations between
the Special Committee and AFC with respect to the Offer that resulted in an
increase in the offer price from $29.00 to $33.25 per Public Share, and the
Special Committee's conclusion, based on such negotiations, that AFC would
not pay more than $33.25 per Public Share.
(v) The Special Committee considered (A) information with respect to the
financial condition, results of operations, business and prospects of the
Company, (B) recent changes in the property and casualty
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industry generally and their impact on the Company and (C) the historical
relationship between the Company and AFC, including the services provided
to the Company by AFC and the fees charged for such services.
(vi) The Special Committee considered the terms of the Offer and the
structure of the Transaction, which provide for a cash tender offer for all
outstanding Shares held by the Public Shareholders to be followed, if
certain conditions are satisfied, by a merger for the same consideration
(thereby enabling the Public Shareholders to quickly obtain the Revised
Offer Price in exchange for their Shares). The Special Committee also
considered the fact that consummation of the Offer is not conditioned on
the approval or recommendation of the Offer by the Board of Directors or
the Special Committee.
(vii) The Special Committee noted that the primary detriment to Public
Shareholders in connection with the Transaction is that the Public
Shareholders will no longer have the opportunity to participate in future
growth of the Company. However, in this regard the Special Committee also
noted that in the Transaction the Public Shareholders would be receiving
the Revised Offer Price in cash which, as noted above, would provide the
Public Shareholders a substantial premium to current market prices for the
Shares and was fair to the Public Shareholders from a financial point of
view in the judgment of Merrill Lynch. In addition, the Special Committee
noted that the Public Shareholders will no longer be exposed to the risk
that the Shares may decline in value.
(viii) The Special Committee considered the fact that, in the event the
Offer is terminated without any Shares being purchased it is uncertain
whether the Public Shareholders will have the opportunity to sell their
Shares, in the open market or otherwise, for prices equal to or in excess
of the Revised Offer Price.
(ix) The Special Committee considered the fact that a tentative
settlement had been reached in the litigation brought with respect to the
Offer on the assumption that the offer price would be increased to $33.25.
See Item 8 below for more information regarding the litigation.
(x) The Special Committee considered the value to AFC of completing the
Transaction, including the flexibility it would provide AFC to more
effectively manage its property and casualty business.
In considering the various valuation and financial analyses performed by
Merrill Lynch, the Special Committee noted that certain analyses performed by
Merrill Lynch resulted in valuations less than the Revised Offer Price and
certain analyses resulted in valuations greater than the Revised Offer Price.
In this regard, the Special Committee considered the fact that Merrill Lynch
had concluded based on its complete analysis, that the Revised Offer Price was
fair to the Public Shareholders from a financial point of view. In addition,
the Special Committee evaluated the analyses presented by Merrill Lynch as a
whole and considered such analyses in light of a variety of factors. For
instance, in connection with Merrill Lynch's analysis of selected acquisition
transactions and minority-purchase transactions which led to certain
valuations greater than the Revised Offer Price, the Special Committee noted
that no transaction considered by Merrill Lynch was identical to the
Transaction, the transactions considered by Merrill Lynch occurred at
different times and in different market environments, and that no entity
involved in those transactions was identical to the Company. The Special
Committee also noted that in several other analyses, including its
recapitalization analysis, discounted cash flow analysis and comparable public
company analysis, Merrill Lynch computed certain valuations that were less
than the Revised Offer Price or valuation ranges which included the Revised
Offer Price. Based on these considerations taken together, the Special
Committee concluded that the Revised Offer Price was fair to the Public
Shareholders from a financial point of view.
The members of the Special Committee evaluated the aforementioned factors in
light of their knowledge of the business, financial condition and prospects of
the Company, and the state and prospects of the property and casualty
insurance sector generally. Other than the Opinion, which was the primary
factor considered, in light of the number and variety of other factors that
the Special Committee considered in connection with their evaluation of the
Offer, the Special Committee did not find it practicable to quantify or
otherwise assign relative weights to any of such other factors, and
accordingly, the Special Committee did not do so. Furthermore, while the
Special Committee considered the positive and negative implications of the
foregoing factors with respect to the Offer, on balance, the Special Committee
concluded that the factors taken as a whole supported a recommendation that
the Public Shareholders accept the Offer and tender their Shares. The Special
Committee considered the going concern value of the Company based on the
factors set forth above and the analyses presented by Merrill Lynch. In
particular, in this respect, the Special Committee considered Merrill Lynch's
discounted cash flow analysis which was based on management's forecasts for
the Company through 2004.
7
<PAGE>
The Special Committee concluded that the per Share liquidation value of the
Company was less than the Revised Offer Price, and in any event did not
believe it was relevant to consider the liquidation value of the Company in
its evaluation of the Offer because the Special Committee believed that AFC
will maintain the Company as a going concern regardless of whether the Offer
is completed.
The Special Committee noted that AFC had declined to amend the Offer to
include the Majority of the Minority condition. In this regard, the Special
Committee considered that: (i) the Special Committee consisted of the
Company's three independent directors (unaffiliated with AFC except as
directors of the Company) appointed to represent the interests of the Public
Shareholders; (ii) the Special Committee retained and was advised by
independent legal counsel; (iii) the Special Committee retained and was
advised by an independent financial advisor, who assisted the Special
Committee in evaluating and negotiating the terms of the Offer and rendered a
fairness opinion with respect to the Offer; and (iv) the negotiations between
the Special Committee and AFC resulted in an increase in the offer price to
the Revised Offer Price. In light of these considerations, the Special
Committee did not believe it necessary to retain any other independent
representatives to act on behalf of the Public Shareholders.
Opinion of Financial Advisor to Special Committee.
On November 16, 1998, Merrill Lynch delivered its oral Opinion to the
Special Committee, which was subsequently confirmed in writing, that as of
that date and on the basis of and subject to the matters set forth therein,
the Revised Offer Price was fair to the Public Shareholders from a financial
point of view.
THE FULL TEXT OF THE WRITTEN OPINION, WHICH SETS FORTH ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH
THE OPINION, IS ATTACHED HERETO AS APPENDIX A TO THIS SCHEDULE 14D-9 AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF THE COMPANY ARE URGED TO,
AND SHOULD, READ THE OPINION IN ITS ENTIRETY.
In arriving at its Opinion, Merrill Lynch, among other things: (1) reviewed
the Offer to Purchase, the related Letter of Transmittal, the related Tender
Offer Statement on Schedule 14D-1 filed by AFC and Purchaser with the
Commission, the Schedule 14D-9, dated November 16, 1998 and filed on such date
by the Company with the Commission, and a draft, dated November 16, 1998, of
Amendment No. 1 to the Schedule 14D-9; (2) reviewed certain publicly available
business and financial information relating to the Company and AFC which it
deemed to be relevant; (3) reviewed certain information, including financial
forecasts and projections, relating to the business, earnings, cash flow,
assets, liabilities and prospects of the Company, furnished to it by the
Company and AFC; (4) conducted discussions with members of management and
representatives of the Company and AFC concerning the matters described in
clauses (2) and (3) above; (5) reviewed the historical market prices, trading
activity and valuation multiples for the Public Shares and the common shares
of AFC and compared them with those of certain publicly traded companies which
it deemed to be relevant; (6) compared the proposed financial terms of the
Offer with the financial terms of certain other transactions which it deemed
to be relevant; (7) participated in certain discussions and negotiations among
representatives of the Company and AFC and their financial and legal advisors;
(8) reviewed the potential pro forma impact of the Offer on AFC; and (9)
reviewed and performed such other financial studies, analyses and
investigations, and took into account such other matters as it deemed
necessary, including its assessment of general economic, market, financial and
other conditions.
Merrill Lynch assumed and relied upon the accuracy and completeness of all
of the financial and other information supplied or otherwise made available to
it by the Company and AFC, discussed with or reviewed by or for it, or
publicly available, and has assumed such accuracy and completeness for
purposes of rendering its Opinion. In addition, Merrill Lynch has not made or
assumed any responsibility for independently verifying such information and it
has not undertaken or assumed any responsibility for making an independent
evaluation or appraisal of the assets and liabilities of the Company or any of
its subsidiaries nor has it been furnished with any such evaluation or
appraisal. With respect to the financial forecasts and projections furnished
to it or discussed with it by the Company and AFC, Merrill Lynch has assumed
that they have been reasonably prepared and reflect
8
<PAGE>
the best currently available estimates and judgments of the respective
managements of the Company and AFC as to the future operating and financial
performance of the Company.
The Opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and information made available to Merrill Lynch,
as of the date of the Opinion. The Opinion was provided for the information
and assistance of the Special Committee in connection with its consideration
of the transaction contemplated by the Offer and such Opinion does not
constitute a recommendation as to whether any Public Shareholders should
tender its shares in such transaction.
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 at issue, 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. In arriving at
its Opinion, Merrill Lynch conducted various methods of financial analysis and
calculated implied per share values for the Public Shares which were both
higher and lower than the Revised Offer Price. No individual valuation
calculation was determinative as to whether the Revised Offer Price was fair
to the Public Shareholders from a financial point of view, although all such
calculations were considered by Merrill Lynch. Merrill Lynch believes that its
analysis must be considered as a whole and that selecting portions of its
analysis, without considering its analysis in full, would create an incomplete
view of the process underlying its Opinion. No limitations were imposed by the
Board of Directors or the Special Committee on the investigations made or
procedures followed by Merrill Lynch.
The following is a summary of the material financial analyses used by
Merrill Lynch in connection with providing the Opinion to the Special
Committee. The following analyses were presented to the Special Committee on a
preliminary basis and subject to the completion of due diligence at various
times from November 7, 1998 through November 16, 1998. During that period, the
analyses were updated only to reflect current market data and Merrill Lynch's
due diligence investigation. As summarized below, and as set forth in Merrill
Lynch's written presentation which was filed with the Commission as Exhibit 5
hereto and considered by the Special Committee in its determination concerning
the Transaction, the analyses reflect market data as of November 13, 1998, the
latest market data available to Merrill Lynch and the Special Committee prior
to the time the Special Committee made its recommendation. All implied per
share values referred to below reflect the value of the Company as a whole,
including all of its divisions.
(i) Historical Stock Trading Analysis. Merrill Lynch reviewed the
historical trading prices and volumes for the Public Shares both separately
and in comparison to the S&P 500 index, the S & P Property and Casualty
index and to AFC and the Public Comparables (as defined below) over various
time periods ranging from March 19, 1993 to November 13, 1998. In addition,
Merrill Lynch analyzed the consideration to be received by the Public
Shareholders pursuant to the Offer in relation to the market price of the
Public Shares both before and after the announcement of the Offer. Such
analysis indicated that the price per share to be paid pursuant to the
Offer represents a premium of 9.5% to the closing price of $30.38 on
November 13, 1998, a premium of 20.6% to the closing price of $27.56 on
October 26, 1998 (the last trading day prior to the announcement of the
Offer) and a premium of 22.4% to the average closing price of $27.16 for
the thirty-day period ended October 26, 1998. In addition, the Offer price
represents a premium of 11.5% to the average closing price of $29.82 for
the one-year period ended October 26, 1998 and a 4.8% discount to the 52-
week high of $34.94.
(ii) Recapitalization Analysis. Merrill Lynch analyzed the financial and
operating leverage under which the Company and its insurance subsidiaries
currently operate. By analyzing the Company's statutory surplus in relation
to its net premiums written and loss and LAE reserves and assuming
operating constraints akin to property and casualty companies of a similar
nature, Merrill Lynch determined that a certain level of capital existed
that could be removed without changing the Company's financial strength and
competitive position from a financial point of view. The Company's
financial leverage was also analyzed by reference to its debt to total
capitalization ratio, which currently stands at 0%, and it was determined
that the Company had the financial flexibility to add leverage to its
balance sheet. The impact on earnings and book value per share was then
calculated assuming that the excess capital and the proceeds from the
incurrence of debt
9
<PAGE>
would be used to either (A) repurchase shares of the Company's common stock
or (B) pay a special one-time dividend to shareholders. The application of
multiples ranging from 11.5x to 13.5x to 1999 management estimated earnings
per share, as adjusted, implied values, including the financial impact of
amounts distributed pursuant to the assumed repurchase or special dividend,
for the Public Shares of $31.31 to $34.99 per share.
(iii) Discounted Cash Flow Analysis. Using a discounted cash flow
methodology, Merrill Lynch calculated a range of implied values for the
Public Shares based on (A) discount rates ranging from 9.5% to 11.5% and
(B) 2004 estimated net income terminal multiples ranging from 11.5x to
13.5x. The discounted cash flow analysis was performed using the maximum
dividends permitted under Michigan law without regulatory approval
("Maximum Dividend"). The Maximum Dividend in each year was calculated as
follows: the greater of (i) 10% of the previous year's surplus and (ii) the
previous year's net income (based on Michigan law) excluding realized
gains; subject to a maximum ratio of net premiums written to surplus of
1.8x. Certain assumptions used in this analysis, including but not limited
to, premium growth, loss and LAE ratios, expense ratios, dividend ratios,
reserve development, investment yields and tax-exempt investments/total
invested assets, were estimated using the Company's management projections
and historical data. This discounted cash flow analysis indicated a
reference range of implied values for the Public Shares of between $27.74
and $33.56 per share. In addition, Merrill Lynch performed the discounted
cash flow analysis assuming the payment of an extraordinary dividend which
increased the ratio of net premiums written to surplus to 1.7x. Applying
this assumption in the discounted cash flow analysis resulted in a range of
implied values for the Public Shares of $31.28 to $36.40 per share.
(iv) Comparable Public Company Analysis. Using publicly available
information (including estimates by First Call Corporation ("First Call")),
Merrill Lynch compared certain financial information and multiples for the
Company with corresponding financial information and multiples for a group
of publicly traded property and casualty insurance companies that Merrill
Lynch deemed similar to the Company (the "Public Comparables"). The
multiples for the Company were calculated using a price of $30.38 per
share, the closing price of the Public Shares on the New York Stock
Exchange on November 13, 1998. The multiples for the Company were based on
First Call earnings estimates and earnings estimates provided by the
Company's management. The multiples for each of the Public Comparables were
based on the most recent publicly available information. For each of the
Public Comparables, Merrill Lynch compared (1) the closing price on
November 13, 1998 of the common stock of each of the Public Comparables as
a multiple of their respective estimated earnings per share ("EPS") for the
calendar year 1998 (the "1998 P/E Multiple") and estimated EPS for the
calendar year 1999 (the "1999 P/E Multiple") and (2) the price of each of
the Public Comparables as a multiple of their respective book values per
share as of September 30, 1998 (the "Price/Book Multiple"). Merrill Lynch
calculated (1) a range of 1998 P/E Multiples for the Public Comparables of
11.3x to 28.5x, with a mean of 14.9x and a median of 16.1x, (2) a range of
1999 P/E Multiples for the Public Comparables of 10.1x to 22.1x, with a
mean of 12.5x and a median of 13.2x, and (3) a range of Price/Book
Multiples for the Public Comparables of 1.00x to 2.88x, with a mean of
1.64x and a median of 1.25x.
By applying the mean and median of the 1998 P/E Multiples to 1998
management earnings estimates, Merrill Lynch calculated implied values for
the Public Shares of $29.37 and $31.84 per share, respectively. By applying
the mean and median of the 1999 P/E Multiples to 1999 management earnings
estimates, Merrill Lynch calculated implied values for the Public Shares of
$29.01 and $30.74 per share, respectively. By applying the mean and median
of the 1999 P/E Multiples to 1999 management earnings estimates, as
adjusted, Merrill Lynch calculated implied values for the Public Shares of
$33.11 and $34.48 per share, respectively. By applying the mean and median
of the Price/Book Multiples to book value per share of the Company as of
September 30, 1998, Merrill Lynch calculated implied values for the Public
Shares of $42.94 and $32.75 per share, respectively. By applying the mean
and median of the Price/Book Multiples to book value per share of the
Company as of September 30, 1998, as adjusted, Merrill Lynch calculated
implied values for the Public Shares of $36.40 and $30.17 per share,
respectively.
(v) Analysis of Other Minority-Purchase Transactions. Merrill Lynch
researched and identified other comparable transactions involving purchases
by controlling shareholders of outstanding minority interests.
10
<PAGE>
Merrill Lynch analyzed (1) the percentage change of the final offer price
from the initial offer price, which indicated a mean of 6.9% and median of
7.0%, (2) the percentage premium represented by the applicable final offer
price as compared to the closing price of the target's stock on the day
prior to the announcement of the initial offer (the "One Day Prior
Premium"), which indicated a mean of 24.6% and a median of 22.8%, and (3)
the percentage premium represented by the applicable final offer price as
compared to the closing price of the target's stock on the day four weeks
prior to the announcement of the initial offer (the "Four Weeks Prior
Premium"), which indicated a mean of 27.2% and a median of 24.2%.
By applying the foregoing premiums to the closing price of the Public
Shares on October 26, 1998, Merrill Lynch calculated the following implied
values for the Public Shares: (1) based on the mean and median One Day
Prior Premiums, $34.34 and $33.84 per share, respectively, and (2) based on
the mean and median Four Weeks Prior Premiums, $35.06 and $34.24 per share,
respectively.
In addition, Merrill Lynch compared the premiums and multiples implied by
the Offer to the premiums and multiples paid in the 1997 purchase by AFC of
the minority interest in Allmerica Property & Casualty ("APY"). Merrill
Lynch's comparison indicated that the final APY offer represented the
following: (1) a 15.8% premium to APY's stock price one day prior to the
initial APY offer and a 14.3% premium to APY's stock price four weeks prior
to the initial APY offer, (2) a 5.2% premium to APY's stock price one day
prior to the final APY offer, (3) a 7.8% premium to APY's stock price four
weeks prior to the final APY offer, and (4) a final offer price to APY book
value per share multiple of 1.22x.
(vi) Analysis of Selected Acquisition Transactions. Merrill Lynch reviewed
the implied premiums and multiples paid in a number of acquisition
transactions involving property and casualty insurance companies. Merrill
Lynch compared (1) the percentage premium of the applicable price paid over
the closing price of the target's stock on the day prior to the
announcement of the transaction, indicating a mean of 40.6% and a median of
25.6%, (2) the percentage premium of the applicable price paid over the
closing price of the target's stock 30 days prior to the announcement of
the transaction, indicating a mean of 51.9% and a median of 30.6%, (3) the
price paid as a multiple of book value per share (the "Transactions
Price/Book Multiple"), indicating a mean multiple of 2.32x and a median
multiple of 2.13x, (4) the price paid as a multiple of trailing operating
earnings (the "Price/Trailing Earnings Multiple"), indicating a mean
multiple of 19.5x and a median multiple of 18.7x, and (5) the price paid as
a multiple of forward operating earnings (the "Price/Forward Earnings
Multiple"), indicating a mean multiple of 18.7x and a median multiple of
18.4x.
By applying the foregoing mean and median calculations to 1999 management
earnings estimates, Merrill Lynch calculated the following implied values
for the Public Shares: (1) $60.58 and $55.62 per share (based on the mean
and median Transactions Price/Book Multiples, respectively), (2) $38.49 and
$36.87 per share (based on the mean and median Price/Trailing Earnings
Multiples, respectively) and (3) $45.35 and $43.44 per share (based on the
mean and median Price/Forward Earnings Multiples, respectively). By
applying the foregoing median and mean calculations to 1999 management
earnings estimates, as adjusted, Merrill Lynch calculated the following
implied values for the Public Shares: (1) $47.20 and $44.16 per share
(based on the mean and median Transactions Price/Book Multiples,
respectively) and (2) $46.06 and $44.54 per share (based on the mean and
median Price/Forward Earnings Multiples, respectively).
(vii) Analysis of Pro Forma Financial Impact to AFC. Merrill Lynch analyzed
the pro forma financial impact of the Offer on AFC's 1999 estimated
earnings per share. This analysis indicated that the Offer would be
accretive to AFC's pro forma 1999 earnings per share based on a range of
per share purchase prices of $29.00 to $37.00 for the Public Shares.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Letter Agreement with Merrill Lynch. Pursuant to a letter agreement, dated
October 27, 1998 (the "Letter Agreement"), the Special Committee, on behalf of
the Company, retained Merrill Lynch to provide financial advice to the Special
Committee in connection with the Offer and render the Opinion as to whether or
not the consideration to be received by the Public Shareholders in the Offer
was adequate or fair, as applicable, to the Public Shareholders from a
financial point of view.
11
<PAGE>
The Special Committee retained Merrill Lynch based on its experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and business and financial advisory services 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 for corporate and other
purposes. In the ordinary course of its business, Merrill Lynch and its
affiliates may at any time actively trade or hold the securities of the
Company or AFC for their own account or for the account of customers and,
accordingly, hold a long or short position in such securities. Merrill Lynch
has rendered significant investment banking and advisory services to the
Company and AFC in the past for which it has received customary compensation.
The Special Committee was made aware of such prior relationships before
retaining Merrill Lynch, and Merrill Lynch informed the Special Committee that
it is not currently rendering any services to AFC.
Pursuant to the Letter Agreement, the Company agreed to pay the following
fees to Merrill Lynch: (i) a fee of $100,000, payable upon execution of the
Letter Agreement, and (ii) an additional fee of $1,000,000, payable either (x)
on the date Merrill Lynch renders the Opinion, or (y) if for any reason
Merrill Lynch is not requested to render the Opinion, the date that Merrill
Lynch determines, in its reasonable discretion, that it has completed the work
necessary to render the Opinion. In addition, the Company has agreed to
reimburse Merrill Lynch for its reasonable out-of-pocket expenses incurred in
connection with its activities pursuant to the Letter Agreement, including the
reasonable fees and disbursements of its counsel. The Company also agreed to
indemnify Merrill Lynch and its affiliates and their respective directors,
officers, employees, agents and controlling persons against certain
liabilities and expenses arising in connection with Merrill Lynch's activities
under the Letter Agreement.
To the knowledge of the Special Committee, neither the Company nor any
person acting on its behalf has employed, retained or compensated any other
person to make solicitations or recommendations to security holders of the
Company on its behalf concerning the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a)-(b) To the knowledge of the Special Committee, neither the Company, any
of its subsidiaries, nor any executive officer or director of any of the
foregoing has engaged in any transactions involving the Shares during the
period of 60 business days prior to the date hereof.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as described in Items 3 and 4 above, to the knowledge of the
Special Committee no negotiation is being undertaken or is under way by the
Company in response to the Offer which related to or would result in (i) an
extraordinary transaction, such as a merger or reorganization, involving the
Company or any affiliate or subsidiary of the Company, (ii) a purchase, sale
or transfer of a material amount of assets by the Company or any subsidiary of
the Company, (iii) a tender offer for or other acquisition of securities by or
of the Company or (iv) any material change in the present capitalization or
dividend policy of the Company.
(b) Except as described in Items 3 and 4 above, there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Offer which relate to or would result in one or more of the matters
referred to in paragraph (a) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Certain Litigation
Since the announcement by AFC of its intention to commence the Offer, six
lawsuits have been commenced by Public Shareholders in the Delaware Chancery
Court: Susser v. O'Brien, et al., Civil Action No. 16745; Specht v. O'Brien,
et al., Civil Action No. 16746; Steiner v. O'Brien, et al., Civil Action No.
16747; Finkelstein v. O'Brien, et al., Civil Action No. 16748; McKinnie v.
O'Brien, et al., Civil Action No. 16749; and Hunter v. O'Brien, et al., Civil
Action No. 16772. Each of the actions purports to be a class action brought on
behalf of the Public Shareholders and asserts claims against AFC, the Company
and the members of the Board of Directors
12
<PAGE>
(including the members of the Special Committee). The actions each allege
that, through the conduct of the defendants, AFC has proposed to acquire the
Shares at an unfair and inadequate price, in violation of fiduciary duties
allegedly owed by the defendants to the Public Shareholders. The various
complaints purport by their terms to seek injunctive relief preventing
consummation of the Offer and Merger, or rescission if they are successfully
consummated, and compensatory damages. The description of the lawsuits set
forth above is qualified by reference to the complaints filed in such lawsuits
which have been filed with the Commission as Exhibits 8 through 13 hereto.
On November 16, 1998, the parties to each of 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 have
agreed to use their best efforts to execute and present a formal Stipulation
of Settlement to the Delaware Chancery Court as soon as practicable. In the
event that the Delaware Chancery Court approves the proposed settlement, it is
anticipated that the lawsuits will be dismissed with prejudice as to the
individual plaintiffs and the class of Public Shareholders. The consideration
for the plaintiffs' agreement to such settlement is the right of such
plaintiffs to receive, along with each other Public Shareholder, the Revised
Offer Price. The description of the MOU set forth above is qualified by
reference to the MOU which has been filed with the Commission as Exhibit 15
hereto.
Unsolicited Letters from Public Shareholders
The Special Committee received unsolicited letters from three Public
Shareholders regarding the Offer. Other than the fact that such Public
Shareholders own Shares, the Special Committee and the Company are not aware
of any material relationship that any such Public Shareholder has with the
Company or its affiliates. The Special Committee and the Company have no
knowledge regarding such Public Shareholders' qualifications to comment on the
Offer and did not investigate the accuracy or validity of the information or
analyses contained in such letters. Except to note that such Public
Shareholders were dissatisfied with the Initial Offer Price, the Special
Committee did not rely on the letters in making its recommendation with
respect to the Offer.
13
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<C> <S>
Exhibit 1 --Resolutions of the Board of Directors of the Company, dated
October 27, 1998.*
Exhibit 2 --Proxy Statement of the Company dated March 31, 1998, relating to
its Annual Meeting of Stockholders held on May 12, 1998.*
Exhibit 3 --Form of Letter to Stockholders of the Company, dated November 16,
1998.*
Exhibit 4 --Opinion of Merrill Lynch, dated November 16, 1998 (attached as
Annex A hereto).
Exhibit 5 --Presentation Book of Merrill Lynch, dated November 16, 1998.*
Exhibit 6 --Press release issued by the Company on November 3, 1998.*
Exhibit 7 --Press release issued by the Company and AFC on November 16,
1998.*
Exhibit 8 --Complaint filed in Finkelstein v. O'Brien, et al.
(Civil Action No. 16748, Delaware Court of Chancery).*
Exhibit 9 --Complaint filed in McKinnie v. O'Brien, et al.
(Civil Action No. 16749, Delaware Court of Chancery).*
Exhibit 10 --Complaint filed in Specht v. O'Brien, et al.
(Civil Action No. 16746, Delaware Court of Chancery).*
Exhibit 11 --Complaint filed in Steiner v. O'Brien, et al.
(Civil Action No. 16747, Delaware Court of Chancery).*
Exhibit 12 --Complaint filed in Susser v. O'Brien, et al.
(Civil Action No. 6745, Delaware Court of Chancery).*
Exhibit 13 --Complaint filed in Hunter v. O'Brien, et al.
(Civil Action No. 16772, Delaware Court of Chancery).*
Exhibit 14 --Consolidated Service Agreement, dated January 1, 1998
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).*
Exhibit 15 --Memorandum of Understanding, dated November 16, 1998.*
Exhibit 16 --Selected page from the Offer to Purchase.
</TABLE>
- --------
* Previously filed
14
<PAGE>
SIGNATURES
After reasonable inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this statement is
true, complete and correct.
Dated: November 25, 1998
CITIZENS CORPORATION
By the Special Committee of the
Board of Directors of Citizens
Corporation
/s/ James A. Cotter, Jr.
-------------------------------------
James A. Cotter, Jr.
/s/ Neal J. Curtin
-------------------------------------
Neal J. Curtin
/s/ Dona Scott Laskey
-------------------------------------
Dona Scott Laskey
15
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ANNEX A
<PAGE>
ANNEX A
[Merrill Lynch Letterhead]
November 16, 1998
Special Committee of the Board of Directors
Citizens Corporation
440 Lincoln Street
Worcester, MA 01653
Attention: Mr. James A. Cotter, Jr.
Chairman of the Special Committee
Ladies and Gentleman :
Citizens Acquisition Corporation (the "Acquisition Sub"), a wholly owned
subsidiary of Allmerica Financial Corporation (the "Acquiror"), has commenced a
tender offer (the "Offer") for all of the outstanding shares of common stock,
par value $.01 per share, of Citizens Corporation (the "Company") that the
Acquiror and its affiliates do not currently own (the "Public Shares"). The
Offer is being made at a price of $33.25 per share, net to the seller in cash,
without interest (the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated November 2, 1998, as
amended by a press release issued by the Acquiror and the Company on November
16, 1998, and the related Letter of Transmittal (the "Offer to Purchase").
You have asked us whether, in our opinion, the Offer Price is fair to the
holders of the Public Shares from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed the Offer to Purchase and the related Tender Offer Statement
on Schedule 14D-1 filed by the Acquiror and Acquisition Sub with the
Securities and Exchange Commission (the "Commission") and the
Solicitation/Recommendation Statement on Schedule 14D-9, dated November 16,
1998 and filed on such date by the Company with the Commission;
(2) reviewed certain publicly available business and financial
information relating to the Company and the Acquiror which we deemed to be
relevant;
(3) reviewed certain information, including financial forecasts and
projections, relating to the business, earnings, cash flow, assets,
liabilities and prospects of the Company, furnished to us by the Company
and the Acquiror;
(4) conducted discussions with members of management and representatives
of the Company and the Acquiror concerning the matters described in clauses
(2) and (3) above;
(5) reviewed the historical market prices, trading activity and valuation
multiples for the Public Shares and the common shares of the Acquiror and
compared them with those of certain publicly traded companies which we
deemed to be relevant;
(6) compared the proposed financial terms of the Offer with the financial
terms of certain other transactions which we deemed to be relevant;
A-1
<PAGE>
(7) participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial and
legal advisors;
(8) reviewed the potential pro forma impact of the Offer on the Acquiror;
and
(9) reviewed and performed such other financial studies, analyses and
investigations, and took into account such other matters as we deemed
relevant and necessary, including our assessment of general economic,
market, financial and other conditions.
In preparing our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information supplied or
otherwise made available to us by the Company and the Acquiror, discussed with
or reviewed by or for us, or publicly available, and we have not assumed any
responsibility for independently verifying such information and we have not
undertaken or assumed any responsibility for making an independent appraisal
of the assets of the Company nor have we been furnished with any such
evaluation or appraisal. With respect to the financial forecasts and
projections furnished to us or discussed with us by the Company and the
Acquiror, we have assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgments of the respective
managements of the Company and the Acquiror as to the future operating and
financial performance of the Company.
In connection with the preparation of this opinion, Merrill Lynch took into
consideration the current ownership by the Acquiror of approximately 83% of
the outstanding common stock of the Company and the fact that the Acquiror had
stated that it did not intend to sell such stock. Accordingly, Merrill Lynch
has not been authorized by the Company, its Board of Directors or the Special
Committee of its Board of Directors (the "Special Committee") to solicit, nor
have we solicited, interest from any third party with respect to the
acquisition of all or any part of the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. We are acting as financial advisor to the Special
Committee in connection with the Offer and will receive a fee from the Company
for our services, a portion of which is payable upon delivery of this opinion.
In addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement. As part of its investment banking services,
Merrill Lynch is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have, in the past, performed
significant investment banking and other services for the Company and the
Acquiror and have been compensated for such services. In addition, in the
ordinary course of its business, Merrill Lynch and its affiliates may at any
time actively trade or hold the securities of the Company or the Acquiror for
their own account or for the account of customers and, accordingly, hold a
long or short position in such securities.
This opinion is for the use and benefit of the Special Committee in its
consideration of the Offer and is, in any event, limited to the fairness of
the Offer Price to the holders of the Public Shares from a financial point of
view, and does not constitute a recommendation to any holder of the Public
Shares as to whether to tender such holder's shares in the Offer.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Offer Price is fair to the holders of the Public
Shares from a financial point of view.
Very truly yours,
By: /s/ Merrill Lynch, Pierce, Fenner &
Smith Incorporated
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
A-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
Exhibit 1 --Resolutions of the Board of Directors of the Company, dated
October 27, 1998.*
Exhibit 2 --Proxy Statement of the Company, dated March 31, 1998, relating to
its Annual Meeting of Stockholders held on May 12, 1998.*
Exhibit 3 --Form of Letter to Stockholders of the Company, dated November 16,
1998.*
Exhibit 4 --Opinion of Merrill Lynch, dated November 16, 1998.
Exhibit 5 --Presentation Book of Merrill Lynch, dated November 16, 1998.*
Exhibit 6 --Press release issued by the Company on November 3, 1998.*
Exhibit 7 --Press release issued by the Company and AFC on November 16,
1998.*
Exhibit 8 --Complaint filed in Finkelstein v. O'Brien, et al.
(Civil Action No. 16748, Delaware Court of Chancery).*
Exhibit 9 --Complaint filed in McKinnie v. O'Brien, et al.
(Civil Action No. 16749, Delaware Court of Chancery).*
Exhibit 10 --Complaint filed in Specht v. O'Brien, et al.
(Civil Action No. 16746, Delaware Court of Chancery).*
Exhibit 11 --Complaint filed in Steiner v. O'Brien, et al.
(Civil Action No. 16747, Delaware Court of Chancery).*
Exhibit 12 --Complaint filed in Susser v. O'Brien, et al.
(Civil Action No. 6745, Delaware Court of Chancery).*
Exhibit 13 --Complaint filed in Hunter v. O'Brien, et al.
(Civil Action No. 16772, Delaware Court of Chancery).*
Exhibit 14 --Consolidated Service Agreement, dated January 1, 1998
(incorporated by reference to Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997).*
Exhibit 15 --Memorandum of Understanding, dated November 16, 1998.*
Exhibit 16 --Selected page from the Offer to Purchase.
</TABLE>
- --------
* Previously filed.
<PAGE>
Exhibit 4
[Merrill Lynch Letterhead]
November 16, 1998
Special Committee of the Board of Directors
Citizens Corporation
440 Lincoln Street
Worcester, MA 01653
Attention: Mr. James A. Cotter, Jr.
Chairman of the Special Committee
Ladies and Gentleman :
Citizens Acquisition Corporation (the "Acquisition Sub"), a wholly owned
subsidiary of Allmerica Financial Corporation (the "Acquiror"), has commenced a
tender offer (the "Offer") for all of the outstanding shares of common stock,
par value $.01 per share, of Citizens Corporation (the "Company") that the
Acquiror and its affiliates do not currently own (the "Public Shares"). The
Offer is being made at a price of $33.25 per share, net to the seller in cash,
without interest (the "Offer Price"), upon the terms and subject to the
conditions set forth in the Offer to Purchase, dated November 2, 1998, as
amended by a press release issued by the Acquiror and the Company on November
16, 1998, and the related Letter of Transmittal (the "Offer to Purchase").
You have asked us whether, in our opinion, the Offer Price is fair to the
holders of the Public Shares from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed the Offer to Purchase and the related Tender Offer Statement
on Schedule 14D-1 filed by the Acquiror and Acquisition Sub with the
Securities and Exchange Commission (the "Commission") and the
Solicitation/Recommendation Statement on Schedule 14D-9, dated November 16,
1998 and filed on such date by the Company with the Commission;
(2) reviewed certain publicly available business and financial
information relating to the Company and the Acquiror which we deemed to be
relevant;
(3) reviewed certain information, including financial forecasts and
projections, relating to the business, earnings, cash flow, assets,
liabilities and prospects of the Company, furnished to us by the Company
and the Acquiror;
(4) conducted discussions with members of management and representatives
of the Company and the Acquiror concerning the matters described in clauses
(2) and (3) above;
(5) reviewed the historical market prices, trading activity and valuation
multiples for the Public Shares and the common shares of the Acquiror and
compared them with those of certain publicly traded companies which we
deemed to be relevant;
(6) compared the proposed financial terms of the Offer with the financial
terms of certain other transactions which we deemed to be relevant;
A-1
<PAGE>
(7) participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial and
legal advisors;
(8) reviewed the potential pro forma impact of the Offer on the Acquiror;
and
(9) reviewed and performed such other financial studies, analyses and
investigations, and took into account such other matters as we deemed
relevant and necessary, including our assessment of general economic,
market, financial and other conditions.
In preparing our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information supplied or
otherwise made available to us by the Company and the Acquiror, discussed with
or reviewed by or for us, or publicly available, and we have not assumed any
responsibility for independently verifying such information and we have not
undertaken or assumed any responsibility for making an independent appraisal
of the assets of the Company nor have we been furnished with any such
evaluation or appraisal. With respect to the financial forecasts and
projections furnished to us or discussed with us by the Company and the
Acquiror, we have assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgments of the respective
managements of the Company and the Acquiror as to the future operating and
financial performance of the Company.
In connection with the preparation of this opinion, Merrill Lynch took into
consideration the current ownership by the Acquiror of approximately 83% of
the outstanding common stock of the Company and the fact that the Acquiror had
stated that it did not intend to sell such stock. Accordingly, Merrill Lynch
has not been authorized by the Company, its Board of Directors or the Special
Committee of its Board of Directors (the "Special Committee") to solicit, nor
have we solicited, interest from any third party with respect to the
acquisition of all or any part of the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. We are acting as financial advisor to the Special
Committee in connection with the Offer and will receive a fee from the Company
for our services, a portion of which is payable upon delivery of this opinion.
In addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement. As part of its investment banking services,
Merrill Lynch is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. We have, in the past, performed
significant investment banking and other services for the Company and the
Acquiror and have been compensated for such services. In addition, in the
ordinary course of its business, Merrill Lynch and its affiliates may at any
time actively trade or hold the securities of the Company or the Acquiror for
their own account or for the account of customers and, accordingly, hold a
long or short position in such securities.
This opinion is for the use and benefit of the Special Committee in its
consideration of the Offer and is, in any event, limited to the fairness of the
Offer Price to the holders of the Public Shares from a financial point of view,
and does not constitute a recommendation to any holder of the Public Shares as
to whether to tender such holder's shares in the Offer.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Offer Price is fair to the holders of the Public
Shares from a financial point of view.
Very truly yours,
By: /s/ Merrill Lynch, Pierce, Fenner &
Smith Incorporated
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
A-2
<PAGE>
EXHIBIT 16
However, under the single employment arrangement, the costs related to the
majority of former Citizens employees are absorbed directly by Citizens, and are
not reflected in the intercompany charges summarized above.
TRANSACTIONS CONCERNING THE SHARES
Since January 1996, Citizens has repurchased an aggregate of 896,500 Shares
at the times and in the amounts summarized in the following schedule:
<TABLE>
<CAPTION>
RANGE OF
NUMBER OF PER SHARE
SHARES OF CITIZENS PURCHASE PRICE AVERAGE
COMMON STOCK --------------- PER SHARE
PURCHASED HIGH LOW PURCHASE PRICE
------------------ ------- ------- --------------
<S> <C> <C> <C> <C>
1996
First Quarter.............. 117,200 $ 20.00 $ 18.63 $19.07
Second Quarter............. 469,000 19.75 17.88 18.70
Third Quarter.............. 14,600 19.00 18.50 18.87
Fourth Quarter............. -- -- -- --
1997
First Quarter.............. -- -- -- --
Second Quarter............. -- -- -- --
Third Quarter.............. -- -- -- --
Fourth Quarter............. -- -- -- --
1998
First Quarter.............. -- -- -- --
Second Quarter............. -- -- -- --
Third Quarter.............. 295,700 27.06 27.06 27.06
Fourth Quarter (through
October 30, 1998)......... -- -- -- --
</TABLE>
CERTAIN TAX CONSEQUENCES
The following summary is a general discussion of certain of the United States
Federal income tax consequences of the Offer and the Merger. It does not
discuss all aspects of Federal income taxation that may be relevant to
particular holders and thus, for example, may not be applicable to holders of
shares who are not citizens or residents of the United States, who acquired
their shares as compensation or pursuant to the exercise of compensatory
options or that are entities subject to typical tax treatment. This summary is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change. No rulings as to any of the matters discussed in this
summary have been requested or received from the Internal Revenue Service
("IRS").
DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH STOCKHOLDER IS URGED
TO CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO SUCH
STOCKHOLDER OF THE OFFER AND THE MERGER, INCLUDING THE EFFECTS OF APPLICABLE
STATE, LOCAL, FOREIGN OR OTHER TAX LAW.
Sales of Shares pursuant to the Offer and the surrender of Shares pursuant to
the Merger will be taxable transactions for Federal income tax purposes and may
also be taxable transactions under applicable state, local, foreign and other
tax laws. This summary does not discuss any aspect of state, local or foreign
tax laws. The Federal income tax consequences to a holder of Shares may vary
depending upon the holder's particular facts and circumstances.
A sale of Shares pursuant to the Offer and the surrender of Shares pursuant
to the Merger will be treated as a sale or exchange of the Shares exchanged or
surrendered. Accordingly, a tendering holder of Shares and a holder
transferring Shares pursuant to the Merger will ordinarily recognize gain or
loss equal to the difference between the amount of cash received by the holder
pursuant to the Transaction and the holder's tax basis in the Shares sold
pursuant to the Transaction. If the Shares are held as capital assets, the gain
or loss will be a capital gain or loss, which will be a long-term capital gain
or long-term capital loss if the Shares have been held for more than one year.
16
