As filed with the Securities and Exchange Commission on
December 4, 1997
_________________________________________________________________
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________________
MERCER INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 6331 23-2939601
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification
of incorporation Classification Number)
or organization) Code Number)
10 North Highway 31
Pennington, New Jersey 08534
(609) 737-0426
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_________________________
William C. Hart
President and Chief Executive Officer
Mercer Insurance Group, Inc.
10 North Highway 31
P.O. Box 278
Pennington, New Jersey 08534
(609) 737-0426
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Jeffrey P. Waldron, Esquire John S. Chapman, Esquire
Edward C. Hogan, Esquire Richard A. Hemmings, Esquire
Stevens & Lee Lord, Bissell & Brook
One Glenhardie Corporate Center 115 South LaSalle Street
1275 Drummers Lane Chicago, Illinois 60603
P.O. Box 236 (312) 443-0700
Wayne, Pennsylvania 19087
(610) 478-2000
<PAGE>
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this form are
to be offered on a delayed or continuous basis pursuant to Rule
415 of the Securities Act of 1933, check the following box: [ X ]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act of
1933, please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=================================================================
Proposed Proposed
Title of each maximum maximum
class of offering aggregate Amount of
securities to Amount to be price per offering registra-
be registered registered share price(1) tion fees
- -----------------------------------------------------------------
Common Stock, 3,322,222 $10.00 $33,222,220 $10,067
no par shares(2)
value per
share
=================================================================
(1) Estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(d) and based on
the maximum of the appraisal valuation range of Mercer
Mutual Insurance Company (to be acquired by the registrant
in connection with this offering), as determined by an
independent appraiser, plus 10% of the shares sold in the
offering, reflecting a possible purchase of shares of the
Common Stock by the registrant's employee stock ownership
plan.
(2) Represents maximum number of shares to be issued in the
transactions contemplated by this Registration Statement.
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and
Exchange Commission, acting pursuant to said Section 8(a), may
determine.
____________________________
<PAGE>
PROSPECTUS
[LOGO]
MERCER INSURANCE GROUP, INC.
Up to 2,990,000 Shares of Common Stock
Mercer Insurance Group, Inc. (the "Company"), a Pennsylvania
corporation and the proposed holding company for Mercer Mutual
Insurance Company ("Mercer Mutual"), is offering up to 2,990,000
shares, subject to adjustment, of its common stock, no par value
per share (the "Common Stock"), in a subscription offering (the
"Subscription Offering") pursuant to nontransferable subscription
rights in the following order of priority: (i) named insureds
under policies of insurance issued by Mercer Mutual and in force
as of the close of business on October 17, 1997 ("Eligible
Policyholders"), (ii) the Company's tax-qualified employee stock
ownership plan (the "ESOP"), and (iii) directors, officers and
employees of Mercer Mutual. Subscription rights received in any
of the foregoing categories will be subordinated to the
subscription rights received by those in a prior category.
Subscription rights are not transferable. Concurrently with the
Subscription Offering, Common Stock will be offered for sale to
the general public in a community offering (the "Community
Offering"). Preference in the Community Offering will be given
to: (i) natural persons and trusts of natural persons (including
individual retirement and Keogh retirement accounts) who reside
in the States of New Jersey and Pennsylvania, (ii) principals of
Eligible Policyholders in the case of an Eligible Policyholder
that is not a natural person, (iii) holders of policies of
insurance originally issued after October 17, 1997, (iv) licensed
insurance agencies that have been appointed by Mercer Mutual to
market and distribute policies of insurance, and their owners and
(v) providers of goods or services to, and identified by, Mercer
Mutual. Sales of Common Stock in the Community Offering will be
subject to the prior rights of holders of subscription rights and
the right of the Company, in its absolute discretion, to reject
orders in the Community Offering in whole or in part.
It is anticipated that shares not subscribed for in the
Subscription Offering and Community Offering (collectively, the
"Conversion Offerings"), if any, will be offered to the general
public in a syndicated community offering (the "Syndicated
Community Offering") to be managed by Sandler O'Neill & Partners,
L.P. ("Sandler O'Neill"). The Conversion Offerings and
Syndicated Community Offering shall be collectively referred to
herein as the "Offerings." The Offerings are being made in
connection with the conversion of Mercer Mutual from mutual to
stock form and the simultaneous acquisition of the capital stock
of the Company pursuant to a Plan of Conversion adopted by the
Board of Directors of Mercer Mutual on October 17, 1997 (the
"Plan"). The conversion of Mercer Mutual to stock form, the
issuance of the capital stock of Mercer Mutual to the Company and
the offer and sale of the Common Stock by the Company are
collectively referred to herein as the "Conversion." The
completion of the Conversion is contingent upon the sale of a
minimum of 2,210,000 shares of Common Stock in the Offerings.
For more information, please call the Stock Information
Center (the "Conversion Center") toll-free at 1-888-___-____.
Prospective investors should review and consider the
discussion under "Risk Factors" beginning on page __.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE PENNSYLVANIA DEPARTMENT OF INSURANCE (THE
"PENNSYLVANIA DEPARTMENT"), NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION, ANY STATE SECURITIES COMMISSION OR THE PENNSYLVANIA
DEPARTMENT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Purchase Fees and Estimated Net
Price(1) Expenses(2) Proceeds(3)
--------- ----------- -------------
Per Share(4). . . . $ 10.00 $ .64 $ 9.36
Total Minimum . . . $ 22,100,000.00 $ 1,587,100.00 $ 20,512,900.00
Total Midpoint . . . $ 26,000,000.00 $ 1,657,300.00 $ 24,342,700.00
Total Maximum . . . $ 29,900,000.00 $ 1,727,500.00 $ 28,172,500.00
(1) Determined in accordance with an independent appraisal (the
"Appraisal") prepared by Alex Sheshunoff & Company
("Sheshunoff") as of November 24, 1997, which states that
the consolidated pro forma market value of Mercer Mutual as
a subsidiary of the Company ranged from $22.1 million (the
"Total Minimum") to $29.9 million (the "Total Maximum") with
a midpoint of $26 million (the "Total Midpoint,"
collectively, the range from the Total Minimum to the Total
Maximum is the "Estimated Valuation Range"). Based on the
Estimated Valuation Range, the Board of Directors of the
Company and Mercer Mutual have determined to offer up to
2,990,000 shares, subject to adjustment, at a purchase price
of $10.00 per share. In addition, the Company may issue up
to 3,322,222 shares in the event the ESOP purchases shares
in excess of the Total Maximum in order to satisfy its 10%
subscription. The final appraised value will be determined
at the time of closing of the Offering and is subject to
change and the valuation set forth in the Appraisal must not
be construed as a recommendation by the Company, Mercer
Mutual, Sandler O'Neill or Sheshunoff of the advisability of
purchasing such shares or that a purchaser will thereafter
be able to sell such shares at or above the Purchase Price.
If the final valuation is outside the Estimated Valuation
Range, the Offering will be terminated and the funds of all
subscribers will be refunded promptly without interest. See
"Use of Proceeds," "Capitalization" and "Pro Forma Data."
(2) Consists of the estimated costs to the Company and Mercer
Mutual arising in the Conversion, including estimated
marketing fees and fixed expenses to be paid to Sandler
O'Neill in connection with the Offerings, which fees and
expenses are estimated to be $437,100 and $577,500 at the
Total Minimum and the Total Maximum, respectively. See "Use
of Proceeds" and "Pro Forma Data" for the assumptions used
to arrive at these estimates. The actual fees and expenses
may vary from these estimates. See "The Conversion --
Marketing and Underwriting Arrangements" and "-- The
Syndicated Community Offering."
(3) Represents net proceeds to the Company before the loan which
the Company intends to make to the ESOP, which will be used
by the ESOP to purchase 10% of the shares of Common Stock
sold in the Subscription Offering. The amount of this loan
will be $2.2 million at the Total Minimum, $2.6 million at
the Total Midpoint, and $3.0 million at the Total Maximum.
See "Use of Proceeds," "Capitalization," and "Pro Forma
Data."
(4) Based on the Total Midpoint. The estimated net proceeds per
share at the Total Minimum and Total Maximum are expected to
be $9.28 and $9.42, respectively.
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is __________________, 1997
<PAGE>
All shares of Common Stock will be sold for $10.00 per share
(the "Purchase Price"). The Appraisal is intended to be an
estimate of the consolidated pro forma market value of Mercer
Mutual as a subsidiary of the Company and is based on a review of
internal projections and a comparison of the consolidated
financial condition and results of operations of Mercer Mutual to
property and casualty insurance industry averages and a peer
group of representative publicly-owned property and casualty
insurance companies. The Appraisal is not intended, and must not
be construed, as a recommendation of any kind as to the
advisability of purchasing Common Stock. In preparing the
valuation, Sheshunoff has relied upon and assumed the accuracy
and completeness of financial and statistical information
provided by the Company and Mercer Mutual. Sheshunoff did not
independently verify the financial statements, projections and
other information provided by the Company and Mercer Mutual,
perform an independent analysis of the assumptions underlying the
financial statements or projections or value independently the
assets and liabilities of the Company and Mercer Mutual. The
valuation considers the Company and Mercer Mutual as a going
concern only and should not be considered as an indication of the
liquidation value of the Company and Mercer Mutual. Upon
completion of the Offering, Sheshunoff will submit to the Company
and to the Pennsylvania Department its updated consolidated pro
forma fair market value of Mercer Mutual as a subsidiary of the
Company. If the updated estimated valuation is within the
Estimated Valuation Range, the Conversion can be completed and
the number of shares of Common Stock sold in the Conversion will
be determined as follows:
(i) If participants in the Subscription Offering subscribe
for 2,990,000 shares or more, the Company, as required
by the Plan, will sell all 2,990,000 shares offered
hereby to participants in the Subscription Offering and
will sell up to an additional 332,222 shares to the
ESOP to satisfy its subscription in full. Shares will
be allocated among participants in the Subscription
Offering in accordance with the terms of the Plan and
excess funds will be promptly returned to subscribers
without interest.
(ii) If participants in the Subscription Offering subscribe
for at least 2,210,000 shares but less than 2,990,000
shares, then, as required by the Plan, the Company will
sell to participants in the Subscription Offering the
number of shares of Common Stock sufficient to satisfy
their subscriptions in full. The Company, in its sole
discretion, may accept subscriptions in the Community
Offering and/or sell shares in the Syndicated Community
Offering provided the total number of shares of Common
Stock sold in the Conversion does not exceed 2,990,000
shares (excluding shares sold to the ESOP). Any excess
funds received in the Community Offering and/or the
Syndicated Community Offering will be promptly returned
to subscribers without interest.
(iii) If participants in the Subscription Offering subscribe
for fewer than 2,210,000 shares, then the Company will
sell to participants in the Subscription Offering the
number of shares of Common Stock sufficient to satisfy
their subscriptions in full and will accept
subscriptions in the Community Offering and/or sell
shares in the Syndicated Community Offering in an
amount sufficient to sell at least 2,210,000 shares in
the aggregate. The Company, in its sole discretion,
may accept additional subscriptions in the Community
Offering and sell additional shares in the Syndicated
Community Offering provided the total number of shares
sold in the Conversion does not exceed 2,990,000
(excluding shares sold to the ESOP). Any excess funds
received in the Community Offering and/or the
Syndicated Community Offering will be promptly returned
to subscribers without interest.
(iv) If the number of shares sold in the Subscription
Offering, Community Offering and the Syndicated
Community Offering is less than 2,210,000, then the
Company will cancel the Offering and all subscription
funds will be returned promptly to subscribers without
interest.
There is a difference of approximately $7.8 million between
the minimum and the maximum of the Estimated Valuation Range.
Therefore, subscribers, in the aggregate and on a per share
basis, may pay more for the Common Stock than the estimated
consolidated pro forma market value of Mercer Mutual as a
subsidiary of the Company. See "Risk Factors - Possible Adverse
Impact of Broad Valuation Range and its Use to Determine the
Number of Shares of Common Stock Sold."
Except for the ESOP, which intends to purchase 10% of the
total number of shares of Common Stock issued in the Conversion,
no purchaser, together with associates or persons acting in
concert with such person, may purchase, in the aggregate, more
than 100,000 shares of Common Stock in the Conversion (4.5%, 3.8%
and 3.4% of the number of shares issued at the Total Minimum,
Total Midpoint and Total Maximum. No person may purchase fewer
than 25 shares. There are 42,432 Eligible Policyholders. In the
event that subscriptions by Eligible Policyholders for Common
Stock exceed the maximum of the Estimated Valuation Range, the
Company will be obligated under the Plan to sell to Eligible
Policyholders 2,990,000 shares, which is the maximum number of
shares offered hereby (excluding shares expected to be purchased
by the ESOP), and shares of Common Stock would be allocated among
Eligible Policyholders in proportion to the respective amounts of
shares for which they subscribed. If all 42,432 Eligible
Policyholders were to subscribe for 100,000 shares of Common
Stock, then each Eligible Policyholder would receive only
approximately 70 shares. The Company is unable to predict the
number of Eligible Policyholders that may participate in the
Subscription Offering.
Directors and executive officers of the Company and Mercer
Mutual as a group (11 persons), including their associates, are
expected to purchase approximately 178,500 shares of the Common
Stock to be issued in the Conversion (6.9% at the Total
Midpoint), not including 10% of the Common Stock (260,000 shares
at the Total Midpoint) expected to be purchased by the ESOP and
excluding additional shares that are expected to be issued (or
issuable) following the Conversion, subject to shareholder
approval, in connection with the implementation of the Company's
Stock Compensation Plan. See "Management of the Company --
Certain Benefit Plans and Agreements."
The Subscription Offering and the Community Offering will
terminate at 1:00 p.m., Eastern Standard Time, on
____________________, 1998, unless extended by the Company in its
sole discretion for up to an additional 45 days (such date and
time, including any extensions, shall be hereinafter referred to
as the "Termination Date"). If the Company extends the Offering,
it will give written notice of such extension to all subscribers
on or before _____, 1998, at which time each subscriber may
immediately withdraw his or her subscription or affirmatively
reconfirm his or her subscription by the extended Termination
Date. If a subscriber does not affirmatively reconfirm a
subscription by the extended Termination Date, as the case may
be, the subscriber's funds will be returned promptly without
interest. No action to extend the Offering will be taken by the
Company after __________, 1998. Subscribers may purchase shares
in the Offering by completing and returning to the Company a
stock order form (the "Stock Order Form") and a certification
form (the "Certification Form"), together with full payment for
all Common Stock subscribed for at the Purchase Price. An
executed Stock Order Form, once received by the Company, may not
be modified, amended or rescinded without the consent of the
Company. Subscriptions will be held in a separate escrow account
at ____________ established specifically for this purpose. If
the Conversion is not completed within 45 days after the extended
Termination Date, the Offerings will be terminated and all funds
held will be promptly returned without interest. See "The
Conversion -- The Conversion Offerings" and "--Purchases in the
Offerings."
The Company and Mercer Mutual have engaged Sandler O'Neill
to consult with and advise the Company and Mercer Mutual with
respect to the Offerings, and Sandler O'Neill has agreed to use
its best efforts to assist the Company with its solicitation of
subscriptions and purchase orders for shares of Common Stock in
the Offerings. Sandler O'Neill is not obligated to purchase any
shares of Common Stock in the Offerings. The Company and Mercer
Mutual will pay a fee to Sandler O'Neill which will be based on
the aggregate Purchase Price of Common Stock sold in the
Offerings. The Company and Mercer Mutual have agreed to
indemnify Sandler O'Neill against certain liabilities arising
under the Securities Act of 1933, as amended (the "Securities
Act"). See "The Conversion-Marketing and Underwriting
Arrangements."
The Common Stock has been approved for inclusion in the
Nasdaq National Market under the symbol "MRCR" subject to
completion of the Conversion. Prior to the Conversion, there was
no market for the Common Stock, and there can be no assurance
that an active and liquid trading market for the Common Stock
will develop, or if developed, will be maintained after
completion of the Conversion. Sandler O'Neill has advised the
Company that, following the completion of the Conversion, it
intends to make a market in the Common Stock, but it is under no
obligation to do so. One of the requirements for continued
quotation of the Common Stock on the Nasdaq National Market is
that there be at least two market makers for the Common Stock.
There can be no assurance there will be two or more market makers
for the Common Stock. Additionally, the development of an active
and liquid public market depends on the existence of willing
buyers and sellers, the presence of which is not within the
control of the Company, Mercer Mutual or any market maker. There
can be no assurance that an active and liquid trading market for
the Common Stock will develop or that, if developed, it will
continue, nor is there any assurance that persons purchasing
shares will be able to sell them at or above the Purchase Price
or that quotations will be available on the Nasdaq National
Market as contemplated.
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE PLAN BY
ELIGIBLE POLICYHOLDERS OF MERCER MUTUAL AT THE SPECIAL MEETING OF
ELIGIBLE POLICYHOLDERS CALLED FOR THAT PURPOSE TO BE HELD ON
______________ (THE "SPECIAL MEETING") AND THE SALE OF THE
MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE PLAN.
PENNSYLVANIA INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO
PERSON MAY ACQUIRE CONTROL OF THE COMPANY, AND THUS INDIRECT
CONTROL OF MERCER MUTUAL, UNLESS SUCH PERSON HAS OBTAINED THE
PRIOR APPROVAL OF THE PENNSYLVANIA INSURANCE COMMISSIONER. UNDER
PENNSYLVANIA LAW, ANY PURCHASER OF 10% OR MORE OF THE VOTING
STOCK OF AN INSURANCE HOLDING COMPANY IS PRESUMED TO HAVE
ACQUIRED CONTROL OF AFFILIATED OR SUBSIDIARY INSURERS.
NEW JERSEY INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO PERSON
MAY ACQUIRE CONTROL OF THE COMPANY, AND THUS INDIRECT CONTROL OF
MERCER INSURANCE COMPANY, A WHOLLY-OWNED INDIRECT SUBSIDIARY OF
MERCER MUTUAL, UNLESS SUCH PERSON HAS OBTAINED THE PRIOR APPROVAL
OF THE NEW JERSEY INSURANCE COMMISSIONER. UNDER NEW JERSEY LAW,
ANY PURCHASER OF 10% OR MORE OF THE VOTING STOCK OF AN INSURANCE
HOLDING COMPANY IS PRESUMED TO HAVE ACQUIRED CONTROL OF
AFFILIATED OR SUBSIDIARY INSURERS.
____________________
ORGANIZATIONAL STRUCTURE BEFORE THE CONVERSION
Mercer Mutual
100%
Queenstown Holding Company, Inc.
100%
Mercer Insurance Company, Inc.
____________________
ORGANIZATIONAL STRUCTURE AFTER THE CONVERSION
LOGO
Shareholders
100%
Mercer Insurance Group, Inc.
100%
Mercer Mutual Insurance Company
100%
Queenstown Holding Company, Inc.
100%
Mercer Insurance Company, Inc.<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is
qualified in its entirety by the more detailed information and
the Consolidated Financial Statements and Notes thereto of Mercer
Mutual appearing elsewhere in this Prospectus. For an
explanation of certain terms used in this Prospectus that are
commonly used in the insurance industry, see "Glossary of
Selected Insurance Terms."
Mercer Insurance Group, The Company was formed under
Inc. Pennsylvania law in November 1997 for
the purpose of becoming the holding
company for Mercer Mutual upon
completion of the Conversion. Prior to
the Conversion, the Company will not
engage in any significant operations.
After the Conversion, the Company's
primary assets will be the outstanding
capital stock of Mercer Mutual and a
portion of the net proceeds of the
Conversion.
The Company's executive offices are
located at 10 North Highway 31,
Pennington, New Jersey 08534, and the
Company's main telephone number is
(609) 737-0426.
The Insurance Companies Mercer Mutual is a Pennsylvania mutual
insurance company that began operations
in 1844. Mercer Mutual was organized
under the laws of the State of New
Jersey and operated as a New Jersey
mutual insurance company until
October 16, 1997, when it filed Articles
of Domestication with the Pennsylvania
Department of State, which changed its
state of domicile from New Jersey to
Pennsylvania (the "Redomestication").
On the effective date of the
Redomestication, the Pennsylvania
Department replaced the New Jersey
Department of Banking and Insurance (the
"New Jersey Department") as Mercer
Mutual's primary insurance regulator.
Mercer Mutual owns all of the
outstanding capital stock of Queenstown
Holding Company, Inc. ("QHC"), the
holding company for Mercer Insurance
Company ("MIC", and collectively with
Mercer Mutual, the "Insurance
Companies"). Mercer Mutual is a
property and casualty insurer of small
and medium-sized businesses and property
owners located in New Jersey and
Pennsylvania. Mercer Mutual markets
homeowners and commercial multi-peril
policies, as well as other liability,
workers' compensation, fire, allied,
inland marine and commercial automobile
coverages through approximately 160
independent agencies. MIC exclusively
offers workers' compensation insurance
to businesses located in New Jersey.
For 1996, Mercer Mutual had consolidated
revenues of $23.7 million and net income
of $640,000. For the nine-month period
ended September 30, 1997, Mercer Mutual
had consolidated revenues of
$15.7 million and net income of
$1.5 million. At September 30, 1997,
Mercer Mutual had consolidated assets of
$73.3 million, total equity of
$21.9 million and over 43,000 property
and casualty policies in force.
The principal strategies of the Company
for the future are to:
- Improve the mix of business by
increasing commercial and casualty
writings in order to enhance
profitability and lessen the impact
of property losses on overall
results;
- Geographically diversify its risk
through acquisitions of other
insurance companies in Pennsylvania
and other jurisdictions, in order
to reduce its overall exposure to
weather-related property losses in
its primary coverage area;
- Attract and retain high-quality
agencies having diverse customer
bases in the Company's targeted
growth markets within Pennsylvania
and New Jersey, through increased
marketing activities and the
development and tailoring of
commercial programs meeting the
needs of their customers; and
- Reduce its reliance on reinsurance
by increasing the maximum exposure
retained by the Insurance Companies
on individual property and casualty
risks, and thereby increase net
premium volume.
Management views the Conversion as a
critical component of its strategic
plan. The additional capital generated
by the Conversion will permit the
Insurance Companies to accelerate
implementation of these strategies. The
resulting holding company structure will
also provide needed flexibility to
achieve the Company's goals by
permitting the Company to use its Common
Stock and/or preferred stock to effect
future acquisitions or raise additional
capital. See "The Conversion --
Business Purposes."
The Conversion Pursuant to the Plan, Mercer Mutual will
(i) convert from a Pennsylvania-
chartered mutual insurance company to a
Pennsylvania-chartered stock insurance
company, and (ii) simultaneously issue
shares of its capital stock to the
Company in exchange for a portion of the
net proceeds from the sale of Common
Stock in the Conversion. The Conversion
will be accounted for as a simultaneous
reorganization, recapitalization and
share offering which will not change the
historical accounting basis of Mercer
Mutual's financial statements.
Background and Reasons Mercer Mutual's exposure to severe
For the Conversion weather conditions has been a major
factor affecting its underwriting
results since 1991. Operating results
in 1994 and 1996 were adversely affected
by severe winter storms in such years
that were largely responsible for a
$1.4 million net loss and a $665,000
reduction in net income, respectively,
for such years. In order to reduce the
risk caused by this exposure, Mercer
Mutual's strategic plan is expressly
predicated upon geographically
diversifying its business and improving
capital strength. Increased capital
would facilitate diversification of risk
through acquisitions and would provide
additional policyholder protection by
increasing policyholder surplus. Since
1996, Mercer Mutual has considered
various capital formation alternatives
and has elected to proceed with the
Conversion in accordance with the
provisions of the Pennsylvania Insurance
Company Mutual to Stock Conversion Act
(the "Act"). On October 17, 1997, the
Board of Directors of Mercer Mutual
unanimously adopted the Plan. An
application with respect to the
Conversion was filed by Mercer Mutual
with the Pennsylvania Department on
November 26, 1997 and notice of the
filing and the opportunity to comment on
and to request and receive a copy of the
Plan was simultaneously mailed to all
Eligible Policyholders as required by
law. The Pennsylvania Department
informed Mercer Mutual on ___________,
1997 that it did [not] intend to hold
any hearings regarding the Conversion.
The Plan was approved by the
Pennsylvania Department on ____________,
1998 and is subject to the approval of
Eligible Policyholders at the Special
Meeting. The Company also has received
the approvals of the Pennsylvania
Department to acquire control of Mercer
Mutual and the New Jersey Department to
acquire control of MIC.
Organization Before and Set forth on page __ of the Prospectus
After the Conversion is an illustration of the organizational
structure of the Insurance Companies
before the Conversion and of the Company
and the Insurance Companies after the
Conversion.
Stock Pricing and Pennsylvania law requires that the
Number of Shares aggregate purchase price of the Common
to be Issued Stock to be issued in the Conversion be
consistent with an independent appraisal
of the estimated consolidated pro forma
market value of Mercer Mutual as a
subsidiary of the Company following the
Conversion. Sheshunoff, a firm
experienced in corporate valuations, has
made an independent appraisal of the
estimated consolidated pro forma market
value of Mercer Mutual as a subsidiary
of the Company and has determined that,
as of November 24, 1997, such estimated
pro forma market value was $26 million.
The Estimated Valuation Range in
Sheshunoff's appraisal, which extends
15% below and 15% above the estimated
value, is from $22.1 million to $29.9
million. The Company, in consultation
with its advisors, has determined to
offer the shares in the Conversion at
the Purchase Price.
The appraisal is intended to be an
estimate of the consolidated pro forma
market value of Mercer Mutual as a
subsidiary of the Company, and is based
on a review of internal projections, and
a comparison of the consolidated
financial condition and results of
operations of Mercer Mutual to property
and casualty insurance company averages
and a peer group of representative
publicly owned property and casualty
insurance companies. The appraisal is
not intended, and must not be construed,
as a recommendation of any kind by the
Company, Mercer Mutual, Sandler O'Neill
or Sheshunoff as to the advisability of
purchasing Common Stock. In preparing
the valuation, Sheshunoff has relied
upon and assumed the accuracy and
completeness of financial and
statistical information provided by the
Company, and Sheshunoff did not
independently verify the financial
statements, projections and other
information provided by the Company and
Mercer Mutual, perform an independent
analysis of the assumptions underlying
the financial statements or projections
or value independently the assets and
liabilities of the Company and Mercer
Mutual. The valuation considers the
Company and Mercer Mutual as a going
concern only and should not be
considered as an indication of the
liquidation value of the Company and
Mercer Mutual. The appraisal will be
updated immediately prior to completion
of the Offering and such updated
appraisal will be filed with the
Securities and Exchange Commission
pursuant to a post effective amendment
to the registration statement of which
this prospectus is a part. If the value
reflected in the updated appraisal is
within the Estimated Valuation Range,
the Company will not notify subscribers
of the updated appraisal and the
Conversion will be consummated. If
participants in the Subscription
Offering subscribe for 2,990,000 shares
or more, the Company, as required by the
Plan, will sell all 2,990,000 shares
offered hereby to participants in the
Subscription Offering and will sell up
to an additional 332,222 shares to the
ESOP to satisfy its subscription in
full. Shares will be allocated among
participants in the Subscription
Offering in accordance with the terms of
the Plan and excess funds will be
promptly returned to subscribers without
interest. If participants in the
Subscription Offering subscribe for at
least 2,210,000 shares but less than
2,990,000 shares, then, as required by
the Plan, the Company will sell to
participants in the Subscription
Offering the number of shares of Common
Stock sufficient to satisfy their
subscriptions in full. The Company, in
its sole discretion, may accept
subscriptions in the Community Offering
and/or sell shares in the Syndicated
Community Offering provided the total
number of shares of Common Stock sold in
the Conversion does not exceed 2,990,000
shares (excluding the shares sold to the
ESOP). Any excess funds received in the
Community Offering and/or the Syndicated
Community Offering will be promptly
returned to subscribers without
interest. If participants in the
Subscription Offering subscribe for
fewer than 2,210,000 shares, then the
Company will sell to participants in the
Subscription Offering the number of
shares of Common Stock sufficient to
satisfy their subscriptions in full and
will accept subscriptions in the
Community Offering and/or sell shares in
the Syndicated Community Offering in an
amount sufficient to sell at least
2,210,000 shares in the aggregate. The
Company, in its sole discretion, may
accept additional subscriptions in the
Community Offering and sell additional
shares in the Syndicated Community
Offering provided the total number of
shares sold in the Conversion does not
exceed 2,990,000 (excluding the shares
sold to the ESOP). Any excess funds
received in the Community Offering
and/or the Syndicated Community Offering
will be promptly returned to subscribers
without interest. If the number of
shares sold in the Subscription
Offering, Community Offering and
Syndicated Community Offering is less
than 2,210,000, then the Company will
cancel the Offering and all subscription
funds will be returned promptly to
subscribers without interest. If the
value reflected in the updated Appraisal
is not within the Estimated Valuation
Range, then the Company will promptly
notify all subscribers by mail of the
updated Appraisal. Subscribers will be
given the opportunity to confirm or
modify their orders. The funds of all
subscribers who do not confirm or modify
their orders will be returned promptly
without interest. Subscription orders
may not be withdrawn for any reason if
the updated Appraisal is within the
Estimated Valuation Range.
There is a difference of approximately
$7.8 million between the minimum and the
maximum of the Estimated Valuation
Range. Therefore, subscribers, in the
aggregate and on a per share basis, may
pay more for the Common Stock than the
estimated consolidated pro forma market
value of Mercer Mutual as a subsidiary
of the Company. See "Risk Factors -
Adverse Impact of Broad Valuation Range
and Its Use to Determine the Number of
Shares of Common Stock Sold."
The Subscription The shares of Common Stock to be
and Community issued in the Conversion are being
Offerings offered at the Purchase Price in the
Subscription Offering pursuant to
nontransferable subscription rights in
the following order of priority:
(i) Eligible Policyholders, (ii) the
ESOP, and (iii) directors, officers and
employees of Mercer Mutual. Subscrip-
tion rights of directors, officers and
employees of Mercer Mutual will be
subordinated to subscription rights of
Eligible Policyholders. Concurrently,
and subject to the prior rights of
holders of subscription rights, any
shares of Common Stock not subscribed
for in the Subscription Offering are
being offered at the Purchase Price in
the Community Offering to members of the
general public. Preference will be
given in the Community Offering to
(i) natural persons and trusts of
natural persons who are permanent
residents of New Jersey and Pennsylvania
(the "Local Community"), (ii) principals
of Eligible Policyholders in the case of
an Eligible Policyholder that is not a
natural person, (iii) licensed insurance
agencies that have been appointed by
Mercer Mutual to market and distribute
policies of insurance, and their owners,
(iv) named insureds under policies of
insurance issued by Mercer Mutual after
October 17, 1997, and (v) providers of
goods and services to, and identified
by, Mercer Mutual. Subscription rights
will expire if not exercised by, and the
Community Offering will terminate at,
1:00 p.m., Eastern Standard Time on
___________, 1998, unless extended by
action of the Company taken prior to
such date for up to an additional 45
days (such date and time, including any
extensions, shall be hereinafter
referred to as the "Termination Date").
If the Company extends the Termination
Date, it will given written notice of
such extension to all subscribers on or
before __________, 1998, at which time
each subscriber may confirm his or her
subscription by the extended Termination
Date. If a Subscriber does not confirm
a subscription by the extended
Termination Date, the subscriber's funds
will be returned promptly without
interest. No action taken to extend the
Termination Date will be taken by the
Company after __________, 1998. The
Company reserves the absolute right to
accept or reject any orders in the
Community Offering, in whole or in part,
either upon receipt of an order or as
soon as practicable following the
Termination Date.
Prospectus Delivery To ensure that each purchaser receives a
and Procedure for prospectus at least 48 hours prior to
Purchasing Shares the Expiration Date in accordance with
Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange
Act"), no prospectus will be mailed
later than five days prior to the
Termination Date or hand delivered later
than two days prior to such date. Stock
Order Forms and Certification Forms will
be distributed only with a prospectus.
The Company is not obligated to accept
for processing orders not submitted on
Stock Order Forms and not accompanied by
a Certification Form. Any person who
desires to subscribe for shares of
Common Stock in the Offering must do so
prior to the Termination Date by
delivering (by mail or in person) to the
Conversion Center at the Company's
principal executive offices located at
10 North Highway 31, P.O. Box 278,
Pennington, New Jersey 08534, a properly
executed and completed Stock Order Form
and Certification Form, together with
full payment for all shares for which
the subscription is made. A Stock Order
Form and Certification Form will be
included with each prospectus delivered
to a prospective purchaser of Common
Stock and no Stock Order Form or
Certification Form will be delivered to
a prospective purchaser unless
accompanied by a prospectus or prior
delivery of a prospectus can be
verified. Payment for shares of Common
Stock may be made by cash (if delivered
in person), check or money order. All
checks or money orders must be made
payable to "Mercer Insurance Group,
Inc." Subscriptions will be held in a
separate escrow account at
____________________. Such funds will
not be released until the Conversion is
completed or terminated. All
subscription rights under the Plan will
expire on the Termination Date whether
or not the Company has been able to
locate each person entitled to such
subscription rights. Once tendered,
orders to purchase Common Stock in the
Offering cannot be revoked. In the
event of an oversubscription in the
Subscription Offering, shares of Common
Stock will be allocated among
subscribing Eligible Policyholders, as
follows. First, shares of Common Stock
will be allocated among subscribing
Eligible Policyholders so as to permit
each such Eligible Policyholder, to the
extent possible, to purchase the lesser
of (i) 1,000 shares, or (ii) the number
of shares for which such Eligible
Policyholder has subscribed. Second,
any shares of Common Stock remaining
after such initial allocation will be
allocated among the subscribing Eligible
Policyholders whose subscriptions remain
unsatisfied in the proportion in which
the aggregate number of shares as to
which each such Eligible Policyholder's
subscription remains unsatisfied bears
to the aggregate number of shares as to
which all such Eligible Policyholders'
subscriptions remain unsatisfied,
provided, however, that no fractional
shares of Common Stock will be issued.
For more information, please call the
Conversion Center toll-free at
1-888-___-____. See "The Conversion --
The Conversion Offerings," -- Purchases
in the Offerings," -- Marketing and
Underwriting Arrangements and "--
Description of Sales Activities in the
Offerings."
The Syndicated All shares of Common Stock not purchased
Community Offering in the Conversion Offerings, if
any, will be offered for sale to the
general public on a best efforts basis
in the Syndicated Community Offering
through a syndicate of registered
broker-dealers to be formed and managed
by Sandler O'Neill, acting as agent of
the Company to assist the Company and
Mercer Mutual in the sale of Common
Stock. The Company and Mercer Mutual
reserve the absolute right to reject
orders, in whole or in part, in their
sole discretion, in the Syndicated
Community Offering. See "The
Conversion -- Marketing and Underwriting
Arrangements" and "-- Syndicated
Community Offering."
Purchase Limitations No person may purchase fewer than
25 shares in the Offering. The ESOP may
purchase up to an aggregate of 10% of
the shares of Common Stock to be issued
in the Conversion and is expected to do
so. With the exception of the ESOP, no
person (including Eligible Policyholders
who elect to purchase stock in the
Conversion), together with his or her
associates or persons acting in concert
with him or her, may purchase in the
aggregate, more than 100,000 shares of
Common Stock (4.5% of the shares to be
issued in the Conversion at the minimum
of the Estimated Valuation Range).
There are 42,432 Eligible Policyholders.
In the event that subscriptions by
Eligible Policyholders for Common Stock
exceed the maximum of the Estimated
Valuation Range, the Company will be
obligated under the Plan to sell to
Eligible Policyholders 2,990,000 shares,
which is the maximum number of shares
offered hereby (excluding shares
expected to be purchased by the ESOP),
and shares of Common Stock would be
allocated among Eligible Policyholders
in proportion to the respective amounts
of shares for which they subscribed. If
all Eligible Policyholders were to
subscribe for 100,000 shares of Common
Stock offered, then each Eligible
Policyholder would receive only
approximately 70 shares. The Company is
unable to predict the number of Eligible
Policyholders that may participate in
the Subscription Offering.
Purchase of Common The directors and executive officers of
Stock by Management the Company and Mercer Mutual, together
with their associates, propose to
purchase, in the aggregate,
approximately 178,500 shares of Common
Stock in the Conversion, or 6.9% of the
shares of Common Stock issued in the
Conversion, assuming an offering at the
midpoint of the Estimated Valuation
Range but excluding shares purchased by
the ESOP. See "The Conversion --
Proposed Management Purchases."
Benefits to Management The Company's ESOP is expected to
purchase 10% of the shares of Common
Stock sold in the Conversion, which will
be awarded to substantially all
employees without payment by such
persons of cash consideration. In
addition, the Company has adopted a
Management Recognition Plan (the "MRP")
pursuant to which the Company intends to
award to employees and directors of the
Company up to 4% of the number of shares
of Common Stock sold in the Conversion
without payment by such persons of cash
consideration, and a Stock Compensation
Plan (the "Compensation Plan") pursuant
to which the Company intends to grant
options to acquire Common Stock to
employees and directors of the Company,
in an amount up to 10% of the number of
shares of Common Stock sold in the
Conversion. The Company intends to
award shares under the MRP and to grant
stock options under the Compensation
Plan as soon as practicable after the
approval of the MRP and the Compensation
Plan by the Company's shareholders. The
MRP and the Stock Compensation Plan are
subject to approval by the Company's
shareholders at the first annual meeting
of shareholders to be held no sooner
than six months after the consummation
of the Conversion. No decisions
concerning the number of shares to be
awarded or options to be granted to any
director or officer have been made at
this time. See "Management of the
Company -- Certain Benefit Plans and
Agreements."
Use of Proceeds The amount of the net proceeds from the
Offerings will depend upon the total
number of shares sold and the expenses
of the Conversion. As a result, the net
proceeds from the Offerings cannot be
determined until the Conversion is
completed. The Company anticipates that
net proceeds will be between
approximately $20.5 million and
$31.4 million. See "Use of Proceeds"
for the assumptions used to arrive at
these estimates.
The Company has received Pennsylvania
Department approval to contribute
$5.0 million of net proceeds from the
Offerings to Mercer Mutual in exchange
for all of the capital stock of Mercer
Mutual to be issued in the Conversion.
Assuming net proceeds from the Offerings
of between $20.5 million and
$31.4 million, the Company would retain
between $15.5 and $26.4 million after
acquiring the stock of Mercer Mutual.
A portion of the net proceeds retained
by the Company will be used for a loan
by the Company to the ESOP to enable it
to purchase 10% of the shares of Common
Stock issued in the Conversion. The
loan will fund the entire purchase price
of the shares purchased by the ESOP in
the Conversion ($3.3 million at the
maximum of the Estimated Valuation Range
plus the ESOP shares) and will be repaid
principally from Mercer Mutual's
contributions to the ESOP and from
dividends payable on unallocated shares
of Common Stock held by the ESOP. The
remaining net proceeds retained by the
Company will be available for a variety
of corporate purposes, including, but
not limited to, additional capital
contributions to Mercer Mutual, future
acquisitions within the property and
casualty insurance industry, dividends
to shareholders and future repurchases
of Common Stock to the extent permitted
by Pennsylvania law and the Pennsylvania
Department. The net proceeds used to
acquire the stock of Mercer Mutual will
become part of Mercer Mutual's capital,
thereby expanding underwriting capacity
and permitting diversification of its
business. Mercer Mutual intends to
cause a portion of the net proceeds it
receives from the Company to be
contributed to MIC to enable MIC to
expand its New Jersey business beyond
workers' compensation insurance to
include the same types of insurance
currently written by Mercer Mutual.
With the exception of the ESOP Loan and
the capital contribution to MIC, the
Company currently has no specific plans,
intentions, arrangements or
understandings regarding any of the
foregoing activities. See "Dividend
Policy."
Non-transferability of The Plan provides that no person shall
Subscription Rights transfer or enter into any agreement or
understanding to transfer the legal or
beneficial ownership of subscription
rights issued under the Plan or, prior
to exercise of the subscription rights,
the shares of Common Stock to be issued
upon their exercise. Persons violating
such prohibition will lose their right
to purchase Common Stock in the
Conversion. Each person exercising
subscription rights will be required to
certify that his or her purchase of
Common Stock is solely for the
purchaser's own account and that there
is no agreement or understanding
regarding the sale or transfer of such
shares.
Market for the Common The Company has received conditional
Stock approval to have the Common Stock quoted
on the Nasdaq National Market under the
symbol "MRCR" upon completion of the
Conversion. Sandler O'Neill has advised
the Company that following the
Conversion, it intends to make a market
in the Common Stock, but it is under no
obligation to do so. Prior to the
Offering and Syndicated Community
Offering, there was no public market for
the Common Stock and there can be no
assurance that an active and liquid
trading market for the Common Stock will
develop or that if developed, it will
continue, nor is there any assurance
that persons purchasing shares of Common
Stock will be able to sell their shares
at or above the Purchase Price or that
quotations will be available on the
Nasdaq National Market as contemplated.
See "Market for the Common Stock."
Dividends Declaration of dividends by the Board of
Directors of the Company will depend on
a number of factors, including the
requirements of applicable law and the
determination by the Board of Directors
of the Company that the net income,
capital and financial condition of the
Company and the Insurance Companies,
industry trends, general economic
conditions and other factors justify the
payment of dividends. The Company has
not yet determined whether it will pay
dividends to its policyholders in the
foreseeable future, and no assurance can
be given that dividends will ultimately
be declared by the Board of Directors of
the Company. See "Dividend Policy" and
"Business -- Regulation."
Antitakeover Provisions The Articles of Incorporation and Bylaws
of the Company, Pennsylvania statutory
provisions and employee benefit
arrangements, as well as certain other
provisions of state and federal law, may
have the effect of discouraging or
preventing a non-negotiated change in
control of the Company, as well as a
proxy contest for control of the Board
of Directors of the Company. For a
detailed discussion of those provisions,
see "Investment Considerations --
Articles of Incorporation, Bylaw and
Statutory Provisions that Could
Discourage Hostile Acquisitions of
Control," "Management -- Certain Benefit
Plans and Agreements," "Certain
Restrictions on Acquisition of the
Company -- Pennsylvania Law" and --
"Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws"
and "Description of Capital Stock."
<PAGE>
MERCER MUTUAL
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated
financial data for Mercer Mutual prior to the Conversion and
should be read in conjunction with the Consolidated Financial
Statements, and accompanying notes thereto and other financial
information included elsewhere herein, as well as "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." The consolidated statement of income data for the
years ended December 31, 1992 and 1993 and for the nine months
ended September 30, 1996 and 1997 and the consolidated balance
sheet data at December 31, 1992, 1993 and 1994 and at
September 30, 1996 and 1997 are derived from the unaudited
consolidated financial statements of Mercer Mutual and include
all adjustments (consisting only of normal recurring accruals)
that the Company considers necessary for a fair presentation of
such financial information for such periods.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended
September 30 Year Ended December 31,
------------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written. . . . . . . . $21,504 $18,580 $24,958 $24,699 $24,355 $23,349 $22,829
Net premiums written(1). . . . . . . . 12,904 15,358 20,124 21,245 19,377 18,964 18,661
Statement of Income Data:
Net premiums earned. . . . . . . . . . 13,288 15,472 20,634 20,817 18,681 18,225 18,733
Net investment income. . . . . . . . . 1,793 1,704 2,289 2,132 1,904 2,196 2,520
Net realized investment gains. . . . . 483 409 596 53 277 509 644
Other income . . . . . . . . . . . . . 144 137 155 161 166 159 158
------- ------- ------- ------- ------- ------- -------
Total revenues . . . . . . . . . 15,708 17,722 23,674 23,163 21,028 21,089 22,055
------- ------- ------- ------- ------- ------- -------
Losses and Expenses:
Losses and loss adjustment
expenses(1). . . . . . . . . . . . 8,038 11,253 14,801 13,296 14,107 11,631 12,234
Other underwriting expenses. . . . . 5,461 5,762 8,062 8,360 8,976 8,494 8,158
------- ------- ------- ------- ------- ------- -------
Total expenses . . . . . . . . . 13,499 17,015 22,863 21,656 23,083 20,125 20,392
------- ------- ------- ------- ------- ------- -------
Income (loss) before federal income
taxes. . . . . . . . . . . . . . . . 2,209 707 811 1,507 (2,055) 964 1,663
Federal income tax expense (benefit) . 694 173 171 369 (681) 165 389
------- ------- ------- ------- ------- ------- -------
Net income (loss)(2) . . . . . . . . . $ 1,515 $ 534 $ 640 $ 1,138 $(1,374) $ 799 $ 1,274
======= ======= ======= ======= ======= ======= =======
Selected Balance Sheet Data (at period end):
Total investments and cash . . . . . $45,177 $41,305 $42,760 $40,454 $33,408 $36,191 $35,913
Total assets . . . . . . . . . . . . 73,258 76,504 74,074 77,523 71,750 71,110 75,486
Total liabilities. . . . . . . . . . 51,312 57,641 54,792 58,560 57,547 53,469 58,505
Total equity . . . . . . . . . . . . $21,946 $18,863 $19,282 $18,963 $14,202 $17,641 $16,981
GAAP Ratios:
Loss and loss adjustment expense
ratio(2)(3). . . . . . . . . . . . 60.5% 72.7% 71.7% 63.9% 75.5% 63.8% 65.3%
Underwriting expense ratio(4). . . . 41.1% 37.2% 39.1% 40.2% 48.0% 46.6% 43.5%
Combined ratio(5). . . . . . . . . . 101.6% 109.9% 110.8% 104.1% 123.5% 110.4% 108.8%
Statutory Data:
Statutory combined ratio . . . . . . 102.6% 113.6% 110.5% 103.0% 122.6% 110.7% 109.5%
Industry combined ratio(6) . . . . . - - 105.9% 106.4% 108.4% 106.9% 115.7%
Statutory surplus. . . . . . . . . . $19,033 $15,501 $16,087 $14,938 $11,133 $12,979 $12,328
Ratio of statutory net written
premiums to statutory
surplus(7) . . . . . . . . . . . . .90x 1.32x 1.25x 1.42x 1.74x 1.46x 1.51x
Pro Forma Data(8):
Net income . . . . . . . . . . . . $ 1,317 $ 362
Net income per share of
Common Stock . . . . . . . . . . $ 0.67 $ 0.19
Weighted average number of shares
of Common Stock outstanding. . . 1,955,298 1,920,490
_____________________
<FN>
(1) The decrease from September 30, 1996 to September 30, 1997
reflects the termination, as of December 31, 1996, of Mercer
Mutual's participation in a pooling arrangement with two
other insurance companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Net income and loss and loss expense ratios for 1994 and
1996 were adversely affected by the frequency and severity
of weather-related property losses. See "Management's
Discussion and Analysis of Financial Condition and Results
of Operations."
(3) Calculated by dividing losses and loss adjustment expenses
by net premiums earned.
(4) Calculated by dividing other underwriting expenses by net
premiums earned.
(5) The sum of the Loss and Loss Adjustment Expense Ratio and
the Underwriting Expense Ratio.
(6) As reported by A.M. Best Company, Inc., an independent
insurance rating organization. Data for the periods ended
September 30, 1997 and September 30, 1996 is unavailable.
(7) Annualized for the periods ended September 30, 1997 and
1996.
(8) Information excerpted from unaudited Pro Forma Consolidated
Statements of Income for the nine months ended September 30,
1997 and the year ended December 31, 1996. See "Pro Forma
Data."
</TABLE>
<PAGE>
RISK FACTORS
Before investing in the Common Stock offered hereby,
prospective investors should carefully consider all of the
information set forth in this prospectus and, in particular, the
matters presented below.
Possible Adverse Impact of Catastrophe and Natural Peril Losses
on Financial Condition and Results of Operations
In common with other property and casualty insurers, Mercer
Mutual is subject to claims arising from catastrophes that may
have a significant impact on its results of operations and
financial condition. Mercer Mutual has experienced, and can be
expected to experience in the future, catastrophe losses that may
materially affect its financial condition and results of
operations. Catastrophe losses can be caused by various events,
including coastal storms, snow storms, ice storms, freezing,
hurricanes, earthquakes, tornadoes, wind, hail and fires, and
their incidence and severity are inherently unpredictable. The
extent of net losses from catastrophes is a function of three
factors: the total amount of insured exposure in the area
affected by the event, the severity of the event and the amount
of reinsurance coverage.
Mercer Mutual's financial condition and results of
operations also are affected periodically by losses caused by
natural perils, regardless of whether such losses, because of
their magnitude, qualify as "catastrophes" as classified by the
Property Claims Service Division of American Insurance Services
Group, Inc., an insurance industry body. Because of the
geographic concentration of its business, Mercer Mutual may be
more exposed to losses of this type than other property and
casualty insurers. The blizzard of January 1996 that adversely
affected Mercer Mutual's results of operations for 1996 is an
example of a "catastrophe." A multiplicity of such events, all
or some of which do not qualify as catastrophes, in the
aggregate, may materially affect the Company's financial
condition and results of operations, partly because losses from
individual events may not permit recovery under Mercer Mutual's
catastrophe reinsurance coverage. The frequency and severity of
winter storms during 1994 that adversely affected Mercer Mutual's
results of operations for such year is an example of this
phenomenon. See "-- Geographic Concentration of Business,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Reinsurance."
Possible Adverse Impact Due to Geographic Concentration of
Business
All direct premiums written by Mercer Mutual are generated
in New Jersey and Pennsylvania. For the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30,
1997, 99.4%, 99.3%, 99.1% and 98.8%, respectively, of Mercer
Mutual's direct premiums written were derived from policies
written in New Jersey. As such, Mercer Mutual has a significant
exposure to weather-related property losses, as evidenced by
Mercer Mutual's $1.4 million net loss for the year ended
December 31, 1994 and its $665,000 reduction in net income in the
year ended December 31, 1996, as compared to the prior year. The
revenues and profitability of Mercer Mutual could be
significantly affected by legal and judicial trends and
prevailing economic, regulatory, demographic and other conditions
in New Jersey as well as the impact of catastrophe and natural
peril losses in that state. See "--Catastrophe and Natural Peril
Losses."
Possible Adverse Impact of Potential Litigation
On February 11, 1997, the affiliated companies of Old Guard
Mutual Insurance Company, Old Guard Mutual Fire Insurance Company
and Goschenhoppen-Home Mutual Insurance Company (the "Old Guard
Companies") completed the first mutual to stock conversions under
the Pennsylvania Insurance Company Mutual to Stock Conversion Act
(the "Act"). Since such time, no other mutual to stock
conversions similar to the Conversion have been completed under
the Act. On January 7, 1997, a policyholder of one of the Old
Guard Companies filed an action in the Commonwealth Court of
Pennsylvania against the Pennsylvania Department, the Old Guard
Companies and their holding company seeking, among other things,
to have the court (1) declare the Act unconstitutional, and
(2) direct the Pennsylvania Department to rescind its approval of
the conversions (the "Old Guard Policyholder Action"). On
July 21, 1997, the Old Guard Policyholder Action was settled and
the litigation terminated without any admissions of liability or
lack of merit of the claims. Under the terms of this settlement,
(i) the Pennsylvania Department implemented certain additional
procedures designed to ensure the dissemination of greater
information and disclosure to policyholders and others; (ii) the
Pennsylvania Department agreed to use certain defined criteria to
evaluate whether a hearing should be held on a conversion plan;
(iii) the parties mutually released each other from all claims
relating to the Old Guard Policyholder Action; and (iv) no money
or other consideration was paid by any party to the litigation to
any other party to the litigation.
On February 10, 1997, the Old Guard Companies and their
holding company and each of their respective directors were
served with an eleven count combination class action and
derivative lawsuit, filed in the United States District Court for
the Eastern District of Pennsylvania (the "Old Guard Class
Action") challenging the constitutionality of the Act, and
alleging violations of the Act and the breach by the directors of
the Old Guard Companies of their fiduciary duties of care and
loyalty. The suit seeks compensatory damages as may be allowed
by law, a declaration that the plan of conversion violates the
Act and the United States and Pennsylvania Constitutions and the
rights of the plaintiffs thereunder, and other relief. The
holding company for the Old Guard Companies has stated in its
filings under the Exchange Act that the Old Guard Companies and
their directors believe they have meritorious defenses to the
action and intend to defend this action vigorously. The Old
Guard Class Action is still pending.
The Pennsylvania Department has stated that it believes the
Act is constitutional. The Company and Mercer Mutual, based on
the advice of their counsel, believe that it is unlikely that any
litigation would be successful principally because of (i) the
existence of court decisions that have consistently upheld the
constitutionality of a very similar federal statutory provision
providing for the conversion to stock form of mutual savings and
loan associations, pursuant to which over 1,000 mutual to stock
conversions have been completed to date, and (ii) a court
decision upholding the constitutionality of a similar
Pennsylvania statutory provision providing for the conversion to
stock form of a Pennsylvania mutual savings bank.
However, because of the recent passage of the Act in
December 1995 and the settlement of the Old Guard Policyholder
Action, no legal precedent exists directly governing the
determination of the claims made in the Old Guard Class Action.
Further, no assurance can be given that if any litigation is
commenced, that the Company or Mercer Mutual would ultimately
prevail. In addition, no assurance can be given that the
commencement of any litigation and the risks associated therewith
would not result in less than the minimum number of shares of
Common Stock being sold, in which case the Conversion would not
be consummated, or that only the minimum number of shares of
Common Stock will be sold, resulting in a sale of Common Stock at
the lower end of the Estimated Valuation Range and reduced net
proceeds therefrom.
If the Conversion is completed but the Act, or any portion
of the Act, is declared unconstitutional, the remedy a court
would grant in any litigation is uncertain, and is subject to the
court's broad discretion. Relief could be applied on a
prospective basis only or on a retroactive basis. No prediction
can be made concerning the remedy a court would fashion in such
an event. However, in the event of any litigation against
Company challenging the validity of the Conversion, two
possibilities include:
-- A requirement that the Company pay all purchasers of
Common Stock, (i) the aggregate Purchase Price paid,
plus interest, or (ii) the market value of the Common
Stock sold in the Conversion, less any proceeds
received by such purchaser from a subsequent sale of
such Common Stock; or
-- The Company could be required to distribute to
policyholders of Mercer Mutual all or a portion of the
surplus of Mercer Mutual as of the date of the
Conversion (statutory surplus as of September 30, 1997
was $19 million). Such distribution could be required
to be made in cash, Common Stock or other debt or
equity securities. Any required distribution of Common
Stock or other equity securities would materially
dilute the interests of existing holders of the Common
Stock.
No assurance can be given that the Company would have sufficient
funds, or the capacity to borrow sufficient funds, to honor any
of its obligations under any remedy imposed by a court in any
litigation. In such event, the Company could be forced to seek
the protection of the bankruptcy laws and Mercer Mutual could be
deemed insolvent and seized by the Pennsylvania Department. In
addition, the commencement of any litigation could have a
material adverse impact on the market price of the Common Stock
during the pendency of the litigation and an adverse
determination of such litigation would have such a material
adverse effect.
Possible Adverse Impact of Broad Valuation Range and Its Use to
Determine the Number of Shares of Common Stock Sold
If the value set forth in the final updated Appraisal is
within the Estimated Valuation Range, the Conversion can be
completed and the Company can sell between 2,210,000 and
2,990,000 shares of Common Stock. There is a difference of
approximately $7.8 million between the minimum and the maximum of
the Estimated Valuation Range. As a result, the percentage
interest in the Company that a subscriber for a fixed number of
shares of Common Stock will have is approximately 26.1% smaller
if 2,210,000 shares are sold than if 2,990,000 shares are sold.
Furthermore, as a result of this broad range, the final updated
Appraisal may estimate a consolidated pro forma market value for
Mercer Mutual as a subsidiary of the Company that is materially
more or less than the aggregate dollar amount of subscriptions
received by the Company. Subscribers will not receive a refund
or have any right to withdraw subscriptions if the updated
Appraisal estimates a consolidated pro forma market value that is
within the Estimated Valuation Range, but is less than the
aggregate dollar amount of subscriptions received by the Company.
Therefore, subscribers, in the aggregate and on a per share
basis, may pay materially more for the Common Stock than the
estimated consolidated pro forma market value of Mercer Mutual as
a subsidiary of the Company. Accordingly, no assurance can be
given that the market price for the Common Stock immediately
following the Conversion will equal or exceed the Purchase Price.
Also, subscribers should be aware that they will not have
available to them information concerning the final updated
Appraisal prior to the end of the Subscription and Community
Offerings. Purchasers of Common Stock in the Syndicated
Community Offering will have such information available to them
and therefore will have a greater ability to assess the merits of
an investment in the Common Stock than subscribers in the
Subscription and Community Offerings.
Possible Adverse Impact of New Jersey Tax Laws
Prior to the Redomestication, Mercer Mutual, as a New
Jersey-domiciled insurance company, paid an annual tax to New
Jersey in an amount equal to 2.1% of 12.5% of the total net
direct premiums collected by Mercer Mutual on all policies of
insurance wherever issued and an annual tax to Pennsylvania in an
amount equal to 2.0% of the total net direct premiums collected
by Mercer Mutual on all policies of insurance issued to
policyholders located in Pennsylvania. For the year ended
December 31, 1996, Mercer Mutual incurred expenses of $63,800 and
$4,473 for amounts due to New Jersey and Pennsylvania,
respectively, pursuant to such taxes. New Jersey has a statutory
retaliatory tax provision that, because Mercer Mutual is now a
Pennsylvania-domiciled insurance company, could be interpreted to
require Mercer Mutual to pay, for a portion of 1997 and for all
future years, a tax to New Jersey equal to 2.0% of the total net
direct premiums collected by Mercer Mutual on all policies of
insurance issued to policyholders located in New Jersey. If such
interpretation is correct, Mercer Mutual would be required to pay
substantially more in taxes to New Jersey than it has in the
past, which would have a material adverse effect on the results
of operations of Mercer Mutual. Under this interpretation, if
the Redomestication had occurred on January 1, 1996, Mercer
Mutual would have been required to pay $481,156 in taxes to New
Jersey for the year ended December 31, 1996, $417,356 more than
the amount which was actually due and paid for such year.
However, the Company and Mercer Mutual do not believe that
such New Jersey retaliatory tax provision should be interpreted
in the manner described above, and believe that the proper
interpretation of such statute would not result in an increase in
the tax liability of Mercer Mutual. No assurance can be given,
however, that New Jersey will not interpret such retaliatory tax
provision in a manner adverse to Mercer Mutual, and that if so,
New Jersey would not seek to enforce such retaliatory tax
provision against Mercer Mutual, and further that, if so, Mercer
Mutual would be successful in any legal challenge to such
enforcement. Moreover, Mercer Mutual may have the ability to
mitigate a portion of any adverse tax consequences by renewing
policies in MIC, a New Jersey domestic insurance company.
Possible Significant Fluctuations in Operating Results
The operating results of property and casualty insurers are
subject to significant fluctuation due to a number of factors,
including extreme weather conditions and natural disasters,
regulation, competition, judicial trends, changes in the
investment and interest rate environment and general economic
conditions. The Company's operating results may also be affected
by changes in the supply of, and the pricing for, property and
casualty insurance and reinsurance, which historically have been
highly cyclical. The unpredictability of claims experience and
the competitive nature of the property and casualty insurance
industry has contributed historically to significant
quarter-to-quarter and year-to-year fluctuations in the
underwriting results and net earnings of Mercer Mutual. Because
of these and other factors, historic results of operations may
not be indicative of future operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Possible Adverse Impact of Inadequate Loss Reserves on Financial
Condition and Results of Operation
Mercer Mutual is required to maintain reserves to cover its
estimated ultimate liability for losses and loss adjustment
expenses ("LAE") with respect to reported and unreported claims
incurred. Reserves are estimates involving actuarial and
statistical projections at a given time of what Mercer Mutual
expects to be the cost of the ultimate settlement and
administration of claims based on facts and circumstances then
known, predictions of future events, estimates of future trends
in claims severity and judicial theories of liability,
legislative activity and other variable factors, such as
inflation. Mercer Mutual's overall reserve practice provides for
ongoing claims evaluation and adjustment (if necessary) based on
the development of related data and other relevant information
pertaining to such claims. Loss and LAE reserves, including
reserves for claims that have been incurred but not yet reported,
are adjusted no less frequently than quarterly. The
uncertainties of estimating insurance reserves are greater for
certain types of property and casualty insurance lines written by
the Insurance Companies, particularly workers' compensation and
other liability coverages, because a longer period of time may
elapse before a definitive determination of ultimate liability
may be made and because of the changing judicial and political
climates relating to these types of claims.
Management believes that Mercer Mutual's reserves for losses
and loss adjustment expenses are adequate and are in accordance
with generally accepted actuarial principles and practices.
However, the establishment of appropriate loss and loss
adjustment expense reserves is an inherently uncertain process
and there can be no assurance that ultimate losses will not
exceed Mercer Mutual's loss reserves. To the extent that
reserves prove to be inadequate in the future, Mercer Mutual
would have to increase reserves which would adversely affect
earnings in the period such reserves are increased and could have
a material adverse effect on the Company's results of operations
and financial condition. See "Business - Loss and LAE Reserves."
Possible Adverse or Inadequate Impact of Geographic
Diversification Strategy
The Company intends to pursue a strategy of growth through
the attraction of new agencies in Pennsylvania and the
acquisition of other insurance companies in Pennsylvania and
other jurisdictions. The success of the Company's growth
strategy will depend largely upon its ability to attract new
agencies and successfully market to them, and to identify
suitable acquisition candidates and effect acquisitions at a
reasonable cost. No assurance can be given that the Company will
be successful in implementing its growth strategy. Moreover,
this growth strategy may present special risks, such as the risk
that Mercer Mutual will not efficiently integrate an acquisition
with present operations, the risk of dilution of book value and
earnings per share of the Common Stock as a result of an
acquisition, the risk that the Company and Mercer Mutual will not
be able to attract and retain qualified personnel needed for
expanded operations, and the risk that internal monitoring and
control systems may prove inadequate. Purchasers of Common Stock
should also be aware that the Company, in many instances, may be
able to make an acquisition without shareholder approval.
Highly Competitive Nature of Insurance Industry
The property and casualty insurance market is highly
competitive. Competition is based on many factors, including
perceived financial strength of the insurer, premiums charged,
policy terms and conditions, service, reputation and experience.
Mercer Mutual competes with stock insurance companies, mutual
companies, local cooperatives and other underwriting
organizations. Certain of these competitors have substantially
greater financial, technical and operating resources than Mercer
Mutual. Many of the lines of insurance written by Mercer Mutual
are subject to significant price competition. Some companies may
offer insurance at lower premium rates through the use of
salaried personnel or other methods, rather than the use of
agents paid on a commission basis as Mercer Mutual does. See
"Business -- Competition."
Possible Adverse Impact of Change in A.M. Best Rating
Ratings assigned by A.M. Best Company, Inc. ("A.M. Best")
are an important factor influencing the competitive position of
insurance companies. A.M. Best ratings are based upon factors of
concern to policyholders and are not directed toward the
protection of investors. As such, the Insurance Companies' A.M.
Best rating should not be relied upon as a basis for an
investment decision to purchase the Common Stock. A.M. Best
affirmed an "A-" (Excellent) rating (its fourth highest out of
15 rating categories) for the Insurance Companies as a group in
1997 based on year-end 1996 financial data. However, A.M. Best
stated in its report that due to the Insurance Companies'
considerable catastrophe exposure, it viewed the Insurance
Companies' ratings outlook as negative. Moreover, there can be
no assurance that the Insurance Companies will be able to
maintain their current rating. Management believes that the
Insurance Companies' business is sensitive to ratings and that a
rating downgrade may affect their ability to underwrite new
business. As a result, if the Insurance Companies were to
experience a rating downgrade, the Company's business and results
of operations could be materially adversely affected. See
"Business - A.M. Best Rating."
Possible Adverse Impact of Regulatory Changes
The Insurance Companies are subject to substantial
regulation by government agencies in the states in which they do
business. Such regulation usually includes (i) regulating
premium rates, policy forms, and lines of business, (ii) setting
minimum capital and surplus requirements, (iii) imposing guaranty
fund assessments and requiring residual market participation,
(iv) licensing companies and agents, (v) approving accounting
methods and methods of setting loss and expense reserves,
(vi) setting requirements for and limiting the types and amounts
of investments, (vii) establishing requirements for the filing of
annual statements and other financial reports, (viii) conducting
periodic statutory examinations of the affairs of insurance
companies, (ix) approving proposed changes in control,
(x) limiting the amount of dividends that may be paid without
prior notice or approval, (xi) regulating transactions with
affiliates, and (xii) regulating trade practices and market
conduct. Such regulation and supervision are primarily for the
benefit and protection of policyholders and not for the benefit
of investors. The insurance regulatory structure has been
subject to increased scrutiny in recent years by federal and
state legislative bodies and state regulatory authorities.
In 1990, the National Association of Insurance Commissioners
(the "NAIC") began an accreditation program to ensure that states
have adequate procedures in place for effective insurance
regulation, especially with respect to financial solvency. The
accreditation program requires that a state meet specific minimum
standards in over five regulatory areas to be considered for
accreditation. The accreditation program is an ongoing process
and once accredited, a state must enact any new or modified
standards approved by the NAIC within two years following
adoption. As of September 30, 1997, Pennsylvania and New Jersey,
the states in which Mercer Mutual and MIC, respectively, are
domiciled, were accredited.
The NAIC has adopted risk-based capital ("RBC") requirements
that require insurance companies to calculate and report
information under a risk-based formula that attempts to measure
statutory capital and surplus needs based on the risks in a
company's mix of products and investment portfolio. The formula
is designed to allow state insurance regulators to identify
weakly capitalized companies. The RBC requirements provide for
four different levels of regulatory attention in the event of
noncompliance with required capital levels, which range from a
requirement to file a corrective plan of action to mandatory
seizure. Neither of the Insurance Companies has ever failed to
meet the required levels of capital. There can be no assurance,
however, that the capital requirements applicable to the
respective businesses of the Insurance Companies will not
increase in the future, or that the Insurance Companies will
continue to meet these requirements.
The NAIC has also developed a set of eleven financial
ratios, referred to as the Insurance Regulatory Information
System ("IRIS"), for use by state insurance regulators in
monitoring the financial condition of insurance companies. The
NAIC has established an acceptable range of values for each of
the eleven IRIS financial ratios. Generally, an insurance
company will become the subject of increased scrutiny when four
or more of its IRIS ratios fall outside the range deemed
acceptable by the NAIC. The nature of increased regulatory
scrutiny resulting from IRIS ratios that are outside the
acceptable range is subject to the judgment of the applicable
state insurance department, but generally will result in
accelerated review of annual and quarterly filings. Depending on
the nature and severity of the underlying cause of the IRIS
ratios being outside the acceptable range, increased regulatory
scrutiny could range from increased but informal regulatory
oversight to placing a company under regulatory control. During
the last three years, each of the Insurance Companies reported
two ratios outside the acceptable range for certain IRIS tests.
However, neither of the Insurance Companies had four or more IRIS
ratios outside the acceptable range and, to their knowledge,
neither of the Insurance Companies is subject to increased
regulatory scrutiny. See "Business -- Regulation."
No assurance can be given that future legislation or
regulatory changes will not adversely affect the business and
results of operations of the Insurance Companies. See
"Business -- Regulation."
Adverse legislative and regulatory activity constraining the
Insurance Companies' ability to price adequately workers'
compensation and other insurance coverages may occur in the
future. In recent years, insurers have been under pressure from
regulators, legislatures and special interest groups to reduce,
freeze or set workers' compensation insurance rates at levels
that may not correspond with current underlying costs. Any such
required rate levels could have a material adverse effect on the
Company's business and results of operations.
Dependence upon Dividends from Insurance Companies
Because the operations of the Company following the
Conversion will be conducted through the Insurance Companies, the
Company will be dependent upon dividends and other payments from
Mercer Mutual for funds to meet its obligations. Pennsylvania
law regulates the distribution of dividends and other payments by
Mercer Mutual to the Company. Such restrictions or any
subsequently imposed restrictions may in the future affect the
Company's ability to pay debt, expenses and cash dividends. See
"Dividend Policy" and "Business -- Regulation."
Availability and Adequacy of Reinsurance
The Insurance Companies' insurance operations rely on the
use of reinsurance arrangements to limit and manage the amount of
risk retained, to stabilize underwriting results and increase
underwriting capacity. The availability and cost of reinsurance
are subject to prevailing market conditions and may vary
significantly over time. No assurance can be given that
reinsurance will continue to be available to the Insurance
Companies in the future at commercially reasonable rates. While
the Insurance Companies seek to obtain reinsurance with coverage
limits that they believe are appropriate for the risk exposures
assumed, there can be no assurance that losses experienced by the
Insurance Companies will be within the coverage limits of their
reinsurance treaties and facultative arrangements. The Company
intends to reduce its reliance on reinsurance by increasing the
maximum exposure retained by the Insurance Companies on
individual property and casualty risks. The Company will rely on
the Company's additional capital raised in the Conversion to
protect itself in the event of individual property losses up to
the increased maximum exposure amounts under its reinsurance
agreements. The precise increase in its maximum exposure will be
determined by the Company based on the amount of capital raised
in the Conversion, the Company's evaluation of its ability to
incur multiple losses without a corresponding material adverse
effect on its future financial condition and results of
operations, and negotiations with its reinsurers. This decrease
in reinsurance will increase the Company's risk of loss. The
Insurance Companies also are subject to credit risk with respect
to their reinsurers because the ceding of risk to reinsurers does
not relieve the Insurance Companies of their liability to
insureds. The insolvency or inability of any reinsurer to meet
its obligations may have a material adverse effect on the
business and results of operations of the Company. See
"Business -- Strategy" and "-- Reinsurance."
Reliance on Existing Management
The operations of the Company and the Insurance Companies
are largely dependent on existing management. The loss to the
Company or the Insurance Companies of one or more of their
existing executive officers could have a material adverse effect
on the Company's business and results of operations. The Company
has entered into employment agreements with the chief executive
officer and chief operating officer of the Company and the
Insurance Companies. See "Management of the Company -- Executive
Officers," "-- Certain Benefit Plans and Agreements."
Potential Benefits of Conversion to Management and Impact of
Purchases by Management and Stock Benefit Plans
It is currently expected that directors and executive
officers of the Insurance Companies and their associates will
subscribe for approximately 178,500 shares of the Common Stock to
be issued in the Conversion, or 6.9% thereof at the midpoint of
the Estimated Valuation Range, and that the ESOP will purchase
10% of the shares to be issued in the Conversion. In addition,
following the Conversion, and subject to shareholder approval,
the Company will implement the MRP and the Compensation Plan. At
the Total Minimum, Total Midpoint and Total Maximum, assuming
that all options to be granted under the Compensation Plan are
exercised, such persons would receive under the MRP and the Stock
Compensation Plan, in the aggregate, 309,400, 364,000 and 418,600
shares, respectively, or in each case, 12.7% of the Common Stock
issued in the Conversion and outstanding after such issuance and
exercise. In addition to the possible financial benefits under
the ESOP, MRP and Compensation Plan, management could benefit
from certain statutory and regulatory provisions, as well as
certain provisions in the Company's Articles of Incorporation and
Bylaws, that may tend to promote the continuity of existing
management and discourage certain acquisition proposals.
As a result of the foregoing, management could acquire a
substantial interest in the Company and, if each member of
management were to act consistently with each other, could have
significant influence over the outcome of the election of
directors and any other shareholder vote, especially a vote on
matters requiring the approval of 80% of the outstanding Common
Stock, such as certain business combinations. Management might
thus have the power to authorize actions that may be viewed as
contrary to the best interests of non-affiliated holders of
Common Stock and might have substantial power to block actions
that such holders may deem to be in their best interests. See
"Pro Forma Data," "Management -- Certain Benefit Plans and
Agreements," "The Conversion -- Proposed Management Purchases,"
and "Certain Restrictions on Acquisition of the Company."
Risk of Delayed Offering
The Company and Mercer Mutual expect to complete the
Conversion within the time periods indicated in this Prospectus.
Nevertheless, it is possible, although not anticipated, that
adverse market, economic or regulatory conditions, or other
factors could significantly delay the completion of the
Conversion and result in increased Conversion costs or in changes
in the Estimated Valuation Range. The Subscription and Community
Offerings could be extended to ______________, 1998. If the
Conversion is not completed within 45 days after _______________,
1998, the Offerings will be terminated and all funds held will be
promptly returned without interest. See "The Conversion -- "The
Conversion Offerings" and "-- Purchases in the Conversion
Offerings."
Dilutive Effect of Stock Options and MRP
The Compensation Plan will be subject to shareholder
approval at the Company's first annual meeting of shareholders to
be held after the Conversion. Because the shares of Common Stock
issued pursuant to the exercise of options granted under the
Compensation Plan would consist of newly issued shares, upon the
exercise of options granted under the Compensation Plan, the
interests of existing shareholders would be diluted. In
addition, if the MRP is unable to purchase shares of Common Stock
at a satisfactory price in the market, in an amount equal to 4%
of the Common Stock issued in the Conversion, the Company may
issue authorized but unissued shares of Common Stock to the MRP
to enable the MRP to require such amount of shares. Such newly
issued shares would dilute the interests of existing
shareholders. See "-- Potential Benefits of Conversion to
Management and Impact of Purchases by Management and Stock
Benefit Plans," "Pro Forma Data" and "Management -- Certain
Benefit Plans and Agreements -- Stock Compensation Plan" and " --
Management Recognition Plan."
Articles of Incorporation, Bylaw and Statutory Provisions that
Could Discourage Hostile Acquisitions of the Company
The Company's Articles of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging a
non-negotiated tender or exchange offer for the Common Stock, a
proxy contest for control of the Company, the assumption of
control of the Company by a holder of a large block of Common
Stock or the removal of the Company's management, all of which
certain shareholders might deem to be in their best interests.
These provisions include, among other things (i) the
classification of the terms of the members of the Board of
Directors, (ii) supermajority provisions for the approval of
certain business combinations and the amendment of the Articles
of Incorporation or Bylaws of the Company, (iii) elimination of
cumulative voting in the election of directors, and
(iv) restrictions on the voting of the Company's equity
securities by any individual, entity or group owning more than
10% of the Common Stock. The provisions in the Company's
Articles of Incorporation requiring a supermajority vote for the
approval of certain business combinations and containing
restrictions on voting of the Company's equity securities provide
that the supermajority voting requirements and voting
restrictions do not apply to business combinations and
acquisitions of Common Stock meeting specified Board of Director
approval requirements. The Articles of Incorporation also
authorize the issuance of 5,000,000 shares of preferred stock as
well as additional shares of Common Stock. These shares could be
issued without shareholder approval on terms or in circumstances
that could deter a future takeover attempt.
In addition, the Pennsylvania Business Corporation Law (the
"Pennsylvania BCL") provides for certain restrictions on the
acquisition of the Company, and Pennsylvania law contains various
restrictions on acquisitions of control of insurance holding
companies.
The Articles of Incorporation, Bylaw and statutory
provisions, as well as certain other provisions of state and
federal law, may have the effect of discouraging or preventing a
future takeover attempt not supported by the Company's Board of
Directors in which shareholders of the Company otherwise might
receive a substantial premium for their shares over then-current
market prices. For a detailed discussion of those provisions,
see "Management -- Certain Benefit Plans and Agreements,"
"Certain Restrictions on Acquisition of the Company," "Certain
Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws" and "Description of Capital Stock."
Possible Adverse Income Tax Consequences of the Distribution of
Subscription Rights
Mercer Mutual has received a letter from Sheshunoff which
states that, under the Appraisal, subscription rights granted to
Eligible Policyholders have no value. However, the Appraisal is
not binding on the Internal Revenue Service ("IRS"). If the
subscription rights granted to Eligible Policyholders are deemed
to have an ascertainable value, receipt of such rights could
result in taxable gain to those Eligible Policyholders who
receive or exercise the subscription rights in an amount equal to
such value. Additionally, Mercer Mutual could recognize a gain
for tax purposes on such distribution. Whether subscription
rights are considered to have ascertainable value is an
inherently factual determination. See "The Conversion -- Effects
of Conversion on Policyholders" and "-- Tax Effects."
Absence of Prior Market for the Common Stock
The Company has never issued capital stock, and consequently
there is no established market for the Common Stock. The Company
has received preliminary approval to have the Common Stock quoted
on the Nasdaq National Market under the symbol "MRCR," upon
completion of the Conversion. However, there can be no assurance
that an active and liquid trading market for the Common Stock
will develop or that, if one develops, it will continue, nor is
there any assurance that persons purchasing Common Stock will be
able to sell the Common Stock at or above the Purchase Price.
See "Market for the Common Stock."
USE OF PROCEEDS
The Company has received Pennsylvania Department approval to
contribute $5.0 million of net proceeds from the Offering to
Mercer Mutual in exchange for all of its capital stock. The
Company will retain the balance of the net proceeds, from which
it will fund a loan to the ESOP in the amount necessary to
purchase 10% of the shares of Common Stock sold in the Offering
(the "ESOP Loan"). The amount of the ESOP Loan may range from
$2.2 million to $3.3 million based on a sale of 221,000 shares to
the ESOP (at the Total Minimum) and 332,222 shares to the ESOP
(at the Total Maximum plus the shares sold to the ESOP),
respectively, at the Purchase Price. It is anticipated that the
ESOP Loan will have a ten year term with interest payable at the
prime rate as published in The Wall Street Journal on the closing
date of the Conversion. The ESOP Loan will be repaid principally
from Mercer Mutual's contributions to the ESOP and from any
dividends paid on the unallocated shares of Common Stock held by
the ESOP. See "Management of the Company -- Certain Benefit
Plans and Agreements -- Employee Stock Ownership Plan."
The Company also intends to use a portion of the net
proceeds of the Offerings to fund the purchase by the MRP, if
implemented, in the open market of a number of shares of Common
Stock equal to 4% of the Common Stock issued in the Conversion.
Assuming that the shares of Common Stock purchased by the MRP in
the open market are purchased at the Purchase Price, from
$884,000 (at the Total Minimum) to $1.3 million (at the Total
Maximum, plus the shares sold to the ESOP) of the net proceeds of
the Offerings would be used to purchase shares for the MRP.
Implementation of the MRP requires shareholder approval, which is
expected to be sought at the first annual meeting of shareholders
to be held no earlier than six months following the Conversion.
See "Pro Forma Data" and "Management of the Company -- Certain
Benefit Plans and Agreements -- Management Recognition Plan."
The remaining net proceeds retained by the Company will be
available for a variety of corporate purposes, including
additional capital contributions, future acquisitions and
diversification of business and dividends to shareholders.
The net proceeds used to acquire the stock of Mercer Mutual
will become part of Mercer Mutual's capital, thereby expanding
underwriting capacity and permitting diversification of its
business. Mercer Mutual intends to cause a portion of the net
proceeds it receives from the Company to be contributed to MIC to
enable MIC to expand its New Jersey business, beyond workers'
compensation insurance to include the same types of insurance
currently written by Mercer Mutual. Any payment of dividends by
Mercer Mutual to the Company will be limited by Pennsylvania
regulatory restrictions on capital distributions by Mercer
Mutual. See "Business -- Regulation."
With the exception of the ESOP Loan, the funding of the MRP,
and the capital contribution to MIC, the Company and Mercer
Mutual currently have no specific plans, arrangements or
understandings regarding the use of the net proceeds from the
Offering. See "Dividend Policy" and "Management of the Company -
- - Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
The amount of proceeds from the sale of Common Stock in the
Offering will depend upon the total number of shares actually
sold, the relative percentages of Common Stock sold in the
Subscription, Community and Syndicated Community Offerings and
the actual expenses of the Conversion. As a result, the net
proceeds from the sale of Common Stock cannot be determined until
the Conversion is completed. Set forth below are the estimated
net proceeds to the Company, assuming the sale of Common Stock at
the minimum, midpoint and maximum of the Estimated Valuation
Range, and at the maximum of the Estimated Valuation Range plus
the shares to be issued to the ESOP in an amount equalling 10% of
the shares issued in the Conversion, based upon the following
assumptions: (i) shares of Common Stock will be sold as follows:
(a)(1) 10% of the shares will be sold to the ESOP and (2) 178,500
shares will be sold to the directors, officers and employees of
the Company and Mercer Mutual, with respect to which no
commission will be paid to Sandler O'Neill and (b) the remaining
shares will be sold to policyholders and the community with
respect to which the Company will pay a 2.0% commission to
Sandler O'Neill; (ii) the purchase of the shares sold to the ESOP
will be financed with the proceeds of the ESOP Loan from the
Company; and (iii) other Conversion expenses, not including sales
commissions, will be approximately $1.2 million. The foregoing
assumption that all shares will be purchased in the Subscription
Offering is illustrative only and is based upon one (and the
only) recent comparable transaction. Actual expenses may vary
from those estimated.<PAGE>
<TABLE>
<CAPTION>
Maximum of
Minimum of Midpoint of Maximum of 2,990,000
2,210,000 2,600,000 2,990,000 shares at
shares at shares at shares at $10.00 per
$10.00 $10.00 $10.00 share plus
per share per share per share ESOP shares
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Gross proceeds of
Offering. . . . . . . . $22,100 $26,000 $29,900 $33,222
Less estimated
expenses, including
underwriting fees . . (1,587) (1,657) (1,727) (1,787)
------ ------- ------- -------
Estimated net proceeds. . 20,513 24,343 28,173 31,435
Less:
Common Stock to be
acquired by ESOP. . . (2,210) (2,600) (2,990) (3,322)
Common stock to be
acquired by MRP. . . (884) (1,040) (1,196) (1,329)
------ ------- ------- ------
Estimated net proceeds,
as adjusted. . . . . . $17,419 $20,703 $23,987 $26,784
======= ======= ======= =======
</TABLE>
DIVIDEND POLICY
Payment of dividends on the Common Stock is subject to
determination and declaration by the Company's Board of
Directors. Any dividend policy of the Company will depend upon
the financial condition, results of operations and future
prospects of the Company. At present, the Company has not made
any determination as to whether it intends to pay dividends to
its shareholders in the foreseeable future. There can be no
assurance that dividends will be paid or, if paid initially, that
they will continue to be paid in the future. In addition,
because the Company initially will have no significant source of
income other than dividends from Mercer Mutual and earnings from
the repayment of the ESOP Loan and investment of the net proceeds
of the Conversion retained by the Company, the payment of
dividends by the Company will depend significantly upon receipt
of dividends from Mercer Mutual, which may be subject to
regulatory restrictions. See "Business -- Regulation."
Unlike Mercer Mutual, the Company is not subject to
regulatory restrictions on the payment of dividends to
shareholders. The Company is subject to the requirements of the
Pennsylvania BCL, which generally permits dividends or
distributions to be paid as long as, after making the dividend or
distribution, the Company will be able to pay its debts in the
ordinary course of business and the Company's total assets will
exceed its total liabilities plus the amount that would be needed
to satisfy the preferential rights upon dissolution of holders of
stock with senior liquidation rights if the Company were to be
dissolved at the time the dividend or distribution is paid.
MARKET FOR THE COMMON STOCK
The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "MRCR," subject to the
completion of the Conversion.
The Company has never issued any capital stock.
Consequently, there is no established market for the Common
Stock. The development of a public market having the desirable
characteristics of depth, liquidity and orderliness, however,
depends upon the presence in the marketplace of a sufficient
number of willing buyers and sellers at any given time, over
which neither the Company nor any market maker has any control.
Accordingly, there can be no assurance that an established and
liquid market for the Common Stock will develop, or if one
develops, that it will continue. Sandler O'Neill has advised the
Company that it intends to make a market in the Common Stock
following the Conversion, but it is under no obligation to do so.
One of the requirements for continued quotation of the Common
Stock on the Nasdaq National Market is that there be at least two
market makers for the Common Stock. There can be no assurance
that there will be two or more market makers for the Common
Stock. Furthermore, there can be no assurance that purchasers
will be able to resell their shares of Common Stock at or above
the Purchase Price, or that quotations will be available on the
Nasdaq National Market, as contemplated.
CAPITALIZATION
The following table sets forth information regarding the
consolidated historical capitalization of Mercer Mutual and its
subsidiaries at September 30, 1997 and the pro forma consolidated
capitalization of the Company giving effect to the sale of Common
Stock at the Total Minimum, Total Midpoint and Total Maximum of
the Estimated Valuation Range, and at the Total Maximum of the
Estimated Valuation Range plus the shares to be issued to the
ESOP in an amount equalling 10% of the shares issued in the
Conversion, based upon the assumptions set forth under "Use of
Proceeds." For additional financial information regarding Mercer
Mutual, see the Consolidated Financial Statements and related
Notes appearing elsewhere herein. Depending on market and
financial conditions, the total number of shares to be issued in
the Conversion may be significantly increased or decreased above
or below the Total Midpoint of the Estimated Valuation Range. No
resolicitation of subscribers and other purchasers will be made
unless the final appraised value of Mercer Mutual is below the
Total Minimum or above the Total Maximum of the Estimated
Valuation Range. A change in the number of shares to be issued
in the Conversion may materially affect the Company's pro forma
capitalization. See "Use of Proceeds" and "The Conversion --
Stock Pricing and Number of Shares to be Issued."<PAGE>
<TABLE>
<CAPTION>
Pro Forma Consolidated
Capitalization of the Company
Based on the Sale of
---------------------------------
Historical 2,990,000
Consolidated shares at
Capitalization 2,210,000 2,600,000 2,990,000 $10.00 per
of Mercer shares at shares at shares at share plus
Mutual at $10.00 $10.00 $10.00 ESOP
September 30, 1997 per share per share per share shares
--------------------- --------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Long term debt -- -- -- -- --
Shareholders' equity(1):
Preferred stock,
authorized 5,000,000
shares; 0 shares
outstanding. . . . . . . . -- -- -- -- --
Common stock, no par value
per share: authorized -
15,000,000 shares; shares to
be outstanding - as
shown(2). . . . . . . . . . -- 20,513 24,343 28,173 31,435
Retained earnings . . . . . . 19,991 19,991 19,991 19,991 19,991
Unrealized gains. . . . . . . 1,995 1,995 1,995 1,995 1,995
Less:
Common stock to be acquired --
by ESOP(3). . . . . . . . . -- (2,210) (2,600) (2,990) (3,322)
Common stock to be acquired by
MRP (4) . . . . . . . . . . (884) (1,040) (1,196) (1,329)
------- ------- ------- ------- -------
Total . . . . . . . . . . . . 21,946 39,365 42,649 45,933 48,730
======= ======= ======= ======= =======
____________
</TABLE>
(1) Pro forma shareholders' equity is not intended to represent
the fair market value of the Common Stock, the net fair
market value of the Company's assets and liabilities or the
amounts, if any, that would be available for distribution to
shareholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of
shares to be sold in the Conversion and by other factors.
(2) Does not reflect additional shares of Common Stock that
could be purchased pursuant to the Compensation Plan, if
implemented, under which directors, executive officers and
other employees of the Company would be granted options to
purchase an aggregate amount of Common Stock equal to 10% of
the shares issued in the Conversion (260,000 shares at the
midpoint of the Estimated Valuation Range). Implementation
of the Compensation Plan requires shareholder approval,
which is expected to be sought at the first annual meeting
of shareholders to be held no earlier than six months
following the Conversion. See "Risk Factors -- Dilutive
Effect of Stock Options" and "Management of the Company --
Certain Benefit Plans and Agreements -- Stock Compensation
Plan"
(3) Assumes that 10% of the shares of Common Stock to be sold in
the Conversion are purchased by the ESOP, and that the funds
used to purchase such shares are borrowed from the Company.
Under GAAP, the aggregate Purchase Price of shares of Common
Stock to be purchased by the ESOP in the Offering represents
unearned compensation and is, accordingly, reflected as a
reduction of capital. As the ESOP Loan is repaid, shares
are released and allocated to ESOP participants' accounts,
and a corresponding reduction in the charge against capital
will occur. See " Pro Forma Data" and "Management of the
Company -- Certain Benefit Plans and Agreements -- Employee
Stock Ownership Plan." Data."
(4) Assumes the purchase by the MRP, if implemented, in the open
market at the Purchase Price of a number of shares equal to
4% of the shares issued in the Conversion. Shares purchased
by the MRP would be awarded to employees and directors of
the Company and are reflected as a reduction of
shareholders' equity. Implementation of the MRP requires
shareholder approval, which is expected to be sought at the
first annual meeting of shareholders to be held no earlier
than six months following the Conversion. See "Pro Forma
Data" and "Management of the Company -- Certain Benefit
Plans and Agreements -- Management Recognition Plan."
PRO FORMA DATA
The following pro forma condensed consolidated balance sheet
as of September 30, 1997 gives effect to the Conversion and
implementation of the ESOP and the MRP as if they had occurred as
of September 30, 1997 and assumes that 2,210,000 shares of Common
Stock (the minimum number of such shares required to be sold) are
sold in the Subscription Offering. The following pro forma
condensed consolidated statements of income for the year ended
December 31, 1996 and the nine months ended September 30, 1997
present consolidated operating results for Mercer Mutual as if
the Conversion and implementation of the ESOP and the MRP had
occurred as of January 1, 1996. Pursuant to the Plan, Mercer
Mutual will convert from a Pennsylvania-chartered mutual
insurance company to a Pennsylvania-chartered stock insurance
company and simultaneously issue shares of its capital stock to
the Company in exchange for a portion of the net proceeds from
the sale of Common Stock in the Offerings. The Conversion will
be accounted for as a simultaneous reorganization,
recapitalization and share offering which will not change the
historical accounting basis of Mercer Mutual's consolidated
financial statements. Completion of the Conversion is contingent
on the sale of a minimum of 2,210,000 shares of Common Stock. If
less than 2,210,000 shares of Common Stock are sold in the
Conversion Offerings, the remaining shares, up to a maximum of
2,990,000 shares (not including shares sold to the ESOP), will be
sold in the Syndicated Community Offering.
The unaudited pro forma information does not purport to
represent what Mercer Mutual's consolidated financial position or
results of operations actually would have been had the Conversion
and implementation of the ESOP and the MRP occurred on the dates
indicated, or to project Mercer Mutual's consolidated financial
position or results of operations for any future date or period.
The pro forma adjustments are based on available information and
certain assumptions that Mercer Mutual believes are factually
supportable and reasonable under the circumstances. The
unaudited pro forma consolidated financial information should be
read in conjunction with the accompanying notes thereto, and the
other consolidated financial information pertaining to Mercer
Mutual included elsewhere in this Prospectus.
The pro forma adjustments and pro forma consolidated amounts
are provided for informational purposes only. Mercer Mutual's
consolidated financial statements will reflect the effects of the
Conversion and implementation of the ESOP only from the dates
such events occur.<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 1997
(in thousands)
Historical Pro Forma
Consolidated Adjusted Consolidated(4)
ASSETS
Investments:
Fixed income securities . $35,251 $17,419(1) $52,670
Equity securities . . . . 9,926 _______ 9,926
Total investments . . . . 45,177 17,419 62,596
Cash and cash equivalents . 2,266 2,266
Receivables . . . . . . . . 17,335 17,335
Prepaid reinsurance premiums 2,995 2,995
Deferred policy acquisition
costs, and other assets . 5,485 _______ 5,485
Total assets . . . . . . . $73,258 $17,419 $90,677
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Losses and loss adjustment
expenses . . . . . . . $32,812 $32,812
Unearned premiums . . . . 14,796 14,796
Other liabilities . . . . 3,704 _______ 3,704
Total liabilities . . . . 51,312 0 51,312
Shareholders' equity:
Common stock. . . . . . . -- 20,513 20,513
Unearned Employee Stock
Ownership Plan
compensation. . . . . . -- (2,210)(2) (2,210)
Unearned Management
Recognition Plan
compensation. . . . . . -- (884)(3) (884)
Retained earnings . . . . 19,991 19,991
Unrealized gains in
investments net of
deferred income taxes . 1,955 1,955
Total shareholders' 21,946 17,419 39,365(5)
equity . . . . . . . .
Total liabilities and
stockholders' equity . . $73,258 $17,419 $90,677
See accompanying Notes to Unaudited Pro Forma Consolidated
Balance Sheet
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(in thousands, except per share data)
(1) The pro forma adjustment to reflect the Conversion is as
follows (in thousands):
Issuance of 2,210,000 shares at $10/share $22,100
Estimated conversion expenses (1,587)
Net proceeds from Conversion $20,513
Less: Common Stock to be purchased
by ESOP (2,210)
Common Stock to be purchased
by MRP (884)
Net investable proceeds $17,419
(2) Upon completion of the Conversion, the Company will
implement an ESOP for the benefit of participating
employees. The ESOP will borrow funds from the Company in
an amount sufficient to purchase 10% of the Common Stock
issued in the Conversion or $2,210. The ESOP Loan will bear
interest at a per annum rate equal to the prime rate as
published in The Wall Street Journal on the closing date of
the Conversion, which rate is currently 8.5%. The ESOP Loan
will require monthly principal payments of approximately $18
for a term of ten years. The amount of this borrowing has
been reflected as a reduction from gross proceeds to
determine estimated net investable proceeds. Mercer Mutual
intends to make contributions to the ESOP at least equal to
the principal and interest requirement of the ESOP Loan. As
the ESOP Loan is repaid, shareholders' equity will be
increased. Mercer Mutual's payment of amounts due under the
ESOP Loan is based upon equal installments of principal over
a 10-year period, assuming a combined federal and state
income tax rate of 34.0%. Interest income earned by the
Company on the ESOP Loan offsets the interest paid by Mercer
Mutual on the ESOP Loan. The ESOP expense reflects adoption
of Statement of Position 93-6, which will require
recognition of expense based upon shares committed to be
allocated under the ESOP, and the exclusion of unallocated
shares from earnings per share computations. The valuation
of shares committed to be allocated under the ESOP, would be
based upon the average market value of the shares during the
year, which, for purposes of this calculation, was assumed
to be equal to the Purchase Price. See "Management of the
Company -- Certain Benefit Plans and Agreements -- Employee
Stock Ownership Plan."
(3) Reflects the purchase by the MRP of 88,400 shares in the
open market at the Purchase Price. Under the MRP, which is
subject to shareholder approval, share awards will vest at
the rate of 20% annually over a five year period. The
dollar amount of Common Stock to be issued to the MRP will
represent unearned compensation. As the Company accrues
compensation expense to reflect the vesting of such shares,
unearned compensation will be reduced accordingly. If the
MRP is unable to purchase, at a satisfactory price, shares
of Common Stock in the open market in an amount equal to 4%
of the Common Stock issued in the Conversion, the Company
may issue shares to the MRP from its authorized but unissued
shares of Common Stock to enable the MRP to acquire such
amount of shares. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Effect
of Conversion on the Company's Future Financial Condition
and Results of Operations," and "Management of the Company -
- Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(4) The unaudited pro forma condensed consolidated balance
sheet, as prepared, gives effect to the sale of Common Stock
at the minimum of the Estimated Valuation Range based upon
the assumptions set forth under "Use of Proceeds." The
following table provides a comparison between the sale of
Common Stock at the Total Minimum and Total Maximum of the
Estimated Valuation Range and at the Total Maximum of the
Estimated Valuation Range plus shares issued to the ESOP in
the amount equal to 10% of the shares issued in the
Conversion.
Maximum
Plus
Minimum Maximum ESOP
Net proceeds from Conversion $20,513 $28,173 $31,435
Common Stock to be
acquired by ESOP $ 2,210 $ 2,990 $ 3,322
Common Stock to be
acquired by MRP $ 884 $ 1,196 $ 1,329
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Consolidated Adjustments(1) Consolidated(5)
<S> <C> <C> <C>
Revenue:
Net premiums earned. . . $20,634 $20,634
Investment income,
net of expenses . . . . 2,289 2,289
Net realized investment
gains. . . . . . . . . 596 596
Other revenue. . . . . . 155 ________ 155
Total revenue. . . . . 23,674 0 23,674
Expenses:
Losses and loss adjustment
expenses . . . . . . . 14,801 14,801
Amortization of deferred
policy acquisition costs 5,491 5,491
Operating expenses . . . 2,571 398(2)(3) 2,969
Total expenses . . . . 22,863 398 23,261
Income before taxes. . . . 811 (398) 413
Income taxes . . . . . . . 171 (135)(4) 36
Net income . . . . . . . . $ 640 $ (263) $ 377
Earnings per share data:
Net income per share of
Common Stock $ 0.20
Weighted average number
of shares of Common
Stock outstanding 1,920,490(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income.
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended September 30, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
Consolidated Adjustments(1) Consolidated(5)
<S> <C> <C> <C>
Revenue:
Net premiums earned. . . $13,288 $13,288
Investment income, net
of expenses. . . . . . 1,793 1,793
Net realized investment
gains. . . . . . . . . 483 483
Other revenue. . . . . . 144 ______ 144
Total revenue. . . . . . 15,708 0 15,708
Expenses:
Losses and loss adjustment
expenses . . . . . . . 8,038 8,038
Amortization of deferred
policy acquisition costs 3,533 3,533
Operating expenses . . . 1,928 299(2)(3) 2,227
Total expenses . . . . . 13,499 299 13,798
Income before income taxes 2,209 (299) 1,910
Income taxes . . . . . . . 694 (101)(4) 593
Net income . . . . . . . . $ 1,515 $ (198) $ 1,317
======= ====== =======
Earnings per share data:
Net income per share of
Common Stock . . . . . $ 0.67
Weighted average number
of shares of Common
Stock outstanding. . . 1,955,298(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(1) Does not reflect any income from the investment of net
investable proceeds assumed to be received as of January 1,
1996, as such income is not "factually supportable" as that
term is used in the Securities Exchange Commission's Rules
and Regulations. If such proceeds were invested at 4.97%,
pro forma net income (after tax), as reported herein, would
have increased by $571 and $428 for the periods ended
December 31, 1996 and September 30, 1997, respectively, and
pro forma net income per share, as reported herein, would
have increased by $0.30 share and $0.22 share for the
periods ended December 31, 1996 and September 30, 1997,
respectively.
(2) Pro forma adjustment to recognize compensation expense under
ESOP for shares of Common Stock committed to be released to
participants as the principal balance of the ESOP Loan is
repaid. Interest income earned by the Company on the ESOP
Loan offsets the interest expense paid by Mercer Mutual
under the ESOP Loan at the assumed rate of 8.5% for 10
years. Therefore, no pro forma adjustment is required with
respect to the interest paid on the ESOP Loan.
(3) Pro forma adjustment to reflect compensation expense
associated with the grant of up to 88,400 shares awarded
under the MRP, which is subject to shareholder approval,
assuming that share awards have a value of $10.00 per share.
Under the MRP, share awards will vest at the rate of 20%
annually over a five-year period. See "Management's
Discussion and Analysis of Financial Condition and Results
of Operations -- Effect of Conversion on the Company's
Financial Condition and Results of Operations."
(4) Adjustment to reflect the federal income tax effects of (2)
and (3) above.
(5) The unaudited pro forma condensed consolidated statements of
income, as prepared, give effect to the sale of Common Stock
at the minimum of the Estimated Valuation Range based upon
the assumptions set forth under "Use of Proceeds." The
following table provides a comparison between the sale of
Common Stock at the minimum and maximum of the Estimated
Valuation Range.
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
Minimum Maximum Minimum Maximum
<S> <C> <C> <C> <C>
Compensation expense $398 $538 $299 $403
Net income $377 $285 $1,317 $1,249
Net income per share of
Common Stock $0.20 $0.11 $0.67 $0.47
Weighted average number of shares
of Common Stock outstanding 1,920,490 2,598,310 1,955,298 2,645,403
</TABLE>
(4) Calculation of weighted average number of shares
outstanding:
<TABLE>
<CAPTION>
Total Shares Less: Uncollected Less: Uncollected Shares
Issued ESOP Shares MRP Shares Outstanding
<S> <C> <C> <C> <C>
January 1, 1996 2,210,000 (221,000) (88,400) 1,900,600
Shares allocated -- 22,100 17,680 39,780
December 31, 1996 2,210,000 (198,900) (70,720) 1,940,380
Shares allocated -- 16,575 13,260 29,835
September 30, 1997 2,210,000 (182,325) (57,460) 1,970,215
========= ========= ========= =========
</TABLE>
ESOP and MRP shares are allocated evenly to plan
participants throughout each of the periods and therefore the
weighted average number of shares outstanding is determined by
adding beginning of period and end of period shares outstanding
and dividing by two.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly,
has no results of operations. As a result, this discussion
relates to the financial condition and results of operations of
Mercer Mutual and its subsidiaries on a consolidated basis.
The Insurance Companies underwrite property and casualty
insurance, including homeowners, commercial multi-peril, general
liability and other lines of business, in New Jersey and
Pennsylvania. The Insurance Companies market their products
through independent agencies. Historically, due to the
concentration of the Insurance Companies' business in New Jersey,
the Insurance Companies' results have been influenced by
weather-related property losses in that state. These results
have also been influenced by other factors affecting the property
and casualty insurance industry in general, such as competition,
catastrophic events, regulation, general economic conditions and
changes in the investment environment.
The Insurance Companies are taking measures to address the
impact of the "Year 2000" issue on its information systems. The
Year 2000 issue, which is common to most businesses, concerns the
inability of certain information systems, primarily certain
computer software programs, to properly recognize and process
date sensitive information beyond the year 1999. The Insurance
Companies outsource the processing of all premium, loss and
billing transactions. Under their agreement with the provider of
such services, the provider is obligated to incur all software
related costs to the make its system Year 2000 compliant. The
provider has prepared a detailed schedule of functions to be
performed in its compliance project. The expected completion of
the project is scheduled for December 1998. The Insurance
Companies are obligated to incur only the hardware cost
associated with implementing the changes required by the service
provider. The hardware costs are not expected to be material.
Other computer programs utilized by the Insurance Companies, such
as accounting packages and investment packages, are either Year
2000 compliant or will be Year 2000 compliant in the near future
at no significant cost to the Insurance Companies.
This analysis of Mercer Mutual's consolidated financial
condition and results of operations, as well as the selected
financial data set forth in the table below, should be read in
conjunction with Mercer Mutual's Consolidated Financial
Statements and the other financial data regarding Mercer Mutual
found elsewhere in this Prospectus. The discussion covers Mercer
Mutual's consolidated financial condition and results of
operations for the nine months ended September 30, 1997 and
September 30, 1996 and for the three years ended December 31,
1996. Mercer Mutual's fiscal year ends on December 31, and
reference herein to a particular year means, unless otherwise
stated, the fiscal year ended on December 31 of that year. For
an explanation of certain terms used in this discussion and
analysis that are commonly used in the insurance industry, see
the "Glossary to Selected Insurance Terms."
<TABLE>
<CAPTION>
Mercer Insurance Group, Inc.
MD & A Selected Financial Data
Nine Months Ended
September 30,
(Unaudited) Year ended December 31,
% % %
1997 change 1996 1996 change 1995 change 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written 21,504 15.7% 18,580 24,958 1.0% 24,699 1.4% 24,355
Assumed premiums written 426 (94.4%) 7,592 5,013 (51.3%) 10,287 7.6% 9,564
Ceded premiums written 9,026 (16.5%) 10,814 9,847 (28.3%) 13,741 (5.5%) 14,542
------ ------- ------- ------ ------
Net premiums written 12,904 (16.0%) 15,358 20,124 (5.3%) 21,245 9.6% 19,377
Change in unearned
premiums 384 114 510 (428) (696)
------ ------- ------- ------ ------
Net premiums earned 13,288 (14.1%) 15,472 20,634 (0.9%) 20,817 11.4% 18,681
Net invested income 1,793 5.2% 1,704 2,289 7.4% 2,132 12.0% 1,904
Net realized investment
gains 483 18.1% 409 596 1024.5% 53 (80.9%) 277
Other income 144 5.1% 137 155 (3.7%) 161 (3.0%) 166
------ ------- ------- ------ ------
Total revenue 15,708 (11.4%) 17,722 23,674 2.2% 23,163 10.2% 21,028
------ ------- ------- ------ ------
Losses and expenses:
Loss and loss adjustment
expenses 8,038 (28.6%) 11,253 14,801 11.3% 13,296 (5.7%) 14,107
Other underwriting
expenses 5,461 (5.2%) 5,762 8,062 (3.6%) 8,360 (6.9%) 8,976
------- ------- ------- ------ ------
Total expenses 13,499 (20.7%) 17,015 22,863 5.6% 21,656 (6.2%) 23,083
Income (loss) before
federal income taxes 2,209 212.4% 707 811 (46.2%) 1,507 173.3% (2,055)
Federal income tax
expenses (benefit) 694 301.2% 173 171 (53.7%) 369 154.2% (681)
------- ------- ------- ------ ------
Net income (loss) 1,515 183.7% 534 640 (43.8%) 1,138 182.8% (1,374)
======= ======= ======= ====== ======
Loss and loss adjustment
expense ratio 60.5% 72.7% 71.7% 63.9% 75.5%
Expense ratio 41.1% 37.2% 39.1% 40.2% 48.0%
Combined ratio 101.6% 109.9% 110.8% 104.1% 123.5%
</TABLE>
Results of Operations for the Nine Months Ended September 30,
1997 Compared to the Nine Months Ended September 30, 1996
Premiums - Mercer Mutual experienced an increase in direct
premiums written for the nine months ended September 30, 1997 of
$2.9 million or 15.7%, as compared to the same period in 1996,
which reflects Mercer Mutual's strategy to increase its
commercial business. Commercial lines premiums increased by
$2.1 million, or 30.5%, for the nine months ended September 30,
1997 over the comparable prior period. The increase in
commercial lines business reflects the introduction of a
religious institution program and a commercial automobile program
in early 1997, combined with enhancements to existing commercial
products. In addition to the commercial lines increase,
homeowners premiums increased in the nine month period ended
September 30, 1997, as compared to the prior period, as a result
of an increase in certain rates. Territorial rating by county
was introduced for Mercer Mutual's New Jersey homeowners product
to better reflect Mercer Mutual's exposures. This rate change
resulted in an increase of 8.8% in direct homeowners premiums
written despite a decrease in the number of homeowners policies
written.
Assumed premiums written decreased by $7.2 million, or
94.4%, for the nine months ended September 30, 1997 as compared
to the same period in 1996. This decrease reflects the
termination of Mercer Mutual's participation in the New Jersey
Homeowners Pool (the "Homeowners Pool") as of December 31, 1996.
See "Business -- Reinsurance" for a description of the Homeowners
Pool and Mercer Mutual's other reinsurance programs.
Ceded premiums written decreased $1.8 million, or 16.5%,
for the nine months ended September 30, 1997 compared to the nine
months ended September 30, 1996, principally because of the
termination of the Homeowners Pool. The decrease in ceded
premiums resulting from the Homeowners Pool termination was
somewhat offset by an increase in premiums ceded to other
reinsurance programs. The increase in premiums subject to other
reinsurance is attributable to (i) the increase in commercial
lines premium and (ii) the reinsurance of the homeowners business
under other programs after termination of the Homeowners Pool.
Mercer Mutual also entered into a new quota share reinsurance
program for the homeowners business, which resulted in a
reinsurance portfolio adjustment at the beginning of the year.
The portfolio adjustment resulted in additional ceded premium
representing ceded unearned premiums from policies written in
prior periods which were reinsured under the terms of the new
program.
Net premiums written decreased $2.5 million or 16.0%, to
$12.9 million for the nine months ended September 30, 1997 from
the nine months ended September 30, 1996. For the same
comparative period, net premiums earned decreased by $2.2
million, or 14.1%, to $13.3 million. The decrease in net
premiums written and net premiums earned for the nine months
ended September 30, 1997 is principally attributable to the
termination of the Homeowners Pool and the introduction of the
homeowners quota share reinsurance program.
Net Investment Income - Net investment income increased
$89,000, or 5.2%, to $1.8 million for the nine months ended
September 30, 1997 as compared to the same period in 1996. Fixed
income securities increased $287,000, or 0.8%, to $35.3 million
for the nine months ended September 30, 1997. Mercer Mutual
continues to principally invest its available funds in taxable
fixed income securities which generally produce higher yields
than nontaxable securities. For the nine months ended
September 30, 1997, the yield on fixed income securities was 6.7%
compared to 6.8% for the same period in 1996.
Net Realized Investment Gains - Net realized investment
gains increased by $74,000 for the nine months ended
September 30, 1997 compared to the nine months ended
September 30, 1996. This increase principally reflects the
continued favorable equity market conditions in which Mercer
Mutual participates.
Underwriting Results - For the nine months ended
September 30, 1997, Mercer Mutual had an underwriting loss of
$211,000 and a combined ratio of 101.6% compared to an
underwriting loss of $1.5 million and a combined ratio of 110%
for the nine months ended September 30, 1996. The decrease in
underwriting loss is largely attributable to the improved winter
weather conditions in 1997. In addition, the improvement in
underwriting results reflects Mercer Mutual's strategy to
increase its casualty business, which is less sensitive to
weather conditions.
Losses and Loss Adjustment Expenses - Net losses and loss
adjustment expenses incurred decreased by $3.2 million, or 28.6%,
to $8.0 million for the nine months ended September 30, 1997 from
the same period in 1996. Loss and loss adjustment expenses were
60.5% of net premiums earned for the nine months ended
September 30, 1997 compared to 72.7% for the nine months ended
September 30, 1996. The favorable improvement in this ratio is
largely attributable to the lack of severe weather conditions in
the 1997 period. The 1997 winter conditions were among the
mildest in recent history, as compared to the severe winter
conditions of 1996 which resulted in increased property loss
claims. In January 1996, a damaging blizzard struck Mercer
Mutual's operating region. The net cost of the blizzard was
approximately $1 million in additional claims. Additional
smaller localized severe conditions also attributed to losses
during the nine months ended September 30, 1996.
Underwriting Expenses - Underwriting expenses decreased by
$301,000, or 5.2%, to $5.5 million for the nine months ended
September 30, 1997 from the same period in 1996. This decrease
was partially attributable to a reduction in net commissions,
which resulted from changes in Mercer Mutual's reinsurance
program. The new homeowners quota share program pays a higher
ceding commission to Mercer Mutual than was available as a
participant in the Homeowners Pool. In addition, the termination
of the Homeowners Pool resulted in a substantial reduction in
assumed commissions. Also, favorable weather conditions during
nine months ended September 30, 1997 resulted in additional ceded
commissions recognized under profit commission arrangements.
Federal Income Tax Expense - Federal income tax expense was
$694,000 for the nine months ended September 30, 1997 compared to
$173,000 for the same period in 1996, which is attributable to
the increase in net income before taxes.
Net Income - Mercer Mutual had net income of $1.5 million
for the nine months ended September 30, 1997, compared to
$534,000 for the same period in 1996, primarily as a result of
the factors discussed above.
Results of Operations for the Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
Premiums - Mercer Mutual experienced a 1.0% increase in
direct premiums written in the year ended December 31, 1996 to
$25.0 million, as compared to $24.7 million for the year ended
December 31, 1995. Premiums written under commercial line
classifications increased during 1996 as Mercer Mutual
substantially increased its underwriting in this direction. The
increase in commercial lines business was somewhat offset by a
reduction in business caused by the termination of unprofitable
agencies.
Assumed premiums written decreased by $5.3 million in 1996,
reflecting the termination of Mercer Mutual's participation in
the Homeowners Pool. See "Business -- Reinsurance." As a result
of this termination, unearned premium reserves assumed from the
other pool participants were returned on December 31, 1996, which
resulted in the reduction of assumed written premiums for the
year.
Ceded premiums written decreased $3.9 million for the year
ended December 31, 1996 compared to the year ended December 31,
1995. As a result of the termination of the Homeowners Pool,
unearned premium reserves ceded to the other pool participants
were returned to Mercer Mutual. The return of ceded unearned
premium reserves was offset by an increase in catastrophe
reinsurance premiums, as Mercer Mutual restructured its
catastrophe reinsurance coverage.
Net premiums written decreased $1.1 million, or 5.3%, to
$20.1 million for the year ended December 31, 1996 from the year
ended December 31, in 1995. For the same comparative periods,
net premiums earned decreased by $183,000, or 0.9%, to
$20.6 million. The decrease in net premiums earned was the
result of the previously discussed increase in direct premiums
written, decrease in premiums assumed from reinsurers, decrease
in premiums ceded to reinsurers and a decrease in the change in
unearned premiums of $938,000.
Net Investment Income - Net investment income increased
$158,000, or 7.4%, to $2.3 million for the year ended
December 31, 1996 from the year ended December 31, 1995.
Reflecting Mercer Mutual's continued strategy to principally
invest in high grade fixed income securities, fixed income
securities increased $1.3 million, or 4.0%, to $35.0 million for
the year ended December 31, 1996 from the year ended December 31,
1995. For the year ended December 31, 1996, the yield on fixed
income securities remained at the 6.8% level attained for the
year ended December 31, 1995. As a result, income from fixed
income securities increased by $258,000.
Due to increased claim activity from the 1996 winter
conditions, cash and cash equivalents decreased $892,000 to
$2.7 million for the year ended December 31, 1996 from the year
ended December 31, 1995. This resulted in a decrease in 1996 of
investment income from cash and cash equivalents of $50,000.
Income from other investments was down slightly in 1996, from
$54,000 in 1995 to $46,000 in 1996, as funds have principally
been reinvested in fixed income securities.
Net Realized Investment Gains - Net realized investment
gains were $596,000 for the year ended December 31, 1996 compared
to $53,000 for the year ended December 31, 1995. Investment
gains in 1996 reflect more favorable equity market conditions,
and compare with smaller gains recognized in 1995. Investments
gains in 1995 from equity securities were offset by investment
losses recognized on the disposal of certain collateralized
mortgage obligations ("CMOs"). This reflected Mercer Mutual's
restructuring of its fixed income portfolio in 1995 to less
interest rate sensitive products.
Underwriting Results - For the year ended December 31, 1996,
Mercer Mutual had an underwriting loss of $2.2 million and a
combined ratio of 110.8% compared to an underwriting loss of
$839,000 and a combined ratio of 104.1% for the year ended
December 31, 1995. The increased underwriting loss for the year
ended December 31, 1996 was primarily attributable to severe
winter weather conditions in New Jersey.
Losses and Loss Adjustment Expenses - Net losses and loss
adjustment expenses incurred increased by $1.5 million, or 11.3%,
to $14.8 million for the year ended December 31, 1996 from the
year ended December 31, 1995. Loss and loss adjustment expenses
were 71.7% of net premiums earned for the year ended December 31,
1996 compared to 63.9% for the year ended December 31, 1995.
Affecting losses and loss adjustment expenses in 1996 were
severe winter weather conditions which resulted in increased
property loss claims. In January 1996, a damaging blizzard
struck Mercer Mutual's operating region. The net cost of the
blizzard was approximately $1 million in additional claims.
Mercer Mutual was further impacted by additional smaller
localized severe conditions. The difference in non-storm
activity between 1996 and 1995 was further influenced by
favorable weather conditions in 1995.
Underwriting Expenses - Underwriting expenses decreased by
$298,000, or 3.6%, for the year ended December 31, 1996 to
$8.1 million for the year ended December 31, 1995. This decrease
was largely attributable to a reduction in net commissions
resulting from the restructuring of Mercer Mutual's reinsurance
programs. For the year ended December 31, 1996, Mercer Mutual
had an underwriting expense ratio of 39.1% compared to 40.2% for
the year ended December 31, 1995.
Federal Income Tax Expense - Federal income tax expense was
$171,000 for the year ended December 31, 1996 compared to
$369,000 for the year ended December 31, 1995. This decrease is
attributable to the decrease in net income before taxes for the
compared periods.
Net Income - Mercer Mutual had net income of $640,000 for
the year ended December 31, 1996 compared to $1.1 million for the
year ended December 31, 1995, primarily as a result of the
factors discussed above.
Results of Operations for the Year Ended December 31, 1995
Compared to Year Ended December 31, 1994
Premiums - Mercer Mutual experienced a slight increase in
direct premiums written of 1.4% for the year ended December 31,
1995, as compared to the year ended December 31, 1994. Increases
in direct business were somewhat offset by reduction in business
caused by the termination of unprofitable agencies in 1996, as
Mercer Mutual completed a re-underwriting of its commercial
business.
Assumed premiums written increased by $723,000 in the year
ended December 31, 1995, due to its participation in the
Homeowners Pool. See "Business -- Reinsurance." Mercer Mutual's
assuming participation percentage in the Homeowners Pool
increased in 1995 from 1994 based on historic participation
rates, resulting in increased assumed premiums written for the
year ended December 31, 1995.
Ceded premiums written decreased $801,000, or 5.5%, for the
year ended December 31, 1995 compared to the year ended
December 31, 1994. As of January 1, 1995, Mercer Mutual
significantly restructured much of its reinsurance program.
Through an increase in its per risk retention for casualty
business and by combining certain reinsurance coverages
previously separated, Mercer Mutual reduced the premiums ceded to
reinsurers. This reduction was somewhat offset by an increase in
cessions to the Homeowners Pool.
Net premiums written increased $1.9 million, or 9.6%, to
$21.2 million for the year ended December 31, 1995, as compared
to the year ended December 31, 1994. For the same comparative
periods, net premiums earned increased by $2.1 million, or 11.4%,
to $20.8 million. The increase in net premiums earned was the
result of the previously discussed increase in direct premiums
written, increase in premiums assumed from reinsurers, decrease
in premiums ceded to reinsurers and a decrease in the change in
unearned premiums of $268,000.
Net Investment Income - Net investment income increased
$228,000, or 12.0%, to $2.1 million for the year ended
December 31, 1995 as compared to the year ended December 31,
1994. Fixed income securities increased $7.3 million, or 27.9%,
to $33.6 million for the year ended December 31, 1995 from the
year ended December 31, 1994. This increase in such securities
reflected Mercer Mutual's strategy to principally invest its
funds in such securities. Within the fixed income category,
Mercer Mutual also repositioned many of its holdings from CMOs
and non-taxable securities to government securities. For the
year ended December 31, 1995, the yield on fixed income
securities was 6.8%, compared to a yield of 6.5% for the year
ended December 31, 1994. As a result, income from fixed income
securities increased by $239,000.
Mercer Mutual also reduced its investment in equity
securities during 1995. This reduction is part of Mercer
Mutual's strategy to prudently reduce its level of equity
holdings to a level more closely aligned with industry averages.
As a result of such reduction, investment income earned through
equity holdings decreased by $52,000 for the year ended December
31, 1995 compared with the year ended December 31, 1994.
Net Realized Investment Gains - Net realized investment
gains were $53,000 for the year ended December 31, 1995 compared
to $277,000 for the year ended December 31, 1994. Investment
gains in 1995 from equity securities were offset by investment
losses recognized on the disposal of CMOs. This reflected Mercer
Mutual's restructuring of its fixed income portfolio in 1995 to
less interest rate sensitive products.
Underwriting Results - For the year ended December 31, 1995,
Mercer Mutual had an underwriting loss of $839,000 and a combined
ratio of 104.1% compared to an underwriting loss of $4.4 million
and a combined ratio of 123.6% for the year ended December 31,
1994. The decrease in underwriting loss is attributable to the
improved winter weather conditions in 1995.
Losses and Loss Adjustment Expenses - Net losses and loss
adjustment expenses incurred decreased by $811,000, or 5.7%, to
$13.3 million for the year ended December 31, 1995, as compared
to the year ended December 31, 1994. Loss and loss adjustment
expenses were 63.9% of net premiums earned for the year ended
December 31, 1995 compared to 75.5% for the year ended
December 31, 1994.
The improvement in the 1995 loss and loss expense resulted
from the absence of severe weather conditions in 1995. The year
ended December 31, 1994 produced the highest number of claims in
Mercer Mutual's history. While the severe winter conditions of
1994 produced a number of significant loss events, none of the
individual events exceeded Mercer Mutual's retention level for
catastrophe reinsurance. Thus no catastrophe reinsurance
recoveries were made for these events. Mercer Mutual did
recognize recovery of losses under the terms of its aggregate
reinsurance contracts. Recoveries are made under the terms of
aggregate reinsurance when losses and loss adjustment expenses
for a calendar year exceed a predetermined level. Even with the
recovery under the aggregate reinsurance contract, net losses and
loss adjustment expenses reached the highest level in Mercer
Mutual's history.
Underwriting Expenses - Underwriting expenses decreased by
$617,000, or 6.9%, for the year ended December 31, 1995 to
$8.4 million for the year ended December 31, 1994. This decrease
was partially attributable to a reduction in net commissions
resulting from changes in Mercer Mutual's reinsurance program.
As a participant in the Homeowners Pool, net commissions varied
with loss historical experience. As a participant's loss
experience improved, the commission expense decreased. Mercer
Mutual's net commissions were reduced in 1995, reflecting its
improvement in losses contributed to the Homeowners Pool. In
addition, other changes to Mercer Mutual's reinsurance program
resulted in increased ceded commissions, which reduced net
commission expenses for Mercer Mutual. Other expenses were also
reduced in 1995, as certain nonrecurring expenses associated with
the recognition of Mercer Mutual's 150th anniversary were
recognized in 1994. For the year ended December 31, 1995, Mercer
Mutual had an underwriting expense ratio of 40.2% compared to
48.1% for the year ended December 31, 1994.
Federal Income Tax Expense - Due to the increase in net
income before tax, federal income tax expense was $369,000 for
the year ended December 31, 1995 compared to a tax benefit of
$681,000 for the year ended December 31, 1994.
Net Income - Mercer Mutual had net income of $1.1 million
for the year ended December 31, 1995 compared to a net loss of
$1.4 million for the year ended December 31, 1994, primarily as a
result of the factors discussed above.
Effect of Conversion on the Company's Future Financial Condition
and Results of Operations
The future financial condition and results of operations of
the Company will be affected by the Conversion and related
transactions. Upon completion of the Conversion, the Company's
capital will increase by between $17.4 million and $26.8 million,
an increase of approximately 79.4% to 122.1% over the
consolidated capital of Mercer Mutual at September 30, 1997. See
"Use of Proceeds," "Capitalization" and "Pro Form Data." This
increased capitalization should permit the Company to
(i) increase direct premium volume to the extent competitive
conditions permit, (ii) increase net premium volume by decreasing
its reliance on reinsurance (see "Business -- Strategy -- Reduced
Reliance on Reinsurance"), and (iii) enhance investment income by
increasing its investable capital.
ESOP. In connection with the Conversion, the ESOP intends
to finance the purchase of 10% of the Common Stock issued in the
Conversion with the proceeds from the ESOP Loan, and Mercer
Mutual will make annual contributions to the ESOP sufficient to
repay the ESOP Loan, which the Company estimates will total, on a
pre-tax basis, between $221,000 (at the Total Minimum) and
$332,222 (at the Total Maximum) annually, plus interest at the
prime rate in effect as of the consummation of the Conversion.
See "Management of the Company -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
MRP. The Company intends to contribute to the MRP, if
implemented, the amount necessary to purchase up to an aggregate
number of shares equal to 4% of the shares of Common Stock that
were issued in the Conversion (up to 119,600 shares at the
maximum of the Estimated Valuation Range). The dollar amount of
Common Stock purchased by the MRP will represent unearned
compensation. As the Company accrues compensation expense to
reflect the vesting of such shares, unearned compensation will be
reduced accordingly. This compensation expense will be
deductible for federal income tax purposes. Assuming shares are
sold equal to the maximum of the Estimated Valuation Range in the
Conversion and further assuming that share awards of restricted
stock have a value of $10.00 per share, the maximum unearned
compensation represented by MRP awards would be approximately
$1.2 million and the annual compensation expense would be
approximately $239,000 on a pre-tax basis. See "Management of
the Company -- Certain Benefit Plans and Agreements -- Management
Recognition Plan."
Liquidity and Capital Resources
Liquidity is a measure of the ability to generate sufficient
cash to meet cash obligations as they come due. Historically,
the principal sources of Mercer Mutual's cash flow have been
premiums, investment income, and maturing investments. In
addition to the need for cash flow to meet operating expenses,
the liquidity requirements of Mercer Mutual relate primarily to
the payment of losses and loss adjustment expenses. The short-
and long-term liquidity requirements of Mercer Mutual vary
because of the uncertainties regarding the settlement dates for
liabilities for unpaid claims and because of the potential for
large losses, either individually or in the aggregate.
Mercer Mutual maintains investment and reinsurance programs
which are intended to provide sufficient funds to meet Mercer
Mutual's obligations without forced sales of investments. Mercer
Mutual maintains a portion of its investment portfolio in
relatively short-term and highly liquid assets to ensure the
availability of funds. Mercer Mutual had no material commitments
for capital expenditures at December 31, 1996.
The NAIC's risk based capital standards require insurance
companies to calculate and report statutory capital and surplus
needs based on a formula measuring underwriting, investment and
other business risks inherent in an individual company's
operations. At December 31, 1996, the capital and surplus of
each of the Insurance Companies were substantially above these
requirements. See "Risk Factors -- Possible Adverse Impact of
Regulatory Changes."
The principal source of liquidity for the Company will be
dividend payments and other fees received from Mercer Mutual.
Mercer Mutual will be restricted by the insurance laws of
Pennsylvania as to the amount of dividends or other distributions
it may pay to the Company without the prior approval of the
Pennsylvania Department. Under Pennsylvania law, the maximum
amount that may be paid by Mercer Mutual during any twelve-month
period after notice to, but without prior approval of, the
Pennsylvania Department cannot exceed the greater of 10% of
Mercer Mutual's statutory surplus as reported on its most recent
annual statement filed with the Pennsylvania Department, or the
net income of Mercer Mutual for the period covered by such annual
statement. As of December 31, 1996, amounts available for
payment of dividends from Mercer Mutual in 1997 without the prior
approval of the Pennsylvania Department would have been
approximately $1.6 million. MIC is required to provide notice to
the New Jersey Department prior to its payment of any dividends.
The New Jersey Department has the power to limit or prohibit
dividend payments if certain conditions exist. Such restrictions
or any subsequently imposed restrictions may in the future affect
the Company's liquidity.
Effects of Inflation
The effects of inflation on Mercer Mutual are implicitly
considered in estimating reserves for unpaid losses and loss
adjustment expenses, and in the premium rate-making process. The
actual effects of inflation on Mercer Mutual's results of
operations cannot be accurately known until the ultimate
settlement of claims. However, based upon the actual results
reported to date, it is management's opinion that Mercer Mutual's
loss reserves, including reserves for losses that have been
incurred but not yet reported, make adequate provision for the
effects of inflation.
New Accounting Standards
Stock-Based Compensation (Financial Accounting Standards
Board ("FASB") Statement No. 123) - The Company does not
presently have any stock-based compensation plans. It plans to
account for any shares issued under the proposed stock-based
compensation plans under APB Opinion 25 and will disclose the
difference, if any, on net earnings and earnings per share if
compensation cost were determined under FASB Statement No. 123.
Earnings Per Share (FASB Statement No. 128) - This Statement
defines the computation, presentation and disclosure requirements
for earnings per share calculations. The Company plans to adopt
these provisions in reports to shareholders when the Statement
becomes effective (periods ended after December 15, 1997).
Comprehensive Income (FASB Statement No. 130) - The Company
adopted FASB Statement No. 130 in 1997 and comprehensive income
is displayed in its statements of changes in surplus for all
periods presented.
Segment Disclosures (FASB Statement No. 131). This
statement establishes standards for the way that public companies
report operating segments and standards for related disclosure
about products and services, geographic areas and major
customers. It is effective for fiscal years beginning
December 15, 1997. The Company is in the process of determining
the effect of this statement upon its financial reporting
requirements.
BUSINESS
The Company
The Company was incorporated under Pennsylvania law in
November 1997 for the purpose of serving as a holding company for
Mercer Mutual upon the acquisition of all of its capital stock in
the Conversion. The Company has applied for approvals from the
Pennsylvania Department to acquire control of Mercer Mutual and
the New Jersey Department to acquire control of MIC. Prior to
the Conversion, the Company has not engaged and will not engage
in any significant operations. Upon completion of the
Conversion, the Company's primary assets will be the outstanding
capital stock of Mercer Mutual and a portion of the net proceeds
of the Conversion.
Management believes that the holding company structure will
permit the Company to expand the products and services it offers
to beyond those currently offered through the Insurance
Companies, although presently there are no definitive plans or
arrangements for such expansion. As a holding company, the
Company will have greater flexibility to diversify its business
activities through existing or newly formed subsidiaries or
through the issuance of capital stock to facilitate acquisitions
or mergers or to obtain additional financing in the future. The
portion of the net proceeds from the sale of Common Stock in the
Conversion that the Company will contribute to Mercer Mutual will
substantially increase Mercer Mutual's surplus, which will, in
turn, enhance policyholder protection and increase the amount of
funds available to support both current operations and future
growth. After the Conversion, the Company will be subject to
regulation by the Pennsylvania Department and the New Jersey
Department as the holding company for Mercer Mutual and MIC,
respectively.
The Insurance Companies
Mercer Mutual is a Pennsylvania mutual insurance company
that was originally incorporated under a special act of the
Legislature of the State of New Jersey in 1844. Mercer Mutual
commenced operations under the name Mercer County Mutual Fire
Insurance Company, which was changed to its current name in 1958.
On October 16, 1997, Mercer Mutual filed Articles of
Domestication with Pennsylvania completing the Redomestication
and thereby changing its state of domicile from New Jersey to
Pennsylvania. Mercer Mutual owns all of the issued and
outstanding capital stock of QHC, which owns all of the issued
and outstanding capital stock of MIC.
Mercer Mutual is a property and casualty insurer of small
and medium-sized businesses and property owners located in New
Jersey and Pennsylvania. Mercer Mutual markets homeowners and
commercial multi-peril policies, as well as other liability,
workers' compensation, fire, allied, inland marine and commercial
automobile coverages through approximately 160 independent
agencies. Mercer Mutual is subject to examination and
comprehensive regulation by the Pennsylvania Department. See
"Business -- Regulation."
MIC is a property and casualty stock insurance company that
was incorporated in 1981. MIC offers only workers' compensation
insurance to businesses located in New Jersey. MIC is subject to
examination and comprehensive regulation by the New Jersey
Department. See "Business -- Regulation."
Direct premiums written in New Jersey accounted for in
excess of 98.8% of the direct premiums written by the Insurance
Companies for the nine-month period ended September 30, 1997 and
for each of the years in the three-year period ended December 31,
1996. As of September 30, 1997, the Insurance Companies had over
43,000 property and casualty policies in force. Mercer Mutual is
licensed to underwrite property and casualty insurance in New
Jersey and Pennsylvania. MIC is licensed only in New Jersey. At
September 30, 1997, the consolidated assets of Mercer Mutual and
its subsidiaries were $73.3 million.
Strategy
The Company's principal strategies for the future are to:
- Improve the mix of business by increasing commercial
and casualty writings in order to enhance profitability
and lessen the impact of property losses on overall
results;
- Geographically diversify its risk through its
acquisition of other insurance companies in
Pennsylvania and other jurisdictions, in order to
reduce its overall exposure to weather-related property
losses in its primary coverage area;
- Attract and retain high-quality agencies having diverse
customer bases located in the Company's targeted growth
markets within Pennsylvania and western New Jersey,
through increased marketing activities and the
development and tailoring of commercial programs
meeting the needs of their customers; and
- Reduce its reliance on reinsurance by increasing the
maximum exposure retained by the Insurance Companies on
individual property and casualty risks, and thereby
increase net premium volume.
Management views the Conversion as a critical component of
its strategic plan. The additional capital generated by the
Conversion will permit the Insurance Companies to accelerate
implementation of these strategies and the resulting holding
company structure will provide needed flexibility to achieve the
Company's goals.
Diversification of Lines of Business. Mercer Mutual has
taken, and will continue to take, steps to increase commercial
and casualty premium volume, both to provide greater product
diversification from personal into commercial lines that may
provide greater flexibility in establishing rates, higher
premiums and a countercyclical balance to personal lines and to
potentially reduce property loss exposure.
One such initiative is a religious institution program
available for churches and synagogues which includes many
preferred coverages and special pricing. Management believes
that this market is underserved and Mercer Mutual's program has
been able to attract agencies which have substantial books of
business with religious institutions. Mercer Mutual has
developed new policy forms tailored for these institutions, which
typically have long-standing relationships with Mercer Mutual's
agencies. Mercer Mutual has also refined and expanded its "main
street" business owner program, which targets commercial
coverages for those businesses that are a normal daily part of
"main street" business, such as bakeries, funeral homes,
delicatessens, pizzerias, florists and restaurants. Under this
program, insurance packages are written using existing policy
forms and are chosen based on the experience of the underwriting
staff and market opportunities available to existing agents.
Mercer Mutual also introduced a program in 1997 offering a two-
tiered pricing approach for commercial automobile insurance
covering light to medium weight trucks and business-owned private
passenger-type vehicles used for commercial purposes. In
addition to a standard rate, Mercer Mutual offered a preferred
rate for risks meeting specified underwriting standards, with the
goal to complement the coverages maintained by its existing
accounts as well as to attract new accounts. To further its goal
of increasing its commercial business, in June 1997 Mercer Mutual
received approval from the Pennsylvania Department to transact
commercial automobile liability and workers' compensation
insurance in Pennsylvania.
Management believes that it has the opportunity to increase
the volume of casualty business by (i) marketing such business to
existing agents, many of whom have traditionally associated
Mercer Mutual with homeowners' property insurance and may not
identify and choose Mercer Mutual for their customers as
providers of casualty line products, and (ii) forming and
developing relationships with new agencies that focus on
commercial and casualty business. Management believes an
increasing share of this market is desirable and attainable given
the existing relationships among Mercer Mutual, its agents and
its insureds, as well as the extensive experience and agency
relationships of its commercial business management personnel.
Completion of the Conversion will supply the additional
surplus necessary to support substantially increased commercial
and casualty premium volume.
Geographic Diversification. The Company's goal is to
geographically diversify its risk by increasing the level of its
business outside of New Jersey in areas with reduced or different
weather-related property loss exposure and in which management
believes insurers generally have been permitted to manage risk
selection and pricing without undue regulatory interference.
Concentration of property insurance in New Jersey has caused
Mercer Mutual to be susceptible to localized severe weather
conditions. The Company expects to accomplish geographic
diversification principally through acquisitions.
Upon completion of the Conversion, the Company plans to seek
acquisitions outside of New Jersey. The Company is currently
targeting for acquisition companies located in Pennsylvania and
other jurisdictions within the mid-Atlantic and Mid-western
United States. Completion of the Conversion will provide funds
for cash acquisitions and the holding company structure will
facilitate the use of capital stock for acquisitions as well.
High-Quality Agencies. Management believes the Insurance
Companies have a strong reputation for personal attention and
prompt efficient service to agencies and insureds. This
reputation has allowed the Insurance Companies to grow and foster
their relationships with many high volume agencies, several of
which focus primarily on commercial business and are located in
areas which the Insurance Companies have targeted as growth areas
within Pennsylvania and New Jersey. The Company intends to focus
its marketing efforts on maintaining and improving its
relationship with these agencies, as well as on attracting new
high-quality agencies in areas with a substantial potential for
growth, particularly in Pennsylvania. The Company also intends
to continue to develop and tailor its commercial programs to
enable its products to meet the needs of the customers served by
its agencies. The religious institutions, "main street" business
and commercial automobile programs are successful examples of
this effort.
Reduced Reliance on Reinsurance. The Company intends to
reduce its reliance on reinsurance by increasing the maximum
exposure retained by the Insurance Companies on individual
property and casualty risks. The Company will rely on the
Company's additional capital raised in the Conversion to protect
itself in the event of individual property losses up to the
increased maximum exposure amounts under its reinsurance
agreements. The precise increase in its maximum exposure will be
determined by the Company based on the amount of capital raised
in the Conversion, the Company's evaluation of its ability to
incur multiple losses without a corresponding material adverse
effect on its future financial condition and results of
operations, and negotiations with its reinsurers. A decrease in
reinsurance could result in a decrease in ceded premiums and a
corresponding increase in net premium income, but would increase
the Company's risk of loss.
Products
Mercer Mutual offers a variety of property and casualty
insurance products primarily designed to meet the insurance needs
of the businesses and property owners located in New Jersey and
Pennsylvania. MIC offers only workers' compensation insurance to
businesses located in New Jersey.
Mercer Mutual's products are developed in part by MSO, Inc.
which provides custom product development, rating and statistical
services for the property and casualty lines of its member
companies, both mutual and stock. MSO, Inc.'s programs are
currently available in a regional area which includes New Jersey,
Pennsylvania, Maryland and Delaware. It is also licensed in
Massachusetts and Virginia, and its programs may be licensed to
companies in other states.
The following tables set forth the direct premiums written,
net premiums earned, net loss ratios, expense ratios and combined
ratios by product line of the Insurance Companies on a
consolidated basis for the periods indicated:<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
------------------------------- -----------------------------------------------
% of % of % of % of % of
1997 Total 1996 Total 1996 Total 1995 Total 1994 Total
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Premiums Written:
Homeowners. . . . . . . . . . . . . $ 9,662 44.9% $ 8,884 47.8% $12,101 48.5% $11,602 47.0% 11,122 45.7%
Commercial multi-peril. . . . . . . 4,797 22.3 3,735 20.1 5,065 20.3 4,437 17.8 4,145 17.0
Other liability . . . . . . . . . . 3,164 14.7 2,719 14.6 3,486 14.0 3,563 14.3 3,364 13.8
Fire, allied, inland marine . . . . 2,565 11.9 2,553 13.7 3,437 13.8 4,112 16.5 4,657 19.1
Workers' compensation . . . . . . . 1,041 4.8 691 3.7 869 3.5 985 3.9 1,067 4.4
Commercial automobile . . . . . . . 275 1.3 - - - - - - - -
-------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . $21,504 100.0% $18,582 100.0% $24,958 100.0% $24,699 100.0% $24,355 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
--------------------------------- -----------------------------------------------
% of % of % of % of % of
1997 Total 1996(1) Total 1996 Total 1995 Total 1994 Total
------- ----- ------- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Premiums Earned
Homeowners. . . . . . . . . . . . . $ 6,053 45.6% $ 7,708 49.8% $10,347 50.1% $10,182 48.9% $ 9,040 48.4%
Commercial multi-peril. . . . . . . 2,195 16.5 2,161 14.0 2,903 14.1 2,471 11.9 2,495 13.4
Other liability . . . . . . . . . . 2,033 15.3 2,229 14.4 2,925 14.2 2,829 13.6 1,847 9.9
Fire, allied, inland marine . . . . 2,063 15.5 2,446 15.8 3,250 15.8 3,991 19.2 3,791 20.3
Workers' compensation . . . . . . . 927 7.0 928 6.0 1,209 5.8 1,344 6.5 1,508 8.1
Commercial automobile . . . . . . . 17 0.1 - - - - - - - -
-------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . $13,288 100.0% $15,472 100.0% $20,634 100.0% $20,817 100.0% $18,681 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Net Loss Ratio
Homeowners. . . . . . . . . . . . . 72.5% 99.2% 85.4% 78.8% 99.1%
Commercial multi-peril. . . . . . . 50.4 41.6 59.3 34.4 71.2
Other liability . . . . . . . . . . 53.5 64.2 102.7 72.1 50.6
Fire, allied, inland marine . . . . 42.9 37.7 36.3 38.3 49.4
Workers' compensation . . . . . . . 59.7 38.1 5.1 63.8 37.7
Commercial automobile . . . . . . . 88.2 - - - -
Total. . . . . . . . . . . . . 60.5% 72.7% 71.7% 63.9% 75.5%
Expense Ratios
Homeowners. . . . . . . . . . . . . 41.4% 38.0% 38.4% 41.4% 48.4%
Commercial multi-peril. . . . . . . 45.9 42.2 42.1 38.9 53.5
Other liability . . . . . . . . . . 42.2 36.0 39.1 41.8 60.3
Fire, allied, inland marine . . . . 39.5 38.3 37.0 37.0 47.0
Workers' compensation . . . . . . . 25.4 19.6 43.2 39.0 25.1
Commercial automobile . . . . . . . 217.6 - - - -
Total. . . . . . . . . . . . . 41.1% 37.2% 39.1% 40.2% 48.1%
Combined Ratios(1)
Homeowners. . . . . . . . . . . . . 113.9% 137.3% 123.8% 120.2% 147.4%
Commercial multi-peril. . . . . . . 96.4 83.7 101.4 73.3 124.7
Other liability . . . . . . . . . . 95.9 100.2 141.8 113.9 110.9
Fire, allied, inland marine . . . . 82.4 75.9 73.3 75.3 96.3
Workers' compensation . . . . . . . 85.0 57.8 48.3 102.8 62.8
Commercial automobile . . . . . . . 305.9 - - - -
Total. . . . . . . . . . . . . 101.6% 109.9% 110.8% 104.1% 123.5%
Industry Combined Ratio . . . . . . - - 105.9% 106.4% 108.4%
</TABLE>
- ----------------
(1) A combined ratio over 100% means that an insurer's
underwriting operations are not profitable.
Homeowners Policy
Mercer Mutual's current homeowners policy, introduced in
1987, is a multi-peril policy providing property and liability
coverages and optional inland marine coverage. The homeowners
policy is sold to provide coverage for an insured's residence.
Mercer Mutual markets both a standard and a preferred homeowner
product targeted for both the newly constructed homes and the
older more mature market. As of September 30, 1997, Mercer
Mutual had approximately 30,000 homeowners policies in force,
with 25% of those the preferred product.
Commercial Multi-peril Products.
Commercial Multi-Peril. Mercer Mutual writes a number of
multi-peril policies in New Jersey and Pennsylvania providing
property and liability coverage to accounts that include all of
Mercer Mutual's 3-4 family dwelling policies, as well as a number
of larger apartment risks. Various other non-business owners
risk classes are also written on this policy, such as larger
contractors. As of September 30, 1997, approximately 1,700
multi-peril policies were in force. Mercer Mutual is working to
increase market penetration for this product because it includes
commercial liability risks that have more flexible and profitable
rate structures and also help to diversify exposures and lessen
the impact of property losses on overall results.
Businessowners. Mercer Mutual introduced a businessowners
policy in the mid-1980s that provides property and liability
coverages to small businesses throughout New Jersey. This
product is marketed to several distinct groups: (i) apartment
building owners with 60 or fewer units; (ii) condominium
associations; (iii) business owners who lease their buildings to
tenants; (iv) mercantile businessowners, such as florists,
delicatessens, and beauty parlors; and (v) offices with owner
and/or tenant occupancies. As of September 30, 1997,
approximately 2,200 businessowners policies were in force.
Religious Institutions - Mercer Mutual enhanced its product
offerings for religious institutions in 1997 through the creation
of a specialized multi-peril policy specifically designed for
this market segment. The enhanced product included the
introduction of directors' and officers' coverage, religious
counseling coverage and systems breakdown coverage (through a
reinsurance arrangement). Coverage for child care centers and
schools is also available. There are approximately 440 religious
institution policies in effect as of September 30, 1997.
Other Liability.
Commercial General Liability - Mercer Mutual also writes
liability coverage for insureds who do not have property exposure
or whose property exposure is insured elsewhere. The majority of
these policies are written for small contractors such as
carpenters, painters or electricians, who choose to self-insure
small property items. Coverage for both premises/operations and
products/completed operations exposures are routinely provided.
Coverage is provided for other exposures such as vacant land and
habitational risks. There were approximately 1,430 commercial
general liability policies in force as of September 30, 1997.
Commercial Umbrella Liability - Commercial umbrella coverage
is available for insureds who insure their primary general
liability exposures with Mercer Mutual through a businessowners,
commercial multi-peril, religious institution or commercial
general liability policy. Limits of $1,000,000 to $5,000,000 are
readily available with higher limits provided if needed. To
improve processing efficiencies and maintain underwriting
standards, Mercer Mutual is beginning to offer this coverage as
an endorsement to the underlying liability policy rather than as
a separate stand-alone policy.
Personal Excess Liability. Mercer Mutual writes personal
line excess liability, or "umbrella," policies covering personal
liabilities in excess of amounts covered under Mercer Mutual's
homeowners policies. Such policies are available generally with
limits of $1 million to $5 million. Mercer Mutual does not
generally market excess liability policies to individuals unless
they also write an underlying primary liability policy.
Fire, Allied Lines and Inland Marine.
Fire, Allied Lines and Inland Marine - Fire and allied lines
insurance generally covers fire, lightning, and removal and
extended coverage. Inland marine coverage insures merchandise or
cargo in transit and business and personal property. Mercer
Mutual offers these coverages for property exposures in cases
where it is not insuring the companion liability exposures.
Generally, the rates charged on these policies are higher than
those for the same property exposures written on a multi-peril or
businessowners policy.
Combination Dwelling Policy - The current combination
dwelling product, developed in 1987, is a flexible, multi-line
package of insurance coverage. It is targeted to be written on
an owner or tenant occupied dwelling of no more than four
families. The dwelling policy combines property and liability
insurance but may also be written on a monoline basis. The
property portion is considered a fire, allied lines and inland
marine policy, and the liability portion is considered an other
liability policy.
Commercial Automobile
This product was introduced in New Jersey in 1997 and is
designed to cover light and medium weight trucks used in
business, as well as company-owned private passenger type
vehicles. Other specialty classes such as church vans and
funeral directors' vehicles can also be covered. The policy is
marketed as a companion offering to Mercer Mutual's
businessowners, commercial multi-peril, religious institution,
commercial property or general liability policies.
Workers' Compensation.
The Insurance Companies generally write workers'
compensation policies in conjunction with an otherwise eligible
businessowners, commercial multi-peril, religious institution,
commercial property or general liability policy. Stand-alone
workers' compensation policies are available only as a management
accommodation and, as of September 30, 1997, over 98% of the
Insurance Companies' workers' compensation insureds have other
Mercer Mutual policies. There were approximately 1,130 workers'
compensation policies in effect as of September 30, 1997.
Marketing
The Insurance Companies market their property and casualty
insurance products in New Jersey and Pennsylvania through
approximately 160 independent agencies, most of which are located
in New Jersey. The Insurance Companies manage their agencies
through quarterly business reviews (with underwriter
participation) and establishment of benchmarks/goals for premium
volume and profitability. The Insurance Companies have in recent
years eliminated a number of low volume or unprofitable agencies.
All of the Insurance Companies' independent agencies represent
multiple carriers and are established businesses in the
communities in which they operate. The Insurance Companies'
independent agencies generally market and write the full range of
the Insurance Companies' products. The Insurance Companies
consider their relationships with agencies to be good.
For the nine months ended September 30, 1997, the Insurance
Companies' largest agency accounted for approximately 7.9% of the
Insurance Companies' direct premiums written, and no other agency
accounted for more than 5% of the Insurance Companies' direct
premiums written. During such period, no agency accounted for
more than 5% of the Insurance Companies' net premiums earned.
For the nine month period ended September 30, 1997, the Insurance
Companies' top 10 agencies accounted for 29.7% of direct premiums
written, and the average volume per agency was $133,000, with the
largest agency generating approximately $1.7 million in premium
revenue for the Insurance Companies.
The Insurance Companies emphasize personal contact between
their agents and the policyholders. The Insurance Companies
believe that their fast and efficient service, name recognition,
policyholder loyalty and policyholder satisfaction with agency
and claims relationships are the principal sources of new
customer referrals, cross-selling of additional insurance
products and policyholder retention.
The Insurance Companies' policies are marketed exclusively
through their network of independent agencies. The Insurance
Companies depend upon their agency force to produce new business
and to provide customer service. The network of independent
agencies also serves as an important source of information about
the needs of the communities served by the Insurance Companies.
This information is utilized by the Insurance Companies to
develop new products and new product features.
Agencies are compensated through a fixed base commission
with an opportunity for profit sharing depending on the agency's
premiums earned and loss experience.
The Insurance Companies' independent agencies are monitored
and supported by marketing representatives, who are employees of
the Insurance Companies and who also have principal
responsibility for recruiting agencies and training new agents.
To support their marketing efforts, the Insurance Companies hold
seminars for agents and conduct training programs that provide
both technical training about products and sales training on how
to market such products.
The Insurance Companies provide personal computer software
to agencies that allows them to quote rates on homeowners and
commercial multi-peril policies.
The Insurance Companies marketing efforts are further
supported by their claims philosophy, which is designed to
provide prompt and efficient service, thereby making the claims
process a positive experience for agents and policyholders.
Underwriting
The Insurance Companies write their personal and commercial
lines by evaluating each risk with consistently applied
standards. The Insurance Companies maintain information on all
aspects of their business that is regularly reviewed to determine
product line profitability. The Insurance Companies' employ 15
underwriters, who generally specialize in either personal or
commercial lines. Specific information is monitored with regard
to individual insureds that is used to assist the Insurance
Companies in making decisions about policy renewals or
modifications. The Insurance Companies' underwriters have an
average of over 12 years of experience as underwriters.
The Insurance Companies rely on information provided by
their independent agencies who, subject to certain guidelines,
also act as field underwriters and pre-screen policy applicants.
Their independent agencies have the authority to sell and bind
insurance coverages in accordance with pre-established
guidelines. Agencies' underwriting results are monitored and, on
occasion, agencies with historically poor loss ratios have had
their binding authority removed until more profitable
underwriting results were achieved.
Claims
Claims on insurance policies written by the Insurance
Companies are received directly from the insured or through the
Insurance Companies' independent agencies. Claims are then
assigned to either an in-house adjuster or an independent
adjuster, depending upon the size and complexity of the claim,
who investigates and settles the claim. As of September 30,
1997, the Insurance Companies had six in-house adjusters and
worked with 15 independent adjusters. Until December 31, 1997
workers' compensation claims were assigned to the Garden State
Reinsurance Association (the "GSRA"), an insurance pool which
provides for the sharing of workers' compensation losses under an
excess of loss reinsurance treaty. As of December 31, 1997,
workers' compensation claims are being handled in the same manner
as all other claims.
Claims settlement authority levels are established for each
claims adjuster based upon his or her level of experience.
Multi-line teams exist to handle all claims. The claims
department is responsible for reviewing all claims, obtaining
necessary documentation, estimating the loss reserves and
resolving the claims.
The Insurance Companies attempt to minimize claims costs by
encouraging the use of alternative dispute resolution procedures.
Less than 19% of all open claims under the Insurance Companies'
policies have resulted in litigation. Litigated claims are
assigned to outside counsel.
Reinsurance
Reinsurance Ceded
In accordance with insurance industry practice, the
Insurance Companies reinsure a portion of their exposure and pay
to the reinsurers a portion of the premiums received on all
policies reinsured. Insurance is ceded principally to reduce net
liability on individual risks, to mitigate the effect of
individual loss occurrences (including catastrophic losses), to
stabilize underwriting results and to increase the Insurance
Companies' underwriting capacity.
Reinsurance can be facultative reinsurance or treaty
reinsurance. Under facultative reinsurance, each risk or portion
of a risk is reinsured individually. Under treaty reinsurance,
an agreed-upon portion of business written is automatically
reinsured. Reinsurance can also be classified as quota share
reinsurance, pro-rata insurance or excess of loss reinsurance.
Under quota share reinsurance and pro-rata insurance, the ceding
company cedes a percentage of its insurance liability to the
reinsurer in exchange for a like percentage of premiums less a
ceding commission, and in turn will recover from the reinsurer
the reinsurer's share of all losses and loss adjustment expenses
incurred on those risks. Under excess reinsurance, an insurer
limits its liability to all or a particular portion of the amount
in excess of a predetermined deductible or retention. Regardless
of type, reinsurance does not legally discharge the ceding
insurer from primary liability for the full amount due under the
reinsured policies. However, the assuming reinsurer is obligated
to reimburse the ceding company to the extent of the coverage
ceded. The Insurance Companies place all of their reinsurance
either through the use of brokers or directly with the
reinsurance company.
The Insurance Companies determine the amount and scope of
reinsurance coverage to purchase each year based upon their
evaluation of the risks accepted, consultations with reinsurance
representatives and a review of market conditions, including the
availability and pricing of reinsurance. For the year ended
December 31, 1996, the Insurance Companies ceded to reinsurers
$14.4 million of earned premiums. For the nine months ended
September 30, 1997, the Insurance Companies ceded earned premiums
of $7.0 million. The significant decrease in ceded premiums for
the nine-month period ended September 30, 1997 reflects the
effect of a restructuring of the reinsurance program as of
January 1, 1997, which restructuring is described below.
The Insurance Companies' reinsurance arrangements are placed
with non-affiliated reinsurers, and are generally renegotiated
annually. Coverages described herein are generally for the year
ended December 31, 1997.
The largest exposure retained by the Insurance Companies on
any one individual property risk is $75,000. Excess reinsurance
is provided on a treaty basis in layers as follows: Individual
property risks in excess of $75,000 are covered on an excess of
loss basis up to $250,000 per risk pursuant to various
reinsurance treaties. Except for commercial auto physical
damage, per risk property losses in excess of $250,000 are
reinsured on a proportional basis through treaty coverage or
facultative coverage. Commercial auto physical damage is
reinsured separately on a quota share and excess of loss basis.
The maximum commercial auto physical damage exposure is $50,000.
Except for workers' compensation, umbrella liability, and
commercial auto liability, individual casualty risks that are in
excess of $100,000 are covered on an excess of loss basis, up to
$1.2 million per occurrence, pursuant to various reinsurance
treaties. Casualty losses arising from workers' compensation
claims are reinsured on a per occurrence and per person treaty
basis by various reinsurers up to $10.0 million through GSRA.
Umbrella liability losses are reinsured on a 95% quota share
basis up to $1.0 million and a 100% quota share basis in excess
of $1.0 million up to $5.0 million with a ceding commission of
35.0%. Commercial automobile liability is reinsured separately
on a quota share and excess of loss basis. The maximum
commercial automobile liability exposure is $50,000. The
Insurance Companies also purchase casualty contingency loss
excess reinsurance providing $3.0 million of coverage in excess
of $1.2 million.
Catastrophic reinsurance protects the ceding insurer from
significant aggregate loss exposure arising from a single event
such as windstorm, hail, tornado, hurricane, earthquake, riot,
blizzard, freezing temperatures or other extraordinary events.
Mercer Mutual has purchased layers of excess treaty reinsurance
for catastrophic property losses for 1997, under which Mercer
Mutual reinsures 100% of losses per occurrence over $1.0 million
up to a maximum of $45.0 million per occurrence.
Mercer Mutual also has an aggregate excess of loss treaty
reinsurance agreement designed to protect against multiple events
each of which is below the $1.0 million retention under the
primary catastrophe reinsurance treaty. Under this agreement,
losses are reinsured for 90% of losses exceeding 70% of annual
earned premiums up to $2.2 million.
Effective January 1, 1997, the Insurance Companies
terminated their participation in the Homeowners Pool. Prior to
1997, the Insurance Companies pooled their New Jersey homeowners
business with two other companies providing homeowners coverage
to New Jersey residents. Premiums were ceded to the other
Homeowners Pool participants based on the respective writings
reinsured in the Homeowners Pool. The Insurance Companies in
turn assumed reinsurance from the other participants. Losses
were reinsured among the Homeowners Pool participants on a pro-
rata basis in the same proportion premiums were ceded. At
January 1, 1997, the Insurance Companies replaced the Homeowners
Pool reinsurance with a combination of a new quota share
reinsurance agreement (for homeowners only) and its existing pro-
rata agreements. The Homeowners Pool was terminated in order to
reduce the Insurance Companies' New Jersey exposure and to
eliminate fluctuations in operating results arising from business
assumed from outside the Insurance Companies under the Homeowners
Pool. The restructuring of the reinsurance program caused a
material reduction in both the consolidated net earned premiums
and net expense of Mercer Mutual. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The insolvency or inability of any reinsurer to meet its
obligations to the Insurance Companies could have a material
adverse effect on the results of operations or financial
condition of the Insurance Companies.
As of September 30, 1997 the Company's five largest
reinsurers based on percentage of ceded premiums are set forth in
the following table:
<TABLE>
<CAPTION>
Percentage of
Name Ceded Premiums A.M. Best Rating
<S> <C> <C>
American Re-Insurance Co. 27.65% A+
Motors Insurance Corporation 12.67% A+
Scor Reinsurance Company 9.79% A+
TIG Reinsurance Company 9.67% A
PMA Reinsurance Corporation 5.15% A+
</TABLE>
The A+ and A ratings are the second and third highest of
A.M. Best's fifteen ratings. The Insurance Companies monitor the
solvency of reinsurers through regular review of their financial
statements and A.M. Best ratings. The Insurance Companies have
experienced no significant difficulties collecting amounts due
from reinsurers.
Reinsurance Assumed
The Insurance Companies assume reinsurance on a voluntary
and non-voluntary basis. Reinsurance is assumed on an excess of
loss basis and pro-rata basis. For the year ended December 31,
1996 the Insurance Companies assumed $10.3 million in earned
premiums. For the nine months ended September 30, 1997, the
Insurance Companies assumed $479,000 in earned premiums. The
significant decrease in assumed earned premiums for the nine
month period ended September 30, 1997 reflects the restructuring
of the Insurance Companies' reinsurance program effective
January 1, 1997 described above.
As described above, the Insurance Companies terminated their
participation in the Homeowners Pool effective December 31, 1996.
As a result, a significant decrease in assumed premiums earned is
reflected in the nine month period ending September 30, 1997, as
the Insurance Companies no longer assumed business from the other
Homeowners Pool participants. For the year ended December 31,
1996, the Insurance Companies had $9.6 million in assumed earned
premiums.
Under its agreement with GSRA, which was terminated
effective December 31, 1997, the Insurance Companies assumed
reinsurance on a voluntary basis from four mutual insurance
companies providing workers' compensation coverage to New Jersey
businesses. The Insurance Companies assumed 7% of losses
incurred by those carriers in excess of $50,000 up to $250,000 or
a maximum of $14,000 per occurrence. In return, the Insurance
Companies assume 7% of the premiums of such carrier on the same
excess of loss basis.
The Insurance Companies are also required by statute to
participate in two residual market pools. The Insurance
Companies assume business for workers' compensation and for
property exposures which are not insured in the voluntary
marketplace. The Insurance Companies participate in these
residual markets on a market share basis for the jurisdiction in
which it writes business.
Loss and LAE Reserves
Property and Casualty Reserves. The Insurance Companies are
required by applicable insurance laws and regulations to maintain
reserves for payment of losses and loss adjustment expenses
("LAE") for both reported claims and for claims incurred but not
reported ("IBNR"), arising from the policies they have issued.
These laws and regulations require that provision be made for the
ultimate cost of those claims without regard to how long it takes
to settle them or the time value of money. The determination of
reserves involves actuarial and statistical projections of what
the Insurance Companies expect to be the cost of the ultimate
settlement and administration of such claims based on facts and
circumstances then known, estimates of future trends in claims
severity, and other variable factors such as inflation and
changing judicial theories of liability.
The estimation of ultimate liability for losses and LAE is
an inherently uncertain process and does not represent an exact
calculation of that liability. The Insurance Companies' reserve
policy recognizes this uncertainty by maintaining reserves at a
level providing for the possibility of adverse development
relative to the estimation process. The Insurance Companies do
not discount their reserves to recognize the time value of money.
When a claim is reported to the Insurance Companies, claims
personnel establish a "case reserve" for the estimated amount of
the ultimate payment. This estimate reflects an informed
judgment based upon general insurance reserving practices and on
the experience and knowledge of the estimator regarding the
nature and value of the specific claim, the severity of injury or
damage, and the policy provisions relating to the type of loss.
Case reserves are adjusted by the Insurance Companies' claims
staff as more information becomes available. It is the Insurance
Companies' policy to settle each claim as expeditiously as
possible.
The Insurance Companies maintain IBNR reserves to provide
for future reporting of already incurred claims and developments
on reported claims. The IBNR reserve is determined by estimating
the Insurance Companies' ultimate net liability for both reported
and IBNR claims and then subtracting the case reserves for
reported claims.
Each quarter, the Insurance Companies compute their
estimated ultimate liability using principles and procedures
applicable to the lines of business written. Such reserves are
also considered annually by the Insurance Companies' independent
auditors in connection with their audit of the Insurance
Companies' consolidated financial statements. However, because
the establishment of loss reserves is an inherently uncertain
process, there can be no assurance that ultimate losses will not
exceed the Insurance Companies' loss reserves. Adjustments in
aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. As
required by insurance regulatory authorities, the Insurance
Companies submit to the various jurisdictions in which they are
licensed a statement of opinion by its appointed actuary
concerning the adequacy of statutory reserves. The results of
these actuarial studies have consistently indicated that reserves
are adequate. Management of the Insurance Companies does not
believe the Insurance Companies are subject to any material
potential asbestos or environmental liability claims.
The following table provides a reconciliation of beginning
and ending consolidated loss and LAE reserve balances of Mercer
Mutual for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1997 and 1996 as prepared
in accordance with GAAP.
<PAGE>
Reconciliation of Reserve for Losses
and Loss Adjustment Expenses
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
1997 1996 1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at the beginning of period . . . . . . . . . $35,221 $36,176 $36,176 $35,531 $33,308
Less: Reinsurance recoverables and receivables . . . . (15,147) (16,819) (16,819) (17,233) (14,313)
Net reserves for losses and loss adjustment
expenses at beginning of period . . . . . . . . . . 20,074 19,357 19,357 18,298 18,995
Add: Provision for losses and loss adjustment
expenses for claims occurring in:
The current year . . . . . . . . . . . . . . . . 8,860 12,901 16,445 14,250 15,364
Prior years . . . . . . . . . . . . . . . . . . (822) (1,647) (1,644) (954) (1,257)
Total incurred losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . 8,038 11,254 14,801 13,296 14,107
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year . . . . . . . . . . . . . . . . 3,205 5,814 7,715 5,302 8,782
Prior years . . . . . . . . . . . . . . . . . . 5,394 5,213 6,369 6,935 6,022
Total losses and loss adjustment expenses. . . . 8,599 11,027 14,084 12,237 14,804
Net reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . 19,513 19,584 20,074 19,357 18,298
Add: Reinsurance recoverables and receivables . . . . 13,299 15,348 15,147 16,819 17,233
Reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . $32,812 $34,932 $35,221 $36,176 $35,531
======= ======= ======= ======= =======
</TABLE>
The following table shows the development of the
consolidated reserves for unpaid losses and LAE from 1986 through
1996 for the Insurance Companies on a GAAP basis. The top line
of the table shows the liabilities at the balance sheet date,
including losses incurred but not yet reported. The upper
portion of the table shows the cumulative amounts subsequently
paid as of successive years with respect to the liability. The
lower portion of the table shows the reestimated amount of the
previously recorded liability based on experience as of the end
of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of
claims for individual years. The redundancy (deficiency) exists
when the reestimated liability at each December 31 is less
(greater) than the prior liability estimate. The "cumulative
redundancy (deficiency)" depicted in the table, for any
particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE
net of reinsurance recoverable . . . $6,278 $7,646 $9,266 $13,247 $16,698 $18,509
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 2,345 2,760 3,268 4,702 5,195 5,621
Two years later. . . . . . . . . . . 3,389 4,101 5,129 7,282 8,091 8,587
Three years later. . . . . . . . . . 4,289 5,181 6,684 9,342 10,307 11,315
Four years later . . . . . . . . . . 4,963 5,825 7,899 10,888 12,112 13,162
Five years later . . . . . . . . . . 5,215 6,363 8,643 11,694 12,904 14,033
Six years later. . . . . . . . . . . 5,457 6,627 9,063 11,997 13,262
Seven years later. . . . . . . . . . 5,574 6,800 9,169 12,096
Eight years later. . . . . . . . . . 5,699 6,857 9,236
Nine years later . . . . . . . . . . 5,743 6,851
Ten years later. . . . . . . . . . . 5,761
Liability estimated as of:
One year later . . . . . . . . . . . 6,102 7,895 10,446 14,766 16,168 17,400
Two years later. . . . . . . . . . . 6,275 7,657 10,914 13,989 15,632 16,293
Three years later. . . . . . . . . . 6,100 7,581 10,330 13,540 14,787 15,973
Four years later . . . . . . . . . . 6,041 7,256 10,076 12,724 14,209 15,411
Five years later . . . . . . . . . . 5,878 7,272 9,603 12,643 13,945 15,298
Six years later. . . . . . . . . . . 5,963 7,100 9,595 12,556 13,996
Seven years later. . . . . . . . . . 5,895 7,055 9,586 12,518
Eight years later. . . . . . . . . . 5,871 7,035 9,522
Nine years later . . . . . . . . . . 5,896 7,033
Ten years later. . . . . . . . . . . 5,905
Cumulative total redundancy
(deficiency) . . . . . . . . . . . . 373 613 (256) 729 2,702 3,211
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE
net of reinsurance recoverable . . . $20,067 $18,995 $18,298 $19,357 $20,074
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 6,329 6,023 6,935 6,368 --
Two years later. . . . . . . . . . . 9,940 9,786 10,272
Three years later. . . . . . . . . . 12,723 12,144
Four years later . . . . . . . . . . 14,160
Five years later . . . . . . . . . .
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Liability estimated as of:
One year later . . . . . . . . . . . 18,246 17,746 17,344 17,712
Two years later. . . . . . . . . . . 17,603 17,088 16,860 --
Three years later. . . . . . . . . . 16,985 16,779
Four years later . . . . . . . . . . 16,490
Five years later . . . . . . . . . .
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Cumulative total redundancy
(deficiency) . . . . . . . . . . . . 3,577 2,216 1,438 1,644 --
Gross liability - end of year 35,531 36,176 35,221
Reinsurance recoverables 17,233 16,819 15,147
------- ------- -------
Net liability - end of year $18,298 $19,357 $20,074
======= ======= =======
Gross reestimated liability - latest 31,296 35,052
Reestimated reinsurance recover-
ables - latest 14,436 17,340
------- -------
Net reestimated liability - latest 16,860 17,712
======= =======
Gross cumulative (deficiency) redundancy 4,235 1,124
======= =======
</TABLE>
Investments
On a consolidated basis, all of Mercer Mutual's investment
securities are classified as available for sale and are carried
at fair market value.
An important component of the consolidated operating results
of Mercer Mutual has been the return on invested assets. The
Company's investment objectives are (i) to maximize current
yield, (ii) to maintain safety of capital through a balance of
high quality, diversified investments which minimize risk,
(iii) to maintain adequate liquidity for its insurance
operations, (iv) to meet regulatory requirements, and (v) to
increase surplus through appreciation.
The Board of Directors sets the investment policy of the
Company, which requires that investments be made in a portfolio
consisting of bonds, common stock and short-term money market
instruments. The Company's equity investments are required to be
concentrated in larger capitalization, quality companies. The
policy does not permit investment in unincorporated businesses,
private placements or direct mortgages, foreign denominated
securities, financial guarantees or commodities.
<PAGE>
The following table sets forth certain consolidated
information concerning Mercer Mutual's investments.
<TABLE>
<CAPTION>
At September 30, 1997 At December 31, 1996 At December 31, 1995
------------------------ ------------------------ ------------------------
Market Market Market
Cost(2) Value Cost(2) Value Cost(2) Value
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Fixed income securities(1)
United States government and
government agencies . . . . . . . $25,795 $25,944 $23,702 $23,692 $18,516 $19,074
Obligations of states and
political subdivisions. . . . . . 3,396 3,470 4,313 4,343 5,146 5,237
Collateralized mortgage
obligations . . . . . . . . . . . 6,334 5,837 7,631 6,930 9,764 9,306
Total fixed income securities . . 35,525 35,251 35,646 34,965 33,426 33,617
Equity securities . . . . . . . . . . 6,689 9,926 5,892 7,795 5,320 6,837
Total . . . . . . . . . . . . . . $42,214 $45,177 $41,538 $42,760 $38,746 $40,454
======= ======= ======= ======== ======= =======
<FN>
____________
(1) In the consolidated financial statements of Mercer Mutual,
investments are carried at fair value as established by
quoted market prices on secondary markets.
(2) Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
</TABLE>
<PAGE>
The table below contains consolidated information concerning
the investment ratings of Mercer Mutual's fixed maturity
investments at September 30, 1997.
<TABLE>
<CAPTION>
Type/Ratings of Amortized Market
Investment(1) Cost Value Percentages(2)
- --------------- --------- ------ --------------
<S> <C> <C> <C>
U.S. Government and
agencies . . . . . . . $25,795 $25,944 73.6%
AAA. . . . . . . . . . . 8,560 8,117 23.0
AA . . . . . . . . . . . 769 789 2.2
A. . . . . . . . . . . . 301 300 .9
BBB. . . . . . . . . . . 100 101 .3
Total. . . . . . . . . $35,525 $35,251 100.0%
</TABLE>
____________
(1) The ratings set forth in this table are based on the
ratings, if any, assigned by Standard & Poor's Corporation
("S&P"). If S&P's ratings were unavailable, the equivalent
ratings supplied by Moody's Investors Services, Inc., Fitch
Investors Service, Inc. or the NAIC were used where
available.
(2) Represents percent of market value for classification as a
percent of total for each portfolio.
<PAGE>
The table below sets forth the maturity profile and weighted
average yields of Mercer Mutual's consolidated fixed maturity
investments as of September 30, 1997 (substituting average life
for mortgage-backed securities):
Amortized Market
Maturity Cost(1) Value Percentages(2)
(Dollars in thousands)
More than 1 year
through 5 years $ 1,942 $ 1,988 5.6%
More than 5 years
through 10 years 25,174 25,298 71.8
More than 10 years 2,075 2,128 6.0
Mortgage-backed
securities(3) 6,334 5,837 16.6
Total $35,525 $35,251 100.0%
======= ======= =====
____________
(1) Fixed maturities are carried at market value in the
consolidated financial statements of Mercer Mutual.
(2) Represents percent of market value of the classification as
a percent of the total.
(3) Mortgage backed securities consist of mortgage pass-through
holdings and securities collateralized by home equity loans.
These securities follow a structured principal repayment
schedule and are of high credit quality rated "AAA" or
better by Standard & Poor's. These securities are presented
separately in the maturity schedule due to the inherent risk
associated with prepayment or early authorization. The
average duration of this portfolio is 3.7 years.
The average duration of Mercer Mutual's fixed maturity
investments, excluding mortgage backed securities which are
subject to paydown, as of September 30, 1997 was approximately
5.6 years. As a result, the market value of the Company's
investments may fluctuate significantly in response to changes in
interest rates. In addition, the Company may experience
investment losses to the extent its liquidity needs require the
disposition of fixed maturity securities in unfavorable interest
rate environments.
Mercer Mutual's consolidated net investment income, average
cash and invested assets and return on average cash and invested
assets for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997 were as
follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
------------------- -----------------------------
(Dollars In thousands)
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average invested assets. . . . . . . . $46,439 $43,866 $44,728 $39,746 $37,942
Net investment income . . . . . . . . 1,793 1,704 2,289 2,132 1,904
Return on average
invested assets. . . . . . . . . . . 5.2% 5.2% 5.1% 5.4% 5.0%
</TABLE>
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors
of concern to policyholders, currently assigns an "A-"
(Excellent) rating (its fourth highest rating category out of
15 categories) to the Insurance Companies as a group. A.M. Best
assigns "A" or "A-" ratings to companies which, in its opinion,
have demonstrated excellent overall performance when compared to
the standards established by A.M. Best. Companies rated "A" and
"A-" have a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity, as well as
the company's book of business, the adequacy and soundness of its
reinsurance, the quality and estimated market value of its
assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competency of
its management and its market presence. No assurance can be
given that A.M. Best will not reduce the Insurance Companies'
current rating in the future. In its 1997 ratings report on the
Insurance Companies, in which A.M. Best assigned the Insurance
Companies an "A-" rating, A.M. Best also stated that due to the
Insurance Companies' considerable catastrophe exposure, it viewed
the Insurance Companies' ratings outlook as negative. See "Risk
Factors -- A.M. Best Rating."
Competition
The property and casualty insurance market is highly
competitive. The Insurance Companies compete with stock
insurance companies, mutual companies, local cooperatives and
other underwriting organizations. Certain of these competitors
have substantially greater financial, technical and operating
resources than the Insurance Companies. The Insurance Companies'
ability to compete successfully in their principal markets is
dependent upon a number of factors, many of which (including
market and competitive conditions) are outside the Insurance
Companies' control. Many of the lines of insurance written by
the Insurance Companies are subject to significant price
competition. Some companies may offer insurance at lower premium
rates through the use of salaried personnel or other methods,
rather than through independent agents paid on a commission
basis, as the Insurance Companies do. In addition to price,
competition in the lines of business written by the Insurance
Companies is based on quality of the products, quality and speed
of service (including claims service), financial strength,
ratings, distribution systems and technical expertise.
Regulation
Insurance companies are subject to supervision and
regulation in the states in which they transact business. Such
supervision and regulation relates to numerous aspects of an
insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the
protection of policyholders. The extent of such regulation
varies, but generally derives from state statutes which delegate
regulatory, supervisory and administrative authority to state
insurance departments. Accordingly, the authority of the state
insurance departments includes the establishment of standards of
solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of
and limitations on investments, premium rates for property and
casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms,
notice requirements for the cancellation of policies and the
approval of certain changes in control. State insurance
departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance
companies.
Examinations are regularly conducted by the Pennsylvania
Department and the New Jersey Department every three to five
years. Because the volume of Mercer Mutual's business in
Pennsylvania to date has been minimal and Mercer Mutual did not
change its domicile from New Jersey to Pennsylvania until October
1997, Mercer Mutual has never been examined by the Pennsylvania
Department. The New Jersey Department's last examination of
Mercer Mutual or MIC was as of December 31, 1995. These
examinations did not result in any adjustments to the financial
position of either of the Insurance Companies. In addition,
there were no substantive qualitative matters indicated in the
examination reports that had a material adverse impact on the
operations of the Insurance Companies.
In addition to state-imposed insurance laws and regulations,
the NAIC has adopted risk-based capital ("RBC") requirements that
require insurance companies to calculate and report information
under a risk-based formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix
of products and investment portfolio. Under the formula, a
company first determines its Authorized Control Level risk-based
capital ("ACL") by taking into account (i) the risk with respect
to the insurer's assets; (ii) the risk of adverse insurance
experience with respect to the insurer's liabilities and
obligations, (iii) the interest rate risk with respect to the
insurer's business; and (iv) all other business risks and such
other relevant risks as are set forth in the RBC instructions. A
company's "Total Adjusted Capital" is the sum of statutory
capital and surplus and such other items as the RBC instructions
may provide. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies.
The requirements provide for four different levels of
regulatory attention. The "Company Action Level" is triggered if
a company's Total Adjusted Capital is less than 2.0 times its ACL
but greater than or equal to 1.5 times its ACL. At the Company
Action Level, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions
to improve the capital position. The "Regulatory Action Level"
is triggered if a company's Total Adjust Capital is less than
1.5 times but greater than or equal to 1.0 times its ACL. At the
Regulatory Action Level, the regulatory authority will perform a
special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized
Control Level" is triggered if a company's Total Adjusted Capital
is than 1.0 times but greater than or equal to 0.7 times its ACL,
and the regulatory authority may take action it deems necessary,
including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total
Adjusted Capital is less than 0.7 times its ACL, and the
regulatory authority is mandated to place the company under its
control. The Insurance Companies have never failed to exceed
these required levels of capital. There can be no assurance,
however, that the capital requirements applicable to the business
of the Insurance Companies will not increase in the future.
The NAIC has also developed a set of eleven financial
ratios, referred to as the Insurance Regulatory Information
System (IRIS), for use by state insurance regulators in
monitoring the financial condition of insurance companies. The
NAIC has established an acceptable range of values for each of
the IRIS financial ratios. Generally, an insurance company will
become the subject of increased scrutiny where four or more of
its IRIS ratio results fall outside the range deemed acceptable
by the NAIC. The nature of increased regulatory scrutiny
resulting from IRIS ratio results that are outside the acceptable
range is subject to the judgment of the applicable state
insurance department, but generally will result in accelerated
review of annual and quarterly filings. Depending on the nature
and severity of the underlying cause of the IRIS ratio results
being outside the acceptable range, increased regulatory scrutiny
could range from increased but informal regulatory oversight to
placing a company under regulatory control.
During the last three years, each of the Insurance Companies
reported results outside the acceptable range for the following
IRIS tests: the two-year overall operating ratio, change in net
writings, and the change in surplus. The two-year overall
operating ratio is a measure of company profitability which
combines three ratios: the loss ratio, plus the expense ratio,
minus the investment income ratio. A ratio result below 100%
indicates a profit, and a ratio result above 100% indicates a
loss. The change in net writings ratio is a measurement of the
stability of a company's operations. The change in surplus ratio
is a measurement of a company's financial condition. The table
below sets forth IRIS ratios outside the acceptable range for the
Insurance Companies during 1994, 1995 and 1996:
<PAGE>
<TABLE>
<CAPTION>
Insurance
Values
Equal to or Mercer Mutual MIC
-------------- ---------------------- ----------------------
Ratio Name/Description Over Under 1996 1995 1994 1996 1995 1994
- ---------------------- ---- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in net writings 33 (33) 263 (84)
Two-year overall
operating ratio 100 100 104 109 103
Change in surplus 50 (10) (10)
</TABLE>
For Mercer Mutual, the 1995 and 1994 two-year overall
operating ratio was outside the acceptable range. For 1995 and
1994, operating results were adversely impacted by winter storms
and wind storms which resulted in significant losses in 1994.
These storms also account for the change in surplus in 1994 to be
outside the normal range.
For MIC, the 1995 and 1994 two-year overall operating ratios
were outside the acceptable range. The 1994 two-year overall
operating ratios was negatively impacted by MIC's share of winter
storms and wind storms it assumed from Mercer Mutual under terms
of their reinsurance treaties at the time. Those treaties were
terminated as of January 1, 1995. The termination of the
intercompany reinsurance agreements resulted in the return of
unearned premium reserves from MIC to Mercer Mutual. As a
result, net writings dropped dramatically in 1995. The drop in
net premium writings in 1995 caused the unusual results for the
1996 and 1995 net writings ratio as well as the unusual result
for the 1995 two year operating ratio.
The states in which the Insurance Companies do business (New
Jersey and Pennsylvania) have guaranty fund laws under which
insurers doing business in such states can be assessed on the
basis of premiums written by the insurer in that state in order
to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of
business, to assist in the payment of policyholder claims against
insolvent insurers. The Insurance Companies make accruals for
their portion of assessments related to such insolvencies when
notified of assessments by the guaranty associations.
The property and casualty insurance industry has recently
received a considerable amount of publicity because of rising
insurance costs and the unavailability of insurance. New
regulations and legislation are being proposed to limit damage
awards, to control plaintiffs' counsel fees, to bring the
industry under regulation by the federal government and to
control premiums, policy terminations and other policy terms. It
is not possible to predict whether, in what form or in what
jurisdictions any of these proposals might be adopted or the
effect, if any, on the Insurance Companies. However, most of
these proposals relate to automobile insurance. The Insurance
Companies do not write, nor do they have any present intention to
write in the future, personal automobile insurance (except
through businesses which may be acquired through acquisition),
and the Insurance Companies' commercial automobile insurance
business is not material to the business of the Insurance
Companies.
Most states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a
holding company system is required to register with the insurance
supervisory agency of its state of domicile and furnish
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurers within the
system. Pursuant to these laws, the respective insurance
departments may examine the Insurance Companies and the Company
at any time, require disclosure of material transactions by the
Insurance Companies and the Company and require prior notice of
approval of certain transactions, such as "extraordinary
dividends" from the Insurance Companies to the Company.
All transactions within the holding company system affecting
the Insurance Companies and the Company must be fair and
equitable. Approval of the applicable insurance commissioner is
required prior to consummation of transactions affecting the
control of an insurer. In some states, including New Jersey and
Pennsylvania, the acquisition of 10% or more of the outstanding
capital stock of an insurer or its holding company is presumed to
be a change in control. These laws also require notice to the
applicable insurance commissioner of certain material
transactions between an insurer and any person in its holding
company system and, in some states, certain of such transactions
cannot be consummated without the prior approval of the
applicable insurance commissioner.
The Insurance Companies are restricted by the insurance
laws of their respective states of domicile as to the amount of
dividends or other distributions they may pay without notice to
or the prior approval of the state regulatory authority. Under
Pennsylvania law, the maximum amount that may be paid by Mercer
Mutual during any twelve-month period after notice to, but
without prior approval of, the Pennsylvania Department cannot
exceed the greater of 10% of Mercer Mutual's statutory surplus as
reported on the most recent annual statement filed with the
Pennsylvania Department, or the net income of Mercer Mutual for
the period covered by such annual statement. As of December 31,
1996, amounts available for payment of dividends by Mercer Mutual
to the Company in 1997 without the prior approval of the
Pennsylvania Department would have been approximately $1.6
million.
Intercompany Agreements
From September 15, 1982 to January 1, 1995, Mercer Mutual
and MIC were parties to reinsurance agreements whereby MIC ceded
100% of its business to Mercer Mutual and Mercer Mutual then
retroceded 10% of its business to MIC. These agreements have
been terminated. Mercer Mutual and MIC, however, remain parties
to a Management Agreement pursuant to which, in exchange for
functions and services performed by employees of Mercer Mutual,
all expenses for the workers' compensation business conducted by
the Insurance Companies are borne by MIC. Mercer Mutual and MIC
are also parties, together with QHC, to a Consolidate Tax
Allocation Agreement whereby each company is allocated a pro rata
share of the consolidated income tax expense based upon its
contribution of taxable income to the consolidated group.
Legal Proceedings
The Insurance Companies are parties to litigation in the
normal course of business. Based upon information presently
available to them, the Insurance Companies' do not consider any
threatened or pending litigation to be material. However, given
the uncertainties attendant to litigation, there can be no
assurance that the Insurance Companies' results of operations and
financial condition will not be materially adversely affected by
any threatened or pending litigation. See "Risk Factors --
Possible Adverse Impact of Potential Litigation" for a
description of the potential for litigation in connection with
the Conversion.
Properties
The Company's and Insurance Companies' main offices are
located at 10 North Highway 31, Pennington, New Jersey in a
14,357 square foot facility owned by Mercer Mutual. The Company
also owns a residential property at 158 Pennington-Harbourtown
Road, Pennington, New Jersey from which it receives rental
income.
Employees
As of September 30, 1997, the total number of full-time
equivalent employees of Mercer Mutual was 43. None of these
employees are covered by a collective bargaining agreement and
Mercer Mutual believes that employee relations are good. MIC
does not have any employees.
MANAGEMENT OF THE COMPANY
Directors
The Board of Directors of the Company consists of Roland D.
Boehm, James J. Freda, William C. Hart, George T. Hornyak,
Richard U. Niedt, Andrew R. Speaker, Eric W. Turner and
Richard G. Van Noy, each of whom presently serves as a director
of Mercer Mutual. The Board is divided into three classes with
directors serving for three-year terms with approximately
one-third of the directors being elected at each annual meeting
of shareholders, beginning with the first annual meeting of
shareholders following the Conversion. Messrs. Hornyak, Speaker
and Turner have terms of office expiring at the first annual
meeting, Messrs. Boehm and Freda have terms of office expiring at
the annual meeting to be held one year thereafter, and
Messrs. Hart, Niedt and Van Noy have terms of office expiring at
the annual meeting to be held two years thereafter.
The following table sets forth certain information regarding
the directors of the Company.
<PAGE>
<TABLE>
<CAPTION>
Age at Business Experience
September 30, Director for the Last Five Years;
1997 Since(1) Other Directorships
-------- -------- ------------------------------------------
<S> <C> <C> <C>
Roland D. Boehm 59 1980 Vice Chairman of the Board of Directors of
the Company, Mercer Mutual and MIC; Owner
of Boehm Appraisal; Director of Prestige
Financial Corp.
James J. Freda 76 1985 Director of the Company, Mercer Mutual and
MIC; Owner of James J. Freda, Inc.
William C. Hart 64 1970 President, Chief Executive
Officer and Director of the Company,
Mercer Mutual and MIC
George T. Hornyak, Jr. 47 1985 Director of the Company, Mercer Mutual and
MIC; President, Chief Executive Officer
and Director of Pulse Bancorp, Inc. and
Pulse Savings Bank
Richard U. Niedt 66 1979 Director of the Company, Mercer Mutual and
MIC; Retired
Andrew R. Speaker 34 1997 Executive Vice President, Chief Operating
Officer, Chief Financial Officer,
Treasurer and Director of the Company,
Mercer Mutual and MIC
Eric W. Turner, Jr. 76 1968 Director of the Company, Mercer Mutual and
MIC; Retired
Richard G. Van Noy 56 1979 Chairman of the Board of Directors of the
Company and Mercer Mutual and MIC;
Hopewell Township Administrator
_______________
</TABLE>
(1) Indicates year first elected as a director of Mercer Mutual.
All members of the Board of Directors of the Company have
served as directors of the Company since its incorporation.
Following the Conversion, directors of Mercer Mutual will be
paid a monthly retainer of $900 and a monthly meeting fee of $700
and directors of MIC will be paid a monthly retainer of $300. No
director of the Company has received any remuneration from the
Company since its formation and the Company does not presently
intend to pay any fees for service as a director of the Company.
Directors of Mercer Mutual elected after October 1, 1997 who
receive a salary from Mercer Mutual or its affiliates are not
entitled to receive an annual retainer or other additional
compensation from Mercer Mutual for services rendered as
directors or committee members.
Certain Transactions
Mercer Mutual is a party to consulting agreements (the
"Consulting Agreements") with directors Roland D. Boehm and
Eric W. Turner, Jr. The Consulting Agreements provide that
Messrs. Boehm and Turner are required to provide certain advisory
services to Mercer Mutual for annual compensation of $31,200 and
$6,000, respectively, until their respective Consulting Agreement
is terminated by the mutual consent of the parties.
Executive Officers
The executive officers of the Company are elected annually
and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by
the Board of Directors of the Company.
The following table sets forth certain information regarding
the executive officers of the Company.
<TABLE>
<CAPTION>
Age at Executive
September 30, Officer Business Experience
Name 1997 Since(1) Title For the Last Five Years
------ -------- --------- --------- -----------------------
<S> <C> <C> <C> <C>
William C. Hart 64 1986 President and President, Chief
Chief Executive Executive Officer, and
Officer Director of Mercer
Mutual and MIC
Andrew R. Speaker 34 1990 Executive Vice Senior Vice President
President, Chief of Mercer Mutual and MIC
Operating Officer, from April 1994 to
Chief Financial October 1, 1997; Chief
Officer and Financial Officer and
Treasurer Treasurer of Mercer
Mutual and MIC since
1990.
Marion J. Crum 54 1984 Vice President Vice President and
and Secretary and Secretary of Mercer
Mutual and MIC
John G. Danka 49 1995 Vice President Vice President of
and Marketing Mercer Mutual and MIC
Director Since 1995; Marketing
Director of Mercer
Mutual and MIC
since 1994; Senior
Manager, American
Reliance Companies from
1988 to 1994
Paul D. Ehrhardt 39 1996 Vice President Vice President of Mercer
Mutual and MIC since
1996; Regional Vice
President, VIK Brothers
Insurance Group from
1995 to 1996; Branch
Manager, American
Reliance Companies from
1991 to 1995
</TABLE>
____________________
(1) Indicates year first appointed as an executive officer of
Mercer Mutual. Each executive officer of the Company was
first appointed on November 12, 1997.
Executive Compensation
The executive officers of the Company have received no
compensation from the Company since its formation. The following
table sets forth information regarding the compensation of the
President and Chief Executive Officer and the Executive Vice
President and Chief Operating Officer of the Company for each of
the fiscal years ended December 31, 1994, 1995 and 1996. The
amounts below represent the aggregate compensation paid in 1995
and 1996 to such executive officers by Mercer Mutual. No other
executive officer of the Company received compensation in excess
of $100,000 for the fiscal year ended December 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
All Other
Name and Compen-
Principal Salary sation
Position Year (1)(2) Bonus (3)
- ------------------- ---- -------- ----- ---------
<S> <C> <C> <C> <C>
William C. Hart 1996 $135,776 $12,191 $ 5,919
1995 129,136 0 5,165
1994 127,038 0 5,278
Andrew R. Speaker 1996 97,964 9,144 3,683
1995 94,254 0 3,063
1994 91,011 0 2,970
</TABLE>
(1) Includes amounts which were deferred pursuant to Mercer
Mutual's 401(k) plan. Under the 401(k) plan, employees who
elect to participate may elect to have earnings reduced and
to cause the amount of such reduction to be contributed to
the 401(k) plan's related trust in an amount up to 15% of
earnings. Any employee who has completed 1 year of service
and has worked 1,000 hours in a plan year is eligible to
participate in the 401(k) plan.
(2) Mercer Mutual provided other benefits to the executive
officers in connection with their employment. The value of
such personal benefits, which is not directly related to job
performance, is not included in the table above because the
value of such benefits does not exceed the lesser of $50,000
or 10% of the salary and bonus paid to any executive
officer.
(3) Includes amounts contributed under a 401(k) plan for the
benefit of the executive officer. Mercer Mutual contributes
2% of an employee's salary. In addition, Mercer Mutual will
make a matching contribution equal to 66.7% of the
employee's salary reduction up to a maximum of 2% of the
employee's salary.
Certain Benefit Plans and Agreements
In connection with the Conversion, the Company's Board of
Directors has approved certain stock incentive plans and
employment agreements with the executive officers of the Company.
In addition, Mercer Mutual has an existing 401(k) plan and profit
sharing plan in which the executive officers of the Company will
be eligible to participate after the Conversion. Implementation
of certain of these stock incentive plans requires shareholder
approval.
Stock Compensation Plan.
On ___________, 1997, the Company's Board of Directors
adopted the Stock Compensation Plan (the "Compensation Plan"),
subject to receipt of shareholder approval at the Company's first
annual meeting of shareholders after the Conversion.
The purpose of the Compensation Plan is to provide
additional incentive to directors and employees of the Company
and Mercer Mutual by facilitating their purchase of stock in the
Company. The Compensation Plan will have a term of ten years
from the date of its approval by the Company's shareholders
(unless the plan is earlier terminated by the Board of Directors
of the Company) after which no awards may be made. Pursuant to
the Compensation Plan, a number of shares equal to 10% of the
shares of Common Stock that are issued in the Conversion will be
reserved for future issuance by the Company, in the form of
newly-issued or treasury shares, upon exercise of stock options
("Options") or stock appreciation rights ("SARs"), or the grant
of restricted stock ("Restricted Stock"). Options, SARs, and
Restricted Stock are collectively referred to herein as "Awards."
If Awards should expire, become unexercisable or be forfeited for
any reason without having been exercised or without becoming
vested in full, the shares of Common Stock subject to such Awards
will, unless the Compensation Plan is terminated, be available
for the grant of additional Awards under the Compensation Plan.
The Compensation Plan will be administered by a committee of
at least three directors of the Company who are designated by the
Board of Directors and who are "non-employee directors" within
the meaning of the federal securities laws (the "Compensation
Committee"). It is expected that the Compensation Committee will
initially consist of Directors _______________, _______________,
and __________. The Compensation Committee will select the
employees to whom Awards are to be granted, the number of shares
to be subject to such Awards, and the terms and conditions of
such Awards (provided that any discretion exercised by the
Compensation Committee must be consistent with the terms of the
Compensation Plan).
It is intended that Options granted under the Compensation
Plan will constitute either incentive stock options (options that
afford favorable tax treatment to recipients upon compliance with
certain restrictions pursuant to Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and that do not
result in tax deductions to the Company unless participants fail
to comply with Section 422 of the Code) ("ISOs")) or options that
do not so qualify ("Non-ISOs"). The exercise price for Options
will be determined by the Compensation Committee as of the date
the Option is granted based on the then market price of the
Common Stock and other factors. The Compensation Plan permits
the Compensation Committee to impose transfer restrictions, such
as a right of first refusal, on the Common Stock that optionees
may purchase. It is possible that the Compensation Committee
will impose transfer restrictions on shares subject to options
granted on the Compensation Plan's effective date. No Option
will be exercisable after the expiration of ten years from the
date it is granted; provided, however, that in the case of any
employee who owns more than 10% of the outstanding Common Stock
at the time an ISO is granted, the option price for the ISO will
not be less than 110% of the price at which the Common Stock is
sold in the Offering, and the ISO will not be exercisable after
the expiration of five years from the date it is granted. An
otherwise unexpired Option, unless otherwise determined by the
Compensation Committee, will cease to be exercisable upon (i) an
employee's termination of employment for "just cause" (as defined
in the Compensation Plan), (ii) the date three months after an
employee terminates service for a reason other than just cause,
death, or disability, (iii) the date one year after an employee
terminates service due to disability, or (iv) the date two years
after termination of such service due to the employee's death.
Options granted to non-employee directors will automatically
expire one year after termination of service on the Board of
Directors (two years in the event of death). Options granted at
the time of the implementation of the Compensation Plan are
expected to be exercisable six months after the date such options
are granted.
A SAR may be granted in tandem with all or any part of any
Option or without any relationship to any Option. Whether or not
a SAR is granted in tandem with an Option, exercise of the SAR
will entitle the optionee to receive, as the Compensation
Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common
Stock subject to the SAR at the time of its exercise, over the
aggregate exercise price of the shares subject to the SAR.
Payment to the optionee may be made in cash or shares of Common
Stock, as determined by the Compensation Committee.
Restricted Stock is Common Stock which is nontransferable
and forfeitable until a grantee's interest vests. Nevertheless,
the grantee is entitled to vote the Restricted Stock and to
receive dividends and other distributions made with respect to
the Restricted Stock. To the extent that a grantee becomes
vested in his Restricted Stock at any time during the
"Restriction Period" (as defined in the Compensation Plan) and
has satisfied applicable income tax withholding obligations, the
Company may deliver unrestricted shares of Common Stock to the
grantee. Vesting of Restricted Stock may be accelerated at the
discretion of the Compensation Committee. At the end of the
Restriction Period, the grantee will forfeit to the Company any
shares of Restricted Stock as to which he did not earn a vested
interest during the Restriction Period.
The Company will receive no monetary consideration for the
granting of Awards under the Compensation Plan, and will receive
no monetary consideration other than the Option exercise price
for each share issued to optionees upon the exercise of Options.
The Option exercise price may be paid in cash or Common Stock.
The exercise of Options and SARs and the conditions under which
Restricted Stock vests will be subject to such terms and
conditions established by the Compensation Committee as are set
forth in a written agreement between the Compensation Committee
and the optionee (to be entered into at the time an Award is
granted). In the event that the fair market value per share of
the Common Stock falls below the option price of previously
granted Options or SARs, the Compensation Committee will have the
authority, with the consent of the optionee, to cancel
outstanding Options or SARs and to reissue new Options or SARs at
the then current fair market price per share of the Common Stock.
Although directors and officers of the Company generally
will be prohibited under the federal securities laws from
profiting from certain purchases and sales of shares of Common
Stock within any six-month period, they generally will not be
prohibited by such laws from exercising options and immediately
selling the shares they receive, as long as the options are held
for six months from the date of grant. As a result, the
Company's directors and officers generally will be permitted to
benefit in the event the market price for the shares exceeds the
exercise price of their Options, without being subject to loss in
the event the market price falls below the exercise price.
Notwithstanding the provisions of any Award that provides
for its exercise or vesting in installments, all shares of
Restricted Stock shall become fully vested upon a "change in
control" (as defined in the Compensation Plan) and, for a period
of 60 days beginning on the date of such change in control, all
Options and SARs shall be immediately exercisable and fully
vested. In the event of a change in control, the Compensation
Committee may permit the holders of exercisable Options to
surrender their Options in exchange for cash in an amount equal
to the excess of the fair market value of the Common Stock
subject to the Options over their exercise price. No Award is
assignable or transferable except by will or the laws of descent
and distribution, or pursuant to the terms of a "qualified
domestic relations order" (within the meaning of Section 414(p)
of the Code and the regulations and rulings thereunder).
The initial grant of Options under the Compensation Plan is
expected to take place on the date of the receipt of shareholder
and regulatory approval of the Compensation Plan. No decisions
concerning the number of options to be granted to any director or
officer have been made at this time. No SARs or Restricted Stock
Awards are expected to be granted when the Compensation Plan
becomes effective, and no Awards would be made prior to the
receipt of shareholder approval of the Compensation Plan.
Employee Stock Ownership Plan.
In connection with the Conversion, the Company's Board of
Directors has adopted the Company's Employee Stock Ownership Plan
(the "ESOP") for the exclusive benefit of participating
employees, to be implemented upon the completion of the
Conversion. Participating employees are all employees of the
Company and its subsidiaries who have attained age 21 and
completed one year of service with the Company or its
subsidiaries. The Company will submit to the IRS an application
for a letter of determination as to the tax-qualified status of
the ESOP. Although no assurances can be given, the Company
expects that the ESOP will receive a favorable letter of
determination from the IRS.
The ESOP intends to borrow funds from the Company pursuant
to the ESOP Loan in an amount sufficient to purchase 10% of the
Common Stock issued in the Conversion. The ESOP Loan will bear
an interest rate equal to the prime rate of interest set forth in
The Wall Street Journal on the closing date of the Conversion.
At the Total Midpoint, the ESOP Loan will require the ESOP to
make monthly principal payments of $21,667, plus interest, for a
term of 10 years. The loan will be secured by the shares of
Common Stock purchased and earnings thereon. Shares purchased
with the ESOP Loan proceeds will be held in a suspense account
for allocation among participants as the ESOP Loan is repaid.
Mercer Mutual expects to contribute sufficient funds to the ESOP
to repay the ESOP Loan.
Contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the
basis of their annual wages subject to federal income tax
withholding, plus any amounts withheld under a plan qualified
under Sections 125 or 401(k) of the Code and sponsored by the
Company or an affiliate of the Company. Participants must be
employed at least 500 hours in a calendar year in order to
receive an allocation. A participant becomes 100% vested in his
or her right to ESOP benefits only after completing 5 years of
service. For vesting purposes, a year of service means any year
in which an employee completes at least 1,000 hours of service.
Vesting will be accelerated to 100% upon a participant's
attainment of age 65, death, or disability or a change in control
of the Company. Forfeitures will be reallocated to participants
on the same basis as other contributions. Benefits are payable
upon a participant's retirement, death, disability, or separation
from service, and will be paid in a lump sum or whole shares of
Common Stock (with cash paid in lieu of fractional shares).
Dividends paid on allocated shares are expected to be credited to
participant accounts within the ESOP or paid to participants, and
dividends on unallocated shares are expected to be used to repay
the ESOP loan.
The Company will administer the ESOP, and an unaffiliated
bank or trust company will be appointed as trustee of the ESOP
(the "ESOP Trustee"). The ESOP Trustee must vote all allocated
shares held in the ESOP in accordance with the instructions of
the participants. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP
Trustee in the same proportion as the participant-directed voting
of allocated shares.
Management Recognition Plan.
On _________________, 1997, the Company's Board of Directors
adopted a management recognition plan (the "MRP") subject to
receipt of shareholder approval at the Company's first annual
meeting of shareholders after the Conversion.
The objective of the MRP is to enable the Company to reward
and retain key personnel. Those eligible to receive benefits
under the MRP will be directors and executive officers of the
Company and the Insurance Companies who are selected by members
of the Compensation Committee.
The MRP will be managed through a separate trust (the "MRP
Trust"). The Trustees of the MRP Trust (the "MRP Trustees"), who
are expected to be the members of the Compensation Committee,
have the responsibility to invest all funds contributed to the
MRP Trust. The Company will contribute sufficient funds to the
MRP Trust to enable it to purchase in the open market up to an
aggregate number of shares equal to 4% of the shares of the
Common Stock that were issued in the Conversion. If the MRP
Trustees are unable to purchase such amount of shares in the open
market at a price which is satisfactory to the MRP Trustees in
their discretion, the Company may issue shares of authorized
Common Stock to the MRP Trust.
It is anticipated that all shares of Common Stock purchased
by the MRP Trust will be awarded to eligible directors and
executive officers at no cost to them pursuant to the terms of
the MRP. Unless the Compensation Committee decides to the
contrary (which is not expected to occur in the case of awards
made on the MRP's effective date), vesting will occur at the rate
of 20% per year of service following the award date. Unvested
shares held in the MRP Trust shall be voted by the MRP Trustees
in the same proportion as the trustee of the Company's ESOP trust
votes Common Stock held therein, and shall be distributed as the
award vests. Dividends on unvested shares will be held in the
MRP Trust for payment as vesting occurs. At the election of the
participant, but subject to approval by the Compensation
Committee, unvested shares that would otherwise be held by the
MRP Trust may be distributed to the participant in the form of
restricted stock subject to forfeiture. A participant who has
received restricted stock may vote such shares, will receive any
dividends paid thereon (subject to the same vesting rules
applicable to the restricted stock), and will be able to exchange
restricted shares for unrestricted shares as vesting occurs.
If an employee terminates employment for reasons other than
retirement at or after age 65, death, or disability, he or she
forfeits all rights to the allocated shares under restriction.
If the employee's termination is caused by retirement at or after
age 65, death, or disability, all restrictions expire and all
shares allocated become vested and, consequently, unrestricted.
The same vesting rules apply to directors except that the
director retirement age is 75. The MRP provides that in the
event of a change in control of the Company, all shares of the
Common Stock subject to outstanding awards will be immediately
payable to the holders of the awards.
Participants will recognize compensation income when their
interests vest, or at such earlier date pursuant to a
participant's election to accelerate income recognition pursuant
to Section 83(b) of the Code.
The Company's Board of Directors intends to seek shareholder
approval of the MRP at the first annual meeting of shareholders
following completion of the Conversion and can terminate the MRP
at any time, and, if it does so, any shares not allocated will
revert to the Company. No decisions have been made concerning
the number of MRP awards to be granted to any director or
officer. Assuming shares are sold equal to the maximum of the
Estimated Valuation Range in the Conversion (not including shares
sold to the ESOP), and further assuming that share awards of
restricted stock have a value of $10 per share, the maximum
aggregate value of MRP awards to employees and non-employee
directors upon the MRP's receipt of shareholder approval would be
$1.2 million. No awards will be made prior to shareholder
approval of the MRP.
Executive Employment Agreements.
As of October 1, 1997, William C. Hart and Andrew R. Speaker
entered into Employment Agreements with the Company and Mercer
Mutual (the "Employment Agreements"). Each Employment Agreement
has an initial three-year term and provides for annual one-year
extensions, upon review by the Board of Directors, commencing on
October 1, 1998 and continuing on each October 1 thereafter
unless the Company or the executive gives prior written notice of
nonrenewal. Under their respective Employment Agreements,
Mr. Hart is entitled to receive an annual base salary of not less
than $150,000, which will increase to $160,000 on April 1, 1998
and to $170,000 on October 1, 1998, and Mr. Speaker is entitled
to receive an annual base salary of not less than $115,000, which
will increase to $125,000 on April 1, 1998 and to $135,000 on
October 1, 1998. In addition, Messrs. Hart and Speaker are each
entitled to participate in any other incentive compensation and
employee benefit plans that the Company maintains.
In the event the Company terminates the executive's
employment for "Cause" as defined in the Employment Agreements,
the executive will be entitled to receive his accrued but unpaid
base salary and an amount for all accumulated but unused vacation
time earned through the date of his termination.
In the event the Company terminates the executive's
employment without Cause, the executive will be entitled to
receive an annual amount equal to the greater of (i) his highest
base salary received during one of the two years immediately
preceding the year in which he is terminated, or (ii) his base
salary in effect immediately prior to his termination, for the
remainder of the term of his Employment Agreement. In addition,
during the remaining term of his Employment Agreement, the
executive will annually be entitled to (i) an amount equal to the
higher of the aggregate bonuses paid to him in one of the two
years immediately preceding the year in which he is terminated
and (ii) an amount equal to the sum of the highest annual
contribution made on his behalf (other than his own salary
reduction contributions) to each of the Company's tax qualified
and non-qualified defined contribution plans (as such term is
defined in Section 3(35) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) in the year in which
he is terminated or in one of the two years immediately preceding
such year. The executive will also be entitled to certain
retirement, health and welfare benefits.
In the event the executive terminates his employment with
the Company for "Good Reason," as defined in the Employment
Agreements, the executive will be entitled to receive the same
amounts and benefits he would receive if terminated without
Cause. In the event the executive terminates his employment with
the Company without Good Reason, the executive will be entitled
to receive his accrued but unpaid base salary until the date of
termination and an amount for all accumulated but unused vacation
time through the date of the determination of his employment.
In the event of the executive's death or disability during
the term of his employment, the executive and his eligible
dependents or his spouse and her eligible dependents, as the case
may be, will be entitled to receive certain cash amounts and
certain health and welfare benefits.
In the event that the executive is required to pay any
excise tax imposed under Section 4999 of the Code (or any similar
tax imposed under federal, state or local law) as a result of any
compensation and benefits received under his Employment Agreement
in connection with a change in control, the Company will pay to
the executive an additional amount such that the net amount
retained by him, after the payment of such excise taxes (and any
additional income tax resulting from such payment by the
Company), equals the amount he would have received but for the
imposition of such taxes.
The Employment Agreements further provide that in the event
the executive's employment is terminated for Cause or he
voluntarily terminates his employment prior to a "Change in
Control," as defined in the Employment Agreements, the executive
may not, for a period of twelve months after the date of
termination, without the prior written consent of the Company's
Board of Directors, become an officer, director or a shareholder
or equity owner of 4.9% or more of any entity engaged in the
property and casualty insurance business with its corporate
headquarters located within New Jersey. In addition, the
executive's employment and for a period of 12 months following
the termination of his employment, except following a Change in
Control, the executive may not solicit, endeavor to entice away
from the Company, its subsidiaries or affiliates, or otherwise
interfere with the relationship of the Company or its
subsidiaries or affiliates with any person who is, or was within
the then most recent 12-month period, an employee or associate of
the Company or any of its subsidiaries or affiliates.
THE CONVERSION
The Plan has been approved by the Pennsylvania Department,
subject to the Plan's approval by the policyholders of Mercer
Mutual entitled to vote and the shareholders of the Company and
the satisfaction of certain other conditions imposed by the
Pennsylvania Department in its approval. Approval by the
Pennsylvania Department does not constitute a recommendation or
endorsement of the Plan.
Background and Reasons for the Conversions
Mercer Mutual's exposure to severe winter weather conditions
has been a major factor affecting its underwriting results since
1991. Operating results in 1994 and 1996 were adversely affected
by severe winter storms in such years that were largely
responsible for a $1.4 million net loss and a $665,000 reduction
in net income for such years, respectively. In order to reduce
the risk caused by this exposure, Mercer Mutual's strategic plan
is expressly predicated upon geographically diversifying its
business and improving capital strength. Increased capital would
provide additional policyholder protection and would facilitate
diversification of risk through the acquisition of companies
located in other geographic areas. Since 1996, Mercer Mutual has
considered various capital formation alternatives and has elected
to proceed with the Conversion in accordance with the provisions
of the Pennsylvania Insurance Company Mutual to Stock Conversion
Act (the "Act"). The Act was passed by the Pennsylvania General
Assembly in December 1995. On August 12, 1997, management was
directed by the Board of Directors of Mercer Mutual to explore
the process and feasibility of conversion under the Act. On
September 11, 1997, the Board of Directors authorized further
study and requested a presentation with respect to the process at
its meeting on September 26, 1997. At such meeting, management
was directed to prepare the Plan for consideration at the next
regularly scheduled meeting of the Board of Directors. On
October 17, 1997, the Board of Directors of Mercer Mutual
unanimously adopted the Plan, subject to approval by the
Pennsylvania Department and the policyholders of Mercer Mutual.
The Board of Directors unanimously adopted amendments to the Plan
on November 12, 1997. An application with respect to the
Conversion was filed by Mercer Mutual with the Pennsylvania
Department on November 26, 1997 and notice of the filing and the
opportunity to comment on and to request and receive a copy of
the Plan was mailed on December 2, 1997 to all Eligible
Policyholders, as required by law. The Pennsylvania Department
informed Mercer Mutual on ___________, 1997 that it did [not]
intend to hold any hearings regarding the Conversion. The Plan
was approved by the Pennsylvania Department on ____________, 1998
and is subject to the approval of Eligible Policyholders at the
Special Meeting. The Company also has applied for the approval
of the Pennsylvania Department to acquire control of Mercer
Mutual and the approval of the New Jersey Department to acquire
control of MIC.
General
The Conversion will be accomplished through the filing with
the Department of State of the Commonwealth of Pennsylvania
amended and restated Articles of Incorporation of Mercer Mutual
to authorize the issuance of shares of Mercer Mutual capital
stock and to conform to the requirements of a Pennsylvania stock
insurance company. The Company has received the approval of the
Pennsylvania Department and the New Jersey Department to
contribute $5.0 million of the net proceeds of the Offering to
Mercer Mutual in exchange for all of the capital stock of Mercer
Mutual to be issued in the Conversion. See "Use of Proceeds."
Upon issuance of the shares of capital stock of Mercer Mutual to
the Company, Mercer Mutual will become a wholly-owned subsidiary
of the Company. The Conversion will be effected only upon
completion of the sale of at least the minimum number of shares
of Common Stock required to be sold by the Company pursuant to
the Plan. The Conversion will be accounted for as a simultaneous
reorganization, recapitalization and share offering which will
not change the historical accounting basis of Mercer Mutual's
financial statements.
The aggregate purchase price of the Common Stock to be
issued in the Conversion will be within the Estimated Valuation
Range of between $22,100,000 and $29,900,000, based upon an
independent Appraisal of the estimated consolidated pro forma
market value of the Common Stock prepared by Sheshunoff. All
shares of Common Stock to be issued and sold in the Conversion
will be sold at the same price of $10.00 per share. The
independent Appraisal will be affirmed or, if necessary, updated
upon the completion of the Conversion Offerings if all shares are
subscribed for or at the completion of any Syndicated Community
Offering. Sheshunoff is a consulting firm experienced in
corporate valuations. For additional information, see "Stock
Pricing and Number of Shares to be Issued" herein.
The following is a summary of certain aspects of the
Conversion. The summary is qualified in its entirety by
reference to the provisions of the Plan, a copy of which is
available for inspection at the Company's principal executive
offices located at 10 North Highway 31, Pennington, New Jersey.
The Plan is also filed as an exhibit to the Registration
Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Available Information."
Offering of Common Stock
Under the Plan, the Company is offering shares of Common
Stock in the Subscription Offering first to the Eligible
Policyholders, second to the ESOP, and third to the directors,
officers and employees of Mercer Mutual. Subscription rights
received in the third category will be subordinated to the
subscription rights of the Eligible Policyholders. The Company
is also concurrently offering Common Stock to the general public
in the Community Offering. See "The Subscription Offering and
Community Offering" herein.
It is anticipated that all shares not purchased in the
Conversion Offerings will be offered for sale by the Company to
the general public in the Syndicated Community Offering. See
"Syndicated Community Offering" herein. The Plan provides that
in the event a Syndicated Community Offering does not appear
feasible, the Company will consult with the Pennsylvania
Department to determine the most practical alternative available
to complete the Conversion, including the sale of the remaining
shares of Common Stock in a private placement. Should no viable
alternative exist, the Company may discontinue the Conversion and
terminate the Plan in accordance with the provisions of the Plan.
The completion of the Offerings is subject to market
conditions and other factors beyond the Company's control. No
assurance can be given as to the length of time that will be
required to complete the sale of Common Stock to be offered in
the Conversion after approval of the Plan by Eligible
Policyholders at the Special Meeting. If delays are experienced,
significant changes may occur in the estimated pro forma market
value of the Company, together with corresponding changes in the
offering price and the net proceeds realized by the Company from
the sale of the Common Stock. Mercer Mutual would also incur
substantial additional legal, accounting and other expenses in
completing the Conversion. In the event that the Conversion is
not completed, Mercer Mutual will remain a mutual insurance
company and all subscription funds will be promptly returned to
subscribers without interest. In addition, Mercer Mutual would
be required to charge all Conversion expenses against current
income.
Business Purposes
The Company was formed to serve as the holding company for
all of the issued and outstanding capital stock of Mercer Mutual
upon completion of the Conversion. The portion of the net
proceeds from the sale of Common Stock in the Conversion that the
Company will contribute to Mercer Mutual will substantially
increase Mercer Mutual's surplus which will, in turn, enhance
policyholder protection and increase the amount of funds
available to support both current operations and future growth
and thereby provide increased opportunities for existing
employees while creating new jobs. The holding company structure
also will provide greater flexibility for diversification of
business activities and geographic operations. Management
believes that this increased capital and operating flexibility
will enable the Company and Mercer Mutual to compete more
effectively with other insurance companies. In addition, the
Conversion will enhance the future access of the Company and
Mercer Mutual to the capital markets.
After completion of the Conversion, the unissued Common
Stock and preferred stock authorized by the Company's Articles of
Incorporation will permit the Company to raise additional equity
capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the
present time, the Company has no plans with respect to additional
offerings of securities following the Conversion, other than the
proposed issuance of additional shares under the MRP and
Compensation Plan, if implemented. Following completion of
Conversion, the Company also will be able to use stock-related
incentive programs to attract, motivate and retain highly
qualified employees for itself and its subsidiaries. See
"Management of the Company."
Effect of Conversion on Policyholders
General.
Each policyholder in a mutual insurance company, including
each policyholder of Mercer Mutual, has certain interests in its
policy issuing insurance company in addition to the contractual
right to insurance coverage afforded by the policyholder's policy
of insurance. These interests are (i) the right to vote with
respect to the election of directors of the company and certain
other fundamental corporate transactions, such as an amendment to
the articles of incorporation of the company or a merger of the
company, (ii) the right to receive dividends if, as and when
declared by the board of directors of the company (Mercer Mutual
has never declared a policyholder dividend and has no intention
of doing so in the future), and (iii) in the unlikely event of a
solvent dissolution of the company, the right to receive a pro
rata distribution of any surplus remaining after the satisfaction
of all claims and other liabilities of the company. However,
these interests are incident to, and contingent upon the
existence of, the underlying insurance policy. These interests
have no tangible market value separate from such insurance
policy, and a policyholder who terminates his policy
automatically forfeits the interests in the company described
above. Policyholder interests other than contract rights under
policies of insurance will be terminated as a result of the
Conversion.
If the Plan is not approved by the Eligible Policyholders or
if the Conversion fails to be completed for any other reason,
Mercer Mutual will continue its existence as a mutual insurance
company and Eligible Policyholders will retain the rights
described above.
Continuity of Insurance Coverage and Business Operations.
The Conversion will not affect the contractual rights of
policyholders to insurance protection under their individual
insurance policies with Mercer Mutual. During and after the
Conversion, the normal business of Mercer Mutual of issuing
insurance policies in exchange for premium payments and
processing and paying claims will continue without change or
interruption. After the Conversion, Mercer Mutual will continue
to provide services for policyholders under current policies and
by its present management and staff.
The Board of Directors of Mercer Mutual at the time of the
Conversion will continue to serve as the Board of Directors of
Mercer Mutual after the Conversion. The Board of Directors of
the Company will consist of the following persons, each of whom
is an existing director of Mercer Mutual: Roland D. Boehm,
James J. Freda, William C. Hart, George T. Hornyak, Richard U.
Niedt, Andrew R. Speaker, Eric W. Turner and Richard G. Van Noy.
See "Management of the Company -- Directors." All officers of
Mercer Mutual at the time of the Conversion will retain their
positions with Mercer Mutual after the Conversion.
Voting Rights.
Upon completion of the Conversion, the voting rights of all
policyholders in Mercer Mutual will terminate and policyholders
will no longer have the right to elect the directors of Mercer
Mutual or approve transactions involving Mercer Mutual. Instead,
voting rights in Mercer Mutual will be vested exclusively in the
Company, which will own all the capital stock of Mercer Mutual.
Voting rights in the Company will be vested exclusively in the
shareholders of the Company, including Eligible Policyholders who
purchase shares of Common Stock in the Subscription Offering.
Each holder of Common Stock shall be entitled to vote on any
matter to be considered by the shareholders of the Company,
subject to the terms of the Company's Articles of Incorporation,
Bylaws and to the provisions of Pennsylvania and federal law.
See "Description of Capital Stock -- Common Stock."
Policyholder Dividends.
The Conversion will not affect the right of a policyholder
to receive dividends from Mercer Mutual in accordance with the
terms of the policyholder's existing policy of insurance, which
provides that dividends will be paid only if, as and when
declared by the Board of Directors of Mercer Mutual. However,
Mercer Mutual has never declared a policyholder dividend and has
no present intention of doing so in the future, whether or not
Mercer Mutual converts to stock form. Shareholders of the
Company, including eligible policyholders who purchase shares of
Common Stock in the Subscription Offering, will have the
exclusive right to receive dividends paid by the Company, if any.
See "Description of Capital Stock -- Common Stock."
Rights Upon Dissolution.
After the Conversion, policyholders will no longer have the
right to receive a pro rata distribution of any remaining surplus
in the unlikely occurrence of a solvent dissolution of Mercer
Mutual. Instead, this right will vest in the Company as the sole
shareholder of Mercer Mutual. In the event of a liquidation,
dissolution or winding up of the Company, shareholders of the
Company, including Eligible Policyholders who purchase shares of
Common Stock in the Subscription Offering, would be entitled to
receive, after payment of all debts and liabilities of the
Company, a pro rata portion of all assets of the Company. See
"Description of Capital Stock -- Common Stock."
The Conversion Offerings
Subscription Offering.
Nontransferable subscription rights to purchase shares of
Common Stock are being issued to all persons entitled to purchase
stock in the Subscription Offering at no cost to such persons.
The amount of Common Stock that these parties may purchase will
be determined, in part, by the total number of shares of Common
Stock to be issued and the availability of Common Stock for
purchase under the categories set forth in the Plan.
Preference categories have been established for the
allocation of Common Stock to the extent that shares are
available. These categories are as follows:
Subscription Category No. 1 is reserved for Eligible
Policyholders of Mercer Mutual (those persons who are named
insureds at the close of business on October 17, 1997 (the
"Eligibility Record Date") under an existing insurance
policy issued by Mercer Mutual). Each Eligible Policyholder
will receive, without payment, subscription rights to
purchase up to 100,000 shares of Common Stock; provided,
however, that the maximum number of shares that may be
purchased by Eligible Policyholders in the aggregate will be
equal to the maximum of the Estimated Valuation Range
divided by the Purchase Price. In the event of an
oversubscription, shares of Common Stock will be allocated
among subscribing Eligible Policyholders, as follows.
First, shares of Common Stock will be allocated among
subscribing Eligible Policyholders so as to permit each such
Eligible Policyholder, to the extent possible, to purchase
the lesser of (i) 1,000 shares, or (ii) the number of shares
for which such Eligible Policyholder has subscribed.
Second, any shares of Common Stock remaining after such
initial allocation will be allocated among the subscribing
Eligible Policyholders whose subscriptions remain
unsatisfied in the proportion in which the aggregate number
of shares as to which each such Eligible Policyholder's
subscription remains unsatisfied bears to the aggregate
number of shares as to which all Eligible Policyholders'
subscriptions remain unsatisfied; provided, however, that no
fractional shares of Common Stock shall be issued.
Subscription Category No. 2 is reserved for the ESOP,
which shall receive, without payment, nontransferable
subscription rights to purchase, in the aggregate, up to 10%
of the shares of Common Stock to be issued in the
Conversion. The ESOP is expected to purchase 10% of the
Common Stock issued in the Conversion. See "Management of
the Company -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
Subscription Category No. 3 is reserved for directors,
officers and employees of Mercer Mutual. Each director,
officer and employee of Mercer Mutual will receive, without
payment, subscription rights to purchase up to 100,000
shares of Common Stock; provided, however, that such
subscription rights will be subordinated to the subscription
rights received by the Eligible Policyholders and may be
exercised only to the extent that there are shares of Common
Stock that could have been purchased by Eligible
Policyholders, but which remain unsold after satisfying the
subscriptions of all Eligible Policyholders. In the event
of an oversubscription among the directors, officers and
employees, shares of Common Stock shall be allocated among
them on the basis of a point system under which each
director, officer and employee will be assigned one point
for each year of service to Mercer Mutual, one point for
each then current annual salary increment of $5,000, and one
point for each office held in Mercer Mutual. If any
director, officer or employee does not subscribe for his
full allocation of shares, the shares not subscribed for
shall be allocated among the directors, officers and
employees whose subscriptions remain unsatisfied in
proportion to their respective subscriptions. A director,
officer or employee of Mercer Mutual who subscribes to
purchase shares of Common Stock and who is also eligible to
purchase shares of Common Stock as an Eligible Policyholder
will be deemed to purchase Common Stock first in his or her
capacity as an Eligible Policyholder.
The Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which
persons entitled to subscribe for Common Stock pursuant to the
Plan reside. However, no person will be offered or allowed to
purchase any Common Stock under the Plan if he or she resides in
a foreign country or in a state of the United States with respect
to which any or all of the following apply: (i) a small number
of persons otherwise eligible to subscribe for shares under the
Plan reside in such state or foreign country; (ii) the granting
of subscription rights or the offer or sale of shares of Common
Stock to such persons would require the Company or Mercer Mutual
or their employees to register, under the securities laws of such
state, as a broker, dealer, salesman or agent or to register or
otherwise qualify its securities for sale in such state or
foreign country; or (iii) such registration or qualification
would be impracticable for reasons of cost or otherwise. No
payments will be made in lieu of the granting of subscription
rights to any such person.
Community Offering.
Concurrently with the Subscription Offering, the Company is
offering shares of the Common Stock to the general public in a
Community Offering. Preference in the Community Offering will be
given to (i) natural persons and trusts of natural persons
(including individual retirement and Keogh retirement accounts
and personal trusts in which such natural persons have
substantial interests) who are permanent residents in the Local
Community of the State of New Jersey or the Commonwealth of
Pennsylvania, (ii) principals of Eligible Policyholders in the
case of an Eligible Policyholder that is a corporation,
partnership, limited liability company or other entity,
(iii) licensed insurance agencies who have been appointed by
Mercer Mutual to market and distribute insurance products, and
their owners, (iv) named insureds under policies of insurance
issued by Mercer Mutual after October 17, 1997, and (v) providers
of goods or services to, and identified by, Mercer Mutual. The
term "resident," as used in relation to the preference afforded
natural persons in the Local Community, means any natural person
who occupies a dwelling within the Local Community, has an
intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non-
transitory presence within one of the states in the Local
Community) and continues to reside in the Local Community at the
time of the Community Offering. The Company may utilize
policyholder records or such other evidence provided to it to
make the determination whether a person is a resident of the
Local Community. In the case of a corporation or other business
entity, such entity shall be deemed to be a resident of the Local
Community only if its principal place of business or headquarters
is located within the Local Community. All determinations as to
the status of a person as a resident of the Local Community shall
be made by Mercer Mutual in its sole and absolute discretion.
Subscriptions for Common Stock received from members of the
general public in the Community Offering will be subject to the
availability of shares of Common Stock after satisfaction of all
subscriptions in the Subscription Offering, as well as the
maximum and minimum purchase limitations set forth in the Plan.
The Community Offering will terminate on the Termination Date,
unless extended by the Company, in its sole discretion, for up to
an additional 45 days. Furthermore, the right of any person to
purchase shares in the Community Offering, including the
preferred subscribers described in clauses (i)-(v) above, is
subject to the absolute right of the Company to accept or reject
such purchases in whole or in part.
Stock Pricing and Number of Shares to be Issued
The Plan requires that the purchase price of the Common
Stock be based on the appraised pro forma market value of Mercer
Mutual following the Conversion, on a consolidated basis, as a
subsidiary of the Company, as determined on the basis of an
independent valuation by an appraiser who is experienced in
corporate valuation. The Company has retained Sheshunoff to
prepare the appraisal, and Sheshunoff, as part of its investment
banking business, is engaged regularly in the valuation of
assets, securities and companies in connection with various types
of asset and security transactions, including mergers,
acquisitions, private placements, and valuations for various
other purposes and in the determination of adequate consideration
in such transactions. Sheshunoff will receive a fee of
approximately $75,000 for its appraisal.
Sheshunoff has determined that, as of November 24, 1997, the
estimated pro forma market value of Mercer Mutual following the
Conversion, on a consolidated basis, as a subsidiary of the
Company was $26,000,000. Under the Plan, the aggregate purchase
price of the common Stock to be offered in the Conversion must
equal the pro forma market value of Mercer Mutual following the
Conversion, on a consolidated basis, as a subsidiary of the
Company. The Company, in consultation with its advisors, has
determined to offer the shares in the Conversion at a price of
$10.00 per share, and by dividing the price per share into the
Estimated Valuation Range, initially plans to issue between
2,210,000 and 2,990,000 shares (exclusive of purchases by the
ESOP) of the Common Stock in the Conversion.
The Plan requires that an appraiser establish a valuation
range (the "Estimated Valuation Range") consisting of a midpoint
valuation (the "Total Midpoint"), a valuation 15 percent (15%)
above the midpoint valuation (the "Total Maximum") and a
valuation 15 percent (15%) below the midpoint valuation (the
"Total Minimum"). Accordingly, Sheshunoff has established a
range of value from $22,100,000 to $29,900,000. Upon completion
of the Conversion Offerings, after taking into account factors
similar to those involved in its initial Appraisal, Sheshunoff
will submit to the Company and to the Pennsylvania Department its
updated estimate of the pro forma fair market value of Mercer
Mutual following the Conversion on a consolidated basis, as a
subsidiary of the Company as of the last day of the Conversion
Offerings. If such updated estimated valuation does not fall
within the Estimated Valuation Range, then, in such event, the
Company may cancel the Offerings and terminate the Plan,
establish a new Estimated Valuation Range, extend, reopen or hold
a new offering or take such other action as may be authorized by
the Pennsylvania Department. In such event, subscribers will be
promptly notified by mail of the updated estimated valuation and,
if a new Estimated Valuation Range is established, subscribers
will be given an opportunity to confirm or modify their orders.
The funds of any subscribers who do not confirm or modify their
orders will be returned promptly without interest. Subscription
orders may not be withdrawn for any reason, if the updated
appraisal is within the Estimated Valuation Range.
If the updated estimated valuation Sheshunoff submits to the
Company and the Pennsylvania Department upon completion of the
Conversion Offerings falls within the Estimated Valuation Range,
the following steps will be taken:
Subscription Offering Meets or Exceeds Maximum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares subscribed for by
participants in the Subscription Offering multiplied by the
Purchase Price is equal to or greater than the Maximum of the
Valuation Range, then in such event the Conversion shall be
promptly consummated and the Company shall on the effective
date of the Conversion (the "Effective Date") issue shares of
Common Stock to the subscribing participants; provided, however,
that the number of shares of Common Stock issued shall not exceed
the number of shares of Common Stock offered in the Subscription
Offering. In the event of an oversubscription in the
Subscription Offering, shares of Common Stock shall be allocated
among the subscribing participants in the priorities set forth in
the Plan; provided, however, that no fractional shares of Common
Stock shall be issued. See "-- Subscription Offering," herein.
Subscription Offering Meets or Exceeds Minimum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares of Common Stock
subscribed for by participants in the Subscription Offering
multiplied by the Purchase Price is equal to or greater than the
Minimum of the Valuation Range, but less than the Maximum of the
Valuation Range, then in such event the Conversion shall be
promptly consummated and the Company shall on the Effective Date
issue to the subscribing participants shares of Common Stock in
an amount sufficient to satisfy the subscriptions of such
participants in full. To the extent that shares of Common Stock
remain unsold after the subscriptions of all participants in the
Subscription Offering have been satisfied in full, the Company
shall have the right in its absolute discretion to accept, in
whole or in part, subscriptions received from any or all
subscribers in the Community Offering and/or to sell shares of
Common Stock to purchasers in the Syndicated Community Offering
or more other registered transactions; provided, however, that
the number of shares of Common Stock issued shall not exceed the
number of shares of Common Stock offered in the Conversion
Offerings; and, provided further, that no fractional shares of
Common Stock shall be issued.
Subscription Offering Does Not Meet Minimum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares of Common Stock
subscribed for by participants in the Subscription Offering
multiplied by the Purchase Price is less than the Minimum of the
Valuation Range, then in such event the Company shall accept
subscriptions received from subscribers in the Community Offering
and/or sell shares of Common Stock to purchasers in a Syndicated
Community Offering or in one or more other registered
transactions. If the aggregate number of shares of Common Stock
subscribed for in the Offerings or other registered transaction
multiplied by the Purchase Price is equal to or greater than the
Minimum of the Valuation Range, then in such event the Conversion
shall be consummated promptly and the Company shall on the
Effective Date: (i) issue to subscribing participants in the
Subscription Offering shares of Common Stock in an amount
sufficient to satisfy the subscriptions of such participants in
full, and (ii) issue to subscribers in the Community Offering
and/or to purchasers in any Syndicated Community Offering or
other registered transaction such additional number of shares of
Common Stock such that the aggregate number of shares of Common
Stock to be issued to subscribing participants, to subscribers in
the Community Offering and/or to purchasers in any Syndicated
Community Offering or other registered transaction multiplied by
the Purchase Price shall be equal to the Minimum of the Valuation
Range; provided, however, that no fractional shares of Common
Stock shall be issued. The Company may in its absolute
discretion elect to issue shares of Common Stock to subscribers
in the Community Offering and/or to purchasers in any Syndicated
Community Offering in excess of the number determined by
reference to clause (ii) of the preceding sentence; provided,
however, that the number of shares of Common Stock issued shall
not exceed the number of shares of Common Stock offered in the
Offering.
Offering Does Not Meet Minimum.
If the aggregate number of shares of Common Stock subscribed
for in the Offerings or in one or more other registered
transactions multiplied by the Purchase Price is less than the
Minimum of the Estimated Valuation Range, then in such event the
Company will cancel the Offering and all subscription funds will
be returned promptly to subscribers without interest.
Notwithstanding anything to the contrary set forth in the
Plan, the Company shall have the right in its absolute discretion
and without liability to any subscriber, purchaser, underwriter
or any other person: (i) to determine which subscriptions, if
any, to accept in the Community Offering and to accept or reject
any such subscription in whole or in part for any reason or for
no reason, and (ii) to determine whether and to what extent
shares of Common Stock are to be sold in a Syndicated Community
Offering or one or more registered transactions.
Under the Act, the Company is permitted to require a minimum
subscription of 25 shares of Common Stock provided that any
required minimum subscription amount established cannot exceed
$500. Based on these minimum subscription parameters, the
maximum price at which the Company could offer shares of Common
Stock in the Conversion is $20 per share. However, at a purchase
price of $20 per share, the maximum number of shares of Common
Stock that could be offered in the Conversion would be 1,495,000
shares compared to a maximum of 2,990,000 shares at $10 per
share. Therefore, the Company determined to offer the Common
Stock in the Conversion at the price of $10.00 per share to
increase the number of shares available for purchase by
policyholders. There were no other factors considered by the
Board of Directors of the Company in determining to offer shares
of Common Stock at $10.00 per share in the Conversion.
The appraisal is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing
Common Stock. In preparing the valuation, Sheshunoff has relied
upon and assumed the accuracy and completeness of financial and
statistical information provided by the Company and Mercer
Mutual. Sheshunoff did not independently verify the financial
statements and other information provided by the Company and
Mercer Mutual and Sheshunoff did not value independently the
assets and liabilities of the Company and Mercer Mutual. The
valuation considers the Company and Mercer Mutual only as a going
concern and should not be considered as an indication of the
liquidation value of the Company and Mercer Mutual. Moreover,
because such valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons
purchasing Common Stock will thereafter be able to sell such
shares at or above the initial purchase price. Copies of the
appraisal report of Sheshunoff setting forth the method and
assumptions for such appraisal are on file and available for
inspection at the principal executive offices of the Company.
Any subsequent updated appraisal report of Sheshunoff also will
be available for inspection.
There is a difference of approximately $7.8 million between
the Total Minimum and the Total Maximum of the Estimated
Valuation Range. As a result, the percentage interest in the
Company that a subscriber for a fixed number of shares of Common
Stock will have is approximately 26.1% smaller if 2,990,000
shares are sold than if 2,210,000 shares are sold. Furthermore,
as a result of this broad range, the updated appraisal may
estimate a pro forma market value for Mercer Mutual as subsidiary
of the Company that is materially more or less than the aggregate
dollar amount of subscriptions received by the Company.
Subscribers will not receive a refund or have any right to
withdraw subscriptions if the updated appraisal estimates a pro
forma market value that is less than the aggregate dollar amount
of subscriptions received by the Company. Therefore,
subscribers, in the aggregate and on a per share basis, may pay
more for the Common Stock than the estimated pro forma market
value of Mercer Mutual as subsidiary of the Company.
Accordingly, no assurance can be given that the market price for
the Common Stock immediately following the Conversion will equal
or exceed the Purchase Price. Also, subscribers should be aware
that they will not have available to them information concerning
the final appraisal. Purchasers of Common Stock in the
Syndicated Community Offering will have such information
available to them and therefore will have a greater ability to
assess the merits of an investment in the Common Stock than
subscribers in the Conversion Offerings.
Tax Effects.
General.
Mercer Mutual has obtained from the IRS a private
letter ruling (the "PLR") concerning the material tax effects of
the Conversion and the Subscription Offering to Mercer Mutual,
Eligible Policyholders, and certain other participants in the
Subscription Offering. The PLR confirms, among other things,
that the Conversion of Mercer Mutual from a mutual to stock form
of corporation will constitute a reorganization within the
meaning of Section 368(a)(1)(E) of the Internal Revenue Code of
1986, as amended (the "Code"), and that, for federal income tax
purposes: (i) no gain or loss will be recognized by Mercer
Mutual in its pre-Conversion mutual or post-Conversion stock form
as a result of the Conversion; (ii) Mercer Mutual's basis in its
assets, holding period for its assets, net operating loss
carryforward, if any, capital loss carryforward, if any, minimum
tax credit carryforward, if any, earnings and profits and
accounting methods will not be affected by the Conversion;
(iii) as discussed below, Eligible Policyholders will be required
to recognize gain upon the receipt of subscription rights if and
to the extent that the subscription rights that are allocated to
an Eligible Policyholder are determined to have fair market
value; (iv) the basis of the Common Stock purchased by an
Eligible Policyholder pursuant to the exercise of subscription
rights will equal the sum of the Purchase Price of such stock,
plus the gain, if any, recognized by the Eligible Policyholder on
the subscription rights that are exercised by the Eligible
Policyholder; and (v) the holding period of the Common Stock
purchased by an Eligible Policyholder pursuant to the exercise of
subscription rights will begin on the date on which the
subscription rights are exercised. In all other cases, the
holding period of Common Stock purchased by an Eligible
Policyholder will begin on the date following the date on which
the stock is purchased.
Subscription Rights.
Generally, the federal income tax consequences of the
receipt, exercise and lapse of subscription rights are uncertain.
They present novel issues of tax law which are not addressed by
any direct authorities. Nevertheless, the IRS has ruled in the
PLR that any gain realized by an Eligible Policyholder as a
result of the receipt of subscription rights with a fair market
value must be recognized, whether or not such rights are
exercised. The amount of gain recognized by each Eligible
Policyholder will equal the fair market value of subscription
rights received by the Eligible Policyholder. If an Eligible
Policyholder is required to recognize gain on the receipt of
subscription rights and does not exercise some or all of such
subscription rights, such Eligible Policyholder should recognize
a corresponding loss upon the expiration or lapse of such
Eligible Policyholder's unexercised subscription rights. The
amount of such loss should equal the gain previously recognized
upon receipt of such unexercised subscription rights, although
such loss may not have the same character as the corresponding
gain. Although not free from doubt, provided the subscription
rights are capital assets in the hands of an Eligible
Policyholder, any gain resulting from the receipt of the
subscription rights should constitute a capital gain, and
provided the Common Stock that an Eligible Policyholder would
have received upon exercise of the lapsed subscription rights
would have constituted a capital asset, the resulting loss upon
expiration of such subscription rights should constitute a
capital loss. For purposes of determining gain, it is unclear
how the subscription rights should be valued or how to determine
the number of subscription rights that may be allocated to each
Eligible Policyholder during the Subscription Offering.
In the opinion of Sheshunoff, the subscription rights
do not have any fair market value, inasmuch as such rights are
nontransferable, personal rights of short duration, that are
provided to Eligible Policyholders and other participants in the
Subscription Offering without charge, and afford the holder only
the right to purchase shares of Common Stock in the Subscription
Offering at a price equal to its estimated fair market value,
which is the same price at which such stock will be sold to
purchasers in the Community Offering or the Syndicated Community
Offering, if any. Nevertheless, Eligible Policyholders are
encouraged to consult with their tax advisors about the tax
consequences of the Conversion and the Subscription Offering.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL INCOME TAXATION WHICH
MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL
RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES, AND ELIGIBLE POLICYHOLDERS WHO ARE EMPLOYEES OF AN
INSURANCE COMPANY OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE
UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
EACH ELIGIBLE POLICYHOLDER IS URGED TO CONSULT HIS OR HER TAX AND
FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX
CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND
CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION
RIGHTS, AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX
CONSEQUENCES ARISING OUT OF THE CONVERSION.
Purchases in the Conversion Offerings.
Termination Dates.
The Conversion Offerings will expire at 1:00 p.m., Eastern
Standard Time, on ___________, 1998, unless extended by the Board
of Directors of the Company with regulatory approval for up to an
additional 45 days (such date and time, including any extension,
are referred to herein as the "Termination Date"). Subscription
rights not exercised prior to the Termination Date will be void.
If the Company extends the Subscription Offering or the Community
Offering, it will give written notice of such extension to all
subscribers on or before _______, 1998, at which time each
subscriber may immediately withdraw the subscriber's subscription
or affirmatively reconfirm the subscriber's subscription by the
extended Termination Date. If a subscriber does not
affirmatively reconfirm a subscription by the extended
Termination Date, the subscriber's funds will be returned
promptly without interest. No action to extend the Subscription
Offering or Community Offering will be taken by the Company after
_______, 1998.
Orders will not be executed by the Company until at least
the minimum number of shares of Common Stock offered have been
subscribed for or sold. If at least the minimum number of shares
of Common Stock offered have not been subscribed for or sold
within 45 days of the end of the Subscription Offering (unless
such period is extended by the Company within 45 days after the
Termination Date with the consent of the Pennsylvania
Department), all funds delivered to the Company pursuant to the
Subscription Offering will be promptly returned to subscribers
without interest.
Use of Order Forms.
Rights to subscribe may be exercised only by completion of a
Stock Order Form. Any person who desires to subscribe for shares
of Common Stock must do so prior to the Termination Date by
delivering (by mail or in person) to the Company's principal
executive offices located at 10 North Highway 31, P.O. Box 278,
Pennington, New Jersey 08534 a properly executed and completed
Stock Order Form, together with full payment for all shares for
which the subscription is made. All checks or money orders must
be made payable to "Mercer Insurance Group, Inc." All
subscription rights under the Plan will expire at 1:00 p.m.,
local time, on the Termination Date whether or not the Company
has been able to locate each person entitled to such subscription
rights. Once tendered, orders to purchase Common Stock in the
Offering cannot be revoked.
To ensure that each purchaser receives a prospectus at least
48 hours prior to the Subscription Offering Termination Date in
accordance with Rule 15c2-8 under the Exchange Act, no Prospectus
will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date.
Execution of the Stock Order Form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock Order Forms will
be distributed only with a Prospectus. Photocopies and facsimile
copies of Stock Order Forms will not be accepted. Payment by
cash, check or money order must accompany the Stock Order Form.
No wire transfers will be accepted.
Each subscription right may be exercised only by the
Eligible Policyholder to whom it is issued and only for his or
her own account. The subscription rights granted under the Plan
are nontransferable. Each Eligible Policyholder subscribing for
shares of Common Stock is required to represent to the Company
that such Eligible Policyholder is purchasing such shares for
such Eligible Policyholder's own account and that such Eligible
Policyholder has no agreement or understanding with any other
person for the sale or transfer of such shares.
In the event a Stock Order Form (i) is not delivered and is
returned to the sender by the United States Postal Service or the
Company is unable to locate the addressee, (ii) is not returned
or is received after the Termination Date (iii) is defectively
completed or executed, or (iv) is not accompanied by payment in
full for the shares of Common Stock subscribed for, the
subscription rights of the Eligible Policyholder to whom such
rights have been granted will not be honored or the subscriber
participating in the Community Offering, as the case may be, will
be treated as having failed to return the completed Stock Order
Form within the time period specified therein. Alternatively,
the Company may (but will not be required to) waive any
irregularity relating to any Stock Order Form or require the
submission of a corrected Stock Order Form or the remittance of
full payment for the shares of Common Stock subscribed for by
such date as the Company may specify. Subscription orders, once
tendered, may not be revoked. The Company's interpretations of
the terms and conditions of the Plan and determinations with
respect to the acceptability of the Stock Order Forms will be
final, conclusive and binding upon all persons and neither the
Company nor Mercer Mutual (or the directors, officers, employees
and agents of any of them) shall be liable to any person in
connection with any such interpretation or determination.
Payment for Shares.
Payment in full for all subscribed shares of Common Stock is
required to accompany all completed Stock Order Forms for
subscriptions to be considered complete. Payment for subscribed
shares of Common Stock may be made by cash, check or money order
in U.S. Dollars. Payments made by cash, check or money order
will be placed in an Escrow Account at
______________________________. The Escrow Account will be
administered by ______________________________ (the "Escrow
Agent"). An executed Stock Order Form, once received by the
Company, may not be modified, amended or rescinded without the
consent of the Company. Payments accompanying such Stock Order
Forms will not be available to subscribers for a 45-day period
after the Termination Date, and may not be available for an
additional period of time if an extension of the period of time
for completion of the Conversion is approved by the Company
within 45 days after the Termination with the consent of the
Department.
The ESOP will not be required to pay for the shares at the
time it subscribes, but is required to pay for such shares at or
before the completion of the Offerings.
Delivery of Certificates.
Certificates representing shares of the Common Stock will be
delivered to subscribers promptly after completion of the
Offerings. Until certificates for the Common Stock are available
and delivered to subscribers, subscribers may not be able to sell
the shares of Common Stock for which they subscribed even though
trading of the Common Stock will have commenced.
Marketing and Underwriting Arrangements
Mercer Mutual and the Company have engaged Sandler O'Neill
as a marketing advisor in connection with the offering of the
Common Stock, and Sandler O'Neill has agreed to use its best
efforts to assist the Company with its solicitation of
subscriptions and purchase orders for shares of Common Stock in
the Offerings. Sandler O'Neill is not obligated to take or
purchase any shares of Common Stock in the Offerings. Mercer
Mutual and the Company have agreed to pay Sandler O'Neill a fee
equal to 2.0% of the aggregate Purchase Price of Common Stock
sold in the Conversion Offerings, excluding subscriptions by any
director, officer or employee of Mercer Mutual or the Company or
members of their immediate families or the ESOP, for which
Sandler O'Neill will not receive a fee. In the event that the
Company enters into selected dealers' agreements with one or more
NASD member firms in connection with a Syndicated Community
Offering, the Company will pay a fee to such selected dealer, any
sponsoring dealer's fees, and a management fee to Sandler O'Neill
of 1.5% for shares sold by the NASD member firm pursuant to such
selected dealer's agreement; provided, however, that any fees
payable to Sandler O'Neill for Common Stock sold pursuant to such
selected dealer's agreement shall not exceed 1.5% of the
aggregate Purchase Price and that the aggregate fees payable to
Sandler O'Neill and the selected and sponsoring dealers will not
exceed 7% of the aggregate Purchase Price of the shares sold
under any such agreement. Fees to Sandler O'Neill and to any
other broker-dealer may be deemed to be underwriting fees and
Sandler O'Neill and such broker-dealers may be deemed to be
underwriters. Sandler O'Neill will also be reimbursed for its
reasonable out-of-pocket expenses, including legal fees, in an
amount not to exceed $75,000. In the event the Conversion is not
consummated or Sandler O'Neill ceases, under certain
circumstances after the subscription solicitation activities are
commenced, to provide assistance to the Company, Sandler O'Neill
will be entitled to be reimbursed for its reasonable out-of-
pocket expenses incurred prior to termination as described above.
The Company and Mercer Mutual have agreed to indemnify Sandler
O'Neill for reasonable costs and expenses in connection with
certain claims or liabilities, including certain liabilities
under the Securities Act. Sandler O'Neill has received advances
towards its fees and expenses totaling $25,000. Total marketing
fees to Sandler O'Neill are expected to be $437,100 and $577,500
at the Total Minimum and the Total Maximum, respectively. See
"Pro Forma Data" for the assumptions used to arrive at these
estimates.
Sandler O'Neill will also perform conversion and
records management services for Mercer Mutual in the Conversion
and will receive a fee for this service of $30,000, plus
reimbursement of reasonable out-of-pocket expenses to be billed
to Mercer Mutual.
Directors and executive officers of the Company and
Mercer Mutual may participate in the solicitation of offers to
purchase Common Stock. Other employees of Mercer Mutual may
participate in the Offering in ministerial capacities or by
providing clerical work in effecting a sales transaction. Other
questions from prospective purchasers will be directed to
executive officers or registered representatives. Such other
employees have been instructed not to solicit offers to purchase
Common Stock or provide advice regarding the purchase of Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange
Act, and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors
and employees to participate in the sale of Common Stock. No
officer, director or employee of the Company or Mercer Mutual
will be compensated in connection with his participation by the
payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
Syndicated Community Offering
As a final step in the Conversion, the Plan provides that,
if feasible, all shares of Common Stock not purchased in the
Subscription Offering and Community Offering, if any, will be
offered for sale to the general public in a Syndicated Community
Offering through a syndicate of registered broker-dealers to be
formed and managed by Sandler O'Neill acting as agent of the
Company, to assist the Company and Mercer Mutual in the sale of
the Common Stock. The Company and Mercer Mutual reserve the
right to reject orders in whole or part in their sole discretion
in the Syndicated Community Offering. Neither Sandler O'Neill
nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the Common Stock in the Syndicated
Community Offering; however, Sandler O'Neill has agreed to use
its best efforts in the sale of shares in the Syndicated
Community Offering.
The price at which Common Stock is sold in the Syndicated
Community Offering will be determined as described above under
"--Stock Pricing." Shares of Common Stock purchased in the
Syndicated Community Offering by any persons, together with
associates of or persons acting in concert with such persons,
will be aggregated with purchases in the Conversion Offerings for
purposes of the maximum purchase limitation of 100,000 shares.
In addition to the foregoing, if a syndicate of broker-
dealers ("selected dealers") is formed to assist in the
Syndicated Community Offering, a purchaser may pay for his shares
with funds held by or deposited with a selected dealer. If a
Stock Order Form is executed and forwarded to the selected dealer
or if the selected dealer is authorized to execute the Stock
Order Form on behalf of a purchaser, the selected dealer is
required to forward the Stock Order Form and funds to Mercer
Mutual for deposit in a segregated account on or before noon of
the business day following receipt of the Stock Order Form or
execution of the Stock Order Form by the selected dealer.
Alternatively, selected dealers may solicit indications of
interest from their customers to place orders for shares. Such
selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their
intent to purchase. Those indicating an intent to purchase shall
execute Stock Order Forms and forward them to their selected
dealer or authorize the selected dealer to execute such forms.
The selected dealer will acknowledge receipt of the order to its
customer in writing on the following business day and will debit
such customer's account on the third business day after the
customer has confirmed his intent to purchase (the "debit date")
and on or before noon of the next business day following the
debit date will send Stock Order Forms and funds to Mercer Mutual
for deposit in a segregated account. Although purchasers' funds
are not required to be in their accounts with selected dealers
until the debit date in the event that such alternative procedure
is employed, once a confirmation of an intent to purchase has
been received by the selected dealer, the purchaser has no right
to rescind his order.
Certificates representing shares of Common Stock purchased,
together with any refund due, will be mailed to purchasers at the
address specified in the Stock Order Form as soon as practicable
following consummation of the sale of the Common Stock. Any
certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more
than 45 days following the Termination Date.
Limitations on Purchases of Common Stock
The Plan provides for certain limitations upon the purchase
of shares in the Conversion. No person may purchase fewer than
25 shares of Common Stock in the Conversion. Except for the
ESOP, which intends to purchase 10% of the total number of shares
of Common Stock issued in the Conversion, no purchaser (including
Eligible Policyholders who elect to purchase stock in the
Conversion) together with such person's affiliates and associates
(as defined in the Plan) or a group acting in concert (as defined
in the Plan) may purchase more than 100,000 shares of Common
Stock in the Conversion (4.5%, 3.9% and 3.4% of the number of
shares to be issued in the Conversion at the Total Minimum, Total
Midpoint and Total Maximum, respectively, of the Estimated
Valuation Range). The Plan states that subscribers in the
Subscription Offering can purchase up to 100,000 shares. There
are 42,432 Eligible Policyholders. In the event that
subscriptions by Eligible Policyholders for Common Stock exceed
the maximum of the Estimated Valuation Range, the Company will be
obligated under the Plan to sell to Eligible Policyholders
2,990,000 shares, which is the maximum number of shares offered
hereby, and shares of Common Stock would be allocated among
Eligible Policyholders in proportion to their respective amounts
subscribed for. If each Eligible Policyholder subscribed for
100,000 shares of Common Stock offered, then each Eligible
Policyholder would receive only approximately 70 shares. The
Company is unable to predict the number of Eligible Policyholders
that may participate in the Subscription Offering.
Shares of Common Stock to be held by the ESOP and
attributable to a participant thereunder shall not be aggregated
with shares of Common Stock purchased by such participant or any
other purchase of Common Stock in the Conversion.
Officers and directors of Mercer Mutual and the Company,
together with their associates, may not purchase, in the
aggregate, more than thirty-four and nine-tenths percent (34.9%)
of the shares of Common Stock. Directors of the Company and of
Mercer Mutual shall not be deemed to be associates of one another
or a group acting in concert with other directors solely as a
result of membership on the Board of Directors of the Company or
the Board of Directors of Mercer Mutual or any subsidiary of
Mercer Mutual.
Subject to any required regulatory approval and the
requirements of applicable law, the Company may increase or
decrease any of the purchase limitations at any time. In the
event that the individual purchase limitation is increased after
commencement of the Subscription Offering and the Community
Offering, the Company shall permit any person who subscribed for
the maximum number of shares of Common Stock to purchase an
additional number of shares, such that such person shall be
permitted to subscribe for the then maximum number of shares
permitted to be subscribed for by such person, subject to the
rights and preferences of any person who has priority
subscription rights. In the event that either the individual
purchase limitation or the number of shares of Common Stock to be
sold in the Conversion is decreased after commencement of the
Subscription Offering and the Community Offering, the order of
any person who subscribed for the maximum number of shares of
Common Stock shall be decreased by the minimum amount necessary
so that such person shall be in compliance with the then maximum
number of shares permitted to be subscribed for by such person.
Each person purchasing Common Stock in the Conversion shall
be deemed to confirm that such purchase does not conflict with
the purchase limitations under the Plan or otherwise imposed by
law. In the event that such purchase limitations are violated by
any person (including any associate or affiliate of such person
or person otherwise acting in concert with such person), the
Company shall have the right to purchase from such person at the
Purchase Price all shares acquired by such person in excess of
any such purchase limitation or, if such excess shares have been
sold by such person, to receive the difference between the
aggregate Purchase Price paid for such excess shares and the
proceeds received by such person from the sale of such excess
shares. This right of the Company to purchase such excess shares
shall be assignable by the Company.
Proposed Management Purchases
The following table sets forth information regarding the
approximate number of shares of Common Stock intended to be
purchased by each of the directors and executive officers of the
Company and Mercer Mutual, including each such person's
associates, and by all directors, trustees and executive officers
as a group, including all of their associates, and other related
information. For purposes of the following table, it has been
assumed that sufficient shares will be available to satisfy
subscriptions in all categories.
Total
Name Shares(1)(2)(3)
Roland D. Boehm (4)(5) 15,000
James J. Freda (4) 15,000
William C. Hart (4)(6) 15,000
George T. Hornyak (4) 100,000
Richard U. Niedt (4) 6,000
Andrew R. Speaker (4)(7) 10,000
Eric W. Turner (4) 500
Richard G. Van Noy (4)(8) 12,000
Marion J. Crum 1,000
John Danka 1,500
Paul Ehrhardt 2,500
-------
Total 178,500
____________
(1) Does not include shares that could be allocated to
participants in the ESOP, under which officers and other
employees would be allocated, in the aggregate, 10% of the
Common Stock issued in the Conversion.
(2) Does not include shares that would be awarded to
participants in the MRP, if implemented, under which
directors, officers and other employees would be awarded, at
no cost to them, an aggregate number of shares equal to 4%
of the Common Stock issued in the Conversion (104,000 shares
at the Total Midpoint). Implementation of the MRP requires
shareholder approval.
(3) Does not include shares that would be purchased by
participants in the Compensation Plan, if implemented, under
which directors, executive officers and other employees
would be granted options to purchase an aggregate amount of
Common Stock equal to 10% of the shares issued in the
Conversion (260,000 shares at the Total Midpoint).
Implementation of the Compensation Plan requires shareholder
approval.
(4) Director of the Company and Mercer Mutual.
(5) Vice Chairman of the Board of Directors of the Company and
Mercer Mutual.
(6) President and Chief Executive Officer of the Company and
Mercer Mutual.
(7) Executive Vice President, Chief Operating Officer, Chief
Financial Officer and Treasurer of the Company and Mercer
Mutual.
(8) Chairman of the Board of Directors of the Company and Mercer
Mutual.
Limitations on Resales
The Common Stock issued in the Conversion will be freely
transferable under the Securities Act of 1933, as amended (the
"Securities Act"); provided, however that shares issued to
directors and officers of Mercer Mutual or of the Company would
be restricted as to transfer for a period of one year from the
Effective Date pursuant to the provisions of the Conversion Act
and would be subject to additional resale restrictions under
Rule 144 of the Securities Act. Shares of Common Stock issued to
directors and officers will bear a legend giving appropriate
notice of these restrictions and the Company will give
instructions to the transfer agent for the Common Stock with
respect to these transfer restrictions. Any shares issued to
directors and officers as a stock dividend, stock split or
otherwise with respect to restricted stock shall be subject to
the same restrictions. Shares acquired by directors and officers
other than in the Conversion will not be subject to certain
restrictions.
In addition, under guidelines of the NASD, members of the
NASD and their associates are subject to certain restrictions on
the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon
purchase of such securities.
Interpretation and Amendment of the Plan of Conversion
To the extent permitted by law, all interpretations of the
Plan by the Board of Directors of Mercer Mutual and the Board of
Directors of the Company will be final. The Plan may be amended
at any time before it is approved by the Pennsylvania Department
by the affirmative vote of two-thirds of the directors of the
Company and Mercer Mutual. The Plan similarly may be amended at
any time after it is approved by the Pennsylvania Department,
subject to the Pennsylvania Department's approval of such
amendment. The Plan may be amended at any time after it is
approved by the Eligible Policyholders of Mercer Mutual and prior
to the Effective Date by the affirmative vote of two-thirds of
the directors of the Company and of Mercer Mutual then in office;
provided, however, that any such amendment shall be subject to
approval by the Pennsylvania Department; and provided further,
that, if such amendment is determined by the Pennsylvania
Department to be material, such amendment shall be subject to
approval by the affirmative vote of at least two-thirds of the
votes cast at a meeting of Eligible Policyholders called for that
purpose. In the event Eligible Policyholders are required to
approve an amendment to the Plan, the Company will send a Proxy
Statement to each Eligible Policyholder as soon as practical
after the amendment is approved by the directors of the Company
and Mercer Mutual and, if required, the Pennsylvania Department.
In the event that the Pennsylvania Department adopts
mandatory regulations applicable to the Conversion prior to the
Effective Date, the Plan may be amended to conform to such
regulations at any time prior to such Effective Date by the
affirmative vote of two-thirds of the directors of the Company
and Mercer Mutual, and no resolicitation of proxies or further
approval by Eligible Policyholders shall be required. In the
event that the Pennsylvania Department adopts regulations
applicable to the Conversion prior to the Effective Date and if
such regulations contain optional provisions, the Plan may be
amended to conform to any such optional provision at any time
before such Effective Date by the affirmative vote of two-thirds
of the directors of the Company and Mercer Mutual and no
resolicitation of proxies or further approval by Eligible
Policyholders shall be required.
Termination
The Plan may be terminated at any time before it is approved
by the Pennsylvania Department by the affirmative vote of
two-thirds of the directors of the Company and Mercer Mutual.
The Plan may be terminated at any time after it is approved by
the Pennsylvania Department by the affirmative vote of two-thirds
of the directors of the Company and Mercer Mutual. The Plan may
be terminated at any time after it is approved by Eligible
Policyholders and prior to the Effective Date by the affirmative
vote of two-thirds of the directors of the Company and Mercer
Mutual provided, however, that any such termination shall be
subject to approval by the Pennsylvania Department.
Conditions
As required by the Plan, the Plan has been approved by the
Pennsylvania Department and the Board of Directors of the Company
and Mercer Mutual. Completion of the Conversion also requires
approval of the Plan by the affirmative vote of at least
two-thirds of the votes cast by Eligible Policyholders of Mercer
Mutual. If the Eligible Policyholders do not approve the Plan,
the Plan will be terminated, and Mercer Mutual will continue to
conduct business as a mutual insurance company.
CERTAIN RESTRICTIONS ON ACQUISITION
OF THE COMPANY
Pennsylvania Law
The Pennsylvania BCL contains certain provisions applicable
to the Company that may have the effect of impeding a change in
control of the Company. These provisions, among other things,
(a) require that, following any acquisition by any person or
group of 20% of a public corporation's voting power, the
remaining shareholders have the right to receive payment for
their shares, in cash, from such person or group in an amount
equal to the "fair value" of their shares, including an increment
representing a proportion of any value payable for acquisition of
control of the corporation; and (b) prohibit, for five years
after an interested shareholder's acquisition date, a "business
combination" (which includes a merger or consolidation of the
corporation or a sale, lease or exchange of assets having a
minimum specified aggregate value or representing a minimum
specified percentage earning power or net income of the
corporation) with a shareholder or group of shareholders
beneficially owning 20% or more of a public corporation's voting
power.
In 1990, the Pennsylvania legislature further amended the
Pennsylvania BCL to expand the antitakeover protections afforded
by Pennsylvania law by redefining the fiduciary duty of directors
and adopting disgorgement and control-share acquisition statutes.
To the extent applicable to the Company at the present time, this
legislation generally (a) expands the factors and groups
(including shareholders) that the Board of Directors can consider
in determining whether a certain action is in the best interests
of the corporation; (b) provides that the Board of Directors need
not consider the interests of any particular group as dominant or
controlling; (c) provides that directors, in order to satisfy the
presumption that they have acted in the best interests of the
corporation, need not satisfy any greater obligation or higher
burden of proof with respect to actions relating to an
acquisition or potential acquisition of control; (d) provides
that actions relating to acquisitions of control that are
approved by a majority of "disinterested directors" are presumed
to satisfy the directors' standard unless it is proven by clear
and convincing evidence that the directors did not assent to such
action in good faith after reasonable investigation; and
(e) provides that the fiduciary duty of directors is solely to
the corporation and may be enforced by the corporation or by a
shareholder in a derivative action, but not by a shareholder
directly.
The 1990 amendments to the BCL explicitly provide that the
fiduciary duty of directors shall not be deemed to require
directors (a) to redeem any rights under, or to modify or render
inapplicable, any shareholder rights plan; (b) to render
inapplicable, or make determinations under, provisions of the BCL
relating to control transactions, business combinations, control-
share acquisitions or disgorgement by certain controlling
shareholders following attempts to acquire control; or (c) to act
as the board of directors, a committee of the board or an
individual director solely because of the effect such action
might have on an acquisition or potential or proposed acquisition
of control of the corporation or the consideration that might be
offered or paid to shareholders in such an acquisition. One of
the effects of these fiduciary duty provisions may be to make it
more difficult for a shareholder to successfully challenge the
actions of the Company's Board of Directors in a potential change
in control context. Pennsylvania case law appears to provide
that the fiduciary duty standard under the 1990 amendment to the
BCL grants directors the statutory authority to reject or refuse
to consider any potential or proposed acquisition of the
corporation.
Under the Pennsylvania control-share acquisition statute, a
person or group is entitled to voting rights with respect to
"control shares" only after shareholders (both disinterested
shareholders and all shareholders) have approved the granting of
such voting rights at a meeting of shareholders. "Control
shares" are shares acquired since January 1, 1988, that upon
acquisition of voting power by an "acquiring person," would
result in a "control-share acquisition." ("Control shares" also
include voting shares where beneficial ownership was acquired by
the "acquiring person" within 180 days of the control-share
acquisition or with the intention of making a control-share
acquisition.) An "acquiring person" is a person or group who
makes or proposes to make a "control-share acquisition." A
"control-share acquisition" is an acquisition, directly or
indirectly, of voting power over voting shares that would, when
added to all voting power of the person over other voting shares,
entitle the person to cast or direct the casting of such
percentage of votes for the first time with respect to any of the
following ranges that all shareholders would be entitled to cast
in an election of directors: (a) at least 20% but less than
33-1/3%; (b) at least 33-1/3 but less than 50%; or (c) 50% or
more. The effect of these provisions is to require a new
shareholder vote when each threshold is exceeded. In the event
shareholders do not approve the granting of voting rights, voting
rights are lost only with respect to "control shares."
A special meeting of shareholders is required to be called
to establish voting rights of control shares if an acquiring
person (a) files with the corporation an information statement
containing specified information, (b) makes a written request for
a special meeting at the time of delivery of the information
statement, (c) makes a control-share acquisition or a bona fide
written offer to make a control-share acquisition, and
(d) provides a written undertaking at the time of delivery of the
information statement to pay or reimburse the corporation for
meeting expenses. If the information statement is filed and a
control-share acquisition is made or proposed to be made, but no
request for a special meeting is made or no written undertaking
to pay expenses is provided, the issue of voting rights will be
submitted to shareholders at the next annual or special meeting
of shareholders of the corporation.
A corporation may redeem all "control shares" at the average
of the high and low sales price, as reported on a national
securities exchange or national quotation system or similar
quotation system, on the date the corporation provides notice of
redemption (a) at any time within 24 months after the date on
which the control-share acquisition occurs if the acquiring
person does not, within 30 days after the completion of the
control-share acquisition, properly request that shareholders
consider the issue of voting rights to be accorded to control
shares and (b) at any time within 24 months after the issue of
voting rights is submitted to shareholders and such voting rights
either are not accorded or are accorded and subsequently lapse.
Voting rights accorded to control shares by a vote of
shareholders lapse and are lost if any proposed control-share
acquisition is not consummated within 90 days after shareholder
approval is obtained.
A person will not be considered an "acquiring person" if the
person holds voting power within any of the ranges specified in
the definition of "control-share acquisition" as a result of a
solicitation of revocable proxies if such proxies (a) are given
without consideration in response to a proxy or consent
solicitation made in accordance with the Exchange Act and (b) do
not empower the holder to vote the shares except on the specific
matters described in the proxy and in accordance with the
instructions of the giver of the proxy.
The statute does not apply to certain control-share
acquisitions effected pursuant to a gift or laws of inheritance,
in connection with certain family trusts or pursuant to a merger,
consolidation or plan of share exchange if the corporation is a
party to the agreement.
The effect of this statutory provision is to deter the
accumulation of a substantial block of Common Stock, including
accumulation with a view to effecting a non-negotiated tender or
exchange offer for Common Stock.
Under the disgorgement provisions of the Pennsylvania BCL,
any profit realized by any person or group who is or was a
"controlling person or group" from the disposition of any equity
security of a corporation shall belong to and be recoverable by
the corporation where the profit is realized (i) within 18 months
after the person becomes a "controlling person or group" and
(ii) the equity security had been acquired by the "controlling
person or group" within 24 months prior to or 18 months after
obtaining the status of a "controlling person or group."
A "controlling person or group" is a person or group who
(a) has acquired, offered to acquire or, directly or indirectly,
publicly disclosed the intention of acquiring 20% voting power of
the corporation or (b) publicly disclosed that it may seek to
acquire control of the corporation.
A person will not be deemed a "controlling person or group"
if the person holds voting power as a result of a solicitation of
revocable proxies if, among other things, such proxies (a) are
given without consideration in response to a proxy or consent
solicitation made in accordance with the Exchange Act and (b) do
not empower the holder to vote the shares except on the specific
matters described in the proxy and in accordance with the
instructions of the giver of the proxy. This exception does not
apply to proxy contests in connection with or as a means toward
acquiring control of the Company.
The effect of this statutory provision is to deter the
accumulation of a substantial block of Common Stock with a view
to putting the Company "in play" and then selling shares at a
profit (whether to the Company, in the market or in connection
with an acquisition of the Company).
Certain Anti-Takeover Provisions in the Articles of Incorporation
and Bylaws
While the Board of Directors of the Company is not aware of
any effort that might be made to obtain control of the Company
after Conversion, the Board believes that it is appropriate to
include certain provisions as part of the Company's Articles of
Incorporation to protect the interests of the Company and its
shareholders from hostile takeovers that the Board might conclude
are not in the best interests of the Company or the Company's
shareholders. These provisions may have the effect of
discouraging a future takeover attempt that is not approved by
the Board but which individual shareholders may deem to be in
their best interests or in which shareholders may receive a
substantial premium for their shares over the then current market
price. As a result, shareholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the Company's current
Board of Directors or management more difficult.
The following discussion is a general summary of certain
provisions of the Articles of Incorporation and Bylaws of the
Company that may be deemed to have such an "anti-takeover"
effect. The description of these provisions is necessarily
general and reference should be made in each case to the Articles
of Incorporation and Bylaws of the Company. For information
regarding how to obtain a copy of these documents without charge,
see "Additional Information."
Classified Board of Directors and Related Provisions
The Company's Articles of Incorporation provide that the
Board of Directors is to be divided into three classes which
shall be as nearly equal in number as possible. The directors in
each class will hold office following their initial appointment
to office for terms of one year, two years and three years,
respectively, and, upon reelection, will serve for terms of three
years thereafter. Each director will serve until his or her
successor is elected and qualified. The Articles of
Incorporation provide that a director may be removed by
shareholders only upon the affirmative vote of at least a
majority of the votes which all shareholders would be entitled to
cast. The Articles of Incorporation further provide that any
vacancy occurring in the Board of Directors, including a vacancy
created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term by a majority vote
of the directors then in office.
A classified board of directors could make it more difficult
for shareholders, including those holding a majority of the
outstanding shares, to force an immediate change in the
composition of a majority of the Board of Directors. Because the
terms of only one-third of the incumbent directors expire each
year, it requires at least two annual elections for the
shareholders to change a majority, whereas a majority of a non-
classified board may be changed in one year. In the absence of
the provisions of the Articles of Incorporation classifying the
Board, all of the directors would be elected each year.
Management of the Company believes that the staggered
election of directors tends to promote continuity of management
because only one-third of the Board of Directors is subject to
election each year. Staggered terms guarantee that in the
ordinary course approximately two-thirds of the Directors, or
more, at any one time have had at least one year's experience as
directors of the Company, and moderate the pace of change in the
composition of the Board of Directors by extending the minimum
time required to elect a majority of Directors from one to two
years.
Other Antitakeover Provisions
The Company's Articles of Incorporation and Bylaws contain
certain other provisions that may also have the effect of
deterring or discouraging, among other things, a non-negotiated
tender or exchange offer for the Common Stock, a proxy contest
for control of the Company, the assumption of control of the
Company by a holder of a large block of the Common Stock and the
removal of the Company's management. These provisions:
(1) empower the Board of Directors, without shareholder approval,
to issue preferred stock, the terms of which, including voting
power, are set by the Board; (2) restrict the ability of
shareholders to remove directors; (3) require that shares with at
least 80% of total voting power approve mergers and other similar
transactions, if the transaction is not approved, in advance, by
the Board of Directors; (4) prohibit shareholders' actions
without a meeting; (5) require that shares with at least 80%, or
in certain instances a majority, of total voting power approve
the repeal or amendment of the Articles of Incorporation;
(6) require any person who acquires stock of the Company with
voting power of 25% or more to offer to purchase for cash all
remaining shares of the Company's voting stock at the highest
price paid by such person for shares of the Company's voting
stock during the preceding year; (7) limit the right of a person
or entity to vote more than 10% of the Company's voting stock;
(8) eliminate cumulative voting in elections of directors; and
(9) require that shares with at least 66-2/3% of total voting
power approve, repeal or amend the Bylaws.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 15,000,000 shares of
Common Stock, without par value, and 5,000,000 shares of
preferred stock, having such par value as the Board of Directors
of the Company shall fix and determine. The Company currently
expects to issue between 2,210,000 and 2,990,000 shares (or, as
permitted by the Plan, in the event the ESOP purchases shares in
excess of the maximum of the Estimated Valuation Range in order
to satisfy its 10% subscription, up to 3,322,222 shares), subject
to adjustment, of the Common Stock and no shares of preferred
stock in the Conversion. The Company has reserved for future
issuance under the Compensation Plan an amount of authorized but
unissued shares of Common Stock equal to 10% of the shares to be
issued in the Conversion.
Common Stock
Voting Rights
Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every
other share of the Common Stock. The holders of the Common Stock
will possess exclusive voting rights in the Company, except to
the extent that shares of preferred stock issued in the future
may have voting rights, if any. Each holder of shares of the
Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of holders of shares of
the Common Stock. Holders of Common Stock will not be entitled
to cumulate their votes for election of directors.
Dividends
The Company may, from time to time, declare dividends to the
holders of Common Stock, who will be entitled to share equally in
any such dividends. For additional information as to cash
dividends, see "Dividend Policy."
Liquidation
In the event of any liquidation, dissolution or winding up
of Mercer Mutual, the Company, as holder of all of the capital
stock of Mercer Mutual, would be entitled to receive all assets
of Mercer Mutual after payment of all debts and liabilities of
Mercer Mutual. In the event of a liquidation, dissolution or
winding up of the Company, each holder of shares of Common Stock
would be entitled to receive, after payment of all debts and
liabilities of the Company, a pro rata portion of all assets of
the Company available for distribution to holders of Common
Stock. If any preferred stock is issued, the holders thereof may
have a priority in liquidation or dissolution over the holders of
the Common Stock.
Other Characteristics
Holders of the Common Stock will not have preemptive rights
with respect to any additional shares of Common Stock that may be
issued. The Common Stock is not subject to call for redemption,
and the outstanding shares of Common Stock, when issued and upon
receipt by the Company of the full purchase price therefor, will
be fully paid and nonassessable.
Preferred Stock
None of the 5,000,000 authorized shares of preferred stock
of the Company will be issued in the Conversion. After the
Conversion is completed, the Board of Directors of the Company
will be authorized, without shareholder approval, to issue
preferred stock and to fix and state voting powers, designations,
preferences or other special rights of such shares and the
qualifications, limitations and restrictions thereof. The
preferred stock may rank prior to the Common Stock as to dividend
rights or liquidation preferences, or both, and may have full or
limited voting rights. The Board of Directors has no present
intention to issue any of the preferred stock. Should the Board
of Directors of the Company subsequently issue preferred stock,
no holder of any such stock shall have any preemptive right to
subscribe for or purchase any stock or any other securities of
the Company other than such, if any, as the Board of Directors,
in its sole discretion, may determine and at such price or prices
and upon such other terms as the Board of Directors, in its sole
discretion, may fix.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is
________________________________.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the
Company by Stevens & Lee, Wayne, Pennsylvania. Stevens & Lee has
consented to the reference herein to its opinion. Certain legal
matters will be passed upon for Sandler O'Neill by Lord,
Bissell & Brook, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedules of
Mercer Mutual as of December 31, 1996 and 1995, and for each of
the years in the three-year period ended December 31, 1996 have
been included herein and in the Registration Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and
auditing.
Sheshunoff has consented to the publication herein of the
summary of its opinion as to the estimated pro forma aggregate
market value of the Common Stock to be issued in the Conversion
and the value of subscription rights to purchase the Common
Stock, and to the use of its name and statements with respect to
it appearing herein.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange
Commission ("SEC") a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). As permitted by the rules and
regulations of the SEC, this prospectus does not contain all the
information set forth in the Registration Statement. Such
information and all exhibits to the Registration Statement,
including the Appraisal which is an exhibit to the Registration
Statement, can be examined without charge at the public reference
facilities of the SEC located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and at Seven World
Trade Center, Suite 1300, New York, New York 10048, and copies of
such material can be obtained from the SEC at prescribed rates.
In addition, copies of such documents may be obtained on the
Internet at http://www.sec.gov.
Mercer Mutual has filed an application for conversion with
the Pennsylvania Department with respect to the Conversion. The
application may be examined at the principal office of the
Pennsylvania Department located in Harrisburg, Pennsylvania.
In connection with the Conversion, the Company will register
its Common Stock with the SEC under Section 12(g) of the Exchange
Act and, upon such registration, the Company and the holders of
its stock will become subject to the proxy solicitation rules,
the annual and periodic reporting requirements, the restrictions
on stock purchases and sales by directors, officers and greater
than 10% stockholders, and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it
will not terminate such registration for a period of at least
three years following the Conversion.
A copy of the Articles of Incorporation and the Bylaws of
the Company and Mercer Mutual are available without charge from
Mercer Mutual.
<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
Acquisition costs . . . . . . Agents' or brokers' commissions,
premium taxes, marketing, and
certain underwriting expenses
associated with the production
of business.
Assumed reinsurance . . . . . Insurance or reinsurance
transferred from another
insurance or reinsurance entity.
Cede. . . . . . . . . . . . . To transfer to an insurer or a
reinsurer all or a part of the
insurance or reinsurance written
by an insurance or reinsurance
entity.
Combined ratio. . . . . . . . The sum of the expense ratio and
the loss ratio, determined
either in accordance with
statutory accounting practices
or GAAP. A combined ratio under
100% generally indicates an
underwriting profit and a
combined ratio over 100%
generally indicates an
underwriting loss. The extent
by which the combined ratio
deviates from 100% indicates
relative underwriting profit or
loss.
Commercial Multi-peril. . . . Commercial multi-peril coverage
insures against losses to
businesses and business personal
property, such as those caused
by fire, wind, hail, water
damage, theft and vandalism, as
well as comprehensive general
liability for injuries to
others. Optional coverages
written include inland marine,
crime and boiler and machinery.
Direct written premiums . . . Total premiums written by an
insurer other than premiums for
reinsurance assumed by an
insurer.
Earned premiums . . . . . . . The portion of net written
premiums applicable to the
expired period of policies.
Expense ratio . . . . . . . . Under statutory accounting
practices, the ratio of
underwriting expenses to net
written premiums.
Fire & Allied Lines . . . . . Fire and allied lines insurance
generally covers fire,
lightning, and removal and
extended coverage.
Gross premiums. . . . . . . . Total premiums for insurance
written and reinsurance assumed
during a given period.
Homeowners. . . . . . . . . . Homeowners coverage insures
individuals for losses to their
residences and personal
property, such as those caused
by fire, wind, hail, water
damage, theft and vandalism, and
against third party liability
claims.
Incurred losses . . . . . . . The sum of losses paid plus the
change in the estimated
liability for claims which have
been reported but which have not
been settled and claims which
have occurred but have not yet
been reported to the insurer.
Inland marine . . . . . . . . Inland marine coverage insures
merchandise or cargo in transit
and business and personal
property. It is also written as
an endorsement to a homeowner's
policy to provide coverage for
scheduled property, such as
antiques, fine art, sports
equipment, boats, firearms,
jewelry and camera equipment.
Loss adjustment expenses. . . The expenses of settling claims,
including legal and other fees
and the general expenses of
administering the claims
adjustment process.
Loss and LAE ratio. . . . . . Under statutory accounting
practices, the ratio of incurred
losses and loss adjustment
expenses to earned premiums.
Net earned premiums . . . . . The portion of written premiums
that is recognized for
accounting purposes as revenue
during a period.
Net premiums. . . . . . . . . Gross premiums written less
premiums ceded to reinsurers.
Net written premiums. . . . . Gross premiums written and
insured by an insurer less
premiums ceded to reinsurers.
Reinsurance . . . . . . . . . A procedure whereby an insurer
remits or cedes a portion of the
premiums to another insurer or
reinsurer as payment to that
insurer or reinsurer for
assuming a portion of the
related risk.
Statutory accounting
practices . . . . . . . . . . Recording transactions and
preparing financial statements
in accordance with the rules and
procedures prescribed or
permitted by statute or
regulatory authorities,
generally reflecting a
liquidating, rather than a going
concern, concept of accounting.
The principal differences
between statutory accounting
practices ("SAP") and GAAP for
property and casualty insurance
companies, are: (a) under SAP,
certain assets that are not
admitted assets are eliminated
from the balance sheet;
(b) under SAP, policy
acquisition costs are expenses
as incurred, while under GAAP,
they are deferred and amortized
over the term of the policies;
(c) under SAP, no provision is
made for deferred income taxes;
(d) under SAP, certain reserves
are recognized that are not
recognized under GAAP; and
(e) under SAP, fixed income
securities (bonds, redeemable
preferred stocks and mortgage-
backed securities) are carried
at cost, while under GAAP, they
are carried at market value.
Statutory surplus . . . . . . The sum remaining after all
liabilities are subtracted from
all assets, applying statutory
accounting practices. This sum
is regarded as financial
protection to policyholders in
the event an insurance company
suffers unexpected or
catastrophic losses.
Umbrella policy . . . . . . . An insurance policy covering
liabilities in excess of amounts
covered under a standard policy.
Underwriting. . . . . . . . . The process whereby an insurer
reviews applications submitted
for insurance coverage and
determines whether it will
accept all or part of the
coverage being requested and
what the applicable premiums
should be. Underwriting also
includes an ongoing review of
existing policies and their
pricing.
Underwriting expenses . . . . The aggregate of policy
acquisition costs and the
portion of administrative,
general and other expenses
attributable to underwriting
operations.
Underwriting profit (loss). . The excess (deficiency),
determined under statutory
accounting practices, resulting
from the difference between
earned premiums and the sum of
incurred losses, loss adjustment
expenses and underwriting
expenses.
Voluntary market. . . . . . . The market consisting of those
persons who insurance companies
voluntarily choose to insure
because such companies believe
that they can do so profitably
at competitive rates.
Workers' Compensation . . . . Workers' compensation coverage
insures employers against
employee medical and indemnity
claims resulting from injuries
related to work as well as third
party employer's liability.<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF MERCER MUTUAL
Page
INDEPENDENT AUDITORS' REPORT F-
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS F-
(As of December 31, 1996 and 1995)
STATEMENTS OF OPERATIONS F-
(For the years ended December 31, 1996,
1995 and 1994)
STATEMENTS OF CHANGES IN SURPLUS F-
(For the years ended December 31, 1996,
1995 and 1994)
STATEMENTS OF CASH FLOWS F-
(For the years ended December 31, 1996,
1995 and 1994)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
BALANCE SHEETS (Unaudited) F-
(As of September 30, 1997 and 1996)
STATEMENTS OF OPERATIONS (Unaudited) F-
(For the nine months ended September 30, 1997 and 1996)
STATEMENTS OF CHANGES IN SURPLUS (Unaudited) F-
(For the nine months ended September 30, 1997 and 1996)
STATEMENTS OF CASH FLOWS (Unaudited) F-
(For the nine months ended September 30, 1997 and 1996)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS F-
(Unaudited)
<PAGE>
Independent Auditors' Report
The Board of Directors
Mercer Mutual Insurance Company:
We have audited the accompanying consolidated balance sheets of
Mercer Mutual Insurance Company and subsidiaries (the Group) as
of December 31, 1996 and 1995, and the related statements of
operations, changes in surplus, and cash flows for each of the
years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Group as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick, LLP
Philadelphia, Pennsylvania
March 21, 1997 (October 17, 1997, as to Note 10)
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
Investments, at fair value:
Fixed income securities,
available-for-sale $34,964,333 $33,616,965
Equity securities 7,795,347 6,837,393
Total investments 42,759,680 40,454,358
Cash and cash equivalents 2,675,406 3,567,286
Premiums receivable 2,307,614 4,652,545
Reinsurance receivables 18,907,588 16,888,987
Prepaid reinsurance premiums 994,286 5,558,473
Deferred policy acquisition costs 2,988,693 3,155,269
Accrued investment income 602,068 539,086
Property and equipment, net 1,440,581 1,434,001
Deferred income taxes 801,644 516,373
Other assets 596,121 756,942
Total assets $74,073,681 $77,523,320
Liabilities and Surplus
Liabilities:
Losses and loss adjustment
expenses $35,221,043 $36,175,967
Unearned premiums 13,178,842 18,253,248
Accounts payable and accrued
expenses 1,700,217 1,448,177
Other reinsurance balances 4,027,836 1,999,524
Other liabilities 663,663 683,245
Total liabilities 54,791,601 58,560,161
Surplus:
Unassigned surplus 18,475,813 17,835,403
Unrealized gains in investments,
net of deferred income taxes 806,267 1,127,756
Total surplus 19,282,080 18,963,159
Total liabilities and surplus $74,073,681 $77,523,320
See accompanying notes to consolidated financial statements.
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenue:
Net premiums earned $20,633,915 $20,816,695 $18,681,147
Investment income, net of expenses 2,289,490 2,131,883 1,903,932
Net realized investment gains 595,797 53,142 277,458
Other revenue 154,944 161,429 165,776
----------- ----------- -----------
Total revenue 23,674,146 23,163,149 21,028,313
----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses 14,800,853 13,295,879 14,106,822
Amortization of deferred policy
acquisition costs 5,490,768 5,943,826 5,860,224
Other expenses 2,571,339 2,415,792 3,116,574
----------- ----------- -----------
Total expenses 22,862,960 21,655,497 23,083,620
----------- ----------- -----------
Income (loss) before income tax 811,186 1,507,652 (2,055,307)
Income tax (benefit) 170,776 369,367 (681,358)
----------- ----------- -----------
Net income (loss) $ 640,410 $ 1,138,285 $(1,373,949)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Surplus
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $18,963,159 $14,202,831 $18,067,272
Net income (loss) 640,410 1,138,285 (1,373,949)
Change in unrealized capital gain
(losses) in investments (321,489) 3,622,043 (2,490,492)
----------- ----------- -----------
Comprehensive net income (loss) 318,921 4,760,328 (3,864,441)
----------- ----------- -----------
Balance, end of year $19,282,080 $18,963,159 $14,202,831
=========== =========== ===========
The balance was comprised of:
Unassigned surplus $18,475,813 $17,835,403 $16,697,118
Unrealized gains (losses) in invest-
ments, net of deferred income taxes 806,267 1,127,756 (2,494,287)
----------- ----------- -----------
$19,282,080 $18,963,159 $14,202,831
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 640,410 $ 1,138,285 $(1,373,949)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation of property and
equipment 137,255 134,446 140,915
Net accretion of discount (58,565) (53,930) (12,892)
Net realized investment gain (595,797) (53,142) (277,458)
Net realized (gain) loss on sale of
property and equipment 3,351 - (1,545)
Deferred income tax (119,657) (54,577) (33,588)
Change in assets and liabilities:
Premiums receivable 2,344,931 (286,312) (219,438)
Reinsurance receivables (2,018,601) 368,207 (3,343,767)
Prepaid reinsurance premiums 4,564,187 (55,187) (16,238)
Deferred policy acquisition costs 166,576 174,244 (77,587)
Other assets 97,839 723,757 (864,312)
Losses and loss expenses (954,924) 645,385 2,222,741
Unearned premiums (5,074,406) 483,325 712,471
Other liabilities 2,299,856 (214,764) 1,167,270
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,432,455 2,949,737 (1,977,377)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed income securities,
available-for-sale (6,476,750) (15,117,951) (8,236,056)
Purchase of equity securities (6,937,955) (5,890,866) (7,079,901)
Sale and maturity of fixed income
securities available-for-sale 4,293,918 10,145,777 5,952,768
Sale of equity securities, available
for sale 6,982,724 9,411,963 9,307,988
Change in receivable/payable of
securities (39,086) 98,836 (23,617)
Purchase of property and equipment (175,686) (92,039) (110,894)
Sale of property and equipment 28,500 - 5,300
----------- ----------- -----------
Net cash used in investing activities (2,324,335) (1,444,280) (184,412)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (891,880) 1,505,457 (2,161,789)
Cash and cash equivalents at beginning
of year 3,567,286 2,061,829 4,223,618
----------- ----------- -----------
Cash and cash equivalents at end of
period $ 2,675,406 $ 3,567,286 $ 2,061,829
=========== =========== ===========
Cash paid during the year for:
Interest $ 0 $ 0 $ 0
Income taxes $ 125,000 $ 280,688 $ 64,000
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Description of Business
Mercer Mutual Insurance Company (MMIC), its subsidiary
Queenstown Holding Company, Inc. (QHC) and QHC's subsidiary
Mercer Insurance Company (MIC) collectively referred herein
as the "Group", provide property and casualty insurance to
both individual and commercial customers in New Jersey and
Pennsylvania. The principal lines of business are
homeowners, commercial multi-peril, general liability and
fire and allied which represent approximately 48%, 20%, 13%
and 12%, respectively, of net premiums written.
MMIC has filed an application with the Insurance Department
of the Commonwealth of Pennsylvania to form of an insurance
holding company, incorporated in Pennsylvania, to purchase
all of the authorized stock of MMIC, which plans to convert
from the mutual to the stock form of organization.
Consolidation Policy and Basis of Presentation
The consolidated financial statements include the accounts
of each member of the Group. All significant intercompany
accounts and transactions have been eliminated in
consolidation. The consolidated financial statements have
been prepared in conformity with generally accepted
accounting principles, which differ in some respects from
those followed in reports to insurance regulatory
authorities.
Use of Estimates
The preparation of the accompanying financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Investments
Due to periodic shifts in the portfolio arising out of
income tax and asset-liability matching, as well as
securities markets and economic factors, management
considers the entire portfolio of fixed income securities as
available-for-sale. Fixed income securities available-for-
sale and equity securities are stated at fair value with
changes in fair value, net of deferred income tax, reflected
in surplus. Realized gains and losses are calculated on the
specific identification basis.
Interest on fixed maturities is credited to income as it
accrues on the principal amounts outstanding, adjusted for
amortization of premiums and accretion of discounts computed
utilizing the effective interest rate method. Premiums and
discounts on mortgage-backed securities are amortized using
anticipated prepayments with significant changes in
anticipated prepayments accounted for prospectively.
Cash and cash equivalents
Cash and cash equivalents are carried at cost which
approximates market value. The Group considers all highly
liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
Fair Values of Financial Instruments
The Group has used the following methods and assumptions in
estimating its fair values:
Investments - The fair values for fixed income securities
available-for-sale are based on quoted market prices, when
available. If not available, fair values are based on
values obtained from investment brokers. Fair values for
marketable equity securities are based on quoted market
prices and on statutory equity for the security indicated
above.
The fair value of an equity security in a reinsurance
company is estimated based on statutory book value because
the security is not traded and because of restrictions
placed on the investors. These equity securities can not be
sold, transferred or given until December 31, 1997. After
December 31, 1997 the stock can be sold. However, after
receipt of a bona fide offer, the stock must first be
offered to the investee or its other shareholders at the
lower of statutory book value or the offered price. The
investee also has the ability to determine that the
potential purchaser is not appropriate and void such an
offer.
Cash and cash equivalents - The carrying amounts reported in
the balance sheet for these instruments approximate their
fair values.
Premium and reinsurance receivables - The carrying amounts
reported in the balance sheet for these instruments
approximate their fair values.
Reinsurance
The Group cedes insurance to, and assumes insurance from,
unrelated insurers to limit its maximum loss exposure
through risk diversification. Ceded reinsurance
receivables and unearned premiums are reported as assets;
loss and loss adjustment expenses are reported gross of
ceded reinsurance credits.
Deferred Policy Acquisition Costs
Acquisition costs such as commissions, premium taxes and
certain other expenses which vary with and are directly
related to the production of business, are deferred and
amortized over the effective period of the related insurance
policies. The method followed in computing deferred policy
acquisition costs limits the amount of such deferred costs
to their estimated realizable value, which gives effect to
premiums to be earned, loss and loss adjustment expenses and
certain other maintenance costs expected to be incurred as
the premiums are earned. To the extent that deferred policy
acquisition costs are not realizable, the deficiency is
charged to income currently.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation calculated on the straight-line basis.
Property is depreciated over useful lives ranging from five
to forty-five years. Equipment is depreciated three to ten
years.
Premium Revenue
Premiums include direct writings plus reinsurance assumed
less reinsurance ceded to other insurers and are recognized
as revenue over the period that coverage is provided using
the monthly pro-rata method. Unearned premiums represent
that portion of premiums written that are applicable to the
unexpired terms of policies in force.
Losses and Loss Adjustment Expenses
The liability for losses includes the amount of claims which
have been reported to the Company and are unpaid at the
statement date as well as provision for claims incurred but
not reported, after deducting anticipated salvage and
subrogation. The liability for loss adjustment expenses is
determined as a percentage of the liability for losses based
on the historical ratio of paid adjustment expenses to paid
losses by line of business.
Management believes that the liabilities for losses and loss
adjustment expenses at December 31, 1996 are adequate to
cover the ultimate net cost of losses and claims to date,
but these liabilities are necessarily based on estimates,
and the amount of losses and loss adjustment expenses
ultimately paid may be more or less than such estimates.
Income Taxes
The Group uses the asset and liability method of accounting
for income taxes. Deferred income taxes arise from the
recognition of temporary differences between financial
statement carrying amounts and the tax bases of the Group's
assets and liabilities. A valuation allowance is provided
when it is more likely than not that some portion of the
deferred tax asset will not be realized. The effect of a
change in tax rates is recognized in the period of the
enactment date.
(2) Investments
Net investment income, net realized investment gains and
change in unrealized capital gains (losses) on investment
securities are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Investment income:
Fixed income securities $2,325,741 $2,068,032 $1,829,408
Equity securities 153,187 168,236 219,847
Cash and cash equivalents 143,562 193,442 173,121
Other 45,971 53,796 45,124
---------- ---------- ----------
Gross investment income 2,668,461 2,483,506 2,267,500
========== ========== ==========
Realized gains (losses):
Fixed income securities (20,661) (172,631) 16,708
Equity securities 616,458 225,773 260,750
---------- ---------- ----------
Net realized investment gains 595,797 53,142 277,458
---------- ---------- ----------
Net investment income and
net realized investment
gains $2,885,287 $2,185,025 $2,181,390
========== ========== ==========
</TABLE>
Change in unrealized gains (losses) of securities, net of
tax, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Fixed income securities $ (576,423) $1,987,268 $(2,287,005)
Equity securities 254,934 1,634,775 (203,487)
---------- ---------- -----------
$ (321,489) $3,622,043 $(2,490,492)
========== ========== ===========
</TABLE>
<PAGE>
The cost and estimated fair value of available-for-sale
investment securities at December 31, 1996 and 1995 are
shown below.
<TABLE>
<CAPTION>
Gross Gross Estimated
unrealized unrealized fair
1996 Cost(1) gains losses value
------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities,
available-for-sale
U.S. Government and
government agencies $23,701,683 $ 223,759 $ 234,107 $23,691,335
Obligations of states and
political subdivisions 4,313,541 48,029 18,751 4,342,819
Mortgage-backed 7,630,969 11,684 712,474 6,930,179
----------- ---------- ---------- -----------
Total fixed maturities 35,646,193 283,472 965,332 34,964,333
----------- ---------- ---------- -----------
Equity securities:
At market value 5,891,857 1,119,149 329,250 6,681,756
At estimated value 12 1,113,579 1,113,591
----------- ---------- ---------- -----------
Total equity securities 5,891,869 2,232,728 329,250 7,795,347
----------- ---------- ---------- -----------
Total available-for-sale $41,538,062 $2,516,200 $1,294,582 $42,759,680
=========== ========== ========== ===========
<CAPTION>
Gross Gross Estimated
unrealized unrealized fair
1995 Cost(1) gains losses value
------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities,
available-for-sale
U.S. Government and
government agencies $18,515,784 $ 566,453 $ 7,966 $19,074,271
Obligations of states and
political subdivisions 5,136,034 104,025 12,767 5,227,292
Public utility, industrial
miscellaneous 10,000 10,000
Mortgage-backed 9,763,639 44,224 502,461 9,305,402
----------- ---------- ---------- -----------
Total fixed maturities 33,425,457 714,702 523,194 33,616,965
----------- ---------- ---------- -----------
Equity securities:
At market value 5,320,180 956,669 311,756 5,965,093
At estimated value 0 872,300 872,300
----------- ---------- ---------- -----------
Total equity securities 5,320,180 1,828,969 311,756 6,837,393
----------- ---------- ---------- -----------
Total available-for-sale $38,745,637 $2,543,671 $ 834,950 $40,454,358
=========== ========== ========== ===========
<FN>
(1) Original cost of equity securities; original cost of fixed income
</TABLE>
<PAGE>
The amortized cost and estimated fair value of fixed income
securities at December 31, 1996, by contractual maturity,
are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or
prepayment penalties.
Estimated
Amortized fair
cost value
Due in one year or less $ 40,717 $ 43,019
Due after one year through
five years 1,994,258 2,031,262
Due after five years through
ten years 23,047,515 23,022,685
Due after ten years 2,932,734 2,937,188
28,015,224 28,034,154
Mortgage backed securities 7,630,969 6,930,179
$35,646,193 $34,964,333
The gross realized gains and losses on investment securities
are as follows:
1996 1995 1994
Gross realized gains $ 920,513 $ 777,592 $ 544,762
Gross realized losses (324,716) (724,450) (267,304)
$ 595,797 $ 53,142 $ 277,458
Proceeds from the sale of available-for-sale securities were
$11,276,642, $19,032,740 and $14,960,670 for 1996, 1995 and
1994, respectively.
(3) Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are as follows:
1996 1995 1994
Balance, January 1 $3,155,269 $3,329,513 $3,251,926
Acquisition costs
deferred 5,324,192 5,769,582 5,937,811
Amortization charged
to earnings (5,490,768) (5,943,826) (5,860,224)
$2,988,693 $3,155,269 $3,329,513
(4) Property and Equipment
Property and equipment was as follows:
1996 1995
Home Office:
Land $ 456,093 $ 456,093
Buildings and improvements 1,468,158 1,422,207
Furniture, fixtures and
equipment 1,289,487 1,237,080
3,213,738 3,115,380
Accumulated depreciation (1,773,157) (1,681,379)
$1,440,581 $1,434,001
(5) Liabilities for Losses and Loss Adjustment Expenses
Activity in the liabilities for losses and loss adjustment
expenses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1 $36,175,967 $35,530,582 $33,307,841
Less reinsurance recoverable
on unpaid losses and loss
expenses (16,819,208) (17,232,679) (14,312,878)
----------- ----------- -----------
Net balance at January 1 19,356,759 18,297,903 18,994,963
Incurred related to:
Current year 16,445,052 14,250,474 15,363,666
Prior years (1,644,199) (954,595) (1,256,844)
----------- ----------- -----------
Total incurred 14,800,853 13,295,879 14,106,822
----------- ----------- -----------
Paid related to:
Current year 7,715,287 5,301,807 8,781,767
Prior years 6,368,661 6,935,216 6,022,115
----------- ----------- -----------
Total paid 14,083,948 12,237,023 14,803,882
----------- ----------- -----------
Net balance, December 31 20,073,664 19,356,759 18,297,903
Plus reinsurance recoverable
on unpaid losses and loss
expenses 15,147,379 16,819,208 17,232,679
----------- ----------- -----------
Balance at December 31 $35,221,043 $36,175,967 $35,530,582
=========== =========== ===========
</TABLE>
The Group has geographic exposure to catastrophe losses in
its operating region. Catastrophes can be caused by various
events including hurricanes, windstorms, earthquakes, hail,
explosion, severe weather and fire. The incidence and
severity of catastrophes are inherently unpredictable. The
extent of losses from a catastrophe is a functions of both
the total amount of insured exposure in the area affected by
the event and the severity of the event. Most catastrophes
are restricted to small geographic areas. However,
hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. The Group generally seeks
to reduce its exposure to catastrophe through individual
risk selection and the purchase of catastrophe reinsurance.
(6) Reinsurance
In the ordinary course of business, the Company seeks to
limit its exposure to loss on individual claims and from the
effects of catastrophes by entering into reinsurance
contracts with other insurance companies. Reinsurance is
ceded on excess of loss and pro-rata bases with the
Company's retention not exceeding $100,000 per occurrence.
Insurance ceded by the Company does not relieve its primary
liability as the originating insurer. The Company also
assumes reinsurance from other companies on a pro-rata
basis.
The effect of reinsurance with unrelated insurers on
premiums written and earned is as follows:
<TABLE>
<CAPTION>
Premiums written 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Direct $24,958,176 $24,698,823 $24,355,116
Assumed 5,013,325 10,287,221 9,564,169
Ceded (9,847,805) (13,741,211) (14,541,905)
----------- ----------- -----------
Net $20,123,696 $21,244,833 $19,377,380
=========== =========== ===========
<CAPTION>
Premiums earned 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Direct $24,760,254 $24,699,791 $23,621,316
Assumed 10,285,653 9,802,928 9,585,498
Ceded (14,411,992) (13,686,024) (14,525,667)
----------- ----------- -----------
Net $20,633,915 $20,816,695 $18,681,147
=========== =========== ===========
</TABLE>
The effect of reinsurance on unearned premiums as of
December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Direct $12,956,675 $12,758,753 $12,759,721
Assumed 222,167 5,494,495 5,010,202
----------- ----------- -----------
Net $13,178,842 $18,253,248 $17,769,923
=========== =========== ===========
</TABLE>
The effect of reinsurance on the liabilities for losses and
loss adjustment and losses and loss adjustment expenses
incurred is as follows:
<TABLE>
<CAPTION>
Liability for Losses and Loss
Adjustment Expenses 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Direct $27,428,624 $27,905,497 $28,236,158
Assumed 7,792,419 8,270,470 7,294,424
----------- ----------- -----------
$35,221,043 $36,175,967 $35,530,582
=========== =========== ===========
<CAPTION>
Losses and Loss Adjustment
Expenses 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Direct $14,596,986 $13,120,502 $18,830,065
Assumed 7,233,718 6,694,210 7,861,992
Ceded (7,029,851) (6,518,833) (12,585,235)
----------- ----------- -----------
Net $14,800,853 $13,295,879 $14,106,822
=========== =========== ===========
</TABLE>
The Group performs credit reviews of its reinsurers,
focusing on financial stability. To the extent that a
reinsurer may be unable to pay losses for which it is liable
under the terms of a reinsurance agreement, the Group is
exposed to the risk of continued liability for such losses.
At December 31, 1996, three independent reinsurers accounted
for approximately $3,607,000 of amounts recoverable for paid
losses and loss adjustment expenses.
Effective December 31, 1996, the Group terminated its
participation in certain ceded and assumed reinsurance
agreements. As a result of the termination of these
agreements, premiums unearned as of December 31, 1996 were
returned to the ceding companies, less commission. The
Group, as a ceding reinsured, received back from reinsurers
$4,895,249 in unearned premium less $1,223,812 in
commission. The Group, as an assuming reinsurer, returned
to reinsureds $5,507,777 in unearned premium less $1,376,944
in commission.
(7) Retirement Plans and Deferred Directors' Fees
The Group has a defined benefit pension plan covering
substantially all of its employees. Benefits are based on
years of service and the employee's career-average annual
compensation. The Group's funding policy is to contribute
annually at least the minimum required contribution in
accordance with minimum funding standards established by
ERISA. Contributions are intended to provide not only for
benefits attributed to service to date, but also for those
expected to be earned in the future.
Effective February 28, 1997, the Group terminated the
defined benefit pension plan. Benefits ceased accruing to
participants as of December 31, 1996. The Group is awaiting
federal approval of the termination of the plan before
distribution of vested benefits. As a result of the
termination of the defined benefit pension plan, the Group
incurred a loss of $173,440.
Plan assets are generally invested in fixed income and
equity securities. The following table sets forth the year-
end funded status of the Plan:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $1,009,494 and $915,827 $(1,021,093) $ (934,636)
Projected benefit obligation for service
rendered to date (1,021,039) (1,321,757)
Plan assets at fair value 861,864 822,587
Excess of the projected benefit obligation
over plan (159,229) (499,170)
Unrecognized net loss due to past experience
different from that assumed and effects of
changes in assumptions 228,627
Unrecognized net transition asset being
recognized over 25 years 240,318
------------ -----------
(159,229) (30,225)
Additional minimum liability (81,824)
------------ -----------
Accrued pension cost $ (159,229) $ (112,049)
============ ===========
</TABLE>
The net periodic pension cost for the plan includes the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Service costs - benefits earned
during the period $ 119,075 $ 98,365 $ 110,904
Interest cost on projected
benefit obligation 95,038 80,801 69,646
Return on plan assets (119,811) (55,833) (34,926)
Net amortization and deferral 61,895 7,020 (3,129)
----------- ----------- -----------
Net periodic pension cost $ 156,197 $ 130,353 $ 142,495
=========== =========== ===========
</TABLE>
In determining the actuarial present value of the projected
benefit obligation, the weighted-average discount rate was
7.5%, 7.25% and 8.25% for 1996, 1995 and 1994, respectively.
The rate of increase in future compensation levels was 4.5%.
The expected long-term rate of return on retirement plan
assets was 8.0%.
The Group also maintains a 401(k) retirement savings plan
covering substantially all employees. The Group matches a
percentage of each employees' pre-tax contribution and also
contributes an amount equal to 2% of each employee's annual
compensation. The cost of this plan amounted to $57,730,
$56,100 and $ 53,609 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Group maintains a non-qualified unfunded retirement plan
for its directors. The plan provides for monthly payments
for 120 months upon retirement. The expense for this plan
amounted to $54,806, $51,659 and $50,113 for 1996, 1995 and
1994 respectively. Costs accrued under this plan amounted
to $358,254 and $334,132 at December 31, 1996 and 1995,
respectively.
The Group maintains a deferred directors' compensation plan.
Under the plan, a director may elect to defer receipt of all
or a portion of their fees. Amounts deferred, together with
accumulated interest, are distributed either as a lump sum
or in installments over a period of not greater than ten
years. Deferred directors' fees and accumulated interest
amounted to $475,702 and $489,567 at December 31, 1996 and
1995, respectively.
(8) Federal Income Taxes
The tax effect of significant temporary differences that
give rise to the Group's net deferred tax asset as of
December 31, is as follows:
1996 1995
Net loss reserve discounting $1,180,547 $1,146,441
Net unearned premiums 828,366 863,245
Other 297,975 263,550
---------- ----------
Deferred tax assets 2,306,888 2,273,236
---------- ----------
Deferred policy acquisition
costs 1,016,156 1,072,791
Unrealized gain on investment 415,351 580,965
Other 73,737 103,107
---------- ----------
Deferred tax liabilities 1,505,244 1,756,863
---------- ----------
Net deferred tax asset $ 801,644 $ 516,373
========== ==========
The net deferred tax asset has not been reduced by a
valuation allowance because management believes that, while
it is not assured, it is more likely than not that it will
generate sufficient future taxable income to utilize these
net excess tax deductions. The amount of the deferred tax
asset considered realizable, however, could be materially
reduced in the near term if estimates of future taxable
income in the years in which the differences are expected to
reverse are not realized.
Actual income tax expense (benefit) differed from expected
tax expense (benefit), computed by applying the United
States federal corporate tax rate of 34% to income before
income taxes, for each of the three years ended December 31
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Expected tax expense (benefit) $ 275,803 $ 512,602 $ (698,804)
Tax-exempt interest (73,155) (106,934) (213,811)
Dividends received deduction (24,966) (34,630) (42,187)
Alternative minimum tax - - 258,912
Other (6,906) (1,671) 14,532
----------- ----------- -----------
Income tax expense (benefit) $ 170,776 $ 369,367 $ (681,358)
=========== =========== ===========
</TABLE>
The components of the provision (benefit) for income taxes
for each of the three years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current federal income tax
expense (benefit) $ 290,433 $ 423,944 $ (647,770)
Deferred federal income tax
expense (benefit) (119,657) (54,577) (33,588)
----------- ----------- -----------
Income tax expense (benefit) $ 170,776 $ 369,367 $ (681,358)
=========== =========== ===========
</TABLE>
(9) Reconciliation of Statutory Filings to Amounts Reported
Herein
A reconciliation of the Group's statutory net income and
surplus to the Group's net income and surplus, under
generally accepted accounting principles (GAAP), is as
follows:
<TABLE>
<CAPTION>
Net income: 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory net income (loss) $ 809,024 $ 1,219,149 $(1,454,483)
Deferred policy acquisition (166,576) (174,244) 77,587
Deferred federal income taxes 199,657 54,577 33,588
Pension (129,004) 24,647 (44,967)
Other 7,309 14,156 14,326
----------- ----------- -----------
GAAP net income (loss) $ 640,410 $ 1,138,285 $(1,373,494)
=========== =========== ===========
<CAPTION>
Surplus: 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory surplus $16,087,222 $14,938,427 $11,132,652
Deferred policy acquisition 2,988,693 3,155,269 3,329,513
Deferred federal income taxes 801,644 516,373 2,327,697
Non-admitted assets 185,401 191,878 288,298
Unrealized gain (loss) on fixed
income securities (681,860) 191,508 (2,819,505)
Other (99,020) (30,296) (55,824)
----------- ----------- -----------
GAAP surplus $19,282,080 $18,963,159 $14,202,831
=========== =========== ===========
</TABLE>
The Group's insurance companies are required to file
statutory financial statements with various state insurance
regulatory authorities. Statutory financial statements are
prepared in accordance with accounting principles and
practices prescribed or permitted by the various states of
domicile. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules,
as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted
statutory accounting practices encompass all accounting
practices that are not prescribed; such practices differ
from state to state, may differ from company to company
within a state, and may change in the future. Furthermore,
the NAIC has a project to codify statutory accounting
practices, the result of which is expected to constitute the
only source of "prescribed" statutory accounting practices.
Accordingly, that project will likely change the definitions
of what comprise prescribed versus permitted statutory
accounting practices, and may result in changes to the
accounting policies that insurance enterprises use to
prepare their statutory financial statements. The effects
of any such changes are not presently determinable and will
not likely affect financial statements prepared under
generally accepted accounting principles.
(10) Subsequent Events
Demutualization
In October 1997 the Group's Boards of Directors approved a
plan of conversion for changing the corporate form of MMIC
from the mutual form to the stock form (demutualization).
Under the plan, policyholders and certain other groups will
have the opportunity to acquire stock in a newly formed
holding company, Mercer Insurance Group, Inc. (MRCR).
MRCR will in turn acquire all of the newly issued stock of
MMIC upon conversion. Prior to the conversion, MRCR will
not engage in any significant operations and will have no
assets or liabilities. The demutualization plan is subject
to approval from the Pennsylvania Insurance Department and
ultimately receipt of sufficient stock subscriptions to
effect the transaction. The Group has requested a ruling
from the Internal Revenue Service regarding the tax
treatment of the demutualization as a tax-free
reorganization. In the event that the plan is executed, the
converted companies will be subject to certain insurance
laws and regulations specific to stock insurance companies
as well as regulations of the Securities and Exchange
Commission. Limitations on the payment of dividends and
Insurance Holding Company regulations are among the types of
regulatory requirements with which the Group will have to
comply. Assuming the conversion were complete as of
December 31, 1996, dividends and other distributions in 1997
to MRCR would be limited to approximately $1,600,000 for
MMIC and $350,000 for MIC without prior approval of the
Insurance Department.
(11) Fair Automobile Insurance Reform Act of 1990
The Fair Automobile Insurance Reform Act of 1990 (FAIRA)
substantially reformed various aspects of the State of New
Jersey's motor vehicle system. As a result of this
legislation, the Group has paid $420,323, $466,582 and
$370,246 in 1996, 1995 and 1994, respectively, as its share
of the funding of the New Jersey Full Insurance Underwriting
Association (the JUA). The amounts represent the fifth,
sixth and seventh installments of eight to be paid toward
funding the JUA. Such amounts are based on the premiums
written in New Jersey by the Group's insurance companies.
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Assets September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Investments, at fair value:
Fixed income securities,
available-for-sale $35,251,228 $34,964,333
Equity securities 9,925,874 7,795,347
----------- -----------
Total investments 45,177,102 42,759,680
Cash and cash equivalents 2,265,889 2,675,406
Premiums receivable 3,446,610 2,307,614
Reinsurance receivables 13,887,557 18,907,588
Prepaid reinsurance premiums 2,995,338 994,286
Deferred policy acquisition costs 2,908,091 2,988,693
Accrued investment income 435,883 602,068
Property and equipment, net 1,437,667 1,440,581
Deferred income taxes 231,389 801,644
Other assets 472,398 596,121
----------- -----------
Total assets $73,257,924 $74,073,681
=========== ===========
Liabilities and Surplus
Liabilities:
Losses and loss adjustment
expenses $32,811,793 $35,221,043
Unearned premiums 14,796,026 13,178,842
Accounts payable and accrued
expenses 1,772,728 1,700,217
Other reinsurance balances 1,206,147 4,027,836
Other liabilities 725,117 663,663
----------- -----------
Total liabilities 51,311,811 54,791,601
----------- -----------
Surplus:
Unassigned surplus 19,990,706 18,475,813
Accumulated other comprehensive
income - unrealized gains in
investments, net of deferred
income taxes 1,955,407 806,267
----------- -----------
Total surplus 21,946,113 19,282,080
----------- -----------
Total liabilities and surplus $73,257,924 $74,073,681
=========== ===========
</TABLE>
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Net premiums earned $13,287,554 $15,472,485
Investment income, net of
expenses 1,793,296 1,704,252
Net realized investment gains 483,133 409,182
Other revenue 143,701 137,262
----------- -----------
Total revenue 15,707,684 17,723,181
----------- -----------
Expenses:
Losses and loss adjustment
expenses 8,037,843 11,253,371
Amortization of deferred
policy acquisition costs 3,532,681 4,120,875
Other expenses 1,928,110 1,641,341
----------- -----------
Total expenses 13,498,634 17,015,587
----------- -----------
Income (loss) before income tax 2,209,050 707,594
Income tax (benefit) 694,157 173,256
----------- -----------
Net income (loss) $ 1,514,893 $ 534,338
=========== ===========
</TABLE>
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Surplus
For the Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
----------- -----------
<S> <C> <C>
Balance, beginning of period $19,282,080 $18,963,159
Net income (loss) 1,514,893 534,338
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities:
Unrealized holding gains
arising during period (net
of related income tax expense
(benefit) of $756,244,
($187,687, $349,054 and
$129,776) 1,468,008 (364,334)
Less:
Reclassification adjust-
ment for gains included
in net income (net of related
income tax expense of
$164,265, $139,122,
$62,182 and $24,322) (318,868) (270,060)
----------- -----------
1,149,140 (634,394)
----------- -----------
Comprehensive income
(loss) 2,664,033 (100,056)
----------- -----------
Balance, end of period $21,946,113 $18,863,103
=========== ===========
The balance was comprised of:
Unassigned surplus $19,990,706 $18,369,741
Unrealized gains (losses) in
investments, net of deferred
income taxes 1,955,407 493,362
----------- -----------
$21,946,113 $18,863,103
=========== ===========
</TABLE>
<PAGE>
No dealer, salesman or any other person has been authorized to
give any information or to make any representation other than as
contained in this Prospectus in connection with the offering made
hereby, and, if given or made, such information shall not be
relied upon as having been authorized by the Company, Mercer
Mutual, or Sandler O'Neill. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby to any person in any jurisdiction in
which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to
do so, or to any person to whom it is unlawful. Neither the
delivery of this Prospectus nor any sale hereunder shall under
any circumstances create any implication that there has been no
change in the affairs of the Company or Mercer Mutual, since the
date as of which information is furnished herein or since the
date hereof.
<PAGE>
Table of Contents
Page
Prospectus Summary ....................................
Selected Financial Information and
Other Data .........................................
Investment Considerations .............................
Use of Proceeds .......................................
Dividend Policy .......................................
Market for the Common Stock ...........................
Capitalization ........................................
Pro Forma Data ........................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations........
Business ..............................................
Management of the Company .............................
The Conversion ........................................
Certain Restrictions on Acquisition of
the Company .........................................
Description of Capital Stock ..........................
Registration Requirements .............................
Legal Opinions ........................................
Experts ...............................................
Available Information .................................
Glossary of Selected Insurance Terms ..................
Index to Consolidated Financial
Statements ..........................................
Until _______________, 1998, or _________ days after
commencement of the Syndicated Community Offering, if any,
whichever is later, all dealers effecting transactions in the
registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in
addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
Up to
2,990,000 Shares
MERCER INSURANCE GROUP, INC.
(Proposed Holding Company for
Mercer Mutual Insurance Company)
COMMON STOCK
PROSPECTUS
SANDLER O'NEILL & PARTNERS, L.P.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expense of Issuance and Distribution.
The Company anticipates the following expenses:
SEC registration fee ......................... $ 10,067
Printing, postage, and mailing* .............. $ 350,000
Legal fees and expenses* ..................... $ 350,000
Accounting fees and expenses* ................ $ 150,000
Appraisal fee and expenses ................... $ 75,000
Blue sky fees and expenses ................... $
(including counsel fees)* .................. $ 25,000
Transfer and conversion agent fees
and expenses* .............................. $ 100,000
Miscellaneous* ............................... $ 89,933
Total $1,150,000
==========
___________________
*Estimated
Item 14. Indemnification of Directors and Officers.
Pennsylvania law provides that a Pennsylvania corporation
may indemnify directors, officers, employees, and agents of the
corporation against liabilities they may incur in such capacities
for any action taken or any failure to act, whether or not the
corporation would have the power to indemnify the person under
any provision of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful
misconduct. Pennsylvania law also permits the adoption of a
Bylaw amendment, approved by shareholders, providing for the
elimination of a director's liability for monetary damages for
any action taken or any failure to taken any action unless
(1) the director has breached or failed to perform the duties of
his/her office; and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness.
The Bylaws of the Company provide for (1) indemnification of
directors, officers, employees, and agents of the Company and its
subsidiaries; and (2) the elimination of a director's liability
for monetary damages, each to the fullest extent permitted by
Pennsylvania law.
Directors and officers are also insured against certain
liabilities for their actions as such by an insurance policy
obtained by the Company.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
1.1 Agency Agreement dated _____________, 1998 among the
Company, Mercer Mutual and Sandler O'Neill.*
2.1 Plan of Conversion, dated as of October 17, 1997, as
amended and restated on November 12, 1997, of Mercer
Mutual Insurance Company
3.1 Articles of Incorporation of Mercer Insurance Group,
Inc.
3.2 Bylaws of Mercer Insurance Group, Inc.
4.1 Form of certificate evidencing shares of Mercer
Insurance Group, Inc.*
5. Opinion of Stevens & Lee re: Legality*
10.1 Mercer Insurance Group, Inc. - Management
Recognition Plan*
10.2 Mercer Insurance Group, Inc. - 1997 Stock
Compensation Plan*
10.3 Mercer Insurance Group, Inc. - Employee Stock
Ownership Plan*
10.4 Employment Agreement, dated as October 1, 1997,
between Mercer Insurance Group, Inc., Mercer Mutual
Insurance Company and William C. Hart
10.5 Employment Agreement, dated as of October 1, 1997,
between Mercer Insurance Group, Inc., Mercer Mutual
Insurance Company and Andrew R. Speaker
10.6 Consultant's Agreement, dated April 1, 1994, among
Mercer Mutual Insurance Company, Mercer Insurance
Company and Roland D. Boehm
10.7 Consultant's Agreement, dated August 5, 1986, among
Mercer Mutual Insurance Company, Mercer Insurance
Company and Eric W. Turner, Jr.
10.8 Mercer Mutual Insurance Company Corporate Director
Deferred Compensation Plan dated April 1, 1986, as
amended.
23.1 Consent of KPMG Peat Marwick LLP and Report on
Schedules (contained in Schedules)
23.2 Consent of Alex Sheshunoff & Company
23.3 Consent of Stevens & Lee (contained in Exhibit 5)*
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
99.1 Conversion Valuation Report on Mercer Mutual
Insurance Company, by Alex Sheshunoff & Company*
99.2 Stock Order Form*
99.3 Question and Answer Brochures*
99.4 Letters to prospective purchasers*
99.5 Mercer Mutual Insurance Company Policyholder
Information Statement*
- -------------
* To be filed by Amendment
(b) Financial Statement Schedules:
Independent Auditor's Consent and Report on Schedules
Schedule I - Summary of Investments - Other than Investments in
Related Parties.
Schedule II - Condensed Financial Information of Registrant (Not
Applicable).
Schedule IV - Reinsurance.
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Operations.
<PAGE>
Independent Auditor's Consent and Report on Schedules
The Board of Directors
Mercer Mutual Insurance Company:
The audits referred to in our report dated March 21, 1997
(October 17, 1997 as to Note 10), included the related financial
statement schedules as of December 31, 1996, and for each of the
years in the three-year period ended December 31, 1996, included
in the registration statement. These financial statement
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth
therein.
We consent to the use of our report included herein and to
the reference to our firm under the heading "Experts" in the
prospectus.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
December 3, 1997
<PAGE>
SCHEDULES TO REGISTRATION STATEMENT
Mercer Mutual Insurance Company and Subsidiaries
Schedule I - Summary of Investments - Other than
Investments in Related Parties as of December 31, 1996
Column A Column B Column C Column D
Market Balance
Type of Investment Cost Value Sheet
Fixed maturities:
Bonds:
United States Government and
government agencies and
authorities $31,198 $30,488 $30,488
States, municipalities and
political subdivisions 4,313 4,343 4,343
All other 285 285 285
Total fixed maturities 35,796 35,116 35,116
Equity securities:
Common stocks
Public utilities 102 95 95
Banks, trust and insurance
companies 664 2,433 2,433
Industrial, miscellaneous
and all other 4,976 5,116 5,116
Total equity securities 5,742 7,644 7,644
Total investments $41,538 xxxxxx $42,760
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1996, 1995 and 1994
Schedule IV - Reinsurance
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Premiums Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1996 24,760 14,412 10,286 20,634 49.8%
For the year ended
December 31, 1995 24,700 13,686 9,803 20,817 47.1%
For the year ended
December 31, 1994 23,621 14,526 9,586 18,681 51.3%
</TABLE>
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1996, 1995 and 1994
Schedule VI - Supplemental Information
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F Column G
Reserve Discount
Deferred for Losses if any
Affiliation Policy and Deducted Net Net
with Acquisition Loss Adj. in Unearned Earned Investment
Registrant Costs Expenses Column C Premiums Premiums Income
<S> <C> <C> <C> <C> <C> <C>
Consolidated Property
and Casualty Entities
For the year ended
December 31, 1996 2,989 35,221 0 13,179 20,634 2,289
For the year ended
December 31, 1995 3,155 36,176 0 18,253 20,817 2,132
For the year ended
December 31, 1994 18,681 1,904
</TABLE>
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1996, 1995 and 1994
Schedule VI - Supplemental Information (continued)
<TABLE>
<CAPTION>
Column H Column I Column J Column K
Paid
Losses and LAE Losses and
Incurred Loss Net
Current Prior Amortization Adjustment Written
Year Year of DPAC Expenses Premiums
<S> <C> <C> <C> <C> <C>
Consolidated
Property and
Casualty Entities
For the year ended
December 31, 1996 16,445 (1,644) 5,491 14,084 20,124
For the year ended
December 31, 1995 14,250 (954) 5,944 12,237 21,245
For the year ended
December 31, 1994 15,364 (1,257) 5,860 14,804 19,377
</TABLE>
<PAGE>
Item 17. Undertakings.
(a) Rule 415 Offering: The undersigned registrant
hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement: (i) to include any prospectus required
by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any fact or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and (iii) to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any
material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Request for acceleration of effective date: Insofar
as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the bylaws of
the registrant, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the Borough of Pennington, State of New Jersey, on
November 24, 1997.
MERCER INSURANCE GROUP, INC.
By: /s/ William C. Hart
William C. Hart,
President and Chief Executive
Officer
KNOWN ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints William C. Hart,
Andrew R. Speaker, or Jeffrey P. Waldron, Esquire, and each of
them, his true and lawful attorney-in-fact, as agent with full
power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacity, to sign any or all
amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
to such attorney-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to
all intents and purposes as they might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Capacity Date
/s/ William C. Hart President, Chief November 24, 1997
William C. Hart Executive Officer,
and Director
(Principal
Executive Officer)
/s/ Roland D. Boehm Vice Chairman of November 24, 1997
Roland D.Boehm the Board of
Directors
/s/ James J. Freda Director November 24, 1997
James J. Freda
/s/ George T. Hornyak, Jr. Director November 24, 1997
George T. Hornyak, Jr.
/s/ Richard U. Niedt Director November 24, 1997
Richard U. Niedt
/s/ Eric W. Turner, Jr. Director November 24, 1997
Eric W. Turner, Jr.
/s/ Richard G. Van Noy Chairman of the November 24, 1997
Richard G. Van Noy Board of Directors
/s/ Andrew R. Speaker Executive Vice November 24, 1997
Andrew R. Speaker President, Chief
Operating Officer,
Chief Financial
Officer, Treasurer
and Director
(Principal Financial
and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Number Title
1.1 Agency Agreement dated _____________, 1998 among the
Company, Mercer Mutual and Sandler O'Neill*
2.1 Plan of Conversion, dated as of October 17, 1997, as
amended and restated November 12, 1997, of Mercer Mutual
Insurance Company
3.1 Articles of Incorporation of Mercer Insurance Group,
Inc.
3.2 Bylaws of Mercer Insurance Group, Inc.
4.1 Form of certificate evidencing shares of Mercer
Insurance Group, Inc.*
5. Opinion of Stevens & Lee re: Legality*
10.1 Mercer Insurance Group, Inc. - Management Recognition
Plan*
10.2 Mercer Insurance Group, Inc. - 1997 Stock Compensation
Plan*
10.3 Mercer Insurance Group, Inc. - Employee Stock Ownership
Plan*
10.4 Employment Agreement, dated as of October 1, 1997,
between Mercer Insurance Group, Inc., Mercer Mutual
Insurance Company and William C. Hart
10.5 Employment Agreement, dated as of October 1, 1997,
between Mercer Insurance Group, Inc., Mercer Mutual
Insurance Company and Andrew R. Speaker
10.6 Consultant's Agreement, dated April 1, 1994, among
Mercer Mutual Insurance Company, Mercer Insurance
Company and Roland D. Boehm
10.7 Consultant's Agreement, dated August 5, 1986, among
Mercer Mutual Insurance Company, Mercer Insurance
Company and Eric W. Turner, Jr.
10.8 Mercer Mutual Insurance Company Corporate Director
Deferred Compensation Plan dated April 1, 1986, as
amended.
23.1 Consent of KPMG Peat Marwick LLP and Report on Schedules
(contained in Schedules)
23.2 Consent of Alex Sheshunoff & Company
23.3 Consent of Stevens & Lee (contained in Exhibit 5)*
24 Power of Attorney (contained on signature page)
27 Financial Data Schedule
99.1 Conversion Valuation Report on Mercer Mutual Insurance
Company, by Alex Sheshunoff & Company*
99.2 Stock Order Form*
99.3 Question and Answer Brochures*
99.4 Letters to prospective purchasers*
99.5 Mercer Mutual Insurance Company Policyholder Information
Statement*
- ----------------
* To be filed by amendment.
EXHIBIT 2.1
AMENDED AND RESTATED PLAN OF CONVERSION
FROM MUTUAL TO STOCK ORGANIZATION
MERCER MUTUAL INSURANCE COMPANY
Adopted October 17, 1997,
as amended and restated on November 12, 1997
1. BACKGROUND AND BUSINESS PURPOSE
As of and effective on October 17, 1997, the Board of
Directors of Mercer Mutual Insurance Company ("Mercer Mutual"),
after careful study and consideration, adopted by unanimous vote
this Plan of Conversion from Mutual to Stock Organization (the
"Plan"). Under the Plan, Mercer Mutual will convert from a
Pennsylvania mutual insurance company to a Pennsylvania stock
insurance company pursuant to the Insurance Company
Mutual-to-Stock Conversion Act, 40 P.S. Sections 911-A, et seq.
(the "Act") and will become a wholly-owned subsidiary of Mercer
Insurance Group, Inc., a to-be-formed holding company (the
"Holding Company") to be incorporated under Pennsylvania law at
the direction of Mercer Mutual. Mercer Mutual, as converted, is
sometimes hereinafter referred to as the "Converted Company" and
the foregoing transaction is sometimes hereinafter referred to as
the "Conversion."
The Conversion is subject to provisions of the Act and the
policies of the Pennsylvania Department of Insurance (the
"Department").
The Plan is subject to the prior written approval of the
Department. The Plan also must be approved by: (i) the
affirmative vote of a majority of the members of the Board of
Directors of the Holding Company, and (ii) the affirmative vote
of at least two-thirds of the votes cast at a meeting of the
Eligible Policyholders (as hereinafter defined) of Mercer Mutual
called for the purpose of considering and voting upon the Plan.
Pursuant to the Plan, shares of stock of the Holding Company will
be offered at a predetermined and uniform price in a subscription
offering pursuant to the exercise of non-transferable
subscription rights granted to the following persons
(collectively, the "Participants"): first to the Eligible
Policyholders of Mercer Mutual; second, to a tax-qualified
employee stock benefit plan to be established by the Holding
Company, and third, to the directors, officers and employees of
Mercer Mutual. Shares not subscribed for in the subscription
offering may be offered to the general public in a community
offering conducted concurrently with the subscription offering.
Shares remaining unsold, if any, may then be offered to the
general public in a best efforts or firm commitment underwritten
public offering or otherwise. The aggregate purchase price of
the Holding Company stock to be sold in the Conversion will be
based upon an independent appraisal of Mercer Mutual and will
reflect the estimated consolidated pro forma market value of the
Converted Company as a subsidiary of the Holding Company.
It is the desire of the Board of Directors of Mercer Mutual
to attract new capital to the Converted Company in order to:
(i) increase its statutory surplus (and thereby strengthen
policyholder protection), (ii) support current operations,
product growth, diversification of risk, and geographic
expansion, (iii) provide increased opportunities for existing
employees, and (iv) create new jobs. It is the further desire of
the Board of Directors of Mercer Mutual to reorganize the
Converted Company as a wholly-owned subsidiary of the Holding
Company in order to enhance and improve operational flexibility,
diversification of business opportunities and financial
capability for business and regulatory purposes, thus enabling
the Converted Company to compete more effectively with other
insurance companies. In addition, the Board of Directors of the
Holding Company intends to adopt a stock option plan and other
stock benefit plans to better attract, motivate and retain highly
qualified employees, officers and directors.
No change will be made in the Board of Directors or
management of Mercer Mutual as a result of the Conversion.
2. DEFINITIONS
Act: The term the "Act" means the Insurance Company
Mutual-to-Stock Conversion Act (40 P.S. Sections 911-A, et seq.).
Acting in Concert: The term "Acting in Concert" means
(i) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or (ii) a combination or
pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement,
whether written or otherwise. A person who acts in concert with
another person ("other party") shall also be deemed to be acting
in concert with any person who is also acting in concert with
that other party, except that any Tax-Qualified Employee Stock
Benefit Plan will not be deemed to be acting in concert with its
trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and
stock held by the Tax-Qualified Employee Benefit Plan will be
aggregated.
Affiliate: The term "Affiliate" means, with respect to a
person, a person that, directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common
control with such person.
Application: The term "Application" means the application
for approval of the Conversion to be filed by Mercer Mutual with
the Department as contemplated in Section 3 of the Plan.
Associate: The term "Associate," when used to indicate a
relationship with any person, means: (i) any corporation or
organization (other than Mercer Mutual, the Holding Company, a
majority-owned subsidiary of Mercer Mutual or the Holding Company
or any other entity that is a member of the same consolidated
group as Mercer Mutual or the Holding Company under generally
accepted accounting principles) of which such person is an
officer or partner or is, directly or indirectly the beneficial
owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity, except that such term shall
not include a Tax-Qualified Employee Stock Benefit Plan in which
a person has a substantial beneficial interest or serves as a
trustee in a similar fiduciary capacity; and (iii) any relative
or spouse of such person, or any relative of such spouse, who has
the same home as such person.
Code: The term "Code" means the Internal Revenue Code of
1986, as amended.
Commissioner: The term "Commissioner" means the Insurance
Commissioner of the Commonwealth of Pennsylvania.
Community Offering: The term "Community Offering" means the
offering of shares of Conversion Stock to the general public by
the Holding Company concurrently with the Subscription Offering,
giving preference to: (i) natural persons and trusts of natural
persons (including individual retirement and Keogh retirement
accounts and personal trusts in which such natural persons have
substantial interests) who are Residents of the Local Community,
(ii) principals of Eligible Policyholders in the case of an
Eligible Policyholder that is a corporation, partnership, limited
liability company or other entity, (iii) licensed insurance
agencies that have been appointed by Mercer Mutual to market and
distribute policies of insurance, and their affiliates,
(iv) named insureds under policies of insurance issued by Mercer
Mutual after October 17, 1997, and (v) providers of goods or
services to Mercer Mutual.
Conversion: The term "Conversion" means: (i) the amendment
of the Articles of Incorporation of Mercer Mutual to authorize
the issuance of shares of Converted Company Capital Stock and to
conform to the requirements of a Pennsylvania stock insurance
company under the laws of the Commonwealth of Pennsylvania,
(ii) the offer and sale of Conversion Stock by the Holding
Company in the Subscription Offering and the Community Offering
and in Underwritten Public Offering or otherwise, and (iii) the
purchase by the Holding Company of all the Converted Company
Capital Stock; all in accordance with the terms of the Plan.
Conversion Stock: The term "Conversion Stock" means the
shares of no par value common stock to be offered and sold by the
Holding Company pursuant to the Plan.
Converted Company: The term "Converted Company" means
Mercer Mutual in its form as a Pennsylvania stock insurance
company resulting from its conversion to the stock form of
organization in accordance with the terms of the Plan.
Converted Company Capital Stock: The term "Converted
Company Capital Stock" means any and all authorized shares of
capital stock of the Converted Company.
Effective Date: The term "Effective Date" means the date
Articles of Conversion for Mercer Mutual are filed in the office
of the Department of State of the Commonwealth of Pennsylvania or
such later date as may be specified in such Articles.
Eligibility Record Date: The term "Eligibility Record Date"
means the close of business on October 17, 1997, the effective
date of the adoption of the Plan by the Board of Directors of
Mercer Mutual.
Eligible Policyholder: The term "Eligible Policyholder"
means a person who, on the Eligibility Record Date, is a named
insured under a Qualifying Policy issued by Mercer Mutual.
Holding Company: The term "Holding Company" means Mercer
Insurance Group, Inc., a Pennsylvania business corporation
incorporated at the direction of Mercer Mutual for the purpose of
becoming a holding company for the Converted Company through
(i) the issuance and sale of Conversion Stock under the Plan, and
(ii) the concurrent purchase of all of the Converted Company
Capital Stock to be issued and sold pursuant to the Plan.
Holding Company Stock: The term "Holding Company Stock"
means any and all authorized shares of capital stock of the
Holding Company.
Independent Appraiser: The term "Independent Appraiser"
means a person independent of Mercer Mutual and the Holding
Company, experienced and expert in the area of corporate
appraisals, to be chosen by Mercer Mutual and retained by it to
prepare an appraisal of the consolidated pro forma market value
of the Converted Company as a subsidiary of the Holding Company.
Local Community: The term "Local Community" means the State
of New Jersey and the Commonwealth of Pennsylvania, in their
entirety, which States comprise the primary geographic market
area of Mercer Mutual.
Market Maker: The term "Market Maker" means a dealer (i.e.,
any person who engages, either for all or part of such person's
time, directly or indirectly, as agent, broker or principal in
the business of offering, buying, selling or otherwise dealing or
trading in securities issued by another person) who, with respect
to a particular security: (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized interdealer
quotation system or furnishes bona fide competitive bid and offer
quotations on request, and (ii) is ready, willing and able to
effect transactions in reasonable quantities at such dealer's
quoted prices with other brokers or dealers.
Maximum of the Valuation Range: The term "Maximum of the
Valuation Range" means the valuation that is 15 percent (15%)
above the midpoint of the Valuation Range as provided in
Section 7(A)(1) of the Plan.
Mercer Mutual: The term "Mercer Mutual" means Mercer Mutual
Insurance Company.
Minimum of the Valuation Range: The term "Minimum of the
Valuation Range" means the valuation that is 15 percent (15%)
below the midpoint of the Valuation Range as provided in
Section 7(A)(1) of the Plan.
Offering: The term "Offering" means the Offering of
Conversion Stock by the Holding Company in the Subscription
Offering, the Community Offering and in an Underwritten Public
Offering or otherwise pursuant to the Plan.
Officer: The term "officer" means an executive officer of
the Holding Company or of Mercer Mutual, as the case may be,
including the President, the Executive Vice President, any Senior
Vice President, and Vice Presidents in charge of principal
business functions.
Order Form: The term "Order Form" means the order form or
forms to be used by Eligible Policyholders and other persons
eligible to purchase Conversion Stock pursuant to the Plan.
Participant: The term "Participant" means a person entitled
to purchase shares of Conversion Stock in the Subscription
Offering (i.e., an Eligible Policyholder, a Tax-Qualified
Employee Stock Benefit Plan, or a director, officer or employee
of Mercer Mutual).
Person: The term "person" means any individual,
corporation, partnership, association, limited liability company,
trust or other entity.
Plan: The term "Plan" means this Plan of Conversion, as it
may from time to time be amended, under which Mercer Mutual will
convert from a Pennsylvania-chartered mutual insurance company to
a Pennsylvania-chartered stock insurance company and become a
wholly-owned subsidiary of the Holding Company.
Private Placement: The term "Private Placement" means the
offer and sale of Conversion Stock in a private placement as
contemplated under Section 7 of the Plan.
Purchase Price: The term "Purchase Price" means the uniform
price per share at which the Conversion Stock will be offered and
sold in the Offering, which price shall be determined by the
Holding Company in accordance with Section 7(A) of the Plan.
Qualifying Policy: The term "Qualifying Policy" means a
policy of insurance issued by Mercer Mutual and in force as of
the close of business on the Eligibility Record Date.
Registration Statement: The term "Registration Statement"
means the Registration Statement on Form S-1 and any amendments
thereto filed by the Holding Company with the SEC pursuant to the
Securities Act of 1933, as amended, to register the shares of
Conversion Stock.
Resident: The term "Resident," as used in this Plan in
relation to the preference afforded natural persons and trusts of
natural persons in the Local Community, means any natural person
who occupies a dwelling within the Local Community, has an
intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non-
transitory presence within the Local Community) and continues to
reside therein at the time of the Subscription and Community
Offerings. Mercer Mutual may utilize policyholder records and
such other evidence as it may determine to be relevant to make a
determination as to whether a person resides in the Local
Community. In the case of a corporation or other business
entity, such entity shall be deemed to be a Resident only if its
principal place of business or headquarters is located within the
Local Community. All determinations as to the status of a person
as a Resident shall be made by Mercer Mutual in its sole and
absolute discretion and shall be final and binding.
Sale: The terms "sale" and "sell" mean every contract to
sell or otherwise dispose of a security or an interest in a
security for value, but such terms do not include an exchange of
securities in connection with a merger or acquisition approved by
the Department.
SEC: The term "SEC" means the Securities and Exchange
Commission or any successor agency.
Special Meeting: The term "Special Meeting" means the
Special Meeting of Eligible Policyholders to be called by Mercer
Mutual for the purpose of submitting the Plan to its Eligible
Policyholders for approval.
Subscription Offering: The term "Subscription Offering"
means the offering of shares of Conversion Stock to Eligible
Policyholders, a Tax-Qualified Employee Stock Benefit Plan and
directors, officers and employees of Mercer Mutual.
Subscription and Community Offering Prospectus: The term
"Subscription and Community Offering Prospectus" means the final
prospectus to be used in connection with the Subscription and
Community Offerings.
Subscription Rights: The term "Subscription Rights" means
the non-transferable, non-negotiable, personal rights of Eligible
Policyholders, the Tax-Qualified Employee Stock Benefit Plan and
directors, officers and employees of Mercer Mutual to subscribe
to purchase Conversion Stock at the Purchase Price.
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-
Qualified Employee Stock Benefit Plan" means any defined benefit
plan or defined contribution plan of Mercer Mutual or of the
Holding Company, such as an employee stock ownership plan, stock
bonus plan, profit sharing plan or other plan that, with its
related trust, meets the requirements to be "qualified" under
Section 401 of the Internal Revenue Code of 1986, as amended.
The term "Non-Tax-Qualified Employee Stock Benefit Plan" means
any defined benefit plan or defined contribution plan which is
not so qualified.
Underwritten Public Offering: The term "Underwritten Public
Offering" means the offer and sale of Conversion Stock in a best
efforts or firm commitment underwritten public offering as
contemplated under Section 7 of the Plan.
Valuation Range: The term "Valuation Range" means the
estimated range of the consolidated pro forma market value of
Mercer Mutual as a subsidiary of the Holding Company, to be
prepared by the Independent Appraiser as provided in
Section 7(A)(1) of the Plan.
3. APPLICATION
Within 90 days after adoption of the Plan by the Board of
Directors of Mercer Mutual and prior to submission of the Plan to
the Eligible Policyholders for approval at the Special Meeting,
Mercer Mutual must file an application for approval of the
Conversion with the Department pursuant to the Act (the
"Application"). The Application shall contain the following:
(A) The Plan;
(B) The independent evaluation of pro forma market
value required by Section 7(A) of the Plan;
(C) The form of notice required by this Section 3;
(D) The form of proxy to be solicited from Eligible
Policyholders pursuant to Section 4 of the Plan;
(E) The form of notice required by Section 809-A of
the Act to persons whose policies are issued after adoption
of the Plan but before the Effective Date;
(F) The proposed amended Articles of Incorporation and
Bylaws of the Converted Company; and
(G) The acquisition of control statement, as required
by Section 1402 of the Insurance Company Act of 1921, as
amended.
Upon the filing of the Application, Mercer Mutual shall send
a notice by first class mail to each Eligible Policyholder, which
notice shall: (i) advise such Eligible Policyholder of the
adoption of the Plan, (ii) advise such Eligible Policyholder of
the filing of the Plan with the Department, (iii) notify such
Eligible Policyholder of his or her right to provide comments on
the Plan to the Department and to Mercer Mutual, (iv) advise such
Eligible Policyholder of the procedure to be followed in
providing comments on the Plan; (v) notify such Eligible
Policyholder of his or her right to request and receive a copy of
the Plan; and (vi) disclose to such Eligible Policyholder that
the initial Plan is not the final approved Plan and that the
Commissioner's approval, if any, of the final plan does not
constitute or imply endorsement of the Plan or the Conversion by
the Commissioner or the Department. Such notice may be given by
mailing one notice to the address of each Qualifying Policy, as
such address appears on the records of Mercer Mutual; separate
notices to each person who is an Eligible Policyholder in respect
of such Qualifying Policy shall not be required.
4. THE SPECIAL MEETING
Following the filing of the Application with the Department,
a Special Meeting to vote on the Plan shall be held by Mercer
Mutual in accordance with the bylaws of Mercer Mutual and
applicable law. Notice of the Special Meeting will be given by
Mercer Mutual by means of the mailing of (i) a notice of special
meeting, (ii) a proxy statement, (iii) a form of proxy authorized
for use by the Department and (iv) a copy of the Plan as approved
by the Department, to the address of each Qualifying Policy as
such address appears on the records of Mercer Mutual at least
30 days prior to the Special Meeting; separate notices to each
person who is an Eligible Policyholder in respect of such
Qualifying Policy shall not be required. Mercer Mutual may in
its discretion include with this mailing a Subscription and
Community Offering Prospectus as provided in Section 5 below.
Pursuant to the Act, the Plan must be approved by the
affirmative vote of at least two-thirds of the votes cast at the
Special Meeting to be held by Mercer Mutual. Voting may be in
person or by proxy. The Department shall be promptly notified of
the vote of the Eligible Policyholders taken at the Special
Meeting. The Plan shall not be deemed to have been approved
unless it is approved by the Eligible Policyholders of Mercer
Mutual.
5. OFFERING DOCUMENTS
The Holding Company may commence the Subscription Offering
and, provided that the Subscription Offering has commenced, may
commence the Community Offering concurrently with or during the
proxy solicitation of Eligible Policyholders. The Holding
Company may close the Subscription Offering and the Community
Offering before the Special Meeting, provided that the offer and
sale of the Conversion Stock shall be conditioned upon approval
of the Plan by the Eligible Policyholders.
The proxy solicitation materials of Mercer Mutual may
require an Eligible Policyholder to return to Mercer Mutual, by a
reasonable date certain, an accompanying postage-paid written
communication requesting receipt of a Subscription and Community
Offering Prospectus in order to be entitled to receive a
Subscription and Community Offering Prospectus; the Subscription
Offering and the Community Offering shall be deemed under such
circumstances to have commenced on the date of the mailing of the
proxy solicitation materials and may not be closed until the
expiration of at least thirty (30) days after the date of mailing
of such proxy solicitation materials; provided, however, that
either or both the Subscription Offering and the Community
Offering may be extended by the Holding Company for up to an
additional forty-five (45) days beyond the expiration of such
thirty (30) day period. If the Subscription Offering is
commenced after the Special Meeting, Mercer Mutual shall mail to
the address of each Qualifying Policy as such address appears on
the records of Mercer Mutual, no more than thirty (30) days prior
to the commencement of the Subscription Offering, a written
notice of the commencement of the Subscription Offering, which
notice shall state that Mercer Mutual is not required to furnish
a Subscription and Community Offering Prospectus unless an
Eligible Policyholder returns, by a reasonable date certain, an
accompanying postage-paid written communication requesting the
receipt of the Subscription and Community Offering Prospectus.
Such notice may be given by mailing one notice to the address of
each Qualifying Policy as such address appears on the records of
Mercer Mutual; separate notices to each person who is an Eligible
Policyholder in respect of such Qualifying Policy shall not be
required.
Prior to the commencement of the Subscription and Community
Offerings, the Holding Company shall file the Registration
Statement with the SEC pursuant to the Securities Act of 1933, as
amended. The Holding Company shall not distribute the
Subscription and Community Offering Prospectus until the
Registration Statement has been declared effective by the SEC.
The Subscription and Community Offering Prospectus may be
combined with the proxy statement prepared in connection with the
Special Meeting.
6. CONSUMMATION OF CONVERSION
The Effective Date will be the date upon which Articles of
Conversion are filed by Mercer Mutual in the office of the
Department of State of the Commonwealth of Pennsylvania. On the
Effective Date, the Conversion Stock will be issued and sold by
the Holding Company, the Converted Company Capital Stock will be
issued and sold to the Holding Company and the Converted Company
will become a wholly-owned subsidiary of the Holding Company.
The Converted Company will issue to the Holding Company 100,000
shares of common stock, representing all of the shares of
Converted Company Capital Stock to be issued in the Conversion,
and the Holding Company will pay to the Converted Company that
portion of the aggregate net proceeds realized by the Holding
Company from the sale of the Conversion Stock under the Plan as
may be determined by the Holding Company, subject to any
requirement of the Department.
7. THE OFFERING
A. Determination of the Number of Shares of Conversion
Stock Required to be Offered and Sold
The number of shares of Conversion Stock required to be
offered and sold in the Conversion will be determined as follows:
1. Independent Appraiser. An expert who is
experienced in the field of corporate appraisals and who is
independent of the Holding Company and Mercer Mutual (the
"Independent Appraiser") will be retained by the Holding Company
and Mercer Mutual to prepare an appraisal of the consolidated
pro-forma market value of the Converted Company as a subsidiary
of the Holding Company. The Independent Appraiser will establish
a valuation range (the "Valuation Range") consisting of a
midpoint valuation, a valuation 15 percent (15%) above the
midpoint valuation (the "Maximum of the Valuation Range") and a
valuation 15 percent (15%) below the midpoint valuation (the
"Minimum of the Valuation Range"). The valuation of the
Independent Appraiser will be based upon the financial condition
of Mercer Mutual, a comparison of Mercer Mutual with comparable
publicly-held insurance companies, and such other factors as the
Independent Appraiser may deem to be relevant and as are not
inconsistent with the provisions of the Act, including (as
required by the Act) that value which the Independent Appraiser
estimates to be necessary to attract a full subscription for the
Conversion Stock. The valuation of the Independent Appraiser
will be submitted to the Department as part of the Application to
be filed by Mercer Mutual for approval of the Conversion.
2. Purchase Price. The Purchase Price will be uniform
as to all purchasers in the Offering, will be determined by the
Holding Company, and will be an amount that when multiplied by
the number of shares of Conversion Stock offered (without regard
to the shares offered pursuant to clauses 7.A.3(ii) and (iii)) is
within the Valuation Range.
3. Number of Shares of Conversion Stock to be
Offered. The number of shares of Conversion Stock to be offered
in the Offering shall be equal to the sum of: (i) the Maximum of
the Valuation Range divided by the Purchase Price, plus (ii) ten
percent (10%) of clause (i), plus (iii) if necessary, the amount
required to enable the Tax-Qualified Employee Stock Benefit Plan
to purchase in the aggregate ten percent (10%) of the total
shares of Conversion Stock issued in the Offering.
4. Number of Shares of Conversion Stock to be Sold.
Immediately following the completion of the Subscription Offering
and the Community Offering, the Independent Appraiser will submit
to the Holding Company and to the Department its updated estimate
of the pro-forma fair market value of the Converted Company as a
subsidiary of the Holding Company, as of the later of the last
day of the Subscription Offering or the last day of the Community
Offering. If such updated estimated valuation does not fall
within the Valuation Range, then the Holding Company, after
consultation with the Department, may cancel the Offering and
terminate the Plan, establish a new Valuation Range, extend,
reopen or hold a new Offering or take such other action as may be
authorized by the Department.
If such updated estimated valuation falls within
the Valuation Range, the following steps will be taken:
a. Subscription Offering Meets or Exceeds
Maximum. If, upon conclusion of the Subscription Offering and
the Community Offering, the number of shares subscribed for by
Participants in the Subscription Offering multiplied by the
Purchase Price is equal to or greater than the Maximum of the
Valuation Range, then in such event the Conversion shall be
promptly consummated and the Holding Company on the Effective
Date shall issue shares of Conversion Stock to the subscribing
Participants; provided, however, that the number of shares of
Conversion Stock issued shall not exceed the number of shares of
Conversion Stock offered in the Offering. In the event of an
oversubscription in the Subscription Offering, shares of
Conversion Stock shall be allocated among the subscribing
Participants as provided in Section 7(C) below; provided,
however, that no fractional shares of Conversion Stock shall be
issued.
b. Subscription Offering Meets or Exceeds
Minimum. If, upon conclusion of the Subscription Offering and
the Community Offering, the number of shares of Conversion Stock
subscribed for by Participants in the Subscription Offering
multiplied by the Purchase Price is equal to or greater than the
Minimum of the Valuation Range, but less than the Maximum of the
Valuation Range, then in such event the Conversion shall be
promptly consummated and the Holding Company on the Effective
Date shall issue to the subscribing Participants shares of
Conversion Stock in an amount sufficient to satisfy the
subscriptions of such Participants in full. To the extent that
shares of Conversion Stock remain unsold after the subscriptions
of all Participants in the Subscription Offering have been
satisfied in full, the Holding Company shall have the right in
its absolute discretion to accept, in whole or in part,
subscriptions received from any or all subscribers in the
Community Offering and/or to sell shares of Conversion Stock to
purchasers in an Underwritten Public Offering or Private
Placement; provided, however, that the number of shares of
Conversion Stock issued shall not exceed the number of shares of
Conversion Stock offered in the Offering; and, provided further,
that no fractional shares of Conversion Stock shall be issued.
c. Subscription Offering Does Not Meet Minimum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares of Conversion Stock
subscribed for by Participants in the Subscription Offering
multiplied by the Purchase Price is less than the Minimum of the
Valuation Range, then in such event the Holding Company shall
accept subscriptions received from subscribers in the Community
Offering and/or sell shares of Conversion Stock to purchasers in
an Underwritten Public Offering or Private Placement. If the
aggregate number of shares of Conversion Stock subscribed for in
the Subscription Offering, the Community Offering and in any
Underwritten Public Offering or Private Placement multiplied by
the Purchase Price is equal to or greater than the Minimum of the
Valuation Range, then in such event the Conversion shall be
consummated promptly and the Holding Company shall on the
Effective Date shall: (i) issue to subscribing Participants
shares of Conversion Stock in an amount sufficient to satisfy the
subscriptions of such Participants in full, and (ii) issue to
subscribers in the Community Offering and/or to purchasers in any
Underwritten Public Offering or Private Placement such additional
number of shares of Conversion Stock such that the aggregate
number of shares of Conversion Stock to be issued to subscribing
Participants, to subscribers in the Community Offering and/or to
purchasers in any Underwritten Public Offering or Private
Placement multiplied by the Purchase Price shall be equal to the
Minimum of the Valuation Range; provided, however, that no
fractional shares of Conversion Stock shall be issued. The
Holding Company may in its absolute discretion elect to issue
shares of Conversion Stock to subscribers in the Community
Offering and/or to purchasers in any Underwritten Public Offering
in excess of the number determined by reference to clause (ii) of
the preceding sentence; provided, however, that the number of
shares of Conversion Stock issued shall not exceed the number of
shares of Conversion Stock offered in the Offering.
d. Offering Does Not Meet Minimum. If the
aggregate number of shares of Conversion Stock subscribed for in
the Subscription Offering, the Community Offering and in any
Underwritten Public Offering or Private Placement multiplied by
the Purchase Price is less than the Minimum of the Valuation
Range, then in such event the Holding Company, in consultation
with the Department, may cancel the Offering and terminate the
Plan, establish a new Valuation Range, extend, reopen or hold a
new Offering or take such other action as may be authorized by
the Department.
If, following a reduction in the Valuation
Range approved by the Department, the aggregate number of shares
of Conversion Stock subscribed for in the Offering multiplied by
the Purchase Price is equal to or greater than the Minimum of the
Valuation Range (as such Valuation Range has been reduced), then
in such event the Conversion shall be promptly consummated. The
Holding Company on the Effective Date shall: (i) issue shares of
Conversion Stock to Participants in the Subscription Offering in
an amount sufficient to satisfy the subscriptions of such
subscribers in full, and (ii) issue to subscribers in the
Community Offering and/or to purchasers in any Underwritten
Public Offering or Private Placement such additional number of
shares of Conversion Stock such that the aggregate number of
shares of Conversion Stock to be issued multiplied by the
Purchase Price shall be equal to the Minimum of the Valuation
Range (as such Valuation Range has been reduced).
e. Discretion of the Holding Company.
Notwithstanding anything to the contrary set forth in the Plan,
the Holding Company shall have the right in its absolute
discretion and without liability to any subscriber, purchaser,
underwriter or any other person: (i) to determine which
subscriptions, if any, to accept in the Community Offering and to
accept or reject any such subscription in whole or in part for
any reason or for no reason, and (ii) to determine whether and to
what extent shares of Conversion Stock are to be sold in an
Underwritten Public Offering or Private Placement.
B. Subscription Rights
Subscription Rights are nontransferable, nonnegotiable
personal rights to subscribe for and purchase shares of
Conversion Stock at the Purchase Price that will be distributed
by the Holding Company, without payment, to each Participant.
The receipt of Subscription Rights by a Participant will permit
(but will not require) the Participant to subscribe to purchase
shares of Conversion Stock at the Purchase Price in the
Subscription Offering.
The exercise of Subscription Rights is irrevocable and an
executed Order Form may not be modified, amended or rescinded.
Conversely, the failure of a Participant to timely deliver a duly
executed Order Form, together with full payment for the shares of
Conversion Stock subscribed for, will be deemed to constitute an
irrevocable waiver and release by the Participant of all rights
to subscribe for and purchase Conversion Stock in the
Subscription Offering.
C. The Subscription Offering
Subscription Rights to purchase shares of Conversion Stock
at the Purchase Price will be distributed by the Holding Company
to the Participants in the following priorities:
1. Eligible Policyholders. Each Eligible
Policyholder will receive, without payment, Subscription Rights
to purchase up to one hundred thousand (100,000) shares of
Conversion Stock; provided, however, that the maximum number of
shares that may be purchased by Eligible Policyholders in the
aggregate shall be equal to the Maximum of the Valuation Range
divided by the Purchase Price. In the event of an
oversubscription, shares of Conversion Stock will be allocated
among subscribing Eligible Policyholders, as follows. First,
shares of Conversion Stock will be allocated among subscribing
Eligible Policyholders so as to permit each such Eligible
Policyholder, to the extent possible, to purchase the lesser of:
(i) 1000 shares, or (ii) the number of shares subscribed for.
Second, any shares of Conversion Stock remaining after such
initial allocation will be allocated among the subscribing
Eligible Policyholders whose subscriptions remain unsatisfied in
the proportion in which: (i) the aggregate number of shares as
to which each such Eligible Policyholder's subscription remains
unsatisfied bears to (ii) the aggregate number of shares as to
which all such Eligible Policyholders' subscriptions remain
unsatisfied; provided, however, that no fractional shares of
Conversion Stock shall be issued.
2. Tax-Qualified Employee Stock Benefit Plans. The
Tax-Qualified Employee Stock Benefit Plan will receive, without
payment, Subscription Rights to purchase in the aggregate up to
ten percent (10%) of the shares of Conversion Stock to be issued
in the Conversion.
3. Directors, Officers and Employees. Each director,
officer and employee of Mercer Mutual will receive, without
payment, Subscription Rights to purchase up to one hundred
thousand (100,000) shares of Conversion Stock; provided, however,
that such Subscription Rights shall be subordinated to the
Subscription Rights received by the Eligible Policyholders and
may be exercised only to the extent that there are shares of
Conversion Stock that could have been purchased by Eligible
Policyholders, but which remain unsold after satisfying the
subscriptions of all Eligible Policyholders. In the event of an
oversubscription among the directors, officers and employees,
shares of Conversion Stock shall be allocated among them on the
basis of a point system under which one point will be assigned
for each year of service to Mercer Mutual, one point for each
then current annual salary increment of $5,000, and one point for
each office held in Mercer Mutual. If any director, officer or
employee does not subscribe for his full allocation of shares,
the shares not subscribed for shall be allocated among the
directors, officers and employees whose subscriptions remain
unsatisfied in proportion to their respective subscriptions.
A director, officer or employee of Mercer Mutual
who subscribes to purchase shares of Conversion Stock and who is
also eligible to purchase shares of Conversion Stock as an
Eligible Policyholder will be deemed to purchase Conversion Stock
first in his or her capacity as an Eligible Policyholder.
D. Community Offering
To the extent that fewer than the maximum number of shares
of Conversion Stock permitted to be sold to Eligible
Policyholders and to the directors, officers and employees of
Mercer Mutual are purchased in the Subscription Offering, shares
of Conversion Stock may be sold to subscribers in the Community
Offering as provided in Section 7(A) above. Shares of Conversion
Stock will be offered in the Community Offering (which will
commence concurrently with the Subscription Offering) to the
general public, giving preference to: (i) natural persons and
the trusts of natural persons (including individual retirement
and Keogh retirement accounts and personal trusts in which such
natural persons have substantial interests) who are Residents of
the Local Community, (ii) principals of Eligible Policyholders in
the case of an Eligible Policyholder which is a corporation,
partnership, limited liability company or other entity,
(iii) licensed insurance agencies that have been appointed by
Mercer Mutual to market and distribute policies of insurance, and
their affiliates, (iv) named insureds under policies of insurance
issued by Mercer Mutual after October 17, 1997, and (v) providers
of goods or services to Mercer Mutual. In the event that the
Holding Company elects to sell shares of Conversion Stock to
subscribers in the Community Offering, shares of Conversion Stock
will be allocated among such subscribers by the Holding Company
in its sole discretion and the Holding Company will have the
right in its sole discretion to accept or reject subscriptions
from subscribers in the Community Offering, including the
preferred subscribers described in clauses (i)-(v) of this
paragraph, in whole or in part for any reason or for no reason.
Subject to the preferences described in the preceding
paragraph, the Conversion Stock to be offered in the Community
Offering shall be offered and sold in a manner designed to
achieve a wide distribution of the Conversion Stock.
E. Underwritten Public Offering, Private Placement or
Other Action.
To the extent that fewer than the maximum number of shares
of Conversion Stock permitted to be sold to Eligible
Policyholders and to the directors, officers and employees of
Mercer Mutual are purchased in the Subscription Offering, shares
of Conversion Stock may be sold in an Underwritten Public
Offering as provided in Section 7(A) above. In the event that
the Holding Company determines that a public offering is
impractical, the Holding Company will consult with the Department
to determine the most practical alternative available to effect
the completion of the Conversion, including a Private Placement
of the remaining shares of Conversion Stock or a reduction in the
Valuation Range.
F. Limitations Upon Purchases of Shares of Conversion
Stock.
The following additional limitations and exceptions
shall apply to all purchases of Conversion Stock:
1. To the extent that shares are available, no person
may purchase fewer than the lesser of 25 shares of Conversion
Stock or shares of Conversion Stock having an aggregate purchase
price of $500.00 in the Conversion.
2. Purchases of shares of Conversion Stock in the
Offering by any person, when aggregated with purchases by such
person's Affiliates and Associates, or by a group of persons
Acting in Concert, shall not exceed one hundred thousand
(100,000) shares of Conversion Stock, except that Tax-Qualified
Employee Stock Benefit Plans may purchase up to ten percent (10%)
of the total shares of Conversion Stock issued in the Offering.
3. Officers and directors of Mercer Mutual and the
Holding Company, together with their Associates, may not purchase
in the aggregate more than thirty-four and nine-tenths percent
(34.9%) of the shares of Conversion Stock issued in the Offering.
4. For purposes of determining compliance with
paragraphs 2 and 3 above, shares of Conversion Stock to be held
by the Tax-Qualified Employee Stock Benefit Plans and
attributable to a participant thereunder shall not be aggregated
with shares of Conversion Stock purchased by such participant or
any other purchaser of Conversion Stock in the Conversion.
5. Directors of the Holding Company and of Mercer
Mutual shall not be deemed to be Associates of one another or a
group Acting in Concert with other directors solely as a result
of membership on the Board of Directors of the Holding Company or
the Board of Directors of Mercer Mutual or any subsidiary of
Mercer Mutual.
Subject to any required regulatory approval and
the requirements of applicable law, the Holding Company may
increase or decrease any of the purchase limitations set forth
herein at any time; provided that in no event shall the maximum
purchase limitation percentage applicable to Eligible
Policyholders be less than the maximum purchase limitation
percentage applicable to any other class of subscribers or
purchasers in the Offerings. In the event that the individual
purchase limitation is increased after commencement of the
Subscription Offering and the Community Offering, the Holding
Company shall permit any person who subscribed for the maximum
number of shares of Conversion Stock to purchase an additional
number of shares, such that such person shall be permitted to
subscribe for the then maximum number of shares permitted to be
subscribed for by such person, subject to the rights and
preferences of any person who has priority Subscription Rights.
In the event that either the individual purchase limitation or
the number of shares of Conversion Stock to be sold in the
Conversion is decreased after commencement of the Subscription
Offering and the Community Offering, the order of any person who
subscribed for the maximum number of shares of Conversion Stock
shall be decreased by the minimum amount necessary so that such
person shall be in compliance with the then maximum number of
shares permitted to be subscribed for by such person.
Each person purchasing Conversion Stock in the
Conversion shall be deemed to confirm that such purchase does not
conflict with the purchase limitations under the Plan or
otherwise imposed by law. In the event that such purchase
limitations are violated by any person (including any Associate
or Affiliate of such person or person otherwise Acting in Concert
with such person), the Holding Company shall have the right to
purchase from such person at the Purchase Price all shares
acquired by such person in excess of any such purchase limitation
or, if such excess shares have been sold by such person, to
receive the difference between the aggregate Purchase Price paid
for such excess shares and the proceeds received by such person
from the sale of such excess shares. This right of the Holding
Company to purchase such excess shares shall be assignable by the
Holding Company.
G. Restrictions on and Other Characteristics of Conversion
Stock.
1. Transferability.
Conversion Stock purchased by persons other than
directors and officers of Mercer Mutual and directors and
officers of the Holding Company may be transferred without
restriction under the Plan. Conversion Stock purchased by such
directors and officers may not be sold for a period of one (1)
year from the Effective Date, provided that a sale by a personal
representative of a deceased director or officer shall not be
considered a sale by such director or officer.
The certificates representing shares of Conversion
Stock issued by the Holding Company to such directors and
officers shall bear the following legend:
The shares of stock evidenced by this Certificate
are restricted as to transfer pursuant to the
provisions of the Pennsylvania Insurance Company
Mutual-to-Stock Conversion Act (the "Conversion
Act") and the Securities Act of 1933, as amended
(the "Securities Act"), and may not be sold
without an opinion of counsel for Mercer Insurance
Group, Inc. that such sale is permissible under
the provisions of the Conversion Act and the
Securities Act.
In addition, the Holding Company shall give
appropriate instructions to its transfer agent with respect to
the foregoing restrictions. Any shares of Holding Company Stock
subsequently issued pursuant to a stock dividend, stock split or
otherwise, with respect to such restricted shares of Conversion
Stock shall be subject to the same restrictions as are then
applicable to such restricted shares of Conversion Stock.
2. Voting Rights.
After the consummation of the Conversion,
exclusive voting rights with respect to the Holding Company shall
be vested in the holders of Holding Company Stock and the Holding
Company will have exclusive voting rights with respect to the
Converted Company Capital Stock.
3. Purchases by Officers, Directors and Associates
Following Conversion.
Without the prior approval of the Commissioner,
officers and directors of the Converted Company and officers and
directors of the Holding Company, and their Associates, shall be
prohibited for a period of three (3) years following the
Effective Date from purchasing outstanding shares of Holding
Company Stock, except through a broker-dealer. Notwithstanding
this restriction: (i) block purchases involving more than one
percent (1%) of the then outstanding shares of Holding Company
Stock may be made without the use of a broker-dealer if approved
in writing by the Department, and (ii) purchases may be made by
or for the account of an officer or director (a) pursuant to a
Tax-Qualified Employee Stock Benefit Plan or (b) pursuant to a
Non-Tax Qualified Employee Stock Benefit Plan approved by the
shareholders of the Holding Company pursuant to Section 921-A(b)
of the Act.
H. Mailing of Offering Materials and Collection of
Subscriptions.
After approval of the Plan by the Department and the
declaration of the effectiveness of the Registration Statement by
the SEC, the Holding Company shall distribute the Subscription
and Community Offering Prospectus and Order Forms for the
purchase of shares of Conversion Stock in accordance with the
terms of the Plan.
The recipient of an Order Form must properly complete,
execute and return the Order Form to the Holding Company on or
before the last day of the Subscription Offering or the Community
Offering, as the case may be. Self-addressed, postage paid
return envelopes shall accompany the Order Forms when delivered
by the Holding Company to a potential subscriber. The Holding
Company will collate the returned Order Forms upon completion of
the Subscription Offering and the Community Offering. The
failure by a person to return a properly completed and executed
Order Form within the prescribed time limits shall be deemed a
waiver and a release by such person of any rights to purchase
shares of Conversion Stock hereunder.
The sale of all shares of Conversion Stock shall be
completed within 45 days after the last day of the Subscription
Offering unless extended by the Holding Company with the approval
of the Department.
I. Method of Payment.
Payment for all shares of Conversion Stock subscribed
for in the Subscription Offering and the Community Offering must
be received in full by the Holding Company, together with
properly completed and executed Order Forms, indicating thereon
the number of shares being subscribed for and such other
information as may be required thereon, on or prior to the
expiration date specified on the Order Form, unless such date is
extended by the Holding Company. Payment for all shares of
Conversion Stock may be made in cash (if delivered in person) or
by check or money order.
Tax-Qualified Employee Stock Benefit Plans may
subscribe for shares of Conversion Stock by submitting an Order
Form, together with (in the case of an employee stock ownership
plan) evidence of a loan commitment from the Holding Company or
an unrelated financial institution for the purchase of the shares
of Conversion Stock, during the Subscription Offering and by
making payment for the shares subscribed for on or before the
Effective Date.
J. Undelivered, Defective or Late Order Forms,
Insufficient Payment.
In the event that an Order Form: (i) is not delivered
to the addressee and is returned to the Holding Company by the
United States Postal Service (or the Holding Company or Mercer
Mutual are unable to locate the addressee); (ii) is not received
by the Holding Company or is received by the Holding Company
after the date specified thereon; (iii) is defectively completed
or executed, or (iv) is not accompanied by payment in full for
the shares of Conversion Stock subscribed for, the Subscription
Rights of the person to whom such rights have been granted will
not be honored and such person will be treated as having failed
to return the completed Order Form within the time period
specified therein. Alternatively, the Holding Company may (but
will not be required to) waive any irregularity relating to any
Order Form or require the submission of a corrected Order Form or
the remittance of full payment for the shares of Conversion Stock
subscribed for by such date as the Holding Company may specify.
Subscription orders, once tendered, may not be revoked. The
Holding Company's determinations with respect to the
acceptability of the Order Forms will be final, conclusive and
binding upon all persons and neither the Holding Company nor
Mercer Mutual (or the directors, officers, employees and agents
of any of them) shall be liable to any person in connection with
any such determination.
K. Persons Who Reside in Non-Qualified States or in
Foreign Countries.
The Holding Company will make reasonable efforts to
comply with the securities laws of all states in the United
States in which persons entitled to subscribe for Conversion
Stock pursuant to the Plan reside. However, the Holding Company
shall not be required to offer or sell Conversion Stock to any
person who resides in a foreign country or who resides in a state
of the United States with respect to which any of the following
apply: (i) a small number of persons otherwise eligible to
subscribe for shares of Conversion Stock under this Plan reside
in such state or foreign country, (ii) the granting of
Subscription Rights or the offer or sale of shares of Conversion
Stock to such person would require the Holding Company or Mercer
Mutual or their employees to register under the securities laws
of such state as a broker, dealer, salesman or agent or to
register or otherwise qualify its securities for sale in such
state or foreign country, or (iii) such registration
qualification would be impracticable for reasons of cost or
otherwise. No payment will be made to any person in lieu of the
granting of Subscription Rights to any such person.
L. Sales Commissions.
Sales commissions may be paid as determined by the
Holding Company or its designee to securities dealers assisting
subscribers in making purchases of Conversion Stock in the
Subscription Offering or in the Community Offering. In addition,
a sales commission may be paid to a securities dealer for
advising and consulting with respect to, or for managing the sale
of Conversion Stock in, the Subscription Offering, the Community
Offering or any other offering.
M. Fractional Shares.
No fractional shares of Conversion Stock shall be
issued in the Conversion. All allocations required to be made
hereunder in the event of an oversubscription in the Subscription
Offering shall be rounded down to the nearest whole share.
N. Repurchase of Conversion Stock.
Without the prior approval of the Department, for a
period of three (3) years from the Effective Date, neither the
Holding Company or the Converted Company shall repurchase any
Holding Company Stock from any person, except that this
restriction shall not apply to either:
(1) A repurchase on a pro rata basis pursuant to
an offer made to all shareholders of the Holding Company; or
(2) A purchase in the open market by a Tax-
Qualified or Non-Tax-Qualified Employee Stock Benefit Plan
in an amount reasonable and appropriate to fund the Plan.
8. ARTICLES OF INCORPORATION
As part of the Conversion, Articles of Incorporation will be
adopted by Mercer Mutual to authorize the Converted Company to
operate as a Pennsylvania stock insurance company. By approving
the Plan, the Eligible Policyholders of Mercer Mutual will
thereby approve amending Mercer Mutual's existing Articles of
Incorporation. Prior to completion of the Conversion, the form
of amended Articles of Incorporation may be revised in accordance
with the provisions and limitations for amending the Plan under
Section 11 below. The amendment of the existing Articles of
Incorporation of Mercer Mutual shall occur on the Effective Date.
9. REGISTRATION AND MARKET MAKERS
In connection and concurrently with the Conversion, the
Holding Company shall register the Holding Company Stock with the
SEC pursuant to the Securities Exchange Act of 1934, as amended.
The Holding Company shall use its best efforts to encourage
and assist various Market Makers to establish and maintain a
market for the Holding Company Stock. The Holding Company shall
also use its best efforts to have the Holding Company Stock
quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or listed on a national or regional
securities exchange.
10. STATUS OF POLICIES IN FORCE ON THE EFFECTIVE DATE
Each policy of insurance issued by Mercer Mutual and in
force on the Effective Date shall remain in force as a policy
issued by the Converted Company in accordance with the terms of
such policy, except that, as of the Effective Date: (i) all
voting rights (if any) of the holder of such policy shall be
extinguished, (ii) all rights (if any) of the holder of such
policy to share in the surplus of Mercer Mutual or the Converted
Company shall be extinguished, and (iii) in the case of a
participating policy, the Converted Company shall have the right
on the renewal date of such policy to issue a nonparticipating
policy as a substitute for the participating policy.
11. INTERPRETATION, AMENDMENT AND TERMINATION OF THE PLAN
A. Interpretation of the Plan.
The Board of Directors of Mercer Mutual and the Board of
Directors of the Holding Company shall have the exclusive
authority to interpret and apply the provisions of the Plan to
particular facts and circumstances and to make all determinations
necessary or desirable to implement the Plan. Any such
interpretation, application or determination made in good faith
and on the basis of such information and assistance as was then
reasonably available for such purpose, shall be final, conclusive
and binding upon all persons, and neither the Holding Company nor
Mercer Mutual (or the directors, officers, employees or agents of
either of them) shall be liable to any person in connection with
any such interpretation, application or determination.
B. Amendment.
The Plan may be amended, as follows:
1. Before Approval by the Department. The Plan may
be amended at any time before it is approved by the Department by
the affirmative vote of two-thirds of the directors of the
Holding Company and two-thirds of the directors of Mercer Mutual
then in office.
2. After Approval by the Department. The Plan may be
amended at any time after its approval by the Department by the
affirmative vote of two-thirds of the directors of the Holding
Company and two-thirds of the directors of Mercer Mutual then in
office; provided, however, that any such amendment shall be
subject to approval by the Department.
3. After Approval by the Eligible Policyholders. The
Plan may be amended at any time after its approval by the
Eligible Policyholders and prior to the Effective Date by the
affirmative vote of two-thirds of the directors of the Holding
Company and two-thirds of the directors of Mercer Mutual then in
office; provided, however, that any such amendment shall be
subject to approval by the Department; and provided further that,
if such amendment is determined by the Department to be material,
such amendment shall be subject to approval by the affirmative
vote of at least two-thirds of the votes cast at a meeting of the
Eligible Policyholders called for that purpose.
4. Certain Conforming Amendments. In the event that
the Department adopts mandatory regulations applicable to the
Conversion prior to the Effective Date, the Plan may be amended
to conform to such regulations at any time prior to the Effective
Date by the affirmative vote of two-thirds of the directors of
the Holding Company and two-thirds of the directors of Mercer
Mutual then in office and no resolicitation of proxies or further
approval by the Eligible Policyholders shall be required. In the
event that the Department adopts regulations applicable to the
Conversion prior to the Effective Date and if such regulations
contain optional provisions, the Plan may be amended to conform
to any such optional provision at any time before the Effective
Date by the affirmative vote of two-thirds of the directors of
the Holding Company and two-thirds of the directors of Mercer
Mutual then in office, and no resolicitation of proxies or
further approval by the Eligible Policyholders shall be required.
C. Termination.
The Plan may be terminated as follows:
1. Before Approval by the Department. The Plan may
be terminated at any time before it is approved by the Department
by the affirmative vote of two-thirds of the directors of the
Holding Company and two-thirds of the directors of Mercer Mutual
then in office.
2. After Approval by the Department. The Plan may be
terminated at any time after it is approved by the Department by
the affirmative vote of two-thirds of the directors of the
Holding Company and two-thirds of the directors of Mercer Mutual
then in office.
3. After Approval by the Eligible Policyholders. The
Plan may be terminated at any time after it is approved by the
Eligible Policyholders and prior to the Effective Date by the
affirmative vote of two-thirds of the directors of the Holding
Company and two-thirds of the directors of Mercer Mutual then in
office; provided, however, that any such termination shall be
subject to approval by the Department.
D. Binding Upon Eligible Policyholders.
By approving the Plan, the Eligible Policyholders of Mercer
Mutual authorize the amendment and termination of the Plan in
accordance with the provisions of this Section 11.
12. STOCK-BASED COMPENSATION PLANS
It is the intention of the Holding Company to adopt a stock
compensation plan (the "Stock Compensation Plan") and a
management recognition plan (the "Management Recognition Plan")
as of the Effective Date, which plans shall, in accordance with
the requirements of the Act, be subject to approval by the
shareholders of the Holding Company at a meeting to be held after
the expiration of six (6) months from the Effective Date.
The Stock Compensation Plan, among other things, will
authorize the Board of Directors of the Holding Company to grant
to directors, officers and employees of the Holding Company and
its subsidiaries (including the Converted Company) options to
purchase in the aggregate that number of shares of Holding
Company Stock equal to ten percent (10%) of the number of shares
sold in the Offering, which options shall have a per share
exercise price equal to the Purchase Price.
The Management Recognition Plan will authorize the Board of
Directors of the Holding Company to grant to directors, officers
and employees of the Holding Company and its subsidiaries
(including the Converted Company) in the aggregate that number of
restricted shares of Holding Company Stock equal to four percent
(4%) of the number of shares sold in the Offering, which shares
of restricted stock will vest at a rate no greater than ratably
over a period of five (5) years (i.e., if vesting is ratable,
then twenty percent (20%) of the shares would vest each year on
the anniversary of the date of grant).
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
MERCER INSURANCE GROUP, INC.
FIRST. The name of the Corporation is Mercer Insurance
Group, Inc.
SECOND. The location and post office address of the
Corporation's registered office in this Commonwealth is One
Glenhardie Corporate Center, Suite 202, 1275 Drummers Lane,
Wayne, Pennsylvania 19087.
THIRD. The purpose of the Corporation is and it shall have
unlimited power to engage in and to do any lawful act concerning
any or all lawful business for which corporations may be
incorporated under provisions of the Business Corporation Law of
1988, the Act approved December, 1988, P.L. 1444, as amended (the
"Pennsylvania Business Corporation Law").
FOURTH. The term of the Corporation's existence is
perpetual.
FIFTH. The aggregate number of shares of capital stock
which the Corporation shall have authority to issue is 20,000,000
shares, divided into two classes consisting of 15,000,000 shares
of common stock without par value ("Common Stock") and 5,000,000
shares of preferred stock, having such par value as the board of
directors shall fix and determine, as provided in Article SIXTH
below ("Preferred Stock").
SIXTH. The Preferred Stock may be issued from time to time
as a class without series or, if so determined by the board of
directors of the Corporation, either in whole or in part, in one
or more series. There is hereby expressly granted to and vested
in the board of directors of the Corporation authority to fix and
determine (except as fixed and determined herein), by resolution,
the par value, voting powers, full or limited, or no voting
powers, and such designations, preferences and relative,
participating, optional or other special rights, if any, and the
qualifications, limitations or restrictions thereof, if any,
including specifically, but not limited to, the dividend rights,
conversion rights, redemption rights and liquidation preferences,
if any, of any wholly unissued series of Preferred Stock (or the
entire class of Preferred Stock if none of such shares have been
issued), the number of shares constituting any such series and
the terms and conditions of the issue thereof. Prior to the
issuance of any shares of Preferred Stock, a statement setting
forth a copy of each such resolution or resolutions and the
number of shares of Preferred Stock of each such class or series
shall be executed and filed in accordance with the Pennsylvania
Business Corporation Law. Unless otherwise provided in any such
resolution or resolutions, the number of shares of capital stock
of any such class or series so set forth in such resolution or
resolutions may thereafter be increased or decreased (but not
below the number of shares then outstanding), by a statement
likewise executed and filed setting forth a statement that a
specified increase or decrease therein had been authorized and
directed by a resolution or resolutions likewise adopted by the
board of directors of the Corporation. In case the number of
such shares shall be decreased, the number of shares so specified
in the statement shall resume the status they had prior to the
adoption of the first resolution or resolutions.
SEVENTH. Each holder of record of Common Stock shall have
the right to one vote for each share of Common Stock standing in
such holder's name on the books of the Corporation. No
shareholder shall be entitled to cumulate any votes for the
election of directors.
EIGHTH. The management, control and government of the
Corporation shall be vested in a board of directors consisting of
not less than seven (7) nor more than twenty-five (25) members in
number, as fixed by the board of directors of the Corporation
from time to time. The directors of the Corporation shall be
divided into three classes: Class I, Class II and Class III.
Each Class shall be as nearly equal in number as possible. If
the number of Class I, Class II or Class III directors is fixed
for any term of office, it shall not be increased during that
term, except by a majority vote of the board of directors. The
term of office of the initial Class I directors shall expire at
the annual election of directors by the shareholders of the
Corporation in 1998; the term of office of the initial Class II
directors shall expire at the annual election of directors by the
shareholders of the Corporation in 1999; and the term of office
of the initial Class III directors shall expire at the annual
election of directors by the shareholders of the Corporation in
2000. After the initial term of each Class, the term of office
of each Class shall be three (3) years, so that the term of
office of one class of directors shall expire each year when
their respective successors have been duly elected by the
shareholders and qualified. At each annual election by the
shareholders of the Corporation, the directors chosen to succeed
those whose terms then expire shall be identified as being of the
same class as the directors they succeed. Unless waived by the
board of directors of the Corporation, in order to qualify for
election as a director of the Corporation, a person must have
been a shareholder of record of the Corporation for a period of
time equal to the lesser of (i) three (3) years, or (ii) the time
elapsed since the acquisition of all of the common stock of
Mercer Mutual Insurance Company by the Corporation. Shareholders
of another corporation that merges with the Corporation, is
acquired by, or acquires the Corporation, or enters into any
similar transaction with the Corporation shall qualify for
election as a director of the Corporation if such shareholder was
a shareholder of record of the other corporation for a period of
time equal to the lesser of (i) three (3) years, or (ii) the time
elapsed since the acquisition of all the common stock of Mercer
Mutual Insurance Company by the Corporation. If, for any reason,
a vacancy occurs on the board of directors of the Corporation, a
majority of the remaining directors shall have the exclusive
power to fill the vacancy by electing a director to hold office
for the unexpired term in respect of which the vacancy occurred.
No director of the Corporation shall be removed from office, as a
director, by the vote of shareholders, unless the votes of
shareholders cast in favor of the resolution for the removal of
such director constitute at least a majority of the votes which
all shareholders would be entitled to cast at an annual election
of directors.
NINTH. No holder of any class of capital stock of the
Corporation shall have preemptive rights, and the Corporation
shall have the right to issue and to sell to any person or
persons any shares of its capital stock or any option, warrant or
right to acquire capital stock, or any securities having
conversion or option rights without first offering such shares,
rights or securities to any holder of any class of capital stock
of the Corporation.
TENTH. Except as set forth below, the affirmative vote of
shareholders entitled to cast at least 80 percent (80%) of the
votes which all shareholders of the Corporation are entitled to
cast, and if any class of shares is entitled to vote as a
separate class, the affirmative vote of shareholders entitled to
cast at least a majority of the votes entitled to be cast by the
outstanding shares of such class (or such greater amount as
required by the provisions of these Articles of Incorporation
establishing such class) shall be required to approve any of the
following:
(a) any merger or consolidation of the Corporation
with or into any other corporation;
(b) any share exchange in which a corporation, person
or entity acquires the issued or outstanding shares of
capital stock of the Corporation pursuant to a vote of
shareholders;
(c) any sale, lease, exchange or other transfer of
all, or substantially all, of the assets of the Corporation
to any other corporation, person or entity; or
(d) any transaction similar to, or having similar
effect as, any of the foregoing transactions.
An affirmative vote as provided in the foregoing provisions
shall be, to the extent permitted by law, in lieu of the vote of
the shareholders otherwise required by law.
The board of directors of the Corporation shall have the
power and duty to determine, for purposes of this Article TENTH,
on the basis of information known to the board, if any
transaction is similar to, or has an effect similar to, any of
the transactions identified above in this Article TENTH. Any
such determination shall be conclusive and binding for all
purposes of this Article TENTH.
The Corporation may voluntarily completely liquidate and/or
dissolve only in accordance with all applicable laws and only if
the proposed liquidation and/or dissolution is approved by the
affirmative vote of shareholders entitled to cast at least 80
percent (80%) of the votes which all shareholders are entitled to
cast.
The provisions of this Article TENTH shall not apply to any
transaction which is approved in advance by 66-2/3 percent (66-
2/3%) of the members of the board of directors of the
Corporation, at a meeting duly called and held.
ELEVENTH. Subsection 1. No Person or Group Acting in
Concert shall Acquire Voting Control of the Corporation, at any
time, except in accordance with the provisions of Article TENTH.
The terms "Acquire," "Voting Control," "Group Acting in Concert,"
and "Person" as used in this Article ELEVENTH are defined in
subsection 4 hereof.
Subsection 2. If Voting Control of the Corporation is
acquired, in violation of this Article ELEVENTH, all shares with
respect to which any Person or Group Acting in Concert has
acquired Voting Control in excess of the number of shares the
beneficial ownership of which is deemed under subsection 4 hereof
to confer Voting Control of the Corporation (as determined
without regard to this Subsection 2) shall be considered from and
after the date of acquisition by such Person or Group Acting in
Concert to be "excess shares" for purposes of this Article
ELEVENTH. All shares deemed to be excess shares shall thereafter
no longer be entitled to vote on any matter or to take other
shareholder action. If, after giving effect to the first two
sentences of this Subsection 2, any Person or Group Acting in
Concert still shall be deemed to be in Voting Control of the
Corporation based on the number of votes then entitled to be cast
(rather than the number of issued and outstanding shares of
common stock of the Corporation), then shares held in excess of
the number of shares deemed to confer Voting Control upon such
Person or Group Acting in Concert also shall not be entitled to
vote on any matter or take any other shareholder action, but this
subsequent reduction in voting rights shall be effected only
once. The provisions of this Subsection 2 deeming shares to be
excess shares shall only apply for so long as such shares shall
be beneficially owned by such Person or Group Acting in Concert
who has acquired Voting Control. Notwithstanding the foregoing,
shares held in excess of the number of shares the beneficial
ownership of which would otherwise be deemed under Subsection 4
to confer Voting Control of the Corporation shall not be deemed
to be excess shares if such shares are held by a Tax-Qualified
Employee Stock Benefit Plan.
Subsection 3. The provisions of this Article ELEVENTH
shall be of no further force and effect after the consummation of
a transaction in which another Person Acquires shares of capital
stock of the Corporation entitled to cast 80% or more of the
votes which all shareholders are entitled to cast (as determined
without regard to the application of this Article ELEVENTH) and
such transaction was approved in advance by the board of
directors of the Corporation.
Subsection 4. For purposes of this Article ELEVENTH:
A. The term "Acquire" includes every type of
acquisition, whether effected by purchase, exchange,
operation of law or otherwise.
B. "Voting Control" means the sole or shared
power to vote or to direct the voting of, or to dispose or
to direct the disposition of, more than ten percent (10%) of
the issued and outstanding common stock of the Corporation;
provided that (i) the solicitation, holding and voting of
proxies obtained by the board of directors of the
Corporation pursuant to a solicitation under Regulation 14A
of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") shall
not constitute Voting Control, (ii) a Tax-Qualified Employee
Stock Benefit Plan which holds more than 10 percent of the
voting shares of the Corporation shall not be deemed to have
Voting Control of the Corporation, and (iii) any trustee,
member of any administrative committee or employee
beneficiary of a Tax-Qualified Employee Stock Benefit Plan
shall not be deemed to have Voting Control of the
Corporation either (A) as a result of their control of a
Tax-Qualified Employee Stock Benefit Plan, and/or their
beneficial interest in voting shares held by a Tax-Qualified
Employee Stock Benefit Plan, or (B) as a result of the
aggregation of both their beneficial interest in voting
shares held by a Tax-Qualified Employee Stock Benefit Plan
and voting shares held by such trustee, administrative
committee member or employee beneficiary independent of a
Tax-Qualified Employee Stock Benefit Plan.
C. "Group Acting in Concert" includes Persons
seeking to combine or pool their voting or other interests
in the voting shares for a common purpose, pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise, provided, that a
"Group Acting in Concert" shall not include (i) the members
of the board of directors of the Corporation solely as a
result of their board membership, (ii) the members of the
board of directors of the Corporation as a result of their
solicitation, holding and voting of proxies obtained by them
pursuant to a solicitation subject to rules and regulations
promulgated under the Exchange Act or any successor statute
or (iii) any member or all the members of the board of
directors of the Corporation, and (iv) any Tax-Qualified
Employee Stock Benefit Plan and the trustees, administrative
committee members and employee beneficiaries thereof.
D. The term "Person" includes an individual, a
Group Acting in Concert, a corporation, a partnership, an
association, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate
or any other group formed for the purpose of acquiring,
holding or disposing of the equity securities of the
Corporation.
E. The term "Tax-Qualified Employee Stock
Benefit Plan" means any defined benefit plan or defined
contribution plan of the Corporation or any subsidiary, such
as an employee stock ownership plan, stock bonus plan,
profit sharing plan or other plan, that, with its related
trust, meets the requirements to be "qualified" under
Section 401 of the Internal Revenue Code of 1986, as
amended.
Subsection 5. This Article ELEVENTH shall not apply to
the purchase of securities of the Corporation by underwriters in
connection with a public offering of such securities by the
Corporation or by a holder of shares of capital stock of the
Corporation with written consent of the board of directors of the
Corporation; provided, however, that purchasers of securities of
the Corporation from any underwriter shall be subject to the
provisions of this Article ELEVENTH.
The board of directors of the Corporation shall have the
power and duty to determine, for purposes of this Article
ELEVENTH, on the basis of information known to the Board, if and
when such other Person has acquired Voting Control of the
Corporation, and/or if any transaction is similar to, or has a
similar effect as, any of the transactions identified in this
Article ELEVENTH. Any such determination shall be conclusive and
binding for all purposes of this Article ELEVENTH.
TWELFTH. No action required to be taken or which may be
taken at any annual or special meeting of shareholders of the
Corporation may be taken without a meeting, and the power of the
shareholders of the Corporation to consent in writing to action
without a meeting is specifically denied. The presence, in
person or by proxy, of shareholders entitled to cast at least a
majority of the votes which all shareholders are entitled to cast
shall constitute a quorum of shareholders at any annual or
special meeting of shareholders of the Corporation.
THIRTEENTH. The authority to make, amend, alter, change or
repeal the By-Laws of the Corporation is hereby expressly and
solely granted to and vested in the board of directors of the
Corporation, subject always to the power of the shareholders to
change such action by the affirmative vote of shareholders of the
Corporation entitled to cast at least 66-2/3 percent (66-2/3%) of
the votes which all shareholders are entitled to cast, except
that provisions of the By-Laws of the Corporation relating to
limitations on directors' liabilities and indemnification of
directors, officers and others may not be amended to increase the
exposure to liability for directors or to decrease the
indemnification of directors, officers and others except by the
affirmative vote of 66-2/3 percent (66-2/3%) of the entire board
of directors or by the affirmative vote of shareholders of the
Corporation entitled to cast at least 80 percent (80%) of the
votes which all shareholders are entitled to cast.
FOURTEENTH. The board of directors of the Corporation, when
evaluating any offer of another party to (a) make a tender or
exchange offer for any equity security of the Corporation,
(b) merge or consolidate the Corporation with another
corporation, (c) purchase or otherwise acquire all or
substantially all of the properties and assets of the
Corporation, or (d) engage in any transaction similar to, or
having similar effects as, any of the foregoing transactions,
shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Corporation and
its shareholders, give due consideration to all relevant factors,
including without limitation the social and economic effects of
the proposed transaction on the policyholders, employees,
suppliers, customers and other constituents of the Corporation
and its subsidiaries and on the communities in which the
Corporation and its subsidiaries operate or are located, the
business reputation of the other party, and the board of
directors' evaluation of the then value of the Corporation in a
freely negotiated sale and of the future prospects of the
Corporation as an independent entity.
FIFTEENTH. If any corporation, person, entity, or group
becomes the beneficial owner, directly or indirectly, of shares
of capital stock of the Corporation having the right to cast in
the aggregate 25 percent (25%) or more of all votes entitled to
be cast by all issued and outstanding shares of capital stock of
the Corporation entitled to vote, such corporation, person,
entity or group shall within thirty (30) days thereafter offer to
purchase all shares of capital stock of the Corporation issued,
outstanding and entitled to vote. Such offer to purchase shall
be at a price per share equal to the highest price paid for
shares of the respective class or series of capital stock of the
Corporation purchased by such corporation, person, entity or
group within the preceding twelve months. If such corporation,
person, entity or group did not purchase any shares of a
particular class or series of capital stock of the Corporation
within the preceding twelve months, such offer to purchase shall
be at a price per share equal to the fair market value of such
class or series of capital stock on the date on which such
corporation, person, entity or group becomes the beneficial
owner, directly or indirectly, of shares of capital stock of the
Corporation having the right to cast in the aggregate 25 percent
(25%) or more of all votes entitled to be cast by all issued and
outstanding capital stock of the Corporation. Such offer shall
provide that the purchase price for such shares shall be payable
in cash. The provisions of this Article FIFTEENTH shall not
apply if 80 percent (80%) or more of the members of the board of
directors of the Corporation approve in advance the acquisition
of beneficial ownership by such corporation, person, entity or
group, of shares of capital stock of the Corporation having the
right to cast in the aggregate 25 percent (25%) or more of all
votes entitled to be cast by all issued and outstanding shares of
capital stock of the Corporation. The provisions of this Article
FIFTEENTH shall be in addition to and not in lieu of any rights
granted under Subchapter E of Chapter 25 of the Pennsylvania
Business Corporation Law and any amendment or restatement of such
section ("Subchapter E"); provided, however, that if the
provisions of this Article FIFTEENTH and Subchapter E are both
applicable in any given instance, the price per share to be paid
for shares of capital stock of the Corporation issued,
outstanding and entitled to vote shall be the higher of the price
per share determined in accordance with this Article FIFTEENTH or
the price per share determined in accordance with the provisions
of Subchapter E.
SIXTEENTH. The Corporation reserves the right to amend,
alter, change or repeal any provision contained in its Articles
of Incorporation in the manner now or hereafter prescribed by
statute and all rights conferred upon shareholders and directors
herein are hereby granted subject to this reservation; provided,
however, that the provisions set forth in Articles SEVENTH,
EIGHTH and NINTH through SIXTEENTH, inclusive, of these Articles
of Incorporation may not be repealed, altered or amended, in any
respect whatsoever, unless such repeal, alteration or amendment
is approved by either (a) the affirmative vote of shareholders of
the Corporation entitled to cast at least 80 percent (80%) of the
votes which all shareholders of the Corporation are then entitled
to cast or (b) the affirmative vote of 80 percent (80%) of the
members of the board of directors of the Corporation and the
affirmative vote of shareholders of the Corporation entitled to
cast at least a majority of the votes which all shareholders of
the Corporation are then entitled to cast.
SEVENTEENTH. The name and post office address of the
incorporator is:
Name Address
Kathleen S. Wetzel STEVENS & LEE
111 North Sixth Street
P.O. Box 679
Reading, PA 19603-0679
IN TESTIMONY WHEREOF, the Incorporator has signed these
Articles of Incorporation this 11th day of November, 1997.
/s/ Kathleen S. Wetzel
Kathleen S. Wetzel,
Incorporator
EXHIBIT 3.2
BYLAWS
OF
MERCER INSURANCE GROUP, INC.
ARTICLE I
SHAREHOLDERS
Section 1.01 - Annual Meeting -
(a) General. The annual meeting of shareholders shall
be held on such day each year as may be fixed from
time to time by the board of directors, or, if no
day be so fixed, on the fourth Tuesday of April of
each year; provided, however, that if such day
falls upon a legal holiday, then on the next
business day thereafter. If the annual meeting
shall not have been called and held within six (6)
months after the designated time, any shareholder
may call the meeting at any time thereafter. At
each annual meeting of shareholders, directors
shall be elected, reports of the affairs of the
corporation shall be considered, and such other
business as may properly come before the meeting
may be transacted.
(b) Conduct of Meetings. At every meeting of the
shareholders, the Chairman of the Board or, in his
absence, the officer designated by the Chairman of
the Board, or, in the absence of such designation,
a chairman (who shall be one of the officers, if
any is present) chosen by a majority of the
members of the board of directors shall act as
chairman of the meeting. The chairman of the
meeting shall have any and all powers and
authority necessary in the chairman's sole
discretion to conduct an orderly meeting and
preserve order and to determine any and all
procedural matters, including imposing reasonable
limits on the amount of time at the meeting taken
up in remarks by any one shareholder or group of
shareholders. In addition, until the business to
be completed at a meeting of the shareholders is
completed, the chairman of a meeting of the
shareholders is expressly authorized to
temporarily adjourn and postpone the meeting from
time to time. The Secretary of the corporation or
in his absence, an assistant secretary, shall act
as Secretary of all meetings of the shareholders.
In the absence at such meeting of the Secretary or
assistant secretary, the chairman of the meeting
may appoint another person to act as Secretary of
the meeting.
Section 1.02 - Special Meetings - Special meetings of the
shareholders may be called only in accordance with the
articles of incorporation of the corporation. Upon written
request to the Chief Executive Officer or the Secretary,
sent by registered mail or delivered to such officer in
person, of any person or persons entitled to call a special
meeting of the shareholders, it shall be the duty of the
Secretary to fix the time of the meeting, which shall be
held not more than sixty (60) days after the receipt of the
request. If the Secretary neglects or refuses to fix the
time of the meeting, the person or persons duly calling the
meeting may do so.
Section 1.03 - Place of Meeting - All meetings of the
shareholders shall be held at such place, within or outside
the Commonwealth of Pennsylvania, as may be designated by
the board of directors in the notice of meeting. In the
absence of such designation, shareholders' meetings shall be
held at the registered office of the corporation.
Section 1.04 - Notice of Meetings of Shareholders - Except
as provided otherwise in these bylaws or required by law,
written notice of every meeting of the shareholders shall be
given by, or at the direction of, the Secretary or other
authorized person, to each shareholder of record entitled to
vote at the meeting at least ten (10) days prior to the day
named for the meeting.
Section 1.05 - Contents - The notice of the meeting shall
specify the place, day and hour of the meeting and, in the
case of a special meeting, the general nature of the
business to be transacted. If the purpose, or one of the
purposes, of the meeting is to consider the adoption,
amendment or repeal of the bylaws, there shall be included
in, enclosed with, or accompanied by, the notice a copy of
the proposed amendment or a summary of the changes to be
made by the amendment.
Section 1.06 - Quorum -
(a) Annual Meetings. An annual meeting of the
shareholders duly called shall not be organized
for the transaction of business unless a quorum is
present. The presence in person or by proxy of
shareholders entitled to cast at least a majority
of the votes that all shareholders are entitled to
cast on a particular matter to be acted upon at
the meeting shall constitute a quorum for the
purposes of consideration and action on such
matter. The shareholders present at a duly
organized annual meeting can continue to do
business until adjournment notwithstanding the
withdrawal of enough shareholders to leave less
than a quorum.
(b) Special Meetings. A special meeting of the
shareholders duly called shall not be organized
for the transaction of business unless a quorum is
present. The presence in person or by proxy of
shareholders entitled to cast at least sixty
percent (60%) of the votes that all shareholders
are entitled to cast on a particular matter to be
acted upon at the meeting shall constitute a
quorum for the purposes of consideration and
action on such matter. The shareholders present
at a duly organized special meeting can continue
to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave
less than a quorum.
Section 1.07 - Adjournments - If a meeting of the
shareholders duly called cannot be organized because a
quorum has not attended, the chairman of the meeting or a
majority of shareholders present in person or by proxy and
entitled to vote may adjourn the meeting to such time and
place as they may determine.
At any meeting at which directors are to be elected and
which has previously been adjourned for lack of a quorum,
the shareholders present and entitled to vote, although less
than a quorum as fixed herein, shall nevertheless constitute
a quorum for the purpose of electing directors. In other
cases, those shareholders entitled to vote who attend a
meeting of the shareholders that has been previously
adjourned for one or more periods aggregating at least
fifteen (15) days because of an absence of quorum, although
less than a quorum as fixed herein, shall nonetheless
constitute a quorum for the purpose of acting upon any
matter stated in the notice of the meeting, provided the
notice of meeting states that shareholders who attend such
adjourned meeting shall nonetheless constitute a quorum for
the purpose of acting upon the matter.
When a meeting of the shareholders is adjourned, it shall
not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at the adjourned meeting
other than by announcement at the meeting at which the
adjournment is taken, unless the board of directors fixes a
new record date for the adjourned meeting or unless notice
of the business to be transacted was required by the
Pennsylvania Business Corporation Law of 1988, as it may be
amended, to be stated in the original notice of the meeting
and such notice had not been previously provided.
Section 1.08 - Action by Shareholders - Whenever any
corporate action is to be taken by vote of the shareholders,
it shall be authorized upon receiving the affirmative vote
of a majority of the votes cast by all shareholders entitled
to vote thereon and, if any shareholders are entitled to
vote thereon as a class, upon receiving the affirmative vote
of the majority of the votes cast by the shareholders
entitled to vote as a class on the matter, except when a
different vote is required by law, or the articles of
incorporation, or these bylaws.
Section 1.09 - Voting Rights of Shareholders - Unless
otherwise provided in the articles of incorporation, every
shareholder of the corporation shall be entitled to one vote
for every share outstanding in the name of the shareholder
on the books of the corporation.
Section 1.10 - Voting and Other Action by Proxy -
(a) General. Every shareholder entitled to vote at a
meeting of shareholders or to express consent or
dissent to corporate action in writing without a
meeting may authorize another person or persons to
act for that shareholder by proxy. The presence
of, or vote or other action at a meeting of
shareholders, or the expression of consent or
dissent to corporate action in writing, by a proxy
of a shareholder shall constitute the presence of,
or vote or action by, or written consent or
dissent of the shareholder.
Where two or more proxies of a shareholder are
present, the corporation shall, unless otherwise
expressly provided in the proxy, accept as the
vote of all shares represented thereby the vote
cast by a majority of them and, if a majority of
the proxies cannot agree whether the shares
represented shall be voted, or upon the manner of
voting the shares, the voting of the shares shall
be divided equally among those persons.
(b) Minimum Requirements. Every proxy shall be
executed in writing by the shareholder or by the
duly authorized attorney-in-fact of the
shareholder and filed with the Secretary of the
corporation. A telegram, telex, cablegram,
datagram or similar transmission from a
shareholder or attorney-in-fact, or a
photographic, facsimile or similar reproduction of
a writing executed by a shareholder or attorney-
in-fact:
(1) may be treated as properly executed; and
(2) shall be so treated if it sets forth a
confidential and unique identification number
or other mark furnished by the corporation to
the shareholder for the purposes of a
particular meeting or transaction.
(c) Revocation. A proxy, unless coupled with an
interest, shall be revocable at will,
notwithstanding any other agreement or any
provision in the proxy to the contrary, but the
revocation of a proxy shall not be effective until
written notice thereof has been given to the
Secretary of the corporation. An unrevoked proxy
shall not be valid after three years from the date
of its execution unless a longer time is expressly
provided therein. A proxy shall not be revoked by
the death or incapacity of the maker unless,
before the vote is counted or the authority is
exercised, written notice of the death or
incapacity is given to the Secretary of the
corporation.
Section 1.11 - Voting by Fiduciaries and Pledgees - Shares
of the corporation standing in the name of a trustee or
other fiduciary and shares held by an assignee for the
benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder
whose shares are pledged shall be entitled to vote the
shares until the shares have been transferred into the name
of the pledgee, or a nominee of the pledgee, but nothing in
this section shall affect the validity of a proxy given to a
pledgee or nominee.
Section 1.12 - Voting of Joint Holders of Shares -
(a) General. Where shares of the corporation are held
jointly or as tenants in common by two or more
persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is
present in person or by proxy, all of the
shares standing in the name of such persons
shall be deemed to be represented for the
purpose of determining a quorum and the
corporation shall accept as the vote of all
the shares the vote cast by a joint owner or
a majority of them; and
(2) if the persons are equally divided upon
whether the shares held by them shall be
voted or upon the manner of voting the
shares, the voting of the shares shall be
divided equally among the persons without
prejudice to the rights of the joint owners
or the beneficial owners thereof among
themselves.
(b) Exception. If there has been filed with the
Secretary of the corporation a copy, certified by
an attorney at law to be correct, of the relevant
portions of the agreement under which the shares
are held or the instrument by which the trust or
estate was created or the order of court
appointing them or of an order of court directing
the voting of the shares, the persons specified as
having such voting power in the document latest in
date of operative effect so filed, and only those
persons, shall be entitled to vote the shares but
only in accordance therewith.
Section 1.13 - Voting by Corporations - Any corporation that
is a shareholder of this corporation may vote by any of its
officers or agents, or by proxy appointed by any officer or
agent, unless some other person, by resolution of the board
of directors of the other corporation or a provision of its
articles or bylaws, a copy of which resolution or provision
certified to be correct by one of its officers has been
filed with the Secretary of this corporation, is appointed
its general or special proxy in which case that person shall
be entitled to vote the shares.
Section 1.14 - Determination of Record Date - The board of
directors may fix a time prior to the date of any meeting of
shareholders as a record date for the determination of the
shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned
meeting, shall be not more than 90 days prior to the date of
the meeting of shareholders. Only shareholders of record on
the date fixed shall be so entitled notwithstanding any
transfer of shares on the books of the corporation after any
record date fixed as provided in this section. The board of
directors may similarly fix a record date for the
determination of shareholders of record for any other
purpose. When a determination of shareholders of record has
been made as provided in this section for purposes of a
meeting, the determination shall apply to any adjournment
thereof unless the board fixes a new record date for the
adjourned meeting.
Section 1.15 - Voting List - The officer or agent having
charge of the transfer books for shares of the corporation
shall make a complete list of the shareholders entitled to
vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of
shares held by each. The list shall be produced and kept
open at the time and place of the meeting and shall be
subject to the inspection of any shareholder during the
whole time of the meeting for the purposes thereof.
Failure to comply with the requirements of this section
shall not affect the validity of any action taken at a
meeting prior to a demand at the meeting by any shareholder
entitled to vote thereat to examine the list. The original
share register or transfer book, or a duplicate thereof kept
in Pennsylvania, shall be prima facie evidence as to who are
the shareholders entitled to examine the list or share
register or transfer book or to vote at any meeting of
shareholders.
Section 1.16 - Judges of Election - In advance of any
meeting of shareholders of the corporation, the board of
directors may appoint judges of election, who need not be
shareholders, to act at the meeting or any adjournment
thereof. If judges of election are not so appointed, the
presiding officer of the meeting may, and on the request of
any shareholder shall, appoint judges of election at the
meeting. The number of judges shall be one or three. No
person who is a candidate for office to be filled at the
meeting shall act as a judge of election.
In the event any person appointed as a judge fails to appear
or fails or refuses to act, the vacancy may be filled by
appointment made by the board of directors in advance of the
convening of the meeting or at the meeting by the presiding
officer thereof.
The judges of election shall determine the number of shares
outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the
authenticity, validity and effect of proxies, receive votes
or ballots, hear and determine all challenges and questions
in any way arising in connection with the right to vote,
count and tabulate all votes, determine the result and do
such acts as may be proper to conduct the election or vote
with fairness to all shareholders. The judge or judges of
election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as
is practical. If there are three judges of election, the
decision, act or certificate of a majority shall be
effective in all respects as the decision, act or
certificate of all.
On request of the presiding officer of the meeting, or of
any shareholder, the judge or judges shall make a report in
writing of any challenge or question or matter determined by
them, and execute a certificate of any fact found by them.
Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
Section 1.17 - No Consent of Shareholders in Lieu of
Meeting - No action required to be taken or which may be
taken at any annual or special meeting of shareholders of
the corporation may be taken without a meeting, and the
power of the shareholders to consent in writing to action
without a meeting is specifically denied.
ARTICLE II
BOARD OF DIRECTORS
Section 2.01 - General - Unless otherwise provided by
statute, all powers vested by law in the corporation shall
be exercised by or under the authority of, and the business
and affairs of the corporation shall be managed under the
direction of, the board of directors of the corporation.
Section 2.02 - Number, Qualifications, Selection and Term of
Office - The board of directors of the corporation shall
consist of at least six (6) and not more than twenty-five
(25) directors, the exact number to be set from time to time
by resolution of the board of directors. Each director
shall be a natural person of full age and not less than
one-third of the directors shall be persons who are not
officers or employees of the corporation or of any entity
controlling, controlled by or under common control with the
corporation and who are not beneficial owners of a
controlling interest in the voting stock of the corporation
or of any such entity. Each director shall hold office
until the expiration of the term for which he or she was
selected and until a successor has been selected and
qualified or until his or her earlier death, resignation or
removal. A decrease in the number of directors shall not
have the effect of shortening the term of any incumbent
director.
Section 2.03 - Nominations for Directors - Nominations for
the election of directors may be made by the board of
directors or by any shareholder entitled to vote for the
election of directors. Nominations made by a shareholder
entitled to vote for the election of directors shall be made
by notice in writing, delivered or mailed by first class
United States mail, postage prepaid, to the Secretary of the
corporation not less than ninety (90) days prior to any
meeting of the shareholders called for the election of
directors; provided, however, that if less than twenty-one
(21) days' notice of the meeting is given to shareholders,
such written notice shall be delivered or mailed, as
prescribed, to the Secretary of the corporation not later
than the close of the seventh day following the day on which
notice of the meeting was mailed to shareholders. Notice of
nominations which are proposed by the board of directors
shall be given by the Chairman of the Board or any other
appropriate officer. Each notice of nominations made by a
shareholder shall set forth (i) the name, age, business
address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or
employment of each such nominee, and (iii) the number of
shares of capital stock of the corporation which are
beneficially owned by each such nominee. Upon receiving a
notice of nomination made by a shareholder, the board of
directors shall be entitled to request any other information
relating to such nominee deemed relevant by the board. The
Chairman of the meeting may, if the facts warrant, determine
and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the
defective nomination shall be disregarded.
Section 2.04 - Election - Except as otherwise provided in
these bylaws, directors of the corporation shall be elected
by the shareholders. In elections for directors, voting
need not be by ballot unless required by vote of the
shareholders before the voting for election of directors
begins. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be
elected.
Section 2.05 - Vacancies -
(a) Vacancies. Vacancies in the board of directors
shall exist in the case of the happening of any of
the following events: (i) the death or
resignation of any director; (ii) if at any annual
or special meeting the shareholders at which
directors are to be elected, the shareholders fail
to elect the full authorized number of directors
to be voted for at that meeting; (iii) an increase
in the number of directors by resolution of the
board of directors; (iv) the removal of a director
by the affirmative vote of shareholders of the
corporation in accordance with the articles of
incorporation of the corporation; or (v) the
removal of a director by the board of directors or
a court of competent jurisdiction in accordance
with these bylaws or otherwise in accordance with
law.
(b) Filling Vacancies. Vacancies in the board of
directors, including vacancies resulting from an
increase in the number of directors, may be filled
by a majority vote of the remaining members of the
board though less than a quorum, or by a sole
remaining director, and each person so selected
shall be a director to serve for the balance of
the unexpired term and until his or her successor
has been selected and qualified or until his or
her earlier death, resignation or removal.
Section 2.06 - Removal and Resignation -
(a) Removal by Shareholders. A director may be
removed by shareholders only in accordance with
the articles of incorporation of the corporation.
(b) Removal by Action of the Directors. The board of
directors may declare vacant the office of a
director if that director: (i) has been
judicially declared of unsound mind; (ii) has been
convicted of an offense punishable by imprisonment
for a term of more than one year; (iii) if within
sixty (60) days after notice of his or her
election, the director does not accept such office
either in writing or by attending a meeting of the
board of directors and fulfilling such other
requirements of qualification as these bylaws or
the articles of incorporation may provide; or
(iv) is ineligible for any reason to serve as a
director of the Corporation's principal insurance
subsidiaries.
(c) Resignation. Any director may resign at any time
from his or her position as a director upon
written notice to the corporation. The
resignation shall be effective upon its receipt by
the corporation or at such later time as may be
specified in the notice of resignation.
Section 2.07 - Regular Meetings - The board of directors of
the corporation shall hold an annual meeting for the
election of officers and the consideration of other proper
business either as soon as practical after, and at the same
place as, the annual meeting of shareholders of the
corporation, or at such other day, hour and place as may be
fixed by the board. The board of directors may designate by
resolution the day, hour and place, within or outside the
Commonwealth of Pennsylvania, of other regular meetings.
Section 2.08 - Special Meetings - Special meetings of the
board of directors may be called by the Chairman of the
Board, the Chief Executive Officer, or the President of the
corporation or a majority of the directors then in office.
The person or persons calling the special meeting may fix
the day, hour and place, within or outside the Commonwealth
of Pennsylvania, of the meeting.
Section 2.09 - Notice of Meetings -
(a) General. No notice of any annual or regular
meeting of the board of directors of the
corporation need be given. Written notice of each
special meeting of the board of directors,
specifying the place, day and hour of the meeting,
shall be given to each director at least 24 hours
before the time set for the meeting. Neither the
business to be transacted at, nor the purpose of,
any annual, regular or special meeting of the
board need be specified in the notice of the
meeting.
(b) Validation of Meeting Defectively Called or
Noticed. The transactions of any meeting of the
board of directors, however called and noticed or
wherever held, are as valid as though taken at a
meeting duly held after regular call and notice,
if a quorum is present and if, either before or
after the meeting, each of the directors not
present signs a waiver of notice. All such
waivers shall be filed with the corporate records
or made a part of the minutes of the meeting.
Attendance of a director at any meeting shall
constitute a waiver of notice of such meeting
except where a director attends a meeting for the
express purpose of objecting to the transaction of
any business because the meeting is not lawfully
called or convened.
Section 2.10 - Quorum and Action by Directors - A majority
of the directors in office shall be necessary to constitute
a quorum for the transaction of business; provided, however,
that at least one director who is not an officer or employee
of the corporation or of any entity controlling, controlled
by or under common control with the corporation and who is
not a beneficial owner of a controlling interest in the
voting stock of the corporation or of any such entity must
be present in order to constitute a quorum. The acts of a
majority of directors present and voting at a meeting at
which a quorum is present shall be the acts of the board of
directors, except where a different vote is required by law,
the articles of incorporation or these bylaws. Every
director shall be entitled to one vote.
Any action required or permitted to be taken at a meeting of
the board of directors may be taken without a meeting if,
prior or subsequent to the action, a consent or consents
thereto by all of the directors in office is filed with the
Secretary of the corporation.
Section 2.11 - Presumption of Assent - A director of the
corporation who is present at a meeting of the board of
directors, or of a committee of the board, at which action
on any corporate matter is taken on which the director is
generally competent to act, shall be presumed to have
assented to the action taken unless his or her dissent is
entered in the minutes of the meeting or unless that
director files his or her written dissent to the action with
the Secretary of the meeting before its adjournment or
submits the dissent in writing to the Secretary of the
corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a
director who voted in favor of the action. Nothing in this
section shall bar a director from asserting that the minutes
of a meeting incorrectly omitted that director's dissent if,
promptly upon receipt of a copy of those minutes, the
director notified the Secretary, in writing, of the asserted
omission or inaccuracy.
Section 2.12 - Presiding Officer - All meetings of the board
of directors of the corporation shall be called to order and
presided over by the Chairman of the Board of Directors, or
in the Chairman's absence, by the Vice Chairman, or in the
Vice Chairman's absence, by the Chief Executive Officer of
the corporation or, in the absence of the Chairman, the Vice
Chairman and the Chief Executive Officer, by a chairman of
the meeting elected at such meeting by the board of
directors. The Secretary of the corporation shall act as
Secretary of the board of directors unless otherwise
specified by the board of directors. In case the Secretary
shall be absent from any meeting, the chairman of the
meeting may appoint any person to act as secretary of the
meeting.
Section 2.13 - Committees - The board of directors may, by
resolution adopted by a majority of the directors in office,
establish one or more committees. Each committee is to
consist of at least two (2) directors of the corporation and
not less than two-thirds of the members of each committee
shall be persons who are not officers or employees of the
corporation or of any entity controlling, controlled by or
under common control with the corporation and who are not
beneficial owners of a controlling interest in the voting
stock of the corporation or of any such entity. The Chief
Executive Officer shall be an ex-officio member of each
committee of the board of directors, except the Audit
Committee. The board may designate one or more directors as
alternate members of any committee who may replace any
absent or disqualified member at any meeting of the
committee or for purposes of any written action of the
committee.
A committee, to the extent provided in the resolution of the
board of directors creating it, shall have and may exercise
all of the powers and authority of the board of directors
except that a committee shall not have any power or
authority regarding: (i) the submission to shareholders of
any action requiring the approval of shareholders under the
Pennsylvania Business Corporation Law of 1988, as it may be
amended, (ii) the creation or filling of vacancies in the
board of directors, (iii) the adoption, amendment or repeal
of these bylaws, (iv) the amendment, adoption or repeal of
any resolution of the board of directors that by its terms
is amendable or repealable only by the board of directors,
or (v) any action on matters committed by the bylaws or
resolution of the board of directors to another committee of
the board. Each committee of the board shall serve at the
pleasure of the board.
Section 2.14 - Audit Committee - There shall be a standing
committee of the board of directors to be known as the Audit
Committee. The members of the Audit Committee shall consist
exclusively of directors who are not officers or employees
of the corporation or of any entity controlling, controlled
by or under common control with the corporation and who are
not beneficial owners of a controlling interest in the
voting stock of the corporation or of any such entity. The
Audit Committee shall: (i) make recommendations to the
board of directors as to the independent accountants to be
appointed by the board, (ii) review with the independent
accountants the scope of their examination, (iii) receive
the reports of the independent accountants and meet with the
representatives of such accountants for the purpose of
reviewing and considering questions relating to their
examination and such reports, (iv) review the internal
accounting and auditing procedures of the corporation, and
(v) perform such other duties as may be assigned to it from
time to time by the board of directors.
Section 2.15 - Personal Liability of Directors - To the
fullest extent permitted by Pennsylvania law, a director of
the corporation shall not be personally liable for monetary
damages for any action taken, or any failure to take any
action, unless the director has breached or failed to
perform the duties of his or her office under Subchapter B
of Chapter 17 of the Pennsylvania Business Corporation Law
of 1988, as it may be amended, and such breach or failure to
perform constitutes self-dealing, willful misconduct or
recklessness; provided, however, that the foregoing
provision shall not eliminate or limit (i) the
responsibility or liability of that director under any
criminal statute, or (ii) the liability of a director for
the payment of taxes according to local, state or federal
law. Any repeal, modification or adoption of any provision
inconsistent with this section shall be prospective only,
and neither the repeal or modification of this bylaw nor the
adoption of any provision inconsistent with this bylaw shall
adversely affect any limitation on the personal liability of
a director of the corporation existing at the time of such
repeal or modification or the adoption of such inconsistent
provision.
ARTICLE III
OFFICERS
Section 3.01 - Officers and Qualifications - The corporation
shall have a Chairman of the Board, a Vice Chairman of the
Board, a Chief Executive Officer, a President, a Secretary,
and a Treasurer, each of whom shall be elected or appointed
by the board of directors. The board may also elect one or
more vice presidents, and such other officers and assistant
officers as the board deems necessary or advisable. All
officers shall be natural persons of full age. Any two or
more offices may be held by the same person. It shall not
be necessary for officers to be directors of the
corporation. Officers of the corporation shall have such
authority and perform such duties in the management of the
corporation as is provided by or under these bylaws or in
the absence of controlling provisions in these bylaws as is
determined by or under resolutions or orders of the board of
directors.
Section 3.02 - Election- Term and Vacancies - The officers
and assistant officers of the corporation shall be elected
by the board of directors at the annual meeting of the board
or from time to time as the board shall determine, and each
officer shall hold office for one (1) year and until his or
her successor has been duly elected and qualified or until
that officer's earlier death, resignation or removal. A
vacancy in any office occurring in any manner may be filled
by the board of directors and, if the office is one for
which these bylaws prescribe a term, shall be filled for the
unexpired portion of the term.
Section 3.03 - Subordinate Officers, Committees and Agents -
The board of directors may from time to time elect such
other officers and appoint such committees, employees or
other agents as the business of the corporation may require,
including one or more assistant secretaries, and one or more
assistant treasurers, each of whom shall hold office for
such period, have such authority, and perform such duties as
are provided in these bylaws or as the board of directors
may from time to time determine. The board of directors may
delegate to any officer or committee the power to elect
subordinate officers and to retain or appoint employees or
other agents, or committees thereof and to prescribe the
authority and duties of such subordinate officers,
committees, employees or other agents.
Section 3.04 - Removal; Resignation and Bonding -
(a) Removal. Any officer or agent of the corporation
may be removed by the board of directors with or
without cause, but such removal shall be without
prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an
officer or agent shall not of itself create
contract rights.
(b) Resignation. Any officer may resign at any time
upon written notice to the corporation. The
resignation shall be effective upon its receipt by
the corporation or at such later time as may be
specified in the notice of resignation.
(c) Bonding. The corporation may secure the fidelity
of any or all of its officers by bond or
otherwise.
Section 3.05 - Chairman of the Board - The Chairman of the
Board of Directors of the corporation, if one is elected,
shall preside at all meetings of the shareholders and of the
directors at which he or she is present, and shall have such
authority and perform such other duties as the board of
directors may from time to time designate.
Section 3.06 - Vice Chairman of the Board - The Vice
Chairman of the Board of Directors of the corporation shall
preside at all meetings of the shareholders and of the
directors at which he or she is present and the Chairman is
absent, and shall have such authority and perform such other
duties as the board of directors may from time to time
designate.
Section 3.07 - Chief Executive Officer - The Chief Executive
Officer shall, in the absence of the Chairman of the Board,
preside at all meetings of the shareholders and of the board
of directors at which he or she is present. Subject to the
control of the board of directors of the corporation and,
within the scope of their authority, any committees thereof,
the Chief Executive Officer shall (a) have general and
active management of all the business, property and affairs
of the corporation, (b) see that all orders and resolutions
of the board of directors and its committees are carried
into effect, (c) appoint and remove subordinate officers and
agents, other than those appointed or elected by the board
of directors, as the business of the corporation may
require, (d) have custody of the corporate seal, or entrust
the same to the Secretary, (e) act as the duly authorized
representative of the board in all matters, except where the
board has formally designated some other person or group to
act, (f) sign, execute and acknowledge, in the name of the
corporation, deeds, mortgages, bonds, contracts or other
instruments authorized by the board of directors, except in
cases where signing and execution thereof shall be expressly
delegated by the board of directors, or by these bylaws, to
some other officer or agent of the corporation, and (g) in
general perform all the usual duties incident to the office
of Chief Executive Officer and such other duties as may be
assigned to such person by the board of directors.
Section 3.08 - President - The President shall perform the
duties of Chief Executive Officer either when he has been
chosen as Chief Executive Officer or when the Chief
Executive Officer is absent or unable to perform the duties
of his office. The President shall have such other powers
and perform such other duties as from time to time as may be
prescribed by him by the board of directors or prescribed by
the bylaws.
Section 3.09 - Vice Presidents - Each vice president, if
any, shall perform such duties as may be assigned to him or
her by the board of directors or the Chief Executive
Officer. One vice president shall be designated by the
board of directors to perform the duties of the Chief
Executive Officer, in the event of the absence or disability
of the Chief Executive Officer.
Section 3.10 - Secretary - The Secretary shall (a) keep or
cause to be kept the minutes of all meetings of the
shareholders, the board of directors, and any committees of
the board of directors in one or more books kept for that
purpose, (b) have custody of the corporate records, stock
books and stock ledgers of the corporation, (c) keep or
cause to be kept a register of the address of each
shareholder, which address has been furnished to the
Secretary by the shareholder, (d) see that all notices are
duly given in accordance with law, the articles of
incorporation, and these bylaws, and (e) in general perform
all the usual duties as may be assigned to him or her by the
board of directors or the Chief Executive Officer.
Section 3.11 - Assistant Secretary - The Assistant
Secretary, if any, or Assistant Secretaries if more than
one, shall perform the duties of the Secretary in his or her
absence and shall perform other duties as the board of
directors, the Chief Executive Officer or the Secretary may
from time to time designate.
Section 3.12 - Treasurer - The Treasurer shall have general
supervision of the fiscal affairs of the corporation and
shall be the Chief Financial Officer of the corporation.
The Treasurer shall, with the assistance of the Chief
Executive Officer and managerial staff of the corporation:
(a) see that a full and accurate accounting of all financial
transactions is made; (b) invest and reinvest the capital
funds of the corporation in such manner as may be directed
by the board of directors, unless that function shall have
been delegated to a nominee or agent; (c) deposit or cause
to be deposited in the name and to the credit of the
corporation, in such depositories as the board of directors
shall designate, all monies and other valuable effects of
the corporation not otherwise employed; (d) prepare any
financial reports that may be requested from time to time by
the board of directors; (e) cooperate in the conduct of any
annual audit of the corporation's financial records by
certified public accountants duly appointed by the board of
directors; and (f) in general perform all the usual duties
incident to the office of treasurer and such other duties as
may be assigned to him or her by the board of directors or
the Chief Executive Officer.
Section 3.13 - Officer Salaries - Unless otherwise provided
by the board of directors of the corporation, the salaries
of each of the officers elected by the board of directors
shall be fixed from time to time by the board of directors
and the salaries of all other officers of the corporation
shall be fixed from time to time by the Chief Executive
Officer or such other person as may be designated from time
to time by the Chief Executive Officer or the board of
directors.
No officer shall be prevented from receiving such salary or
other compensation by reason of the fact that the officer is
also a director of the corporation.
ARTICLE IV
SHARE CERTIFICATES AND TRANSFERS
Section 4.01 - Share Certificates - Share certificates shall
be in such form as shall be approved by the board of
directors and shall state: (i) that the corporation is
incorporated under the laws of the Commonwealth of
Pennsylvania, (ii) the name of the person to whom issued,
and (iii) the number and class of shares and the designation
of the series, if any, that the share certificate
represents.
The share register or transfer books and blank share
certificates shall be kept by the Secretary or by any
transfer agent or registrar designated by the board of
directors for that purpose.
Section 4.02 - Issuance - The share certificates of the
corporation shall be numbered and registered in the share
register or transfer books of the corporation as they are
issued. They shall be signed on behalf of the corporation
by the President or a vice president and by the Secretary or
an Assistant Secretary or the Treasurer or an Assistant
Treasurer; but where a certificate is signed by a transfer
agent or a registrar, the signature of any corporate officer
upon the certificate may be a facsimile, engraved or
printed. In case any officer who has signed, or whose
facsimile signature has been placed upon, any share
certificate shall have ceased to be such officer because of
death, resignation or otherwise, before the certificate is
issued, it may be issued with the same effect as if the
officer had not ceased to be such at the date of its issue.
The provisions of this section shall be subject to any
inconsistent or contrary agreement at the time between the
corporation and any transfer agent or registrar.
Section 4.03 - Transfer of Shares - Transfer of shares shall
be made on the books of the corporation upon surrender of
the certificates therefor, endorsed by the person named in
the certificate or by his attorney, lawfully constituted in
writing. No transfer shall be made which is inconsistent
with law.
Section 4.04 - Lost, Destroyed, Mutilated or Stolen
Certificates - If the registered owner of a share
certificate claims that the security has been lost,
destroyed, mutilated or wrongfully taken, another may be
issued in lieu thereof in a manner and upon such terms as
the board of directors may authorize and shall be issued in
place of the original security, in accordance with law, if
the owner: (a) so requests before the corporation has
notice that the security has been acquired by a bona fide
purchaser; (b) files with the corporation, if requested by
the corporation, a sufficient indemnity bond; and
(c) satisfies any other reasonable requirements imposed by
the corporation.
ARTICLE V
NOTICE, WAIVERS, AND MEETINGS
Section 5.01 - Manner of Giving Notice - Whenever written
notice is required to be given to any person under the
provisions of the Pennsylvania Business Corporation Law of
1988, as it may hereafter be amended, or by the articles of
incorporation or these bylaws, it may be given to the person
either personally or by sending a copy of it by first class
or express mail, postage prepaid; or by telegram (with
messenger service specified), telex or TWX (with answerback
received) or courier service, charges prepaid; or by
facsimile transmission, to the shareholder's address (or to
shareholder's telex, TWX, or facsimile number) appearing on
the books of the corporation; or, in the case of directors,
supplied by the director to the corporation for the purpose
of notice. Notice sent by mail, by telegraph or by courier
service shall be deemed to have been given to the person
entitled thereto when deposited in the United States mail or
with a telegraph office or courier service for delivery to
that person, or in the case of telex or TWX, when dispatched
or in the case of fax, when received except that, in the
case of directors, notice sent by regular mail shall be
deemed to have been given 48 hours after being deposited in
the United States mail or, in the case of telex, TWX, or
facsimile, when dispatched.
A notice of meeting shall specify the place, day and hour of
the meeting and any other information required by any other
provision of the Business Corporation Law of 1988, the
articles of incorporation or these bylaws.
Section 5.02 - Waiver of Notice - Whenever any written
notice is required to be given by statute or the articles of
incorporation or these bylaws, a waiver of the notice in
writing, signed by the person or persons entitled to the
notice, whether before or after the time stated in it, shall
be deemed equivalent to the giving of the notice. Neither
the business to be transacted at, nor the purpose of, a
meeting need be specified in the waiver of notice of such
meeting. Attendance of a person, either in person or by
proxy, at any meeting shall constitute a waiver of notice of
the meeting, except where the person attends the meeting for
the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the
meeting was not lawfully called or convened.
Section 5.03 - Modification of Proposal - Whenever the
language of a proposed resolution is included in a written
notice of a meeting required to be given under the
provisions of the Business Corporation Law of 1988, as it
may be amended, or the articles of incorporation or these
bylaws, the meeting considering the resolution may without
further notice adopt it with such clarifying or other
amendments as do not enlarge its original purpose.
Section 5.04 - Use of Conference Telephone and Similar
Equipment - One of more persons may participate in a meeting
of the directors, or of any committee of directors, by means
of conference telephone or similar communications equipment
by means of which all persons participating in the meeting
can hear each other. Such participation shall constitute
presence in person at the meeting.
ARTICLE VI
INDEMNIFICATION AND INSURANCE
Section 6.01 - Indemnification -
(a) Indemnification of Directors and Officers. The
Corporation shall indemnify any person who was or
is a party or is threatened to be made a party to
any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal,
administrative, or investigative (including,
without limitation, actions by or in the right of
the Corporation), by reason of the fact that such
person is or was a director or officer of the
Corporation, or is or was serving at the request
of the Corporation as a director, officer,
employee, or agent of another corporation,
partnership, joint venture, trust or other
enterprise, against expenses (including attorneys'
fees), amounts paid in settlement, judgments, and
fines actually and reasonably incurred by such
person in connection with such action, suit, or
proceeding; provided, however, that no
indemnification shall be made in any case where
the act or failure to act giving rise to the claim
for indemnification is determined by a court to
have constituted willful misconduct or
recklessness.
(b) Indemnification of Others. The corporation may,
at its discretion, indemnify any person who was or
is a party or is threatened to be made a party to
any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal,
administrative, or investigative (including,
without limitation, actions by or in the right of
the corporation), by reason of the fact that such
person is or was an employee or agent of the
Corporation who is not entitled to rights under
Section 6.01(a) hereof, or such person is or was
serving at the request of the Corporation as an
employee or agent of another corporation,
partnership, joint venture, trust or other
enterprise, against expenses (including attorneys'
fees), amounts paid in settlement, judgments, and
fines actually and reasonably incurred by such
person in connection with such action, suit, or
proceeding; provided, however, that no
indemnification shall be made in any case where
the act or failure to act giving rise to the claim
for indemnification is determined by a court to
have constituted willful misconduct or
recklessness.
(c) Advancing Expenses. Expenses (including
attorneys' fees) incurred in defending a civil or
criminal action, suit, or proceeding shall be paid
by the corporation in advance of the final
disposition of such action, suit, or proceeding
upon receipt of an undertaking by or on behalf of
the director, officer, employee, or agent to repay
such amount if it shall be ultimately determined
that he is not entitled to be indemnified by the
corporation as authorized in this Article Six.
(d) Rights Not Exclusive. The indemnification and
advancement of expenses provided by this Article
Six shall not be deemed exclusive of any other
right to which persons seeking indemnification and
advancement of expenses may be entitled under any
agreement, vote of shareholders or disinterested
directors, or otherwise, both as to actions in
such persons' official capacity and as to their
actions in another capacity while holding office,
and shall continue as to a person who has ceased
to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs,
executors, and administrators of such person.
(e) Insurance; Other Security. The corporation may
purchase and maintain insurance on behalf of any
person, may enter into contracts of
indemnification with any person, may create a fund
of any nature (which may, but need not be, under
the control of a trustee) for the benefit of any
person, and may otherwise secure in any manner its
obligations with respect to indemnification and
advancement of expenses, whether arising under
this Article Six or otherwise, to or for the
benefit of any person, whether or not the
corporation would have the power to indemnify such
person against such liability under the provisions
of this Article Six.
Section 6.02 - Contract Rights; Amendment or Repeal - All
rights under this Article Six shall be deemed a contract
between the corporation and the indemnified representative
pursuant to which the corporation and each indemnified
representative intend to be legally bound. Any repeal,
amendment or modification hereof shall be prospective only
and shall not affect any rights or obligations then
existing.
Section 6.03 - Reliance on Provisions - Each person who
shall act as an indemnified representative of the
corporation shall be deemed to be doing so in reliance upon
the rights provided by this Article Six.
Section 6.04 - Interpretation - The provisions of this
Article are intended to constitute bylaws authorized by
15 Pa. C.S. Section 1746.
ARTICLE VII
MISCELLANEOUS
Section 7.01 - Registered Office - The registered office of
the corporation, required by law to be maintained in the
Commonwealth of Pennsylvania, may be, but need not be, the
principal place of business of the corporation. The address
of the registered office may be changed from time to time by
the board of directors of the corporation.
Section 7.02 - Other Offices - The corporation may have
additional offices and business in such places, within or
outside the Commonwealth of Pennsylvania, as the board of
directors of the corporation may designate or as the
business of the corporation may require.
Section 7.03 - Corporate Seal - The corporation may have a
corporate seal, which shall have inscribed on it the name of
the corporation, the year of organization, and the words
"Corporate Seal--Pennsylvania" or such inscription as the
board of directors of the corporation may determine. The
seal may be used by causing it or a facsimile of it to be
impressed or affixed, or in any manner reproduced.
Section 7.04 - Fiscal Year - The fiscal year of the
corporation shall be the calendar year.
Section 7.05 - Checks - All checks, notes, bills of exchange
or other orders in writing shall be signed by such person or
persons as the board of directors or, any person authorized
by resolution of the board of directors may from time to
time designate.
Section 7.06 - Contracts - Except as otherwise provided in
the Business Corporation Law of 1988, as it may be amended,
in the case of transactions that require action by the
shareholders, the board of directors may authorize any
officer or agent to enter into any contract or to execute or
deliver any instrument on behalf of the corporation, and
such authority may be general or confined to specific
instances.
Any note, mortgage, evidence of indebtedness, contract or
other document, or any assignment or endorsement thereof,
executed or entered into between the corporation and any
other person, when signed by one or more officers or agents
having actual or apparent authority to sign it, or by the
Chief Executive Officer, the President or a vice president
and the Secretary or Assistant Secretary or Treasurer or
Assistant Treasurer of the corporation, shall be held to
have been properly executed for and on behalf of the
corporation, without prejudice to the rights of the
corporation against any person who shall have executed the
instrument in excess of his or her actual authority.
Section 7.07 - Amendment of Bylaws - These bylaws may be
amended, altered, changed or repealed as provided in the
articles of incorporation. Any change in the bylaws shall
take effect when adopted unless otherwise provided in the
resolution effecting the change.
Section 7.08 - Severability - If any provision of these
bylaws or the application thereof to any person or
circumstance shall be invalid or unenforceable to any
extent, the remainder of these bylaws and the application of
such provisions to other persons or circumstances shall not
be affected thereby and shall be deemed to be applicable to
the greatest extent permitted by law.
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of October, 1997, by and
between MERCER MUTUAL INSURANCE COMPANY, a Pennsylvania
corporation, MERCER INSURANCE GROUP, INC., a Pennsylvania
corporation, and WILLIAM C. HART.
Mercer Mutual Insurance Company and Mercer Insurance Group,
Inc. both desire to employ Mr. Hart, and Mr. Hart is willing to
serve Mercer Mutual Insurance Company and Mercer Group, Inc. on
the terms and conditions herein provided.
In order to effect the foregoing, the parties hereto desire
to enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises
and the respective covenants and agreements of the parties
contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions and Special Provisions. Each capitalized
word and term used herein shall have the meaning ascribed to it
in the glossary appended hereto, unless the context in which such
word or term is used otherwise clearly requires. Such glossary
is incorporated herein by reference and made a part hereof. In
addition, until such time as Mercer converts from mutual to stock
form and the Company acquires all of the common stock, the
provisions set forth at Appendix 1 shall apply, notwithstanding
anything in this Agreement to the contrary.
2. Employment. Mercer hereby agrees to employ the
Executive, and the Executive hereby agrees to serve Mercer, on
the terms and conditions set forth herein.
3. Term of Agreement. The Executive's employment under
this Agreement shall commence on the date hereof and, except as
otherwise provided herein, shall continue until October 1, 2000;
provided, however, that commencing on October 1, 1998 and each
October 1 thereafter, the term of this Agreement shall
automatically be extended for one additional year beyond the term
otherwise established unless, prior to such October 1st date,
Mercer shall not have given a Notice of Extension.
4. Position and Duties. The Executive shall serve as
President and Chief Executive Officer of Mercer and the Company,
and he shall have such responsibilities, duties and authority as
may, from time to time, be generally associated with such
positions. In addition, the Executive shall serve in such
capacity, with respect to each Subsidiary or affiliated company,
as the Board of Directors of each such Subsidiary or affiliated
company shall designate from time to time. During the term of
this Agreement, he shall devote substantially all of his working
time and efforts to the business and affairs of Mercer, the
Subsidiaries and affiliated companies; provided, however, that
nothing herein shall be construed as precluding him from devoting
a reasonable amount of time to civic, charitable, trade
association, and similar activities, at least to the extent he is
presently devoting time.
5. Compensation and Related Matters.
(a) Base Compensation. During the period of the
Executive's employment hereunder, Mercer shall pay to him
annual base compensation as follows:
(i) For the period from October 1, 1997 to
March 31, 1998, at a rate not less than $150,000;
(ii) For the period from April 1, 1998 to
September 30, 1998, at an annual rate not less than
$160,000; and
(iii) For the period beginning October 1, 1998,
at an annual rate not less than $170,000.
Thereafter, the Board(s) of Directors of Mercer shall
periodically review the Executive's employment performance,
in accordance with policies generally in effect from time to
time, for possible merit or cost-of-living increases in such
base compensation. Except for a reduction which is
proportionate to a company-wide reduction in executive pay,
the annual base compensation paid to the Executive in any
period shall not be less than the annual base compensation
paid to him in any prior period. The frequency and manner
of payment of such base compensation shall be in accordance
with Mercer's executive payroll practices from time to time
in effect. Nothing herein shall be construed as precluding
the Executive from entering into any salary reduction or
deferral plan or arrangement during the term of this
Agreement; provided, however, that his base compensation
shall be determined without regard to any such salary
reduction or deferral for purposes of calculating the amount
of any compensation and benefits to which he or his
surviving spouse may be entitled under Paragraph 6, 7, 10,
or 11 following his termination of employment. The amounts
set forth in the first sentence of this subparagraph shall
be pro rated to the extent such period is less than a year.
(b) Incentive Compensation. During the period of the
Executive's employment hereunder, he shall be entitled to
participate in all incentive plans, stock option plans,
stock appreciation rights plans, and similar arrangements
maintained by Mercer for executive officers on a basis and
at award levels consistent and commensurate with his
position and duties hereunder.
(c) Employee Benefit Plans and Other Plans or
Arrangements. The Executive shall be entitled to
participate in all Employee Benefit Plans of Mercer on the
same basis as other executive officers of Mercer. In
addition, he shall be entitled to participate in and enjoy
any other plans and arrangements which provide for sick
leave, vacation, sabbatical, or personal days,
company-provided automobile, club memberships and dues,
education payment or reimbursement, business-related
seminars, and similar fringe benefits provided to or for the
executive officers of Mercer from time to time, but at least
to the extent he is presently entitled to participate in and
enjoy such plans and arrangements.
(d) Expenses. During the period of the Executive's
employment hereunder, he shall be entitled to receive prompt
reimbursement for all reasonable and customary expenses,
including transportation expenses, incurred by him in
performing services hereunder in accordance with the general
policies and procedures established by Mercer.
6. Termination By Reason of Disability.
(a) In General. In the event the Executive becomes
unable to perform his duties on a full-time basis by reason
of the occurrence of his Disability and, within 30 days
after a Notice of Termination is given, he shall not have
returned to the full-time performance of such duties, his
employment may be terminated by Mercer.
(b) Compensation and Benefits. In the event of the
termination of the Executive's employment under Subparagraph
(a), Mercer shall pay or provide the compensation and
benefits set forth below:
(1) The Executive shall be paid an amount per
annum equal to the greater of (i) his highest base
compensation received during one of the two calendar
years immediately preceding the calendar year in which
the Date of Termination occurs, or (ii) his base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason) for
one year beginning with such Date of Termination. The
frequency and manner of payment of such amounts shall
be in accordance with Mercer's executive payroll
practices from time to time in effect.
(2) The Executive shall be paid an amount equal
to the higher of the aggregate bonus(es) paid to him
with respect to one of the two years immediately
preceding the year in which the Date of Termination
occurs. Such amount shall be paid to him in cash on
each of the first and second anniversary dates of the
Date of Termination.
(3) The Executive shall be paid an amount equal
to the highest annual contribution made on his behalf
(other than his own salary reduction contributions) to
each tax-qualified and non-qualified Defined
Contribution Plan of Mercer with respect to the year in
which the Date of Termination occurs or one of the two
years immediately preceding such year. The amount
separately determined for each such plan shall be
aggregated and shall be paid to him in cash on the
first anniversary date of the Date of Termination.
(4) The Executive shall accrue benefits equal to
the excess of (i) the aggregate retirement benefits he
would have received under the terms of each tax-
qualified and non-qualified Defined Benefit Plan of
Mercer as in effect immediately prior to the Date of
Termination had he (A) continued to be employed for one
more year, and (B) received (on a pro rated basis, as
appropriate) the greater of (I) the highest
compensation taken into account under each such plan
with respect to one of the two years immediately
preceding the year in which the Date of Termination
occurs, or (II) his annualized base compensation in
effect immediately prior to the Date of Termination (or
prior to any reduction which entitled him to terminate
his employment for Good Reason), over (ii) the
retirement benefits he actually receives under such
plans. The frequency, manner and extent of payment of
such benefits shall be consistent with the terms of the
plans to which they relate and any elections made
thereunder.
(5) The Executive and his eligible dependents
shall be entitled to continue to participate at the
same aggregate benefit levels, for one year and at no
out-of-pocket or tax cost to him, in the Welfare
Benefit Plans in which he was a participant immediately
prior to the Date of Termination, to the extent
permitted under the terms of such plans and applicable
law. To the extent Mercer is unable to provide for
continued participation in a Welfare Benefit Plan, it
shall provide an equivalent benefit directly at no
out-of-pocket or tax cost to him. For purposes of the
preceding two sentences, Mercer shall be deemed to have
provided a benefit at no tax cost to him if it pays an
additional amount to him or on his behalf, with respect
to those benefits which would otherwise be nontaxable
to him, calculated in a manner consistent with the
provisions of Paragraph 12.
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. Notwithstanding the provisions
of Subparagraph (b)(5), Mercer's obligation to pay or fund
any disability insurance premiums on behalf of the Executive
shall be suspended while his Disability continues, provided
the cessation of payment or funding does not result in the
termination of disability benefits. Any amounts otherwise
due under Subparagraph (b) shall be reduced (but not below
zero) by the dollar amount of disability benefits received
by him pursuant to plans or policies funded, directly at its
cost, by Mercer.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b)(5),
Mercer shall not be required to provide, at its cost, the
welfare benefits covered therein after the later of (i) the
attainment by the Executive and his spouse (if any) of age
65, or (ii) the date specified in the relevant plan document
for benefit termination (assuming that he was employed until
age 65 or the normal retirement date, if any, specified in
such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Disability and he is survived by a
spouse, the compensation and benefits remaining to be
paid and provided under Subparagraph (b) shall be
unaffected by his death and shall be paid and provided
to her or on her behalf; provided, however, that the
extent of her rights to the accrued benefits described
in Subparagraph (b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans; and provided further, that Mercer
shall not be required to provide continued benefits
with respect to her deceased husband; and provided
further, that in no event shall Mercer be required to
provide, at its cost, the other welfare benefits
described in Subparagraph (b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Disability and he is not survived by a
spouse, (i) Mercer shall thereafter make the remaining
payments described in Subparagraphs (b)(1) through
(b)(3) directly to his estate, (ii) the extent of the
rights of any person to the accrued benefits described
in Subparagraph (b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans, and (iii) Mercer's obligation to
provide continued benefits under Subparagraph (b)(5)
shall terminate.
(f) Compensation and Benefits Upon Expiration of
Remaining Term of Agreement. Upon the expiration of the
remaining term of this Agreement following the Executive's
termination for Disability, and provided his Disability then
continues, he shall be entitled to receive the compensation
and benefits provided under the terms of Mercer's long-term
disability plan in effect on the Date of Termination or, if
greater, at the expiration of such remaining term. Such
compensation and benefits shall continue until the earlier
of (i) his death, or (ii) the later of (A) his attainment of
age 65, or (B) the date specified in the plan document for
benefit termination. To the extent Mercer is unable to
provide such compensation and benefits under its long-term
disability plan, it shall provide equivalent compensation
and benefits directly at no out-of-pocket or tax cost to
him. For purposes of the preceding sentence, Mercer shall
be deemed to have provided compensation and benefits at no
tax cost to him if it pays an additional amount to him or on
his behalf, with respect to the compensation and benefits
which would otherwise be nontaxable to him, calculated in a
manner consistent with the provisions of Paragraph 12.
7. Termination By Reason of Death.
(a) Compensation and Benefits to Surviving Spouse. In
the event the Executive dies while he is employed under this
Agreement and is survived by a spouse, Mercer shall pay or
provide the compensation and benefits set forth below:
(1) The surviving spouse shall be paid an amount
equal to the greater of (i) the Executive's highest
base compensation received during one of the two
calendar years immediately preceding the calendar year
in which the Date of Termination occurs, or (ii) his
base compensation in effect immediately prior to the
Date of Termination (or prior to any reduction which
entitled him to terminate his employment for Good
Reason) for a period of one year, beginning with such
Date of Termination. The frequency and manner of
payment of such amounts shall be in accordance with
Mercer's executive payroll practices from time to time
in effect.
(2) The surviving spouse shall be paid an amount
equal to the highest payment made to Executive under
each incentive bonus plan of Mercer with respect to one
of the two years immediately preceding the year in
which the Date of Termination occurs. Such amount
shall be paid in cash to her within 30 days after the
Date of Termination.
(3) The surviving spouse shall be paid an amount
equal to the sum of the highest annual contribution
made on the Executive's behalf (other than his own
salary reduction contributions) to each tax-qualified
and non-qualified Defined Contribution Plan of Mercer
with respect to the year in which the Date of
Termination occurs or one of the two years immediately
preceding such year. Such amount shall be paid in cash
to her within 30 days after the Date of Termination or
within 30 days after such amount can first be
determined, whichever is later.
(4) Subject to the following sentence, the
surviving spouse shall be paid benefits determined by
reference to the excess of (i) the aggregate retirement
benefits the Executive would have accrued under the
terms of each tax-qualified and non-qualified Defined
Benefit Plan as in effect immediately prior to the Date
of Termination, had he (A) continued to be employed for
a period of one year following the Date of Termination,
and (B) received (on a pro rated basis, as appropriate)
the greater of (I) the highest compensation taken into
account under each such plan with respect to one of the
two years immediately preceding the year in which the
Date of Termination occurs, or (II) his annualized base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason), over
(ii) the retirement benefits actually determined under
such plans. The frequency, manner, and extent of
payment of such benefits shall be consistent with the
terms of the plans to which they relate and any
elections made thereunder.
(5) The surviving spouse and her eligible
dependents shall be entitled to continue to participate
at the same aggregate benefit levels, for a period of
one year following the Date of Termination and at no
out-of-pocket or tax cost to her, in the Welfare
Benefit Plans in which the Executive was a participant
immediately prior to the Date of Termination, to the
extent permitted under the terms of such plans and
applicable law; provided, however, that Mercer shall
not be required to provide continued benefits with
respect to her deceased husband; and provided further,
that Mercer shall not thereafter be required to
provide, at its cost, the other welfare benefits
covered by such plans to such spouse and her eligible
dependents after the earlier of (i) her death, or
(ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming the Executive was
employed until age 65 or the normal retirement date, if
any, specified in such document). To the extent Mercer
is unable to provide for continued participation in a
Welfare Benefit Plan as required, it shall provide an
equivalent benefit directly at no out-of-pocket or tax
cost to her. For purposes of the preceding two
sentences, Mercer shall be deemed to have provided a
benefit at no tax cost to her if it pays an additional
amount to her or on her behalf, with respect to those
benefits which would otherwise be nontaxable to her,
calculated in a manner consistent with the provisions
of Paragraph 12.
(b) Compensation and Benefits to Estate, Etc. In the
event the Executive dies while he is employed under this
Agreement and is not survived by a spouse, (i) Mercer shall
make the payments described in Subparagraphs (a)(1) through
(a)(3) directly to his estate, (ii) the extent of the rights
of any person to the accrued benefits described in
Subparagraph (a)(4) shall be determined by reference to the
relevant plan provisions and any elections made under such
plans, and (iii) Mercer's obligation to provide benefits
under Subparagraph (a)(5) shall terminate.
8. Termination By Mercer for Cause.
(a) In General. In the event Mercer intends to
terminate the Executive's employment for Cause, it shall
deliver a Notice of Termination to him which specifies a
Date of Termination not less than 30 days following the date
of such notice, unless a shorter period of notice is
required by the principal regulator of the Company or any
affiliate of the Company.
(b) Compensation. Within 30 days after the
Executive's termination under Subparagraph (a), Mercer shall
pay him, in one lump sum, his accrued but unpaid base
compensation and vacation compensation earned through the
Date of Termination.
9. Termination By the Executive Without Good Reason.
(a) In General. In the event the Executive intends to
terminate his employment without Good Reason, he shall
deliver a Notice of Termination to Mercer which specifies a
Date of Termination not less than (i) 90 days following the
date of such notice, if a Change in Control shall not have
occurred, or (ii) 30 days following the date of such notice,
if a Change in Control shall have occurred.
(b) Compensation. Within 30 days after the
Executive's termination under Subparagraph (a), Mercer shall
pay him, in one lump sum, his accrued but unpaid base
compensation and vacation compensation earned through the
Date of Termination.
10. Termination By Mercer Without Disability or Cause.
(a) In General. In the event Mercer intends to
terminate the Executive's employment for any reason other
than Disability or Cause, it shall deliver a Notice of
Termination to him which specifies a Date of Termination not
less than 90 days following the date of such notice.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a), Mercer shall
pay or provide the compensation and benefits described in
Paragraph 6(b), except that all such compensation and
benefits shall be for the remaining term of this Agreement
and, with respect to Subparagraphs 6(b)(2) and (3), an
additional pro rated amount shall be paid to him in cash on
the last day of the remaining term of this Agreement. Such
pro rated amount shall be determined by reference to a
fraction, the numerator of which is the number of whole
months elapsed during the year in which termination occurs,
and the denominator of which is 12.
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. In the event the Executive
suffers a Disability during the remaining term of this
Agreement following the Date of Termination, Mercer's
obligation to pay or fund any disability insurance premiums
on his behalf shall be suspended while his Disability
continues, provided the cessation of payment or funding does
not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable
under Subparagraph (b) shall be reduced (but not below zero)
by the dollar amount of disability benefits received by him
pursuant to plans or policies funded, directly at its cost,
by Mercer.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b), Mercer
shall not be required to provide, at its cost, the welfare
benefits covered by Paragraph 6(b)(5) after the later of
(i) the attainment by the Executive and his spouse (if any)
of age 65, or (ii) the date specified in the relevant plan
document for benefit termination (assuming that he was
employed until age 65 or the normal retirement date, if any,
specified in such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination without Disability or Cause by Mercer and
he is survived by a spouse, the compensation and
benefits required to be paid and provided under
Subparagraph (b) shall be unaffected by his death and
shall be paid and provided to her or on her behalf;
provided, however, that the extent of her rights to the
accrued benefits described in Paragraph 6(b)(4) shall
be determined by reference to the relevant plan
provisions and any elections made under such plans; and
provided further, that Mercer shall not be required to
provide continued benefits with respect to her deceased
husband; and provided further, that in no event shall
Mercer be required to provide, at its cost, the other
welfare benefits described in Paragraph 6(b)(5) to such
spouse and her eligible dependents after the earlier of
(i) her death, or (ii) the later of (A) her attainment
of age 65, or (B) the date specified in the relevant
plan document for benefit termination (assuming that
the Executive was employed until age 65 or the normal
retirement date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination without Disability or Cause and he is not
survived by a spouse, (i) Mercer shall thereafter make
the remaining payments described in Paragraphs 6(b)(1)
through 6(b)(3) directly to his estate, (ii) the extent
of the rights of any person to the accrued benefits
described in Paragraph 6(b)(4) shall be determined by
reference to the relevant plan provisions and any
elections made under such plans, and (iii) Mercer's
obligation to provide the continued benefits described
in Paragraph 6(b)(5) shall terminate.
11. Termination By the Executive for Good Reason.
(a) In General. In the event the Executive intends to
terminate his employment for Good Reason, he shall deliver a
Notice of Termination to Mercer which specifies a Date of
Termination not less than 30 days following the date of such
notice.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a), Mercer shall
pay or provide the compensation and benefits described in
Paragraph 6(b), except that all such compensation and
benefits shall be for the remaining term of this Agreement
and, with respect to Subparagraphs 6(b)(2) and (3), an
additional pro rated amount shall be paid to him in cash on
the last day of the remaining term of this Agreement. Such
pro rated amount shall be determined by reference to a
fraction, the numerator of which is the number of whole
months elapsed during the year in which termination occurs,
and the denominator of which is 12.
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. In the event the Executive
suffers a Disability during the remaining term of this
Agreement following the Date of Termination, Mercer's
obligation to pay or fund any disability insurance premiums
on his behalf shall be suspended while his Disability
continues, provided the cessation of payment or funding does
not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable
under Subparagraph (b) shall be reduced (but not below zero)
by the dollar amount of disability benefits received by him
pursuant to plans or policies funded, directly at its cost,
to Mercer.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b), Mercer
shall not be required to provide, at its cost, the welfare
benefits covered by Paragraph 6(b)(5) after the later of
(i) the attainment by the Executive and his spouse (if any)
of age 65, or (ii) the date specified in the relevant plan
document for benefit termination (assuming that he was
employed until age 65 or the normal retirement date, if any,
specified in such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Good Reason and he is survived by a
spouse, the compensation and benefits required to be
paid and provided under Subparagraph (b) shall be
unaffected by his death and shall be paid and provided
to her or on her behalf; provided, however, that the
extent of her rights to the accrued benefits described
in Paragraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans; and provided further, that Mercer
shall not be required to provide continued benefits
with respect to her deceased husband; and provided
further, that in no event shall Mercer be required to
provide, at its cost, the other welfare benefits
described in Paragraph 6(b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Good Reason and he is not survived by a
spouse, (i) Mercer shall thereafter make the remaining
payments described in Paragraphs 6(b)(1) through
6(b)(3) directly to his estate, (ii) the extent of the
rights of any person to the accrued benefits described
in Paragraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans, and (iii) Mercer's obligation to
provide the continued benefits described in Paragraph
6(b)(5) shall terminate.
12. Provisions Relating to Excise Taxes.
(a) In General. In the event the Executive becomes
liable, for any taxable year, for the payment of an Excise
Tax (because of a change in control) with respect to the
compensation and benefits payable by Mercer under this
Agreement or otherwise, Mercer shall make one or more
Gross-Up Payments to the Executive or on his behalf. The
amount of any Gross-Up Payment shall be calculated by a
certified public accountant or other tax professional
designated jointly by the Executive and Mercer. The
provisions of this paragraph shall apply with respect to the
Executive's surviving spouse or estate, where relevant.
(b) Methodology for Calculation of Gross-Up Payment.
For purposes of determining the amount of any Gross-Up
Payment, the Executive shall be deemed to pay income taxes
at the highest federal, state, and local marginal rates of
tax for the calendar year in which the Gross-Up Payment is
to be made, net of the maximum reduction in federal income
tax which could be obtained from the deduction of state and
local income taxes. In the event that the Excise Tax is
subsequently determined to be less than the amount taken
into account at the time the Gross-Up Payment was made, the
Executive shall repay to Mercer, at the time that the amount
of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to the
reduction (plus a portion of the Gross-Up Payment
attributable to the Excise Tax and the federal, state, and
local income taxes imposed on the portion of the Gross-Up
Payment being repaid by the Executive to the extent such
repayment results in a reduction in Excise Tax or federal,
state, or local income tax), plus interest on the amount of
such repayment. Such interest shall be calculated by using
the rate in effect under Section 1274(d)(1) of the IRC, on
the date the Gross-Up Payment was made, for debt instruments
with a term equal to the period of time which has elapsed
from the date the Gross-Up Payment was made to the date of
repayment. In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the
time the Gross-Up Payment was made (including by reason of
any payment the existence or amount of which could not be
determined at the time of the Gross-Up Payment), Mercer
shall make an additional Gross-Up Payment with respect to
the excess at the time the amount thereof is finally
determined, plus interest calculated in a manner similar to
that described in the preceding sentence.
(c) Time of Payment. Any Gross-Up Payment provided
for herein shall be paid not later than the 30th day
following the payment of any compensation or the provision
of any benefit which causes such payment to be made;
provided, however, that if the amount of such payment cannot
be finally determined on or before such day, Mercer shall
pay on such day an estimate of the minimum amount of such
payment and shall pay the remainder of such payment
(together with interest calculated in a manner similar to
that described in Subparagraph (b)) as soon as the amount
thereof can be determined. In the event that the amount of
an estimated payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a
loan by Mercer to the Executive, payable on the 30th day
after demand by Mercer (together with interest calculated in
a manner similar to that described in Subparagraph (b)).
(d) Notwithstanding the provisions of this
paragraph to the contrary, the actual amounts payable
hereunder as Gross-Up Payments shall be coordinated with any
similar amounts paid to the Executive under any other
contract, plan, or arrangement.
13. Fees and Expenses of the Executive. After a Change in
Control and except as provided in the following sentence, Mercer
shall pay, within 30 days following demand by the Executive, all
legal, accounting, actuarial, and related fees and expenses
incurred by him in connection with the enforcement of this
Agreement. An arbitration panel or a court of competent
jurisdiction shall be empowered to deny payment to the Executive
of such fees and expenses only if it determines that he
instituted a proceeding hereunder, or otherwise acted, in bad
faith.
14. Reduction for Compensation and Benefits Received Under
Mercer Severance Policy, Etc. Notwithstanding anything herein to
the contrary, in the event the Executive, his surviving spouse,
or any other person becomes entitled to continued compensation
and benefits hereunder by reason of the Executive's termination
of employment and, in addition, compensation or similar benefits
are payable under a severance policy, program or arrangement
maintained by Mercer (other than retirement plans), then the
compensation or benefits otherwise payable hereunder shall be
reduced by the compensation or benefits provided under such
severance policy, program or arrangement.
15. Mitigation. The Executive shall not be required to
mitigate the amount of any compensation or benefits which may
become payable hereunder by reason of his termination by seeking
other employment or otherwise, nor, except as otherwise provided
in the following sentence or elsewhere herein, shall the amount
of any such compensation or benefits be reduced by any
compensation or benefits received by the Executive as the result
of his employment by another employer. Notwithstanding anything
in this Agreement to the contrary, Mercer's obligation to provide
any medical and dental benefits hereunder may be suspended, with
the written concurrence of the Executive or, if applicable, his
surviving spouse during any period of time that such benefits are
being provided by reason of his or her employment.
16. Funding of Compensation and Benefits; Acceleration of
Certain Payments.
(a) Grantor Trust. In the event the Executive's
employment is terminated without Cause or he terminates his
employment for Good Reason and a Change in Control has
occurred as of the Date of Termination or occurs thereafter,
the Executive shall have the right to require Mercer to
establish a grantor trust (taxable to Mercer) and fund such
trust, on an actuarially sound basis, to provide the
compensation and benefits to which he is entitled hereunder,
other than those which may be paid pursuant to the
provisions of Subparagraph (c). The specific terms of such
trust shall be as agreed to by the parties in good faith;
provided, however, that the trustee shall be a financial
institution independent of Mercer; and provided further,
that in no event shall Mercer be entitled to withdraw funds
from the trust for its benefit, or otherwise voluntarily
assign or alienate such funds, until such time as all
compensation and benefits required hereunder are paid and
provided. The determination of the extent of required
funding, including any supplemental funding in the event of
adverse investment performance of trust assets, shall be
made by an actuary or a certified public accountant retained
by each party. To the extent such professionals cannot
agree on the proper level of funding, they shall select a
third such professional whose determination shall be binding
upon the parties. Notwithstanding the foregoing, Mercer
shall remain liable for all compensation and benefits
required to be paid or provided hereunder.
(b) Alternate Security. In lieu of the right given to
the Executive under Subparagraph (a), he shall have the
right under such circumstances to require that Mercer
provide (i) an irrevocable standby letter of credit issued
by a financial institution other than the Company or any
Subsidiary of the Company with a senior debt credit rating
of "A" or better by Moody's Investors Service or Standard &
Poor's Corporation, or (ii) other security reasonably
acceptable to him, to secure the payment of such
compensation and benefits.
(c) Accelerated Payment of Present Value of Certain
Compensation. In the event the Executive's employment is
terminated without Cause or he terminates his employment for
Good Reason and a Change in Control has occurred as of the
Date of Termination or occurs thereafter, the Executive
shall have the continuing right to demand that the present
value of the remaining payments described in
Paragraphs 6(b)(1) through (3), and payable by reason of the
provisions of Paragraph 10 or 11 (as the case may be), be
paid to him in one lump sum within 30 days after the date
written demand is given. For purposes of calculating the
present value of such payments, a discount factor shall be
applied to each such payment which is equal to the relevant
applicable federal rate in effect on the date written demand
is given by him, determined by reference to the period of
time between the date of such notice and the scheduled time
such payment would otherwise be made. In the event any
payment described in Paragraphs 6(b)(1) through (3) is not
yet determinable on the date written demand is made, the
other payments shall nonetheless be made as provided above;
and the undetermined payment shall be made within 30 days
after it becomes determinable, calculated as provided in the
preceding sentence but by treating the date on which the
payment becomes determinable as the date of written notice.
Nothing in this subparagraph shall be construed as affecting
the Executive's right to one or more Gross-Up Payments in
accordance with the provisions of Paragraph 12; and a Gross-
Up Payment (if applicable) will be calculated and made with
any payment made under this subparagraph, as well as any
other Gross-Up Payments that may be required hereunder at a
subsequent date.
17. Withholding Taxes. All compensation and benefits
provided for herein shall, to the extent required by law, be
subject to federal, state, and local tax withholding.
18. Confidential Information. The Executive agrees that
subsequent to his employment with Mercer, he will not, at any
time, communicate or disclose to any unauthorized person, without
the written consent of the Mercer, any proprietary or other
confidential information concerning the Company or any Subsidiary
of the Company; provided, however, that the obligations under
this paragraph shall not apply to the extent that such matters
(i) are disclosed in circumstances where the Executive is legally
obligated to do so, or (ii) become generally known to and
available for use by the public otherwise than by his wrongful
act or omission; and provided further, that he may disclose any
knowledge of insurance, financial, legal and economic principles,
concepts and ideas which are not solely and exclusively derived
from the business plans and activities of Mercer.
19. Covenants Not to Compete or to Solicit.
(a) Noncompetition. If the Executive's employment
terminates under Paragraph 8 or 9 prior to a Change in
Control, he agrees that for a period of 12 months after the
Date of Termination he will not, without the written consent
in writing of the Board of Directors of the Company, become
an officer, employee, agent, partner, director, or a four
and nine-tenths percent or greater shareholder or equity
owner of any entity engaged in the property and casualty
insurance business with its corporate headquarters located
within New Jersey. If at the time of the enforcement of
this paragraph a court holds that the duration, scope, or
area restrictions stated herein are unreasonable under the
circumstances then existing and, thus, unenforceable, Mercer
and the Executive agree that the maximum duration, scope, or
area reasonable under such circumstances shall be
substituted for the stated duration, scope, or area.
(b) Nonsolicitation. During his employment and for a
period of 12 months following the Date of Termination, the
Executive shall not, whether on his own behalf or on behalf
of any other individual or business entity, solicit,
endeavor to entice away from the Company, a Subsidiary or
any affiliated company, or otherwise interfere with the
relationship of the Company, a Subsidiary or any affiliated
company with any person who is, or was within the then most
recent 12 month period, an employee or associate thereof;
provided, however, that this subparagraph shall not apply
following the occurrence of a Change in Control.
20. Arbitration. To the extent permitted by applicable
law, any controversy or dispute arising out of or relating to
this Agreement, or any alleged breach hereof, shall be settled by
arbitration in Pennington, New Jersey, in accordance with the
commercial rules of the American Arbitration Association then in
existence (to the extent such rules are not inconsistent with the
provisions of this Agreement), it being understood and agreed
that the arbitration panel shall consist of three individuals
acceptable to the parties hereto. In the event that the parties
cannot agree on three arbitrators within 20 days following
receipt by one party of a demand for arbitration from another
party, then the Executive and Mercer shall each designate one
arbitrator and the two arbitrators selected shall select the
third arbitrator. The arbitration panel so selected shall
convene a hearing no later than 90 days following the selection
of the panel. The arbitration award shall be final and binding
upon the parties, and judgment may be entered thereon in the
Pennsylvania Court of Common Pleas or in any other court of
competent jurisdiction.
21. Additional Equitable Remedy. The Executive
acknowledges and agrees that Mercer's remedy at law for a breach
or a threatened breach of the provisions of Paragraphs 18 and 19
would be inadequate; and, in recognition of this fact and
notwithstanding the provisions of Paragraph 20, in the event of
such a breach or threatened breach by him, it is agreed that
Mercer shall be entitled to request equitable relief in the form
of specific performance, temporary restraining order, temporary
or permanent injunction, or any other equitable remedy which may
then be available. Nothing in this paragraph shall be construed
as prohibiting Mercer from pursuing any other remedy available
under this Agreement for such a breach or threatened breach.
22. Related Agreements. Except as may otherwise be
provided herein, to the extent that any provision of any other
agreement between Mercer and the Executive shall limit, qualify,
duplicate, or be inconsistent with any provision of this
Agreement, the provision in this Agreement shall control and such
provision of such other agreement shall be deemed to have been
superseded, and to be of no force or effect, as if such other
agreement had been formally amended to the extent necessary to
accomplish such purpose.
23. No Effect on Other Rights. Except as otherwise
specifically provided herein, nothing contained in this Agreement
shall be construed as adversely affecting any rights the
Executive may have under any agreement, plan, policy or
arrangement to the extent any such right is not inconsistent with
the provisions hereof.
24. Exclusive Rights and Remedy. Except for any explicit
rights and remedies the Executive may have under any other
contract, plan or arrangement with Mercer, the compensation and
benefits payable hereunder and the remedy for enforcement thereof
shall constitute his exclusive rights and remedy in the event of
his termination of employment.
25. Director and Officer Liability Insurance;
Indemnification. Mercer shall provide the Executive (including
his heirs, executors, and administrators) with coverage under a
standard directors' and officers' liability insurance policy, at
Mercer's expense, in amounts consistent with amounts provided by
peer corporations to their directors and officers, and shall
indemnify him as both a director and as an officer (and his
heirs, executors, and administrators) to the fullest extent
permitted under Pennsylvania law against all expenses and
liabilities reasonably incurred by him in connection with or
arising out of any action, suit, or proceeding in which he may be
involved by reason of his having been an officer or director of
Mercer or any Subsidiary or affiliated company (whether or not he
continues to be such an officer or director at the time of
incurring such expenses or liabilities). Such expenses and
liabilities shall include, but not be limited to, judgments,
court costs, and attorneys' fees, and the costs of reasonable
settlements.
26. Notices. Any notice required or permitted under this
Agreement shall be sufficient if it is in writing and shall be
deemed given (i) at the time of personal delivery to the
addressee, or (ii) at the time sent certified mail, with return
receipt requested, addressed as follows:
If to the Executive--
Mr. William C. Hart
455 Federal City Road
Pennington, NJ 08534
If to Mercer, or the Company--
10 North Highway 31
P.O. Box 278
Pennington, NJ 08534
Attention: Chairman of the Board of Directors
The name or address of any addressee may be changed at any time
and from time to time by notice similarly given.
27. No Waiver. The failure by any party to this Agreement
at any time or times hereafter to require strict performance by
any other party of any of the provisions, terms, or conditions
contained in this Agreement shall not waive, affect, or diminish
any right of the first party at any time or times thereafter to
demand strict performance therewith and with any other provision,
term, or condition contained in this Agreement. Any actual
waiver of a provision, term, or condition contained in this
Agreement shall not constitute a waiver of any other provision,
term, or condition herein, whether prior or subsequent to such
actual waiver and whether of the same or a different type. The
failure of Mercer to promptly terminate the Executive's
employment for Cause or the Executive to promptly terminate his
employment for Good Reason shall not be construed as a waiver of
the right of termination, and such right may be exercised at any
time following the occurrence of the event giving rise to such
right.
28. Joint and Several Obligations of Mercer and the
Company. Mercer and the Company shall be jointly and severally
liable for all compensation and benefits that may become payable
hereunder to or on behalf of the Executive or, if applicable, his
surviving spouse, estate or beneficiaries.
29. Survival. Notwithstanding the nominal termination of
this Agreement and the Executive's employment hereunder, the
provisions hereof which specify continuing obligations,
compensation and benefits, and rights (including the otherwise
applicable term hereof) shall remain in effect until such time as
all such obligations are discharged, all such compensation and
benefits are received, and no party or beneficiary has any
remaining actual or contingent rights hereunder.
30. Severability. In the event any provision in this
Agreement shall be held illegal or invalid for any reason, such
illegal or invalid provision shall not affect the remaining
provisions hereof, and this Agreement shall be construed,
administered and enforced as though such illegal or invalid
provision were not contained herein.
31. Binding Effect and Benefit. The provisions of this
Agreement shall be binding upon and shall inure to the benefit of
the successors and assigns of Mercer and the executors, personal
representatives, surviving spouse, heirs, devisees, and legatees
of the Executive.
32. Entire Agreement. This Agreement embodies the entire
agreement among the parties with respect to the subject matter
hereof, and it supersedes all prior discussions and oral
understandings of the parties with respect thereto.
33. No Assignment. This Agreement, and the benefits and
obligations hereunder, shall not be assignable by any party
hereto except by operation of law.
34. No Attachment. Except as otherwise provided by law, no
right to receive compensation or benefits under this Agreement
shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to
set off, execution, attachment, levy, or similar process, and any
attempt, voluntary or involuntary, to effect any such action
shall be null and void.
35. Captions. The captions of the several paragraphs and
subparagraphs of this Agreement have been inserted for
convenience of reference only. They constitute no part of this
Agreement and are not to be considered in the construction
hereof.
36. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed one and the
same instrument which may be sufficiently evidenced by any one
counterpart.
37. Number. Wherever any words are used herein in the
singular form, they shall be construed as though they were used
in the plural form, as the context requires, and vice versa.
38. Applicable Law. Except to the extent preempted by
federal law, the provisions of this Agreement shall be construed,
administered, and enforced in accordance with the domestic
internal law of the State of New Jersey.
39. Guarantee. The business entities executing this
Agreement as Guarantor shall be liable as payment guarantors of
the obligations of Mercer and the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this
Agreement, or caused it to be executed, as of the date first
above written.
/s/ William C. Hart (SEAL)
William C. Hart
MERCER MUTUAL INSURANCE COMPANY
By /s/Andrew R. Speaker
Attest: /s/ Marion Crum
MERCER INSURANCE GROUP, INC.
By /s/ Andrew R. Speaker
Attest: /s/ Marion Crum
<PAGE>
APPENDIX 1
The parties hereto acknowledge that the corporate
reorganization of Mercer (pursuant to which Mercer will
demutualize under Pennsylvania law) and certain other related
transactions involving Mercer have not occurred as of the date of
this Agreement, so that literal application of the terms of this
Agreement prior thereto may be inappropriate or otherwise not
feasible. Accordingly, pending the occurrence of such
demutualizations and related transactions, the parties agree that
this Agreement shall be construed, administered and enforced, to
the maximum extent practical, in a manner consistent with the
spirit and reasonably inferable intent hereof.
<PAGE>
GLOSSARY
"Board of Directors" means the board of directors of the
relevant corporation.
"Cause" means (i) a documented repeated and willful failure
by the Executive to perform his duties, but only after written
demand and only if termination is effected by action taken by a
vote of (A) prior to a Change in Control, at least a majority of
the directors of the Company then in office, or (B) after a
Change in Control, at least 80% of the nonofficer directors of
the Company then in office, (ii) his final conviction of a
felony, (iii) conduct by him which constitutes moral turpitude
which is directly and materially injurious to the Company or any
Subsidiary or affiliated company, (iv) willful material violation
of corporate policy, or (v) the issuance by the regulator of the
Company or any Subsidiary or affiliated company of an
unappealable order to the effect that he be permanently
discharged.
For purposes of this definition, no act or failure to act on the
part of the Executive shall be considered "willful" unless done
or omitted not in good faith and without reasonable belief that
the action or omission was in the best interest of the Company or
any of its Subsidiaries or affiliated companies.
"Change in Control" means the occurrence of any of the
following events:
(a) any Person (except (i) the Company or any
Subsidiary or prior affiliate of the Company, or (ii) any
Employee Benefit Plan (or any trust forming a part thereof)
maintained by the Company or any Subsidiary or prior
affiliate of the Company) is or becomes the beneficial
owner, directly or indirectly, of the Company's securities
representing 19.9% or more of the combined voting power of
the Company's then outstanding securities, or 50.1% or more
of the combined voting power of a Material Subsidiary's then
outstanding securities, other than pursuant to a transaction
described in Clause (c);
(b) there occurs a sale, exchange, transfer or other
disposition of substantially all of the assets of the
Company or a Material Subsidiary to another entity, except
to an entity controlled directly or indirectly by the
Company;
(c) there occurs a merger, consolidation, share
exchange, division or other reorganization of or relating to
the Company, unless--
(i) the shareholders of the Company immediately
before such merger, consolidation, share exchange,
division or reorganization own, directly or indirectly,
immediately thereafter at least two-thirds of the
combined voting power of the outstanding voting
securities of the Surviving Company in substantially
the same proportion as their ownership of the voting
securities immediately before such merger,
consolidation, share exchange, division or
reorganization; and
(ii) the individuals who, immediately before such
merger, consolidation, share exchange, division or
reorganization, are members of the Incumbent Board
continue to constitute at least two-thirds of the board
of directors of the Surviving Company; provided,
however, that if the election, or nomination for
election by the Company's shareholders, of any new
director was approved by a vote of at least two-thirds
of the Incumbent Board, such director shall, for the
purposes hereof, be considered a member of the
Incumbent Board; and provided further, however, that no
individual shall be considered a member of the
Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened
Election Contest or Proxy Contest, including by reason
of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; and
(iii) no Person (except (A) the Company or any
Subsidiary or prior affiliate of the Company, (B) any
Employee Benefit Plan (or any trust forming a part
thereof) maintained by the Company or any Subsidiary or
prior affiliate of the Company, or (C) the Surviving
Company or any Subsidiary or prior affiliate of the
Surviving Company) has beneficial ownership of 19.9% or
more of the combined voting power of the Surviving
Company's outstanding voting securities immediately
following such merger, consolidation, share exchange,
division or reorganization;
(d) a plan of liquidation or dissolution of the
Company, other than pursuant to bankruptcy or insolvency
laws, is adopted; or
(e) during any period of two consecutive years,
individuals who, at the beginning of such period,
constituted the Board of Directors of the Company cease for
any reason to constitute at least a majority of such Board
of Directors, unless the election, or the nomination for
election by the Company's shareholders, of each new director
was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the
beginning of the period; provided, however, that no
individual shall be considered a member of the Board of
Directors of the Company at the beginning of such period if
such individual initially assumed office as a result of
either an actual or threatened Election Contest or Proxy
Contest, including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest.
Notwithstanding the foregoing, a Change in Control shall not be
deemed to have occurred if a Person becomes the beneficial owner,
directly or indirectly, of securities representing 19.9% or more
of the combined voting power of the Company's then outstanding
securities solely as a result of an acquisition by the Company of
its voting securities which, by reducing the number of shares
outstanding, increases the proportionate number of shares
beneficially owned by such Person; provided, however, that if a
Person becomes a beneficial owner of 19.9% or more of the
combined voting power of the Company's then outstanding
securities by reason of share repurchases by the Company and
thereafter becomes the beneficial owner, directly or indirectly,
of any additional voting securities of the Company, then a Change
in Control shall be deemed to have occurred with respect to such
Person under Clause (a).
Notwithstanding anything contained herein to the contrary, if the
Executive's employment is terminated and he reasonably
demonstrates that such termination (i) was at the request of a
third party who has indicated an intention of taking steps
reasonably calculated to effect a Change in Control and who
effects a Change in Control, or (ii) otherwise occurred in
connection with, or in anticipation of, a Change in Control which
actually occurs, then for all purposes hereof, a Change in
Control shall be deemed to have occurred on the day immediately
prior to the date of such termination of his employment.
"Company" means Mercer Insurance Group, Inc., a Pennsylvania
(stock) corporation, and any successor thereto.
"Date of Termination" means:
(a) if the Executive's employment is terminated for
Disability, 30 days after the Notice of Termination is given
(provided that he shall not have returned to the performance
of his duties on a full-time basis during such 30-day
period);
(b) if the Executive's employment terminates by reason
of his death, the date of his death;
(c) if the Executive's employment is terminated by
Mercer for Cause, the date specified in the Notice of
Termination;
(d) if the Executive's employment is terminated by him
without Good Reason, the date specified in the Notice of
Termination;
(e) if the Executive's employment is terminated by
Mercer for any reason other than for Disability or Cause,
the date specified in the Notice of Termination; or
(f) if the Executive's employment is terminated by him
for Good Reason, the date specified in the Notice of
Termination;
provided, however that the Date of Termination shall mean the
actual date of termination in the event the parties mutually
agree to a date other than that described above.
"Defined Benefit Plan" has the meaning ascribed to such term
in Section 3(35) of ERISA.
"Defined Contribution Plan" has the meaning ascribed to such
term in Section 3(34) of ERISA.
"Disability" has the meaning ascribed to the term "permanent
and total disability" in Section 22(e)(3) of the IRC.
"Election Contest" means a solicitation with respect to the
election or removal of directors that is subject to the
provisions of Rule 14a-11 of the 1934 Act.
"Employee Benefit Plan" has the meaning ascribed to such
term in Section 3(3) of ERISA.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended and as the same may be amended from time to
time.
"Excise Tax" means the tax imposed by Section 4999 of the
IRC (or any similar tax that may hereafter be imposed by federal,
state or local law).
"Executive" means William C. Hart, an individual residing in
Pennington, New Jersey.
"Good Reason" means:
(a) prior to a Change in Control--
(i) a change in the Executive's status or
position, or any material diminution in his duties or
responsibilities;
(ii) a reduction in the Executive's base
compensation, other than a reduction which is
proportionate to a company-wide reduction in executive
pay;
(iii) a failure to increase the Executive's base
compensation, consistent with his performance rating,
within 24 months since the last increase, other than
similar treatment on a company-wide basis for
executives or a voluntary deferral by him of an
increase;
(iv) delivery to the Executive of a Notice of
Nonextension; or
(v) any purported termination of the Executive's
employment which is not in accordance with the terms of
this Agreement; and
(b) after a Change in Control--
(i) a change in the Executive's status or
position, or any material diminution in his duties or
responsibilities;
(ii) any increase in the Executive's duties
inconsistent with his position;
(iii) any reduction in the Executive's base
compensation;
(iv) a failure to increase the Executive's base
compensation, consistent with his performance review,
within 12 months of the last increase; or a failure to
consider Executive for an increase within 12 months of
his last performance review;
(v) a failure to continue in effect any Employee
Benefit Plan in which the Executive participates,
including (whether or not they constitute Employee
Benefit Plans) incentive bonus, stock option, or other
qualified or nonqualified plans of deferred
compensation (A) other than as a result of the normal
expiration of such a plan, or (B) unless such plan is
merged or consolidated into, or replaced with, a plan
with benefits which are of equal or greater value;
(vi) requiring the Executive to be based anywhere
other than the county where his principal office was
located immediately prior to the Change in Control;
(vii) refusal to allow the Executive to attend to
matters or engage in activities in which he was
permitted to engage prior to the Change in Control;
(viii) delivery to the Executive of a Notice of
Nonextension;
(ix) failure to secure the affirmation by a
Successor, within three business days prior to a Change
in Control, of this Agreement and its or Mercer's
continuing obligations hereunder (or where there is not
at least three business days advance notice that a
Person may become a Successor, within one business day
after having notice that such Person may become or has
become a Successor); or
(x) any purported termination of the Executive's
employment which is not in accordance with the terms of
this Agreement.
Notwithstanding anything herein to the contrary, at the election
of the Executive, beginning with the 181st day following a Change
in Control and continuing through the first anniversary of such
Change in Control, he may terminate his employment for any reason
or no reason and such termination will be treated as having
occurred for Good Reason.
"Gross-Up Payment" means an additional payment to be made to
or on behalf of the Executive in an amount such that the net
amount retained by him, after deduction of any Excise Tax on the
Total Payments and any federal, state, and local income tax and
Excise Tax on such additional payment, equals the Total Payments.
"Incumbent Board" means the Board of Directors of the
Company as constituted at any relevant time.
"IRC" means the Internal Revenue Code of 1986, as amended
and as the same may be amended from time to time.
"Material Subsidiary" means a Subsidiary whose net worth,
determined under generally accepted accounting principles, at the
fiscal year end immediately prior to any relevant time is at
least 25% of the aggregate net worth of the controlled group of
corporations of which the Company is the common parent.
"1934 Act" means the Securities Exchange Act of 1934, as
amended and as the same may be amended from time to time.
"Mercer" means, prior to conversion from mutual to stock
form, Mercer Mutual Insurance Company, and after conversion from
mutual to stock form, Mercer Insurance Company.
"Notice of Extension" means a written notice delivered to or
by the Executive which advises that the Agreement will be
extended as provided in Paragraph 3.
"Notice of Termination" means a written notice that
(i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so
indicated, and (iii) gives the required advance notice of
termination.
"Person" has the same meaning as such term has for purposes
of Sections 13(d) and 14(d) of the 1934 Act.
"Proxy Contest" means the solicitation of proxies or
consents by or on behalf of a Person other than the Board of
Directors of the Company.
"Subsidiary" means any business entity of which a majority
of its voting power or its equity securities or equity interests
is owned, directly or indirectly by the Company.
"Successor" means any Person that succeeds to, or has the
practical ability to control (either immediately or with the
passage of time), Mercer's business directly, by merger or
consolidation, or indirectly, by purchase of Mercer's voting
securities or all or substantially all of its assets.
"Surviving Company" means the business entity that is a
resulting company following a merger, consolidation, share
exchange, division or other reorganization of or relating to the
Company.
"Total Payments" means the compensation and benefits that
become payable under the Agreement or otherwise (and which may be
subject to an Excise Tax) by reason of the Executive's
termination of employment, determined without regard to any
Gross-Up Payments that may also be made.
"Welfare Benefit Plan" has the meaning ascribed to the term
"employee welfare benefit plan" in Section 3(1) of ERISA. For
purposes of determining the Executive's or his dependents' right
to continued welfare benefits hereunder following his termination
of employment, the meaning of such term shall include any retiree
health plan maintained by Mercer at any time after the relevant
Date of Termination, notwithstanding the fact that the Executive
is not a participant therein prior to such date.
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of October, 1997, by and
between MERCER MUTUAL INSURANCE COMPANY, a Pennsylvania
corporation, MERCER INSURANCE GROUP, INC., a Pennsylvania
corporation, and ANDREW R. SPEAKER.
Mercer Mutual Insurance Company and Mercer Group, Inc. both
desire to employ Mr. Speaker, and Mr. Speaker is willing to serve
Mercer Mutual Insurance Company and Mercer Insurance Group, Inc.
on the terms and conditions herein provided.
In order to effect the foregoing, the parties hereto desire
to enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises
and the respective covenants and agreements of the parties
contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions and Special Provisions. Each capitalized
word and term used herein shall have the meaning ascribed to it
in the glossary appended hereto, unless the context in which such
word or term is used otherwise clearly requires. Such glossary
is incorporated herein by reference and made a part hereof. In
addition, until such time as Mercer converts from mutual to stock
form and the Company acquires all of the common stock, the
provisions set forth at Appendix 1 shall apply, notwithstanding
anything in this Agreement to the contrary.
2. Employment. Mercer hereby agrees to employ the
Executive, and the Executive hereby agrees to serve Mercer, on
the terms and conditions set forth herein.
3. Term of Agreement. The Executive's employment under
this Agreement shall commence on the date hereof and, except as
otherwise provided herein, shall continue until October 1, 2000;
provided, however, that commencing on October 1, 1998 and each
October 1 thereafter, the term of this Agreement shall
automatically be extended for one additional year beyond the term
otherwise established unless, prior to such October 1st date,
Mercer shall not have given a Notice of Extension.
4. Position and Duties. The Executive shall serve as
Executive Vice President and Chief Operating Officer of Mercer
and the Company, and he shall have such responsibilities, duties
and authority as may, from time to time, be generally associated
with such positions. In addition, the Executive shall serve in
such capacity, with respect to each Subsidiary or affiliated
company, as the Board of Directors of each such Subsidiary or
affiliated company shall designate from time to time. During the
term of this Agreement, he shall devote substantially all of his
working time and efforts to the business and affairs of Mercer,
the Subsidiaries and affiliated companies; provided, however,
that nothing herein shall be construed as precluding him from
devoting a reasonable amount of time to civic, charitable, trade
association, and similar activities, at least to the extent he is
presently devoting time.
5. Compensation and Related Matters.
(a) Base Compensation. During the period of the
Executive's employment hereunder, Mercer shall pay to him
annual base compensation as follows:
(i) For the period from October 1, 1997 to
March 31, 1998, at a rate not less than $115,000;
(ii) For the period from April 1, 1998 to
September 30, 1998, at an annual rate not less than
$125,000; and
(iii) For the period beginning October 1, 1998,
at an annual rate not less than $135,000.
Thereafter, the Board(s) of Directors of Mercer shall
periodically review the Executive's employment performance,
in accordance with policies generally in effect from time to
time, for possible merit or cost-of-living increases in such
base compensation. Except for a reduction which is
proportionate to a company-wide reduction in executive pay,
the annual base compensation paid to the Executive in any
period shall not be less than the annual base compensation
paid to him in any prior period. The frequency and manner
of payment of such base compensation shall be in accordance
with Mercer's executive payroll practices from time to time
in effect. Nothing herein shall be construed as precluding
the Executive from entering into any salary reduction or
deferral plan or arrangement during the term of this
Agreement; provided, however, that his base compensation
shall be determined without regard to any such salary
reduction or deferral for purposes of calculating the amount
of any compensation and benefits to which he or his
surviving spouse may be entitled under Paragraph 6, 7, 10,
or 11 following his termination of employment. The amounts
set forth in the first sentence of this subparagraph shall
be pro rated to the extent such period is less than a year.
(b) Incentive Compensation. During the period of the
Executive's employment hereunder, he shall be entitled to
participate in all incentive plans, stock option plans,
stock appreciation rights plans, and similar arrangements
maintained by Mercer for executive officers on a basis and
at award levels consistent and commensurate with his
position and duties hereunder.
(c) Employee Benefit Plans and Other Plans or
Arrangements. The Executive shall be entitled to
participate in all Employee Benefit Plans of Mercer on the
same basis as other executive officers of Mercer. In
addition, he shall be entitled to participate in and enjoy
any other plans and arrangements which provide for sick
leave, vacation, sabbatical, or personal days,
company-provided automobile, club memberships and dues,
education payment or reimbursement, business-related
seminars, and similar fringe benefits provided to or for the
executive officers of Mercer from time to time, but at least
to the extent he is presently entitled to participate in and
enjoy such plans and arrangements.
(d) Expenses. During the period of the Executive's
employment hereunder, he shall be entitled to receive prompt
reimbursement for all reasonable and customary expenses,
including transportation expenses, incurred by him in
performing services hereunder in accordance with the general
policies and procedures established by Mercer.
6. Termination By Reason of Disability.
(a) In General. In the event the Executive becomes
unable to perform his duties on a full-time basis by reason
of the occurrence of his Disability and, within 30 days
after a Notice of Termination is given, he shall not have
returned to the full-time performance of such duties, his
employment may be terminated by Mercer.
(b) Compensation and Benefits. In the event of the
termination of the Executive's employment under Subparagraph
(a), Mercer shall pay or provide the compensation and
benefits set forth below:
(1) The Executive shall be paid an amount per
annum equal to the greater of (i) his highest base
compensation received during one of the two calendar
years immediately preceding the calendar year in which
the Date of Termination occurs, or (ii) his base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason) for
one year beginning with such Date of Termination. The
frequency and manner of payment of such amounts shall
be in accordance with Mercer's executive payroll
practices from time to time in effect.
(2) The Executive shall be paid an amount equal
to the higher of the aggregate bonus(es) paid to him
with respect to one of the two years immediately
preceding the year in which the Date of Termination
occurs. Such amount shall be paid to him in cash on
the first anniversary date of the Date of Termination.
(3) The Executive shall be paid an amount equal
to the highest annual contribution made on his behalf
(other than his own salary reduction contributions) to
each tax-qualified and non-qualified Defined
Contribution Plan of Mercer with respect to the year in
which the Date of Termination occurs or one of the two
years immediately preceding such year. The amount
separately determined for each such plan shall be
aggregated and shall be paid to him in cash on the
first anniversary date of the Date of Termination.
(4) The Executive shall accrue benefits equal to
the excess of (i) the aggregate retirement benefits he
would have received under the terms of each tax-
qualified and non-qualified Defined Benefit Plan of
Mercer as in effect immediately prior to the Date of
Termination had he (A) continued to be employed for one
more year, and (B) received (on a pro rated basis, as
appropriate) the greater of (I) the highest
compensation taken into account under each such plan
with respect to one of the two years immediately
preceding the year in which the Date of Termination
occurs, or (II) his annualized base compensation in
effect immediately prior to the Date of Termination (or
prior to any reduction which entitled him to terminate
his employment for Good Reason), over (ii) the
retirement benefits he actually receives under such
plans. The frequency, manner and extent of payment of
such benefits shall be consistent with the terms of the
plans to which they relate and any elections made
thereunder.
(5) The Executive and his eligible dependents
shall be entitled to continue to participate at the
same aggregate benefit levels, for one year and at no
out-of-pocket or tax cost to him, in the Welfare
Benefit Plans in which he was a participant immediately
prior to the Date of Termination, to the extent
permitted under the terms of such plans and applicable
law. To the extent Mercer is unable to provide for
continued participation in a Welfare Benefit Plan, it
shall provide an equivalent benefit directly at no
out-of-pocket or tax cost to him. For purposes of the
preceding two sentences, Mercer shall be deemed to have
provided a benefit at no tax cost to him if it pays an
additional amount to him or on his behalf, with respect
to those benefits which would otherwise be nontaxable
to him, calculated in a manner consistent with the
provisions of Paragraph 12.
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. Notwithstanding the provisions
of Subparagraph (b)(5), Mercer's obligation to pay or fund
any disability insurance premiums on behalf of the Executive
shall be suspended while his Disability continues, provided
the cessation of payment or funding does not result in the
termination of disability benefits. Any amounts otherwise
due under Subparagraph (b) shall be reduced (but not below
zero) by the dollar amount of disability benefits received
by him pursuant to plans or policies funded, directly at its
cost, by Mercer.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b)(5),
Mercer shall not be required to provide, at its cost, the
welfare benefits covered therein after the later of (i) the
attainment by the Executive and his spouse (if any) of age
65, or (ii) the date specified in the relevant plan document
for benefit termination (assuming that he was employed until
age 65 or the normal retirement date, if any, specified in
such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Disability and he is survived by a
spouse, the compensation and benefits remaining to be
paid and provided under Subparagraph (b) shall be
unaffected by his death and shall be paid and provided
to her or on her behalf; provided, however, that the
extent of her rights to the accrued benefits described
in Subparagraph (b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans; and provided further, that Mercer
shall not be required to provide continued benefits
with respect to her deceased husband; and provided
further, that in no event shall Mercer be required to
provide, at its cost, the other welfare benefits
described in Subparagraph (b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Disability and he is not survived by a
spouse, (i) Mercer shall thereafter make the remaining
payments described in Subparagraphs (b)(1) through
(b)(3) directly to his estate, (ii) the extent of the
rights of any person to the accrued benefits described
in Subparagraph (b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans, and (iii) Mercer's obligation to
provide continued benefits under Subparagraph (b)(5)
shall terminate.
(f) Compensation and Benefits Upon Expiration of
Remaining Term of Agreement. Upon the expiration of the
remaining term of this Agreement following the Executive's
termination for Disability, and provided his Disability then
continues, he shall be entitled to receive the compensation
and benefits provided under the terms of Mercer's long-term
disability plan in effect on the Date of Termination or, if
greater, at the expiration of such remaining term. Such
compensation and benefits shall continue until the earlier
of (i) his death, or (ii) the later of (A) his attainment of
age 65, or (B) the date specified in the plan document for
benefit termination. To the extent Mercer is unable to
provide such compensation and benefits under its long-term
disability plan, it shall provide equivalent compensation
and benefits directly at no out-of-pocket or tax cost to
him. For purposes of the preceding sentence, Mercer shall
be deemed to have provided compensation and benefits at no
tax cost to him if it pays an additional amount to him or on
his behalf, with respect to the compensation and benefits
which would otherwise be nontaxable to him, calculated in a
manner consistent with the provisions of Paragraph 12.
7. Termination By Reason of Death.
(a) Compensation and Benefits to Surviving Spouse. In
the event the Executive dies while he is employed under this
Agreement and is survived by a spouse, Mercer shall pay or
provide the compensation and benefits set forth below:
(1) The surviving spouse shall be paid an amount
equal to the greater of (i) the Executive's highest
base compensation received during one of the two
calendar years immediately preceding the calendar year
in which the Date of Termination occurs, or (ii) his
base compensation in effect immediately prior to the
Date of Termination (or prior to any reduction which
entitled him to terminate his employment for Good
Reason) for a period of one year, beginning with such
Date of Termination. The frequency and manner of
payment of such amounts shall be in accordance with
Mercer's executive payroll practices from time to time
in effect.
(2) The surviving spouse shall be paid an amount
equal to the highest payment made to Executive under
each incentive bonus plan of Mercer with respect to one
of the two years immediately preceding the year in
which the Date of Termination occurs. Such amount
shall be paid in cash to her within 30 days after the
Date of Termination.
(3) The surviving spouse shall be paid an amount
equal to the sum of the highest annual contribution
made on the Executive's behalf (other than his own
salary reduction contributions) to each tax-qualified
and non-qualified Defined Contribution Plan of Mercer
with respect to the year in which the Date of
Termination occurs or one of the two years immediately
preceding such year. Such amount shall be paid in cash
to her within 30 days after the Date of Termination or
within 30 days after such amount can first be
determined, whichever is later.
(4) Subject to the following sentence, the
surviving spouse shall be paid benefits determined by
reference to the excess of (i) the aggregate retirement
benefits the Executive would have accrued under the
terms of each tax-qualified and non-qualified Defined
Benefit Plan as in effect immediately prior to the Date
of Termination, had he (A) continued to be employed for
a period of one year following the Date of Termination,
and (B) received (on a pro rated basis, as appropriate)
the greater of (I) the highest compensation taken into
account under each such plan with respect to one of the
two years immediately preceding the year in which the
Date of Termination occurs, or (II) his annualized base
compensation in effect immediately prior to the Date of
Termination (or prior to any reduction which entitled
him to terminate his employment for Good Reason), over
(ii) the retirement benefits actually determined under
such plans. The frequency, manner, and extent of
payment of such benefits shall be consistent with the
terms of the plans to which they relate and any
elections made thereunder.
(5) The surviving spouse and her eligible
dependents shall be entitled to continue to participate
at the same aggregate benefit levels, for a period of
one year following the Date of Termination and at no
out-of-pocket or tax cost to her, in the Welfare
Benefit Plans in which the Executive was a participant
immediately prior to the Date of Termination, to the
extent permitted under the terms of such plans and
applicable law; provided, however, that Mercer shall
not be required to provide continued benefits with
respect to her deceased husband; and provided further,
that Mercer shall not thereafter be required to
provide, at its cost, the other welfare benefits
covered by such plans to such spouse and her eligible
dependents after the earlier of (i) her death, or
(ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming the Executive was
employed until age 65 or the normal retirement date, if
any, specified in such document). To the extent Mercer
is unable to provide for continued participation in a
Welfare Benefit Plan as required, it shall provide an
equivalent benefit directly at no out-of-pocket or tax
cost to her. For purposes of the preceding two
sentences, Mercer shall be deemed to have provided a
benefit at no tax cost to her if it pays an additional
amount to her or on her behalf, with respect to those
benefits which would otherwise be nontaxable to her,
calculated in a manner consistent with the provisions
of Paragraph 12.
(b) Compensation and Benefits to Estate, Etc. In the
event the Executive dies while he is employed under this
Agreement and is not survived by a spouse, (i) Mercer shall
make the payments described in Subparagraphs (a)(1) through
(a)(3) directly to his estate, (ii) the extent of the rights
of any person to the accrued benefits described in
Subparagraph (a)(4) shall be determined by reference to the
relevant plan provisions and any elections made under such
plans, and (iii) Mercer's obligation to provide benefits
under Subparagraph (a)(5) shall terminate.
8. Termination By Mercer for Cause.
(a) In General. In the event Mercer intends to
terminate the Executive's employment for Cause, it shall
deliver a Notice of Termination to him which specifies a
Date of Termination not less than 30 days following the date
of such notice, unless a shorter period of notice is
required by the principal regulator of the Company or any
affiliate of the Company.
(b) Compensation. Within 30 days after the
Executive's termination under Subparagraph (a), Mercer shall
pay him, in one lump sum, his accrued but unpaid base
compensation and vacation compensation earned through the
Date of Termination.
9. Termination By the Executive Without Good Reason.
(a) In General. In the event the Executive intends to
terminate his employment without Good Reason, he shall
deliver a Notice of Termination to Mercer which specifies a
Date of Termination not less than (i) 90 days following the
date of such notice, if a Change in Control shall not have
occurred, or (ii) 30 days following the date of such notice,
if a Change in Control shall have occurred.
(b) Compensation. Within 30 days after the
Executive's termination under Subparagraph (a), Mercer shall
pay him, in one lump sum, his accrued but unpaid base
compensation and vacation compensation earned through the
Date of Termination.
10. Termination By Mercer Without Disability or Cause.
(a) In General. In the event Mercer intends to
terminate the Executive's employment for any reason other
than Disability or Cause, it shall deliver a Notice of
Termination to him which specifies a Date of Termination not
less than 90 days following the date of such notice.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a), Mercer shall
pay or provide the compensation and benefits described in
Paragraph 6(b), except that all such compensation and
benefits shall be for the remaining term of this Agreement
and, with respect to Subparagraphs 6(b)(2) and (3), an
additional pro rated amount shall be paid to him in cash on
the last day of the remaining term of this Agreement. Such
pro rated amount shall be determined by reference to a
fraction, the numerator of which is the number of whole
months elapsed during the year in which termination occurs,
and the denominator of which is 12.
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. In the event the Executive
suffers a Disability during the remaining term of this
Agreement following the Date of Termination, Mercer's
obligation to pay or fund any disability insurance premiums
on his behalf shall be suspended while his Disability
continues, provided the cessation of payment or funding does
not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable
under Subparagraph (b) shall be reduced (but not below zero)
by the dollar amount of disability benefits received by him
pursuant to plans or policies funded, directly at its cost,
by Mercer.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b), Mercer
shall not be required to provide, at its cost, the welfare
benefits covered by Paragraph 6(b)(5) after the later of
(i) the attainment by the Executive and his spouse (if any)
of age 65, or (ii) the date specified in the relevant plan
document for benefit termination (assuming that he was
employed until age 65 or the normal retirement date, if any,
specified in such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination without Disability or Cause by Mercer and
he is survived by a spouse, the compensation and
benefits required to be paid and provided under
Subparagraph (b) shall be unaffected by his death and
shall be paid and provided to her or on her behalf;
provided, however, that the extent of her rights to the
accrued benefits described in Paragraph 6(b)(4) shall
be determined by reference to the relevant plan
provisions and any elections made under such plans; and
provided further, that Mercer shall not be required to
provide continued benefits with respect to her deceased
husband; and provided further, that in no event shall
Mercer be required to provide, at its cost, the other
welfare benefits described in Paragraph 6(b)(5) to such
spouse and her eligible dependents after the earlier of
(i) her death, or (ii) the later of (A) her attainment
of age 65, or (B) the date specified in the relevant
plan document for benefit termination (assuming that
the Executive was employed until age 65 or the normal
retirement date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination without Disability or Cause and he is not
survived by a spouse, (i) Mercer shall thereafter make
the remaining payments described in Paragraphs 6(b)(1)
through 6(b)(3) directly to his estate, (ii) the extent
of the rights of any person to the accrued benefits
described in Paragraph 6(b)(4) shall be determined by
reference to the relevant plan provisions and any
elections made under such plans, and (iii) Mercer's
obligation to provide the continued benefits described
in Paragraph 6(b)(5) shall terminate.
11. Termination By the Executive for Good Reason.
(a) In General. In the event the Executive intends to
terminate his employment for Good Reason, he shall deliver a
Notice of Termination to Mercer which specifies a Date of
Termination not less than 30 days following the date of such
notice.
(b) Compensation and Benefits During Remaining Term of
Agreement. In the event of the termination of the
Executive's employment under Subparagraph (a), Mercer shall
pay or provide the compensation and benefits described in
Paragraph 6(b), except that all such compensation and
benefits shall be for the remaining term of this Agreement
and, with respect to Subparagraphs 6(b)(2) and (3), an
additional pro rated amount shall be paid to him in cash on
the last day of the remaining term of this Agreement. Such
pro rated amount shall be determined by reference to a
fraction, the numerator of which is the number of whole
months elapsed during the year in which termination occurs,
and the denominator of which is 12.
(c) Adjustment to Certain Subparagraph (b)
Compensation and Benefits. In the event the Executive
suffers a Disability during the remaining term of this
Agreement following the Date of Termination, Mercer's
obligation to pay or fund any disability insurance premiums
on his behalf shall be suspended while his Disability
continues, provided the cessation of payment or funding does
not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable
under Subparagraph (b) shall be reduced (but not below zero)
by the dollar amount of disability benefits received by him
pursuant to plans or policies funded, directly at its cost,
to Mercer.
(d) Earlier Cessation of Certain Welfare Benefits.
Notwithstanding the provisions of Subparagraph (b), Mercer
shall not be required to provide, at its cost, the welfare
benefits covered by Paragraph 6(b)(5) after the later of
(i) the attainment by the Executive and his spouse (if any)
of age 65, or (ii) the date specified in the relevant plan
document for benefit termination (assuming that he was
employed until age 65 or the normal retirement date, if any,
specified in such document).
(e) Death During Remaining Term of Agreement.
(1) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Good Reason and he is survived by a
spouse, the compensation and benefits required to be
paid and provided under Subparagraph (b) shall be
unaffected by his death and shall be paid and provided
to her or on her behalf; provided, however, that the
extent of her rights to the accrued benefits described
in Paragraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans; and provided further, that Mercer
shall not be required to provide continued benefits
with respect to her deceased husband; and provided
further, that in no event shall Mercer be required to
provide, at its cost, the other welfare benefits
described in Paragraph 6(b)(5) to such spouse and her
eligible dependents after the earlier of (i) her death,
or (ii) the later of (A) her attainment of age 65, or
(B) the date specified in the relevant plan document
for benefit termination (assuming that the Executive
was employed until age 65 or the normal retirement
date, if any, specified in such document).
(2) In the event the Executive dies during the
remaining term of this Agreement following his
termination for Good Reason and he is not survived by a
spouse, (i) Mercer shall thereafter make the remaining
payments described in Paragraphs 6(b)(1) through
6(b)(3) directly to his estate, (ii) the extent of the
rights of any person to the accrued benefits described
in Paragraph 6(b)(4) shall be determined by reference
to the relevant plan provisions and any elections made
under such plans, and (iii) Mercer's obligation to
provide the continued benefits described in Paragraph
6(b)(5) shall terminate.
12. Provisions Relating to Excise Taxes.
(a) In General. In the event the Executive becomes
liable, for any taxable year, for the payment of an Excise
Tax (because of a change in control) with respect to the
compensation and benefits payable by Mercer under this
Agreement or otherwise, Mercer shall make one or more
Gross-Up Payments to the Executive or on his behalf. The
amount of any Gross-Up Payment shall be calculated by a
certified public accountant or other tax professional
designated jointly by the Executive and Mercer. The
provisions of this paragraph shall apply with respect to the
Executive's surviving spouse or estate, where relevant.
(b) Methodology for Calculation of Gross-Up Payment.
For purposes of determining the amount of any Gross-Up
Payment, the Executive shall be deemed to pay income taxes
at the highest federal, state, and local marginal rates of
tax for the calendar year in which the Gross-Up Payment is
to be made, net of the maximum reduction in federal income
tax which could be obtained from the deduction of state and
local income taxes. In the event that the Excise Tax is
subsequently determined to be less than the amount taken
into account at the time the Gross-Up Payment was made, the
Executive shall repay to Mercer, at the time that the amount
of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to the
reduction (plus a portion of the Gross-Up Payment
attributable to the Excise Tax and the federal, state, and
local income taxes imposed on the portion of the Gross-Up
Payment being repaid by the Executive to the extent such
repayment results in a reduction in Excise Tax or federal,
state, or local income tax), plus interest on the amount of
such repayment. Such interest shall be calculated by using
the rate in effect under Section 1274(d)(1) of the IRC, on
the date the Gross-Up Payment was made, for debt instruments
with a term equal to the period of time which has elapsed
from the date the Gross-Up Payment was made to the date of
repayment. In the event that the Excise Tax is subsequently
determined to exceed the amount taken into account at the
time the Gross-Up Payment was made (including by reason of
any payment the existence or amount of which could not be
determined at the time of the Gross-Up Payment), Mercer
shall make an additional Gross-Up Payment with respect to
the excess at the time the amount thereof is finally
determined, plus interest calculated in a manner similar to
that described in the preceding sentence.
(c) Time of Payment. Any Gross-Up Payment provided
for herein shall be paid not later than the 30th day
following the payment of any compensation or the provision
of any benefit which causes such payment to be made;
provided, however, that if the amount of such payment cannot
be finally determined on or before such day, Mercer shall
pay on such day an estimate of the minimum amount of such
payment and shall pay the remainder of such payment
(together with interest calculated in a manner similar to
that described in Subparagraph (b)) as soon as the amount
thereof can be determined. In the event that the amount of
an estimated payment exceeds the amount subsequently
determined to have been due, such excess shall constitute a
loan by Mercer to the Executive, payable on the 30th day
after demand by Mercer (together with interest calculated in
a manner similar to that described in Subparagraph (b)).
(d) Notwithstanding the provisions of this
paragraph to the contrary, the actual amounts payable
hereunder as Gross-Up Payments shall be coordinated with any
similar amounts paid to the Executive under any other
contract, plan, or arrangement.
13. Fees and Expenses of the Executive. After a Change in
Control and except as provided in the following sentence, Mercer
shall pay, within 30 days following demand by the Executive, all
legal, accounting, actuarial, and related fees and expenses
incurred by him in connection with the enforcement of this
Agreement. An arbitration panel or a court of competent
jurisdiction shall be empowered to deny payment to the Executive
of such fees and expenses only if it determines that he
instituted a proceeding hereunder, or otherwise acted, in bad
faith.
14. Reduction for Compensation and Benefits Received Under
Mercer Severance Policy, Etc. Notwithstanding anything herein to
the contrary, in the event the Executive, his surviving spouse,
or any other person becomes entitled to continued compensation
and benefits hereunder by reason of the Executive's termination
of employment and, in addition, compensation or similar benefits
are payable under a severance policy, program or arrangement
maintained by Mercer (other than retirement plans), then the
compensation or benefits otherwise payable hereunder shall be
reduced by the compensation or benefits provided under such
severance policy, program or arrangement.
15. Mitigation. The Executive shall not be required to
mitigate the amount of any compensation or benefits which may
become payable hereunder by reason of his termination by seeking
other employment or otherwise, nor, except as otherwise provided
in the following sentence or elsewhere herein, shall the amount
of any such compensation or benefits be reduced by any
compensation or benefits received by the Executive as the result
of his employment by another employer. Notwithstanding anything
in this Agreement to the contrary, Mercer's obligation to provide
any medical and dental benefits hereunder may be suspended, with
the written concurrence of the Executive or, if applicable, his
surviving spouse during any period of time that such benefits are
being provided by reason of his or her employment.
16. Funding of Compensation and Benefits; Acceleration of
Certain Payments.
(a) Grantor Trust. In the event the Executive's
employment is terminated without Cause or he terminates his
employment for Good Reason and a Change in Control has
occurred as of the Date of Termination or occurs thereafter,
the Executive shall have the right to require Mercer to
establish a grantor trust (taxable to Mercer) and fund such
trust, on an actuarially sound basis, to provide the
compensation and benefits to which he is entitled hereunder,
other than those which may be paid pursuant to the
provisions of Subparagraph (c). The specific terms of such
trust shall be as agreed to by the parties in good faith;
provided, however, that the trustee shall be a financial
institution independent of Mercer; and provided further,
that in no event shall Mercer be entitled to withdraw funds
from the trust for its benefit, or otherwise voluntarily
assign or alienate such funds, until such time as all
compensation and benefits required hereunder are paid and
provided. The determination of the extent of required
funding, including any supplemental funding in the event of
adverse investment performance of trust assets, shall be
made by an actuary or a certified public accountant retained
by each party. To the extent such professionals cannot
agree on the proper level of funding, they shall select a
third such professional whose determination shall be binding
upon the parties. Notwithstanding the foregoing, Mercer
shall remain liable for all compensation and benefits
required to be paid or provided hereunder.
(b) Alternate Security. In lieu of the right given to
the Executive under Subparagraph (a), he shall have the
right under such circumstances to require that Mercer
provide (i) an irrevocable standby letter of credit issued
by a financial institution other than the Company or any
Subsidiary of the Company with a senior debt credit rating
of "A" or better by Moody's Investors Service or Standard &
Poor's Corporation, or (ii) other security reasonably
acceptable to him, to secure the payment of such
compensation and benefits.
(c) Accelerated Payment of Present Value of Certain
Compensation. In the event the Executive's employment is
terminated without Cause or he terminates his employment for
Good Reason and a Change in Control has occurred as of the
Date of Termination or occurs thereafter, the Executive
shall have the continuing right to demand that the present
value of the remaining payments described in
Paragraphs 6(b)(1) through (3), and payable by reason of the
provisions of Paragraph 10 or 11 (as the case may be), be
paid to him in one lump sum within 30 days after the date
written demand is given. For purposes of calculating the
present value of such payments, a discount factor shall be
applied to each such payment which is equal to the relevant
applicable federal rate in effect on the date written demand
is given by him, determined by reference to the period of
time between the date of such notice and the scheduled time
such payment would otherwise be made. In the event any
payment described in Paragraphs 6(b)(1) through (3) is not
yet determinable on the date written demand is made, the
other payments shall nonetheless be made as provided above;
and the undetermined payment shall be made within 30 days
after it becomes determinable, calculated as provided in the
preceding sentence but by treating the date on which the
payment becomes determinable as the date of written notice.
Nothing in this subparagraph shall be construed as affecting
the Executive's right to one or more Gross-Up Payments in
accordance with the provisions of Paragraph 12; and a Gross-
Up Payment (if applicable) will be calculated and made with
any payment made under this subparagraph, as well as any
other Gross-Up Payments that may be required hereunder at a
subsequent date.
17. Withholding Taxes. All compensation and benefits
provided for herein shall, to the extent required by law, be
subject to federal, state, and local tax withholding.
18. Confidential Information. The Executive agrees that
subsequent to his employment with Mercer, he will not, at any
time, communicate or disclose to any unauthorized person, without
the written consent of the Mercer, any proprietary or other
confidential information concerning the Company or any Subsidiary
of the Company; provided, however, that the obligations under
this paragraph shall not apply to the extent that such matters
(i) are disclosed in circumstances where the Executive is legally
obligated to do so, or (ii) become generally known to and
available for use by the public otherwise than by his wrongful
act or omission; and provided further, that he may disclose any
knowledge of insurance, financial, legal and economic principles,
concepts and ideas which are not solely and exclusively derived
from the business plans and activities of Mercer.
19. Covenants Not to Compete or to Solicit.
(a) Noncompetition. If the Executive's employment
terminates under Paragraph 8 or 9 prior to a Change in
Control, he agrees that for a period of 12 months after the
Date of Termination he will not, without the written consent
in writing of the Board of Directors of the Company, become
an officer, employee, agent, partner, director, or a four
and nine-tenths percent or greater shareholder or equity
owner of any entity engaged in the property and casualty
insurance business with its corporate headquarters located
within New Jersey. If at the time of the enforcement of
this paragraph a court holds that the duration, scope, or
area restrictions stated herein are unreasonable under the
circumstances then existing and, thus, unenforceable, Mercer
and the Executive agree that the maximum duration, scope, or
area reasonable under such circumstances shall be
substituted for the stated duration, scope, or area.
(b) Nonsolicitation. During his employment and for a
period of 12 months following the Date of Termination, the
Executive shall not, whether on his own behalf or on behalf
of any other individual or business entity, solicit,
endeavor to entice away from the Company, a Subsidiary or
any affiliated company, or otherwise interfere with the
relationship of the Company, a Subsidiary or any affiliated
company with any person who is, or was within the then most
recent 12 month period, an employee or associate thereof;
provided, however, that this subparagraph shall not apply
following the occurrence of a Change in Control.
20. Arbitration. To the extent permitted by applicable
law, any controversy or dispute arising out of or relating to
this Agreement, or any alleged breach hereof, shall be settled by
arbitration in Pennington, New Jersey, in accordance with the
commercial rules of the American Arbitration Association then in
existence (to the extent such rules are not inconsistent with the
provisions of this Agreement), it being understood and agreed
that the arbitration panel shall consist of three individuals
acceptable to the parties hereto. In the event that the parties
cannot agree on three arbitrators within 20 days following
receipt by one party of a demand for arbitration from another
party, then the Executive and Mercer shall each designate one
arbitrator and the two arbitrators selected shall select the
third arbitrator. The arbitration panel so selected shall
convene a hearing no later than 90 days following the selection
of the panel. The arbitration award shall be final and binding
upon the parties, and judgment may be entered thereon in the
Pennsylvania Court of Common Pleas or in any other court of
competent jurisdiction.
21. Additional Equitable Remedy. The Executive
acknowledges and agrees that Mercer's remedy at law for a breach
or a threatened breach of the provisions of Paragraphs 18 and 19
would be inadequate; and, in recognition of this fact and
notwithstanding the provisions of Paragraph 20, in the event of
such a breach or threatened breach by him, it is agreed that
Mercer shall be entitled to request equitable relief in the form
of specific performance, temporary restraining order, temporary
or permanent injunction, or any other equitable remedy which may
then be available. Nothing in this paragraph shall be construed
as prohibiting Mercer from pursuing any other remedy available
under this Agreement for such a breach or threatened breach.
22. Related Agreements. Except as may otherwise be
provided herein, to the extent that any provision of any other
agreement between Mercer and the Executive shall limit, qualify,
duplicate, or be inconsistent with any provision of this
Agreement, the provision in this Agreement shall control and such
provision of such other agreement shall be deemed to have been
superseded, and to be of no force or effect, as if such other
agreement had been formally amended to the extent necessary to
accomplish such purpose.
23. No Effect on Other Rights. Except as otherwise
specifically provided herein, nothing contained in this Agreement
shall be construed as adversely affecting any rights the
Executive may have under any agreement, plan, policy or
arrangement to the extent any such right is not inconsistent with
the provisions hereof.
24. Exclusive Rights and Remedy. Except for any explicit
rights and remedies the Executive may have under any other
contract, plan or arrangement with Mercer, the compensation and
benefits payable hereunder and the remedy for enforcement thereof
shall constitute his exclusive rights and remedy in the event of
his termination of employment.
25. Director and Officer Liability Insurance;
Indemnification. Mercer shall provide the Executive (including
his heirs, executors, and administrators) with coverage under a
standard directors' and officers' liability insurance policy, at
Mercer's expense, in amounts consistent with amounts provided by
peer corporations to their directors and officers, and shall
indemnify him as both a director and as an officer (and his
heirs, executors, and administrators) to the fullest extent
permitted under Pennsylvania law against all expenses and
liabilities reasonably incurred by him in connection with or
arising out of any action, suit, or proceeding in which he may be
involved by reason of his having been an officer or director of
Mercer or any Subsidiary or affiliated company (whether or not he
continues to be such an officer or director at the time of
incurring such expenses or liabilities). Such expenses and
liabilities shall include, but not be limited to, judgments,
court costs, and attorneys' fees, and the costs of reasonable
settlements.
26. Notices. Any notice required or permitted under this
Agreement shall be sufficient if it is in writing and shall be
deemed given (i) at the time of personal delivery to the
addressee, or (ii) at the time sent certified mail, with return
receipt requested, addressed as follows:
If to the Executive--
Mr. Andrew R. Speaker
7 Balsam Court
Newtown, Pennsylvania 18940
If to Mercer, or the Company--
10 North Highway 31
P.O. Box 278
Pennington, NJ 08534
Attention: Chairman of the Board of Directors
The name or address of any addressee may be changed at any time
and from time to time by notice similarly given.
27. No Waiver. The failure by any party to this Agreement
at any time or times hereafter to require strict performance by
any other party of any of the provisions, terms, or conditions
contained in this Agreement shall not waive, affect, or diminish
any right of the first party at any time or times thereafter to
demand strict performance therewith and with any other provision,
term, or condition contained in this Agreement. Any actual
waiver of a provision, term, or condition contained in this
Agreement shall not constitute a waiver of any other provision,
term, or condition herein, whether prior or subsequent to such
actual waiver and whether of the same or a different type. The
failure of Mercer to promptly terminate the Executive's
employment for Cause or the Executive to promptly terminate his
employment for Good Reason shall not be construed as a waiver of
the right of termination, and such right may be exercised at any
time following the occurrence of the event giving rise to such
right.
28. Joint and Several Obligations of Mercer and the
Company. Mercer and the Company shall be jointly and severally
liable for all compensation and benefits that may become payable
hereunder to or on behalf of the Executive or, if applicable, his
surviving spouse, estate or beneficiaries.
29. Survival. Notwithstanding the nominal termination of
this Agreement and the Executive's employment hereunder, the
provisions hereof which specify continuing obligations,
compensation and benefits, and rights (including the otherwise
applicable term hereof) shall remain in effect until such time as
all such obligations are discharged, all such compensation and
benefits are received, and no party or beneficiary has any
remaining actual or contingent rights hereunder.
30. Severability. In the event any provision in this
Agreement shall be held illegal or invalid for any reason, such
illegal or invalid provision shall not affect the remaining
provisions hereof, and this Agreement shall be construed,
administered and enforced as though such illegal or invalid
provision were not contained herein.
31. Binding Effect and Benefit. The provisions of this
Agreement shall be binding upon and shall inure to the benefit of
the successors and assigns of Mercer and the executors, personal
representatives, surviving spouse, heirs, devisees, and legatees
of the Executive.
32. Entire Agreement. This Agreement embodies the entire
agreement among the parties with respect to the subject matter
hereof, and it supersedes all prior discussions and oral
understandings of the parties with respect thereto.
33. No Assignment. This Agreement, and the benefits and
obligations hereunder, shall not be assignable by any party
hereto except by operation of law.
34. No Attachment. Except as otherwise provided by law, no
right to receive compensation or benefits under this Agreement
shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to
set off, execution, attachment, levy, or similar process, and any
attempt, voluntary or involuntary, to effect any such action
shall be null and void.
35. Captions. The captions of the several paragraphs and
subparagraphs of this Agreement have been inserted for
convenience of reference only. They constitute no part of this
Agreement and are not to be considered in the construction
hereof.
36. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed one and the
same instrument which may be sufficiently evidenced by any one
counterpart.
37. Number. Wherever any words are used herein in the
singular form, they shall be construed as though they were used
in the plural form, as the context requires, and vice versa.
38. Applicable Law. Except to the extent preempted by
federal law, the provisions of this Agreement shall be construed,
administered, and enforced in accordance with the domestic
internal law of the State of New Jersey.
39. Guarantee. The business entities executing this
Agreement as Guarantor shall be liable as payment guarantors of
the obligations of Mercer and the Company hereunder.
IN WITNESS WHEREOF, the parties have executed this
Agreement, or caused it to be executed, as of the date first
above written.
/s/ Andrew R. Speaker (SEAL)
Andrew R. Speaker
MERCER MUTUAL INSURANCE COMPANY
By/s/ William C. Hart
Attest: /s/ Marion Crum
MERCER INSURANCE GROUP, INC.
By /s/ William C. Hart
Attest:/s/ Marion Crum
<PAGE>
APPENDIX 1
The parties hereto acknowledge that the corporate
reorganization of Mercer (pursuant to which Mercer will
demutualize under Pennsylvania law) and certain other related
transactions involving Mercer have not occurred as of the date of
this Agreement, so that literal application of the terms of this
Agreement prior thereto may be inappropriate or otherwise not
feasible. Accordingly, pending the occurrence of such
demutualizations and related transactions, the parties agree that
this Agreement shall be construed, administered and enforced, to
the maximum extent practical, in a manner consistent with the
spirit and reasonably inferable intent hereof.
<PAGE>
GLOSSARY
"Board of Directors" means the board of directors of the
relevant corporation.
"Cause" means (i) a documented repeated and willful failure
by the Executive to perform his duties, but only after written
demand and only if termination is effected by action taken by a
vote of (A) prior to a Change in Control, at least a majority of
the directors of the Company then in office, or (B) after a
Change in Control, at least 80% of the nonofficer directors of
the Company then in office, (ii) his final conviction of a
felony, (iii) conduct by him which constitutes moral turpitude
which is directly and materially injurious to the Company or any
Subsidiary or affiliated company, (iv) willful material violation
of corporate policy, or (v) the issuance by the regulator of the
Company or any Subsidiary or affiliated company of an
unappealable order to the effect that he be permanently
discharged.
For purposes of this definition, no act or failure to act on the
part of the Executive shall be considered "willful" unless done
or omitted not in good faith and without reasonable belief that
the action or omission was in the best interest of the Company or
any of its Subsidiaries or affiliated companies.
"Change in Control" means the occurrence of any of the
following events:
(a) any Person (except (i) the Company or any
Subsidiary or prior affiliate of the Company, or (ii) any
Employee Benefit Plan (or any trust forming a part thereof)
maintained by the Company or any Subsidiary or prior
affiliate of the Company) is or becomes the beneficial
owner, directly or indirectly, of the Company's securities
representing 19.9% or more of the combined voting power of
the Company's then outstanding securities, or 50.1% or more
of the combined voting power of a Material Subsidiary's then
outstanding securities, other than pursuant to a transaction
described in Clause (c);
(b) there occurs a sale, exchange, transfer or other
disposition of substantially all of the assets of the
Company or a Material Subsidiary to another entity, except
to an entity controlled directly or indirectly by the
Company;
(c) there occurs a merger, consolidation, share
exchange, division or other reorganization of or relating to
the Company, unless--
(i) the shareholders of the Company immediately
before such merger, consolidation, share exchange,
division or reorganization own, directly or indirectly,
immediately thereafter at least two-thirds of the
combined voting power of the outstanding voting
securities of the Surviving Company in substantially
the same proportion as their ownership of the voting
securities immediately before such merger,
consolidation, share exchange, division or
reorganization; and
(ii) the individuals who, immediately before such
merger, consolidation, share exchange, division or
reorganization, are members of the Incumbent Board
continue to constitute at least two-thirds of the board
of directors of the Surviving Company; provided,
however, that if the election, or nomination for
election by the Company's shareholders, of any new
director was approved by a vote of at least two-thirds
of the Incumbent Board, such director shall, for the
purposes hereof, be considered a member of the
Incumbent Board; and provided further, however, that no
individual shall be considered a member of the
Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened
Election Contest or Proxy Contest, including by reason
of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; and
(iii) no Person (except (A) the Company or any
Subsidiary or prior affiliate of the Company, (B) any
Employee Benefit Plan (or any trust forming a part
thereof) maintained by the Company or any Subsidiary or
prior affiliate of the Company, or (C) the Surviving
Company or any Subsidiary or prior affiliate of the
Surviving Company) has beneficial ownership of 19.9% or
more of the combined voting power of the Surviving
Company's outstanding voting securities immediately
following such merger, consolidation, share exchange,
division or reorganization;
(d) a plan of liquidation or dissolution of the
Company, other than pursuant to bankruptcy or insolvency
laws, is adopted; or
(e) during any period of two consecutive years,
individuals who, at the beginning of such period,
constituted the Board of Directors of the Company cease for
any reason to constitute at least a majority of such Board
of Directors, unless the election, or the nomination for
election by the Company's shareholders, of each new director
was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the
beginning of the period; provided, however, that no
individual shall be considered a member of the Board of
Directors of the Company at the beginning of such period if
such individual initially assumed office as a result of
either an actual or threatened Election Contest or Proxy
Contest, including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy Contest.
Notwithstanding the foregoing, a Change in Control shall not be
deemed to have occurred if a Person becomes the beneficial owner,
directly or indirectly, of securities representing 19.9% or more
of the combined voting power of the Company's then outstanding
securities solely as a result of an acquisition by the Company of
its voting securities which, by reducing the number of shares
outstanding, increases the proportionate number of shares
beneficially owned by such Person; provided, however, that if a
Person becomes a beneficial owner of 19.9% or more of the
combined voting power of the Company's then outstanding
securities by reason of share repurchases by the Company and
thereafter becomes the beneficial owner, directly or indirectly,
of any additional voting securities of the Company, then a Change
in Control shall be deemed to have occurred with respect to such
Person under Clause (a).
Notwithstanding anything contained herein to the contrary, if the
Executive's employment is terminated and he reasonably
demonstrates that such termination (i) was at the request of a
third party who has indicated an intention of taking steps
reasonably calculated to effect a Change in Control and who
effects a Change in Control, or (ii) otherwise occurred in
connection with, or in anticipation of, a Change in Control which
actually occurs, then for all purposes hereof, a Change in
Control shall be deemed to have occurred on the day immediately
prior to the date of such termination of his employment.
"Company" means Mercer Insurance Group, Inc., a Pennsylvania
(stock) corporation, and any successor thereto.
"Date of Termination" means:
(a) if the Executive's employment is terminated for
Disability, 30 days after the Notice of Termination is given
(provided that he shall not have returned to the performance
of his duties on a full-time basis during such 30-day
period);
(b) if the Executive's employment terminates by reason
of his death, the date of his death;
(c) if the Executive's employment is terminated by
Mercer for Cause, the date specified in the Notice of
Termination;
(d) if the Executive's employment is terminated by him
without Good Reason, the date specified in the Notice of
Termination;
(e) if the Executive's employment is terminated by
Mercer for any reason other than for Disability or Cause,
the date specified in the Notice of Termination; or
(f) if the Executive's employment is terminated by him
for Good Reason, the date specified in the Notice of
Termination;
provided, however that the Date of Termination shall mean the
actual date of termination in the event the parties mutually
agree to a date other than that described above.
"Defined Benefit Plan" has the meaning ascribed to such term
in Section 3(35) of ERISA.
"Defined Contribution Plan" has the meaning ascribed to such
term in Section 3(34) of ERISA.
"Disability" has the meaning ascribed to the term "permanent
and total disability" in Section 22(e)(3) of the IRC.
"Election Contest" means a solicitation with respect to the
election or removal of directors that is subject to the
provisions of Rule 14a-11 of the 1934 Act.
"Employee Benefit Plan" has the meaning ascribed to such
term in Section 3(3) of ERISA.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended and as the same may be amended from time to
time.
"Excise Tax" means the tax imposed by Section 4999 of the
IRC (or any similar tax that may hereafter be imposed by federal,
state or local law).
"Executive" means William C. Hart, an individual residing in
Pennington, New Jersey.
"Good Reason" means:
(a) prior to a Change in Control--
(i) a change in the Executive's status or
position, or any material diminution in his duties or
responsibilities;
(ii) a reduction in the Executive's base
compensation, other than a reduction which is
proportionate to a company-wide reduction in executive
pay;
(iii) a failure to increase the Executive's base
compensation, consistent with his performance rating,
within 24 months since the last increase, other than
similar treatment on a company-wide basis for
executives or a voluntary deferral by him of an
increase;
(iv) delivery to the Executive of a Notice of
Nonextension; or
(v) any purported termination of the Executive's
employment which is not in accordance with the terms of
this Agreement; and
(b) after a Change in Control--
(i) a change in the Executive's status or
position, or any material diminution in his duties or
responsibilities;
(ii) any increase in the Executive's duties
inconsistent with his position;
(iii) any reduction in the Executive's base
compensation;
(iv) a failure to increase the Executive's base
compensation, consistent with his performance review,
within 12 months of the last increase; or a failure to
consider Executive for an increase within 12 months of
his last performance review;
(v) a failure to continue in effect any Employee
Benefit Plan in which the Executive participates,
including (whether or not they constitute Employee
Benefit Plans) incentive bonus, stock option, or other
qualified or nonqualified plans of deferred
compensation (A) other than as a result of the normal
expiration of such a plan, or (B) unless such plan is
merged or consolidated into, or replaced with, a plan
with benefits which are of equal or greater value;
(vi) requiring the Executive to be based anywhere
other than the county where his principal office was
located immediately prior to the Change in Control;
(vii) refusal to allow the Executive to attend to
matters or engage in activities in which he was
permitted to engage prior to the Change in Control;
(viii) delivery to the Executive of a Notice of
Nonextension;
(ix) failure to secure the affirmation by a
Successor, within three business days prior to a Change
in Control, of this Agreement and its or Mercer's
continuing obligations hereunder (or where there is not
at least three business days advance notice that a
Person may become a Successor, within one business day
after having notice that such Person may become or has
become a Successor); or
(x) any purported termination of the Executive's
employment which is not in accordance with the terms of
this Agreement.
Notwithstanding anything herein to the contrary, at the election
of the Executive, beginning with the 181st day following a Change
in Control and continuing through the first anniversary of such
Change in Control, he may terminate his employment for any reason
or no reason and such termination will be treated as having
occurred for Good Reason.
"Gross-Up Payment" means an additional payment to be made to
or on behalf of the Executive in an amount such that the net
amount retained by him, after deduction of any Excise Tax on the
Total Payments and any federal, state, and local income tax and
Excise Tax on such additional payment, equals the Total Payments.
"Incumbent Board" means the Board of Directors of the
Company as constituted at any relevant time.
"IRC" means the Internal Revenue Code of 1986, as amended
and as the same may be amended from time to time.
"Material Subsidiary" means a Subsidiary whose net worth,
determined under generally accepted accounting principles, at the
fiscal year end immediately prior to any relevant time is at
least 25% of the aggregate net worth of the controlled group of
corporations of which the Company is the common parent.
"1934 Act" means the Securities Exchange Act of 1934, as
amended and as the same may be amended from time to time.
"Mercer" means, prior to conversion from mutual to stock
form, Mercer Mutual Insurance Company, and after conversion from
mutual to stock form, Mercer Insurance Company.
"Notice of Extension" means a written notice delivered to or
by the Executive which advises that the Agreement will be
extended as provided in Paragraph 3.
"Notice of Termination" means a written notice that
(i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so
indicated, and (iii) gives the required advance notice of
termination.
"Person" has the same meaning as such term has for purposes
of Sections 13(d) and 14(d) of the 1934 Act.
"Proxy Contest" means the solicitation of proxies or
consents by or on behalf of a Person other than the Board of
Directors of the Company.
"Subsidiary" means any business entity of which a majority
of its voting power or its equity securities or equity interests
is owned, directly or indirectly by the Company.
"Successor" means any Person that succeeds to, or has the
practical ability to control (either immediately or with the
passage of time), Mercer's business directly, by merger or
consolidation, or indirectly, by purchase of Mercer's voting
securities or all or substantially all of its assets.
"Surviving Company" means the business entity that is a
resulting company following a merger, consolidation, share
exchange, division or other reorganization of or relating to the
Company.
"Total Payments" means the compensation and benefits that
become payable under the Agreement or otherwise (and which may be
subject to an Excise Tax) by reason of the Executive's
termination of employment, determined without regard to any
Gross-Up Payments that may also be made.
"Welfare Benefit Plan" has the meaning ascribed to the term
"employee welfare benefit plan" in Section 3(1) of ERISA. For
purposes of determining the Executive's or his dependents' right
to continued welfare benefits hereunder following his termination
of employment, the meaning of such term shall include any retiree
health plan maintained by Mercer at any time after the relevant
Date of Termination, notwithstanding the fact that the Executive
is not a participant therein prior to such date.
EXHIBIT 10.6
CONSULTANT'S AGREEMENT
AGREEMENT made this 1st day of April, 1994, between
MERCER MUTUAL INSURANCE COMPANY AND MERCER INSURANCE COMPANY,
with offices at 10 North Highway 31, Pennington, NJ 08534
(the"Companies") and ROLAND D. BOEHM, residing at 14 William
Barnes Road, Flemington, NJ 08822 ("Consultant").
WITNESSETH:
WHEREAS, the Companies desire that Roland D. Boehm act
as a consultant to the Companies; and
WHEREAS, Roland D. Boehm has agreed to become a
Consultant to the Companies;
NOW, THEREFORE, in consideration of the promises and
mutual covenants herein set forth and made and to be performed by
the parties hereto, it is covenanted and agreed as follows:
1. Term of Consultancy: The term of this Agreement
shall commence on April 1, 1994 and shall be subject to annual
renewal by the Companies.
2. Compensation: In consideration for entering into
this Agreement and for all services rendered and to be rendered
by the Consultant under the terms of this Agreement, the
Companies shall set an annual Consultant's fee as of April 1st
each year to be payable in monthly installments on the date of
the regular monthly Board meeting.
3. Duties: During the term of this Agreement the
Consultant shall undertake such duties and assignments as the
Companies and the Consultant deem appropriate including but not
limited to agency development, marketing, public relations and
reports to management.
4. Confidential Information: Consultant agrees that
any information received by Consultant in the course of his
duties and assignments hereunder will be treated by the
Consultant in full confidence and will not be revealed to any
other persons, firms or organizations.
5. Independent Contractor: Both the Companies and
the Consultant agree that the Consultant will act as an
independent contractor in the performance of his duties under
this Agreement. Accordingly, the Consultant shall be responsible
for payment of all taxes including Federal, State and Local taxes
arising out of the Consultant's activities in accordance with
this contract, including by way of illustration but not
limitation, Federal and State income tax, Social Security tax,
unemployment insurance taxes, and any other taxes or business
license fees as required.
6. Sale or Merger of the Companies: In the event of
any consolidation or merger of the Companies into or with another
firm or corporation, or the sale of all or substantially all of
the assets of the Companies to another firm or corporation, this
Agreement shall become null and void.
7. Expenses: In the event that the Consultant incurs
out-of-pocket expenses in connection with the performance by him
of consulting service to the Companies, the Companies will
reimburse the Consultant for such expenses; provided such
expenses are reasonable.
8. Other Agreements: The Consultant and the
Companies expressly covenant that this Agreement does not
conflict with any other agreement or contract between them and
any other entity and that there are no restrictions, contractual
or otherwise, upon the ability of the Consultant and the
Companies, to fulfill the terms of this Agreement.
9. Notice: Any and all notices required or permitted
to be given under the terms of this Agreement shall be sufficient
if in writing and forwarded to the parties hereto at the
addresses set forth herein by prepaid certified mail, as follows:
If to the Companies - Mercer Mutual Insurance Company, 10 North
Highway 31, Pennington, NJ 08534, and Mercer Insurance Company,
10 North Highway 31, Pennington, NJ 08534; if to the
Consultant - Roland D. Boehm, 14 William Barnes Road, Flemington,
NJ 08822.
10. Assignment of Interest: To the extent that the
obligations provided for herein require the personal performance
of the Consultant, the Consultant's rights, interests and
obligations as provided herein may not be assigned.
11. Modification of Agreement: This Agreement
contains the entire agreement between the parties and supersedes
any and all other agreements, written or oral, express or
implied, pertaining to the subject matter hereof. It may not be
changed orally, but only by written instruments signed by the
party against whom enforcement of any waiver, change,
modification or discharge is sought.
12. Governing Law: This Agreement shall be construed
and governed in all respects in accordance with the laws of the
State of New Jersey.
ATTEST: MERCER MUTUAL INSURANCE COMPANY
Seal
/s/ Marion J. Crum /s/ Richard G. Van Noy
Marion J. Crum Richard G. Van Noy
Secretary Chairman of the Board
ATTEST: MERCER INSURANCE COMPANY
Seal
/s/ Marion J. Crum /s/ Richard G. Van Noy
Marion J. Crum Richard G. Van Noy
Secretary Chairman of the Board
WITNESSETH:
/s/ William C. Hart /s/ Roland D. Boehm
William C. Hart Roland D. Boehm
EXHIBIT 10.7
CONSULTANT'S AGREEMENT
AGREEMENT made this 5th day of August, 1986, between
MERCER MUTUAL INSURANCE COMPANY and MERCER INSURANCE COMPANY,
with offices at 10 North Highway 31, P.O. Box 278, Pennington, NJ
08534 (the"Companies") and ERIC W. TURNER, JR., residing at
Patterson Avenue, R.D. 2, Box 173, Titusville, New Jersey 08560
("Consultant").
WITNESSETH:
WHEREAS, the Companies desire that Eric W. Turner, Jr.,
act as a consultant to the Companies; and
WHEREAS, Eric W. Turner, Jr. has agreed to become a
Consultant to the Companies;
NOW, THEREFORE, in consideration of the promises and
mutual covenants herein set forth and made and to be performed by
the parties hereto, it is covenanted and agreed as follows:
1. Term of Consultancy: The term of this Agreement
shall commence on April 1, 1987 and shall remain in full force
and effect unless and until terminated by the mutual consent of
both parties in writing.
2. Compensation: In consideration for entering into
this Agreement and for all services rendered and to be rendered
by the Consultant under the terms of this Agreement, the
Companies shall pay to the Consultant an annual sum of $6,000.00,
payable in equal monthly installments on the last day of each
calendar month. As additional consideration for entering into
this Agreement and for all services rendered to the Companies by
the Consultant during the term of this Agreement, the Companies,
upon the death of the Consultant, shall pay the Consultant's
wife, Ruth S. Turner, the annual sum of $6,000.00, payable in
equal monthly installments on the last day of each calendar month
for the remainder of her life.
3. Duties: During the term of this Agreement the
Consultant shall undertake such duties and assignments as the
Companies and the Consultant deem appropriate.
4. Confidential Information: Consultant agrees that
any information received by Consultant in the course of his
duties and assignments hereunder will be treated by the
Consultant in full confidence and will not be revealed to any
other persons, firms or organizations.
5. Independent Contractor: Both the Companies and
the Consultant agree that the Consultant will act as an
independent contractor in the performance of his duties under
this Agreement. Accordingly, the Consultant shall be responsible
for payment of all taxes including Federal, State and Local taxes
arising out of the Consultant's activities in accordance with
this contract, including by way of illustration but not
limitation, Federal and State income tax, Social Security tax,
unemployment insurance taxes, and any other taxes or business
license fees as required.
6. Sale or Merger of the Companies: In the event of
any consolidation or merger of the Companies into or with another
firm or corporation, or the sale of all or substantially all of
the assets of the Companies to another firm or corporation, the
acquiring firm or corporation shall assume this Agreement and
become obligated to perform all of the terms and conditions
herein set forth to be performed on the part of the Companies,
and the Consultant's obligations hereunder shall continue in
favor of the acquiring firm or corporation.
7. Expenses: In the event that the Consultant incurs
out-of-pocket expenses in connection with the performance by him
of consulting service to the Companies, the Companies will
reimburse the Consultant for such expenses; provided such
expenses are reasonable.
8. Other Agreements: The Consultant and the
Companies expressly covenant that this Agreement does not
conflict with any other agreement or contract between them and
any other entity and that there are no restrictions, contractual
or otherwise, upon the ability of the Consultant and the
Companies, to fulfill the terms of this Agreement.
9. Notice: Any and all notices required or permitted
to be given under the terms of this Agreement shall be sufficient
if in writing and forwarded to the parties hereto at the
addresses set forth herein by prepaid certified mail, as follows:
If to the Companies - Mercer Mutual Insurance Company, 10 North
Highway 31, P.O. Box 278, Pennington, NJ 08534, and Mercer
Insurance Company, 10 North Highway 31, P.O. Box 278, Pennington,
NJ 08534; If to the Consultant - Eric W. Turner, Jr., Patterson
Avenue, R.D. 2, Box 173, Titusville, New Jersey 08560.
10. Assignment and Successors In Interest: To the
extent that the obligations provided for herein require the
personal performance of the Consultant, the Consultant's rights,
interests and obligations as provided herein may not be assigned.
Except as otherwise provided in the immediately preceding
sentence of this section, all rights, privileges and obligations
of the parties hereto shall inure to the benefit of and be
binding upon the respective successors, assigns, heirs,
executors, administrators and estates.
11. Modification of Agreement: This Agreement
contains the entire agreement between the parties and supersedes
any and all other agreements, written or oral, express or
implied, pertaining to the subject matter hereof. It may not be
changed orally, but only by written instruments signed by the
party against whom enforcement of any waiver, change,
modification or discharge is sought.
12. Governing Law: This Agreement shall be construed
and governed in all respects in accordance with the laws of the
State of New Jersey.
ATTEST: MERCER MUTUAL INSURANCE COMPANY
Seal
/s/ Marion J. Crum By/s/ Richard G. Van Noy
, Secretary Chairman of the Board
ATTEST: MERCER INSURANCE COMPANY
Seal
Marion J. Crum By/s/ Richard G. Van Noy
, Secretary Chairman of the Board
WITNESSETH: ERIC W. TURNER, JR.
/s/ William C. Hart /s/ Eric W. Turner, Jr.
William C. Hart Eric W. Turner, Jr.
EXHIBIT 10.8
MERCER MUTUAL INSURANCE COMPANY
Corporate Director Deferred Compensation Plan
1. Purpose
The purpose of this Plan is to permit members of the Board
of Directors of Mercer Mutual Insurance Company (the
Company) to elect deferred receipt of the directors' fees.
This plan is intended to constitute a deferred compensation
plan for corporate directors' fees in accordance with
Revenue Ruling 71-419, Cumulative Bulletin 1971-2, page 220.
2. Definitions
The following words or terms used herein shall have the
following meanings:
(a) "Plan" shall mean this Corporate Director Deferred
Compensation Plan.
(b) "Board" shall mean the Board of Directors of the
company.
(c) "Member" shall mean any person duly elected to the
Board of Directors of the Company.
(d) "Participant" shall mean any Member who elects to
participate in the Plan.
(e) "Director's Fees" shall refer to any compensation,
whether for Board meetings or for Committee meetings or
otherwise, earned by a Member for services rendered as
a Member during a particular calendar year in which he
has elected to be a Participant.
3. Participation
This Plan shall become effective April 1, 1986. A member
may become a Participant by filing a written Election to
Participate in the Plan with the Treasurer of the Company
within ten days after the adoption of this Plan by the
Board. A member who wishes to begin participation in any
subsequent month may do so by filing an Election to
Participate not later than the first day of the month.
An Election to Participate may be made for all or a portion
of Director's Fees to be earned for any year or years to
which such Election to Participate may relate. An Election
to Participate, once filed, shall apply to Director's Fees
earned in subsequent years in which a Participant shall
serve as a Member, unless revoked by written request to the
Treasurer of the Company.
Any person who becomes a member and who was not a Member the
preceding month may file an Election to Participate before
is term as a Member begins.
4. Deferral of Director's Fees
The Company shall, during any year in which a Participant
has an Election to Participate on file with the Treasurer of
the Company, withhold and defer the payment of the
Participant's Director's Fees in accordance with his
Election to Participate.
The Company shall maintain accurate, separate memorandum
accounts with respect to each Participant's Director's Fees
credited and deferred in accordance with his Election to
Participate, and shall credit interest to each Participant's
account at the rate set by the Board of Directors.
5. Distribution of Deferred Director's Fees
Amounts deferred under the Plan, together with accumulated
interest, shall be distributed to a Participant in either of
the following ways at his election:
(a) in a lump sum payable on the first business day of the
first month for which he elects to discontinue
participation.
(b) In annual installments over any period which shall not
be more than ten years, beginning on the first business
day of the first month for which he elects to
discontinue participation.
In the event a Participant shall die while he is a Member,
the balance credited to his account, including interest,
shall be paid to his Designated Beneficiary in annual
installments over a period equal to the period in which the
Member was a Participant in this Plan, but in no event to
exceed ten years, beginning with the first day of the month
immediately following his date of death. Each participant
may file with the Treasurer of the Company a Designation of
Beneficiary form for this purpose.
In the event a former Participant shall die before he has
received complete distribution from his account, any balance
credited to his account, including interest, shall be paid o
his Designated Beneficiary in annual installments over the
remaining period necessary in order to complete distribution
of the Participant's account as provided in the first
paragraph of this Section 5 on a continuing basis,
notwithstanding the Participant's death.
In the event a Participant shall not file a Designation of
Beneficiary form or his Designated Beneficiary is not living
at the Participant's death, the balance credited to his
account, including interest, shall be paid in full to his
state on the first business day of the calendar year
following his date of death.
6. Termination of Election to Participate
A Participant may terminate his Election to Participate by
written request to the Treasurer of the Company which shall
become effective as of the first of the following month
provided, however, that termination shall not have
retroactive effect.
7. Obligation of the Company
This Plan shall be unfunded and credits to the memorandum
account of each Participant shall not be set apart for him
or otherwise made available so that he may draw upon it at
any time, except as provided by this Plan. Neither any
Participant nor his Designated Beneficiary shall have any
right, title or interest in such credits or any claim
against them. Payments may only be made at such times and
in the manner expressly provided in this Plan, and the
Company is merely under a contractual obligation to make the
payments when due. No notes or security for the payment of
any Participant's account shall be issued by the Company.
8. Claims Against Participant's Accounts
No credits to the account of any Participant under this Plan
shall be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance or charge,
and any attempt to do so shall be void, nor shall any credit
be subject to attachment or legal process for debts or other
obligations. Nothing contained in this Plan shall give any
Participant any interest, lien or claim against any specific
assets of the Company. No participant or his Designated
Beneficiary shall have any rights other than as a general
creditor of the Company.
9. Competition by Participant
In the event a Participant ceases to be a Member and becomes
a proprietor, officer, partner, employee, director or
otherwise becomes affiliated with any business that is in
competition with the Company, the entire balance credited to
his account, including interest, may, if directed by the
Board in its sole discretion, be paid immediately to him in
a lump sum.
10. Amendment or Termination
This Plan may be altered, amended, suspended or terminated
at any time by the Board of Directors of the Company,
provided, however, that no alteration, amendment, suspension
or termination shall be made to this Plan which would result
in the distribution of amounts credits to the accounts of
all Participants in any manner other than is provided in
this Plan without the consent of all Participants.
EXHIBIT 23.2
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
December 4, 1997
Board of Directors
Mercer Insurance Group, Inc.
10 North Highway 31
Pennington, New Jersey 08534
Directors:
We hereby consent to the inclusion of our appraisal of the
estimated pro forma market value of Mercer Mutual Insurance
Company on a consolidated basis as a subsidiary of Mercer
Insurance Group, Inc. as an exhibit to the Mercer Insurance
Group, Inc. Form S-1 Registration Statement.
Sincerely,
/s/ Alex Sheshunoff & Co Investment
Banking
ALEX SHESHUNOFF & CO
INVESTMENT BANKING
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