<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[X] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
ALLMERICA FINANCIAL CORPORATION
(Name of Registrant as Specified in Its Charter)
ALLMERICA FINANCIAL CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously by written preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
ALLMERICA FINANCIAL CORPORATION
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
ANNUAL MEETING
OF SHAREHOLDERS
MAY 20, 1997
<PAGE>
LOGO
ALLMERICA FINANCIAL CORPORATION
440 LINCOLN STREET
WORCESTER, MASSACHUSETTS 01653
March 31, 1997
TO OUR SHAREHOLDERS:
Enclosed is a Notice of Annual Meeting of Shareholders of Allmerica
Financial Corporation which will be held on Tuesday, May 20, 1997, at 9:00
a.m. in Bullock Hall, 1st Floor, Allmerica Financial Corporation Headquarters,
440 Lincoln Street, Worcester, Massachusetts.
The accompanying Notice and Proxy Statement describe in detail the matters
to be acted on at the meeting. You are cordially invited to attend the meeting
and vote your shares in person. However, if you are unable to attend, please
complete, sign and return the enclosed proxy in the envelope provided as soon
as possible. Your cooperation will assure your shares being voted and will
also greatly assist our officers in preparing for the meeting.
Sincerely,
LOGO
John F. O'Brien
President and Chief Executive
Officer
<PAGE>
LOGO
ALLMERICA FINANCIAL CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 20, 1997
----------------
To the Shareholders of Allmerica Financial Corporation:
The Annual Meeting of Shareholders of Allmerica Financial Corporation ("AFC")
will be held at AFC's headquarters, Bullock Hall, 1st Floor, 440 Lincoln
Street, Worcester, Massachusetts on Tuesday, May 20, 1997, at 9:00 a.m. local
time, for the purpose of considering and voting on:
1. Election of two Directors for terms expiring at the 2000 annual
meeting of shareholders and one Director for a term expiring at the
1998 annual meeting of shareholders;
2. Ratification of the appointment of Price Waterhouse LLP as the
independent public accountants of AFC for 1997;
3. Proposal to amend the Long-Term Stock Incentive Plan to increase the
total number of shares of Common Stock that may be issued thereunder;
and
4. Such other business as may properly come before the Annual Meeting or
any adjournment thereof.
The Board of Directors has fixed March 21, 1997 as the record date for
determining the shareholders of AFC entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof.
By Order of the Board of Directors
LOGO
Richard J. Baker
Vice President and Secretary
Worcester, Massachusetts
March 31, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN,
DATE AND MAIL PROMPTLY THE ENCLOSED PROXY, WHICH IS BEING SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS. A RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES, IS ENCLOSED FOR THAT PURPOSE. IF YOU DO ATTEND THE
ANNUAL MEETING AND DESIRE TO WITHDRAW YOUR PROXY AND VOTE IN PERSON, YOU MAY DO
SO.
<PAGE>
LOGO
ALLMERICA FINANCIAL CORPORATION
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF SHAREHOLDERS
MAY 20, 1997
INTRODUCTION
This Proxy Statement, with the accompanying proxy card, is being mailed to
shareholders on or about March 31, 1997 and is furnished in connection with
the solicitation of proxies by the Board of Directors of Allmerica Financial
Corporation ("AFC" or the "Company") for use at the Annual Meeting of
Shareholders of AFC to be held on May 20, 1997 (the "Annual Meeting").
As of March 21, 1997, 50,134,651 shares of AFC's common stock, par value
$.01 per share (the "Common Stock"), were outstanding and entitled to be
voted. Each share entitles the holder to one vote. The record date and hour
for determining shareholders entitled to vote at the Annual Meeting has been
fixed at the close of business on March 21, 1997 (the "Record Date").
The shares of Common Stock represented by the enclosed proxy will be voted
as directed by the shareholder or, in the absence of such direction, in favor
of the election of the nominees for Director designated herein, in favor of
the ratification of Price Waterhouse LLP as AFC's independent public
accountants for 1997 and in favor of the proposal to amend the Long-Term Stock
Incentive Plan (the "Stock Plan") to increase the total number of shares that
may be issued under the Stock Plan. The enclosed proxy confers discretionary
authority with respect to any other proposals that may properly be brought
before the Annual Meeting. As of the date hereof, management is not aware of
any other matters to be presented for action at the Annual Meeting. However,
if any other matters properly come before the Annual Meeting, the proxies
solicited hereby will be voted in accordance with the recommendation of the
Board of Directors.
As long as a quorum (a majority of issued and outstanding shares of Common
Stock entitled to vote at the Annual Meeting) is present at the Annual
Meeting, the Directors shall be elected by a plurality of the votes properly
cast at the Annual Meeting, either in person or by proxy. A majority of the
votes properly cast, either in person or by proxy, is required to approve the
other matters currently contemplated to be considered at the Annual Meeting.
Votes may be cast in favor of the election of the nominees for Director or
withheld; votes that are withheld will have no effect on the outcome of the
election of Directors. Abstentions and broker non-votes will have the effect
of a vote against the other matters presently contemplated to be considered at
the Annual Meeting.
<PAGE>
Insofar as management is advised, no executive officer, Director or Director
nominee of AFC, nor any person who has been an executive officer, Director or
Director nominee of AFC at any time since the beginning of its last fiscal
year, nor any associate of any such executive officer, Director or Director
nominee, has any substantial interest in the matters to be acted upon at the
Annual Meeting.
Any shareholder giving a proxy may revoke it at any time before it is
exercised by delivering written notice thereof to the Secretary. Any
shareholder attending the Annual Meeting may vote in person whether or not the
shareholder has previously filed a proxy. Presence at the Annual Meeting by a
shareholder who has signed a proxy does not in itself revoke the proxy.
The enclosed proxy is being solicited by the Board of Directors of AFC. The
cost of soliciting proxies will be borne by AFC, and will consist primarily of
preparing and mailing the proxies and Proxy Statements. AFC will also
reimburse brokerage houses and other custodians, nominees and fiduciaries for
their expenses in sending proxy materials to the beneficial owners. The
Company has retained Georgeson & Co. ("Georgeson") to assist in the
solicitation of proxies by telephonic and written means on behalf of the Board
of Directors and in the mailing and distribution of proxy material. The
estimated cost of Georgeson's services is $7,500 plus reimbursement of
reasonable out-of-pocket expenses.
AFC's Annual Report to Shareholders for the fiscal year ended December 31,
1996, including financial statements for AFC and its subsidiaries and the
report of Price Waterhouse LLP thereon, accompanies this Proxy Statement. The
Annual Report and financial statements are neither a part of this Proxy
Statement nor incorporated herein by reference.
ITEM I
ELECTION OF DIRECTORS
The Board of Directors consists of three classes of approximately equal
size. Of the class of three Directors whose term will expire at the Annual
Meeting, David A. Barrett has been nominated for re-election to a one-year
term ending at the 1998 Annual Meeting of Shareholders, and Gail L. Harrison
and Robert G. Stachler have been nominated for re-election to a three-year
term ending at the 2000 Annual Meeting of Shareholders. The Board of Directors
has voted to increase the size of the Board, and has elected Robert P.
Henderson to the Board for a term to expire at the 1999 Annual Meeting of
Shareholders. The remaining seven Directors will continue to serve in
accordance with their previous appointment.
The Board of Directors recommends a vote FOR all nominees. All nominees have
indicated their willingness to serve and unless otherwise directed, it is
intended that proxies received in response to this solicitation will be voted
in favor of the election of the nominees.
In the event that any of the nominees should be unavailable to serve as a
Director, it is intended that the proxies will be voted for the election of
such substitute nominees, if any, as shall be designated by the Board of
Directors. Management has no reason to believe that any nominee will be
unavailable to serve.
Information as to each nominee and as to Directors continuing in office
follows:
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NOMINEES FOR DIRECTOR
David A. Barrett, 69, has been a Director of AFC since February 1995, of
First Allmerica Financial Life Insurance Company ("FAFLIC"), a wholly-owned
subsidiary of AFC, from March 1976 to April 1996, of Allmerica Property &
Casualty Companies, Inc. ("Allmerica P&C"), a majority-owned, publicly traded
subsidiary of AFC, since August 1992 and of The Hanover Insurance Company
("Hanover"), a wholly-owned subsidiary of Allmerica P&C, 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.
Gail L. Harrison, 49, has been a Director of AFC since February 1995, of
FAFLIC from March 1986 to April 1996, of Allmerica P&C 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.
Robert G. Stachler, 67, has been a Director of AFC since February 1995, of
FAFLIC from March 1978 to April 1996, of Allmerica P&C 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.
DIRECTORS CONTINUING IN OFFICE
John F. O'Brien, 53, 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 Allmerica P&C since August 1992, and
has been a Director of Hanover since September 1989, of Citizens Insurance
Company of America ("Citizens Insurance") since March 1992 and Citizens
Corporation ("Citizens"), for which he also serves as Chief Executive Officer,
since December 1992. Citizens is a majority-owned, publicly traded subsidiary
of Hanover, and Citizens Insurance is a wholly-owned subsidiary of Citizens.
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 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 Director of AFC expires in 1998.
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<PAGE>
Michael P. Angelini, 54, has been a Director of AFC since February 1995, of
FAFLIC from August 1984 to April 1996, and of Allmerica P&C 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.
Robert P. Henderson, 65, 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, 57, 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 J. Murray, 55, has been a Director of AFC since May 1996. He 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 L. Sprague, 66, 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 MicroDevices
Corporation, an electronic components manufacturer.
Mr. Sprague is a member of the Audit Committee of AFC's Board of Directors.
His term of office as a Director of AFC expires in 1999.
Herbert M. Varnum, 59, has been a Director of AFC since February 1995, of
FAFLIC from March 1979 to April 1996, of Allmerica P&C 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
4
<PAGE>
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.
Mr. Varnum is Chairman of the Compensation Committee of AFC's Board of
Directors. His term of office as a Director of AFC expires in 1998.
Richard M. Wall, 68, has been a Director of AFC since February 1995, of
FAFLIC from March 1986 to April 1996, of Allmerica P&C 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 in office as a Director of AFC expires in 1999.
CERTAIN INFORMATION REGARDING DIRECTORS
During the last fiscal year, the Board of Directors held seven regularly
scheduled meetings. All of the incumbent Directors attended at least 75% of
the meetings of the Board and of the committees which he or she was scheduled
to attend. The Board of Directors has an Audit Committee, a Compensation
Committee and a Committee on Directors.
The Audit Committee of the Board of Directors is comprised of Mr. Angelini
(Chair), Mr. Barrett, Mr. Sprague and Mr. Varnum. The committee reviews the
professional services to be provided by AFC's independent auditors and the
independence of such auditors from management of AFC. The committee also
reviews the scope of the audit by AFC's independent auditors, the annual
financial statements of AFC, AFC's system of internal accounting controls and
such other matters with respect to the accounting, auditing and financial
reporting practices and procedures of AFC as it may find appropriate or as may
be brought to its attention, and meets from time to time with members of AFC's
internal audit staff. The committee met twice during 1996.
The Compensation Committee of the Board of Directors is comprised of Mr.
Varnum (Chair), Mr. Stachler and Mr. Wall. Guy W. Nichols was the Chairman of
the Compensation Committee until his retirement following the Annual Meeting
on May 21, 1996. Mr. Varnum was elected Chairman of the committee at the Board
of Directors meeting that followed the Annual Meeting. The Compensation
Committee has oversight responsibility with respect to compensation matters
involving Directors and executive officers of AFC. No member of this committee
has any interlocking or other relationships with AFC and its subsidiaries that
would call into question his independence as a member of the committee. The
committee met four times in 1996.
The Committee on Directors is comprised of Ms. Harrison (Chair), Mr. J. T.
Murray and Mr. R. Murray. The Committee on Directors advises and makes
recommendations to the Board on all matters concerning directorship and
corporate governance practices and the selection of candidates as nominees for
election as directors. The committee held two meetings in 1996. The committee
recommended this year's candidates and recommended Board member committee
assignments to the full Board of Directors. The committee is authorized to
consider nominees recommended by shareholders. Shareholders who wish to
suggest qualified candidates for consideration by the committee may do so by
writing to the Secretary, giving the candidate's name, biographical data and
qualifications.
Non-employee Directors of AFC who are not also directors of Allmerica P&C
receive an annual retainer of $20,000. Non-employee Directors of AFC who are
also directors of Allmerica P&C receive an aggregate retainer of $30,000. In
addition, non-employee Directors of AFC receive $1,500 per meeting of the
Board of Directors and $1,000 for each meeting of a committee thereof that
they attend. Mr. O'Brien, the only Employee
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<PAGE>
Director, is not paid any fees or additional compensation for service as a
member of the Board of Directors or any of its committees. All Directors are
reimbursed for reasonable travel and other expenses of attending meetings of
the Board of Directors and committees of the Board of Directors.
Beginning on the date of the annual meeting in 1997, Non-employee Directors
of AFC will receive an annual retainer consisting entirely of 1,400 shares of
AFC stock payable on the first business day following the annual meeting.
Chairpersons of committees will receive a $4,000 annual retainer. In addition,
Non-employee Directors of AFC will receive $1,500 per meeting of the Board of
Directors and $1,000 for each meeting of a committee thereof that they attend.
There are no family relationships among any of the directors or executive
officers of AFC and its subsidiaries.
ITEM II
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The firm of Price Waterhouse LLP has been selected by the Board of
Directors, subject to ratification by the shareholders, to be AFC's
independent public accountants for 1997. Representatives of Price Waterhouse
LLP will be present at the Annual Meeting, will have the opportunity to make a
statement if they desire to do so, and will be available to respond to
appropriate questions from shareholders.
The Board of Directors recommends that you vote FOR the proposal to ratify
the selection of the firm of Price Waterhouse LLP as independent public
accountants for AFC for 1997. If ratification is not obtained, the Board of
Directors will reconsider the appointment.
ITEM III
AMENDMENT TO LONG-TERM STOCK INCENTIVE PLAN
The Company's Long-Term Stock Incentive Plan (the "Stock Plan") was adopted
by the shareholders of the Company in May 1996 and provides for the award of
up to 2,350,000 shares of Common Stock in the form of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock and
stock awards. To date, the Company has only granted non-qualified stock
options under the Stock Plan. The Company intends to continue awarding non-
qualified stock options and to grant incentive stock options, stock and
restricted stock awards in 1997 under the Stock Plan. The Company has not
awarded, and presently does not intend to award, stock appreciation rights
under the Stock Plan.
On February 24, 1997, the Board of Directors of the Company approved,
subject to shareholder approval, an amendment to the Company's Stock Plan: (i)
increasing the maximum number of Shares (as defined in the Stock Plan) that
may be issued under the Stock Plan to an amount equal to the sum of (a) five
percent (5%) of the number of Shares outstanding at the close of business on
May 20, 1997, the day of the Annual Meeting, plus (b) an amount, not to exceed
1,172,000 Shares, equal to the number of Shares underlying awards granted
under the Stock Plan and not surrendered as of the date of the Annual Meeting;
and (ii) thereafter, commencing with the annual meeting of shareholders in
1998, increasing annually the maximum number of Shares that may be issued
under the Stock Plan by an amount equal to one and one-quarter percent (1.25%)
of the number of Shares outstanding at the close of business on the day of
each annual meeting of shareholders for the term of the Stock Plan.
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Assuming the number of Shares outstanding as of March 21, 1997 remains
unchanged as of the date of the Annual Meeting, and assuming no awards granted
under the Stock Plan are surrendered prior to the Annual Meeting, upon
approval of this amendment the committee administering the Stock Plan will be
authorized to issue a maximum of 3,678,732 Shares under the Stock Plan.
Thereafter, the actual number of Shares added annually to the total amount of
Shares issuable under the Stock Plan, equal to 1.25% of the Shares outstanding
on each annual meeting date commencing in 1998, will vary depending on many
factors. Factors that could affect the number of Shares outstanding include:
(i) increases in Shares outstanding due to the anticipated merger of AFC and
Allmerica P&C, stock option exercises, future grants of awards under the Stock
Plan and possible offerings of AFC Common Stock; and (ii) decreases in
outstanding shares of AFC Common Stock due to the recapture by the Company of
restricted stock awards that fail to vest and stock repurchases by the
Company. The Company has no current plans to conduct stock offerings or to
institute stock repurchase programs.
On February 19, 1997, the Company and Allmerica P&C entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement"), pursuant to
which AFC will acquire the outstanding shares of Allmerica P&C's common stock
not held directly or indirectly by AFC, and a merger subsidiary of AFC will
merge with and into Allmerica P&C (the "Merger") resulting in Allmerica P&C
becoming a wholly owned subsidiary of the Company. In connection with the
Merger, all outstanding non-qualified stock options of Allmerica P&C will be
replaced by non-qualified stock options of the Company at the same conversion
ratio set forth in the Merger Agreement for the conversion of outstanding
Allmerica P&C common stock. Pursuant to the terms of the Stock Plan, any
Shares issued by the Company as a result of the substitution of outstanding
grants from an acquired entity will not reduce the number of Shares available
for issuance under the Stock Plan. The Merger will result, however, in an
increase in the number of eligible participants under the Stock Plan. As a
result, the Board of Directors believes that the amendment increasing the
shares available under the Stock Plan is a necessary factor in allowing the
Company to continue to attract and retain those highly competent individuals
upon whose judgment, initiative and leadership the Company's continuing
success in large measure depends.
The following summary description is qualified in its entirety by reference
to the copy of the Stock Plan, which is attached hereto as Exhibit A.
The Stock Plan is intended to advance the interest of the Company by
providing meaningful incentives to participants for making substantial
contributions to the Company's long-term business growth; by enhancing the
Company's ability to attract and retain executive officers and other key
employees and certain insurance agents and brokers who will make such
contributions; by rewarding participants for their contributions to the
success of the Company and its subsidiaries; and by closely aligning the
interests of participants with those of Company shareholders by providing
opportunities for them to obtain longer-term rewards through stock ownership.
To accomplish these purposes, the Stock Plan authorizes the grant of
incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), stock
appreciation rights and share awards, including restricted stock awards.
Awards under the Stock Plan may be granted until February 27, 2006 or until
earlier termination of the Stock Plan by the Board of Directors. Outstanding
awards may extend beyond that date.
A maximum of 2,350,000 shares of Common Stock are currently authorized for
the granting of awards under the Stock Plan. If an award is forfeited,
canceled, reacquired by the Company, or otherwise terminated (other than by
exercise, in the case of an option), shares of Common Stock underlying such
award will again be available for grants and issuance under the Stock Plan.
The maximum number of shares of Common Stock that may be covered by awards for
any one participant over the period that the Stock Plan is in effect may not
exceed
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500,000 shares. In the event of a stock dividend, stock split, combination or
exchange of shares, merger, consolidation, spin-off or other distribution
(other than normal cash dividends), or other change affecting the Common
Stock, the Board of Directors or the committee administering the Stock Plan
will make appropriate adjustments in the number and kind of shares authorized
by the Stock Plan and any adjustments to outstanding awards as it determines,
provided that any such actions are consistently and equitably applicable to
all affected participants.
Eligibility and Administration. The selection of the participants in the
Stock Plan and the terms of awards granted to each participant will be
determined by a committee of not less than two non-employee members of the
Board of Directors (the "Committee") appointed by the Board. Persons eligible
to receive awards under the Stock Plan include executive officers and other
key employees of the Company, its subsidiaries and affiliates, as well as
certain insurance agents and brokers. It is currently estimated that
approximately 300 individuals will be eligible to participate in the Stock
Plan, with appropriate adjustments for any significant change in the size or
operations of the Company, its subsidiaries and affiliates in the future.
Options. The exercise price of any option granted under the Stock Plan may
not be less than 100% of the fair market value of the Common Stock on the date
the option is granted. If a participant owns or is deemed to own more than 10%
of the combined voting power of all classes of stock of the Company or any
parent or subsidiary of the Company, the option price of any ISO awarded to
such participant may not be less than 110% of the fair market value of the
Common Stock at the date of grant. To the extent that the aggregate fair
market value of stock with respect to which ISOs are exercisable for the first
time by any one optionee in any calendar year exceeds $100,000, such stock
options will be treated as NQSOs.
Each stock option may be exercised at such times and subject to such terms
and conditions as the Committee administering the Stock Plan may specify at or
after the time of grant. If the Committee does not establish a different
exercise schedule at or after the date of grant, the option is exercisable in
five approximately equal annual installments on each of the first, second,
third, fourth and fifth anniversaries of the grant date. An option is not
exercisable after the expiration of ten years from the date of grant. Unless
the Committee shall otherwise permit an option to remain exercisable for such
greater or lesser period (but not beyond its otherwise stated term) as the
Committee shall specify, an option is not exercisable following the
termination of a participant's employment. Special rules apply for
terminations due to death, disability and retirement. The recipient of an
option shall pay the exercise price for the shares of Common Stock underlying
the option in cash or pursuant to such other arrangements as are satisfactory
to the Committee.
Except under certain limited circumstances as may be permitted by the
Committee, options generally are not transferable except by will or the laws
of descent and distribution. Additional limitations on exercise are imposed in
the event the Committee determines that the listing, registration or
qualification of any option upon any securities exchange or under state or
federal law, or the consent or approval of any government regulatory body, is
necessary or desirable. The Company is authorized to make appropriate
deductions to satisfy applicable withholding obligations with respect to the
settlement of options.
Restricted Stock. An Award of restricted stock ("Restricted Stock") entitles
the participant to acquire shares of Common Stock for a purchase price equal
to or greater than par value, subject to such conditions and restrictions,
including a right of the Company, during a specified period or periods, to
repurchase such shares at their original purchase price (or to require
forfeiture of such shares) upon the participant's termination of employment.
Subject to the provisions of the Stock Plan, the Committee may award shares of
Restricted Stock
8
<PAGE>
and determine the cash purchase price or other consideration therefor, the
duration of the restricted period during which, and the conditions under
which, the shares may be forfeited to or repurchased by the Company, and the
other terms and conditions of such Awards. The Committee may modify or waive
the restrictions with respect to any Restricted Stock. Shares of Restricted
Stock may be issued for no cash consideration or such minimum consideration as
may be required by applicable law. A participant has all the rights of a
shareholder with respect to his or her Restricted Stock including voting and
dividend rights, subject to any applicable restrictions on transfer and
Company repurchase or forfeiture rights, and subject to any other conditions
contained in the Award.
A recipient of Restricted Stock generally will be subject to tax at ordinary
income rates on the fair market value of the Common Stock at the time the
Common Stock is no longer subject to forfeiture, less any amount paid for such
stock. However, a recipient who makes an election under Section 83(b) of the
Code within 30 days of the date of issuance of the Restricted Stock will
realize ordinary income on the date of issuance equal to the fair market value
of the shares of Restricted Stock at that time (measured as if the shares were
unrestricted and could be sold immediately), less any amount paid for such
stock. If the election is made, no taxable income will be recognized when the
shares subject to such election are no longer subject to forfeiture. If the
shares subject to such election are forfeited, the recipient will not be
entitled to any deduction, refund or loss for tax purposes with respect to
amounts previously included in income with respect to the shares. The holding
period to determine whether the recipient has long-term or short-term capital
gain or loss upon sale of the shares begins when the restriction period
expires (or upon earlier issuance of the shares, if the recipient elected
immediate recognition of income under Section 83(b) of the Code).
Amendments. Under the terms of the Stock Plan, the Board of Directors or the
Committee may amend the Stock Plan as it deems necessary or appropriate to
better achieve the purposes of the Stock Plan, except that no amendment may be
made without the approval of the Company's shareholders if such approval is
required to satisfy the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, to satisfy applicable requirements of the Internal
Revenue Code, or to satisfy applicable securities exchange requirements.
Federal Income Tax Consequences. Based on current provisions of the Internal
Revenue Code of 1986, as amended ("Code"), and the existing regulations
thereunder, the anticipated federal income tax consequences in respect of
options under the Stock Plan are as described below. The following discussion
is not intended to be a complete statement of applicable law and is based upon
the federal income tax laws as in effect on the date hereof.
ISOs. ISOs under the Stock Plan are intended to meet the requirements of
Section 422 of the Code. No tax consequences result from the grant of the
option. If an option holder acquires stock upon exercise of the ISO, no
income will be recognized by the option holder for ordinary income tax
purposes (although the difference between the option exercise price and the
fair market value of the stock subject to the option may result in
alternative minimum tax liability to the option holder), and the Company
will be allowed no deduction as a result of such exercise, if the following
conditions are met: (a) at all times during the period beginning with the
date of the granting of the option and ending on the day three months
before the date of such exercise, the option holder is an employee of the
Company or of a subsidiary; and (b) the option holder makes no disposition
of the stock within two years from the date the option is granted nor
within one year after the stock is transferred to the option holder. In the
event of a sale of such stock by the option holder after compliance with
these conditions, any gain realized over the price paid will ordinarily be
treated as long-term capital gain, and any loss will be treated as long-
term capital loss, in the year of sale.
9
<PAGE>
If the option holder fails to comply with the employment or holding
period requirements described above, the option holder will recognize
ordinary income in an amount equal to the lesser of (i) the excess of the
fair market value of the stock on the date the option was exercised over
the exercise price, or (ii) the excess of the amount realized upon such
disposition over the exercise price. If the option holder is treated as
having received ordinary income because of his failure to comply with
either condition above, an equivalent deduction will be allowed to the
Company in the same year.
NQSOs. No tax consequences result from the grant of the option. An option
holder who exercises a NQSO with cash will generally realize compensation
taxable as ordinary income in an amount equal to the difference between the
option price and the fair market value of the shares on the date of
exercise, and the Company will be entitled to a deduction from income in
the same amount. The option holder's basis in such shares will be the fair
market value on the date exercised, and when he disposes of the shares he
will recognize capital gain or loss, either long-term or short-term,
depending on the holding period of the shares.
New Plan Benefits. Future awards under the Stock Plan are subject to the
discretion of the Committee. Therefore, it is impossible to indicate the
specific awards that will be granted to or the benefits that will be received
by any individual participant or group of participants under the Stock Plan.
The following table, however, provides certain information about stock option
awards anticipated on or before the Annual Meeting in May 1997 to the named
executive officers, all current executive officers as a group, all current
directors who are not executive officers as a group and all employees,
including officers who are not executive officers, as a group. The dollar
value of the anticipated stock option awards set forth below cannot be
determined at this time.
<TABLE>
<CAPTION>
LONG-TERM
STOCK INCENTIVE PLAN
NAME AND POSITION NUMBER OF SHARES
----------------- --------------------
<S> <C>
John F. O'Brien, President & CEO....................... 50,000
Larry C. Renfro, Vice President........................ 20,000
Eric A. Simonsen, Vice President....................... 30,000
Phillip E. Soule, Vice President....................... 20,000
Richard M. Reilly, Vice President...................... 20,000
Executive Group (12 persons)........................... 257,000
Non-Executive Director Group (10 persons).............. --
Non-Executive Officer Employee Group (168 persons)..... 575,500
</TABLE>
In addition, in 1997 each of the named executive officers and certain other
members of the executive group will receive stock awards ("Stock Awards")
granting the right to purchase, at fair market value on the date of grant, a
number of shares of Common Stock up to a specified dollar amount per
individual (the "Purchase Limit"). For each such share purchased under the
Stock Plan (the "Purchased Shares"), participating executive officers will
receive a matching share of Restricted Stock. The shares of Restricted Stock
will become freely tradeable three years after the date of grant, subject to
certain conditions including continued employment with the Company or its
subsidiaries and continued ownership of an equal amount of Purchased Shares.
The Purchase Limit for each of the named executive officers and for the
executive group are: $1,000,000 for Mr. O'Brien; $150,000 for Mr. Renfro;
$250,000 for Mr. Simonsen; $150,000 for Mr. Soule; $150,000 for Mr. Reilly;
and $2,325,000 for the executive group as a whole (12 persons). Non-employee
Directors are not eligible to participate in the Stock Plan. Grants of Stock
Awards to non-executive officer employees are not anticipated in 1997.
On March 21, 1997, the closing price of the Common Stock, as reported in The
Wall Street Journal, New York Stock Exchange Composite Transactions, was
$35.25.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE STOCK
PLAN, AS AMENDED.
10
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the number of shares of Common Stock of AFC,
APY and Citizens Corporation owned as of March 17, 1997 by (i) each Director
of AFC, (ii) the named executive officers in the Summary Compensation Table
appearing later in this Proxy Statement, (iii) all officers and directors of
AFC as a group and (iv) each person who is known by AFC to be the beneficial
owner of more than five percent of the Common Stock as of such date. This
information has been furnished by the persons listed in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK OF COMMON STOCK OF COMMON STOCK
NAME OF BENEFICIAL OWNER OF AFC* OF APY* OF CITIZENS*
- ------------------------ ---------------- ---------------- ----------------
<S> <C> <C> <C>
Michael P. Angelini....... 54 3,000 --
David A. Barrett.......... 285 600 1,000(1)
Gail L. Harrison.......... 82 450 --
Robert P. Henderson....... -- -- --
J. Terrence Murray........ 69 -- --
Robert J. Murray.......... -- -- --
John F. O'Brien........... 270(2) 16,000 1,000
Richard M. Reilly......... 98(3) -- --
Larry C. Renfro........... 88(4) -- --
Eric A. Simonsen.......... 146(5) 9,000(6) 3,000(7)
Phillip E. Soule.......... 652(8) 300 100
John L. Sprague........... 220 -- --
Robert G. Stachler........ 171 -- --
Herbert M. Varnum......... 76 600 --
Richard M. Wall........... 180 -- --
Directors and executive
officers as a group (22
persons)................. 21,674(9) 40,400 12,500
Holder of Greater Than
Five Percent of Common
Stock
FMR Corp.
82 Devonshire Street
Boston MA 02109.......... 5,233,970(10) 10.43% of shares of AFC Common
Stock outstanding
</TABLE>
- --------
* With the exception of FMR Corp.'s holdings of AFC Common Stock, each of
the amounts represents less than 1% of the outstanding shares of Common
Stock as of March 17, 1997. As to shares beneficially owned, each person
has sole voting and investment power, except as indicated in other
footnotes to this table.
(1) Shares owned by Mr. Barrett's spouse. Mr. Barrett disclaims beneficial
ownership with respect to such shares.
(2) Includes 198 shares held for the benefit of Mr. O'Brien by the trustees
of the First Allmerica Financial Life Insurance Company's Employees'
401(k) Matched Savings Plan (the "FAFLIC Plan").
(3) Shares held for the benefit of Mr. Reilly by the trustees of the FAFLIC
Plan.
(4) Shares held for the benefit of Mr. Renfro by the trustees of the FAFLIC
Plan.
(5) Shares held for the benefit of Mr. Simonsen by the trustees of the FAFLIC
Plan.
(6) Includes an aggregate of 3,000 shares of Common Stock of APY 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.
11
<PAGE>
(7) Includes an aggregate of 1,000 shares of Common Stock of Citizens 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.
(8) Includes 596 shares held for the benefit of Mr. Soule by the trustees of
the FAFLIC Plan.
(9) Includes 18,683 shares held by the trustees of the FAFLIC Plan. See notes
2-5 and 8 above.
(10) Based on a Schedule 13G dated February 14, 1997 filed by FMR Corp., which
has sole dispositive power overall 5,226,920 shares and sole voting power
over 289,820 shares.
As of March 17, 1997, there were no persons other than FMR Corp. known to
AFC to be the beneficial owners of more than 5% of the outstanding shares of
Common Stock.
12
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all plan and non-plan compensation awarded
to, earned by, or paid to the Chief Executive Officer of AFC, and the four
other most highly compensated executive officers of AFC (collectively, the
"Named Executive Officers"). Because AFC is a holding company, it does not pay
any compensation to its executive officers. The Named Executive Officers,
unless otherwise indicated, receive compensation in their capacities as
executive officers of FAFLIC, which is then reimbursed, in accordance with
AFC's policy and intercompany service agreements, by its various subsidiaries
for services rendered to such subsidiaries.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
LONG-TERM
OTHER COMPENSATION
ANNUAL ------------ ALL OTHER
COMPEN- LTIP COMPEN-
BONUS SATION PAY-OUTS SATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) ($)(1) ($)(2) ($)(3) ($)(4)
- --------------------------- ---- --------- --------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
John F. O'Brien......... 1996 850,000 1,816,000 109,422 500,000 120,227
President and Chief 1995 775,000 775,000 109,422 250,000 120,227
Executive Officer 1994 725,000 400,000 132,922 0 161,402
Larry C. Renfro......... 1996 370,000 667,609 11,275 160,000 4,500
Vice President 1995 340,000 390,150 17,070 200,000 0
1994 340,000 95,000 10,250 240,000 21,420
Eric A. Simonsen........ 1996 370,000 406,436 12,215 160,000 4,500
Vice President 1995 305,000 99,430 18,492 210,000 4,500
1994 305,000 81,282 -- 260,000 19,215
Phillip E. Soule........ 1996 295,000 254,991 6,577 120,000 4,500
Vice President 1995 265,000 85,993 9,958 120,000 4,500
1994 245,000 91,508 3,208 140,000 15,435
Richard M. Reilly....... 1996 270,000 256,893 7,517 120,000 4,500
Vice President 1995 210,000 58,380 8,463 130,000 4,500
1994 210,000 74,760 -- 130,000 13,230
</TABLE>
- --------
(1) Amounts shown for 1996 include the following special bonus payments,
discussed in more detail in the Compensation Committee Report, which
payments are intended by the Company to facilitate the purchase of AFC
common stock by the executive officers in 1997: $1,000,000 for Mr.
O'Brien, $150,000 for Mr. Renfro, $250,000 for Mr. Simonsen, $150,000 for
Mr. Soule and $150,000 for Mr. Reilly. All other amounts shown are bonuses
earned pursuant to FAFLIC's Incentive Compensation Plan, except with
respect to the amounts reported for Mr. Renfro in 1996 and 1995, which
also include payments of $335,384 and $255,000, respectively, in
connection with the sale of FAFLIC's mutual fund servicing business,
discussed below.
(2) The amounts shown reflect the payment of taxes in the amount of $109,422
in 1996, $109,422 in 1995 and $109,850 in 1994 in connection with the
payment by FAFLIC of a life insurance premium on behalf of Mr. O'Brien.
All other amounts shown include interest earned on long-term incentive
compensation paid, or deferred at the election of the Named Executive
Officer, in the respective year. No Named Executive Officer received any
perquisites or other personal benefits from any source for his services to
FAFLIC or any subsidiary with an aggregate value exceeding the lesser of
$50,000 or 10% of cash compensation.
(3) Amounts shown include installment payments vesting and received by the
Named Executive Officers in the respective year pursuant to awards which
were earned in 1992, 1993, 1995 and 1996 under FAFLIC's Long-
13
<PAGE>
Term Performance Unit Plan (the "Long-Term Performance Plan"). No such cash
amounts were earned in 1994 by the Named Executive Officers in respect of
units granted under the Long-Term Performance Plan with values determinable
based on FAFLIC's surplus level at the end of 1994.
(4) Amounts shown include $4,500 paid to each of the Named Executive Officers
by FAFLIC during 1996 in the form of employer contributions to each Named
Executive Officer's 401(k) and related post-retirement accounts pursuant
to FAFLIC's 401(k) Matched Savings Plan ("Matched Savings Plan") (in
effect beginning in 1995) (except amounts contributed on behalf of Messrs.
O'Brien and Reilly in 1996, which are attributable to the Executive Non-
Qualified Retirement Plan) as well as pursuant to FAFLIC's Excess Benefit
Retirement Plan ("Excess Benefit Plan") as described more fully below. The
amount shown for Mr. O'Brien in 1996 also reflects the payment by FAFLIC
of a life insurance premium of $115,727.
OPTION GRANTS
The Company maintains a long-term stock incentive plan pursuant to which
stock options covering shares of the Company's Common Stock may be granted to
key employees.
In 1996, the Company did not grant any options to the Named Executive
Officers.
LONG-TERM INCENTIVE AWARDS
Neither the Company nor FAFLIC made any awards to Named Executive Officers
under the Long-Term Performance Plan in 1996.
EMPLOYMENT AGREEMENTS AND NON-SOLICITATION AGREEMENTS
In connection with the sale of FAFLIC's mutual fund servicing business to
The Shareholder Services Group, Inc. ("TSSG") and related transactions in
March 1995, and in consideration of the agreement by Mr. Renfro not to engage
in this business for four years, AFC agreed to pay Mr. Renfro (i) a one-time
bonus payment of $350,000 in 1995 ($95,000 of which represents a payment under
FAFLIC's Incentive Compensation Plan in respect of his 1994 performance), and
(ii) annual contingent payments based upon the prospective performance of the
businesses sold or assigned in the TSSG transactions for four years with
certain guaranteed minimum payments up to a maximum aggregate amount for four
years of $3.7 million. The agreement also provides that, in the event Mr.
Renfro is terminated without cause, he will receive $25,000 per month until
March 31, 1998 plus $600,000 (less any contingent payments made under (ii)
above). In the event of any such termination without cause, the agreement
provides that Mr. Renfro would be subject to confidentiality and non-
competition restrictions during the payment period.
As of December 31, 1996, substantially all of the Company's executive
officers had entered into non-solicitation agreements ("Non-Solicitation
Agreements") with the Company. The Non-Solicitation Agreements provide that,
during employment and for a period of two years after termination, the
executive officer will not recruit or solicit, attempt to induce, or assist or
encourage others to recruit or solicit, any employee, agent or broker of the
Company to terminate employment with the Company. The Non-Solicitation
Agreements prohibit the executive officers from soliciting the business or
patronage of any policyholders or existing or prospective clients, customers
or accounts of the Company that were contacted, solicited or served while the
executive officer was employed by the Company. Finally, the Non-Solicitation
Agreements provide that all proprietary information relating to the Company's
business and all software, works of authorship and other developments created
during employment by the Company are the sole property of the Company.
14
<PAGE>
EMPLOYMENT CONTINUITY PLAN
In December 1996 the AFC Board of Directors voted to adopt the Allmerica
Financial Corporation Employment Continuity Plan (the "Employment Continuity
Plan"). The purposes of the Employment Continuity Plan are (i) to secure
senior management's objectivity and ensure focus on behalf of shareholder
interest in the event of actions or occurrences that could lead to a Change of
Control, and (ii) to ensure, in the event of a Change in Control resulting in
payment under the Employment Continuity Plan, that senior management does not
compete in the business of the Company, solicit Company employees or disclose
any confidential or propriety information of the Company. The Employment
Continuity Plan is administered by the AFC Board of Directors. All of the
Named Executive Officers were named as participants in the Employment
Continuity Plan at its adoption.
In the event of a Change in Control (defined below) of the Company and
subsequent involuntary termination of a participant within a two-year period
after the Change in Control, or voluntary termination of the participant in
the 13th month after a Change in Control, the Employment Continuity Plan
authorizes the payment of specified benefits to eligible participants. These
include a lump-sum cash payment equal to a Multiplier (defined below) times a
participant's base salary, average bonus for the preceding three years, and
the amount that would be credited under a cash balance pension plan sponsored
by the Company or its affiliates. The Multiplier is three (3) for the Chief
Executive Officer and two (2) for all other participants. Additionally, the
Employment Continuity Plan provides for continued coverage under the health
and welfare benefit plans sponsored by the Company and its affiliates, the
lump-sum actuarial equivalent for grandfathered benefits earned under the
retirement plan for "transition group" employees for the number of years
commensurate with the Multiplier, 75% of a participant's maximum bonus
potential pro-rated for service performed in the year of termination, and
outplacement services. The Chief Executive Officer is also entitled to a
gross-up payment when the Change in Control payment or other benefit under the
plan is subject to the excise tax imposed by section 4999 of the Internal
Revenue Code.
For purposes of the Employment Continuity Plan, a Change in Control is
defined as follows: (i) a change in the composition of the Board of Directors
such that the Incumbent Directors (as defined in the Employment Continuity
Plan) at the beginning of any consecutive twenty-four month period cease to
constitute a majority of the Board; (ii) any person or group is or becomes the
beneficial owner of 35% or more of the Company's voting stock outstanding;
(iii) a merger or consolidation of the Company or any affiliate that requires
shareholder approval, unless the shareholders immediately prior to the merger
or consolidation own more than 50% of the total voting stock of the successor
corporation or a majority of the board of directors of the successor
corporation were Incumbent Directors immediately prior to the merger or
consolidation; or (iv) the approval by shareholders of a plan of liquidation
or dissolution of the Company or the sale of all or substantially all of the
Company's assets.
In the event of a Change of Control, for all stock awards and stock options
granted to a participant pursuant to the Company's Long-Term Stock Incentive
Plan that do not otherwise vest immediately after the Change of Control, the
participant will be paid a lump sum amount equal to (i) the fair market value
of all stock awards as of the date of the Change of Control (excluding stock
options) and (ii) with respect to stock options, the excess of the fair market
value of the Company's common stock as of the date of the Change of Control
over the stock option exercise price.
The payment of benefits under the Employment Continuity Plan is contingent
upon the Company's receipt of a signed waiver and release from the participant
that release certain claims the participant may have and precludes the
participant from competing with the Company for a period of two years.
15
<PAGE>
PENSION BENEFITS
FAFLIC, Hanover and Citizens each maintain a tax-qualified, non-contributory
defined benefit retirement plan ("Pension Plan") for the benefit of eligible
employees.
Until December 31, 1994, annual benefits under the Pension Plan were based
primarily upon each employee's years of service and compensation during the
highest five consecutive plan years of employment or the last 60 months if
greater. Such benefits under the Pension Plan were frozen as of December 31,
1994 for most participants, with the exception of certain grandfathered
employees, including Mr. Soule. These benefits will be paid to participants as
a monthly annuity at age 65 unless a participant terminates with 15 or more
years of service in which case monthly benefits may commence anytime after the
participant's 55th birthday. Effective as of January 1, 1995, the Pension Plan
was converted into a cash balance plan, such that benefits are no longer
determined primarily by final average compensation and years of service.
Instead, annually each employee accrues a benefit that is equal to a
percentage of the employee's salary, similar to a defined contribution plan
arrangement. Amounts contributed by the employer to an employee are allocated
to a memorandum account as to which the employee is permitted to make
investment elections from among choices provided by the employer. Upon
termination of employment of a participant, the amount in the participant's
memorandum account as of such date is eligible for distribution. If the amount
in the participant's memorandum account plus the present value of the benefit
frozen under the Pension Plan as of December 31, 1994 is less than $3,500, all
benefits are distributed immediately in a lump sum.
The estimated annual benefits payable under the Pension Plan upon retirement
at normal retirement age for each of the Named Executive Officers is as
follows: Mr. O'Brien: $428,138; Mr. Renfro: $258,033; Mr. Simonsen: $151,262;
Mr. Soule: $491,745; Mr. Reilly: $53,640. Such figures include amounts that
have accrued under the Pension Plan as in effect on December 31, 1994,
including, $355,841 for Mr. Soule. With respect to benefits attributable to
the cash balance component of the Pension Plan, it was assumed that each
individual's salary and bonus for the years until retirement were as shown in
the Summary Compensation Table; that employer allocations were made to the
Pension Plan at a rate of 7% of eligible compensation (7% is the actual amount
accrued in 1996, although the plan only guarantees an accrual rate of 0.5%);
and that investment earnings accrued to each participant's memorandum account
under the Pension Plan at a rate of 6% per year.
The estimated annual benefits under the Pension Plan shown for each of the
Named Executive Officers are not reduced to reflect the limitations imposed by
Federal tax laws, which place upper limits on the benefits which may be
provided to any individual by tax-qualified pension plans. FAFLIC, Hanover and
Citizens Insurance each have adopted an Excess Benefit Plan, an unfunded, non-
qualified plan, which provides that it will pay directly the difference
between the retirement benefit normally calculated under the Pension Plan and
the maximum amount which may be paid from the Pension Plan consistent with
Federal tax law. In addition, certain employees of FAFLIC and its subsidiaries
may participate, in the discretion of the Board of Directors, in either an
unfunded, Non-Qualified Executive Retirement Plan or an unfunded, Non-
Qualified Executive Deferred Compensation Plan. Under the Non-Qualified
Executive Retirement Plan, participating employees may (i) elect to defer
compensation in an amount not to exceed the annual dollar limitation set forth
in the Internal Revenue Code in respect of defined contribution plans, (ii)
elect to defer additional compensation in an amount not to exceed 12.5% of the
participant's annual salary, (iii) receive and defer the amount, if any, that
the participant would have received as a matching employer's contribution
under his employer's 401(k) Matched Savings Plan, and (iv) receive and defer
the amount, if any, that the participant would have been credited under his
employer's Cash Balance and Excess Benefit Plans had the participant
participated in such plan during the year. Under the Non-Qualified Executive
Deferred Compensation Plan, certain other employees may elect to defer up to
12.5%
16
<PAGE>
of their annual salaries. In both cases, AFC shall from time to time designate
one or more investments in which each participant's accounts shall be deemed
to be invested for the purpose of determining the participant's gains and
income on such account. Participation in the Non-Qualified Executive
Retirement Plan is in lieu of participation in the corresponding qualified
retirement and/or pension plans of FAFLIC, Hanover or Citizens.
COMPENSATION COMMITTEE REPORT
General. The Compensation Committee ("Committee") of the Board of Directors
is comprised of the Directors whose names appear at the end of this report,
none of whom is an employee of AFC or of any affiliate or subsidiary of AFC.
Among other duties, the Committee has oversight responsibility with respect to
compensation matters involving Directors and executive officers of AFC. As a
holding company, AFC has no employees of its own and does not pay any
compensation to its officers. Officers who are employees of FAFLIC, Hanover or
Citizens Insurance are compensated directly by their respective employers. In
addition, a portion of the salaries and other compensation paid by FAFLIC to
its employees, who provide services to Hanover or Citizens Insurance, is
allocated to such companies. This report reflects the compensation philosophy
of AFC, FAFLIC, Hanover and Citizens Insurance as endorsed by the Committee.
Compensation Philosophy. The Executive Compensation Program is designed to
support the following objectives:
.to attract and retain individuals key to the future success of AFC and
its subsidiaries;
.to align the interests of executives with those of shareholders;
.to motivate and reward the profitable growth of AFC;
.to ensure that AFC has competitive opportunities for key personnel.
The key elements of the Executive Compensation Program consist of base
salary, annual incentive compensation and long-term incentive compensation. A
general description of each element and the review taken by the Committee for
the 1996 fiscal period is presented in the following material.
Base Salary. The chief goals of AFC and its subsidiaries are to improve
market focus in order to identify profitable opportunities that capitalize on
competitive strengths; to provide quality, value-added services that are
flexible and responsive to customer needs; to capitalize on growth
opportunities in targeted markets with innovative, market-driven products and
services that can be distributed broadly and cost-effectively; and to build
financial strength with effective business strategies that generate superior
financial performance and deliver solid returns on capital. In furtherance of
these goals, annual base salaries of the Named Executive Officers and other
key executives are set at levels considered to be competitive with amounts
paid to executive officers with comparable qualifications, experience and
responsibilities at competing companies, based on published surveys and proxy
information, which include base salary, total cash compensation data, and
other SEC required salary disclosures.
Annual Incentive Compensation. Annual incentive compensation for employees
of FAFLIC, Hanover and Citizens Insurance is tied to the achievement of
significant financial performance goals.
FAFLIC, Hanover and Citizens Insurance maintain a consolidated incentive
plan which provides supplementary cash compensation as an incentive to key
employees who, through exceptional performance, contribute materially to the
success of the companies. For 1996, the incentive plan had two components: (a)
the corporate and business unit return on equity; and (b) the successful
completion of individual performance goals. Awards under the incentive plan
may range from 0% to 100% of a participant's base salary.
17
<PAGE>
Long-Term Compensation. FAFLIC maintains a Long-Term Performance Unit Plan
("Long-Term Performance Plan"). The Boards of both Hanover and Citizens
Insurance have ratified the participation of certain of their officers in the
Long-Term Performance Plan.
The objectives of the Long-Term Performance Plan include providing
incentives to attract and retain top executives and achieving significant
long-term financial results for FAFLIC and its subsidiaries. Criteria
considered in determining participation in the Long-Term Performance Plan
include the direct and measurable impact the executive has on longer-term
financial results, the influence the individual has on strategic direction and
the degree of risk inherent in the individual's business decisions. Previously
awarded units are payable dependent upon specific increases in capital,
surplus and equity position determined at of the end of a three-year plan
cycle and payments are made subject to a subsequent three-year vesting cycle.
The last three-year plan cycle under the Long-Term Performance Plan began in
1995. Therefore, no Named Executive Officers were awarded Long-Term
Performance Plan units in 1996, although certain awards made in 1995 will
continue to vest through 1999. Commencing in 1997, long-term incentive
compensation awards will be made to the Named Executive Officers pursuant to
AFC's Long-Term Stock Incentive Plan.
AFC, Allmerica P&C and Citizens Corporation each have in place Long Term
Stock Incentive Plans (the "Stock Plans"). The objectives of each of the Stock
Plans include providing incentives for participants to make substantial
contributions to the company's long-term business growth, enhancing the
company's ability to attract and retain executive officers and other key
employees, rewarding participants for their contributions to the success of
the company, and aligning the interests of executive officers and other key
employees with those of the company's stockholders. Up to 2,350,000 shares are
available for awards under the AFC plan, up to 1,000,000 shares are available
for awards under Allmerica P&C's plan and up to 200,000 shares are available
for awards under Citizens Corporation's plan. In connection with its
conversion from a mutual life insurance company to a stock life insurance
company in October 1995, State Mutual Life Assurance Company of America,
FAFLIC's predecessor, agreed with the Commissioner of Insurance of the
Commonwealth of Massachusetts, in the Plan of Reorganization dated February
28, 1995 (the "Plan of Reorganization"), that certain executive officers of
FAFLIC and AFC would not be permitted to acquire AFC stock, and would not be
eligible to participate in any stock-based compensation plan, until one year
after the demutualization was completed. As a result, during 1996 no stock-
based awards were made to the ineligible executive officers, which included
the Named Executive Officers. Factors to be considered in determining the
grant of options under the respective stock plans include the contribution of
each executive to the long-term performance of AFC, Allmerica P&C or Citizens
Corporation, respectively, and the importance of such executive's
responsibilities within the organization.
Special Cash Bonus. In evaluating the total compensation of the Named
Executive Officers and certain other executive officers of FAFLIC and Hanover,
the Compensation Committee also considered the importance of individual stock
ownership of executive officers to the future performance of the Company. Due
to the restrictions imposed by the Plan of Reorganization prohibiting the
Named Executive Officers and certain other executive officers of AFC and
FAFLIC from acquiring AFC stock or participating in AFC's Stock Plan until
October 1996, the Compensation Committee approved a special cash bonus payment
to these executives with the intent that the bonus be used to purchase an
equal amount of AFC Common Stock. As an incentive to encourage such purchases,
for each share of AFC Common Stock purchased with such bonus funds, certain of
the Named Executive Officers will be awarded one share of restricted stock
pursuant to the AFC Stock Plan.
Compensation of the Chief Executive Officer. John F. O'Brien, President and
Chief Executive Officer of AFC, serves as President and Chief Executive
Officer of FAFLIC, and as Chairman of the Board of Hanover and of Citizens
Insurance.
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In approving the 1996 compensation package for Mr. O'Brien, the Compensation
Committee compared Mr. O'Brien's compensation against the comparative base
salaries, annual and long-term incentives and other compensation of chief
executives of a peer group of companies. The peer group companies included (i)
insurance companies identified as having distribution systems,
products/product mix and/or markets similar to FAFLIC and its subsidiaries;
(ii) a subset of insurance companies that were identified by scope of
financial activity (such as assets, revenue, and net written premium); and
(iii) a subset of financial service companies that provide for a
stratification of salary data based on similarity in the nature and scope of
business activities. The Compensation Committee assumes (a) that such
independent variables are meaningful in determining CEO compensation, and (b)
that a correlation exists between pay and such variables. However, the
approach does not consider variances in the business strategies and goals of
each company, the relative competitive positions of the companies, and the
personal characteristics and accomplishments of the individual executives.
Therefore, the review of Mr. O'Brien's compensation by the Compensation
Committee also included an assessment of the performance of FAFLIC and its
subsidiaries in terms of profitability and growth in the various business
lines, as well as an evaluation of the capital positions of the companies, the
implementation of significant cost controls and other strategic initiatives.
In comparison to the peer group of companies, Mr. O'Brien's base salary was
near the median, while the potential for incentive compensation, as a
percentage of base salary, was below the median.
Mr. O'Brien's 1996 incentive compensation performance measures included a
corporate goal based upon GAAP Consolidated Net Income Return on Equity of
AFC, business unit Return on Equity, focus goals relating to earnings per
share, revenue, AFC's stock price and individual performance goals. Individual
performance goals included significant improvement in earnings and capital;
development of alternate distribution systems; initiatives to improve
technology; and continued development and implementation of a strategic plan
for the Company. Achievement of individual performance goals and other
initiatives undertaken by Mr. O'Brien in 1996 resulted in performance that
exceeded expectations.
The Compensation Committee carefully reviewed Mr. O'Brien's personal
achievements against his 1996 goals and based on its evaluation, the Committee
approved Mr. O'Brien's annual incentive compensation award of 96% of his base
salary, out of a maximum potential of 100% of base salary. In addition, the
Committee approved a special bonus award to Mr. O'Brien in the amount of
$1,000,000, based on the reasons discussed in the paragraph entitled "Special
Cash Bonus" above.
The Committee believes that the executive compensation policies of AFC and
its subsidiaries are appropriate both to attract and retain corporate officers
and other key employees of outstanding abilities and to motivate them to
perform to the full extent of their abilities.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
Chief Executive Officer and its four other most highly compensated executive
officers. Qualifying performance-based compensation will not be subject to the
deduction limit if certain requirements are met. In 1996, the compensation
paid to the Chief Executive Officer exceeded the limit imposed by Section
162(m). The Committee monitors the impact of Section 162(m) in order to
balance the benefits of favorable tax treatment with a need to apply prudent
judgment in carrying out AFC's compensation philosophy, recognizing that under
certain circumstances it may be appropriate to exceed the deduction limit.
Members of the Compensation Committee:
Herbert M. Varnum, Chair Robert G. Stachler Richard M. Wall
19
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COMMON STOCK PERFORMANCE CHART
The following graph compares the performance of the Company's Common Stock
since its initial public offering on October 11, 1995 with the performance of
the S&P 500 Index and with the performance of an industry peer group comprised
of a composite of two published indices--the S&P Property-Casualty Insurance
Index and the S&P Life Insurance Index. Returns of the latter two indices have
been weighted according to their respective aggregate market capitalization at
the beginning of each period shown on the graph. The graph plots the changes
in the value of an initial $100 investment over the indicated time periods,
assuming reinvestment of all dividends.
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN *
AMONG ALLMERICA FINANCIAL CORPORATION,
THE S&P 500 INDEX AND A PEER GROUP
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION> Allmerica
Measurement period Financial S & P Peer
(Fiscal Year Covered) Corporation 500 Group
- --------------------- ----------- -------- --------
<S> <C> <C> <C>
Measurement PT -
10/11/95 $100 $100 $100
FYE 12/95 $111 $107 $106
FYE 3/96 $109 $113 $108
FYE 6/96 $124 $118 $112
FYE 9/96 $135 $121 $114
FYE 12/96 $139 $131 $131
</TABLE>
- --------
* $100 invested on 10/11/95 in stock or index--including reinvestment of
dividends. Fiscal year ending December 31.
The insurance composite is a market value weighted composite of the S&P
Property-Casualty Insurance and the S&P Life Insurance indices. The components
of the insurance composite have been weighted in accordance with the
respective aggregate market capitalization of the companies in each index as
of the date of Allmerica Financial Corporation's public offering and at the
beginning of each period shown on the graph, as indicated below:
<TABLE>
<CAPTION>
10/11/95 12/95 3/96 6/96 9/96 12/96
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
S&P Property-Casualty.......... 62.09% 62.73% 61.13% 60.78% 59.62% 61.47%
S&P Life....................... 37.91% 37.27% 38.87% 39.22% 40.38% 38.53%
------ ------ ------ ------ ------ ------
Total.......................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
The Compensation Committee Report and Stock Price Performance Graph above
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that AFC specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and Directors, and persons who beneficially own more than ten percent
(10%) of the Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange (the "NYSE"). Such persons are required by SEC
regulations to provide to AFC copies of all their Section 16(a) filings. Based
solely on a review of the forms furnished to AFC and written representations
from AFC's executive officers and Directors, AFC believes that during 1996
there was full compliance with all Section 16(a) filing requirements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's subsidiaries or affiliates have, from time to time, retained
the services of Bowditch & Dewey, LLP, a law firm in which Mr. Angelini, a
Director of the Company, is a partner.
In April 1996, Ms. Harrison and Messrs. Angelini, Barrett, J.T. Murray,
Sprague, Stachler, Varnum and Wall resigned their positions as Directors of
FAFLIC, the Company's operating subsidiary, in connection with the Company's
restructuring following the demutualization of FAFLIC's predecessor, State
Mutual Life Assurance Company of America. FAFLIC's subsequent Board of
Directors, consisting of insiders, terminated a FAFLIC policy that provided
FAFLIC's directors with periodic cash payments upon retirement from the FAFLIC
Board based on years of service with that company. Accrued benefits under the
terminated policy, which will be paid to the former FAFLIC directors in one
lump sum in 1997, had the following values as of December 17, 1996: $33,074
for Mr. Angelini; $166,851 for Mr. Barrett; $23,910 for Ms. Harrison; $18,417
for Mr. J.T. Murray; $137,745 for Mr. Sprague; $126,798 for Mr. Stachler;
$72,913 for Mr. Varnum; and $76,229 for Mr. Wall. Until the amounts above are
disbursed, the funds are accruing interest at the rate of 7% per annum.
FORM 10-K
Shareholders may obtain without charge a copy of AFC's Annual Report on Form
10-K, including financial statements and financial statement schedules,
required to be filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934 for the fiscal year ended December 31,
1996, by calling (800) 407-5222 or by writing to AFC at 440 Lincoln Street,
Worcester, Massachusetts 01653 (attention: Secretary).
OTHER MATTERS
Management knows of no business which will be presented for consideration at
the Annual Meeting other than as stated in the Notice of Meeting. If, however,
other matters are properly brought before the Annual Meeting, it is the
intention of the proxy holders to vote the shares represented thereby on such
matters in accordance with the recommendation of the Board of Directors and
authority to do so is included in the proxy.
21
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SHAREHOLDER PROPOSALS
Proposals submitted by shareholders of AFC must be received at Allmerica
Financial Corporation, 440 Lincoln Street, Worcester, Massachusetts 01653 on
or before December 1, 1997, to be considered for inclusion in the proxy
materials relating to the 1998 Annual Meeting of Shareholders.
DATED at Worcester, Massachusetts this 31st day of March 1997.
By Order of the Board of Directors,
Richard J. Baker
Vice President and Secretary
22
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EXHIBIT A
ALLMERICA FINANCIAL CORPORATION
LONG-TERM STOCK INCENTIVE PLAN
Section 1. Purpose. The Allmerica Financial Long-Term Stock Incentive Plan
(the "Plan") has been adopted to encourage and create significant ownership of
the Company's Common Stock among executive officers, other key employees and
certain insurance agents and brokers of the Company and its Subsidiaries and
Affiliates. The Plan may be adopted by any Subsidiary of the Company,
including, but not limited to, First Allmerica Financial Life Insurance
Company, The Hanover Insurance Company and Citizens Insurance Company of
America. Any Subsidiary adopting the Plan agrees to adhere to the terms and
conditions of the Plan as set forth below. Additional purposes of the Plan
include:
(a) To provide a meaningful incentive to Participants for making substantial
contributions to the Company's long-term business growth;
(b) To enhance the Company's and its Subsidiaries' ability to attract and
retain executive officers, other key employees and certain insurance agents
and brokers who will make such contributions; and
(c) To closely align the interests of these executive officers and other key
employees with those of Company stockholders by providing opportunities for
them to obtain significant longer term rewards through stock ownership.
Section 2. Definitions.
(a) "Affiliate" means any entity, other than a Subsidiary, that is directly
or indirectly controlled by the Company or in which the Company has a
significant equity interest as determined by the Committee.
(b) "Award" means any Stock Option, Stock Appreciation Right or Stock Award
granted under the Plan.
(c) "Board" means the Company's Board of Directors.
(d) "Cause" shall mean (i) the willful failure by the Participant to perform
substantially the Participant's duties as an employee of the Company (other
than due to physical or mental illness), (ii) the Participant's engaging in
serious misconduct that is injurious to the Company, any Subsidiary or any
Affiliate, (iii) the Participant's having been convicted of, or entered a plea
of nolo contendere to, a crime that constitutes a felony, (iv) the breach by
the Participant of any written or unwritten covenant or agreement not to
compete with the Company, any Subsidiary or any Affiliate or (v) the breach by
the Participant of his or her duty of loyalty to the Company, any Subsidiary
or any Affiliate.
(e) "Change in Control" means the occurrence of any of the following events:
(i) the members of the Board at the beginning of any consecutive twenty-four
calendar month period (the "Incumbent Directors") cease for any reason other
than due to death or retirement to constitute at least a majority of the
members of the Board, provided that any director whose election or nomination
for election by the Company's stockholders was approved by a vote of at least
a majority of the members of the Board at the beginning of such twenty-four
calendar month period shall be treated as an Incumbent Director; (ii) any
"person" including a "group" (as such terms are used in Section 13(d) and
14(d)(2) of the 1934 Act, but excluding the Company, any of its
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Subsidiaries, any employee benefit plan of the Company or any of its
Subsidiaries) is or becomes the "beneficial owner" (as defined in Rule
13(d)(3) under the 1934 Act), directly or indirectly, of securities of the
Company representing 35% or more of the combined voting power of the Company's
then outstanding securities; or (iii) the stockholders of the Company shall
approve a definitive agreement (1) for the merger or other business
combination of the Company with or into another corporation, a majority of the
directors of which were not directors of the Company immediately prior to the
merger or other business combination and in which the stockholders of the
Company immediately prior to the effective date of such merger or other
business combination own less than 50% of the voting power in such corporation
or (2) for the sale or other disposition of all or substantially all of the
assets of the Company.
(f) "Change in Control Price" means the highest price per Share offered in
conjunction with any transaction resulting in a Change in Control (as
determined in good faith by the Committee if any part of the offered price is
payable other than in cash) or, in the case of a Change in Control occurring
solely by reason of a change in the composition of the Board, the highest Fair
Market Value of the Stock on any of the 30 trading days immediately preceding
the date on which a Change in Control occurs.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(h) "Committee" means a committee of not less than two non-employee members
of the Board, appointed by the Board to administer the Plan. The Committee
shall be comprised of members who qualify to administer this Plan as
contemplated by Rule 16b-3 under the 1934 Act (or any successor rule thereto).
(i) "Common Stock" means the common stock, par value $.01 per share, of the
Company.
(j) "Company" means Allmerica Financial Corporation, a corporation
established under the laws of the State of Delaware.
(k) "Disability" shall mean long-term disability as defined under the terms
of the Company's or any Subsidiaries' applicable long term disability plans or
policies.
(l) "Early Retirement" with respect to a Participant shall mean retirement
under any qualified pension plan maintained by the Company or any of its
Subsidiaries or Affiliates at or after the earliest age at which a Participant
may retire and receive an immediate, but actuarially reduced, retirement
benefit under such plan. If a Participant is not a participant in such a plan,
"Early Retirement" shall mean retirement at or after age 55 with at least 15
years of service with the Company or a Subsidiary.
(m) "Fair Market Value" means, with respect to Common Stock, the fair market
value of a Share as determined by the Committee in good faith in such manner
as shall be established by the Committee from time to time; provided that at
any time that the Common Stock is traded on an established securities market,
Fair Market Value means the last reported sale price at which the Common Stock
is traded on such date or, if no Common Stock is traded on such date, the most
recent date on which Common Stock was traded, as reflected on such public
market. Under no circumstances shall the Fair Market Value be less than the
par value of the Common Stock.
(n) "Incentive Stock Option" or "ISO" means a Stock Option to purchase
Shares awarded to a Participant which is intended to meet the requirements of
Section 422 of the Code or any successor provision.
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(o) "Non-Qualified Stock Option" or "NQSO" means a Stock Option to purchase
Shares of Common Stock awarded to a Participant which is not intended to meet
the requirements of Section 422 of the Code or any successor provision.
(p) "1934 Act" means the Securities Exchange Act of 1934, as amended from
time to time.
(q) "Normal Retirement" with respect to a Participant shall mean retirement
under any qualified pension plan maintained by the Company or any of its
Subsidiaries or Affiliates at or after the earliest age at which a Participant
may retire and receive a retirement benefit under such plan without an
actuarial reduction for early commencement of benefits. If a Participant is
not a participant in such a plan, "Normal Retirement" shall mean retirement at
or after age 65 with no minimum service requirement.
(r) "Participant" means a person selected by the Committee (or its delegate
as provided under Section 4) to receive an Award under the Plan.
(s) "Reporting Person" means an individual who is subject to Section 16 of
the 1934 Act by virtue of his or her relationship with the Company.
(t) "Senior Management" means the executive officers (within the meaning of
Rule 3b-7 under the 1934 Act) of the Company from time to time, whether such
persons are officers of the Company or of a Subsidiary.
(u) "Shares" means shares of the Common Stock of the Company.
(v) "Stock Appreciation Right" or "SAR" means an Award in the form of a
right to receive a payment equal to the excess of Fair Market Value as of the
date of exercise over the base value of the SAR.
(w) "Stock Award" means an Award to a Participant comprised of Common Stock
or valued by reference to Common Stock granted under Section 7 of the Plan.
(x) "Stock Option" means an Award in the form of the right to purchase a
specified number of Shares at a specified price during a specified period.
(y) "Subsidiary" shall mean any entity of which the Company possesses
directly or indirectly fifty percent (50%) or more of the total combined
voting power of all classes of stock of such entity.
Section 3. Effective Date. Subject to the approval of the stockholders of
the Company, the Plan shall be effective as of May 22, 1996. Senior
Management, however, shall not be eligible to participate until the later of
the date the Board adopts the Plan with respect to Senior Management or
October 17, 1996. No Awards may be made under the Plan after ten years from
the effective date or earlier termination of the Plan by the Board.
Section 4. Administration. The Plan shall be administered by the Committee.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the operation of the
Plan as it shall from time to time consider advisable. The Committee shall
also have full discretion to interpret the provisions of the Plan. Any
decision or action taken or to be taken by the Committee, arising out of or in
connection with the construction, administration, interpretation and effect of
the Plan and of its rules and regulations, shall, to the maximum extent
permitted by applicable law, be within its absolute discretion (except as
otherwise specifically provided herein) and shall be conclusive and binding
upon all Participants and any
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person claiming under or through any Participant. To the extent permitted by
applicable law and the provisions of the Plan, the Committee may delegate to
one or more employee members of the Board the power to make Awards to
Participants who are not Reporting Persons.
Section 5. Eligibility. Any executive officer or other key employee
(including, without limitation, insurance agents, brokers and independent
agents) of the Company, any Subsidiary or any Affiliates shall be eligible to
receive an Award under the Plan, provided that such participation would not
jeopardize (i) the Plan's compliance with Rule 16b-3 under the 1934 Act or any
successor rule, and (ii) the Company's ability to register shares underlying
the Plan on Registration Statements on Form S-8 pursuant to the Securities Act
of 1933, as amended, or any successor form. Directors who are not employees
shall not be eligible to be granted Awards under the Plan.
Section 6. Stock Available for Awards.
(a) Common Shares Available. The maximum number of Shares available for
Awards under the Plan with respect to each fiscal year the Plan is in effect
will be 1.25% of the total Shares of outstanding Common Stock of the Company
as of the start of each such fiscal year plus any Shares available for Awards
under the Plan in prior fiscal years but not used. Shares of Common Stock
underlying any Awards which are forfeited, canceled, reacquired by the
Company, satisfied without the issuance of Common Stock or otherwise
terminated (other than by exercise) shall be added back to the Shares of
Common Stock available for issuance under the Plan.
(b) Share Usage Limits. For the period that the Plan is in effect, the
aggregate number of Shares that may be issued on exercise of Stock Options and
as Stock Awards shall be as follows: (i) an amount equal to the sum of (a)
five percent (5%) of the number of Shares outstanding at the close of business
on May 20, 1997, plus (b) an amount, not to exceed 1,172,000 Shares, equal to
the number of Shares underlying Awards granted under the Plan and not
surrendered as of May 20, 1997; and (ii) thereafter, commencing with the
annual meeting of shareholders in 1998, increasing annually the maximum number
of Shares that may be issued under the Plan by an amount equal to one and one-
quarter percent (1.25%) of the number of Shares outstanding at the close of
business on the day of each annual meeting of shareholders for the term of the
Plan. Additionally, the aggregate number of Shares that may be covered by
Awards for any one Participant over the period that the Plan is in effect
shall not exceed 500,000 Shares.
(c) Adjustments. In the event of any stock dividend, stock split,
combination or exchange of Shares, merger, consolidation, spin-off or other
distribution (other than normal cash dividends) of Company assets to
stockholders, or any other change affecting Shares, such proportionate
adjustments, if any, as the Committee in its discretion may deem appropriate
to reflect such change shall be made with respect to (i) the aggregate number
of Shares that may be issued under the Plan; (ii) the number of Shares covered
by each outstanding Award made under the Plan; and (iii) the option, base or
purchase price per Share for any outstanding Stock Options, Stock Appreciation
Rights and other Awards granted under the Plan, provided that any such actions
are consistently and equitably applicable to all affected Participants. In
addition, any Shares issued by the Company through the assumption or
substitution of outstanding grants or grant commitments from an acquired
entity shall not reduce the Shares available for issuance under the Plan.
Section 7. Awards.
(a) General. The Committee (or its delegate, as permitted under Section 4),
shall determine the type or types of Award(s) (as set forth below) to be made
to each Participant and shall approve the terms and conditions
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of all such Awards in accordance with Sections 4 and 8 of the Plan. Awards may
be granted singularly, in combination, or in tandem such that the settlement
of one Award automatically reduces or cancels the other. Awards may also be
made in replacement of, as alternatives to, or as form of payment for grants
or rights under any other employee compensation plan or arrangement of the
Company, including the plans of any acquired entity.
(b) Stock Option. A Stock Option shall confer on a Participant the right to
purchase a specified number of Shares from the Company subject to the terms
and conditions of the Stock Option grant. Stock Options may be in the form of
ISOs or NQSOs. The terms and conditions of ISOs shall be subject to and comply
with Section 422 of the Code, or any successor provision, and any regulations
thereunder. Anything in the Plan notwithstanding, no term of the Plan relating
to ISOs shall be interpreted, amended or altered, nor shall any discretion or
authority granted to the Committee under the Plan be so exercised, so as to
disqualify the Plan or, without the consent of the optionee, any ISO granted
under the Plan, under Section 422 of the Code. The Committee shall establish
the option price at the time each Stock Option is awarded, provided that such
price shall not be less than 100% of the Fair Market Value of the Common Stock
on the date the Stock Option is granted. If a Participant owns or is deemed to
own (by reason of the attribution rules applicable under Section 424(d) of the
Code) more than 10% of the combined voting power of all classes of stock of
the Company or any subsidiary or parent corporation and an ISO is awarded to
such Participant, the option price shall not be less than 110% of the Fair
Market Value at the time such ISO is awarded. The aggregate Fair Market Value
at time of grant of the Shares covered by ISOs exercisable by any one optionee
in any calendar year shall not exceed $100,000 (or such other limit as may be
required by the Code).
Each Stock Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may specify at or after the time of
grant; provided, however, that if the Committee does not establish a different
exercise schedule at or after the date of grant of a Stock Option, such Stock
Option shall become exercisable in five approximately equal annual
installments on each of the first, second, third, fourth and fifth
anniversaries of the date the Stock Option is granted. A Stock Option shall
not be exercisable after the expiration of ten years from the date of grant.
The recipient of a Stock Option shall pay the exercise price for the Shares in
cash or pursuant to such other arrangements as are satisfactory to the
Committee, including, without limitation, using Shares valued at Fair Market
Value on the date of exercise. The Committee may also permit Participants to
have the option price delivered to the Company by a broker pursuant to an
arrangement whereby the Company, upon irrevocable instructions from a
Participant, delivers the exercised Shares to the broker. A Stock Option may
include forfeitability contingencies based on continued employment with the
Company or a Subsidiary. In addition, a violation of a continued employment
provision may entitle the Company or a Subsidiary to repurchase the Shares
obtained through the Stock Option at the original exercise price, without
interest.
Unless the Committee shall otherwise permit a Stock Option to remain
exercisable for such greater or lesser period (but not beyond its otherwise
stated term) as the Committee shall specify at or after the grant of such
Stock Option, a Stock Option shall be exercisable following the termination of
a Participant's employment with the Company and each Subsidiary and Affiliate
only to the extent provided in this paragraph. If a Participant's employment
terminates due to the Participant's death, Disability, Normal Retirement or
Early Retirement with the consent of the Committee, the Participant (or, in
the event of the Participant's death or Disability during employment or during
the period during which a Stock Option is exercisable under this sentence, the
Participant's beneficiary or legal representative) may exercise any Option
held by the Participant at the time of such termination, regardless of whether
then exercisable, for up to three years (or such greater or lesser period as
the Committee shall determine at or after grant) following the date of such
termination, but in no event after the date the Stock Option otherwise
expires. If a Participant's employment is terminated for Cause or, if
following
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the Participant's termination of employment, the Committee determines that the
Participant's employment could have been terminated for Cause, all Stock
Options held by the Participant shall immediately terminate, regardless of
whether then exercisable and any Stock Option exercised by the Participant in
anticipation of his/her For Cause termination shall be rescinded and the stock
returned to the Company and/or its Subsidiary and the exercise price returned
to the Participant. Any option exercised 60 days before notice of termination
and all options exercised after notice of termination shall be considered to
be exercised in anticipation of termination.
(c) Stock Appreciation Rights (SARs). An SAR grant shall confer on a
Participant the right to receive in Shares, cash or a combination, up to the
positive difference, if any, between the Fair Market Value of a designated
number of Shares when the SARs are exercised and the base price of the SAR
contained in the terms and conditions of the Award. The Committee shall have
the authority to grant an SAR in tandem with a Stock Option, in addition to a
Stock Option, or freestanding and unrelated to a Stock Option. An SAR granted
in tandem or in addition to a Stock Option may be granted either at the same
time as the Stock Option or at a later time. An SAR shall not be exercisable
after the expiration of ten years from the date of grant. Shares issued in
settlement of the exercise of SARs shall be valued at their Fair Market Value
on the date of exercise.
The Committee shall establish the base price of the SAR at the time the SARs
are awarded; provided that the base price of an SAR granted in combination
with, in tandem with, or in replacement for a Stock Option shall have a base
price determined in the same manner as, and subject to the same conditions as
applied with respect to, such Stock Option under Section 7(b). The Committee
shall determine the time or times at which or the event or events (including,
without limitation, a Change in Control) upon which an SAR may be exercised in
whole or in part; provided, however, that unless otherwise specified by the
Committee at or after grant, an SAR granted in tandem with a Stock Option
shall be exercisable at the same time or times as the related Stock Option is
exercisable.
(d) Stock Awards. A Stock Award shall confer on a Participant the right to
acquire a specified number of Shares for a purchase price (which may be zero)
or the right to receive a cash equivalent payment or a combination of both
subject to the terms and conditions of the Award, which may include
forfeitability contingencies based on continued employment with the Company or
a Subsidiary or on meeting performance criteria or both, and the Committee may
also grant Stock Awards that are not subject to any restrictions. A Stock
Award may be in the form of Shares or share units. In no event shall more than
25% of the total amount of Shares available under the Plan be granted as Stock
Awards. Such 25% limit shall be subject to the replenishment provision in
Section 6(a).
If the vesting of a Stock Award is conditioned in whole or in part upon the
attainment of specified performance goals or targets (or if the vesting of a
Stock Award that will vest upon the passage of time and the Participant's
continued employment is accelerated upon the attainment of such goals or
targets), such goals and targets shall be determined by the Committee and set
forth in the specific Award agreements. Such performance goals or targets may
be related to the performance of (i) the Company; (ii) a Subsidiary or an
Affiliate, (iii) a division or unit of the Company, any Subsidiary or any
Affiliate, (iv) the Participant or (v) any combination of the foregoing, over
a performance period or periods established by the Committee. Except to the
extent otherwise expressly provided herein, the Committee may, at any time and
from time to time, change the performance objectives applicable with respect
to any Stock Award to reflect such factors, including, without limitation,
changes in a Participant's duties or responsibilities or changes in business
objectives (e.g., from corporate to Subsidiary or business unit performance or
vice versa), as the Committee shall deem necessary or appropriate. In making
any such adjustment, the Committee shall adjust the number of Shares subject
to any such Stock
A-6
<PAGE>
Award or take other appropriate actions to prevent any enlargement or
diminution of the Participant's rights related to service rendered and
performance attained prior to the effective date of such adjustment.
Unless the Committee otherwise determines at or after grant, the rights of a
Participant with respect to a Stock Award outstanding at the time of the
Participant's termination of employment with the Company and each Subsidiary
and Affiliate shall be determined pursuant to this paragraph. In the event
that a Participant's employment terminates due to the Participant's (i) death,
(ii) disability, (iii) retirement; or, (iv) early retirement with the consent
of the Committee, a pro-rated portion of any unvested Shares subject to a
Stock Award shall become vested based on the number of days the Participant
actually worked since the date the Stock Award was granted (or in the case of
any award which becomes vested in installments, since the date, if any, on
which the last installment of such Stock Award became vested); provided that,
in the case of an award with respect to which the restrictions will lapse, if
at all, based on the attainment of performance goals or targets, such vesting
shall be deferred until the end of the applicable performance period and be
based on that number of Shares of such Stock Award, if any, that would have
been earned based on the attainment or partial attainment of such performance
goals or targets. Any portion of any Stock Award that has not vested at the
date of a Participant's termination of employment (or which does not become
vested until after such date under the preceding sentence) shall be forfeited
as of such termination date (or, if applicable, such deferred vesting date).
Section 8. General Provisions Applicable to Awards.
(a) Transferability and Exercisability. Unless the Committee shall permit
(on such terms and conditions as it shall establish) an Award to be
transferred to a member of the Participant's immediate family, a Guardian, or
to a trust or similar vehicle for the benefit of such immediate family members
("Permitted Transferees"), any Award under this Plan will be non-transferable
and accordingly shall not be assignable, alienable, saleable or otherwise
transferable by the Participant other than by will or the laws of descent and
distribution; provided, however, that in no event shall the Committee permit
any Award to be transferable if the effect thereof would be to cause any other
nontransferable Award to fail to qualify for the exemptive relief available
under Rule 16b-3 promulgated under the 1934 Act. During the Participant's
lifetime, only the Participant (or the Participant's Permitted Transferees, if
any) shall be able to exercise any Stock Option or SAR awarded to the
Participant. If so permitted by the Committee, a Participant may designate a
beneficiary or beneficiaries to exercise the Participant's rights and receive
any distribution under this Plan upon the Participant's death.
(b) General Restriction. Each Award shall be subject to the requirement
that, if at any time the Committee shall determine, in its sole discretion,
that the listing, registration, exemption or qualification of any Award under
the Plan upon any securities exchange or under any state or federal law, or
the consent or approval of any government regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of such Award
or the grant or settlement thereof, such Award may not be exercised or settled
in whole or in part unless such listing, registration, qualification,
exemption, consent or approval has been effected or obtained free of any
conditions not acceptable to the Committee.
(c) Tax Withholding. The Company or any Subsidiary which adopts the Plan
shall have the right to deduct from any settlement of an Award, including the
delivery or vesting of Shares, made under the Plan, a sufficient amount to
cover withholding of any federal, state or local taxes required by law or to
take such other actions as may be necessary to satisfy any such withholding
obligations. The Committee may require or permit Shares to be used to satisfy
required tax withholding and such Shares shall be valued at their Fair Market
Value on the date the tax withholding is effective.
A-7
<PAGE>
(d) Documentation of Grants. Awards made under the Plan shall be evidenced
by written agreements or such other appropriate documentation as the Committee
shall prescribe. Any written agreement or other such documentation shall be
delivered to the Participant and shall incorporate the terms of the Plan by
reference and specify the terms and conditions thereof and any rules
applicable thereto. The Committee need not require the execution of any
instrument or acknowledgment of notice of an Award under the Plan, in which
case acceptance of such Award by the respective Participant will constitute
agreement to the terms of the Award and acceptance of the Award in accordance
with the terms of this Agreement.
(e) Settlement. The Committee shall determine whether Awards are settled in
whole or in part in cash, Shares or other Awards. The Committee may require or
permit a Participant to defer all or any portion of a payment under the Plan,
including the crediting of interest on deferred amounts denominated in cash.
(f) Change in Control. Except as provided below, in the event of a Change in
Control, each Stock Option (including, for this purpose, any SAR granted in
tandem with such Stock Option) and each freestanding SAR (whether or not then
exercisable) shall be cancelled in exchange for a payment in cash of an amount
equal to the excess of the Change in Control Price (or, in the case of any
ISO, the excess of the Fair Market Value on the date of exercise) over the
exercise or base price thereof and all Stock Awards shall become
nonforfeitable. Notwithstanding the immediately preceding sentence, no
cancellation, cash settlement or acceleration of vesting shall occur with
respect to any Award or any class of Awards if the Committee reasonably
determines in good faith prior to the occurrence of a Change in Control that
such Award or Awards shall be honored or assumed, or new rights substituted
therefor (such honored, assumed or substituted award hereinafter called an
"Alternative Award"), by a Participant's employer (or the parent or a
subsidiary of such employer) immediately following the Change in Control,
provided that any such Alternative Award must:
(i) be based on stock which is traded on an established securities
market, or which will be so traded within 60 days of the Change in Control;
(ii) provide such Participant (or each Participant in a class of
Participants) with rights and entitlements substantially equivalent to or
better than the rights, terms and conditions applicable under such Award,
including, but not limited to, an identical or better exercise or vesting
schedule and identical or better timing and methods of payment;
(iii) have substantially equivalent economic value to such Award
(determined at the time of the Change in Control); and
(iv) have terms and conditions which provide that in the event that the
Participant's employment is involuntarily terminated or constructively
terminated, any conditions on a Participant's rights under, or any
restrictions on transfer or exercisability applicable to, each such
Alternative Award shall be waived or shall lapse, as the case may be.
For this purpose, a constructive termination shall mean a termination by a
Participant following a material reduction in the Participant's compensation,
a material reduction in the Participant's responsibilities or the relocation
of the Participant's principal place of employment to another location, in
each case without the Participant's written consent.
Section 9. Miscellaneous.
(a) Plan Amendment. The Board or the Committee may amend the Plan as it
deems necessary or appropriate to better achieve the purposes of the Plan,
except that no amendment without the approval of the
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<PAGE>
Company's stockholders shall be made which would (i) increase the total number
of Shares available for issuance under the Plan, (ii) materially increase the
benefits accruing to Participants under the Plan, or (iii) materially modify
the requirements as to eligibility for participation in the Plan.
(b) No Right to Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as giving a
Participant the right to continued employment. The Company expressly reserves
the right at any time to dismiss a Participant free from any liability or
claim under the Plan, except as expressly provided by an applicable agreement
or other documentation of an Award.
(c) No Rights as Shareholder. Only upon issuance of Shares to a Participant
(and only in respect to such Shares) shall the Participant obtain the rights
of a shareholder, subject, however, to any limitations imposed by the terms of
the applicable Award.
(d) No Fractional Shares. No fractional shares shall be issued under the
Plan, however, the Committee may provide for a cash payment as settlement in
lieu of any fractional shares.
(e) Other Company Benefit and Compensation Programs. Except as expressly
determined by the Committee, settlements of Awards received by Participants
under this Plan shall not be deemed as part of a Participant's regular,
recurring compensation for purposes of calculating payments or benefits from
any Company or Subsidiary benefit or severance program (or severance pay law
of any country). The above programs notwithstanding, the Company may adopt
other compensation plans or arrangements as it deems appropriate or necessary.
(f) Unfunded Plan. The Plan shall be unfunded and shall not create (or be
construed to create) a trust or a separate fund(s). Likewise, the Plan shall
not establish any fiduciary relationship between the Company, any Subsidiary
or Affiliate and any Participant or other person. To the extent any person
holds any rights by virtue of an Award granted under the Plan, such rights
shall be no greater than the rights of an unsecured general creditor of the
Company, any Subsidiary or Affiliate.
(g) Successors and Assignees. The Plan shall be binding on all successors
and assignees of a Participant, including, without limitation, the estate or
beneficiaries of such Participant and the executor, administrator or trustee
of such estate, or any receiver or trustee in bankruptcy or representative of
the Participant's creditors.
(h) Governing Law. The validity, construction and effect to the Plan and any
actions taken under or relating to the Plan shall be determined in accordance
with the laws of the State of Delaware.
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<PAGE>
LOGO
09668 (Rev.3/97)
<PAGE>
ALLMERICA FINANCIAL CORPORATION
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 20, 1997
The undersigned, having received the Notice of Annual Meeting of
Stockholders and the Board of Directors' Proxy Statement (the "Proxy
Statement"), hereby appoint(s) John F. O'Brien and John F. Kelly, and each of
them, Proxies of the undersigned (with full power of substitution) to attend
the Annual Meeting of Stockholders of Allmerica Financial Corporation to be
held May 20, 1997, and all adjournments thereof (the "Meeting"), and there to
vote all shares of Common Stock of Allmerica Financial Corporation that the
undersigned would be entitled to vote, if personally present, in regard to all
matters that may come before the Meeting.
The undersigned hereby confer(s) upon the Proxies, and each of them,
discretionary authority (i) to consider and act upon such business, matters or
proposals other than the business set forth below as may properly come before
the Meeting and (ii) with respect to the election of Directors in the event
that any of the nominees is unwilling to serve. The Proxy when properly
executed will be voted in the manner specified herein. If no specification is
made, the Proxies intend to vote FOR each proposal and FOR all nominees for
director.
Please mark vote as in this example. [X]
---
1. For the election of all nominees listed below (except as otherwise
indicated).
Nominees: David A. Barrett, Gail L. Harrison and Robert G. Stachler
[_] FOR all nominees [_] WITHHOLD from all nominees
___________________________________________________________________
FOR all nominees, except those listed on the line above
2. Ratification of the appointment of Price Waterhouse LLP as the independent
public accountants of Allmerica Financial Corporation.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approval of an amendment to the Long-Term Stock Incentive Plan to increase
the total number of shares of Common Stock that may be issued under such
plan, as more fully described in the Proxy Statement.
[_] FOR [_] AGAINST [_] ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS,
WHICH RECOMMENDS APPROVAL OF THE FOREGOING PROPOSALS
(Form of Proxy continued)
<PAGE>
Mark here for address change and note below. [_]
___________________________________ ____________
Signature Date
___________________________________ ____________
Signature Date
In signing, please write name(s) exactly as appearing in the imprint on this
card. For shares held jointly, each joint owner should sign. If signing as
executor, or in any other representative capacity, or as an officer of a
corporation, please indicate your full title as such.
[End of Proxy]
