SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
SCHEDULE 14D-9
Solicitation/Recommendation Statement Pursuant to
Section 14(d)(4) of the Securities Exchange Act of 1934
GUARANTY NATIONAL CORPORATION
(Name of Subject Company)
GUARANTY NATIONAL CORPORATION
(Name of Person(s) Filing Statement)
Common Stock, par value $1.00 per share
(Title of Class of Securities)
401192109
(CUSIP Number of Class of Securities)
Michael L. Pautler
Senior Vice President - Finance
Guaranty National Corporation
9800 South Meridian Boulevard
Englewood, Colorado 80112
(303) 754-8400
(Name, address and telephone number of person authorized
to receive notice and communications on behalf of the
person(s) filing statement)
Copy to:
Hardin Holmes, Esq.
Ireland, Stapleton, Pryor & Pascoe, P.C.
1675 Broadway, 26th Floor
Denver, Colorado 80202
(303) 623-2700
Item 1. SECURITY AND SUBJECT COMPANY
The subject company is Guaranty National Corporation, a Colorado
corporation (the "Company"). The address of the principal executive offices of
the Company is 9800 South Meridian Boulevard, Englewood, Colorado 80112. The
title of the class of equity securities to which this statement relates is the
Common Stock, par value $1.00 per share (the "Shares"), of the Company.
Item 2. TENDER OFFER OF THE BIDDER
This statement relates to the tender offer disclosed in a Schedule
14D-1 dated May 8, 1996 (the "Schedule 14D-1") of Orion Capital Corporation
("Orion") and the following wholly-owned subsidiaries of Orion: The Connecticut
Indemnity Company, Connecticut Specialty Insurance Company, Design Professionals
Insurance Company, EBI Indemnity Company, The Fire and Casualty Insurance
Company of Connecticut and Specialty Insurance Company of Hartford (together
with Orion, the "Purchasers"), to purchase up to 4,600,000 Shares at $17.50 per
Share net to the seller in cash, upon the terms and subject to the conditions
set forth in the Offer to Purchase dated May 8, 1996 (the "Offer to Purchase"),
and the related Letter of Transmittal (which together constitute the "Offer").
The Schedule 14D-1 states that the principal executive offices of Orion are
located at 600 Fifth Avenue, New York, New York 10020, and that the principal
executive offices of Orion's wholly-owned subsidiaries who are Purchasers are
located at 9 Farm Springs Drive, Farmington, Connecticut 06032.
Item 3. IDENTITY AND BACKGROUND
(a) The name and business address of the Company, which is the
person filing this statement, are set forth in Item 1, above.
(b) Certain contracts, agreements, arrangements, and
understandings, and any actual or potential conflicts of interest, between the
Company or its affiliates and (i) the Company's executive officers, directors or
affiliates, (ii) Orion or its executive officers, directors or affiliates, or
(iii) any other Purchasers or their executive officers, directors or affiliates,
are described in the sections entitled "Election of Directors," "Security
Ownership of Directors, Officers, and Principal Beneficial Owners," "Executive
Compensation," and "Certain Relationships and Related Transactions" in the
Company's Proxy Statement dated March 28, 1996, for its Annual Meeting of
Shareholders held on Wednesday, May 15, 1996 (the "1996 Proxy Statement"),
"Directors and Executive Officers of the Registrant" in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form
10-K"), and in the Offer to Purchase under the headings "SPECIAL FACTORS --
Background of the Transaction," " - Fairness of the Offer," " - Purpose and
Structure of the Transaction; Plans for the Company After the Offer," and " -
Interests of Certain Persons in the Transaction; Securities Ownership; Related
Transactions." Copies of the portions of the 1996 Proxy Statement, the 1995 Form
10-K and the Offer to Purchase referred to above are filed herewith as Exhibits
1, 2 and 3, respectively, and are incorporated herein by reference.
As a result of the Offer, all options granted under the Company's 1991
Long-Term Performance Incentive Plan (the "Incentive Plan") have become
immediately exercisable and all restrictions provided for under the Incentive
Plan on the shares of restricted stock awarded thereunder have lapsed. Thus,
the executive officers of the Company have the following fully exercisable
options and restricted stock free of all restrictions as a result of the Offer:
Number of Number of
Fully Exercisable Restricted Shares
Options Free of Restrictions
------------------ --------------------
Roger B. Ware 61,000 (a) 2,500
Fred T. Roberts 33,000 (b) 1,500
Arthur J. Mastera 31,000 (c) 11,500
Michael L. Pautler 34,000 (d) 11,500
Jacqueline L. Melton 22,500 (e) 1,500
James R. Pouliot 35,000 (f) 12,000
Shelly J. Hengsteler 2,500 (f) 0
(a) Of which 15,750 were not exercisable prior to the Offer.
(b) Of which 10,750 were not exercisable prior to the Offer.
(c) Of which 10,750 were not exercisable prior to the Offer.
(d) Of which 10,750 were not exercisable prior to the Offer.
(e) Of which 9,875 were not exercisable prior to the Offer.
(f) None of which was exercisable prior to the Offer.
Except as described or incorporated by reference herein, as of the date
hereof, there exists no material contract, agreement, arrangement or
understanding and no material actual or potential conflict of interest between
the Company or its affiliates and (i) the Company's executive officers,
directors or affiliates, (ii) Orion or its executive officers, directors or
affiliates, or (iii) any other Purchasers or their executive officers, directors
or affiliates.
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Background of the Offer; Appointment of the Special Committee
According to the Offer to Purchase, Alan R. Gruber, Chairman and Chief
Executive Officer of Orion and Chairman of the Board of the Company, and Roger
B. Ware, the Company's President and Chief Executive Officer and a member of the
Board of Directors of both the Company and Orion, have discussed from time to
time increasing Orion's ownership interest in the Company. At the April 2, 1996
meeting of the Board of Directors of the Company, Mr. Ware asked Mr. Gruber to
indicate Orion's present plans, if any, with respect to increasing its ownership
interest in the Company. Mr. Gruber indicated that no plans, proposals or any
intention had been arrived at by Orion or its subsidiaries which hold Shares,
but that each reserved the right to develop plans to acquire additional Shares,
including through open-market purchases or a tender offer which could be for all
or a part of the Shares. Mr. Ware stated that, if Orion made a tender offer for
Shares, it would be his personal preference that Orion acquire all of the equity
of the Company.
On May 7, 1996, at special meetings, the Board of Directors of each
Purchaser authorized the making of the Offer. At the meeting of the Board of
Directors of Orion, Mr. Ware participated but abstained from voting. The
Company was advised that the Offer would be commenced on May 8, 1996, and a
press release was issued by Orion on May 7, 1996.
A regularly scheduled meeting of the Company's Board of Directors was
held on Wednesday, May 15, 1996, and at such meeting, the Board appointed a
special committee (the "Special Committee") consisting of five (5) outside
directors: Dennis J. Lacey, Chairman, Tucker Hart Adams, M. Ann Padilla, Carroll
D. Speckman, and Richard R. Thomas. None of the members of the Special
Committee is affiliated with the Company or any of its affiliates, including
Orion or any of the other Purchasers, other than in his or her capacity as a
director or shareholder of the Company, except that Mr. Thomas is Chairman of
the Board and sole owner of ADCO General Corporation, a general agent of the
Company. ADCO has received from the Company gross commissions (including
contingency commissions), pursuant to a standard agency contract, of
approximately $813,000 in 1995 and is expected to receive gross commissions of
approximately the same amount during the current fiscal year.
The Board authorized and directed the Special Committee "to review the
Purchaser's Offer to Purchase ... and to make a recommendation to the Board of
Directors as to how the Company should fulfill its obligations with respect to
the tender offer, including without limitation its obligation to prepare and
file with the Securities and Exchange Commission and mail to its shareholders a
Statement on Schedule 14D-9 under the Securities Exchange Act of 1934, as
amended, disclosing the Company's position with respect to the Offer". In
addition, the Special Committee was authorized to take all actions necessary or
appropriate in connection with the obligations of the Board of Directors arising
out of the tender offer and to retain such legal and financial advisors as it
deems appropriate to assist it in carrying out its activities.
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On May 15, 1996, the Special Committee met and retained Ireland,
Stapleton, Pryor & Pascoe, P.C. ("Ireland Stapleton") and Salomon Brothers Inc
("Salomon Brothers") to act as its legal and financial advisors, respectively.
On May 16, 1996, the Special Committee met with its advisors to discuss the
evaluation process and methodology. On May 19 and 20, 1996, the Special
Committee met with its advisors to evaluate and discuss the Offer. On May 21,
1996, the Special Committee again met to discuss its presentation to the Board
and, at a subsequent meeting of the Board of Directors on that day, reported
that it was unable at this time to take a position with respect to the Offer for
the following reasons:
(i) the Special Committee's financial advisor, Salomon Brothers,
has evaluated a number of factors in the course of its extensive review of the
Offer and of the Company, including but not limited to an analysis of certain
publicly available financial statements and other information of the Company; a
review of the Company's 1996 operating plan; discussions of the past and current
operations and financial condition and the prospects of the Company with senior
executives of the Company and members of the Special Committee; a review of the
historical and recent reported prices and trading activity for the Shares; a
comparison of the financial performance of the Company and the prices and
trading activity of the Shares with that of certain other comparable publicly-
traded companies and their securities; and a review of the terms, to the extent
publicly available, of certain transactions which Salomon Brothers believes are
comparable. As a result of certain questions and comments from members of the
Special Committee after presentation of its analyses and findings, Salomon
Brothers is preparing additional information for the Special Committee to
evaluate. The Special Committee has indicated to the Board that it has concerns
relating to the Offer price and to the potential impact on the value and
liquidity of the remaining Shares in the event of a tender offer for less than
100% of the outstanding Shares.
(ii) The Special Committee desired to initiate discussions with the
Purchasers with respect to the structure of the transaction and the Offer price.
(iii) Since Salomon Brothers has not completed its evaluation of the
Offer for the Special Committee, and given the Special Committee's desire to
initiate discussions with the Purchasers, the Special Committee had determined
that it was not prepared at this time to request Salomon Brothers to issue an
opinion as to the fairness of the Offer to the shareholders of the Company.
Immediately following the adjournment of the Board of Directors
meeting, Mr. Gruber, the members of the Special Committee, and their respective
legal and financial advisors, convened to discuss the above matters. The
discussions were preliminary and inconclusive and the Special Committee expects
that additional discussions will be held in the near future. The Special
Committee was told by Mr. Gruber that the Purchasers have no intention to change
the Offer price or to increase their holdings to more than approximately 80% of
the outstanding Shares; the Special Committee has no reason to expect that the
additional discussions will result in any material changes to the structure of
the transaction or to the Offer price. The Special Committee may request an
opinion as to the fairness of the current Offer, or any revised offer,
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from Salomon Brothers once any further discussions with the Purchasers have
concluded, but there can be no assurance that Salomon Brothers will be able to
render an opinion that the Offer, or any revised offer, is fair from a financial
point of view.
On May 9 and 17, 1996, complaints were filed in the Denver District
Court and the Supreme Court of the State of New York, respectively, by Eugenia
Gladstone Vogel on behalf of the putative class consisting of the Company's
public shareholders against the Company, Orion, and each of the Company's
directors (the "Vogel Complaints"). The Vogel Complaints allege that Orion and
each of the directors breached their fiduciary duties to the Company's
shareholders in that the Offer price was unfair and inadequate consideration.
At the time the first Vogel Complaint was filed, the Company's directors had not
met, had not appointed the Special Committee and had not taken any action
relating to the Offer. Subsequent to the file date of the first Vogel
Complaint, the Board did meet and appointed the Special Committee, as described
above. On May 17, 1996, a complaint was filed in the Arapahoe County District
Court by Charles Miller on behalf of a putative class consisting of the
Company's public shareholders against the Company, Orion and Roger B. Ware, Alan
R. Gruber, Larry D. Hollen, Robert B. Sanborn and William J. Shepherd (the
"Miller Complaint"), alleging that the Offer price is unfair and inadequate.
The Company and the members of the Board of Directors have reviewed the Vogel
Complaints and the Miller Complaint and believe that they are without merit.
The Company intends to vigorously contest the litigation. Nonetheless, because
litigation of this type involves inherent risks, it is not possible for the
Company at this time to make an assessment of the potential exposure with
respect to either Complaint, nor to predict what the ultimate outcome will be.
Item 4. THE SOLICITATION OR RECOMMENDATION
(a) It is the unanimous opinion of the Special Committee that it is
unable at this time to take a position with respect to the Offer. Therefore,
the Company's Board of Directors was not asked to, and has not, made any
determination with respect to the Offer. A letter to shareholders communicating
the Special Committee's current position as to the Offer is filed herewith as
Exhibit 4, and is incorporated by reference herein.
(b) In reaching its determination to not take a position with
respect to the Offer at this time, the Special Committee considered a number of
factors, all of which were disclosed to the Board of Directors and are described
in Section 3, above.
In view of the wide variety of factors considered in connection with
their review of the Offer, the Special Committee found it impractical to, and
therefore did not, quantify or otherwise assign relative weights to the specific
factors it considered in reaching its conclusion that it could not take a
position with respect to the Offer.
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Item 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Pursuant to a letter agreement dated May 16, 1996, the Special
Committee engaged Salomon Brothers to act as its exclusive financial advisor
with respect to the Offer. The Company has agreed to pay Salomon Brothers a fee
of $100,000 for such services, and a fee of $450,000 for rendering its opinion
to the Special Committee, if one is requested or upon the completion of the work
necessary to render such an opinion (against which amount Salomon Brothers would
credit $50,000 of the $100,000 initially paid to it). Additionally, if the
Purchasers acquire Shares (whether in the Offer or as part of a merger
transaction or otherwise) at a price greater than $17.50 per Share, an
additional fee equal to 10% of the product of (x) the difference between the per
share consideration offered to be paid and $17.50 and (y) 4,600,000 shares will
be payable to Salomon Brothers. If the Purchasers seek to acquire in excess of
4,600,000 shares, an additional fee equal to 1% of the product of (x) the per
share price offered by the Purchasers and (y) the number of shares sought to be
purchased by the Purchasers in excess of 4,600,000 will be payable to Salomon
Brothers. If the Company consummates a transaction with a third party, an
additional fee equal to .75% of the aggregate consideration in connection with
such other transaction will be payable to Salomon Brothers. Finally, the
Company has agreed to reimburse all of Salomon Brothers' reasonable out-of-
pocket expenses, including fees and disbursements of counsel, incurred in
connection with its engagement, and to indemnify Salomon Brothers against
certain losses, claims, damages or liabilities arising in connection with its
engagement, including liabilities under federal or state securities laws, or
otherwise relating to the engagement.
Except as described above, neither the Company nor any person acting
on its behalf currently intends to employ, retain or compensate any other person
to make solicitations or recommendations to security holders on its behalf
concerning the Offer.
Item 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) No transactions in Shares have been effected during the past 60
days by the Company, or, to the best of the Company's knowledge, by any
executive officer, director, affiliate, or subsidiary of the Company, except for
the open market purchases by Design Professionals Insurance Company, one of the
Purchasers, on the dates and at the prices set forth below:
Price Per Share
Number of Shares (net of commission) Date
- ---------------- ------------------- --------
1,900 $ 13.50 03/11/96
10,000 $13.625 03/12/96
1,600 $ 13.50 03/12/96
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(b) To the best of the Company's knowledge, the following of the
Company's executive officers, directors, affiliates and subsidiaries who own
Shares, presently intend to tender such Shares to the Purchasers pursuant to the
Offer:
(i) William J. Shepherd, a director of the Company, intends
to tender 5,000 Shares;
(ii) Fred T. Roberts, the President of Commercial Lines,
intends to tender 16,966 Shares;
(iii) Jacqueline L. Melton, the Company's Senior Vice
President-Human Resources, intends to tender 6,086 Shares;
(iv) James R. Pouliot, the Chief Executive Officer of Viking
Holdings, Inc., the Company's subsidiary, intends to tender 13,000
Shares; and
(v) Shelly J. Hengsteler, the Company's Controller, intends
to tender 2,500 Shares.
Mr. Pouliot purchased 1,000 Shares of the Company within six (6)
months of the Offer termination date, and the tender by him of the above Shares
will result in liability under Section 16 of the Securities Exchange Act of
1934, as amended. Mr. Pouliot intends to pay to the Company, pursuant to the
rules and regulations promulgated under Section 16, the profits earned by him in
connection with the earlier purchase and the current tender of the 1,000 Shares.
The Company believes that Mr. Ware, the Company's Chief Executive
Officer and member of the Board of Directors of both the Company and Orion,
Michael L. Pautler, the Company's Senior Vice President - Finance and Treasurer,
and Arthur J. Mastera, the President of Guaranty National Insurance Company's
Personal Lines, currently do not intend to tender any Shares in the Offer.
The above officers and directors may change the number of Shares
indicated, or change their determination as to whether or not they intend to
tender Shares in the Offer, at any time prior to the termination date of the
Offer. None of the Company's directors or executive officers, in their
capacities as such, makes any recommendation to the shareholders of the Company
regarding the Offer.
Item 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
The Company is not now engaged in any discussions or negotiations in
response to the Offer which relate to, or would result in, (i) an extraordinary
transaction such as a merger or reorganization involving the Company or any
subsidiary of the Company, (ii) a purchase, sale or transfer of a material
amount of assets by the Company or any subsidiary of the Company,
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(iii) a tender offer for or other acquisition or securities by, or of, the
Company, or (iv) any material change in the present capitalization or dividend
policy of the Company, except for the discussions taking place between the
Special Committee and the Purchasers relating to the Offer. See Item 3, above,
for a description of the discussions. There can be no assurance that the
discussions will result in any change in the terms of the Offer; indeed, the
Purchasers stated in their Offer to Purchase that they would not negotiate the
Offer price with the Company.
Item 8. ADDITIONAL INFORMATION TO BE FURNISHED
None.
Item 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1 - Portions of Proxy Statement, dated March 28, 1996/*/
Exhibit 2 - Portions of Form 10-K Annual Report for fiscal year ended
December 31, 1995/*/
Exhibit 3 - Portions of Offer to Purchase, dated May 8, 1996/*/
Exhibit 4 - Letter to Shareholders, dated May 22, 1996
Exhibit 5 - Press release issued on May 22, 1996/*/
Exhibit 6 - 1991 Long-Term Performance Incentive Plan (previously filed as
Exhibit 10.20 to the Company's Registration Statement on Form
S-1 filed with the Commission on September 13, 1991, and
incorporated herein by reference)/*/
Exhibit 7 - Shareholder Agreement, dated November 7, 1991, and amendments
thereto dated February 2, 1994 and March 2, 1995, by and among
Guaranty National Corporation, Orion Capital Corporation, The
Connecticut Indemnity Company, Connecticut Specialty Insurance
Company, Design Professionals Insurance Company, Employee
Benefits Insurance Company, The Fire and Casualty Insurance
Company of Connecticut, Security Insurance Company of Hartford
and Security Reinsurance Company (previously filed as Exhibit
10.30 to the Company's Amendment No. 2 to Registration
Statement on Form S-1, Exhibit 10.49 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994 and Exhibit 10.50 to the Company's Annual Report
- --------
/*/Not included in copies mailed to shareholders.
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on Form 10-K for the fiscal year ended December 31, 1995,
respectively, and incorporated herein by reference)/**/
Exhibit 8 - Note Issuance Agreement, as Amended and Restated as of June
14, 1995, by and among Guaranty National Corporation, Orion
Capital Corporation, The Connecticut Indemnity Company,
Connecticut Specialty Insurance Company, Design Professionals
Insurance Company, Employee Benefits Insurance Company, EBI
Indemnity Company, The Fire and Casualty Insurance Company of
Connecticut, Security Insurance Company of Hartford, Security
Reinsurance Company and Security Re, Inc. (previously filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1995, and incorporated
herein by reference)/**/
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: May 22, 1996
GUARANTY NATIONAL CORPORATION
By:/s/ Michael L. Pautler
----------------------
Michael L. Pautler, Senior Vice
President - Finance and Treasurer
/**/Not included in copies mailed to shareholders.
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EXHIBIT INDEX
Description
- -----------
Exhibit 1 - Portions of Proxy Statement, dated March 28, 1996
Exhibit 2 - Portions of Form 10-K Annual Report for fiscal year ended
December 31, 1995
Exhibit 3 - Portions of Offer to Purchase, dated May 8, 1996
Exhibit 4 - Letter to Shareholders, dated May 22, 1996
Exhibit 5 - Press release issued on May 22, 1996
Exhibit 6 - 1991 Long-Term Performance Incentive Plan (previously filed as
Exhibit 10.20 to the Company's Registration Statement on Form S-1
filed with the Commission on September 13, 1991, and incorporated
herein by reference)
Exhibit 7 - Shareholder Agreement, dated November 7, 1991, and amended as of
February 2, 1994 and March 2, 1995, by and among Guaranty
National Corporation, Orion Capital Corporation, The Connecticut
Indemnity Company, Connecticut Specialty Insurance Company,
Design Professionals Insurance Company, Employee Benefits
Insurance Company, The Fire and Casualty Insurance Company of
Connecticut, Security Insurance Company of Hartford and Security
Reinsurance Company (previously filed as Exhibit 10.30 to the
Company's Amendment No. 2 to Registration Statement on Form S-1,
Exhibit 10.49 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and Exhibit 10.50 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, respectively, and incorporated herein by
reference)
Exhibit 8 - Note Issuance Agreement, as Amended and Restated as of June 14,
1995, by and among Guaranty National Corporation, Orion Capital
Corporation, The Connecticut Indemnity Company, Connecticut
Specialty Insurance Company, Design Professionals Insurance
Company, Employee Benefits Insurance Company, EBI Indemnity
Company, The Fire and Casualty Insurance Company of Connecticut,
Security Insurance Company of Hartford, Security Reinsurance
Company and Security Re, Inc. (previously filed as Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995, and incorporated herein by
reference)
EXHIBIT 1
---------
ELECTION OF DIRECTORS
Pursuant to the Company's By-Laws, the Board has fixed the number of
directors at eleven. The Directors are to be elected by the holders of the
Company's Common Stock, to serve until the 1997 Annual Meeting of Shareholders
and until their successors are elected and qualify. Unless instructions to the
contrary are received, proxies received in response to this solicitation will be
voted in favor of the nominees listed below. If any nominee should become
unavailable for election, the shares represented by the enclosed proxy will be
voted for such substitute nominee as may be proposed by the Board.
Name, Age and Position with Director Principal Occupation, Five-Year Business
the Company Since Experience and Other Corporate Directorships
- ---------------------------- -------- --------------------------------------------
Tucker Hart Adams, 58 1994 President, The Adams Group, Inc. (an economic
Director consulting firm), since 1989; Director of Tax
Free Fund of Colorado, Montana Power Company
and Rocky Mountain Equity Fund.
Alan R. Gruber, 68 1984 Chairman of the Board and Chief Executive
Chairman of the Board Officer of Orion Capital Corporation ("Orion")
since 1976; Trustee of six trusts which manage
the Neuberger & Berman family of equity mutual
funds; Director of Trenwick Group, Inc.
Larry D. Hollen, 50 1995 Director, President and Chief Operating
Director Officer of Orion since 1994, Executive Vice
President and Assistant Chief Operating
Officer, 1992-1994, Senior Vice President,
1990-1992.
Dennis J. Lacey, 42 1994 Director, President and Chief Executive
Director Officer of Capital Associates, Inc. (an
equipment leasing company) since 1991 and Vice
President, 1989-1991.
M. Ann Padilla, 53 1994 President, Sunny Side, Inc./Temp Side (a
Director private employment service), since 1975;
Director of Bank One Denver N.A.
James R. Pouliot, 42 1995 President and Chief Executive Officer of
Director; President of Viking Viking since 1992; Vice President, Marketing,
Insurance Company of Great American Insurance Co., 1990-1992.
Wisconsin, Inc. ("Viking")
Name, Age and Position with Director Principal Occupation, Five-Year Business
the Company Since Experience and Other Corporate Directorships
- --------------------------- -------- --------------------------------------------
Robert B. Sanborn, 67 1988 Senior Executive Consultant of Orion since
Director 1995; Director since 1987, Vice Chairman 1994-
1995, and President and Chief Operating
Officer, 1987-1994, of Orion; Director of
HCG/Lloyd's Investment Trust plc., Intercargo
Corporation and Nobel Insurance Limited.
William J. Shepherd, 69 1991 Private investor; Chairman, 1989-1991, and
Director Chief Executive Officer, 1989-1990, Chemical
New Jersey Holdings (a bank holding company);
Chairman, Chemical Bank New Jersey and
Princeton Bank and Trust Company (commercial
banks), 1989-1991; Director of Orion, Chemical
Bank New Jersey and Princeton Bank and Trust
Company.
Carroll D. Speckman, 64 1991 Private investor; President and Director of
Director Romo Corporation, 1991-1992 (a holding company
for Rocky Mountain Bank Note Company and McBee
Systems); President and Director of United
Bank of Denver (a commercial bank), 1987-1991,
which was acquired by Norwest Corporation in
1991.
Richard R. Thomas, 50 1991 Chief Executive Officer and Chairman of the
Director Board of ADCO General Corporation (a property
and casualty general agency) since 1990.
Roger B. Ware, 61 1983 President and Chief Executive Officer of
Director, President and Chief Guaranty since 1983. Senior Vice President of
Executive Officer Orion from 1988-1991; Director of Orion.
The Board of Directors met nine times during 1995. Each director attended
at least 75% of the meetings of the Board of Directors, as well as of the
meetings of the Committees on which he or she served.
Orion and Guaranty have entered into a Shareholder Agreement with respect
to the composition of the Board of Directors and committees thereof and the
future designation by Orion of three nominees (one of whom will be the Chairman
of the Board) to Guaranty's Board of Directors so long as Orion or its
subsidiaries beneficially own in the aggregate 30% or more of voting securities
of Guaranty (or securities convertible or exchangeable therefor) and of two
nominees so long as Orion or its subsidiaries beneficially own 20% or more of
such securities. Also, among other matters, the Shareholder Agreement provides
that the members of the Board,
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other than the Orion designees and two officers of Guaranty, be unaffiliated
with but mutually agreeable to both Orion and Guaranty and Orion may require
that Guaranty's Compensation Committee include the Orion nominees to the
Guaranty Board. Messrs. Gruber, Hollen and Shepherd have been nominated by Orion
pursuant to this agreement.
COMMITTEES
The Board of Directors has Executive, Audit and Compensation Committees.
The Executive Committee, during intervals between meetings of the Board, may
exercise all of the powers of the Board in the management and control of the
business of Guaranty, except as limited by law and except with respect to
matters within the powers of the Audit or Compensation Committees. The
Executive Committee is composed of Mr. Gruber, as Chairman, and Messrs. Ware and
Speckman. The Committee did not meet during 1995.
The Compensation Committee consists of Mr. Shepherd as Chairman, Ms.
Padilla and Messrs. Gruber and Sanborn. The Compensation Committee recommends
to the Board of Directors the compensation to be paid to employees of the
Company and administers the Company's various employee benefit and key officer
and employee plans. The Committee met five times during 1995.
The Audit Committee confers periodically with management, the Company's
internal auditors and the Company's independent accountants in connection with
the preparation of financial statements and audits thereof and the maintenance
of proper financial records and controls. The Audit Committee also reviews the
nature and extent of any non-audit services provided by the Company's
independent accountants. The Audit Committee makes recommendations to the Board
of Directors with respect to the foregoing and brings to the attention of the
Board any criticism and recommendations that the independent accountants or the
Audit Committee itself may suggest. The Audit Committee consists of Mr.
Speckman, as Chairman, Ms. Adams and Messrs. Lacey and Thomas. The Committee
met five times during 1995.
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS,
AND PRINCIPAL BENEFICIAL OWNERS
The following table sets forth information concerning the shares of the
Company's Common Stock beneficially owned by each of the directors and nominees
for the Board, each of the named executive officers, all directors and executive
officers of the Company as a group, and each person or group who is known by the
Company to be the beneficial owner of more than five percent of the total number
of shares of the Company's Common Stock outstanding and entitled to vote. All
such information is given as of January 31, 1996, unless otherwise indicated.
Shares outstanding were deemed to be shares actually outstanding on January 31,
1996, and shares subject to options which were exercisable on or within 60 days
after that date.
-3-
Amount and Nature of Percent of
Name and Address of Beneficial Owner Beneficial Ownership Class
- -------------------------------------- -------------------- ----------
Orion Capital Corporation 7,340,142(a) 49.06%
600 Fifth Avenue
New York, NY 10020
Tucker Hart Adams -0- -0-
Alan R. Gruber (b) (b)
Larry D. Hollen (b) (b)
Dennis J. Lacey 400 *
Arthur J. Mastera 39,482(c) .26%
M. Ann Padilla 506 *
Michael L. Pautler 41,236(d) .28%
James R. Pouliot 12,000(e) .08%
Fred T. Roberts 25,216(f) .17%
Robert B. Sanborn 1,000(b) *
William J. Shepherd 5,000(b) .03%
Carroll D. Speckman 500 *
Richard R. Thomas 1,500 .01%
Roger B. Ware 74,321(b,g) .50%
All Directors and Executive Officers as a
Group 7,559,264 50.53%
Sanford C. Bernstein & Co., Inc., One 779,200(h) 5.21%
State Street Plaza
New York, NY 10004
- -------------------------------------------------------------------------------
(a) Represents beneficial ownership with sole voting and dispositive
power of Orion and certain of its subsidiaries as reported on an amendment to
its Schedule 13G filed with the Securities and Exchange Commission on February
5, 1996. The Schedule reflects the issuance
- --------
* Less than .01%
-4-
of 1,326,128 shares to Orion during 1995 in exchange for the cancellation of
indebtedness of Guaranty to Orion in the principal amount of $20,896,000.
(b) Excludes the shares owned by Orion. Messrs. Gruber and Hollen are
executive officers and directors of Orion and Messrs. Sanborn, Shepherd and
Ware are directors. Each of such persons disclaims any beneficial interest in
Orion's shares.
(c) Includes 7,732 shares as to which Mr. Mastera has sole voting and
investment power, 11,500 shares of non-vested Restricted Stock, and vested
options to acquire 20,250 shares granted pursuant to the terms of the Company's
Performance Incentive Plan.
(d) Includes 6,486 shares as to which Mr. Pautler has sole voting and
investment power, 11,500 shares of non-vested Restricted Stock, and vested
options to acquire 23,250 shares granted pursuant to the terms of the Company's
Performance Incentive Plan.
(e) Includes 12,000 shares of non-vested Restricted Stock issued
pursuant to the terms of the Company's Performance Incentive Plan.
(f) Includes 1,466 shares as to which Mr. Roberts has sole voting and
investment power, 1,500 shares of non-vested Restricted Stock, and vested
options to acquire 22,250 shares granted pursuant to the terms of the Company's
Performance Incentive Plan.
(g) Includes 26,571 shares as to which Mr. Ware has sole voting and
investment power, 2,500 shares of non-vested Restricted Stock, and vested
options to acquire 45,250 shares granted pursuant to the terms of the Company's
Performance Incentive Plan.
(h) Sanford C. Bernstein & Co., Inc. reported in a Schedule 13G filed
with the Securities and Exchange Commission and dated February 7, 1996 that it
was the beneficial owner of, and had sole dispositive power with respect to,
779,200 shares of the Company's common stock and that it had shared voting power
as to 10,700 of such shares and sole voting power as to 628,500 of the shares.
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company during the three consecutive years ended December 31, 1995.
-5-
SUMMARY COMPENSATION TABLE
Other Restricted
Annual Stock All Other
Name and Principal Salary Bonus Compen- Award(s) Options Compensation
Position Year ($)(a) ($)(b) sation($) ($)(c) (#) ($)(d)
- --------------------------------------------------------------------------------------------------------------
Roger B. Ware 1995 291,917 50,000 -- -- -- 65,651
President & Chief 1994 244,427 150,000 -- 87,500 16,000 58,483
Executive Officer 1993 216,938 65,000 -- -- -- 8,994
of Guaranty
Fred T. Roberts 1995 162,384 25,000 -- -- -- 31,373
President of 1994 148,115 75,000 -- 52,500 12,000 29,263
Commercial Lines 1993 141,943 32,000 -- -- -- 8,143
Arthur J. Mastera 1995 158,538 10,000 -- -- -- 33,058
President of 1994 147,038 60,000 -- 52,500 12,000 29,301
Guaranty National 1993 135,887 31,000 -- 203,875 -- 7,690
Insurance
Company Personal
Lines
Michael L. Pautler 1995 152,558 35,000 -- -- -- 24,534
Senior Vice 1994 136,769 63,000 -- 52,500 12,000 20,924
President-Finance 1993 125,987 29,000 -- 203,875 -- 7,550
& Treasurer of
Guaranty
James R. Pouliot 1995 114,915(e) 50,000 -- $207,000 35,000 1,731
President of Viking
- -----------------------------------------------------------------------------------------------------------------
(a) Includes compensation deferred under Company's 401(k) Retirement Plan.
(b) Annual bonus amounts are earned and accrued during the year indicated.
(c) During 1995 12,000 shares of restricted stock were granted to Mr. Pouliot.
Restricted stock was granted during 1994 as follows: Mr. Ware 5,000 shares,
and Messrs. Roberts, Mastera and Pautler 3,000 shares each. During 1993,
10,000 shares of restricted stock were granted to each of Messrs. Mastera
and Pautler. Dividends are paid on non-vested shares of restricted stock.
The value of the executive officers' non-vested restricted stock on
December 31, 1995 was: Mr. Ware, $38,438 (2,500 shares valued at $43,750
on date of grant); Mr. Roberts, $23,063 (1,500 shares valued at $26,250 on
date of grant); Mr. Mastera, $176,813 (11,500 shares valued at $230,000 on
date of grant); Mr. Pautler, $176,813 (11,500 shares valued at $230,000 on
date of grant); and Mr. Pouliot, $184,500 (12,000 shares valued at $207,000
on date of grant). The remaining shares, other than those granted in 1993,
will vest over a period of up to four years, at a rate of
-6-
25% a year in the year following the date of the original grant. The shares
granted to Messrs. Mastera and Pautler in 1993 will vest in 1997.
(d) For 1993, "All Other Compensation" represented 401(k) contributions; for
1995 and 1994, it consisted of Company contributions to the 401(k)
Retirement Plan ("401K"), Supplementary Executive Retirement Plan ("SERP"),
and split dollar insurance premiums ("LIFE"), as follows:
1995 1994
---------------------------- ----------------------------
401K($) SERP($) LIFE($) 401K($) SERP($) LIFE($)
------- ------- ------- ------- ------- -------
Roger B. Ware 9,240 37,224 19,187 9,000 28,201 21,282
Fred T. Roberts 9,240 12,613 9,520 8,887 10,015 10,361
Arthur J. Mastera 9,240 11,882 11,936 8,822 9,875 10,604
Michael L. Pautler 9,240 10,746 4,548 8,206 8,540 4,178
James R. Pouliot 1,731 -- -- -- -- --
During 1995, Mr. Pouliot did not participate in the Company's 401K plan as
Viking had a separate plan. For 1996, Mr. Pouliot will be included in the
Company's 401K and SERP plans.
(e) Represents Mr. Pouliot's salary, including deferred amounts since the
acquisition of Viking on July 18, 1995, payable at an annual rate of
$250,000.
OPTIONS GRANTED AND EXERCISED
The following table sets forth the options granted (none were exercised) in
1995 under the Company's 1991 Long-Term Performance Incentive Plan with respect
to the chief executive officer and the four most highly compensated executive
officers of the Company. In addition, the table shows the hypothetical gains or
"option spreads" that would exist for the respective options. These gains are
based on assumed rates of annual compound stock price appreciation of 5% and 10%
from the date the options were granted over the full option term.
-7-
Option Grants in Last Fiscal Year
- ------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term (b)
- ----------------------------------------------------------------------------------------------------------
Name Options % of Total Exercise Expiration 5%($) 10%($)
Granted Options Granted Price or Base Date
(#)(a) to Employees in Price ($/Sh)
1995
- ----------------------------------------------------------------------------------------------------------
Roger B. Ware -- -- -- -- -- --
Fred T. Roberts -- -- -- -- -- --
Arthur J. Mastera -- -- -- -- -- --
Michael L. Pautler -- -- -- -- -- --
James R. Pouliot 35,000 38.9 17.25 7/27/05 380,363 959,963
All Shareholders -- -- 17.25 7/27/05 162,592,000 410,353,000
(c)
- ----------------------------------------------------------------------------------------------------------
(a) Options may be either non-qualified options or qualified incentive stock
options. The options granted in 1995 were non-qualified and become
exercisable in installments at the rate of 25% per year after the first,
second, third and fourth anniversaries of the date of grant. Vested
options are exercisable for ten years from the date of grant.
(b) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises and common stock holdings are
dependent on the future performance of the Common Stock and overall stock
market conditions. There can be no assurance that the amounts reflected in
this table will be achieved.
(c) The potential realizable gain to all stockholders is based on 14,961,354
shares outstanding and a fair market value of $17.25 per share on July 27,
1995, the date the options were granted, over the 10-year term of the
options.
The following table sets forth as of the year-end the number and values of the
shares of common stock underlying the outstanding "in-the-money" options held by
the named executive officers. The values represent the positive spread between
the exercise price of the options and the year-end price of the common stock.
Shares Number of Unexercised Value of Unexercised In-the
Acquired on Value Options at Year-End Exercisable/ Money Options at Year-End
Name Exercise Realized Unexercisable Exercisable/Unexercisable($)
- --------------------------------------------------------------------------------------------------------------
Roger B. Ware None N/A 45,250 15,750 26,250 --
- --------------------------------------------------------------------------------------------------------------
-8-
Shares Number of Unexercised Value of Unexercised In-the
Acquired on Value Options at Year-End Exercisable/ Money Options at Year-End
Name Exercise Realized Unexercisable Exercisable/Unexercisable($)
- ----------------- ----------- --------- -------------------------------- ----------------------------
Fred T. Roberts None N/A 22,250 10,750 12,250 --
Arthur J. Mastera None N/A 20,250 10,750 -- --
Michael L. Pautler None N/A 23,250 10,750 12,375 --
James R. Pouliot None N/A -- 35,000 -- --
PERFORMANCE UNIT PLAN VALUES
Guaranty's Performance Unit Plan, adopted in 1987, presently covers only
three key officers. Awards under the Plan are payable in cash over a period of
five to eight years. Each vested unit is approximately equal in value to the
book value of one share of the Company's common stock. The purpose of the Plan
is to motivate the participants to remain with the Company for an extended
period of time and to use their best efforts to maximize shareholder value so
long as the units are outstanding.
In order to encourage the recipients of 1987 awards to defer payment of their
awards until 1998, the Committee placed a floor on the value of the awards equal
to their value as of September 30, 1994. To receive the cash value of a unit,
the employee must remain an employee of the Company until the dates shown in the
following table, which also sets forth the value of the awards as of December
31, 1995:
Year Number Value at Payment Deferred
Name Awarded of Units 12/31/95 Until
- --------------- ------- -------- ---------- ----------------
Roger B. Ware 1987 89,248 $1,175,147 January 1, 1998
1983 26,774 352,538 Sept. 30, 1998
James R. 1995 15,994 $ 210,599 Dec. 31, 1998
Pouliot
Fred T. 1987 41,650 $ 548,414 January 1, 1998
Roberts 1993 10,413 137,110 Sept. 30, 1998
EMPLOYMENT AND SEVERANCE AGREEMENTS
On September 1, 1986, Guaranty entered into an employment agreement with
Mr. Ware. The agreement currently provides for a base annual salary to be fixed
by the Board of Directors ($310,000 as of March 25, 1996), and for such bonus
and other incentive and deferred compensation as the Board determines to be
appropriate. The agreement also provides that its
-9-
term is automatically extended so that it will be effective at all times for a
period of two years. On February 29, 1996, the agreement with Mr. Ware and the
Company was amended to provide that he will remain as President and Chief
Executive Officer through December 31, 1996, and thereafter will serve for two
years as a Senior Consultant to the Company at the same base salary. Mr. Ware
remains eligible for his normal 1996 performance bonus, but is not eligible for
such bonuses for 1997 or 1998. Mr. Ware has agreed that he will not compete with
Guaranty for a one-year period after the termination of the agreement. The
agreement may be terminated by Guaranty upon Mr. Ware's disability. Mr. Ware
would be paid 50% of his base salary for a two-year period if the agreement is
terminated due to his disability.
With the acquisition of Viking on July 18, 1995, an employment agreement
with Mr. Pouliot became effective for a term which is automatically extended so
that it will be in effect at all times for a period of two years. The agreement
provides for the grants of Restricted Stock, Stock Options and Performance Units
described above, an annual salary of at least $250,000 ($262,000 as of March 25,
1996), and a guaranteed bonus with respect to 1995 and 1996 of at least 35% of
his earned salary for those years. Mr. Pouliot has also agreed that he will not
be employed by any business in the non-standard private passenger automobile
insurance industry for a period of one year following termination of his
employment agreement.
The Board of Directors has adopted a severance policy applicable to the
officers of the Company's insurance company subsidiaries. Pursuant to this
policy, officers are entitled to receive six months to one year's notice of
termination, depending on the position held, except in the event of termination
for cause. The policy currently applies to all of the senior officers other
than Messrs. Ware and Pouliot, including the other executive officers named in
the Compensation Table above, each of whom is entitled to one year's notice of
termination.
In September, 1991, the shareholders of Guaranty authorized the execution
by Guaranty of indemnification agreements with directors, officers and certain
employees of Guaranty and its subsidiaries, which, among other matters,
supplement the indemnity provided under Guaranty's articles of incorporation and
by-laws and the Colorado Corporation Code.
COMPENSATION OF DIRECTORS
In 1995, Guaranty paid its seven non-management directors a retainer fee at
the rate of $15,000 a year and an attendance fee of $800 for each Board of
Directors or committee meeting attended, except that $400 was paid for a
committee meeting held on the same date as a board meeting. The Committee
chairmen received an additional annual retainer of $5,000. Officers of Guaranty
and Orion who serve as directors of Guaranty do not receive either a retainer
fee or attendance fees for their service. All directors and officers are
reimbursed for expenses incurred in attending Board of Directors and committee
meetings. Effective January 1, 1996 the annual retainer fee was increased to
$17,000.
-10-
COMPENSATION COMMITTEE REPORT
The Company's Compensation Committee consists of four members of the
Company's Board of Directors. Three members are nominated by Orion, pursuant to
the November 7, 1991, Shareholder Agreement, as amended, between Orion and the
Company. The current Orion designees are its chief executive officer, its
former chief operating officer who is now a consultant to Orion, and the
chairman of Orion's Compensation Committee, who is an outside director of both
Orion and Guaranty. Roger B. Ware, Guaranty's president, serves as a member of
the board of directors of Orion, and as such receives the regular fees paid to
all non-employee directors of Orion, but he is not a member of the Compensation
Committee of either corporation.
Objectives. Guaranty's Compensation Committee is responsible for
establishing and administering the Company's compensation policies for its chief
executive officer and its other senior officers, for determining annually the
base salary and bonus for each of the senior officers, and for awarding grants
under the Company's Long-Term Incentive Performance Plan and its Incentive Bonus
Plan. The Committee's goal is to motivate management to enhance the
profitability of the Company and thus its value to shareholders. The Committee
recognizes that to achieve this goal the Company must attract and retain
qualified executives who will contribute significantly to the Company's
progress. Therefore, the Committee has sought to establish compensation
policies which will maintain a multi-dimensional balance among corporate,
business unit and individual performance factors which will lead to long term
growth in premium volume and profitability at a pace consistent with maintaining
conservative levels of capitalization and loss reserves.
To this end, the Committee has determined that, in general, the base
salaries of management should be at or slightly above the median salary levels
of comparable companies recognizing, however, that limited information is
available concerning competitive specialty insurance companies of comparable
size. The Committee emphasizes variable compensation programs, based upon
achievement of individual and Company goals, which would make possible total
compensation levels which the Committee believes to be at the high end of the
range for such companies if the Company's or business unit's performance is
above average. The Committee believes that the Company's Bonus and Long-Term
Incentive Compensation Plans are key factors both for achieving this objective
and for attracting, retaining and motivating its executives.
General. The Committee considers a variety of factors in connection with
compensation decisions, although none of them is assigned a specific weight.
During the first quarter of each year, the Committee reviews material provided
by the chief executive officer in connection with his recommendations for
adjustments in the base salaries of each officer and the award of bonuses with
respect to services performed during the preceding year. This information
includes the annual performance goals established for the Company and its
various business units and the Company's operating results for the preceding
year, as compared to its business plan and the results of other companies.
Specially commissioned surveys of competitive companies are also
-11-
obtained at three to five year intervals. The individual experiences of its
members in connection with the operation of other businesses with which they are
or were associated are also taken into account by the Committee.
Chief Executive Officer. In determining the 1995 base salary for the chief
executive officer, the Committee considered, in addition to the foregoing, the
Company's financial performance as measured by its three key financial targets:
a 15% increase in gross written premiums, a GAAP operating ratio of not more
than 98%; and a return on equity of at least 15%. For 1994, against these key
ratios, the Company achieved a 15% return on equity, a 13% increase in gross
written premium volume and an operating ratio of 97.5%.
In addition, the statutory combined loss and expense ratio was under 100%
in 1994 for the eighth consecutive year, at 96.8%. The property and casualty
industry ratio during 1994 averaged 108.4% and has not been under 100% since
1978. During 1994 the Company's achievements were also recognized by A.M. Best,
which upgraded the Company's insurance subsidiaries to a rating of "A+
(Superior)." Based on the foregoing, the Company awarded Mr. Ware a salary
increase of approximately 11%, commencing in April, 1995.
Mr. Ware's 1995 bonus award of $50,000 represented an amount equal to one-
third of his bonus for the preceding year and 21% of the maximum 1995 bonus for
which he was eligible. In determining the amount, the Committee took into
account the fact that while the Company's overall financial results for the year
were disappointing and it did not meet its key objectives, its statutory
combined loss and expense ratio of 105.6% was nevertheless approximately one
point better than A.M. Best's 1995 estimate for the property and casualty
industry, and a number of other positive achievements were recorded. In
particular, the Company acquired Viking and financed the acquisition on what the
Committee believes to be favorable terms, a significant development which the
Committee anticipates will have a positive effect on future net earnings and
shareholder value. Also, book value per share increased during 1995 by 20%,
primarily due to the positive impact on the Company's investment portfolio of
the strong stock and bond markets.
Other Executive Officers. A similar process was followed in determining
the level of salary increases and bonuses for the other officers of Guaranty.
Performance goals are established at the beginning of the year for each officer
and the Committee is able to consider the extent to which they have been met.
In addition, the Committee reviewed the earnings, the expense ratio, the
operating ratio, premium growth and operating cash flow of the individual
business units within the Company with which the officers were associated, and
it met with the chief executive officer to review management's compensation
recommendations, based on the individual performance of each officer and
management's evaluation of the factors considered by the Committee as they
applied to each of the officers. While individual compensation increases varied
substantially, Guaranty limited its annual executive compensation increases in
1995 to an aggregate of 5% of the executive payroll.
-12-
Awards under Guaranty's Incentive Cash Bonus Plan are based in part on the
Company's performance for the year and in part on the achievement of the
individual goals and objectives which are set at the beginning of the year by
agreement between each officer and the senior executive to whom he or she
reports. Target awards for 1995, as a percentage of 1995 base salaries, ranged
from 20% for certain vice presidents to 40% for the chief executive officer.
Depending on performance, bonus payments may range between zero and two times
the target amount. In February, 1996, the Committee approved aggregate bonus
payments of $501,000 under the Plan for 1995 performance by all officers of the
Company's insurance subsidiaries. This amount, which was approximately one-
third of the total for the previous year, reflected both the achievement by the
officers of their personal goals for the year and the Company's 1995 financial
performance. Bonuses paid to Viking's officers reflect their performance since
Viking's acquisition by the Company. Amounts awarded to the Company's executive
officers in 1996 with respect to 1995 performance are reported in the Proxy
Statement's Summary Compensation Table.
Long-Term Incentives. Long-term incentives for the company's chief
executive officer and other officers are provided through the Company's 1991
Long-Term Performance Incentive Plan. The Committee grants awards under the
Incentive Plan primarily on the basis of the executive's ability to influence
the Company's long term growth and profitability. The awards can be in the form
of stock options or restricted stock. The Committee has the authority to
determine to whom awards will be made, in what amounts and on what conditions.
It is through awards under this Plan that the Committee attempts to align
management's long range interests with those of the shareholders and to provide
an opportunity for its officers to build a meaningful stake in the Company. The
amounts of the restricted stock awards described in the Summary Compensation
Table of this Proxy Statement, were based on the Committee's subjective
determination as to an award which would motivate the executive to remain with
the Company until the award vested and to use his best efforts to enhance the
value of the Company during that period.
Other Benefits. The officers of the Company may also participate in the
Company's 401(k) Plan to which both the Company and employees may make
contributions, and in health and other benefit plans which are available to
employees generally. In addition, the Company adopted in 1987 a Performance
Unit Plan pursuant to which the awards described under "Performance Unit Plan
Values" in the Proxy Statement were made. The authority to make awards under
the Plan is reserved to the Committee, which determined that the 1987 and 1993
awards under the Plan had demonstrated their usefulness in retaining and
motivating the key executives who were responsible for the Company's operating
results during the ensuing years, and that the 1995 award to Mr. Pouliot would
motivate him to remain as key executive of the Company until 1998 and compensate
him fairly for his contribution to increases in shareholder values during that
period. At the present time, the Committee has no plans to make further awards
under the Performance Unit Plan.
Deductibility of Compensation. Section 162(m) of the Internal Revenue
Code, enacted in 1993, generally disallows a tax deduction to public companies
for compensation over $1
-13-
million paid to the Company's Chief Executive Officer or any of the four other
most highly compensated executive officers. Qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. No executive officer would have been subject to the limitations of
Section 162(m) had it applied in 1995. The Committee intends to structure any
compensation for executive officers so that it qualifies for deductibility under
the new statute to the extent feasible. However, the Committee reserves the
authority to authorize payments, including salary and bonuses, that may not be
deductible if it determines that they are needed to maintain the Company's
competitive position.
COMPENSATION COMMITTEE
William J. Shepherd, Chairman
Alan R. Gruber
M. Ann Padilla
Robert B. Sanborn
-14-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Guaranty and Orion have entered into a shareholder agreement pursuant to
which Orion has the right to require Guaranty to register any or all of Orion's
shares of Common Stock under the Securities Act of 1933, as amended (the
"Securities Act"), on up to three occasions through November 1997. In addition,
Guaranty has agreed to use its best efforts to include such shares in any
underwritten public offering of its Common Stock under the Securities Act and to
pay all expenses in connection with the first two registrations.
In the ordinary course of business, the Company's wholly-owned insurance
company subsidiaries reinsure certain risks with other companies. Such
arrangements serve to limit their maximum loss on large risks. To the extent
that any reinsuring company is unable to meet its obligations, the Company would
be liable for such amounts. For 1995, Guaranty National Insurance Company
("GNIC") and Landmark American Insurance Company entered into a 100% reinsurance
agreement with an Orion insurance subsidiary. Premiums written and ceded under
this agreement are included in premiums written as reported in Guaranty's
financial statements and were $152,000 for 1995. Guaranty was paid $5,000 in
fees in conjunction with this reinsurance agreement. Also, during 1995 GNIC
entered into reinsurance agreements with other Orion insurance subsidiaries
pursuant to which GNIC assumed business written through affiliates totalling
$9,495,000 in premium. Guaranty paid to Orion $160,000 in fees and reimbursed
$178,000 of actual expenses incurred by Orion in conjunction with this
reinsurance agreement.
Effective January 1, 1993, the Company's insurance subsidiaries entered
into a reinsurance agreement ("1993 Agreement") with National Reinsurance
Corporation ("NRC"), a wholly owned subsidiary of National Re Holdings
Corporation ("National Re"). The 1993 Agreement, as amended, primary provides
reinsurance limits up to $6,000,000 in excess of the Company's retention of
$150,000 to $300,000. The Company ceded $38,215,000 in premiums to NRC during
1995 and received $12,358,000 in ceding commissions. Subject to certain renewal
and cancellation provisions, the agreement expires at the end of 1998. With the
exception of 1992, NRC has been a principal reinsurer of the Company since
1985. Steven B. Gruber, a son of Alan R. Gruber, Chairman of Guaranty, has been
a director of National Re since 1990. Neither of the Messrs. Gruber
participated in the negotiation of the 1993 Agreement and its subsequent
amendments.
A subsidiary of Orion is an agent for the Company, pursuant to the
Company's standard agency contract. During 1995, this agency produced $411,000
in premiums and was paid $72,000 in commissions. The Company expects to pay it
a similar amount in 1996.
During 1995, the Company's outstanding subordinated notes (the "2003
Notes") in the principal amount of $20,896,000, which were held by Orion, were
converted into 1,326,128 shares of the Company's common stock. Total interest
paid to Orion in 1995 was $1,122,000.
-15-
In 1995, during the assembly of the Viking acquisition financing, the
Company received a commitment for a $21,000,000 Bridge Loan from Orion for which
it paid a $210,000 commitment fee to Orion.
The Company and Orion have entered into an investment management agreement
pursuant to which the investment portfolio of the Company (other than short-term
investments and a portion of the equity securities) will continue to be managed
by investment managers of Orion, under the direction and supervision of Guaranty
and subject to Guaranty's Investment Policies. For its investment management
services, Orion was paid $595,000 in 1995, which will be increased to $650,000
in 1996, in recognition of the additional investment balances resulting from the
Viking acquisition. The contract will continue in effect for one year unless
terminated by either party upon 90 days prior written notice.
During 1995 the Company's investment in a leasehold participation in an
office building in Monterey, California, owned and primarily occupied by one of
Orion's insurance subsidiaries, Design Professionals Insurance Company ("DPIC"),
was redeemed for cash. Interest earned for 1995 was $355,000.
Orion has committed to invest up to $5,000,000 in Insurance Partners L.P.,
a partnership formed to make equity investments of up to approximately $550
million in the insurance industry. Guaranty has committed to participate in
Orion's commitment in an aggregate amount not to exceed $1,500,000. Insurance
Partners L.P. is managed by Insurance Partners Advisors L.P., of which Steven B.
Gruber is a managing director.
Mr. Richard R. Thomas, who is a director of Guaranty, is Chairman of the
Board and sole owner of ADCO General Corporation, a general agent of the
Company. ADCO has received from the Company gross commissions (including
contingency commissions), pursuant to a standard agency contract, of
approximately $813,000 in 1995 and is expected to receive gross commissions of
approximately the same amount during the current fiscal year.
-16-
EXHIBIT 2
INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY
The following is a summary of certain information regarding the executive
officers of the Company. All officers of Guaranty and its subsidiaries serve at
the pleasure of their respective Boards of Directors.
Roger B. Ware has been President, Chief Executive Officer, and a Director
of Guaranty since 1983; he also served as a Senior Vice President of Orion from
1988 to 1991 and is a Director of Orion. At his request, December 31, 1996 has
been fixed as Mr. Ware's normal retirement date. The Board expects to designate
a successor to Mr. Ware by mid-year; age 61.
Shelly J. Hengsteler was appointed Controller and Assistant Treasurer and
Principal Accounting Officer of Guaranty in January 1996. Ms. Hengsteler joined
Guaranty National as a Financial Accountant in 1989. From 1991 until 1994, she
was a Financial Reporting Manager and from 1994 through 1995 she served as
Director of Corporate Finance; age 33.
Arthur J. Mastera has been President of Guaranty National Personal Lines
Division since November 1995. Mr. Mastera rejoined GNIC as Senior Vice
President-Administration and Corporate Information Systems in February 1992.
From 1989 until 1992, he was Senior Vice President of Planning and
Administration at Orion Capital Companies. Mr. Mastera originally joined GNIC
in 1983; age 55.
Jacqueline L. Melton has been Senior Vice President of Human Resources of
GNIC since 1991. Ms. Melton joined GNIC in 1980 and from 1986 to 1991 she
served as Vice President of Human Resources; age 45.
Michael L. Pautler joined GNIC in 1981 and since 1988 has been Senior Vice
President-Finance and Treasurer of Guaranty; age 41.
James R. Pouliot has been Chief Executive Officer of Viking Insurance
Holdings, Inc. since 1992. Prior to joining Viking in 1992, Mr. Pouliot served
as Vice President of Marketing for Great American Insurance Company from 1990 to
1992; age 42.
Fred T. Roberts has been President of Commercial Lines Unit of GNIC since
November 1995. He served as Senior Vice President of Claims of GNIC from 1984
to 1995; age 54.
EXHIBIT 3
SPECIAL FACTORS
BACKGROUND OF THE TRANSACTION
Since August 1984, Orion has had, directly or through wholly-owned
subsidiaries, a substantial ownership interest in the Company. In November
1988, Orion, through wholly-owned subsidiaries, increased its ownership of the
Company from 49.7% to 100%. On November 20, 1991, Orion sold 6,250,000 Shares
of the Company's common stock in an initial public offering at a net price per
Share of $13.60, reducing its ownership interest to 49.3% of the then
outstanding Shares. Since then, the Company has operated as an independent
publicly-traded company.
In connection with the 1991 public offering, Orion, certain of its
subsidiaries and the Company entered into a Shareholders Agreement. Such
Agreement was amended in 1994 to provide for an increase in the number of
directors, including directors independent of management and Orion, and was most
recently amended in March 1995 to provide for increasing the number of directors
to eleven. Pursuant to the Shareholders Agreement, as amended (the
"Shareholders Agreement"), Messrs. Alan R. Gruber, Chairman and Chief Executive
Officer of Orion, Larry D. Hollen, President and Chief Operating Officer of
Orion, and William J. Shepherd, a director of Orion, currently serve as Orion's
designated directors on the Company's Board. Mr. Gruber is Chairman of the
Board of the Company. Messrs. Gruber and Shepherd represent two of the four
members of the Company's Compensation Committee. Mr. Shepherd is the Chairman
of both Orion's Compensation Committee and the Company's Compensation Committee.
For additional information about the Shareholders Agreement, see SPECIAL
FACTORS--"Interests of Certain Persons in the Transaction; Securities Ownership;
Related Transactions" and THE OFFER--Section 11.
Mr. Robert B. Sanborn, Mr. Hollen's predecessor as President and Chief
Operating Officer of Orion, who is a director of and a senior executive
consultant to Orion, is also a member of the Company's Board and of its
Compensation Committee. Mr. Sanborn receives the regular fees and other
benefits provided to all non-employee directors of the Company. Mr. Roger B.
Ware, the Company's President and Chief Executive Officer, serves as a member of
Orion's Board of Directors but is not a member of any of its committees. Mr.
Ware receives the regular fees and other benefits provided to all non-employee
directors of Orion.
Orion and the Company are also parties to an investment management
agreement pursuant to which the investment portfolio of the Company (other than
short-term investments and a portion of the equity portfolio) is managed by
Orion under the direction and supervision of the Company and subject to the
Company's investment policies. In addition, Orion's insurance subsidiaries have
entered into certain reinsurance agreements in the ordinary course of business
with the Company's insurance subsidiaries. For additional information about
transactions
between Orion and the Company, see SPECIAL FACTORS--"Interests of Certain
Persons in the Transaction; Securities Ownership; Related Transactions."
On July 18, 1995, the Company acquired all the capital stock of Viking
Insurance Holdings, Inc. ("Viking Holdings") for a total consideration of
$102,700,000 (subject to certain adjustments). The Company financed the
acquisition of Viking Holdings by selling 1,550,000 Shares in a European
offering pursuant to Regulation S under the Securities Act of 1933, as amended
(the "Securities Act"), and utilizing a portion of a new $110,000,000 credit
facility from a group of lending banks. Certain of Orion's wholly-owned
subsidiaries held $20,896,000 of the Company's subordinated promissory notes due
2003 (the "2003 Notes") which had been issued in November 1991. To facilitate
the Company's acquisition of Viking Holdings, the entire principal amount of the
2003 Notes was converted in July and October 1995 into 1,326,128 Shares at
$15.76 per Share, the same net price received by the Company in its Regulation S
offering. The conversion of the 2003 Notes restored Orion to its previous
ownership level in the Company of slightly less than 50% of the outstanding
Shares following the increase in the number of Shares resulting from the
Company's Regulation S offering. See SPECIAL FACTORS--"Interests of Certain
Persons in the Transaction; Securities Ownership; Related Transactions."
Orion's subsidiaries received the following number of Shares upon conversion of
the 2003 Notes:
Number of
Shares Received
---------------
The Connecticut Indemnity Company 74,462
Connecticut Specialty Insurance Company 10,154
Design Professionals Insurance Company 47,448
EBI Indemnity Company 47,046
Employee Benefits Insurance Company 67,212
The Fire and Casualty Insurance Company of Connecticut 27,416
Security Insurance Company of Hartford 855,721
Security Reinsurance Company 128,955
SecurityRe, Inc. 67,714
---------
Total 1,326,128
=========
From November 1995 through March 1996, Design Professionals Insurance
Company ("DPIC") acquired an additional 80,000 Shares in open market purchases.
Except as set forth below or elsewhere herein, there have been no transactions
or negotiations between or among Orion, the Company and their affiliates and
third parties in the last three fiscal years regarding a merger, consolidation,
asset acquisition, tender offer, sale of assets, election of directors, or
acquisition of securities.
In December 1995, a representative of a company in the insurance industry
expressed an interest to Mr. Gruber in acquiring from Orion its Shares in
connection with a possible acquisition of the Company. In a subsequent
conversation in February 1996, the representative
-2-
of such company indicated that its management had decided to pursue another
possible acquisition. No further contact has been made by the interested party
and no price for securities of the Company was discussed.
Also in February 1996, Mr. Gruber discussed with a representative of
another insurance company a possible acquisition from Orion of its Shares. Such
company decided to pursue other opportunities. No price was discussed for the
Shares, and no offer was made.
In March 1996, a representative of a financial intermediary told Mr. Gruber
that he had proposed to a named third-party entity the possible purchase from
Orion of its Shares in connection with a possible purchase of the Company. The
financial intermediary was not retained by Orion to effect such a transaction
and Orion has no information to the effect that he has been retained to do so by
the third party. Orion has had no further contact concerning the proposal, has
received no offer and is not engaged in negotiations concerning the proposal.
Messrs. Ware and Gruber have discussed from time to time increasing Orion's
ownership interest in the Company. At the April 2, 1996 Board of Directors
meeting of the Company, Mr. Ware asked Mr. Gruber to indicate Orion's present
plans, if any, with respect to increasing its ownership interest in the Company.
Mr. Gruber indicated that no plans, proposals or any intention had been arrived
at by Orion or its subsidiaries which hold Shares, but that each reserved the
right to develop plans to acquire additional Shares, including through open-
market purchases or a tender offer which could be for all or a part of the
Shares. Mr. Ware expressed his preference for Orion's acquiring all of the
equity of the Company.
On May 7,1996, at special meetings, the Board of Directors of each
Purchaser authorized the making of the Offer. At the meeting of the Board of
Directors of Orion, Mr. Ware participated but abstained from voting. The
Company was advised that the Offer would be commenced on May 8, 1996. A press
release was issued by Orion on May 7, 1996.
FAIRNESS OF THE OFFER
The Offer price of $17.50 per Share was determined by Orion, with the other
Purchasers, after considering the factors set forth below and without
negotiations with the Company.
The Purchasers believe that the Offer is fair to the unaffiliated holders
of Shares to whom it is directed. In concluding that the Offer is fair to such
stockholders, the Purchasers have considered, among other matters, (i) that the
$17.50 per Share price represents a premium of $1.375 over the closing sale
price of $16.125 per Share as reported by the New York Stock Exchange (the
"NYSE") on May 7, 1996, the date prior to the commencement of the Offer; (ii)
that the $17.50 per Share price represents an increase of $3.12 over the net
book value per Share of $14.38 as of March 31, 1996 and an increase of $5.33
over the tangible book value per Share of $12.17 as of the same date (the
Purchasers have made no analysis of the liquidation value of the Company and
therefore have no basis for expressing an opinion as to the comparison of the
Offer price to liquidation value); (iii) recent, and historical, market prices
of
-3-
the Shares since the Company became a public company in November 1991,
including the average daily closing stock price for the six-month period ended
April 30, 1996 of $14.695; (iv) Orion's evaluation of competitive trends and
other conditions in the markets in which the Company operates; (v) Orion's
knowledge of the business, historical results of operations and the properties,
assets and earnings of the Company and its recent financial and operating
performance (see THE OFFER--Section 7); (vi) the per Share price of $16.50
($15.76 net of expenses) received by the Company from the sale of 1,550,000
Shares in June 1995 in the Regulation S offering; (vii) the conversion price of
$15.76 per Share for an aggregate of 1,326,128 Shares issued in June and October
of 1995 for the conversion of $20,896,000 of the 2003 Notes of the Company which
were held by subsidiaries of Orion; (viii) the average per Share price of
approximately $14.45 paid by the Company both to subsidiaries of Orion and to
unaffiliated holders in 1994 for the repurchase of 459,200 Shares pursuant to
the repurchase program authorized by the Company's Board of Directors in 1994
(see THE OFFER--Section 9); (ix) the per Share prices paid by DPIC ranging from
$13.375 to $14.00 to acquire 80,000 Shares in the open market between November
1995 and March 1996; and (x) the fact that the Purchasers already beneficially
own 49.5% of the outstanding Shares.
The foregoing discussion of the information and factors considered by the
Purchasers is not intended to be exhaustive. In view of the wide variety of
factors considered in connection with their determination of the Offer price and
their evaluation of the fairness of the Offer, the Purchasers did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the foregoing factors or determine that any factor was of particular
importance. Rather, the Purchasers viewed their position as being based on the
totality of the information presented to and considered by them. On balance,
however, the Purchasers viewed the factors set forth in items (i) through (v)
and (x) as very favorable to their decision, the matters set forth in items (vi)
and (ix) as being influential, and the remainder of lesser significance. In
particular the Purchasers consider that the Offer price of $17.50 per Share
represents a premium over the price at which the Shares were trading immediately
prior to the date of commencement of the Offer.
The Purchasers also have taken into account that the liquidity and market
value of the remaining Shares held by the public could be adversely affected by
the reduction in the number of stockholders, reduction in the number of Shares
held by unaffiliated stockholders, the possible de-listing of the Shares by the
NYSE and the possible de-registration of the Shares under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Purchasers have
further taken into account their intent and present expectation that the Shares
will remain publicly traded. See SPECIAL FACTORS--"Certain Effects of the
Transaction" and THE OFFER--Section 6.
In advance of a meeting of the Board of Directors of the Company in
December 1995, the Company provided its 1996 operating plan to the members of
its Board of Directors, including Messrs. Gruber, Hollen, Sanborn and Shepherd
(all of whom are members of the Board of Directors of Orion of which Mr. Gruber
is Chairman of the Board, Messrs. Gruber and Hollen are executive officers and
Mr. Sanborn is a senior executive consultant) (see
-4-
INTRODUCTION and SPECIAL FACTORS--"Interests of Certain Persons in the
Transaction; Securities Ownership; Related Transactions"). Such operating plan
was prepared by the Company's management based on numerous assumptions
concerning mix of business, changes in insurance premium rates, growth, renewal
rates, claim frequencies and severity, commission ratios, premium taxes,
expenses, realized gains, shareholder dividends and other factors. The 1996
operating plan includes premiums earned of $486,481,000; operating earnings
(earnings after taxes, excluding realized investment gains and losses) of
$22,401,000 or $1.50 per Share; and net income (including assumed realized
investment gains) of $24,351,000 or $1.63 per Share. In 1995, the Company had
premiums earned of $390,017,000, operating earnings of $6,790,000 or $.51 per
Share, and net income of $8,929,000 or $.67 per Share. For the first quarter of
1996 and 1995, respectively, the Company's earned premiums were $115,470,000 and
$79,468,000; operating earnings were $4,499,000, or $.30 per Share, and
$5,398,000, or $.45 per Share; and net income was $5,787,000, or $.39 per Share,
and $5,768,000, or $.48 per Share.
Orion believes that the 1996 operating plan is based on a variety of
assumptions which, though considered reasonable by the Company's management for
purposes of establishing an operating business plan, are subject to substantial
uncertainties and contingencies, many of which are beyond the Company's control.
The 1996 operating plan was not prepared with a view to public dissemination or
compliance with published guidelines of the Commission or of the American
Institute of Certified Public Accountants. The information cited therefrom is
included herein solely because it was known to the executive officers and
directors of Orion during the period when it was considering whether to proceed
with the Offer. None of the Purchasers assumes any responsibility for the
accuracy of the 1996 operating plan. For historical financial information
concerning the Company, see THE OFFER--Section 7.
The Purchasers have not obtained, or sought to obtain, any report, opinion
or appraisal from an outside party, including, without limitation, an investment
banker's opinion as to the fairness of the Offer to unaffiliated holders of
Shares. The Purchasers have not negotiated the Offer price with the Company and
do not intend to do so.
PURPOSE AND STRUCTURE OF THE TRANSACTION; PLANS FOR THE COMPANY AFTER THE OFFER
Orion, through its subsidiaries, beneficially owns approximately 49.5% of
the Shares outstanding as of May 6, 1996. A principal purpose of the Offer, in
addition to its being a favorable investment opportunity, is to achieve a
sufficient ownership interest in the Company to permit Orion to file
consolidated federal income tax returns that include the Company. Section
1504(a)(2) of the Code requires generally that 80% or more of both the total
voting power and the total value of the stock of a corporation (other than
certain preferred stock) be owned by one or more of the members of an
"affiliated group" in order for such corporation to be included within such
group and thereby join in the filing of consolidated federal income tax returns
of such group. See INTRODUCTION and SPECIAL FACTORS--"Certain Effects of the
Transaction" with respect to the federal income tax sharing agreement that Orion
intends to seek to enter into with the Company in such event.
-5-
As described under THE OFFER--Section 2, if fewer than 4,600,000 Shares are
properly tendered and purchased pursuant to the Offer, and Orion together with
the other entities in its consolidated tax group then owns less than 80% of the
outstanding Shares, Orion intends, subject to market conditions, that it and/or
its wholly-owned subsidiaries will purchase additional Shares in order to
acquire an 80% ownership interest in the Company. Such purchases may be made
through open market or privately negotiated purchases or another tender offer
(which may be for less than all the Shares), at prices acceptable to Orion and
its subsidiaries, which may be greater or lesser than the Offer price for the
Shares. There can be no assurance that such purchases of Shares will be made or
over what period of time such Shares, if any, might be purchased.
After completion or termination of the Offer, regardless of the number of
Shares purchased in the Offer, Orion also reserves the right to purchase
directly or through its subsidiaries additional Shares in the open market, in
privately negotiated transactions, in another tender or exchange offer or
otherwise. Any acquisition of Shares by Orion, or its subsidiaries, would have
to be made in accordance with applicable legal requirements, including those
under the Exchange Act. After completion or termination of the Offer, Orion
also reserves the right, but has no present intention, (i) to sell Shares in
open market or negotiated transactions, (ii) to propose a merger or other
similar business combination of the Company involving consideration consisting
of cash or securities or a combination of cash and securities or (iii) to
propose such a transaction involving consideration having a value more or less
than the amount to be paid per Share pursuant to the Offer. See THE OFFER--
Section 11.
It is the present intention of the Purchasers, following the consummation
of the Offer, that the Company operate with its own management and that its
Shares will continue to be publicly traded. However, upon the completion of the
Offer, Orion reserves the right to conduct a further review of the Company and
its assets, corporate structure, dividend policy, capitalization, operations,
properties, policies, management and personnel and to consider what, if any,
changes would be desirable in light of the circumstances which then exist,
subject to applicable legal requirements. Such changes could include, in
addition to those described under SPECIAL FACTORS--"Purpose and Structure of the
Transaction; Plans for the Company After the Offer" and - "Certain Effects of
the Transaction," changes in the Company's or any subsidiary's business,
corporate structure, articles of incorporation, by-laws, capitalization, board
of directors, management or dividend policy. The Purchasers expect that the
Company will continue to have a number of directors who are independent of
management of the Company, consistent with applicable law and the requirements
of the NYSE and other regulatory bodies.
For additional information concerning legal or contractual requirements
applicable to the Purchasers' plans, see THE OFFER--Section 11. In addition,
while Orion does not intend or presently anticipate that the acquisition of up
to 4,600,000 Shares in the Offer, if the Offer is consummated, would result in
the de-listing of the Shares which currently trade on the NYSE or in de-
registration of the Shares under Section 12 of the Exchange Act, there can be no
-6-
assurance that this will not occur. See SPECIAL FACTORS--"Certain Effects of
the Transaction" and THE OFFER--Section 6.
Except as set forth above in this Offer to Purchase, none of the Purchasers
has any present plans or proposals which relate to or would result in (i) an
extraordinary corporate transaction, such as a merger, reorganization or
liquidation of the Company or any of its subsidiaries, (ii) a sale or transfer
of a material amount of assets of the Company or any of its subsidiaries; (iii)
any material changes in the Company's corporate structure, business or
composition of its management or personnel; (iv) any material change in the
present capitalization, dividend rate or policy or indebtedness of the Company;
(v) any change in the present board of directors of the Company, including, but
not limited to, any plan or proposal to change the number or term of existing
directors, to fill any existing vacancy on the board or to change any term of
the employment contract of any executive officer; (vi) a class of equity
securities of the Company being de-listed from a national securities exchange or
ceasing to be authorized to be quoted on an inter-dealer quotation system of a
registered national securities association or becoming eligible for termination
of registration pursuant to Section 12(g)(4) of the Exchange Act or the
suspension of the Company's obligation to file reports pursuant to Section 15(d)
of the Exchange Act.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION; SECURITIES OWNERSHIP; RELATED
TRANSACTIONS
Directors and Officers. As described in this Offer to Purchase under
SPECIAL FACTORS--"Background of the Transactions" and - "Purpose and Structure
of the Transaction; Plans for the Company After the Offer," three of the
Company's directors are designated by Orion pursuant to the Shareholders
Agreement, including Mr. Gruber, who is Chairman of the Board of the Company and
also of Orion. The Shareholders Agreement also provides that so long as Orion
or its subsidiaries beneficially own in the aggregate 30% or more of the voting
securities of the Company, Orion will continue to have the right to designate
three nominees to the Company's Board (one of whom will be the Chairman of the
Board), and so long as Orion or its subsidiaries beneficially own 20% or more of
the Company's securities, Orion will have the right to designate two nominees.
Orion may also require that the Company's Compensation Committee include Orion's
nominees to the Company's Board. None of Orion's nominees, other than Mr.
Shepherd, receives any compensation from the Company, including any retainer fee
or attendance fee, for his services, except for travel expenses in connection
with attendance at directors' meetings. For information concerning the
directors and executive officers of the Purchasers, see Schedule I to this Offer
to Purchase.
Securities Ownership. Orion, through its subsidiaries, owns, in the
aggregate, 7,409,942 Shares. Set forth below is the number of Shares held by
the Purchasers respectively as of the date of this Offer to Purchase:
-7-
Purchaser No. of Shares %*
- --------- ------------- ----
The Connecticut Indemnity Company 407,995 2.7
Connecticut Specialty Insurance Company 110,154 0.7
Design Professionals Insurance Company 167,115 1.1
EBI Indemnity Company 505,379 3.4
Employee Benefits Insurance Company 493,612 3.3
The Fire and Casualty Insurance Company of Connecticut 197,416 1.3
Security Insurance Company of Hartford 4,921,802 32.9
- ---------------------
* Based on the number of Shares reported by the Company in the March 10-Q to
be outstanding as of May 6, 1996.
In addition, two other wholly-owned subsidiaries of Orion own Shares as
follows: SecurityRe, Inc. owns 67,714 Shares or 0.5% of the Shares outstanding
and Security Reinsurance Company owns 538,955 Shares or 3.6% of the Shares
outstanding as of such date.
Although each of Orion's subsidiaries has sole power to vote and dispose of
its Shares and makes its own investment decisions, Orion is deemed by its direct
or indirect voting control of the subsidiaries to be able ultimately to direct
the acquisition, voting and disposition of the Shares held by its subsidiaries.
As indicated elsewhere herein, DPIC purchased a total of 80,000 Shares in
the open market from November 1995 through March 1996 at prices ranging from
$13.375 to $14.00 for an average price per Share of $13.70. Of the 80,000
Shares, 13,500 Shares were purchased during the 60 days prior to the date of
this Offer to Purchase on the dates and at the prices set forth below:
PRICE PER
SHARE
NO. OF (NET OF
NAME SHARES COMMISSIONS) DATE
Design Professionals Insurance Company 1,900 $ 13.50 03/11/96
10,000 $13.625 03/12/96
1,600 $ 13.50 03/12/96
The conversion in 1995 of the 2003 Notes of the Company is discussed under
SPECIAL FACTORS--"Background of the Transaction" above.
In other transactions, pursuant to the Company's 1994 repurchase program
(referred to under SPECIAL FACTORS--"Fairness of the Offer" above and THE OFFER-
- -Section 9), in 1994 the Purchasers sold an aggregate of 139,600 Shares to the
Company at an average price
-8-
per Share of $14.62. Such aggregate number of Shares sold by Orion's
subsidiaries represented approximately 1.1% of the Shares outstanding
immediately prior to the adoption by the Company of its share repurchase
program.
No executive officer or director of Orion or of any of the other
Purchasers, or to the knowledge of Orion, any associate of the persons named on
Schedule I hereto beneficially owns, or has the right to acquire, directly or
indirectly, any Shares except as follows:
Name No. of Shares
-------------------------- --------------
W. Marston Becker 1,400
Bertram J. Cohn 103,600*
Robert B. Sanborn 1,000
Raymond J. Schuyler 500
William J. Shepherd 5,000
John R. Thorne 1,500
Roger B. Ware 74,321**
* Mr. Cohn, as a managing director of First Manhattan Company, acts as co-
manager in conjunction with another co-manager of each of two discretionary
accounts which hold an aggregate of 103,600 Shares.
** As reported in the Company's Proxy Statement dated March 28, 1996 for its
Annual Meeting of Stockholders. The number includes Shares beneficially
owned as well as non-vested restricted stock and exercisable options.
No executive officer or director has effected any transaction in the Shares
during the past 60 days except that Mr. Robert H. Jeffrey sold 1,300 Shares on
March 11, 1996 at a price of $13.50 per Share. For information concerning the
business address of the foregoing persons, see THE OFFER--Section 8 and Schedule
I.
None of Orion's wholly-owned subsidiaries will tender Shares in the Offer.
Orion has been advised that each of Messrs. Becker, Cohn, Schuyler, Shepherd and
Thorne intends to tender his Shares but that Mr. Sanborn does not intend to
tender his Shares. At present Orion has no information as to whether Mr. Ware
intends to tender any Shares. None of the Purchasers nor any of their directors
or executive officers, in his capacity as such, makes any recommendation to the
stockholders of the Company regarding the Offer.
According to the Company's Proxy Statement dated March 28, 1996 for its
Annual Meeting of Stockholders to be held May 15, 1996 (the "Annual Meeting
Proxy Statement"), the only holder of 5% or more of the Shares, other than Orion
through its subsidiaries, is Sanford C. Bernstein & Co., Inc., One State Street
Plaza, New York, New York 10004, which owned, as reported in its Schedule 13G
filed with the Commission on February 7, 1996, 779,200 Shares or 5.21% of the
Shares issued and outstanding as of that date. Based on information set forth
-9-
in the Annual Meeting Proxy Statement, the directors and executive officers of
the Company as of January 31, 1996 beneficially owned (including Shares
outstanding, Shares subject to options exercisable within 60 days of January 31,
1996 and restricted Shares) an aggregate 219,122 Shares, of which 1,000 Shares
were owned by Robert B. Sanborn, 5,000 Shares were owned by William J. Shepherd,
74,321 Shares were owned by Roger B. Ware, 400 Shares by Dennis J. Lacey, 39,482
Shares by Arthur J. Mastera, 506 Shares by M. Ann Padilla, 41,236 Shares by
Michael L. Pautler, 12,000 Shares by James R. Pouliot, 500 Shares by Carroll D.
Speckman, 25,216 Shares by Fred T. Roberts and 1,500 Shares by Richard R.
Thomas.
According to the Annual Meeting Proxy Statement, the Company adopted a Long
Term Incentive Plan in 1991 for all of its employees under which, as of December
31, 1995, the number of Shares underlying outstanding unexercised options held
by the named executive officers of the Company was as follows:
NUMBER OF
UNEXERCISED OPTIONS
AT YEAR-END
--------------------------
NAME EXERCISABLE UNEXERCISABLE
Roger B. Ware 45,250 15,750
Fred T. Roberts 22,250 10,750
Arthur J. Mastera 20,250 10,750
Michael L. Pautler 23,250 10,750
James R. Pouliot - 35,000
Except as set forth herein, to the Purchasers' knowledge, no member of the
Company's management or Board of Directors has interests in the Offer which are
not identical to those of other holders of the Shares.
Related Transactions. As indicated elsewhere herein, Orion and its
subsidiaries have entered into several agreements with the Company and its
subsidiaries. Pursuant to the Shareholders Agreement, Messrs. Gruber, Hollen
and Shepherd serve on the Company's Board of Directors. Under the Shareholders
Agreement, Orion also has the right on up to three occasions to require the
Company to register under the Securities Act Shares owned by Orion and its
wholly-owned subsidiaries, which right expires in November 1997. In addition,
the Company has agreed to use its best efforts to include such Shares in any
underwritten public offering of its Shares under the Securities Act and to pay
all expenses in connection with the first two registrations.
Most state insurance codes require transactions between a licensed
insurance company and its affiliates to be fair and reasonable. In the case of
certain material transactions, an insurance company must obtain prior approval
of the transaction from the appropriate state insurance department. Reinsurance
agreements, tax sharing agreements, loans, guarantees, sales
-10-
and other transactions of a material size, as well as management, service and
cost sharing agreements must similarly be approved.
In the ordinary course of business, the Company's insurance subsidiaries
reinsure certain risks with other companies. Such arrangements serve to limit
their maximum loss on large risks. To the extent that any reinsuring company is
unable to meet its obligations, the Company's insurance subsidiaries would not
be relieved of their liabilities. For 1995, Guaranty National Insurance Company
("GNIC") and Landmark American Insurance Company ("LAIC"), wholly-owned
subsidiaries of the Company, were parties to a 100% reinsurance agreement with
an Orion insurance subsidiary. Premiums written and ceded under this agreement
are included in premiums written as reported in the Company's financial
statements and were $152,000 for 1995. Insurance subsidiaries of the Company
were paid $5,000 in fees in conjunction with this reinsurance agreement. Also,
during 1995 GNIC was a party to reinsurance agreements with Orion insurance
subsidiaries pursuant to which GNIC assumed business written through affiliates
totalling $9,495,000 in premiums. GNIC paid to the Orion insurance subsidiaries
$160,000 in fees and reimbursed $178,000 of actual expenses incurred by Orion's
insurance subsidiaries in conjunction with this reinsurance agreement. For
1994, GNIC and LAIC were parties to a 100% reinsurance agreement with an Orion
insurance subsidiary. Premiums written and ceded under this agreement are
included in premiums written as reported in the Company's financial statements
and were $643,000 for 1994. The Company's insurance subsidiaries were paid
$14,000 in fees and reimbursed $1,000 for expenses in conjunction with this
reinsurance agreement. Also, during 1994 GNIC was a party to reinsurance
agreements with Orion insurance subsidiaries pursuant to which GNIC assumed
business written through affiliates totalling $30,921,000 in premium. GNIC paid
to Orion's insurance subsidiaries $666,000 in fees and reimbursed $774,000 of
actual expenses incurred by Orion's insurance subsidiaries in conjunction with
this reinsurance agreement. For 1993 GNIC and LAIC were parties to a 100%
reinsurance agreement with an Orion insurance subsidiary. Premiums written and
ceded under this agreement are included in premiums written as reported in the
Company's financial statements and were $847,000 for 1993. The Company's
insurance subsidiaries were paid $15,000 in fees and reimbursed $1,000 for
expenses in conjunction with this reinsurance agreement. Also, during 1993 GNIC
and LAIC were parties to reinsurance agreements with Orion insurance
subsidiaries pursuant to which GNIC assumed business written through affiliates
totalling $30,856,000 in premiums. The Company's insurance subsidiaries paid to
Orion's insurance subsidiaries $582,000 in fees and reimbursed $673,000 for
actual expenses in conjunction with this reinsurance agreement.
Effective January 1, 1993, the Company's insurance subsidiaries entered
into a reinsurance agreement ("1993 Agreement") with National Reinsurance
Corporation ("NRC"), a wholly-owned subsidiary of National Re Holdings
Corporation ("National Re"). The 1993 Agreement, as amended, primarily provides
reinsurance limits up to $6,000,000 in excess of the Company's retention of
$150,000 to $300,000. The Company ceded $38,215,000 in premiums to NRC during
1995 and received $12,358,000 in ceding commissions. Subject to certain renewal
and cancellation provisions, the agreement expires at the end of 1998. With the
exception of 1992, NRC has been a principal reinsurer of the Company since 1985.
Mr. Steven
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B. Gruber, a son of Mr. Alan R. Gruber, Chairman of the Company and of Orion,
has been a director of National Re since 1990. Neither of the Messrs. Gruber
participated in the negotiation of the 1993 Agreement and its subsequent
amendments. The 1993 Agreement, as amended in 1994, provided reinsurance limits
up to $9,700,000 in excess of the Company's retention of $300,000. The company
ceded $31,929,000 in premiums to NRC during 1994 and received $10,377,000 in
ceding commissions. The Company ceded $27,722,000 in premiums during 1993 to NRC
and received $9,010,000 in ceding commissions.
A subsidiary of Orion is an agent for the Company, pursuant to the
Company's standard agency contract. During 1995, this agency produced $411,000
in premiums and was paid $72,000 in commissions. The Company expects similar
premium production and commissions in 1996. During 1994, this agency produced
$516,000 in premiums and was paid $90,000 in commissions. During 1993, this
agency produced $537,000 in premiums and was paid $94,000 in commissions.
During 1995, the Company's 2003 Notes in the principal amount of
$20,896,000, were converted by Orion's subsidiaries into 1,326,128 Shares.
Total interest paid by the Company on the 2003 Notes in 1995 to Orion's
subsidiaries was $1,122,000. Total interest paid to Orion's subsidiaries for
1993 was $1,928,000 and for 1994 was $1,640,000. See SPECIAL FACTORS--
"Background of the Transaction."
In 1995, in connection with the Viking Holdings acquisition financing,
Orion made a commitment for a $21,000,000 bridge loan to the Company. The loan
was not drawn down, but the Company paid a $210,000 commitment fee to Orion at
the time the commitment was executed.
The Company and Orion have entered into an investment management agreement
pursuant to which the investment portfolio of the Company (other than short-term
investments and a portion of the equity securities) is managed by investment
managers of Orion under the direction and supervision of the Company and subject
to the Company's investment policies. For its investment management services,
fees were paid to Orion at a rate of $550,000 per year from 1993 through July
1995, at which time they were increased to a rate of $650,000 per year in
recognition of the additional investment balances resulting from the Viking
Holdings acquisition. The contract continues in effect for annual periods
unless terminated by either party upon 90 days prior written notice.
During 1990, GNIC entered into a loan participation agreement pursuant to
which DPIC borrowed approximately $9 million from affiliates. The loan, which
was secured by a leasehold deed of trust on an office building in Monterey,
California, owned and primarily occupied by DPIC, matured in November 1995.
GNIC's proportionate share of this loan was $3,700,000 or 41.1%. GNIC received
quarterly interest payments at a rate of 11% per year. Interest earned for each
of 1993 and 1994 was $407,000 and for 1995 was $355,000.
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Orion has committed to invest up to $5,000,000 in Insurance Partners, L.P.,
a partnership formed to make equity investments of up to approximately $550
million in the insurance industry. The Company has committed to participate in
Orion's commitment in an aggregate amount not to exceed $1,500,000. As of
December 31, 1995, Orion had invested $510,000 and the Company $219,000 in such
partnership investments. Insurance Partners L.P. is managed by Insurance
Partners Advisors L.P., of which Mr. Steven B. Gruber is a managing director.
As described under SPECIAL FACTORS--"Certain Effects of the Transaction,"
Orion may enter into a tax sharing agreement with the Company and its
subsidiaries. See also, SPECIAL FACTORS--"Background of the Transaction."
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EXHIBIT 4
GUARANTY NATIONAL CORPORATION
9800 SOUTH MERIDIAN BOULEVARD
ENGLEWOOD, COLORADO 80112
May 22, 1996
Dear Shareholder:
On May 8, 1996, Orion Capital Corporation and certain of its subsidiaries
("Orion") commenced a cash tender offer (the "Offer") to purchase up to
4,600,000 shares of common stock of Guaranty National Corporation (the
"Company") at a price of $17.50 per share.
Orion currently owns approximately 49.5 percent of the Company's
outstanding common stock. If the Offer is consummated and Orion acquires
4,600,000 shares pursuant to the Offer, Orion's percentage ownership of the
outstanding common stock would increase to approximately 80.3 percent.
The Special Committee of outside directors of the Company appointed in
connection with the Offer has unanimously determined that it is unable to take a
position or make a recommendation at this time with respect to the Offer. In
reaching its determination, the Special Committee considered a number of factors
which are discussed in the enclosed Schedule 14D-9, which was filed by the
Company today with the Securities and Exchange Commission.
You are urged to consider the enclosed materials in determining whether to
tender some or all of your shares.
Sincerely,
Dennis J. Lacey
Chairman of the Special Committee
EXHIBIT 5
[GNC Letterhead]
May 22, 1996
FOR IMMEDIATE RELEASE
Contact: Michael Pautler
Senior Vice President of Finance
(303) 754-8701, or
Sharon McDougall
Director of Communications
(303) 754-8717
For: Guaranty National Corporation (NYSE: GNC)
GUARANTY NATIONAL CORPORATION
SPECIAL COMMITTEE
UNABLE TO TAKE POSITION
ON TENDER OFFER
(Englewood, Colorado) - Guaranty National Corporation ("GNC") announced today
that its Special Committee of disinterested, outside directors unanimously
determined that it is unable to take a position or make a recommendation at this
time with respect to Orion Capital Corporation's tender offer for approximately
30% of GNC's common stock at a price of $17.50 per share.
In reaching its determination, the Special Committee considered a number of
factors which are discussed in the Company's Schedule 14D-9
Solicitation/Recommendation Statement, which is being filed with the Securities
and Exchange Commission and mailed to all GNC shareholders. These factors
include the Special Committee's evaluation of analyses prepared by its financial
advisor and its request for additional information from its financial advisor
which has not yet been received; the Special Committee's concerns with respect
to the Offer price and the potential impact of the Offer on the value and
liquidity of the remaining shares; and preliminary and inconclusive discussions
with Orion's Chairman, who informed the Committee that the Purchasers have no
intention to change the Offer price or to increase Orion's holdings to more than
approximately 80% of the outstanding shares of GNC. The Special Committee
expects that additional discussions will be held with Orion in the future, but
has no reason to believe that they will result in material changes in the
structure of the transaction or the Offer price.
The Company also announced that on May 21, 1996, it was served with a complaint
captioned Charles Miller v. Roger B. Ware, Alan R. Gruber, Larry D. Hollen,
Robert B. Sanborn, William J. Shepherd, Orion Capital Corporation and Guaranty
National Corporation, and filed in the District Court in Arapahoe County,
Colorado. The complaint alleges a class action on behalf of Guaranty's public
shareholders and claims compensatory damages because of the alleged inadequacy
of the price of $17.50 per share specified in Orion's current tender for 30%
of Guaranty's common stock. GNC previously announced that it had been served
with a similar complaint by Eugenia Vogel on behalf of the same putative class.
Through its subsidiaries, Guaranty National writes specialty commercial and
private passenger automobile insurance, as well as collateral protection and
other commercial coverages. The Company is a leading provider of nonstandard
personal automobile insurance written through independent agents. A.M. Best
Company rates Guaranty National Insurance Company and its subsidiaries "A
(Excellent)" and Viking Insurance Company of Wisconsin and its affiliate "A-
(Excellent)". The Company's common stock is traded on the New York Stock
Exchange under the symbol GNC.
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