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Exhibit (d)(10)
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
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Item 1. SECURITY AND SUBJECT COMPANY
The subject company is Guaranty National Corporation, a Colorado
corporation ("Guaranty"). The address of the principal executive offices of
Guaranty 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, of Guaranty (the "Shares"), including the
associated stock purchase rights under the Rights Agreement dated November 20,
1991.
Item 2. TENDER OFFER OF THE BIDDER
This Solicitation/Recommendation Statement on Schedule 14D-9
("Schedule 14D-9") relates to the tender offer disclosed in a Schedule 14D-1
dated November 5, 1997 (the "Schedule 14D-1") of Orion Capital Corporation
("Orion"), to purchase all of the outstanding Shares at $36.00 per Share net to
the seller in cash, upon the terms and subject to the conditions set forth in
the Offer to Purchase dated November 5, 1997 (the "Offer to Purchase"), and the
related Letter of Transmittal (which together constitute the "Offer"). The
Offer is conditioned upon, among other things, there being validly tendered and
not withdrawn prior to the expiration date of the Offer, a number of Shares
which, excluding the Shares owned by Orion and its wholly-owned subsidiaries,
will constitute at least 50.01 percent of the outstanding Shares (the "Minimum
Share Condition"). The Schedule 14D-1 states that the principal executive
offices of Orion are located at 9 Farm Springs Road, Farmington, Connecticut
06032.
The Offer is being made pursuant to an Agreement and Plan of Merger,
dated as of October 31, 1997 (the "Merger Agreement"), by and between Orion and
Guaranty. A copy of the Merger Agreement is filed as Exhibit 1 to this Schedule
14D-9 and is incorporated herein by reference. The Merger Agreement provides,
among other things, that as promptly as practicable following the completion of
the Offer and the satisfaction or waiver of certain conditions, including the
purchase of Shares pursuant to the Offer and satisfaction of the Minimum Share
Condition, and the approval and adoption of the Merger Agreement by the
shareholders of Guaranty if required by applicable law, a newly formed wholly-
owned subsidiary of Orion, GNC Transition Corp., will be merged with and into
Guaranty (the "Merger"), with Guaranty as the surviving corporation, with the
result that all the outstanding Shares will be owned by Orion and its wholly-
owned subsidiaries. In the Merger, each issued and outstanding Share (other than
dissenting shares) not owned directly or indirectly by Guaranty will be
converted into and represent the right to receive $36.00 in cash, without
interest (the "Merger Price"); provided, however, that the Merger Price will not
be paid with respect to any Shares owned by Orion and its wholly-owned
subsidiaries. The Merger Agreement is described under the heading "The Merger
Agreement" in the portions of the Offer to Purchase contained in Exhibit 4 to
this Schedule 14D-9 and incorporated herein by reference.
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Item 3. IDENTITY AND BACKGROUND
(a) The name and business address of Guaranty, 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 Guaranty or its
affiliates and (i) Guaranty's executive officers, directors or affiliates, or
(ii) Orion or its 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 Guaranty's Proxy Statement
dated March 27, 1997, for its Annual Meeting of Shareholders held on May 13,
1997 (the "1997 Proxy Statement"), "Directors and Executive Officers of the
Registrant" in Guaranty's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (the "1996 Form 10-K"), and in the Offer to Purchase under the
headings "SPECIAL FACTORS --Background of the Transactions," " -Fairness of the
Offer and the Merger," " - Reasons for the Offer and the Merger; Purpose and
Structure of the Transactions; Plans After the Offer; Effects of the Offer and
Merger," and " - Interests of Certain Persons in the Transaction; Securities
Ownership; Related Transactions." Copies of the portions of the 1997 Proxy
Statement, the 1996 Form 10-K and the Offer to Purchase referred to above are
filed herewith as Exhibits 2, 3 and 4, respectively, and are incorporated herein
by reference.
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
Guaranty or its affiliates and (i) Guaranty's executive officers, directors or
affiliates, or (ii) Orion or its executive officers, directors or affiliates.
Background of the Offer; Appointment of the Special Committee
On September 16, 1997, Mr. Becker was asked, as Chairman of the Board of
Guaranty, to convene a meeting of its Executive Committee at which the
independent directors could be designated as a special committee to review any
acquisition proposal which might be received from Orion. That meeting was held
on September 16, 1997, and a Special Committee was appointed with Dennis J.
Lacey as its Chairman; the other director-members are Tucker H. Adams, M. Ann
Padilla, and Richard R. Thomas. None of the members of the Special Commit tee is
affiliated with Guaranty or any of its affiliates, including Orion, other than
in his or her capacity as a director or shareholder of Guaranty, except that Mr.
Thomas is Chairman of the Board and sole owner of ADCO General Corporation, a
general agent of Guaranty. ADCO received from Guaranty gross commissions
(including contingency commissions), pursuant to a standard agency contract, of
approximately $731,000 in 1996 and is expected to receive gross commissions of
approximately the same amount during the current fiscal year.
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The Executive Committee authorized and directed the Special Committee "to
review any such Acquisition Proposal . . . and to make a recommendation to the
Board of Directors as to how Guaranty should fulfill its obligations with
respect thereto, including without limitation its obligation to prepare and file
any necessary documents with the Securities and Exchange Commission". 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 any Acquisition Proposal and to retain such legal and financial advisors
as it deemed appropriate to assist it in carrying out its activities.
Thereafter, the Special Committee met and formally retained Ireland, Stapleton,
Pryor & Pascoe, P.C. ("Ireland Stapleton") and Salomon Brothers Inc ("Salomon
Brothers") to act as its legal and financial advisors, respectively. Both firms
had been requested by Guaranty in July to be prepared to advise the Special
Committee if it was appointed, and had engaged in appropriate due diligence
efforts since that time.
Mr. Becker was then asked, as the Chairman of Orion, to meet with Mr. Lacey
and the legal and financial advisors of both Orion and the Special Committee, to
discuss the potential transaction and to attempt to reach agreement on the value
of the Shares. That meeting took place on September 17, 1997, in Denver,
Colorado.
At the September 17 meeting, a representative of Salomon Brothers presented
an analysis of its valuation approach but noted that his firm was not yet in a
position to render an opinion as to the fairness of any particular price. Mr.
Lacey stated that he was prepared to recommend to the Special Committee a price
of $36.00 per Share with adjustments for increases in the market price of Orion
Common Stock but no adjustments for decreases. At the conclusion of discussions,
Mr. Becker proposed an offer of $34 per Share, payable 80% in cash and 20% in
Orion Common Stock, with a formula designed to adjust for changes in excess of
approximately 7 1/2% in the market price of Orion Common Stock subsequent to
September 17 and prior to the exchange date, and with provision for termination
rights if the market price of Orion Common Stock should rise or fall by
approximately 15% or more. Orion's advisors further recommended that this
transaction be accomplished by a exchange offer for all Shares not owned by
Orion, followed by a merger in which any Shares not properly tendered could be
acquired.
Thereafter, Mr. Lacey convened a meeting of the Special Committee and
reported on the meeting which had been held earlier that day with the Special
Committee's advisors and the representatives of Orion. He stated that the Orion
representatives, and particularly its investment advisor, had presented an
analysis of the Share values which justified the initial offer price of $30.25
per share and described his response and that of Orion, as noted above. The
Special Committee then discussed possible steps which might be taken at the
present time, and agreed with the recommendation of its financial advisor that
it would be inadvisable to make a recommendation with respect to the Offer
pending further investigation by the Special Committee and an opportunity for
Orion to re-think its proposed terms. It was agreed that Salomon Brothers
should convey to Orion's financial advisor that the Special Committee was not
prepared at this time to recommend acceptance of the Offer by the Guaranty
shareholders.
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Later that evening Mr. Lacey telephoned Mr. Becker and informed him that
the Special Committee had met and considered a report on the substance of the
meeting with the Orion representatives. He stated that the Special Committee
was not willing to accept the offer which had been extended.
On September 18, 1997, Orion issued a press release announcing that it
would make an offer directly to the shareholders of Guaranty so that each
Guaranty shareholder could make his or her own judgment as to whether to accept
Orion's offer. Later that day, the Special Committee again met and received a
report from Mr. Lacey with respect to his conversation with Mr. Becker on the
previous evening. The Special Committee's financial advisor then described the
events which had taken place earlier that day, including the announcement by
Orion that it intended to initiate the offer, which had not yet been filed with
the Securities and Exchange Commission, and the resulting trading activity in
the Company's stock, which had closed at 34 9/16ths, or slightly more than $2
over the preceding day's closing price. After discussion of possible options
available to the Special Committee, it was determined that it would take no
action until the actual offer documents were filed with the Securities and
Exchange Commission ("Commission") and the Special Committee had an opportunity
to review them and consult with its financial and legal advisors.
The Special Committee also discussed the filing on September 18, 1997 of an
action in Denver District Court captioned Vogel v. Guaranty National
Corporation, et al., naming as additional defendants Orion Capital Corporation
and the directors of Guaranty National Corporation. The action challenged the
fairness of Orion's announced offer and sought an unspecified amount of damages,
attorney's fees and injunctive relief.
On September 22, 1997, Orion filed with the Commission a Registration
Statement on Form S-4 with respect to an offer to exchange for each share not
owned by it or its wholly-owned subsidiaries, $27.20 in cash and $6.80 in shares
of Orion Common Stock, subject to certain adjustments as described above (the
"Exchange Offer"). Following the filing, Orion's representatives inquired as to
when the Special Committee would make a recommendation pursuant to Rule 14d-9
with respect to the Exchange Offer and were informed that no filing would be
made pursuant to that rule until after the Registration Statement on Form S-4
was declared effective by the Commission and reviewed by the Special Committee
and its advisors.
The Special Committee met on September 24, 1997 to discuss the Registration
Statement. The Special Committee's financial advisor reported on its ongoing
review of Guaranty's business and prospects, and its discussions with Orion's
financial advisor with respect to the basis for the Special Committee's view as
to the value of the Shares. Salomon Brothers emphasized to Orion's
representative that no formal stock price had been adopted by the Special
Committee as being either adequate or fair, and that its tentative views had not
been influenced by the recent increase in the market price of the stock, but
rather were based on the intrinsic value of the
Shares. It was
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the consensus of the Special Committee that no further action be taken by it
until the members had an opportunity to review the final Registration Statement.
The Special Committee met again on October 6, 1997 and reviewed in detail
the Registration Statement and certain data relied upon by its financial
advisor in arriving at a range of possible values for the Shares, based upon
different analyses. The Special Committee also reviewed changes in the market
price for the stocks of Orion and Guaranty as well as of various comparable
companies reviewed by the financial advisor and determined that in the absence
of any legal or other obligation to file a response to the Exchange Offer at the
present time it would be desirable to continue to await further information from
Orion. The Chairman was also authorized, in his discretion and after receiving
additional advice from the Special Committee's advisors, to inquire of Orion as
to whether it might increase its offer price to $36.00 if the consideration were
entirely in cash.
On October 21, 1997, after further conversations with the Special
Committee's advisors, Mr. Lacey called Mr. Becker to inquire as to the progress
being made by the SEC in reviewing Orion's Form S-4 filing. He also asked
whether Orion might increase its offer price to $36.00 per share if the
consideration were all cash and if the Special Committee found that price
acceptable. Mr. Becker asked whether the Special Committee and Salomon Brothers
had concluded that $36.00 represented fair value to the holders of Shares. Mr.
Lacey responded that no action had been taken but that he would request formal
consideration of that price if Mr. Becker thought that would be a productive
step. Mr. Becker agreed that it would be and said that he would immediately
convey any finding of the Special Committee to the Executive Committee of
Orion's Board of Directors. Messrs. Becker and Lacey also discussed whether, if
a mutually-agreeable price could be reached, the Exchange Offer should proceed
or a merger be proposed instead.
The Special Committee met again on the morning of October 27, 1997, at
which time Mr. Lacey reviewed with members of the Special Committee the
substance of his conversations with Mr. Becker and also with the Special
Committee's financial advisor, which had indicated that while it had not made a
final determination, it was likely it would be able to render a fairness opinion
with respect to a cash price of $36.00 per share. The Special Committee
determined that it would not be appropriate to take final action until it had
had a report from its financial advisor which was directly responsive to the
proposed price, and a meeting was called for 4:00 p.m. on Thursday, October 30,
1997, for that purpose. For the interim, Mr. Lacey was authorized to report to
Mr. Becker that the Special Committee proposed a price of $36.00 plus a
contingent payment to the Guaranty shareholders other than Orion and its wholly-
owned subsidiaries (the "Non-Orion Stockholders"), in the event Orion should
sell Guaranty within twelve months, equal to 50% of the difference between
$36.00 and the per-share sales price received by Orion in the event of any such
sale. Mr. Lacey discussed this proposal with Mr. Becker later that day.
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That proposal was reported to the Executive Committee of the Orion Board of
Directors by Mr. Becker on October 28, 1997. The Executive Committee concluded,
and Mr. Becker then reported to Mr. Lacey, that although Orion has no present
intention to sell Guaranty, it would accept a contingent sharing proposal and
would, in fact, raise the percent contingently shared to 75%, but because of the
administrative expense involved in establishing and maintaining records of
persons entitled at any point in time to a contingent shared right, the
possibility that the offering of such rights might require registration under
applicable state or federal securities laws and the uncertainty that might be
created as to whether a future ordinary-course restructuring or repositioning by
Guaranty of its assets or operations constituted a "triggering" event, Orion
would be prepared to offer $35.00 (plus 75% of any future contingent profit) if
the Special Committee insisted on the contingent profit-sharing feature. Mr.
Lacey reported to Mr. Becker that if Orion would raise its offer price to $36.00
net to shareholders in cash, Mr. Lacey would recommend to the Special Committee
that the offer be accepted. He further stated that Salomon Brothers had
indicated that it would report favorably on the fairness of that price, from a a
financial point of view, to the holders of the Shares subject to Orion's offer.
Mr. Becker said that he had authority to make such a proposal and he and Mr.
Lacey agreed that an appropriate agreement should be drawn up for presentation
to the Boards of Directors of Guaranty and Orion.
On October 30, 1997, copies of an Agreement and Plan of Merger proposed by
Orion and a written presentation to the Special Committee on the same date from
Salomon Brothers were delivered to the members of the Special Committee for
their review. A meeting of the Special Committee was held later that day,
attended by all of its members and representatives of its legal and financial
advisors. The purpose of the meeting was to consider the proposal of Orion to
acquire the balance of the Shares which it and its wholly-owned subsidiaries did
not own, at a cash price of $36.00 per share net to the shareholders. The terms
of the proposal were set forth in the proposed Agreement and Plan of Merger.
The Special Committee first heard a detailed review by Salomon Brothers of its
presentation, covering the principal factors which had been considered by
Salomon Brothers in reaching its views as to the value of the Shares and the
various analyses upon which its views were based. At the conclusion of its
report, Salomon Brothers stated that in its opinion the consideration to be
received by the Non-Orion Stockholders in the proposed transaction was fair,
from a financial point of view, to such holders. They stated that a written
opinion confirming the oral opinion would be furnished promptly to the Special
Committee. After reviewing the terms of the proposed Agreement and Plan of
Merger, the Special Committee voted unanimously to recommend to the Board of
Directors of Guaranty that it recommend acceptance of Orion's offer and
authorize the execution and delivery of the proposed Merger Agreement.
On October 30, 1997, following the Special Committee meeting, the Board of
Directors of Guaranty unanimously approved the Agreement and Plan of Merger and
on October 31, 1997, it was approved unanimously by the Board of Directors of
Orion. Following those meetings, the SEC was formally notified by Orion of the
withdrawal of its Registration Statement on Form S-4 with respect to the
proposed Exchange Offer. On October 31, 1997, a press release was issued
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announcing that Orion and Guaranty had entered into the Merger Agreement, which
provides for the making of the Offer.
Item 4. THE SOLICITATION OR RECOMMENDATION
(a) Pursuant to the unanimous recommendation of its Special
Committee, Guaranty's Board of Directors unanimously approved the Merger
Agreement, the Offer and the Merger, determined that the Offer and the Merger
are fair to, and in the best interests of, the shareholders of Guaranty, and
recommended an acceptance of the Offer and approval and adoption of the Merger
Agreement and the Merger by the shareholders of Guaranty.
(b) In reaching its conclusions and recommendation to the Board of
Directors, the Special Committee considered a number of factors, including
without limitation, the following:
(i) the fact that the $36.00 per Share price represents (A) a premium
of $17.50 or 94.6% over the $18.50 paid by Orion in its tender offer completed
in July 1996, (B) a premium of $20.62 or 134.1% over the 52-week low of $15.38,
(C) a premium of 48.5% over the closing sale price of $24.25 on July 7, 1997,
the day prior to the commencement of discussions between Orion and Guaranty, (D)
a multiple of 1.94x Guaranty's net book value per share as of September 30,
1997, and (E) a multiple of 2.21x Guaranty's net tangible book value per share
as of September 30, 1997;
(ii) the fact that the Offer is conditioned upon there being validly
tendered and not withdrawn prior to the expiration date of the Offer, a number
of Shares which, excluding the Shares owned by Orion and its wholly-owned
subsidiaries, will constitute at least 50.01 percent of the outstanding Shares;
(iii) the various analyses of the Special Committee's financial advisor
described below under the heading "Opinion of Financial Advisor";
(iv) the opinion of the Special Committee's financial advisor that the
Offer is fair, from a financial point of view, to the Non-Orion Stockholders,
and the analyses of various factors considered by the financial advisor in
reaching its opinion, including those described below;
(v) the Special Committee's familiarity with Guaranty's business,
financial condition, results of operations, current business strategy and
prospects, and the beneficial relationship between Guaranty and Orion over the
past thirteen years; and
(vi) the fact that Orion currently beneficially owns approximately 81%
of the outstanding shares and has stated that it has no present intention to
sell its Shares.
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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 and recommendation.
OPINION OF FINANCIAL ADVISOR
Salomon Brothers was retained by Guaranty pursuant to a letter
agreement dated September 16, 1997 (the "Engagement Letter") to act as financial
advisor to the Special Committee in connection with its review of the proposed
acquisition by Orion of the Shares it did not already own and to render an
opinion relating to the fairness, from a financial point of view, to the Non-
Orion Stockholders of the consideration to be received by such holders in such
proposed acquisition. Pursuant to the Engagement Letter, Salomon Brothers
rendered an opinion to the Special Committee on October 30, 1997 to the effect
that, based upon and subject to the considerations set forth in such opinion, as
of such date, the consideration to be received by the Non-Orion Stockholders in
the Offer and the Merger (the "Transaction") was fair to such holders from a
financial point of view.
The full text of Salomon Brothers' fairness opinion, which sets forth
the assumptions made, general procedures followed, matters considered and limits
on the review undertaken, is included as Exhibit 5 to this Schedule 14D-9. The
summary of Salomon Brothers' opinion set forth below is qualified in its
entirety by reference to the full text of such opinion included as Exhibit 5.
STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
In connection with rendering its opinion, Salomon Brothers reviewed
and analyzed material bearing upon the financial and operating conditions and
prospects of Guaranty including, among other things, the following: (i) a draft
dated October 29, 1997 of the Merger Agreement; (ii) certain publicly available
information concerning Guaranty, including the Annual Reports on Form 10-K of
Guaranty for the years ended December 31, 1995 and December 31, 1996 and the
Quarterly Reports on Form 10-Q of Guaranty for the quarters ended March 31, 1997
and June 30, 1997, respectively, and the press release of Guaranty dated October
23, 1997, announcing the financial results of Guaranty for the quarter ended
September 30, 1997; (iii) certain internal information, primarily financial in
nature, including projections, concerning the business and operations of
Guaranty furnished to Salomon Brothers by Guaranty for purposes of its analysis;
(iv) statutory financial information of Guaranty's insurance subsidiaries for
the years ended December 31, 1995 and December 31, 1996 and for the three-month
periods ended March 31, 1997 and June 30, 1997; (v) certain publicly available
information concerning the trading of, and the trading market for, the Shares;
(vi) certain publicly available information with respect to certain other
companies that Salomon Brothers believed to be comparable to Guaranty and the
trading markets for certain of such other companies' securities; and (vii)
certain publicly available information concerning the nature and terms of
certain other transactions and certain transactions involving the acquisition of
minority interests by controlling stockholders that Salomon Brothers
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considered relevant to its inquiry. Salomon Brothers also considered such other
information, financial studies, analyses, investigations and financial, economic
and market criteria that it deemed relevant. Salomon Brothers also met with
certain officers and employees of Guaranty to discuss the foregoing as well as
other matters Salomon Brothers believed relevant to its inquiry.
In its review and analysis and in arriving at its opinion, Salomon
Brothers assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information and further relied on assurances of management of
Guaranty that they are not aware of facts that would make any of such
information inaccurate or misleading. With respect to projections, Salomon
Brothers assumed that they had been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of Guaranty
as to the future financial performance of Guaranty. Salomon Brothers expressed
no view with respect to such projections or the assumptions on which they were
based. Salomon Brothers did not make or obtain or assume any responsibility for
making or obtaining any independent evaluations or appraisals of any of
Guaranty's assets, properties or facilities, nor was Salomon Brothers furnished
with any such evaluations or appraisals. Salomon Brothers further assumed that
the Merger Agreement, when executed and delivered, would not contain any terms
or conditions that differed materially from the draft Salomon Brothers reviewed,
the conditions precedent to each of the Offer and the Merger contained in the
Merger Agreement will be satisfied and the Merger will be consummated in
accordance with the terms of the Merger Agreement.
In conducting its analysis and arriving at its opinion, Salomon
Brothers considered such financial and other factors as it deemed appropriate
under the circumstances including, among others, the following: (i) the
historical and current financial position and results of operations of Guaranty;
(ii) the business prospects of Guaranty; (iii) the historical and current market
for the Shares and for the equity securities of certain other companies that
Salomon Brothers believes to be comparable to Guaranty; and (iv) the nature and
terms of certain other acquisition transactions and acquisitions of minority
interests by controlling stockholders that Salomon Brothers believes to be
relevant. Salomon Brothers also took into account its assessment of general
economic, market and financial conditions as well as its experience in
connection with similar transactions and securities valuation generally.
Salomon Brothers took into consideration the current ownership by Orion of
approximately 80.7% of the outstanding the Shares and the fact that Orion had
stated that it did not intend to sell such stock. In light of that, Salomon
Brothers was not authorized to, and accordingly did not, solicit third party
indications of interest in acquiring all or any part of Guaranty. Salomon
Brothers' opinion necessarily was based on conditions as they existed and could
be evaluated on the date thereof and Salomon Brothers assumed no responsibility
to update or revise its opinion based upon circumstances or events occurring
after such date. Salomon Brothers' opinion was for the sole benefit of the
Special Committee in its consideration of the Transaction and was, in any event,
limited to the fairness, from a financial point of view, of the consideration to
be received by the Non-Orion Stockholders
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in the Transaction and did not address Guaranty's underlying business decision
to effect the Transaction or constitute a recommendation to any holder of the
Shares as to whether such holder should tender shares in the Offer or as to how
such holder should vote with respect to the Merger, if such a vote is taken.
Salomon Brothers has advised the Special Committee that, based on an
express disclaimer in the Engagement Letter, Salomon Brothers does not believe
that any person (including a stockholder of Guaranty), other than Guaranty or
the Guaranty Board (including the Special Committee), has a legal right to rely
upon its fairness opinion to support any claims against Salomon Brothers arising
under applicable state law and that, should any such claims be brought against
Salomon Brothers by any such person, this assertion will be raised as a defense.
In the absence of applicable state law authority, the availability of such a
defense will be resolved by a court of competent jurisdiction. Resolution of
the question of the availability of such a defense, however, will have no effect
on the rights and responsibilities of the Guaranty Board, or the Special
Committee, under applicable state law. Nor would the availability of such a
state law defense to Salomon Brothers have any effect on the rights and
responsibilities of either Salomon Brothers or the Guaranty Board (including the
Special Committee) under the federal securities laws.
In connection with its opinion, Salomon Brothers made a presentation
to the Special Committee on October 30, 1997, with respect to certain analyses
performed by Salomon Brothers in evaluating the consideration to be received in
the Transaction by the Non-Orion Stockholders and other considerations. The
following is a summary of such Salomon Brothers presentation. The following
quantitative information, to the extent it is based on market data, is based on
market data as it existed at October 28, 1997 and is not necessarily indicative
of current market conditions.
Overview of Guaranty and Historical Trading Analysis. Salomon
Brothers reviewed certain aspects of the historical financial performance of
Guaranty, including, among other things, gross and net premiums written,
revenues, net operating earnings, operating and net earnings per share ("EPS"),
loss ratios, expense ratios and combined ratios for fiscal years 1992 through
1996 and for the nine months ended September 30, 1996 and 1997. In addition,
Salomon Brothers reviewed with the Special Committee certain information
concerning Wall Street earnings estimates, the trading prices and volume of the
Shares and Orion Common Stock from January 1, 1997 through October 28, 1997.
Salomon Brothers noted that the Shares had generally outperformed an index of
selected peer companies, Orion Common Stock, the S&P Property and Casualty
Insurance Index and the S&P 500 Composite Average over such period.
Discounted Cash Flow Analysis. Salomon Brothers performed a
discounted cash flow analysis pursuant to which the value of Guaranty was
estimated by adding (i) the estimated net present value of the future
distributable free cash flows of Guaranty for the fiscal years 1998 through 2000
and 1998 through 2002, plus (ii) the estimated net present value of the terminal
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value of Guaranty at the end of the years 2000 and 2002, based on certain
operating and financial assumptions, forecasts and other information provided by
management of Guaranty. For purposes of such analysis, Salomon Brothers
utilized discount rates of 9%, 11% and 13% (with particular focus on discount
rates of 11% and 13%), and terminal values based on multiples of 12x, 13x, 14x,
15x and 16x projected GAAP earnings for the years 2000 and 2002 and multiples of
1.50x, 1.75x, 2.00x, 2.25x and 2.50x projected GAAP book value at the end of the
years 2000 and 2002 (with particular focus on multiples of 13x to 15x GAAP
earnings). From these analyses, Salomon Brothers used the ranges calculated for
discount rates of 11% and 13% and for terminal value multiples 13x to 15x year
2000 and year 2002 GAAP earnings to derive reference ranges for the implied
value of the Shares of $33.79 to $40.68 and $33.48 to $41.79, respectively.
Dividend Discount Analysis. Salomon Brothers also performed a
dividend discount analysis pursuant to which the value of Guaranty was estimated
by adding (i) the estimated net present value of Guaranty's future stream of
dividend payments to Guaranty's stockholders for the years 1998 through 2000 and
1998 through 2002, plus (ii) the estimated net present value of the terminal
value of Guaranty at the end of the years 2000 and 2002, based upon certain
operating and financial assumptions, forecasts and other information provided to
Salomon Brothers by the management of Guaranty. For purposes of such analysis,
Salomon Brothers utilized discount rates of 9%, 11% and 13% (with particular
focus on discount rates of 11% and 13%), and terminal values based on multiples
of 12x, 13x, 14x, 15x and 16x projected GAAP earnings for the years 2000 and
2002 and multiples of 1.50x, 1.75x, 2.00x, 2.25x and 2.50x projected GAAP book
value at the end of the years 2000 and 2002 (with particular focus on multiples
of 13x to 15x GAAP earnings). From these analyses, Salomon Brothers used the
ranges calculated for discount rates of 11% and 13% and for terminal value
multiples 13x to 15x year 2000 and year 2002 GAAP earnings to derive reference
ranges for the implied value of the Shares of $33.71 to $40.83 and $36.08 to
$45.15, respectively.
Comparable Company Analysis. Salomon Brothers reviewed certain
publicly available financial, operating and stock market information for
Guaranty, Orion and twenty-one other publicly-traded personal lines, non-
standard automobile and specialty commercial property and casualty insurance
companies (personal lines -- The Allstate Corporation, SAFECO Corporation,
Mercury General Corporation, 20th Century Industries, Horace Mann Educators
Corporation, Commerce Group Corp., Citizens Corporation and Allied Group Inc.;
non-standard automobile -- The Progressive Corporation, American Financial
Group, Symons International Group Inc., Penn America Group, Omni Insurance Group
Inc. and Mobile America Corp.; and specialty commercial -- W.R. Berkley Corp.,
Frontier Insurance Group Inc., Markel Corp., Executive Risk Inc., Acceptance
Insurance Companies Inc., RLI Corporation and Baldwin & Lyons Inc., each of
which is a "Comparable Company" and collectively referred to as "Comparable
Companies"). Salomon Brothers considered the Comparable Companies to be
reasonably similar to Guaranty insofar as they participate in business segments
similar to Guaranty's business segments, but none of these companies has the
same management, makeup, size and combination of businesses as Guaranty.
Accordingly, the analysis described below is not
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purely mathematical. Rather it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of Guaranty and the Comparable Companies and other factors that
could affect public trading value.
For Guaranty, Orion and each of the Comparable Companies, Salomon
Brothers reviewed, among other things, its market capitalization and enterprise
value (equity market capitalization plus total debt, preferred stock and
minority interests), (in each case, based on the closing price for its stock on
October 28, 1997), 52-week trading range, dividend yield, 5-year projected
earnings per share growth (based upon Institutional Brokers Estimate Systems
("IBES") reports), multiples of price to book value, estimated 1997 EPS and
estimated 1998 EPS and multiples of enterprise value to latest twelve months
("LTM") net premiums written and statutory surplus. (Estimated 1997 EPS and
1998 EPS were based upon mean First Call estimates as of October 22, 1997.)
Salomon Brothers derived high, low, mean and median multiples from the foregoing
analysis of the Comparable Companies. Using primarily the multiples of price to
book value, estimated 1997 EPS and estimated 1998 EPS of the personal lines and
non-standard automobile Comparable Companies, Salomon Brothers derived a
reference range (based on the median values resulting from application of those
multiples) for the implied value of the Shares of $32.88 to $47.24.
Analysis of Selected Insurance Company Acquisitions. Salomon Brothers
also analyzed certain publicly available financial, operating and stock market
information for thirteen selected merger or acquisition transactions in the non-
standard automobile insurance industry since 1988. The transactions reviewed
included the following: Omni Insurance Group Inc./Hartford Financial Services
Group Inc., Titan Holdings Inc./USF&G Corp., Integon Corp./GMAC, Midland
Financial Group, Inc./The Progressive Corporation, Midland Financial Group,
Inc./Danielson Holding Corporation, Viking Insurance Holdings Inc./Guaranty,
Victoria Financial Corp./USF&G Corp., Bankers and Shippers Insurance Co./Integon
Corp., American Ambassador Casualty Co./Guardian Royal Exchange plc, Leader
National Insurance Co./Penn Central Corp., Atlanta Casualty Company/Penn Central
Corp., Integon Corp./Jupiter Industries, Inc. and the 1988 Guaranty/Orion
transaction. In addition, Salomon Brothers reviewed approximately forty
additional property and casualty insurance company acquisitions since 1993.
Salomon Brothers considered the precedent mergers and acquisition transactions
to be reasonably similar to the Merger, but none of these precedents is
identical to the Merger. In the presentation, Salomon Brothers focused on the
three most recent transactions (Hartford Financial Services Group's pending
acquisition of Omni Insurance Group, USF&G Corp.'s pending acquisition of Titan
Holdings and GMAC's acquisition of Integon Corp.) For each transaction reviewed,
Salomon Brothers calculated the premium represented by the highest price offered
over the market price one day prior to the announcement of the offer, and the
multiples of, among other things, offer price to LTM GAAP net operating income,
offer price to GAAP book value, offer price to estimated forward EPS for the
fiscal year following the announcement date (based on median IBES estimates as
of the announcement date), enterprise value to LTM statutory net operating
income and enterprise value to statutory capital and surplus. Based on the
foregoing analyses,
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Salomon Brothers derived high, low, median and mean multiples. Using primarily
the multiples of price to book value, price to LTM GAAP net operating income and
estimated forward EPS, Salomon Brothers derived a reference range (based on the
median values resulting from application of those multiples) for the implied
value of the Shares of $25.66 to $39.22.
Comparable Transaction Analysis Involving Acquisition of Minority
Interests by Controlling Stockholders. Salomon Brothers reviewed the
consideration paid in certain transactions in which a controlling stockholder,
generally one owning more than 40% of a public company, was seeking to acquire
substantial additional ownership of that company. Salomon Brothers considered
seventy transactions generally since 1992. Using publicly available
information, Salomon Brothers calculated the premium represented by the highest
price offered by the controlling stockholder over the market price one week
prior to, and four weeks prior to, the announcement of the offer. Salomon
Brothers determined that the median premiums to market one week and four weeks
prior to announcement for all transactions were 20.4% and 21.5%, respectively.
Of the seventy transactions, eight had been withdrawn. The median premiums to
market one week and four weeks prior to the announcement for the sixty-two
transactions that were consummated or pending were 18.7% and 22.5%,
respectively. Salomon Brothers also reviewed separately the nine transactions
since 1995 included in the group of seventy that involved insurance companies.
In those nine transactions, Salomon Brothers determined that the median premiums
to market one week and four weeks prior to announcement were 18.5% and 22.3%,
respectively. Salomon Brothers used the median premiums in all seventy
transactions to the market price one week prior to the announcement of the offer
and four weeks prior to the announcement of the offer to derive a reference
range for the implied value of the Shares of $40.12 to $40.47. Salomon Brothers
also used the median premiums in the nine insurance company transactions to the
market price one week prior to the announcement of the offer and four weeks
prior to the announcement of the offer to derive a reference range for the
implied value of the Shares of $39.48 to $40.74. Salomon Brothers noted that
these calculations used the market price of $33.31 of the Shares as of October
28, 1997, which had been affected by the previous announcement by Orion of its
offer valued at approximately $34.00 per share. Salomon Brothers noted that the
$36.00 offer price would be higher than the range (approximately $34.00 - $35.00
per share) that would be established using these median premiums against the
price one week prior, and four weeks prior, to September 18, 1997, the date on
which Orion announced its proposed offer.
Merger Consequences Analysis. Salomon Brothers also performed an
analysis of the effect on Orion's estimated 1998 EPS of the Transaction. Salomon
Brothers noted that, at a deal price of $36.00 per share and taking into
consideration the mean First Call estimates as of October 22, 1997 of Guaranty's
estimated 1998 EPS, as well as the slightly higher estimates for 1998 EPS of
management of Guaranty, both with and without the effect of the anticipated
acquisition of Unisun, which is anticipated to be accretive to Guaranty's 1998
EPS by $0.08, the Transaction is essentially break-even to slightly accretive
for Orion's EPS.
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The foregoing summary does not purport to be a complete description of
the analyses performed by Salomon Brothers or of its presentations to the
Special Committee. The preparation of financial analyses and fairness opinions
is a complex process involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. Salomon Brothers made
no attempt to assign specific weights to particular analyses or factors
considered, but rather made qualitative judgments as to the significance and
relevance of the analyses and factors considered. Accordingly, Salomon Brothers
believes that its analyses (and the summary set forth above) must be considered
as a whole, and that selecting portions of such analyses and of the factors
considered by Salomon Brothers, without considering all of such analyses and
factors, could create a misleading or incomplete view of the processes
underlying the analyses conducted by Salomon Brothers and its opinion. With
regard to the comparable public company analysis and the comparable transaction
analysis summarized above, Salomon Brothers selected comparable public companies
on the basis of various factors, including the size of the public company and
similarity of the line of business; however, no public company or transaction
utilized as a comparison is identical to Guaranty, any business segment of
Guaranty or the Transaction. Accordingly, an analysis of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
Comparable Companies and other factors that could affect the transaction or
public trading value of the Comparable Companies and transactions to which
Guaranty, the business segments of Guaranty and the Transaction are being
compared. In its analyses, Salomon Brothers made numerous assumptions with
respect to Guaranty, industry performance, general business, economic, market
and financial conditions and other matters, many of which are beyond the control
of Guaranty. Any estimates contained in Salomon Brothers' analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. Estimates of values of companies do not purport to be
appraisals or necessarily to reflect the prices at which companies may actually
be sold. Because such estimates are inherently subject to uncertainty, none of
Guaranty, the Special Committee, Salomon Brothers or any other person assumes
responsibility if future results or actual values differ materially from the
estimates. Salomon Brothers' analyses were prepared solely as part of Salomon
Brothers' analysis of the fairness of the consideration to be received by the
Non-Orion Stockholders in the Transaction and were provided to the Special
Committee in that connection. The opinion of Salomon Brothers was one of the
factors taken into consideration by the Special Committee in making its
determination to recommend that the Board of Directors of Guaranty approve the
Merger Agreement, the Offer and the Merger.
Salomon Brothers is an internationally recognized investment banking
firm engaged, among other things, in the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The Special Committee
selected Salomon Brothers to act as its financial advisor on the basis of
Salomon Brothers' international reputation and Salomon Brothers' familiarity
with Guaranty following its service to the Special Committee
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as constituted in 1996 to consider Orion's partial tender offer. Salomon
Brothers had previously rendered investment banking and financial advisory
services to the Special Committee in that connection, for which Salomon Brothers
received customary compensation. In addition, in the ordinary course of its
business, Salomon Brothers may trade the debt and equity securities of both
Guaranty and Orion for its own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
As noted under the caption "SPECIAL FACTORS - Determination of the
Special Committee; Approval of the Guaranty Board of Directors," the fairness
opinion of Salomon Brothers was only one of several factors considered by the
Special Committee in determining to approve the Merger Agreement, the Offer and
the Merger. The amount of consideration payable in the Transaction was
determined by arms'-length negotiations between Orion and the Special Committee,
in consultation with their respective financial advisors and other
representatives, and was not established by such financial advisors.
Item 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
Pursuant to the Engagement Letter, Guaranty will pay Salomon Brothers
the following fees: (a) $50,000, payable upon Guaranty's execution of the
Engagement Letter (which has been paid); plus (b) an additional fee of $600,000,
which became payable upon Salomon Brothers' delivery of its fairness opinion
(which has not yet been paid); plus (c) an additional fee of $300,000, which is
payable upon the consummation or termination of the Offer. Guaranty has also
agreed to reimburse Salomon Brothers for its reasonable travel and other out-of-
pocket expenses incurred in connection with its engagement (including the
reasonable fees and disbursements of its counsel) and to indemnify Salomon
Brothers against certain liabilities and expenses relating to or arising out of
its engagement, including certain liabilities under the federal securities laws.
Except as described above, neither Guaranty 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 Guaranty, or, to the best of Guaranty's knowledge, by any executive
officer, director, affiliate, or subsidiary of Guaranty.
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(b) Guaranty believes that Guaranty's executive officers and
directors, who own Shares, presently intend to tender such Shares pursuant to
the Offer.
Guaranty's officers and directors may 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.
Item 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as described in Items 3 and 4 of this Schedule 14D-9,
Guaranty 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 Guaranty or any subsidiary of
Guaranty, (ii) a purchase, sale or transfer of a material amount of assets by
Guaranty or any subsidiary of Guaranty, (iii) a tender offer for or other
acquisition or securities by, or of, Guaranty, or (iv) any material change in
the present capitalization or dividend policy of Guaranty.
(b) Except as described in Items 3 and 4 of this Schedule 14D-9,
there are no transactions, board resolutions, agreements in principle or signed
contracts in response to the Offer which relate to or would otherwise result in
one or more of the matters referred to in paragraph (a) of this Item 7.
Item 8. ADDITIONAL INFORMATION TO BE FURNISHED
On September 18, 1997, an action was filed in the Denver District
Court, City and County of Denver, Colorado, entitled Eugenia Gladstone Vogel v.
Guaranty National Corporation, Orion Capital Corporation, Tucker Hart Adams, W.
Marston Becker, Vincent T. Papa, Dennis J. Lacey, M. Ann Padilla, James R.
Pouliot, Robert B. Sanborn, William J. Shepherd, Richard R. Thomas and Roger B.
Ware. The action challenges the fairness of the offer announced by Orion on
September 18, 1997, and seeks an unspecified amount of damages, attorneys fees
and injunctive relief. Guaranty believes the complaint to be without merit and
intends to contest it.
Item 9. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1 - Agreement and Plan of Merger dated October 31, 1997, between
Guaranty National Corporation and Orion Capital Corporation/*/
_________________
/*/Not included in copies mailed to shareholders.
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Exhibit 2 - Portions of Proxy Statement, dated March 27, 1997/*/
Exhibit 3 - Portions of Form 10-K Annual Report for fiscal year ended
December 31, 1996/*/
Exhibit 4 - Portions of Offer to Purchase, dated November 5, 1997/*/
Exhibit 5 - Opinion of Salomon Brothers Inc dated October 30, 1997
Exhibit 6 - Letter to Shareholders, dated November 5, 1997
Exhibit 7 - Joint Press release issued on October 31, 1997/*/
Exhibit 8 - Joint Press release issued on November 5, 1997/*/
Exhibit 9 - Shareholder Agreement, dated November 7, 1991, and amendments
thereto dated February 2, 1994, March 2, 1995 and June 18, 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 (now
called Orion Insurance Company) (previously filed as Exhibit
10.30 to Guaranty's Amendment No. 2 to Registration Statement
on Form S-1, Exhibit 10.49 to Guaranty's Annual Report on Form
10-K for the fiscal year ended December 31, 1994, Exhibit
10.50 to Guaranty's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, and Exhibit 18 to Guaranty's
Schedule 14D-9 dated June 19, 1996, respectively, and
incorporated herein by reference)/*/
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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: November 5, 1997
GUARANTY NATIONAL CORPORATION
By:/s/ Michael L. Pautler
-------------------------------------------
Michael L. Pautler, Senior Vice President -
Finance and Treasurer
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