As filed with the Securities and Exchange Commission on
June 10, 1998
_________________________________________________________________
Registration No. 333-41497
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
AMENDMENT NO. 2 TO 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 23-2934601
(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 C-1>
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
Title of each 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, 3,769,444 $10.00 $37,694,440 $11,120
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
<PAGE C-2> 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 C-3
<PAGE>
[To be used in connection with the Syndicated Community Offering
only]
SYNDICATED PROSPECTUS SUPPLEMENT
MERCER INSURANCE GROUP, INC.
_______ Shares of Common Stock
Mercer Insurance Group, Inc. (the "Company"), a Pennsylvania
corporation, is offering for sale in a syndicated community
offering (the "Syndicated Community Offering") ______ shares, at
a per share price of $10.00, of its common stock, no par value
per share (the "Common Stock"), to be issued upon the conversion
(the "Conversion") of Mercer Mutual Insurance Company ("Mercer
Mutual") from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company and the issuance of all of
the authorized capital stock of Mercer Mutual to the Company
pursuant to a Plan of Conversion from Mutual to Stock
Organization (the "Plan"). ______ shares of the Common Stock
have been subscribed for in subscription and community offerings
(the "Conversion Offerings") by (i) named insureds under policies
of insurance issued by Mercer Mutual and in force as of the close
of business on October 17, 1997, (ii) the Company's tax-qualified
employee stock ownership plan (the "ESOP"), (iii) directors,
officers and employees of Mercer Mutual, and then by (iv) certain
members of the general public. Contained herein is the
Prospectus in the form used in the Conversion Offerings (the
"Prospectus"). For a description of the Conversion Offerings,
see "The Conversion -- The Conversion Offerings" in the
Prospectus. The purchase price for all shares purchased in the
Syndicated Community Offering will be $10.00 per share, which is
the same purchase price paid by subscribers in the Conversion
Offerings (the "Purchase Price"). The Purchase Price must be
paid for each share at the time a purchase order is submitted.
See the cover page of the Prospectus for information regarding
the method of subscribing for shares of the Common Stock.
The Syndicated Community Offering will expire no later
than ______________, 1998. If the Syndicated Community Offering
is not completed by ____________, 1998, the Syndicated Community
Offering will be terminated and all funds held will be returned
promptly to subscribers without interest. The minimum number of
shares which may be purchased is 25 shares. Except for the ESOP,
which may purchase up to 10% of the total number of shares of
Common Stock issued in the Conversion, no person, together with
associates of, and persons acting in concert with, such person,
may purchase more than 100,000 shares of Common Stock. See "The
Conversion -- Stock Pricing and Number of Shares to Be Issued"
and "--Limitations on Purchases of Common Stock" in the
Prospectus. The Company reserves the right, in its absolute
discretion, to accept or reject, in whole or in part, any or all
subscriptions received in the Syndicated Community Offering.
<PAGE S-1>
The Company and Mercer Mutual have engaged Sandler,
O'Neill & Partners, L.P. ("Sandler O'Neill") as financial
advisors to assist them with the sale of the Common Stock in the
Syndicated Community Offering. It is anticipated that Sandler
O'Neill will use the services of other registered broker-dealers
("Selected Dealers") and that fees to Sandler O'Neill and such
Selected Dealers will not exceed 7% of the aggregate Purchase
Price of the shares sold in the Syndicated Community Offering.
Neither Sandler O'Neill nor any Selected Dealer shall have any
obligation to take or purchase any shares of Common Stock in the
Syndicated Community Offering. See "The Conversion -- Marketing
and Underwriting Arrangements" and "-- Syndicated Community
Offering" in the Prospectus.
The Company has received approval to have its Common Stock
listed on the Nasdaq National Market under the symbol "MRCR,"
subject to completion of the Conversion. Sandler O'Neill has
advised the Company that, following completion of the Conversion,
it intends to make a market in the Common Stock, but it is under
no obligation to do so. 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. The absence or
discontinuance of a market may have an adverse impact on both the
price and liquidity of the stock.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE PENNSYLVANIA DEPARTMENT
OF INSURANCE, OR ANY OTHER FEDERAL OR STATE AGENCY OR ANY STATE
SECURITIES COMMISSION, NOR HAS SUCH COMMISSION OR DEPARTMENT, OR
ANY SUCH OTHER AGENCY OR SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Estimated Estimated Net
Estimated Net Proceeds of
Underwriting Proceeds Subscription,
Syndicated Commission of Community
Community and Other Syndicated and Syndicated
Offering Fees and Community Community
Price(1) Expenses(2) Offering Offerings(3)(4)
<S> <C> <C> <C> <C>
Per Share $10.00 $ $ $
Total $ $ $ $
</TABLE>
_____________________________
(1) Based on the sale of _______ shares of Common Stock at
the Purchase Price of $10.00 per share. In addition,
the Company has received subscriptions for <PAGE S-2>
_______ shares of Common Stock in the Conversion
Offerings. Alex Sheshunoff & Company has advised the
Company that, as of June 4, 1998, the estimated
consolidated pro forma market value of Mercer Mutual as
a subsidiary of the Company is between $25.1 million
and $33.9 million.
(2) Consists of the Syndicated Community Offering's pro
rata allocation of the estimated expenses of the
Company and Mercer Mutual in connection with the
Conversion (other than estimated fees to be paid to
Sandler O'Neill for services in connection with the
Conversion Offerings) and estimated compensation of
Sandler O'Neill and Selected Dealers in connection with
the sale of shares in the Syndicated Community
Offering, which fees are estimated to be $__________
and may be deemed to be underwriting fees. The
information under "Pro Forma Data" in the Prospectus
was based on the assumptions stated therein, which may
differ from the estimates used for this table. See
"The Conversion -- Marketing and Underwriting
Agreements" for a more detailed discussion of fee
arrangements.
(3) The Company intends to contribute $5 million of the net
proceeds to Mercer Mutual in exchange for all of the
capital stock of Mercer Mutual to be issued in
connection with the Conversion. The Company intends to
retain the balance of the net proceeds. See "Use of
Proceeds."
(4) The net proceeds of the Conversion Offerings (based
upon the sale of the _______________ shares subscribed
for at a price of $10.00 per share and after the
allocation to the Conversion Offerings of their pro
rata portion of the estimated expenses related to the
Conversion) are estimated to be $___________.
SANDLER O'NEILL & PARTNERS, L.P.
___________________________
The date of this Prospectus Supplement is _____________, 1998.
PAGE S-3
<PAGE>
PROSPECTUS
[LOGO]
MERCER INSURANCE GROUP, INC.
Up to 3,392,500 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 3,392,500 shares 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. Except for the ESOP,
which may purchase a maximum of between 250,750 and 376,944
shares of Common Stock, no purchaser, together with associates of
or persons acting in concert with such person, may purchase, in
the aggregate, more than 100,000 shares of Common Stock in the
Subscription Offering. The maximum number of shares that may be
purchased in the Subscription Offering by all Eligible
Policyholders in the aggregate is 3,392,500 shares. The total
numbers of shares of Common Stock offered in the Subscription
Offering may be increased to up to 3,769,444 shares if necessary
to satisfy the subscription rights of the ESOP.
Concurrently with the Subscription Offering, the Company is
offering the Common Stock 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) licensed insurance agencies that have been
appointed by Mercer Mutual to market and distribute policies of
insurance, and their owners, (iv) holders of policies of
insurance originally issued after October 17, 1997, 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.
<PAGE P-1>
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 Mercer Mutual by
the Company pursuant to a Plan of Conversion from Mutual to Stock
Organization adopted by the Board of Directors of Mercer Mutual
on October 17, 1997 (as amended, 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 2,507,500 shares of Common Stock in
the Offerings.
No person may purchase fewer than 25 shares of Common
Stock in the Offerings.
For more information, please call the Stock Information
Center (the "Conversion Center") toll-free at 1-888-303-9085.
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 $ .66 $ 9.34
Total Minimum.. $25,075,000.00 $1,866,050.00 $23,208,950.00
Total Midpoint. $29,500,000.00 $1,945,700.00 $27,554,300.00
Total Maximum.. $33,925,000.00 $2,025,350.00 $31,899,650.00
(1) Determined in accordance with an independent appraisal
(the "Appraisal") prepared by Alex Sheshunoff & Company
("Sheshunoff") and updated as of June 4, 1998, which
states that the consolidated pro forma market value of
Mercer Mutual as a subsidiary of the Company ranged
from $25,075,000 (the "Total Minimum") to $33,925,000
<PAGE P-2> (the "Total Maximum") with a midpoint of
$29,500,000 (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 3,392,500 shares at a Purchase Price of $10.00
per share (the "Purchase Price"). The Company,
however, may issue up to 3,769,444 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 Offerings and is subject to change. The
valuation set forth in the Appraisal must not be
construed as a recommendation by the Company, Mercer
Mutual, Sandler O'Neill or Sheshunoff as to the
advisability of purchasing such shares or that a
purchaser subsequently will be able to sell such shares
at or above the Purchase Price. If the final valuation
is outside the Estimated Valuation Range, then the
Company will promptly notify all subscribers by mail of
the final valuation. 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. 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 $489,050
and $648,350 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 "-- 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 $2.5 million at the Total
Minimum, $3.0 million at the Total Midpoint, and
$3.4 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 $9.26 and $9.40,
respectively.
<PAGE P-3>
SANDLER O'NEILL & PARTNERS, L.P.
The date of this Prospectus is __________________, 1998
PAGE P-4
<PAGE>
All shares of Common Stock will be sold in the Offerings 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 3,392,500 shares or more, the Company, as required
by the Plan, will sell all 3,392,500 shares offered
hereby to participants in the Subscription Offering and
will sell up to an additional 376,944 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. For a description of the allocation
method and procedure, see "The Conversion -- The
Conversion Offerings -- Subscription Offering."
(ii) If participants in the Subscription Offering subscribe
for at least 2,507,500 shares but less than 3,392,500
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 3,392,500
shares (excluding shares sold to the ESOP). Any excess
<PAGE P-5> 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 2,507,500 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 2,507,500 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 3,392,500
(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 subscribed for in the Offerings
is less than 2,507,500, then the Company will cancel
the Offerings and all subscription funds will be
returned promptly to subscribers without interest.
There is a difference of approximately $8.9 million
between the Total Minimum and the Total Maximum of the Estimated
Valuation Range. 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 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 such estimated consolidated pro forma
market value. 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 (4.0%, 3.4%
and 3.0% 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 42,178 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 3,392,500 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
<PAGE P-6> shares for which they subscribed. If all 42,178
Eligible Policyholders were to subscribe for 100,000 shares of
Common Stock, then each Eligible Policyholder would receive only
80 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 186,500 shares
of the Common Stock to be issued in the Conversion (7.4%, 6.3%,
5.5% and 5.0% at the Total Minimum, Total Midpoint, Total Maximum
and Total Maximum plus ESOP Shares, respectively), not including
10% of the Common Stock (250,750, 295,000, 339,250 and 376,944
shares at the Total Minimum, Total Midpoint, Total Maximum and
Total Maximum plus ESOP shares, respectively) 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
Offerings, it will give written notice of such extension to all
subscribers on or before ____________, 1998, and each subscriber
may withdraw or confirm his or her subscription by the extended
Termination Date. If a subscriber withdraws a subscription, or
does not confirm a subscription by the extended Termination Date,
the subscriber's funds will be returned promptly without
interest. No action to extend the Offerings will be taken by the
Company after __________, 1998. Subscribers may purchase shares
in the Offerings 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 First Union National Bank 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 returned promptly 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
<PAGE P-7> 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. 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. The absence or discontinuance of a market may have an
adverse impact on both the price and liquidity of the Common
Stock. There is no 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
<PAGE P-8> 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 P-9
<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."
This Prospectus contains certain forward-looking statements
within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Reference is made in
particular to the descriptions of the Company's and its
subsidiaries' plans and objectives for future operations,
assumptions underlying such plans and objectives and other
forward-looking statements included in this Prospectus under "Use
of Proceeds," "Business" and "Risk Factors." Such statements are
based on management's current expectations and are subject to a
number of factors and uncertainties which could cause actual
results to differ materially from those described in such
forward-looking statements. Factors which could cause such
results to differ materially from those described in the forward-
looking statements include those set forth under "RISK FACTORS"
below.
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
<PAGE 1> 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, Inc. ("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 the years ended December 31, 1997
and 1996, Mercer Mutual and its
subsidiaries had consolidated revenues
of $21.0 million and $23.7 million
respectively, and net income of
$2.2 million and $640,000, respectively.
For the three months ended March 31,
1998, Mercer Mutual and its subsidiaries
had consolidated revenue of $6.1 million
and net income of $696,000. At
March 31, 1998, Mercer Mutual and its
subsidiaries had consolidated assets of
$74.7 million, total equity of
$24.5 million and over 42,000 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; <PAGE 2>
- 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 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.
<PAGE 3>
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 Mercer
Mutual's $1.4 million net operating loss
in 1994 and that reduced net income by
$665,000 in 1996. 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. On June 5, 1998, the Pennsylvania
Department held a hearing regarding the
Conversion. The Plan was approved by
the Pennsylvania Department on June ___,
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.
<PAGE 4>
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
(the "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 (the "Appraisal")
of the estimated consolidated pro forma
market value of Mercer Mutual as a
subsidiary of the Company and has
determined that, as of June 4, 1998,
such estimated pro forma market value
was $29.5 million. The Estimated
Valuation Range in the Appraisal, which
extends 15% below and 15% above the
estimated value, is from $25.1 million
to $33.9 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 Appraisal, 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
<PAGE 5> Mutual. The Appraisal
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
Offerings, 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
3,392,500 shares or more, the Company,
as required by the Plan, will sell all
3,392,500 shares offered hereby to
participants in the Subscription
Offering and will sell up to an
additional 376,944 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 2,507,500 shares but less than
3,392,500 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 sell shares in the Syndicated
Community Offering provided the total
number of shares of Common Stock sold in
the Conversion does not exceed 3,392,500
shares (excluding the shares sold to the
ESOP). Any excess funds received in the
Community Offering or the Syndicated
Community Offering will be promptly
returned to subscribers without
interest. If participants in the
Subscription Offering subscribe for
<PAGE 6> fewer than 2,507,500 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 2,507,500
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 3,392,500 (excluding the shares
sold to the ESOP). Any excess funds
received in the Community Offering or
the Syndicated Community Offering will
be promptly returned to subscribers
without interest. If the number of
shares subscribed for in the Offerings
is less than 2,507,500, then the Company
will cancel the Offerings 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, the Company may
terminate the Offerings. If in such
event the Company proceeds with the
Offerings, then the Company will deliver
promptly to the subscribers an updated
prospectus containing a description of
the updated Appraisal. The Conversion
Valuation Report containing the updated
Appraisal will not be delivered to
subscribers, but will be an exhibit to a
post-effective amendment to the
registration statement of which this
prospectus is a part, and may be
obtained through the Securities and
Exchange Commission directly or accessed
through its Internet website at
http://www.sec.gov. See "Available
Information." 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
<PAGE 7> may not be withdrawn for any
reason if the updated Appraisal is
within the Estimated Valuation
Range.
There is a difference of
approximately $8.9 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 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 a purchase price of $10.00
per share (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
<PAGE 8> by, Mercer Mutual. The Company
reserves the absolute right to accept or
reject any orders in the Community
Offering, in whole or in part.
Subscription rights will expire if not
exercised by, and the Conversion
Offerings will terminate at, 1:00 p.m.,
Eastern Standard Time on ___________,
1998, unless extended by the Company 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 withdraw or confirm his
or her subscription by the extended
Termination Date. If a Subscriber
withdraws a subscription, or does not
confirm a subscription by the extended
Termination Date, the subscriber's funds
will be returned promptly without
interest. In no event shall the
extended Termination Date be later than
__________, 1998.
The Syndicated If participants in the Conversion
Community Offering Offerings (excluding the ESOP) subscribe
for fewer than 3,392,500 shares in the
aggregate, the Company, in its sole
discretion, may sell additional shares
in the Syndicated Community Offering.
All shares of Common Stock offered in
the Syndicated Community Offering will
be offered for sale at the Purchase
Price to the general public on a best
efforts basis 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 in the sale of Common Stock.
The Syndicated Community Offering would
be commenced as soon as practicable
following the Termination Date, and must
be completed within 45 days thereafter.
The Company reserves the absolute right
to reject orders, in whole or in part,
in its sole discretion, in the
Syndicated Community Offering. See "The
Conversion -- Marketing and Underwriting
Arrangements" and "-- Syndicated
Community Offering." <PAGE 9>
Prospectus Delivery To ensure that each purchaser
and Procedure for receives a prospectus at least
Purchasing Shares 48 hours prior to the Termination 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 Offerings must do so
prior to the Termination Date by
delivering to the Conversion Center by
mail at P.O. Box 15, Pennington, New
Jersey 08534-0015, or in person at the
Company's principal executive offices
located at 10 North Highway 31,
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 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 First
Union National Bank. Such funds will
not be released until the Conversion is
completed or terminated. The Conversion
will be completed no later than
__________, 1998. If the number of
shares subscribed for in the Offerings
at the Purchase Price through
__________, 1998 is less than 2,507,500
shares, then the Company will cancel the
Offerings on such date and all
subscription funds will be returned
<PAGE 10> promptly to subscribers
without interest.
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.
If, because of the magnitude of the
oversubscription, shares of Common Stock
cannot be allocated among subscribing
Eligible Policyholders so as to permit
each such Eligible Policyholder to
purchase the lesser of 1,000 shares or
the number of shares subscribed for,
then shares of Common Stock will be
allocated among the subscribing Eligible
Policyholders in the proportion in
which: (i) the aggregate number of
shares subscribed for by each such
Eligible Policyholder bears to (ii) the
aggregate number of shares subscribed
for by all Eligible Policyholders;
provided, however, that no fractional
shares of Conversion Stock shall be
issued. For more information, please
call the Conversion Center toll-free at
1-888-303-9085. See "The Conversion --
<PAGE 11> The Conversion Offerings," "--
Purchases in the Offerings," "--
Marketing and Underwriting
Arrangements" and "-- Description of
Sales Activities in the Offerings."
Purchase Limitations No person may purchase fewer than
25 shares in the Offerings. 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 (4.0% of the
shares to be issued in the Conversion at
the Total Minimum of the Estimated
Valuation Range). There are 42,178
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 3,392,500 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 80 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
Stock by Management officers of the Company and Mercer
Mutual, each of whom is an Eligible
Policyholder, together with their
associates, propose to purchase, in the
aggregate, approximately 186,500 shares
of Common Stock in the Conversion, which
equals 6.3% of the shares of Common
Stock to be issued in the Conversion
assuming an offering at the Total
<PAGE 12> Midpoint of the Estimated
Valuation Range (but excluding shares
purchased by the ESOP). All such shares
will be purchased by the directors and
executive officers and their associates,
if any, in the Subscription Offering and
in their capacities as Eligible
Policyholders. See "The Conversion --
Proposed Management Purchases."
Benefits to Management Up to 10.8% of the net proceeds of the
Offering is expected to be used to fund
the purchase by the ESOP of 10% of the
shares of Common Stock sold in the
Conversion. These shares will be
awarded to substantially all employees
without payment by such persons of cash
consideration. See "Use of Proceeds."
In addition, the Board of Directors of
the Company has adopted, subject to
shareholder approval, 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
<PAGE 13> 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 at
least $23.2 million. See "Use of
Proceeds" for the assumptions used to
arrive at this estimate.
Between 10.8% and 10.6% 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
($3.8 million at the Total 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
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 $23.2 million and
$35.6 million and the implementation of
the ESOP, the Company would retain
between $15.7 million and $26.8 million
after acquiring the stock of Mercer
Mutual. These funds 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. With the exception of the
ESOP Loan and the capital contribution
to Mercer Mutual, the Company currently
has no specific plans, intentions,
arrangements or understandings regarding
any of the foregoing activities. See
"Dividend Policy."
<PAGE 14>
The portion of the net proceeds
contributed to 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.
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 approval to
Stock have the Common Stock quoted on the
Nasdaq National Market under the symbol
"MRCR," subject to 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
Offerings, 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."
<PAGE 15>
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 shareholders 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 "Risk
Factors -- 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 16
<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
year ended December 31, 1994 and the consolidated balance sheet
data at December 31, 1995 are derived from the audited
consolidated financial statements of Mercer Mutual and its
subsidiaries not included in this Prospectus. The consolidated
statement of income data for the year ended December 31, 1993 and
for the three months ended March 31, 1997 and 1998 and the
consolidated balance sheet data at December 31, 1993 and 1994 and
at March 31, 1997 and 1998 are derived from the unaudited
consolidated financial statements of Mercer Mutual and its
subsidiaries 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 17
<PAGE>
<TABLE>
<CAPTION>
Three months ended
March 31, Year Ended December 31,
----------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(Unaudited) (Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written. . . . . . . . $7,122 $6,420 $28,453 $24,958 $24,699 $24,355 $23,349
Net premiums written(1)(2) . . . . . . 6,440 3,082 17,461 20,124 21,245 19,377 18,964
Statement of Income Data:
Net premiums earned. . . . . . . . . . 5,265 4,384 17,969 20,634 20,817 18,681 18,225
Net investment income. . . . . . . . . 553 614 2,350 2,289 2,132 1,904 2,196
Net realized investment gains. . . . . 211 89 589 596 53 277 509
Other income . . . . . . . . . . . . . 43 37 173 155 161 166 159
------ ------ ------ ------ ------- ------- -------
Total revenues . . . . . . . . . 6,072 5,124 21,081 23,674 23,163 21,028 21,089
------ ------ ------ ------ ------- ------- -------
Losses and Expenses:
Losses and loss adjustment
expenses(2)(3) . . . . . . . . . . 2,861 2,908 10,594 14,801 13,296 14,107 11,631
Other underwriting expenses. . . . . 2,195 1,634 7,269 8,062 8,360 8,976 8,494
------ ------ ------ ------ ------- ------- -------
Total expenses . . . . . . . . . 5,056 4,542 17,863 22,863 21,656 23,083 20,125
------ ------ ------ ------ ------- ------- -------
Income (loss) before federal income
taxes. . . . . . . . . . . . . . . . 1,016 582 3,218 811 1,507 (2,055) 964
Federal income tax expense (benefit) . 320 227 1,001 171 369 (681) 165
------ ------ ------ ------ ------- ------- -------
Net income (loss)(3) . . . . . . . . . $696 $355 $2,217 $640 $1,138 $(1,374) $799
====== ====== ====== ====== ======= ======= =======
Selected Balance Sheet Data (at period end): (Unaudited) (Unaudited)
Total investments and cash . . . . . $50,625 $44,776 $48,506 $45,434 $44,022 $35,470 $40,414
Total assets . . . . . . . . . . . . 74,697 71,625 74,085 74,074 77,523 71,750 71,110
Total liabilities. . . . . . . . . . 50,162 52,390 50,849 54,792 58,560 57,547 53,469
Total equity . . . . . . . . . . . . $24,535 19,235 $23,236 $19,282 $18,963 $14,202 $17,641
GAAP Ratios:
Loss and loss adjustment expense
ratio(3)(4). . . . . . . . . . . . 54.3% 66.3% 58.9% 71.7% 63.9% 75.5% 63.8%
Underwriting expense ratio(5). . . . 41.7% 37.3% 40.5% 39.1% 40.2% 48.0% 46.6%
Combined ratio(6). . . . . . . . . . 96.0% 103.6% 99.4% 110.8% 104.1% 123.5% 110.4%
Statutory Data:
Statutory combined ratio . . . . . . 93.8% 113.6% 102.1% 110.5% 103.0% 122.6% 110.7%
Industry combined ratio(7) . . . . . -- -- 101.6% 105.9% 106.4% 108.4% 106.9%
Statutory surplus. . . . . . . . . . $21,498 $16,759 $20,132 $16,087 $14,938 $11,133 $12,979
Ratio of statutory net written
premiums to statutory
surplus(8) . . . . . . . . . . . . 1.20x .74x .87x 1.25x 1.42x 1.74x 1.46x
Pro Forma Data(9):
Net income . . . . . . . . . . . . . $654 $ 2,051
Net income per share of
Common Stock . . . . . . . . . . . $0.29 $ 0.90
Weighted average number of shares
of Common Stock outstanding. . . . 2,284,960 2,269,288
_____________________
</TABLE>
(1) The increase from March 31, 1997 to March 31, 1998
reflects the restructuring of Mercer Mutual's
reinsurance programs during both years.
(2) The decrease from December 31, 1996 to December 31,
1997 reflects the termination, as of December 31, 1996,
<PAGE 18> 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."
(3) Losses and loss adjustment expenses, net income and
loss and loss expense ratios for the years ended
December 31, 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."
(4) Calculated by dividing losses and loss adjustment
expenses by net premiums earned.
(5) Calculated by dividing other underwriting expenses by
net premiums earned.
(6) The sum of the Loss and Loss Adjustment Expense Ratio
and the Underwriting Expense Ratio.
(7) As reported by A.M. Best Company, Inc., an independent
insurance rating organization. Data for the periods
ended March 31, 1997 and March 31, 1998 is
unavailable.
(8) Annualized for the periods ended March 31, 1997 and
1998.
(9) Information excerpted from unaudited Pro Forma
Condensed Consolidated Statements of Income for the
year ended December 31, 1997 and the three months ended
March 31, 1998. See "Pro Forma Data."
PAGE 19
<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."
<PAGE 20>
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, 1995, 1996 and 1997 and the three months ended
March 31, 1998, 99.3%, 99.1%, 98.7% and 98.7%, 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
<PAGE 21> 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.
Mercer Mutual's directors and officers liability insurance
policy may not cover losses, damages, liabilities, and attorneys'
fees and other expenses resulting from any claims made against
its directors and officers arising as a result of the Conversion
(collectively, "Director and Officer Liabilities"). Mercer
Mutual intends to indemnify and hold harmless its directors and
officers from and against all Director and Officer Liabilities to
the fullest extent permitted by law. Even if Mercer Mutual is
successful on the merits defending its directors and officers
against any such claims, the attorneys' fees and expenses
incurred in such a defense could be material.>
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
<PAGE 22> 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 March 31, 1998
was $21.5 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 2,507,500 and
3,392,500 shares of Common Stock. There is a difference of
approximately $8.9 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% smaller if
3,392,500 shares are sold than if 2,507,500 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
<PAGE 23> 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.
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, 1997, Mercer Mutual has calculated expenses of
approximately $72,000 and $7,000 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 all or
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, 1997, Mercer Mutual would have been
required to pay approximately $542,000 in taxes to New Jersey for
the year ended December 31, 1997, $469,000 more than the amount
which has been calculated as due for such year.
No assurance can be given that the New Jersey taxing
authorities will not interpret such retaliatory tax provision in
a manner adverse to Mercer Mutual, and that if so, they would not
seek to enforce such retaliatory tax provision against Mercer
Mutual. If enforcement is sought, Mercer Mutual would likely
challenge such enforcement before the appropriate administrative
and judicial authorities, but no assurance can be given that
Mercer Mutual would be successful in such a challenge. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effect of Conversion and Redomestication
on the Company's Future Financial Condition and Results of
Operations -- State Taxes."
<PAGE 24>
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
<PAGE 25> 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
<PAGE 26> 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. This
catastrophe exposure results from the geographic concentration of
the Insurance Companies' business. As a geographically
concentrated insurer, the Insurance Companies are susceptible to
a weather-related event such as a windstorm, a hurricane, hail, a
tornado, freezing temperatures or other extraordinary event. In
fact, Mercer Mutual's exposure to severe weather conditions has
been a major factor affecting its underwriting results since
1991. See "-- Possible Adverse Impact Due to Geographic
Concentration of Business." Therefore, there can be no assurance
that the Insurance Companies will be able to maintain their
current A.M. Best 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
independent agents that sell the Insurance Companies' products
could be inclined to place their customers with higher-rated
insurance carriers, which could have a material adverse effect on
the Company's business and results of operations.
Management met with A.M. Best personnel in February 1997
to discuss the measures the Insurance Companies are implementing
to reduce the risk caused by their exposure to severe weather
conditions and preserve their A.M. Best Rating. These measures
include an increase in the rates charged for homeowners
insurance, the termination of their relationships with
unprofitable agencies, decreasing their catastrophe exposure by
improving the Insurance Companies' mix of business through an
increase in commercial and casualty writings, the planned
geographic diversification of business through the acquisition of
other insurance companies, and the planned improvement of capital
strength through the Conversion and the Offerings. Each of these
measures is in various stages of implementation. See "Business -
A.M. Best Rating."
Reliance on Key Agencies
For the three months ended March 31, 1998 and the year
ended December 31, 1997, the Insurance Companies' largest agency
accounted for approximately 10.5% and 7.3%, respectively, of the
Insurance Companies' direct premiums written, and generated
approximately $749,000 and $2.1 million, respectively, in premium
revenue for the Insurance Companies. For the three months ended
March 31, 1998 and the year ended December 31, 1997, the
Insurance Companies' 10 largest agencies accounted for 30.5% and
26.8%, respectively, of direct premiums written. A significant
decrease in business from, or the loss of, its largest agency or
several of its other large agencies would have a material adverse
<PAGE 27> effect on the Company. Furthermore, the Insurance
Companies' largest agency has written a significant portion of
its business with religious institutions using a specialized
multi-peril policy specially designed by Mercer Mutual for this
market segment. See "Business -- Products -- Commercial
Multi-Peril Products -- Religious Institutions." Decisions by
such institutions to discontinue certain coverages or to
emphasize certain coverages over others, and any inability of
Mercer Mutual to offer such coverages at a price satisfactory to
such institutions may have a material adverse effect on the
Company.
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 March 31, 1998, 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
<PAGE 28> 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 years ended December 31, 1995 and 1996, 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. During the year ended December
31, 1997, neither Insurance Company reported any ratio outside
the acceptable IRIS range. 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.
<PAGE 29>
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. During 1997
and 1998, the Company has reduced its reliance on reinsurance by
increasing the maximum exposure retained by the Insurance
Companies on individual property and casualty risks. The Company
may further increase such maximum exposure in the future. The
Company will rely, in part, on the 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 Company's maximum exposure
will be adjusted by the Company from time to time 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.
The 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."
<PAGE 30>
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 186,500 shares of the Common Stock to
be issued in the Conversion, or 7.4% thereof at the Total Minimum
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 intends to 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, 351,050, 413,000
and 474,950 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."
<PAGE 31>
Requirement for Policyholder Approval
The Conversion is contingent upon the approval of the
Plan by the Eligible Policyholders. Approval of the Plan will
require the affirmative vote, either in person or by proxy, of at
least two-thirds of the votes cast by the Eligible Policyholders.
Each Eligible Policyholder is entitled to one vote. The Special
Meeting has been scheduled for ______________, 1998 for the
purpose of considering and voting on the Plan. Mercer Mutual's
Board of Directors is unanimously recommending to the Eligible
Policyholders that they vote in favor of the Plan.
On March 3, 1998, Mercer Mutual received an unsolicited
offer from Franklin Mutual Insurance Company ("Franklin"), an
Eligible Policyholder, to purchase from Mercer Mutual, upon the
consummation of the Conversion, all of the to-be-issued capital
stock of Mercer Mutual for a purchase price of $23.2 million,
representing the net worth of Mercer Mutual at December 31, 1997
under generally accepted accounting principles. Under Franklin's
proposal, Mercer Mutual was asked to amend the Plan to provide
that policyholders would receive the $23.2 million payment.
Franklin also committed to contribute an additional $5 million of
capital to Mercer Mutual. Mercer Mutual's Board of Directors
unanimously rejected such offer.
On April 27, 1998, Mercer Mutual received correspondence
from Franklin demanding permission to examine Mercer Mutual's
list of all Eligible Policyholders and to make copies of or
extracts from such list, for the purpose of communicating with
Eligible Policyholders concerning the Plan. On May 7, 1998,
Mercer Mutual rejected such request and filed an action in the
Court of Common Pleas of Chester County, Pennsylvania, seeking,
among other things, a declaratory judgment that Franklin is not
entitled to examine or make copies of or extracts from Mercer
Mutual's list of Eligible Policyholders. Mercer Mutual believes
that Franklin's intended purposes for requesting a list of
Eligible Policyholders are (i) to solicit opposition to the Plan
so that the Conversion will not be approved by the Eligible
Policyholders and Mercer Mutual, a competitor of Franklin, will
not be able to complete the Conversion and become a stronger
competitor, and (ii) to use the list to make an offer for the
stock of Mercer Mutual that violates applicable insurance holding
company laws. Franklin also could use the list to communicate
and market Franklin and its insurance products directly to Mercer
Mutual's policyholders. On May 11, 1998, Franklin responded to
Mercer Mutual's action by filing in the same court an application
to compel production of the policyholder list. The litigation
matters between Franklin and Mercer Mutual are still pending.
If, as a result of Franklin's efforts in opposition to
the Plan or otherwise, the Eligible Policyholders fail to approve
the Plan at the Special Meeting, the Company will cancel the
Offerings and all subscription funds will be returned promptly to
subscribers without interest. In such event, Mercer Mutual would
<PAGE 32> maintain and continue its existence as an independent
property and casualty insurance 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 and the MRP will be subject to
shareholder approval at the Company's first annual meeting of
shareholders to be held after the Conversion. If approved, these
plans would be implemented as soon as practicable after such
meeting. 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. The total number of shares that
could be issued pursuant to the exercise of options granted under
the Compensation Plan would be an amount equal to 10% of the
Common Stock issued in the Conversion. In addition, in lieu of
purchasing shares of Common Stock for the MRP in the open market,
the Company may issue authorized but unissued shares of Common
Stock to the MRP. The total number of shares that could be
issued to the MRP would be an amount equal to 4% of the Common
Stock issued in the Conversion. 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
<PAGE 33> 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
Directors' 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
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. Mercer Mutual has been advised
by Sheshunoff that the subscription rights granted to Eligible
Policyholders have no value. However, Sheshunoff's conclusion is
not binding on the Internal Revenue Service ("IRS"). See "The
Conversion -- Effects of Conversion on Policyholders" and "-- Tax
Effects."
<PAGE 34>
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 approval to have the Common Stock quoted on the
Nasdaq National Market under the symbol "MRCR," subject to
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
$2.5 million to $3.8 million based on a sale of 250,750 shares to
the ESOP (at the Total Minimum) and 376,944 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."
On a short-term basis, the remaining net proceeds retained
by the Company will be invested primarily in U.S. government
securities and other federal agency securities. The 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 Company also may use a portion of the net
proceeds of the Offerings to fund the purchase by the MRP, if
implemented, in the open market of all or a portion of the shares
of Common Stock to be acquired by 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 "Management of the
Company -- Certain Benefit Plans and Agreements -- Management
Recognition Plan."
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
<PAGE 35> 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 capital
contributions to Mercer Mutual and MIC, and the possible funding
of the MRP, the Company and Mercer Mutual currently have no
specific plans, arrangements or understandings regarding the use
of the net proceeds from the Offerings. See "Dividend Policy"
and "Management of the Company -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan" and " -- Management
Recognition Plan."
The amount of proceeds from the sale of Common Stock in
the Offerings 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 Total Minimum, Total Midpoint and Total Maximum, and at the
Total Maximum 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) 186,500 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 Eligible
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
$1.4 million. The foregoing assumption that all shares will be
purchased in the Subscription Offerings is illustrative only and
is based upon one (and the only) recent comparable transaction.
Actual expenses may vary from those estimated.
PAGE 36
<PAGE>
<TABLE>
<CAPTION> Total
Total Total Total Maximum of
Minimum of Midpoint of Maximum of 3,392,500
2,507,500 2,950,000 3,392,500 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
Offerings. . . . . . . $25,075 $29,500 $33,925 $37,694
Less estimated
expenses, including
underwriting fees . . (1,866) (1,946) (2,025) (2,093)
------ ------- ------- -------
Estimated net proceeds. . 23,209 27,554 31,900 35,601
Less:
Common Stock to be
acquired by ESOP. . . (2,508) (2,950) (3,393) (3,769)
------ ------- ------- ------
Estimated net proceeds,
as adjusted(1) . . . . $20,701 $24,604 $28,507 $31,832
======= ======= ======= =======
_________
</TABLE>
(1) Does not include any adjustment for the portion of the
estimated net proceeds of the Offerings which may be used to
fund the purchase by the MRP, if implemented, of shares of
Common Stock in the open market because (i) the
implementation of the MRP is subject to shareholder
approval, (ii) any such implementation would not occur until
at least six months after the consummation of the Conversion
and, therefore, the Company is unable to predict with any
certainty the market price of the Common Stock at that time,
(iii) the Company may fund a portion of the costs of such
purchase from its cash flow, and (iv) the Company may issue
new shares directly to the MRP in lieu of purchasing shares
in the open market.
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
<PAGE 37> 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 March 31, 1998 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
<PAGE 38> 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 will range from
2,507,500 shares to 3,392,500 shares. See "Use of Proceeds" and
"The Conversion -- Stock Pricing and Number of Shares to be
Issued."
PAGE 39
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Consolidated
Capitalization of the Company
Based on the Sale of
---------------------------------
Historical 3,392,500
Consolidated shares at
Capitalization 2,507,500 2,950,000 3,392,500 $10.00 per
of Mercer shares at shares at shares at share plus
Mutual at $10.00 $10.00 $10.00 ESOP
March 31, 1998 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). . . . . . . . . . -- 23,209 27,554 31,900 35,601
Retained earnings . . . . . . 21,389 21,389 21,389 21,389 21,389
Unrealized gains. . . . . . . 3,146 3,146 3,146 3,146 3,146
Less:
Common stock to be acquired --
by ESOP(3). . . . . . . . . -- (2,508) (2,950) (3,393) (3,769)
------- ------- ------- ------- -------
Total(4). . . . . . . . . . . 24,535 45,236 49,139 53,042 56,367
======= ======= ======= ======= =======
____________
</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 (250,750, 295,000, 339,250 and
376,944 shares at the Total Minimum, Total Midpoint,
Total Maximum and Total Maximum plus ESOP shares,
respectively). 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
<PAGE 40> 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."
(4) Does not reflect any adjustments to shareholders'
equity that would result from the implementation of the
MRP because (i) of the total shares of Common Stock to
be acquired by the MRP, an undetermined portion may be
newly issued shares and an undetermined portion may be
purchased in the open market, each of which methods and
amounts would have different and varying effects on the
Company's shareholders' equity, (ii) the implementation
of the MRP is subject to shareholder approval,
(iii) any such implementation would not occur until at
least six months after the consummation of the
Conversion and, therefore, the Company is unable to
predict with any certainty the market price of the
Common Stock at that time, and (iv) the Company may
fund a portion of the costs of any open-market purchase
of shares from its then current cash flow. See
"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 March 31, 1998 gives effect to the Conversion and
implementation of the ESOP as if they had occurred as of
March 31, 1998 and assumes that 2,507,500 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,
1997 and the three months ended March 31, 1998 present
consolidated operating results for Mercer Mutual and its
subsidiaries as if the Conversion and implementation of the ESOP
had occurred as of January 1, 1997. 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
<PAGE 41> 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 2,507,500 shares of Common Stock. If
less than 2,507,500 shares of Common Stock are subscribed for in
the Conversion Offerings, the remaining shares, up to a maximum
of 3,392,500 shares (not including shares sold to the ESOP), will
be offered 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 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 42
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 1998
(in thousands)
Historical Pro Forma
Consolidated Adjustments Consolidated(4)
<S> <C> <C> <C>
ASSETS
Investments:
Fixed income securities . . $34,710 $20,701(1) $55,411
Equity securities . . . . . 12,957 _______ 12,957
Total investments . . . . . 47,667 20,701 68,368
Cash and cash equivalents . . 2,958 2,958
Receivables . . . . . . . . . 15,811 15,811
Prepaid reinsurance premiums. 1,855 1,855
Deferred policy acquisition
costs, and other assets . . 6,406 _______ 6,406
Total assets. . . . . . . . . $74,697 $20,701 $95,398
======= ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Losses and loss adjustment
expenses . . . . . . . . $31,190 $31,190
Unearned premiums . . . . . 14,707 14,707
Other liabilities . . . . . 4,265 _______ 4,265
Total liabilities . . . . . 50,162 0 50,162
Shareholders' equity:
Common stock. . . . . . . . -- 23,209 23,209
Unearned Employee Stock
Ownership Plan
compensation. . . . . . . -- (2,508)(2) (2,508)
Retained earnings . . . . . 21,389 21,389
Accumulated other
comprehensive income. . .
Unrealized gains in
investments net of
deferred income taxes . 3,146 3,146
Total shareholders' 24,535 20,701(3) 45,236
equity. . . . . . . . . .
Total liabilities and
stockholders' equity. . . . $74,697 $20,701 $95,398
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheet
PAGE 43
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
(1) The pro forma adjustment to reflect the Conversion is
as follows (in thousands):
Issuance of 2,507,500 shares at $10/share $25,075
Estimated conversion expenses (1,866)
Net proceeds from Conversion $23,209
=======
Less: Common Stock to be purchased
by ESOP (2,508)
Net investable proceeds $20,701
=======
(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 $2,508. 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 $21 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."
<PAGE 44>
(3) Does not reflect the proposed implementation of the MRP,
which is subject to shareholder approval and, therefore, is
not "factually supportable," within the meaning of the
Securities and Exchange Commission's rules and regulations.
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 -- Management Recognition
Plan."
(4) The unaudited pro forma condensed consolidated balance
sheet, as prepared, gives effect to the sale of Common
Stock at the Total 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 $23,209 $31,900 $35,601
Common Stock to be
acquired by ESOP $ 2,508 $ 3,393 $ 3,769
PAGE 45
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, 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. . . $17,969 $17,969
Investment income,
net of expenses . . . . 2,350 2,350
Net realized investment
gains. . . . . . . . . 589 589
Other revenue. . . . . . 173 ________ 173
Total revenue. . . . . 21,081 0 21,081
Expenses:
Losses and loss adjustment
expenses . . . . . . . 10,594 10,594
Amortization of deferred
policy acquisition costs 4,706 4,706
Operating expenses . . . 2,563 251(2) 2,814
Total expenses . . . . 17,863 251(3) 18,114
Income before taxes. . . . 3,218 (251) 2,967
Income taxes . . . . . . . 1,001 (85)(4) 916
Net income . . . . . . . . $ 2,217 $ (166) $ 2,051
======= ======== =======
Earnings per share data:
Net income per share of
Common Stock $ 0.90
Weighted average number
of shares of Common
Stock outstanding 2,269,288(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income.
PAGE 46
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31, 1998
(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. . . $ 5,265 $ 5,265
Investment income,
net of expenses . . . . 553 553
Net realized investment
gains. . . . . . . . . 211 211
Other revenue. . . . . . 43 ________ 43
Total revenue. . . . . 6,072 0 6,072
Expenses:
Losses and loss adjustment
expenses . . . . . . . 2,861 2,861
Amortization of deferred
policy acquisition costs 1,477 1,477
Operating expenses . . . 718 63(2)(3) 781
Total expenses . . . . 5,056 63 5,119
Income before taxes. . . . 1,016 (63) 953
Income taxes . . . . . . . 320 (21)(4) 299
Net income . . . . . . . . $ 696 $ (42) $ 654
======= ======== =======
Earnings per share data:
Net income per share of
Common Stock $ 0.29
Weighted average number
of shares of Common
Stock outstanding 2,284,960(6)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Statement of Income.
PAGE 47
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except share data)
(1) Does not reflect any income from the investment of net
investable proceeds assumed to be received as of
January 1, 1997, as such income is not "factually
supportable" as that term is used in the Securities and
Exchange Commission's rules and regulations. On a
short-term basis, such proceeds will be invested
primarily in U.S. government securities and other
federal agency securities. The average three-month
U.S. Treasury bill rate during the year ended
December 31, 1997 was 5.14% per annum. If such
proceeds were invested at 5.14% for the year ended
December 31, 1997 and the three months ended March 31,
1998, pro forma net income (after tax), as reported
herein, would have increased by $702 and $175 for the
year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, and pro forma net income
per share, as reported herein, would have increased by
$0.31 and $0.08 per share, 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) Does not reflect compensation expense associated with the
grant of shares which may be awarded under the MRP, as
implementation of the MRP is subject to shareholder approval
and, therefore, is not "factually supportable," within the
meaning of the Securities and Exchange Commission's rules
and regulations. 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," and "Management of the Company --
Certain Benefit Plans and Agreements -- Management
Recognition Plan."
(4) Adjustment to reflect the federal income tax effects of (2)
above.
(5) The unaudited pro forma condensed consolidated
statements of income, as prepared, give effect to the
sale of Common Stock at the Total 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
<PAGE 48> at the Total Minimum and Total Maximum of the
Estimated Valuation Range.
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
Minimum Maximum Minimum Maximum
<S> <C> <C> <C> <C>
Compensation expense $ 251 $ 339 $ 63 $ 85
Net income $2,051 $1,993 $ 654 $ 637
Net income per share of
Common Stock $0.90 $0.65 $0.29 $0.21
Weighted average number of shares
of Common Stock outstanding 2,269,288 3,070,213 2,284,960 3,091,416
</TABLE>
(6) Calculation of weighted average number of shares
outstanding:
<TABLE>
<CAPTION>
Total Shares Less: Unallocated Shares Weighted
Issued ESOP Shares Outstanding Average
<S> <C> <C> <C> <C>
January 1, 1997 2,507,500 (250,750) 2,256,750
Shares allocated -- 25,075 25,075
December 31, 1997 2,507,500 (225,675) 2,281,825 2,269,288
Shares allocated -- 6,269 6,269 --
March 31, 1998 2,507,500 (219,406) 2,288,094 2,284,900
========= ========= ========= =========
</TABLE>
ESOP 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 49
<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.
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 three months ended March 31, 1997 and 1998 and
the three years ended December 31, 1997. 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."
Mercer Insurance Group, Inc.
MD & A Selected Financial Data
<TABLE>
<CAPTION>
Three Months Ended March 31,
(Unaudited) Year ended December 31,
% % %
1998 change 1997 1997 change 1996 change 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written 7,122 10.9% 6,420 28,453 14.0% 24,958 1.0% 24,699
Assumed premiums written 154 41.3% 109 547 (89.1%) 5,013 (51.3%) 10,287
Ceded premiums written 836 (75.7%) 3,447 11,539 17.2% 9,847 (28.3%) 13,741
Net premiums written 6,440 109.0% 3,082 17,461 (13.2%) 20,124 (5.3%) 21,245
Change in unearned <PAGE 50>
premiums (1,175) 1,302 508 510 (428)
Net premiums earned 5,265 20.1% 4,384 17,969 (12.9%) 20,634 0.9%) 20,817
Net investment income 553 (9.9%) 614 2,350 2.7% 2,289 7.4% 2,132
Net realized investment
gains 211 137.1% 89 589 (1.2%) 596 1,024.5% 53
Other income 43 16.2% 37 173 11.6% 155 (3.7%) 161
Total revenue 6,072 18.5% 5,124 21,081 (11.0%) 23,674 2.2% 23,163
Losses and expenses:
Loss and loss adjustment
expenses 2,861 (1.6%) 2,908 10,594 (28.4%) 14,801 11.3% 13,296
Other underwriting
expenses 2,195 34.3% 1,634 7,269 (9.8%) 8,062 (3.6%) 8,360
Total expenses 5,056 11.3% 4,542 17,863 (21.9%) 22,863 5.6% 21,656
Income before federal
income taxes 1,016 74.6% 582 3,218 296.8% 811 (46.2%) 1,507
Federal income tax
expenses 320 41.0% 227 1,001 485.4% 171 (53.7%) 369
Net income 696 96.1% 355 2,217 246.4% 640 (43.8%) 1,138
Loss and loss adjustment
expense ratio 54.3% 66.3% 58.9% 71.7% 63.9%
Expense ratio 41.7% 37.3% 40.5% 39.1% 40.2%
Combined ratio 96.0% 103.6% 99.4% 110.8% 104.1%
</TABLE>
Results of Operations for the Three Months Ended March 31,
1998 Compared to the Three Months Ended March 31, 1997
Premiums - Direct premiums written for the three months
ended March 31, 1998 increased by $702,000 or 10.9%, as compared
to the same period in 1997, reflecting Mercer Mutual's strategic
decision to increase its commercial business. Commercial lines
premiums increased by $731,000, or 25.8%, for the three months
ended March 31, 1998 over the comparable prior period. The
increase in commercial lines writings reflects the continued
success of recently introduced commercial programs such as the
religious institution program and the commercial automobile
program. Commercial lines now represent slightly more than 50%
of the total direct writings of Mercer Mutual. The effect on
direct premiums written caused by the increase in direct
commercial writings was slightly offset by a decrease in personal
lines writings of $30,000.
Assumed premiums written increased by $45,000 or 41.3%,
reflecting Mercer Mutual's share of increasing residual market
facilities. Certain residual markets in which Mercer Mutual must
participate, as directed by statute, have grown in recent years
thereby increasing Mercer Mutual's dollar participation.
Ceded premiums written decreased $2.6 million, or 75.7%,
for the three months ended March 31, 1998 compared to the three
months ended March 31, 1997, reflecting changes in Mercer
Mutual's reinsurance programs during both periods. Effective
January 1, 1998, Mercer Mutual converted its reinsurance program
to one that is predominantly an excess of loss program, and also
increased its retention levels. As a result, there have been
<PAGE 51> significant reductions in premiums ceded to outside
reinsurers. Ceded premiums for the three months ended March 31,
1997 included approximately $1.3 million of additional ceded
premiums attributable to the introduction of a new quota share
reinsurance program for the homeowners business (the "Homeowners
Quota Share Program") at January 1, 1997. See "Business --
Reinsurance" for a description of Mercer Mutual's reinsurance
programs.
Net premiums written increased $3.4 million or 109%, to
$6.4 million for the three months ended March 31, 1998 from the
three months ended March 31, 1997. For the same comparative
period, net premiums earned increased by $881,000, or 20.1%, to
$5.3 million. The increases in net premiums written and net
premiums earned for the three months ended March 31, 1998 are
attributable to the increase in direct commercial writings and
the restructuring of the reinsurance program discussed above.
Net Investment Income - Net investment income decreased
$61,000, or 9.9%, to $553,000 for the three months ended
March 31, 1998, as compared to the same period in 1997. This
decrease was partly due to a slight decrease in the yield on
fixed income securities, which was 6.55% for the three months
ended March 31, 1998 compared to 6.67% for the same period in
1997. In addition, investment income from equity securities
decreased by $17,000 for the three months ended March 31, 1998
compared to the same period in 1997.
Net Realized Investment Gains - Net realized investment
gains increased by $122,000 for the three months ended March 31,
1998 compared to the three months ended March 31, 1997. Realized
investment gains in the first quarter of 1998 reflect the
continued favorable equity market conditions in which Mercer
Mutual participates.
Underwriting Results - For the three months ended
March 31, 1998, Mercer Mutual had an underwriting gain of
$209,000 and a combined ratio of 96.0%, compared to an
underwriting loss of $158,000 and a combined ratio of 103.6% for
the three months ended March 31, 1997. The improvement in
underwriting results reflects the low claim volume for the
quarter, due in part to Mercer Mutual's strategic decision to
increase its commercial and casualty business which is less
sensitive to weather-related property losses, and the
restructuring of its reinsurance program.
Losses and Loss Adjustment Expenses - Net losses and loss
adjustment expenses incurred decreased by $47,000, or 1.6%, to
$2.9 million for the three months ended March 31, 1998 from the
same period in 1997. Loss and loss adjustment expenses were
54.3% of net premiums earned for the three months ended March 31,
1998 compared to 66.3% for the three months ended March 31, 1997.
The favorable ratio for the first quarter of 1998 is largely
attributable to the lack of severe weather conditions during such
period. Winter conditions were extremely mild, and the number of
<PAGE 52> losses reported to Mercer Mutual during the three
months ended March 31, 1998 were the lowest number reported
during the first quarter in the past five years.
Underwriting Expenses - Underwriting expenses increased
by $561,000, or 34.3%, to $2.2 million for the three months ended
March 31, 1998 from the same period in 1997. This increase was
primarily attributable to an increase in net commissions, which
resulted from changes in Mercer Mutual's reinsurance program.
The termination of most of the proportional reinsurance
arrangements significantly reduces the amount of ceded
commissions received. The reduction in ceded commissions results
in the increase in net commissions.
Federal Income Tax Expense - Federal income tax expense
was $320,000 for the three months ended March 31, 1998 compared
to $227,000 for the same period in 1997, which is attributable to
the increase in net income before taxes.
Net Income - Mercer Mutual had net income of $696,000 for
the three months ended March 31, 1998, compared to $355,000 for
the same period in 1997, primarily as a result of the factors
discussed above.
Results of Operations for the Year Ended December 31, 1997
Compared to the Year Ended December 31, 1996
Premiums - Mercer Mutual experienced an increase in direct
premiums written for the year ended December 31, 1997 of
$3.5 million or 14.0%, as compared to the same period in 1996,
which reflects Mercer Mutual's strategy to increase its
commercial business. Commercial lines premiums increased by
$2.6 million, or 28.2%, for the year ended December 31, 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 year ended December 31, 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 7.9% in
direct homeowners premiums written despite a decrease of 4.3% in
the number of homeowners policies written.
Assumed premiums written decreased by $4.5 million, or
89.1%, for the year ended December 31, 1997 as compared to the
same period in 1996. Approximately $4.3 million of this decrease
is directly attributable to the termination of Mercer Mutual's
participation in the New Jersey Homeowners Pool (the "Homeowners
Pool") as of December 31, 1996 because premiums are no longer
assumed under the terms of that agreement.
<PAGE 53>
Ceded premiums written increased $1.7 million, or 17.2%,
for the year ended December 31, 1997 compared to the year ended
December 31, 1996, principally because of the above-described
increase in direct premiums written of 14.0%. As premiums
subject to reinsurance coverage increase, ceded written premiums
increase at similar levels. The increase in ceded premiums also
reflects the introduction of reinsurance for Mercer Mutual's new
commercial automobile program and small increases in certain
premium rates.
Net premiums written decreased $2.7 million or 13.2%, to
$17.4 million for the year ended December 31, 1997 from the year
ended December 31, 1996. For the same comparative period, net
premiums earned decreased by $2.7 million, or 12.9%, to
$18.0 million. The decrease in net premiums written and net
premiums earned for the year ended December 31, 1997 is
principally attributable to the termination of the Homeowners
Pool.
Net Investment Income - Net investment income increased
$61,000, or 2.7%, to $2.4 million for the year ended December 31,
1997 as compared to the same period in 1996. Mercer Mutual
continues to principally invest its available funds in taxable
fixed income securities which generally produce higher yields
than nontaxable securities. For the year ended December 31,
1997, the yield on fixed income securities remained at the 6.7%
level attained in 1996.
Net Realized Investment Gains - Net realized investment
gains decreased by $7,000 for the year ended December 31, 1997
compared to the year ended December 31, 1996. Despite this small
decrease, realized investment gains in 1997 reflect continued
favorable equity market conditions.
Underwriting Results - For the year ended December 31, 1997,
Mercer Mutual had an underwriting gain of $106,000 and a combined
ratio of 99.4% compared to an underwriting loss of $2.2 million
and a combined ratio of 110.8% for the year ended December 31,
1996. The change in underwriting results 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 $4.2 million, or 28.4%,
to $10.6 million for the year ended December 31, 1997 from the
same period in 1996. Loss and loss adjustment expenses were
58.9% of net premiums earned for the year ended December 31, 1997
compared to 71.7% for the year ended December 31, 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
<PAGE 54> damaging blizzard struck Mercer Mutual's operating
region. The net cost of the blizzard was approximately
$1 million in additional claims. In addition, as of January 1,
1997, the Homeowners Pool was replaced with the Homeowners Quota
Share Program. The termination of the Homeowners Pool and the
placement of the Homeowners Quota Share Program served to reduce
net loss and loss adjustment expenses in 1997 by $2.3 million
over 1996. In 1996, participation in the Homeowners Pool
increased losses and loss adjustment expenses by $1.4 million.
In 1997, however, because participation in the Homeowners Quota
Share Program does not require the assumption of premiums or
losses (unlike the Homeowners Pool) but does require the ceding
of premiums and losses, such participation decreased loss and
loss adjustment expenses by $865,000. See "Business --
Reinsurance" for a description of the Homeowners Pool, the
Homeowners Quota Share Program and Mercer Mutual's other
reinsurance programs.
Underwriting Expenses - Underwriting expenses decreased by
$793,000, or 9.8%, to $7.3 million for the year ended
December 31, 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
the year ended December 31, 1997 resulted in additional ceded
commissions recognized under profit commission arrangements.
Federal Income Tax Expense - Federal income tax expense was
$1.0 million for the year ended December 31, 1997 compared to
$171,000 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 $2.2 million
for the year ended December 31, 1997, compared to $640,000 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.
<PAGE 55>
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 unearned
premiums of $510,000.
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
<PAGE 56> 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.
<PAGE 57>
Effect of Conversion and Redomestication 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 $20.7 million and $31.8 million,
an increase of approximately 84.4% to 129.7 over the consolidated
capital of Mercer Mutual at December 31, 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 $250,750 (at the Total
Minimum) and $376,944 (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 may contribute to the MRP 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 135,700 shares at the Total Maximum of the
Estimated Valuation Range). The cost of any 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. Implementation of the MRP is
subject to shareholder approval. See "Management of the
Company -- Certain Benefit Plans and Agreements -- Management
Recognition Plan."
State Taxes. Prior to the Redomestication, which occurred
on October 16, 1997, Mercer Mutual was subject to tax in New
Jersey as a New Jersey-domiciled insurance company. 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 all or a
portion of 1997 and for all future years, substantially more in
taxes to New Jersey than it has in the past, which would have a
material adverse affect on the results of operations of Mercer
Mutual. Under this interpretation, if the Redomestication had
occurred on January 1, 1997, Mercer Mutual would have been
required to pay $542,000 in taxes to New Jersey for the year
<PAGE 58> ended December 31, 1997, $469,000 more than the amount
which has been calculated due for such year. If this
interpretation is correct, the New Jersey retaliatory tax
provision would materially affect the Company's future results of
operations and cash flows, but would not be expected to
materially affect the Company's liquidity because the investment
and reinsurance strategies in place provide liquidity to Mercer
Mutual. See "Risk Factors -- Possible Adverse Impact of New
Jersey Tax Laws." Mercer Mutual, however, may have the ability
to mitigate a portion of any adverse tax consequences by renewing
policies in MIC, a New Jersey domestic insurance company.
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 March 31, 1998.
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, 1997, 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
<PAGE 59> statement. As of December 31, 1997, amounts available
for payment of dividends from Mercer Mutual in 1998 without the
prior approval of the Pennsylvania Department would have been
approximately $2.0 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.
Changes in Reinsurance
Mercer Mutual terminated its participation in the Garden
State Reinsurance Association ("GSRA") as of December 31, 1997.
The termination of this arrangement is not expected to have a
material impact on the Company's results of operations and cash
flows because the cost to reinsure this business should
approximate the net cost incurred in participating in the GSRA.
Effective January 1, 1998, the Insurance Companies
restructured their reinsurance program by increasing the exposure
retained by the Insurance Companies on certain coverages. The
level of such restructuring with respect to each coverage was
based largely on historical loss experience, with overall
consideration given to a recent reduction in the amount of the
Insurance Companies' Probable Maximum Loss. By increasing
retention levels, the amount of premiums ceded to reinsurers will
decrease, thus increasing net premiums. Losses and loss
adjustment expenses will increase because fewer losses and loss
adjustment expenses will be recovered from reinsurers. Net
reserve estimates should increase as recoveries from reinsurers
decrease. Management believes that by restructuring the
Insurance Companies' retention levels, there should be a positive
impact on its results of operations and financial condition, as
increased premium earnings should exceed any increase in losses
and loss adjustment expenses caused by this restructuring. No
assurance can be made, however, that any future losses resulting
from this restructuring would not exceed the aggregate increase
in net premiums resulting from the restructuring, or would not
otherwise have a material adverse effect on the Insurance
Companies' financial condition and results of operations. See
"Business -- Reinsurance."
Changes in Interest Rates
Much of the Company's fixed income investment portfolio
matures after five years. It is the Company's strategy to hold
these securities until maturity. Even so, fluctuations in near-
term interest rates could have an impact on the Company's results
of operations and cash flows. Certain of these securities have
call features. In a declining interest rate environment, these
securities may be called by their issuer and replaced with
securities bearing lower interest rates. In a rising interest
rate environment, because of its strategy of holding these
<PAGE 60> securities to maturity, the Company's ability to invest
in higher yielding securities would be limited.
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. Material provisions of this statement include
reclassification adjustments of other comprehensive income
components, the prominent display of other comprehensive income
components and the disclosure on the amount of income tax expense
or benefit allocated to each component. All such provisions have
been applied 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.
<PAGE 61>
Impact of Year 2000 Issue
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. This inability
could result in system failures or miscalculations causing
possible inaccuracies in data and disruption of operations,
including among other things, a temporary inability to process
transactions, prepare invoices, or engage in similar normal
business activities.
The Company has completed an initial assessment of the
impact of this issue on the Company, and has determined that its
vulnerability is mainly (i) with the third party provider who
processes all of the Insurance Companies' premium, loss and
billing transactions, and (ii) under policies of insurance
providing business interruption and other coverages to insureds
who are adversely impacted by the Year 2000.
Under the Insurance Companies' agreement with the third
party provider, the provider is obligated to pay all software
related costs incurred in order to 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,
either are believed to be Year 2000 compliant or are expected to
be Year 2000 compliant in the near future at no significant cost
to the Insurance Companies. With respect to insurance policies
providing coverages to insureds who may incur losses as a result
of Year 2000 problems, the Insurance Companies are in the process
of reviewing these coverages to evaluate the Insurance Companies'
possible exposure under such coverages. To the extent that the
Insurance Companies' systems and those of their policyholders are
not fully Year 2000 compliant, there can be no assurance that
systems interruptions, the cost necessary to update software, or
resulting losses and loss adjustment expenses under policies
issued by the Insurance Companies would not have a materially
adverse effect on the Insurance Companies' business, financial
condition and results of operations.
<PAGE 62>
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
<PAGE 63> 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 98.7% of the direct premiums written by the Insurance
Companies for the three months ended March 31, 1998 and each of
the years in the three-year period ended December 31, 1997. As
of March 31, 1998, the Insurance Companies had approximately
42,000 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
March 31, 1998, the consolidated assets of Mercer Mutual and its
subsidiaries were $74.7 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.
<PAGE 64>
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.
Capital raised in the Conversion is expected to supply
additional surplus necessary to support any substantial increase
in commercial and casualty premium volume.
<PAGE 65>
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
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.
<PAGE 66>
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:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
----------------------------- -------------------------------------------------
% of % of % of % of % of
1998 Total 1997 Total 1997 Total 1996 Total 1995 Total
---- ----- ----- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Premiums Written:
Homeowners. . . . . . . . . . . . . $2,782 39.1% $2,747 42.8% $13,057 45.9% $12,101 48.5% $11,602 47.0%
Commercial multi-peril. . . . . . . 1,790 25.1% 1,489 23.2% 6,374 22.4 5,065 20.3 4,437 17.8
Other liability . . . . . . . . . . 997 14.0% 898 14.0% 3,965 13.9 3,486 14.0 3,563 14.3
Fire, allied, inland marine . . . . 810 11.4% 803 12.5% 3,413 12.0 3,437 13.8 4,112 16.5
Workers' compensation . . . . . . . 528 7.4% 464 7.2% 1,239 4.4 869 3.5 985 3.9
Commercial automobile . . . . . . . 215 3.0% 19 0.3% 405 1.4 - - - -
------ ------ ------ ------ ------- ------ ------- ------ ------- ------
Total. . . . . . . . . . . . . $7,122 100.0% 6,420 100.0% $28,453 100.0% $24,958 100.0% $24,699 100.0%
====== ====== ====== ====== ======= ====== ======= ====== ======= ======
<CAPTION>
Three Months Ended March 31 Year Ended December 31,
------------------------------- ------------------------------------------------
% of % of % of % of % of
1998 Total 1997 Total 1997 Total 1996 Total 1995 Total
---- ----- ---- ----- ------- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Premiums Earned
Homeowners. . . . . . . . . . . . . 2,400 45.6% 2,034 46.4% $ 8,215 45.7% $10,347 50.1% $10,182 48.9%
Commercial multi-peril. . . . . . . 840 18.0% 719 16.4% 2,969 16.5 2,903 14.1 2,471 11.9
Other liability . . . . . . . . . . 851 16.2% 679 15.5% 2,825 15.7 2,925 14.2 2,829 13.6
Fire, allied, inland marine . . . . 726 13.8% 707 16.1% 2,746 15.3 3,250 15.8 3,991 19.2
Workers' compensation . . . . . . . 377 7.2% 254 5.8% 1,235 6.9 1,209 5.8 1,344 6.5
Commercial automobile(1). . . . . . 71 1.3% (9) -0.2% (21) (0.1) - - - -
---- ----- ----- ----- ------- ------ ------- ------ ------- -----
Total. . . . . . . . . . . . . 5,265 100.0% 4,384 100.0% $17,969 100.0% $20,634 100.0% $20,817 100.0%
===== ====== ===== ====== ======= ====== ======= ====== ======= ======
Net Loss Ratio
Homeowners(2) . . . . . . . . . . . 47.6% 70.1% 67.2% 85.4% 78.8%
<PAGE 67>
Commercial multi-peril. . . . . . . 67.3% 53.6% 33.5% 59.3 34.3
Other liability . . . . . . . . . . 67.9% 87.0% 70.7% 102.7 72.1
Fire, allied, inland marine . . . . 41.1% 55.9% 49.4% 36.3 38.4
Workers' compensation . . . . . . . 68.9% 43.9% 54.4% 5.2 63.8
Commercial automobile(1). . . . . . 21.5% 0.0% (239.4%) - -
Total. . . . . . . . . . . . . 54.3% 66.3% 58.9% 71.7% 63.9%
Expense Ratios
Homeowners. . . . . . . . . . . . . 40.1% 36.2% 43.1% 38.4% 41.4%
Commercial multi-peril. . . . . . . 43.8% 35.4% 31.2% 42.1 38.9
Other liability . . . . . . . . . . 41.9% 42.8% 42.5% 39.1 41.8
Fire, allied, inland marine . . . . 43.0% 35.3% 38.6% 37.0 37.0
Workers' compensation . . . . . . . 39.1% 41.0% 40.7% 43.2 39.0
Commercial automobile(1). . . . . . 67.0% 11.2% (173.4%) - -
Total. . . . . . . . . . . . . 41.7% 37.3% 40.5% 39.1% 40.2%
Combined Ratios(3)
Homeowners. . . . . . . . . . . . . 87.8% 106.3% 110.3% 123.8% 120.2%
Commercial multi-peril. . . . . . . 111.1% 89.0% 64.7% 101.4 73.3
Other liability . . . . . . . . . . 109.9% 129.8% 113.2% 141.8 113.9
Fire, allied, inland marine . . . . 84.2% 91.2% 88.0% 73.3 75.3
Workers' compensation . . . . . . . 108.0% 85.0% 95.1% 48.4 102.8
Commercial automobile(1). . . . . . 88.5% 11.2% (412.8%) - -
Total. . . . . . . . . . . . . 96.0% 103.6% 99.4% 110.8% 104.1%
Industry Combined Ratio (4) . . . . -- -- 101.6% 105.9% 106.4%
</TABLE>
- ----------------
(1) The Insurance Companies commenced writing commercial
automobile coverages in 1997. The negative balances
for commercial automobile result from the minimum
reinsurance charges incurred in connection with the
commencement of this line of business.
(2) The reduction in the net loss ratio related to
homeowners insurance for the three months ended
March 31, 1998 as compared to the three months ended
March 31, 1997, and for the year ended December 31,
1997 as compared to the year ended December 31, 1996,
is principally due to improved weather conditions and
lower claim volume combined with changes in the
Insurance Companies' reinsurance programs introduced in
1997. See "Management's Discussion and Analyses of
Financial Condition and Results of Operations --
Results of Operations for the Year Ended December 31,
1997 compared to the Year Ended December 31, 1996.
(3) A combined ratio over 100% means that an insurer's
underwriting operations are not profitable.
(4) Data unavailable for the three month periods ended
March 31, 1998 and 1997.
<PAGE 68>
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 March 31, 1998, Mercer Mutual
had approximately 29,500 homeowners policies in force, with 27.5%
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 March 31, 1998, 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 March 31, 1998,
approximately 2,300 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.
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
<PAGE 69> products/completed operations exposures are routinely
provided. Coverage is provided for other exposures such as
vacant land and habitational risks. There were approximately
1,400 commercial general liability policies in force as of
March 31, 1998.
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 <PAGE 70>
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 March 31, 1998, over 98% of the
Insurance Companies' workers' compensation insureds have other
Mercer Mutual policies. There were approximately 1,150 workers'
compensation policies in effect as of March 31, 1998.
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 three months ended March 31, 1998 and the year
ended December 31, 1997, the Insurance Companies' largest agency
accounted for approximately 10.5% and 7.3%, respectively, of the
Insurance Companies' direct premiums written, and no other agency
accounted for more than 5% of the Insurance Companies' direct
premiums written. For the three months ended March 31, 1998 and
the year ended December 31, 1997, the Insurance Companies' top
10 agencies accounted for 30.5% and 26.8%, respectively, of
direct premiums written, with the largest agency generating
approximately $749,000 and $2.1 million, respectively, 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
<PAGE 71> 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.
<PAGE 72>
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 March 31, 1998,
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 GSRA, an insurance pool
which provides for the sharing of workers' compensation losses
under an excess of loss reinsurance treaty. As of January 1,
1998, 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 23% 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
<PAGE 73> 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. The Insurance
Companies' reinsurance arrangements are placed with non-
affiliated reinsurers, and are generally renegotiated annually.
For the year ended December 31, 1996, the Insurance Companies
ceded to reinsurers $14.4 million of earned premiums. For the
year ended December 31, 1997, the Insurance Companies ceded to
reinsurers earned premiums of $9.5 million. The significant
decrease in ceded premiums for the year ended December 31, 1997
reflects the effect of a restructuring of the reinsurance program
as of January 1, 1997, which restructuring is described below.
For the three months ended March 31, 1998, the Insurance
Companies ceded to reinsurers earned premiums of $2.0 million,
compared to $2.1 million in earned premiums ceded to reinsurers
for the three months ended March 31, 1997.
For the year ended December 31, 1997, the largest exposure
retained by the Insurance Companies on any one individual
property risk was $75,000. Excess reinsurance was provided on a
treaty basis in layers as follows: Individual property risks in
excess of $75,000 were covered on an excess of loss basis up to
$250,000 per risk pursuant to various reinsurance treaties.
Except for commercial automobile physical damage, per risk
property losses in excess of $250,000 was reinsured on a
proportional basis through treaty coverage or facultative
coverage. Commercial automobile physical damage was reinsured
separately on a quota share and excess of loss basis. The
maximum commercial automobile physical damage exposure was
$50,000.
Effective January 1, 1998, the largest exposure retained by
the Insurance Companies on any one individual property risk is
$250,000. Individual property risks in excess of $250,000 are
covered on an excess of loss basis pursuant to various
reinsurance treaties. As of January 1, 1998, all property lines
of business, including commercial automobile physical damage, are
reinsured under the same treaties.
For the year ended December 31, 1997, except for workers'
compensation, umbrella liability, and commercial automobile
liability, individual casualty risks that were in excess of
$100,000 were covered on an excess of loss basis, up to
$1.2 million per occurrence, pursuant to various reinsurance
<PAGE 74> treaties. Casualty losses arising from workers'
compensation claims were reinsured on a per occurrence and per
person treaty basis by various reinsurers up to $10.0 million
through GSRA. Umbrella liability losses were 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 was
reinsured separately on a quota share and excess of loss basis.
The maximum commercial automobile liability exposure was $50,000.
The Insurance Companies also purchased casualty contingency loss
excess reinsurance providing $3.0 million of coverage in excess
of $1.2 million.
Effective January 1, 1998, except for umbrella liability,
individual casualty risks that are in excess of $250,000 are
covered on an excess of loss basis up to $1.0 million per
occurrence, pursuant to various reinsurance treaties. Casualty
losses in excess of $1.0 million arising from workers'
compensation claims are reinsured up to $10.0 million on a per
occurrence and per person treaty basis by various reinsurers.
Umbrella liability losses are reinsured on a 90% 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
32.5%. The Insurance Companies also purchase casualty
contingency loss excess reinsurance providing $3.0 million of
coverage in excess of $1.0 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 purchased layers of excess treaty reinsurance for
catastrophic property losses for 1997, under which Mercer Mutual
reinsured 100% of losses per occurrence in excess of $1.0 million
and up to $2.0 million, and 95% of losses per occurrence in
excess of $2.0 million, up to a maximum of $45.0 million per
occurrence.
Effective January 1, 1998, Mercer Mutual purchased layers of
excess treaty reinsurance for catastrophic property losses, under
which Mercer Mutual reinsures 100% of losses per occurrence in
excess of $1.0 million and up to $2.0 million, and 97.5% of
losses per occurrence in excess of $2.0 million, up to a maximum
of $32.0 million per occurrence. Mercer Mutual reduced its
catastrophe excess reinsurance amounts in 1998 because its
estimated exposure to catastrophes, as calculated in 1997 by
computer modeling techniques, demonstrated a significant
reduction in such exposures.
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. During 1997, under this
agreement, losses were reinsured for 90% of losses exceeding 70%
of annual earned premiums, up to $2.2 million. Such agreement
<PAGE 75> has been amended so that, effective January 1, 1998,
losses are reinsured for 90% of losses exceeding 70% of annual
earned premiums up to $2.7 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 the Homeowners Quota Share
Program 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 March 31, 1998 the
Company's five largest reinsurers based on percentage of ceded
premiums are set forth in the following table:
Percentage of A.M. Best
Name Ceded Premiums Best Rating
American Re-Insurance Co. 19.31% A+
Motors Insurance Corporation 16.75% A+
Hartford Fire Insurance Co. 15.87% A+
Arkwright Mutual Insurance Company 5.27% A+
Vesta Fire Insurance Corporation 3.56% A
The following table sets forth the five largest amounts
of loss and loss expenses recoverable from reinsurers on unpaid
claims as of March 31, 1998.
<PAGE 76>
Loss and
loss expenses
recoverable A.M. Best
Name on unpaid claims Rating
(In thousands)
Franklin Mutual Insurance Co. 1,556 A
Cumberland Mutual Fire Ins. Co. 1,531 A+
Hartford Fire Insurance Co. 1,421 A+
Odyssey Reinsurance Co. 716 A-
Motors Insurance Corporation 617 A+
The A+ and A ratings are the second and third highest of
A.M. Best's fifteen ratings. All of the Insurance Companies'
other reinsurers are rated "A-" or better by A.M. Best.
According to A.M. Best, companies with a rating of "A-" or better
have a strong ability to meet their ongoing obligations to
policyholders. 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 year ended December 31, 1997, the Insurance
Companies assumed $598,000 in earned premiums. The significant
decrease in assumed earned premiums for the year ended
December 31, 1997 reflects the above-described termination by the
Insurance Companies of their participation in the Homeowners Pool
effective December 31, 1996, which resulted in the Insurance
Companies no longer assuming business from the other Homeowners
Pool participants. For the three months ended March 31, 1998,
the Insurance Companies assumed $137,000 in earned premiums
compared with $103,000 in earned premiums assumed for the three
months ended March 31, 1997.
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
<PAGE 77> 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
<PAGE 78> 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 three months ended March 31, 1998 and
1997 and the years ended December 31, 1997, 1996 and 1995 as
prepared in accordance with GAAP.
Reconciliation of Reserve for Losses
and Loss Adjustment Expenses
<TABLE>
<CAPTION> Three Months Ended
March 31, Year Ended December 31,
1998 1997 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at the beginning of period . . . . . . . . . $31,872 $35,221 $35,221 $36,176 $35,531
Less: Reinsurance recoverables and receivables . . . . (12,021) (15,147) (15,147) (16,819) (17,233)
Net reserves for losses and loss adjustment
expenses at beginning of period . . . . . . . . . . 19,851 20,074 20,074 19,357 18,298
Add: Provision for losses and loss adjustment
expenses for claims occurring in:
The current year . . . . . . . . . . . . . . . . 2,967 3,068 11,649 16,445 14,251
Prior years . . . . . . . . . . . . . . . . . . (106) (160) (1,055) (1,644) (955)
Total incurred losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . 2,861 2,908 10,594 14,801 13,296
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year . . . . . . . . . . . . . . . . 390 391 4,775 7,715 5,302
Prior years . . . . . . . . . . . . . . . . . . 1,557 2,669 6,042 6,369 6,935
Total losses and loss adjustment expenses. . . . 1,947 3,060 10,817 14,084 12,237
Net reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . 20,765 19,922 19,851 20,074 19,357
Add: Reinsurance recoverables and receivables . . . . 10,425 14,654 12,021 15,147 16,819
Reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . 31,190 34,576 $31,872 $35,221 $36,176
</TABLE>
The following table shows the development of the
consolidated reserves for unpaid losses and LAE from 1987 through
1997 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
<PAGE 79> 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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1987 1988 1989 1990 1991
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE
net of reinsurance recoverable . . . $7,646 $9,266 $13,247 $16,698 $18,509
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 2,760 3,268 4,702 5,195 5,621
Two years later. . . . . . . . . . . 4,101 5,129 7,282 8,091 8,587
Three years later. . . . . . . . . . 5,181 6,684 9,342 10,307 11,315
Four years later . . . . . . . . . . 5,825 7,899 10,888 12,112 13,162
Five years later . . . . . . . . . . 6,363 8,643 11,694 12,904 14,033
Six years later. . . . . . . . . . . 6,627 9,063 11,997 13,262 14,389
Seven years later. . . . . . . . . . 6,800 9,169 12,096 13,470
Eight years later. . . . . . . . . . 6,857 9,236 12,177
Nine years later . . . . . . . . . . 6,851 9,275
Ten years later. . . . . . . . . . . 6,864
Liability estimated as of:
One year later . . . . . . . . . . . 7,895 10,446 14,766 16,168 17,400
Two years later. . . . . . . . . . . 7,657 10,914 13,989 15,632 16,293
Three years later. . . . . . . . . . 7,581 10,330 13,540 14,787 15,973
Four years later . . . . . . . . . . 7,256 10,076 12,724 14,209 15,411
Five years later . . . . . . . . . . 7,272 9,603 12,643 13,945 15,298
Six years later. . . . . . . . . . . 7,100 9,595 12,556 13,996 15,153
Seven years later. . . . . . . . . . 7,055 9,586 12,518 13,963
Eight years later. . . . . . . . . . 7,035 9,522 12,517
Nine years later . . . . . . . . . . 7,033 9,529
Ten years later. . . . . . . . . . . 7,040
Cumulative total redundancy
(deficiency) . . . . . . . . . . . . 606 (263) 730 2,735 3,356
</TABLE>
PAGE 80
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <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 $19,851
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 6,329 6,023 6,935 6,368 6,042 --
Two years later. . . . . . . . . . . 9,940 9,786 10,272 9,554
Three years later. . . . . . . . . . 12,723 12,144 12,336
Four years later . . . . . . . . . . 14,160 13,590
Five years later . . . . . . . . . . 14,852
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 19,018 --
Two years later. . . . . . . . . . . 17,603 17,088 16,860 17,247
Three years later. . . . . . . . . . 16,985 16,779 16,495
Four years later . . . . . . . . . . 16,490 16,244
Five years later . . . . . . . . . . 16,225
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Cumulative total redundancy
(deficiency). . . . . . . . . . . 3,842 2,751 1,803 2,110 1,056 --
Gross liability - end of year. . . . . 38,472 33,308 35,531 36,176 35,221 31,872
Reinsurance recoverables . . . . . . . 18,405 14,313 17,233 16,819 15,147 12,021
Net liability - end of year. . . . . . $20,067 $18,995 $18,298 $19,357 $20,074 $19,851
======= ======= ======= ======= ======= =======
Gross reestimated liability-latest . . 33,323 28,775 31,011 30,974 31,539
Reestimated reinsurance recoverables-
latest. . . . . . . . . . . . . . 17,097 12,531 14,515 13,726 12,521
Net reestimated liability-latest . . . 16,225 16,244 16,495 17,247 19,018
====== ====== ====== ====== ======
Gross cumulative redundancy. . . . . . 5,149 4,533 4,520 5,202 3,682
====== ====== ====== ====== ======
</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.
<PAGE 81>
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.
The following table sets forth certain consolidated
information concerning Mercer Mutual's investments.
<TABLE>
<CAPTION>
At March 31, 1998 At December 31, 1997 At December 31, 1996
------------------------ ------------------------ ------------------------
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 . . . . . . . $23,238 $23,346 $25,195 $25,407 $23,702 $23,691
Obligations of states and
political subdivisions. . . . . . 5,175 5,251 3,396 3,517 4,313 4,343
Industrial and miscellaneous. . . . 500 492 300 300 -- --
Mortgage-backed securities. . . . . 5,941 5,621 6,106 5,723 7,631 6,930
Total fixed income securities . . 34,854 34,710 34,997 34,947 35,646 34,964
Equity securities . . . . . . . . . . 8,046 12,957 6,948 10,852 5,892 7,795
Total . . . . . . . . . . . . . . $42,900 $47,667 $41,945 $45,799 $41,538 $42,759
======= ======= ======= ======== ======= =======
</TABLE>
____________
(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.
The table below contains consolidated information
concerning the investment ratings of Mercer Mutual's fixed
maturity investments at March 31, 1998.
Type/Ratings of Amortized Market
Investment(1) Cost Value Percentages(2)
- --------------- --------- ------ --------------
(Dollars in thousands)
U.S. Government and
agencies . . . . . . . $23,238 $23,346 67.3%
AAA. . . . . . . . . . . 10,246 9,975 28.7
AA . . . . . . . . . . . 770 795 2.3
A. . . . . . . . . . . . 500 492 1.4
<PAGE 82>
BBB. . . . . . . . . . . 100 102 0.3
Total. . . . . . . . . $34,854 $34,710 100.0%
____________
(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 83
<PAGE>
The table below sets forth the maturity profile of Mercer
Mutual's consolidated fixed maturity investments as of March 31,
1998:
Amortized Market
Maturity Cost(1) Value Percentages(2)
(Dollars in thousands)
More than 1 year
through 5 years $ 1,232 $ 1,259 3.6%
More than 5 years
through 10 years 22,828 22,963 66.2
More than 10 years 4,853 4,867 14.0
Mortgage-backed
securities(3) 5,941 5,621 16.2
Total $34,854 $34,710 100.0%
======= ======= =====
____________
(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 3.5 years.
The average duration of Mercer Mutual's fixed maturity
investments, excluding mortgage backed securities which are
subject to paydown, as of March 31, 1998 was approximately 5.8
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 three months ended March 31, 1998 and
1997 and the years ended December 31, 1997, 1996 and 1995 and
were as follows: <PAGE 84>
<TABLE>
<CAPTION>
Three Months
Ended March 31 Year Ended December 31,
------------------ -----------------------
(Dollars in thousands)
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C>
Average invested assets. . . . . . . . $49,566 $45,105 $46,970 $44,728 $39,746
Net investment income . . . . . . . . 553 614 2,350 2,289 2,132
Return on average
invested assets. . . . . . . . . . . 4.5% 5.4% 5.0% 5.1% 5.4%
</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. In 1997,
management met with A.M. Best personnel to discuss the measures
the Insurance Companies are implementing to mitigate the concerns
expressed by A.M. Best. These measures include an increase in
the rates charged for homeowners insurance, the termination of
relationships with unprofitable agencies, decreasing their
catastrophe exposure by improving their mix of business through
an increase in commercial and casualty writings, the planned
geographic diversification of its business through acquisitions,
and the planned improvement of capital strength through the
Offerings. A.M. Best uses independent computer modeling systems
to measure an insurance company's catastrophe exposure. One of
the measurements generated by such computer modeling systems and
utilized by A.M. Best in the rating process is Probable Maximum
Loss. From August 31, 1996 to August 31, 1997, the Probable
Maximum Loss (before catastrophe reinsurance) of the Insurance
<PAGE 85> Companies has been reduced by 69.5% or from
$64.9 million to $19.8 million. 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
General. 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. 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
<PAGE 86> 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 and 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.
NAIC Requirements. 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
<PAGE 87> 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 years ended December 31, 1995 and 1996, either
or both of the Insurance Companies reported results outside the
acceptable range for the following IRIS tests: the two-year
overall operating ratio and the change in net writings. 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. For the
year ended December 31, 1997, neither of the Insurance Companies
reported results outside the acceptable range for any IRIS test.
The table below sets forth IRIS ratios outside the acceptable
range for the Insurance Companies during 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Insurance
Values
Equal to or Mercer Mutual MIC
-------------- ---------------------- ----------------------
Ratio Name/Description Over Under 1997 1996 1995 1997 1996 1995
- ---------------------- ---- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Change in net writings 33 (33) 263 (84)
Two-year overall
operating ratio 100 100 109
</TABLE>
For Mercer Mutual, the 1995 two-year overall operating
ratio was outside the acceptable range. Operating results were
adversely impacted by winter storms and wind storms which
resulted in significant losses in 1994, thereby increasing the
1995 two-year operating ratio.
For MIC, the 1995 two-year overall operating ratio was
outside the acceptable range. This ratio was negatively impacted
by MIC's share of losses from winter storms and wind storms it
<PAGE 88> assumed from Mercer Mutual under terms of their
reinsurance treaties at the time. (These storms occurred in 1994
and increased MIC's 1995 two-year operating ratio.) The treaties
with Mercer Mutual 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.
Guaranty Fund Laws. 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.
New and Proposed Legislation and Regulations. 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.
Dividends. 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, 1997, amounts available for payment of
dividends by Mercer Mutual to the Company in 1998 without the
<PAGE 89> prior approval of the Pennsylvania Department would
have been approximately $2.0 million.
Holding Company Laws. 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. Notice of certain material transactions between
an insurer and any person in its holding company system is
required to be given to the applicable insurance commissioner
and, in some states, certain of such transactions cannot be
consummated without the prior approval of the applicable
insurance commissioner.
Approval of the applicable insurance commissioner is
required prior to consummation of transactions affecting the
control of an insurer. In 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.
Offer to Acquire Mercer Mutual
Pennsylvania law also prohibits any person from making a
tender offer for, or a request or invitation for tenders of, or
seeking to acquire or acquiring any voting security of an insurer
if, after the consummation of such an acquisition, such person
would be in control of such insurer, unless such offer, request,
invitation or acquisition has received the prior approval of the
Pennsylvania Department. On March 3, 1998, Mercer Mutual
received an unsolicited offer from Franklin Mutual Insurance
Company ("Franklin") to purchase from Mercer Mutual, upon the
consummation of the Conversion, all of the to-be-issued capital
stock of Mercer Mutual for a purchase price of $23.2 million,
representing the net worth of Mercer Mutual at December 31, 1997
under generally accepted accounting principles. Under Franklin's
proposal, Mercer Mutual was asked to amend the Plan to provide
that policyholders would receive the $23.2 million payment.
Franklin also committed to contribute an additional $5 million of
capital to Mercer Mutual. Franklin made such offer without
receiving the prior approval of the Pennsylvania Department.
Mercer Mutual's Board of Directors unanimously rejected such
<PAGE 90> offer. On April 3, 1998, Mercer Mutual received a
letter from Franklin reextending its offer. Such reextention was
also made without the prior approval of the Pennsylvania
Department. Mercer Mutual's Board of Directors again unanimously
rejected such offer.
Legal Proceedings
On April 27, 1998, Franklin delivered a letter to Mercer
Mutual demanding that Mercer Mutual allow Franklin to examine
Mercer Mutual's list of Eligible Policyholders and to make copies
of or extracts from such list, for the purpose of communicating
with Eligible Policyholders concerning the Plan. Mercer Mutual
refused such demand and on May 7, 1998 filed an action against
Franklin in the Court of Common Pleas of Chester County,
Pennsylvania seeking, among other things, a declaratory judgment
that Franklin is not entitled to examine or make copies or
extracts from Mercer's Mutual's list of Eligible
Policyholders.
Mercer Mutual denied Franklin's request because
management of Mercer Mutual believes that Franklin's intended
purposes for requesting a list of Eligible Policyholders are (i)
to solicit opposition to the Plan so that Conversion will not be
approved by the Eligible Policyholders and Mercer Mutual, a
competitor of Franklin, will not complete the Conversion and
become a stronger competitor, and (ii) to use the list to make an
offer for the stock of Mercer Mutual that violates applicable
insurance holding company laws (see "--- Regulation --- Holding
Company Laws"). Further, allowing Franklin to inspect and copy
Mercer Mutual's policyholder list would enable Franklin to
communicate and market Franklin and its insurance products
directly to Mercer Mutual's policyholders.
On May 11, 1998, Franklin responded by filing in the same
court an application to compel production of the policyholder
list. Both actions are still pending.
In addition to the foregoing, 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.
<PAGE 91>
Intercompany Agreements
Mercer Mutual and MIC are 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 Consolidated 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.
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 March 31, 1998, the total number of full-time
equivalent employees of Mercer Mutual was 47. 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, Jr. 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 92
<PAGE>
<TABLE>
<CAPTION>
Age at Business Experience
March 31, Director for the Last Five Years;
1998 Since(1) Other Directorships
<S> <C> <C> <C>
Roland D. Boehm 60 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. 48 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 35 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 $950 and a monthly meeting fee of
$700 and directors of MIC will be paid a monthly retainer of
$350. 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.
<PAGE 93>
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 Business Experience
March 31, Officer For the Last
Name 1998 Since(1) Title Five Years
<S> <C> <C> <C> <C>
William C. Hart 64 1986 President and President, Chief
Chief Executive Executive Officer,
and Director of
Mercer Mutual and MIC
Andrew R. Speaker 35 1990 Executive Vice Senior Vice President
President, Chief of Mercer Mutual and
Operating Officer, MIC from April 1994
Chief Financial to October 1, 1997;
Officer and Chief Financial
Treasurer Officer and 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
<PAGE 94>
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, the Executive Vice
President, Chief Operating Officer, Chief Financial Officer and
Treasurer, and a Vice President of the Company, for each of the
fiscal years ended December 31, 1995, 1996 and 1997. All
compensation paid in 1995, 1996 and 1997 to such executive
officers was paid by Mercer Mutual. No other executive officer
of the Company received compensation in excess of $100,000 for
the fiscal year ended December 31, 1997.
All Other
Name and Principal Salary Compensa-
Position Year (1)(2) Bonus tion(3)
William C. Hart 1997 $144,905 $30,000 $ 5,925
President and Chief 1996 135,776 9,102 5,919
Executive Officer 1995 129,136 12,191 5,165
Andrew R. Speaker 1997 108,421 25,000 4,110
Executive Vice 1996 97,964 7,079 3,768
President, Chief 1995 94,254 9,144 3,063
Operating Officer, Chief
Financial Officer and
Treasurer
Paul D. Ehrhardt 1997 84,616 19,000 2,003
Vice President 1996 50,769 4,045 0
1995 0 0 0
(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
<PAGE 95> 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 the 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 ___________, 1998, 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.
<PAGE 96>
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 Hornyak, Niedt, and Van Noy. 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. 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).
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
<PAGE 97> 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
<PAGE 98> 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 Awards will 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 $24,583, 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
<PAGE 99> 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.
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 _________________, 1998, 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 MRP may grant up to an aggregate number of shares
equal to 4% of the shares of the Common Stock that were issued in
the Conversion (the "MRP Shares"). The Company intends to
contribute sufficient funds to the MRP Trust to enable it to
purchase the MRP shares in the open market. However, if the MRP
Trustees are unable to purchase all of the MRP Shares in the open
market at a price which is satisfactory to the MRP Trustees in
their discretion, then all or a portion of the MRP Shares will
consist of newly issued shares of authorized Common Stock issued
directly by the Company to the MRP Trust. Subject to the
foregoing, at the Total Minimum, Total Midpoint, Total Maximum,
the Company anticipates that the number of MRP Shares purchased
in the open market would be 100,300 shares, 118,000 shares, and
<PAGE 100> 135,700 shares, respectively, and assuming that all of
the MRP Shares purchased in the open market are purchased at the
Purchase Price, the cost to the Company would be $1,003,000,
$1,180,000 and $1,357,000, respectively.
It is anticipated that all of the MRP Shares 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 MRP Shares shall
be voted by the MRP Trustees in the same manner and proportion as
the trustee of the ESOP's trust votes Common Stock held therein
(unless, in the opinion of counsel to the MRP Trustees, the MRP
Trustees' fiduciary duty requires otherwise), and shall be
distributed as the award vests. Dividends on unvested MRP 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 MRP 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 unvested MRP Shares. If the
employee's termination is caused by retirement at or after
age 65, death, or disability, all restrictions expire and all
awarded MRP Shares become vested and, consequently, unrestricted.
The same vesting rules apply to directors except that the
director retirement age is 75.
Participants will recognize compensation income when their
MRP Shares 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 MRP Shares not awarded will
revert to the Company. No decisions have been made concerning
the number of MRP awards to be granted to any director or
officer. No awards will be made prior to shareholder approval of
the MRP.
<PAGE 101>
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.
<PAGE 102>
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, during 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 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 Conversion
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 losses from severe winter storms in such
years that were largely responsible for Mercer Mutual's
<PAGE 103> $1.4 million net operating loss in 1994 and that
reduced net income by $665,000 in 1996. 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. Mercer Mutual's Board
of Directors believes that the geographic diversification that
could be achieved under Mercer Mutual's current organizational
structure as a mutual insurance company, by engaging in
relationships with independent agencies in other geographic
areas, through acquisitions or otherwise, would be a lengthy
process, and would be limited to the extent of Mercer Mutual's
capital and personnel resources, as well as by its inability to
issue stock to finance acquisitions. The Board of Directors of
Mercer Mutual has determined that the fastest and most effective
method to achieve its goals is through a conversion to a stock
company and a simultaneous and substantial infusion of capital.
The ability to issue stock and the additional capital would
immediately allow Mercer Mutual to seek and finance the
acquisition of companies with significant business in other
geographic areas, and would provide additional policyholder
protection. 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 an amended and
restated 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 held an informational public hearing regarding the
Conversion on June 5, 1998, and the Plan was approved by the
Pennsylvania Department on June ___, 1998. The Plan is subject
to the approval of Eligible Policyholders at the Special Meeting.
Completion of the Conversion is subject to the prior receipt of
the Pennsylvania Department's approval of the Company's
acquisition of control of Mercer Mutual.
<PAGE 104>
General
The Conversion will be accomplished through the filing with
the Department of State of the Commonwealth of Pennsylvania of
amended and restated Articles of Incorporation of Mercer Mutual
to authorize the issuance of shares of the capital stock of
Mercer Mutual 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 $25,075,000 and $33,925,000, 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 Conversion Offerings." It
<PAGE 105> is anticipated that all shares not subscribed for 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."
The completion of the Offerings is subject to market
conditions and other factors beyond the Company's control. 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 -- Certain Benefit Plans and
Agreements."
<PAGE 106>
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 currently does not anticipate 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, Jr. and Richard G. Van
Noy. See "Management of the Company -- Directors." All officers
<PAGE 107> 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 presently does not anticipate doing so in the future, whether
or not Mercer Mutual converts to stock form. With respect to the
Company, its shareholders, 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."
<PAGE 108>
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 at the
Purchase Price; provided, however, that the maximum number
of shares that may be purchased by Eligible Policyholders in
the aggregate is 3,392,500 shares. 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. If,
because of the magnitude of the oversubscription, shares of
Common Stock cannot be allocated among subscribing Eligible
Policyholders so as to permit each such Eligible
Policyholder to purchase the lesser of 1,000 shares or the
number of shares subscribed for, then shares of Common Stock
will be allocated among the subscribing Eligible
Policyholders in the proportion in which: (i) the aggregate
number of shares subscribed for by each such Eligible
Policyholder bears to (ii) the aggregate number of shares
subscribed for by all Eligible Policyholders; provided,
however, that no fractional shares of Conversion Stock shall
be issued.
<PAGE 109>
The following table sets forth the maximum number of
shares that an Eligible Policyholder could purchase if a
certain number of Eligible Policyholders each subscribed for
the maximum number of shares:
Number of Percentage of Maximum Number
Eligible Policyholders Eligible Policyholders of Shares
Subscribing for Subscribing for Each Subscriber
100,000 Shares(1) 100,000 Shares Could Purchase(1)
42,178 100% 80
31,634 75% 107
21,089 50% 160
10,545 25% 321
__________________
(1) Assumes that all subscribing Eligible Policyholders
subscribe for 100,000 shares. If any other Eligible
Policyholders subscribes for less than 100,000 shares, the
maximum number of shares that a subscriber for
100,000 shares could purchase could be less than the amount
reflected in the table.
Subscription Category No. 2 is reserved for the ESOP,
which shall receive, without payment, nontransferable
subscription rights to purchase at the Purchase Price, in
the aggregate, up to 10% of the total shares of Common Stock
to be issued in the Offerings. The ESOP is expected to
purchase 10% of the total shares of Common Stock issued in
the Offerings. 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 at the Purchase Price;
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. Each subscribing director, officer or
employee will then receive that number of shares of Common
Stock equal to the remaining unallocated shares of Common
Stock multiplied by a fraction the numerator of which is the
number of points held by such director, officer or employee
<PAGE 110> and the denominator of which is the total number
of points held by all subscribing directors, officers and
employees. 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 total number of shares that each
director, officer or employee will be able to purchase both
in his or her capacities as an Eligible Policyholder and a
director, officer or employee, will equal 100,000 shares in
the aggregate. Each of the Company's directors and
executive officers is also an Eligible Policyholder and will
purchase all of his or her shares in his or her capacity as
an Eligible Policyholder and not under Subscription Category
No. 3.
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
<PAGE 111> 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.
If 2,507,500 or more shares of the Common Stock are subscribed
for in the Subscription Offering, the Company, in its sole
discretion, will determine whether to accept subscriptions for
shares in the Community Offering. If 3,392,500 or more shares of
the Common Stock are subscribed for in the Subscription Offering,
no shares will be sold in the Community Offering. 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 June 4, 1998, the
estimated consolidated pro forma market value of Mercer Mutual as
a subsidiary of the Company was between $25.1 million and
$33.9 million. Under the Plan, the aggregate purchase price of
the common Stock to be offered in the Conversion must equal the
<PAGE 112> pro forma market value of Mercer Mutual following the
Conversion, on a consolidated basis, as a subsidiary of the
Company. 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
1,696,250 shares compared to a maximum of 3,392,500 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
Purchase Price will be $10.00 per share regardless of any change
in the estimated consolidated pro forma market value of Mercer
Mutual following the Conversion as a subsidiary of the Company,
as determined by Sheshunoff. The Company plans to issue between
2,507,500 and 3,392,500 shares (exclusive of purchases by the
ESOP) of the Common Stock in the Conversion. This range was
determined by dividing the price per share into the Estimated
Valuation Range.
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 an
Estimated Valuation Range of $25,075,000 to $33,925,000. 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 consolidated pro forma
market value of Mercer Mutual following the Conversion as a
subsidiary of the Company immediately prior to the completion of
the Offerings. If such updated estimated valuation does not fall
within the Estimated Valuation Range, the Company may cancel the
Offerings and terminate the Plan. If the Company proceeds with
the Offerings using the updated estimated valuation, subscribers
will be promptly notified by mail of the updated estimated
valuation and subscribers will be given an opportunity to confirm
or modify their orders. The funds of any subscribers who do not
withdraw or confirm 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.
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
<PAGE 113> 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.
If the updated estimated valuation Sheshunoff submits to the
Company and the Pennsylvania Department upon completion of the
Offerings falls within the Estimated Valuation Range, the
following steps will be taken:
Subscription Offering Meets or Exceeds Total Maximum.
If, upon conclusion of the Conversion Offerings, the
number of shares subscribed for by participants in the
Subscription Offering is equal to or greater than
3,392,500 shares, 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 Total Minimum.
If, upon conclusion of the Conversion Offerings, the
number of shares of Common Stock subscribed for by participants
in the Subscription Offering is equal to or greater than
2,507,500 shares, but less than 3,392,500 shares, then in such
event the Company may promptly consummate the Conversion, in
which case 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. Prior to consummating the Conversion, however, the Company
shall have the right in its absolute discretion to accept, in
whole or in part, subscriptions received from any or all
<PAGE 114> subscribers in the Community Offering and/or to offer
shares of Common Stock to purchasers in the Syndicated Community
Offering; provided, however, that no more than 3,392,500 shares
of Common Stock shall be issued in the Offerings (not including
shares issued to the ESOP); and, provided further, that no
fractional shares of Common Stock shall be issued.
Subscription Offering Does Not Meet Total Minimum.
If, upon conclusion of the Conversion Offerings, the
number of shares of Common Stock subscribed for by participants
in the Subscription Offering is less than 2,507,500 shares, the
Company will accept subscriptions received from subscribers in
the Community Offering and/or sell shares of Common Stock to
purchasers in a Syndicated Community Offering so that the
aggregate number of shares of Common Stock sold in the Offerings
is equal to or greater than 2,507,500 shares. The Conversion
will 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 such
additional number of shares of Common Stock such that the
aggregate number of shares of Common Stock to be issued in the
Offerings will be equal to 2,507,500 shares; provided, however,
that no fractional shares of Common Stock will be issued. In
order to raise additional capital, or to satisfy Nasdaq National
Market listing requirements (see "Management of the Company --
Certain Benefit Plans and Agreements -- Management Recognition
Plan"), the Company may in its absolute discretion elect to issue
in excess of 2,507,500 shares of Common Stock to subscribers in
the Community Offering and/or to purchasers in any Syndicated
Community Offering; provided, however, that the number of shares
of Common Stock issued shall not exceed 3,392,500 shares of
Common Stock (not including shares issued to the ESOP). See "The
Conversion -- The Conversion Offerings -- Community Offering,"
and "-- Syndicated Community Offering."
Offerings Do Not Meet Minimum.
If the aggregate number of shares of Common Stock
subscribed for in the Offerings is less than 2,507,500 shares,
then in such event the Company will cancel the Offerings and all
subscription funds will be returned promptly to subscribers
without interest.
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 offered or sold in a Syndicated
Community Offering. <PAGE 115>
There is a difference of approximately $8.9 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% smaller if 3,392,500 shares
are sold than if 2,507,500 shares are sold. Furthermore, as a
result of this broad range, the updated appraisal may estimate a
consolidated 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
consolidated 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
consolidated 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, prior to the consummation
of the Offerings, they will not have available to them
information concerning the final updated Appraisal. After
completion of the Offerings, the final 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 forms a part. See "Available Information."
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, 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
<PAGE 116> 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.
<PAGE 117>
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 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 withdraw or
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 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
2,507,500 shares of Common Stock have been subscribed for or
sold. If at least the 2,507,500 shares of Common Stock have not
been subscribed for or sold by the extended Termination Date, all
funds delivered to the Company pursuant to the Offerings 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 to the Conversion Center at P.O. Box 15,
Pennington, New Jersey 08534-0015, or in person at the Company's
principal executive offices located at 10 North Highway 31,
Pennington, New Jersey, 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
<PAGE 118> 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 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. The Company is
not aware of any restrictions which would prohibit Eligible
Policyholders who purchase shares of Common Stock in the
Conversion, and who are not executive officers or directors of
the Company or Mercer Mutual, from freely transferring such
shares after the Conversion. See "-- Limitations on Resales."
In the event a subscriber submits a Stock Order Form that
(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, any subscription rights of such
subscriber will not be honored, and such subscriber 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.
<PAGE 119>
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 check or money order in
U.S. Dollars. Payments made by check or money order will be
placed in an Escrow Account at First Union National Bank. The
Escrow Account will be administered by First Union National Bank
(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. Funds accompanying
Stock Order Forms will not be released until the Conversion is
completed or terminated.
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 the
aggregate fees payable to Sandler O'Neill for Common Stock sold
pursuant to such selected dealer's agreement shall not exceed
2.0% 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
<PAGE 120> 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
$489,050 and $648,350 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 Offerings 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
Conversion Offerings, 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
<PAGE 121> 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 the Purchase Price. 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.
<PAGE 122>
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 (4.0%, 3.4% and 3.0% 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 42,178 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
3,392,500 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 80 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 percent (34.0%) 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 Conversion Offerings, 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
<PAGE 123> individual purchase limitation or the number of shares
of Common Stock to be sold in the Conversion is decreased after
commencement of the Conversion Offerings, 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) 20,000
James J. Freda (4) 15,000
William C. Hart (4)(6) 15,000
George T. Hornyak, Jr. (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, Jr. (4)(8) 15,000
Marion J. Crum 1,000
John Danka 1,500
Paul Ehrhardt 2,500
Total 186,500
____________
(1) Does not include shares that could be allocated to
participants in the ESOP, under which officers and other
<PAGE 124> employees would be allocated, in the aggregate,
10% of the Common Stock issued in the Conversion. See
"Management of the Company -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
(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 (100,300, 118,000, 135,700 and
150,778 shares at the Total Minimum, Total Midpoint,
Total Maximum and Total Maximum plus ESOP shares,
respectively). Implementation of the MRP requires
shareholder approval. See "Management of the
Company -- Certain Benefit Plans and Agreements --
Management Recognition Plan."
(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 (250,750, 295,000,
339,250 and 376,944 shares at the Total Minimum, Total
Midpoint, Total Maximum and Total Maximum plus ESOP
shares). Implementation of the Compensation Plan
requires shareholder approval. See "Management of the
Company -- Certain Benefit Plans and Agreements --
Stock Compensation Plan."
(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; 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
<PAGE 125> 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 these 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
<PAGE 126> 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
<PAGE 127> 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
<PAGE 128> 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
<PAGE 129> 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).
<PAGE 130>
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
<PAGE 131>-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) eliminate the right of shareholders to
call a special meeting; (6) 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;
(7) 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; (8) limit the right of a person
or entity to vote more than 10% of the Company's voting stock;
(9) eliminate cumulative voting in elections of directors; and
(10) require that shares with at least 66-2/3% of total voting
power approve, repeal or amend the Bylaws.
<PAGE 132>
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 2,507,500 and 3,392,500 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 3,769,444 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.
<PAGE 133>
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, 1997 and 1996, and for each of
the years in the three-year period ended December 31, 1997 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.
<PAGE 134>
Sheshunoff has consented to the publication herein of the
summary of its opinion as to the estimated consolidated 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 to Convert from
Mutual to Stock Form 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 135
<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. <PAGE 136>
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.
<PAGE 137>
Net written premiums. . . . Gross premiums written and insured
by an insurer less premiums ceded
to reinsurers.
Probable Maximum Loss . . . The largest loss that a catastrophe
will probably cause under most
circumstances. It is not
ordinarily the "maximum possible
loss," which is the worst possible
scenario and which would, in many
cases, be 100% of the property
value. It is a concept used by
underwriters, reinsurers and A.M.
Best in evaluating catastrophe loss
potential.
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.
<PAGE 138>
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 139
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF MERCER MUTUAL
Page
INDEPENDENT AUDITORS' REPORT F-
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS F-
(As of December 31, 1997 and 1996)
STATEMENTS OF EARNINGS F-
(For the years ended December 31, 1997,
1996 and 1995)
STATEMENTS OF CHANGES IN SURPLUS F-
(For the years ended December 31, 1997,
1996 and 1995)
STATEMENTS OF CASH FLOWS F-
(For the years ended December 31, 1997,
1996 and 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
BALANCE SHEETS (Unaudited)
(As of March 31, 1998 and December 31, 1997) F-
STATEMENTS OF EARNINGS (Unaudited) F-
(For the three months ended March 31, 1998 and 1997)
STATEMENTS OF CHANGES IN SURPLUS (Unaudited) F-
(For the three months ended March 31, 1998 and 1997)
STATEMENTS OF CASH FLOWS (Unaudited) F-
(For the three months ended March 31, 1998 and 1997)
PAGE F-1
<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, 1997 and 1996, and the related statements of
earnings, changes in surplus, and cash flows for each of the
years in the three-year period ended December 31, 1997. 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, 1997 and 1996,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick, LLP
Philadelphia, Pennsylvania
February 18, 1998
PAGE F-2
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
(Dollars in thousands)
Investments, at fair value:
Fixed income securities,
available-for-sale $34,947 $34,964
Equity securities 10,852 7,795
Total investments 45,799 42,759
Cash and cash equivalents 2,707 2,675
Premiums receivable 3,334 2,308
Reinsurance receivables 13,206 18,908
Prepaid reinsurance premiums 3,046 994
Deferred policy acquisition costs 3,019 2,989
Accrued investment income 625 602
Property and equipment, net 1,413 1,441
Deferred income taxes -- 802
Other assets 936 596
Total assets $74,085 $74,074
Liabilities and Surplus
Liabilities:
Losses and loss adjustment
expenses $31,872 $35,221
Unearned premiums 14,723 13,179
Accounts payable and accrued
expenses 2,417 1,700
Deferred income taxes 177 --
Other reinsurance balances 835 4,028
Other liabilities 825 664
Total liabilities 50,849 54,792
Surplus:
Unassigned surplus 20,693 18,476
Accumulated other comprehensive
income:
Unrealized gains in investments,
net of deferred income taxes 2,543 806
Total surplus 23,236 19,282
Total liabilities and surplus $74,085 $74,074
See accompanying notes to consolidated financial statements.
PAGE F-3
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Revenue:
Net premiums earned $17,969 $20,634 $20,817
Investment income, net of expenses 2,350 2,289 2,132
Net realized investment gains 589 596 53
Other revenue 173 155 161
------- ------- -------
Total revenue 21,081 23,674 23,163
------- ------- -------
Expenses:
Losses and loss adjustment expenses 10,594 14,801 13,296
Amortization of deferred policy
acquisition costs 4,706 5,491 5,944
Other expenses 2,563 2,571 2,416
------- ------- -------
Total expenses 17,863 22,863 21,656
------- ------- -------
Income before income tax 3,218 811 1,507
Income tax 1,001 171 369
------- ------- -------
Net income $ 2,217 $ 640 $ 1,138
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE F-4
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Surplus
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of period $19,282 $18,963 $14,203
Net income 2,217 640 1,138
Other comprehensive income,
net of tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period (net of related
income tax expense of $1,095,
$37 and $1,884) 2,126 72 3,657
Less:
Reclassification adjustment for gains
included in net income (net of
related income tax expense of $200,
$203 and $18) (389) (393) (35)
------- ------- -------
Total 1,737 (321) 3,622
------- ------- -------
Comprehensive income 3,954 319 4,760
------- ------- -------
Balance, end of period $23,236 $19,282 $18,963
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE F-5
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flow
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,217 $ 640 $ 1,138
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property and
equipment 117 137 134
Net accretion of discount (51) (58) (54)
Net realized investment gain (589) (596) (53)
Net realized gain on sale of
property and equipment -- 3 --
Deferred income tax 83 (120) (55)
Change in assets and liabilities:
Premiums receivable (1,026) 2,345 (286)
Reinsurance receivables 5,702 (2,019) 368
Prepaid reinsurance premiums (2,052) 4,564 (55)
Deferred policy acquisition costs (30) 167 174
Other assets (363) 98 724
Losses and loss expenses (3,349) (955) 645
Unearned premiums 1,544 (5,074) 483
Other liabilities (2,355) 2,300 (214)
------- ------- -------
Net cash provided by (used in)
operating activities (152) 1,432 2,949
------- ------- -------
Cash flows from investing activities:
Purchase of fixed income securities,
available-for-sale (7,747) (6,477) (15,118)
Purchase of equity securities (7,477) (6,938) (5,891)
Sale and maturity of fixed income
securities available-for-sale 8,368 4,294 10,146
Sale of equity securities, available
for sale 7,089 6,983 9,412
Change in receivable/payable of
securities 40 (39) 99
Purchase of property and equipment (89) (176) (92)
Sale of property and equipment -- 29 --
------- ------- -------
Net cash used in investing activities 184 (2,324) (1,444)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 32 (892) 1,505
Cash and cash equivalents at beginning
of year 2,675 3,567 2,062
------- ------- -------
Cash and cash equivalents at end of
period $ 2,707 $ 2,675 $ 3,567
======= ======= =======
Cash paid during the year for: <PAGE F-6>
Interest $ 0 $ 0 $ 0
Income taxes $ 730 $ 125 $ 281
</TABLE>
See accompanying notes to consolidated financial statements
PAGE F-7
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Dollars in Thousands)
(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 46%, 22%, 13%
and 10%, respectively, of net premiums written in 1997.
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
<PAGE F-8> 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
below.
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. After receipt of a bona fide offer
to purchase this security, 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;
<PAGE F-9> 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, 1997 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.
<PAGE F-10>
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>
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Investment income:
Fixed income securities $2,379 $2,326 $2,068
Equity securities 192 153 168
Cash and cash equivalents 118 143 194
Other 41 46 54
------ ------ ------
Gross investment income 2,730 2,668 2,484
Less investment expenses(1) 380 379 352
------ ------ ------
Net investment income 2,350 2,289 2,132
Realized gains (losses):
Fixed income securities (78) (21) (173)
Equity securities 667 617 226
------ ------ ------
Net realized investment gains 589 596 53
------ ------ ------
Net investment income and
net realized investment
gains $2,939 $2,885 $2,185
====== ====== ======
</TABLE>
<PAGE F-11>
Change in unrealized gains (losses) of securities, net of
tax, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Fixed income securities $ 417 $ (576) $1,987
Equity securities 1,320 255 1,635
------ ------ ------
$1,737 $ (321) $3,622
====== ====== ======
</TABLE>
(1) Investment expenses include salaries, counseling fees and
other miscellaneous expenses attributable to the maintenance
of investment activities.
PAGE F-12
<PAGE>
The cost and estimated fair value of available-for-sale
investment securities at December 31, 1997 and 1996 are
shown below.
<TABLE>
<CAPTION>
Gross Gross Estimated
unrealized unrealized fair
1997 Cost(1) gains losses value
------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed income securities,
available-for-sale
U.S. Government and
government agencies $25,195 $ 266 $ 54 $25,407
Obligations of states and
political subdivisions $ 3,396 $ 121 $ -- $ 3,517
Industrial and miscellaneous $ 300 $ 1 $ 1 $ 300
Mortgage-backed securities $ 6,106 $ 10 $ 393 $ 5,723
------- ------ ------ -------
Total fixed maturities $34,997 $ 398 $ 448 $34,947
------- ------ ------ -------
Equity securities:
At market value $ 6,854 $2,664 $ 104 $ 9,414
At estimated value $ 94 $1,344 $ -- $ 1,438
------- ------ ------ -------
Total equity securities $ 6,948 $4,008 $ 104 $10,852
------- ------ ------ -------
Total available-for-sale $41,945 $4,406 $ 552 $45,799
======= ====== ====== =======
<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 $23,702 $ 223 $ 234 $23,691
Obligations of states and
political subdivisions 4,313 48 18 4,343
Mortgage-backed securities 7,631 12 713 6,930
------- ------ ------ -------
Total fixed maturities 35,646 283 965 34,964
------- ------ ------ -------
Equity securities:
At market value 5,892 1,119 329 6,682
At estimated value -- 1,113 -- 1,113
------- ------ ------ -------
Total equity securities 5,892 2,232 329 7,795
------- ------ ------ -------
Total available-for-sale $41,538 $2,515 $1,294 $42,759
======= ====== ====== =======
</TABLE>
(1) Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
<PAGE F-13>
The amortized cost and estimated fair value of fixed income
securities at December 31, 1997, 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
(Dollars in Thousands)
Due after one year through
five years $ 1,361 $ 1,496
Due after five years through
ten years 25,251 25,470
Due after ten years 2,279 2,258
28,891 29,224
Mortgage backed securities 6,106 5,723
$34,997 $34,947
The gross realized gains and losses on investment securities
are as follows:
1997 1996 1995
(Dollars in Thousands)
Gross realized gains $1,027 $ 921 $ 778
Gross realized losses (438) (325) (725)
$ 589 $ 596 $ 53
Proceeds from the sale of available-for-sale securities were
$15,457, $11,276 and $19,032 for 1997, 1996 and 1995,
respectively.
(3) Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are as follows:
1997 1996 1995
(Dollars in Thousands)
Balance, January 1 $2,989 $3,155 $3,330
Acquisition costs
deferred 4,736 5,325 5,769
Amortization charged
to earnings (4,706) (5,491) (5,944)
Balance, December 31 $3,019 $2,989 $3,155
<PAGE F-14>
(4) Property and Equipment
Property and equipment was as follows:
1997 1996
(Dollars in Thousands)
Home Office:
Land $ 456 $ 456
Buildings and improvements 1,479 1,468
Furniture, fixtures and
equipment 1,368 1,290
3,303 3,214
Accumulated depreciation (1,890) (1,773)
$1,413 $1,441
(5) Liabilities for Losses and Loss Adjustment Expenses
Activity in the liabilities for losses and loss adjustment
expenses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance, January 1 $35,221 $36,176 $35,531
Less reinsurance recoverable
on unpaid losses and loss
expenses (15,147) (16,819) (17,233)
------- ------- -------
Net balance at January 1 20,074 19,357 18,298
Incurred related to:
Current year 11,649 16,445 14,251
Prior years (1,055) (1,644) (955)
------- ------- -------
Total incurred 10,594 14,801 13,296
------- ------- -------
Paid related to:
Current year 4,775 7,715 5,302
Prior years 6,042 6,369 6,935
------- ------- -------
Total paid 10,817 14,084 12,237
------- ------- -------
Net balance, December 31 19,851 20,074 19,357
Plus reinsurance recoverable
on unpaid losses and loss
expenses 12,021 15,147 16,819
------- ------- -------
Balance at December 31 $31,872 $35,221 $36,176
======= ======= =======
</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
<PAGE F-15> 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 1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Direct $28,453 $24,958 $24,699
Assumed 547 5,013 10,287
Ceded (11,539) (9,847) (13,741)
------- ------- -------
Net $17,461 $20,124 $21,245
======= ======= =======
<CAPTION>
Premiums earned 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Direct $26,858 $24,760 $24,700
Assumed 598 10,286 9,803
Ceded (9,487) (14,412) (13,686)
------- ------- -------
Net $17,969 $20,634 $20,817
======= ======= =======
</TABLE>
<PAGE F-16>
The effect of reinsurance on unearned premiums as of
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Direct $14,552 $12,957 $12,759
Assumed 171 222 5,494
------- ------- -------
Net $14,723 $13,179 $18,253
======= ======= =======
</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>
Liabilities 1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Direct $27,068 $27,429 $27,906
Assumed 4,804 7,792 8,270
------- ------- -------
$31,872 $35,221 $36,176
======= ======= =======
<CAPTION>
Expenses Incurred 1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Direct $11,743 $14,597 $13,120
Assumed 301 7,234 6,694
Ceded (1,450) (7,030) (6,518)
------- ------- -------
Net $10,594 $14,801 $13,296
======= ======= =======
</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, 1997, three independent reinsurers accounted
for approximately $4,867 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
<PAGE F-17> 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 in unearned premium less $1,224 in commission. The
Group, as an assuming reinsurer, returned to reinsureds
$5,508 in unearned premium less $1,377 in commission. Ceded
loss and loss adjustment reserves attributable to these
agreements were $5,669 at December 31, 1996, and assumed
loss and loss adjustment reserves attributable to these
agreements were $6,016 at December 31, 1996.
(7) Retirement Plans and Deferred Directors' Fees
Effective January 1, 1997, the Company implemented a defined
contribution pension plan to replace a defined benefit
pension plan. The plan covers substantially all of its
employees. Benefits are based on years of service and the
employee's annual compensation. Pension expense from the
defined contribution plan in 1997 amounted to $95.
Benefits under the defined benefit pension plan ceased
accruing to participants as of December 31, 1996. Benefits
were based on years of service and the employee's career-
average annual compensation. The Group's funding policy was
to contribute annually at least the minimum required
contribution in accordance with minimum funding standards
established by ERISA. Contributions were intended to
provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future. As
a result of the termination of the defined benefit pension
plan, the Group incurred a loss of $173. In December 1997,
the Group completed distribution of all benefits. Plan
assets were sufficient to discharge all obligations without
further expense attributable to the defined benefit pension
plan.
Plan assets were generally invested in fixed income and
equity securities. The following table sets forth the year-
end funded status of the terminated defined benefit pension
plan:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Actuarial present value of benefit obligations:
Accumulated and projected benefit obligation,
including vested benefits of $1,009 $(1,021)
Plan assets at fair value 862
Excess of the projected benefit obligation
over plan (159)
</TABLE>
<PAGE F-18>
The net periodic pension cost for the terminated defined
benefit pension plan included the following components:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Service costs - benefits earned
during the period $ 119 $ 98
Interest cost on projected
benefit obligation 95 81
Return on plan assets (120) (56)
Net amortization and deferral 62 7
------ ------
Net periodic pension cost $ 156 $ 130
====== ======
</TABLE>
In determining the actuarial present value of the projected
benefit obligation, the weighted-average discount rate was
7.5% and 7.25% for 1996 and 1995, 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, $58
and $56 for the years ended December 31, 1997, 1996 and
1995, respectively.
The Group maintains a non-qualified unfunded retirement plan
for its directors. The plan provides for monthly payments
for 10 years upon retirement. The expense for this plan
amounted to $57, $55 and $52 for 1997, 1996 and 1995,
respectively. Costs accrued under this plan amounted to
$306 and $249 at December 31, 1997 and 1996, 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 $549 and $476 at December 31, 1997 and 1996,
respectively.
(8) Federal Income Taxes
The tax effect of significant temporary differences that
give rise to the Group's net deferred tax asset (liability)
as of December 31, is as follows:
<PAGE F-19>
1997 1996
(Dollars in Thousands)
Net loss reserve discounting $1,173 $1,181
Net unearned premiums 794 828
Unrealized loss on investments 188 440
Other 272 298
------ ------
Deferred tax assets 2,427 2,747
------ ------
Deferred policy acquisition
costs 1,027 1,016
Unrealized gain on investment 1,498 855
Other 79 74
------ ------
Deferred tax liabilities 2,604 1,945
------ ------
Net deferred tax asset
(liability) $ (177) $ 802
====== ======
The 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 differed from expected tax
expense, 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>
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Expected tax expense $ 1,094 $ 276 $ 513
Tax-exempt interest (56) (73) (107)
Dividends received deduction (28) (25) (35)
Other (9) (7) (2)
------- ------- -------
Income tax expense $ 1,001 $ 171 $ 369
======= ======= =======
</TABLE>
The components of the provision for income taxes are as
follows:
<PAGE F-20>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Current $ 918 $ 291 $ 424
Deferred 83 (120) (55)
------- ------- -------
Income tax expense $ 1,001 $ 171 $ 369
======= ======= =======
</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: 1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Statutory net income $ 2,129 $ 809 $ 1,219
Deferred policy acquisition 30 (167) (174)
Deferred federal income taxes (83) 120 55
Pension 116 (129) 24
Other 25 7 14
------- ------- -------
GAAP net income $ 2,217 $ 640 $ 1,138
======= ======= =======
<CAPTION>
Surplus: 1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Statutory surplus $20,132 $16,087 $14,938
Deferred policy acquisition 3,019 2,989 3,155
Deferred federal income taxes (177) 802 516
Non-admitted assets 177 185 192
Unrealized gain (loss) on fixed
income securities (50) (682) 192
Other 135 (99) (30)
------- ------- -------
GAAP surplus $23,236 $19,282 $18,963
======= ======= =======
</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
<PAGE F-21> 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) 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, 1997, dividends and other distributions in 1997
to MRCR from MMIC would be limited to approximately $2,000
without prior approval of the Insurance Department.
<PAGE F-22>
(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 $410, $420 and $467 in 1997,
1996 and 1995, respectively, as its share of the funding of
the New Jersey Full Insurance Underwriting Association (the
JUA). The amounts represent the sixth, seventh and eighth
installments of eight to be paid toward funding the JUA.
Such amounts are based on the premiums written in New
Jersey.
PAGE F-23
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
As of March 31, 1998 and December 31, 1997
(dollars in thousands)
March 31, December 31,
Assets 1998 1997
Investments, at fair value:
Fixed income securities,
available-for-sale $34,710 34,947
Equity securities 12,957 10,852
Total investments 47,667 45,799
Cash and cash equivalents 2,958 2,707
Premiums receivable 3,508 3,334
Reinsurance receivables 12,303 13,206
Prepaid reinsurance Premiums 1,855 3,046
Deferred policy acquisition costs 3,329 3,019
Accrued investment income 452 625
Property and equipment, net 1,431 1,413
Other assets 1,194 936
Total assets $74,697 $74,085
Liabilities and Surplus
Liabilities:
Losses and loss adjustment expenses 31,190 31,872
Unearned premiums 14,707 14,723
Accounts payable and accrued expenses 2,053 2,417
Deferred income taxes 487 177
Other reinsurance balances 926 835
Other liabilities 799 825
Total liabilities 50,162 50,849
Surplus:
Unassigned surplus 21,389 20,693
Accumulated other comprehensive income:
Unrealized gains in investments, net of
deferred income taxes 3,146 2,543
Total surplus 24,535 23,236
Total liabilities and surplus $74,697 $74,085
PAGE F-24
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statement of Earnings
Three months ended March 31, 1998 and 1997
(dollars in thousands)
1998 1997
Revenue:
Net premiums earned $5,265 $4,384
Investment income, net of expenses 553 614
Net realized investment gains 211 89
Other revenue 43 37
Total revenue 6,072 5,124
Expenses:
Losses and loss adjustment expenses 2,861 2,908
Amortization of deferred policy
acquisition costs 1,477 1,123
Other expenses 718 511
Total expenses 5,056 4,542
Income before income tax 1,016 582
Income tax 320 227
Net income $ 696 $ 355
PAGE F-25
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statement of Changes in Surplus
Three months ended March 31, 1998 and 1997
(dollars in thousands)
1998 1997
Balance, beginning of period $23,236 $19,282
Net income 696 355
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (net of related
income tax expense (benefit) of $382,
and ($177)) 742 (343)
Less:
Reclassification adjustment for gains
included in net income (net of
related income tax expense of $72
and $30) (139) (59)
603 (402)
Comprehensive income (loss) 1,299 (47)
Balance, end of period $24,535 $19,235
PAGE F-26
<PAGE>
MERCER MUTUAL INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statement of Cash Flow
Three months ended March 31, 1998 and 1997
(dollars in thousands)
1998 1997
Cash flows from operating activities:
Net income $ 696 $ 355
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property and equipment 33 15
Net accretion of discount (12) (14)
Net realized investment gain (211) (89)
Deferred income tax - (39)
Change in assets and liabilities:
Premiums receivable (173) (2,338)
Reinsurance receivables 903 3,342
Prepaid reinsurance premiums 1,191 (1,381)
Deferred policy acquisition costs (310) 360
Other assets (87) 149
Losses and loss expenses (682) (645)
Unearned premiums (16) 79
Other liabilities (199) 117
Net cash provided by (used in)
operating activities 1,133 (89)
Cash flows from investing activities:
Purchase of fixed income securities,
available-for-sale (4,861) (1,176)
Purchase of equity securities (2,643) (1,844)
Sale and maturity of fixed income
securities available-for-sale 5,057 424
Sale of equity securities 1,716 1,930
Change in receivable/payable for
securities (100) (60)
Purchase of property and equipment (51) (5)
Net cash used in investing activities (882) (731)
Net increase (decrease) in cash
and cash equivalents 251 (820)
Cash and cash equivalents at beginning
of period 2,707 2,675
Cash and cash equivalents at end
of period $2,958 1,855
Cash paid during the year for:
Interest $ 0 $ 0
Income taxes $ 310 $ 100
PAGE F-27
<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 F-28
<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 F-29
<PAGE>
Up to
3,392,500 Shares
MERCER INSURANCE GROUP, INC.
(Proposed Holding Company for
Mercer Mutual Insurance Company)
COMMON STOCK
PROSPECTUS
SANDLER O'NEILL & PARTNERS, L.P.
PAGE F-30
<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 ......................... $ 11,423
Printing, postage, and mailing* .............. $ 350,000
Legal fees and expenses* ..................... $ 400,000
Accounting fees and expenses* ................ $ 175,000
Appraisal fees and expenses .................. $ 225,000
Blue sky fees and expenses (including
counsel fees)* .................. $ 25,000
Transfer and conversion agent fees
and expenses* .............................. $ 100,000
Miscellaneous* ............................... $ 90,577
Total $1,377,000
___________________
*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.
<PAGE II-1>
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,
April 15, 1998 and May 13, 1998, of Mercer Mutual
Insurance Company
3.1.1 Articles of Incorporation of Mercer Insurance
Group, Inc.**
3.1.2 Articles of Amendment to 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.**
<PAGE II-2>
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**
27.1 Financial Data Schedule
99.1 Conversion Valuation Report, as amended through
June 4, 1998, prepared for 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
** Previously Filed
(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 II-3
<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 February 18, 1998
included the related financial statement schedules as of
December 31, 1997, and for each of the years in the three-year
period ended December 31, 1997, 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
June 4, 1998
PAGE II-4
<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, 1997
Column A Column B Column C Column D
Market Balance
Type of Investment Cost Value Sheet
(Dollars in Thousands)
Fixed maturities:
Bonds:
United States Government and
government agencies and
authorities $31,203 $31,031 $31,031
States, municipalities and
political subdivisions 3,396 3,517 3,517
All other 548 555 555
Total fixed maturities 35,147 35,103 35,103
Equity securities:
Common stocks
Public utilities 102 111 111
Banks, trust and insurance
companies 842 3,472 3,472
Industrial, miscellaneous
and all other 5,854 7,113 7,113
Total equity securities 6,798 10,696 10,696
Total investments $41,945 xxxxxx $45,799
PAGE II-5
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1997, 1996 and 1995
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
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997 26,858 9,487 598 17,969 3.3%
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%
</TABLE>
PAGE II-6
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1997, 1996 and 1995
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
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Property
and Casualty Entities
For the year ended
December 31, 1997 3,019 31,872 0 14,723 17,969 2,350
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
</TABLE>
PAGE II-7
<PAGE>
Mercer Mutual Insurance Company and Subsidiaries
For the years ended December 31, 1997, 1996 and 1995
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
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Consolidated
Property and
Casualty Entities
For the year ended
December 31, 1997 11,649 (1,055) 4,706 10,817 17,461
For the year ended
December 31, 1996 16,445 (1,644) 5,491 14,084 20,124
For the year ended
December 31, 1995 14,251 (955) 5,944 12,237 21,245
</TABLE>
PAGE II-8
<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 II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the Registrant has duly caused this Pre-Effective Amendment
No. 2 to Registration Statement No. 333-41497 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
Borough of Pennington, State of New Jersey, on June 9, 1998.
MERCER INSURANCE GROUP, INC.
By:/s/ Andrew R. Speaker
Andrew R. Speaker,
Executive Vice President
and Chief Operating
Officer
Pursuant to the requirements of the Securities Act
of 1933, this Pre-Effective Amendment No. 2 to Registration
Statement No. 333-41497 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 June 9, 1998
William C. Hart Executive Officer,
and Director
(Principal
Executive Officer)
/s/ Roland D. Boehm* Vice Chairman of June 9, 1998
Roland D.Boehm the Board of
Directors
/s/ James J. Freda* Director June 9, 1998
James J. Freda
/s/ George T. Hornyak, Jr.* Director June 9, 1998
George T. Hornyak, Jr.
/s/ Richard U. Niedt* Director June 9, 1998
Richard U. Niedt
/s/ Eric W. Turner, Jr.* Director June 9, 1998
Eric W. Turner, Jr.
/s/ Richard G. Van Noy* Chairman of the June 9, 1998
Richard G. Van Noy Board of Directors
<PAGE II-10>
/s/ Andrew R. Speaker Executive Vice June 9, 1998
Andrew R. Speaker President, Chief
Operating Officer,
Chief Financial
Officer, Treasurer
and Director
(Principal Financial
and Accounting Officer)
*By /s/ Andrew R. Speaker
Andrew R. Speaker
Attorney-in-Fact
PAGE II-11
<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, April 15, 1998
and May 13, 1998, of Mercer Mutual Insurance
Company
3.1.1 Articles of Incorporation of Mercer Insurance Group,
Inc.**
3.1.2 Articles of Amendment to 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.**
<PAGE II-12>
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**
27.1 Financial Data Schedule
99.1 Conversion Valuation Report, as amended through June 4,
1998, prepared for 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.
** Previously Filed <PAGE II-13>
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,
April 15, 1998 and May 13, 1998.
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.
<PAGE 1> 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
<PAGE 2> 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
<PAGE 3> 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.
<PAGE 4>
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. <PAGE 5>
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. <PAGE 6>
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; <PAGE 7>
(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.
<PAGE 8>
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.
<PAGE 9>
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. <PAGE 10>
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
<PAGE 11> 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
<PAGE 12> 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.
<PAGE 13>
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 the lesser of 5% or 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. If,
because of the magnitude of the oversubscription, shares of
Conversion Stock cannot be allocated among subscribing Eligible
Policyholders so as to permit each such Eligible Policyholder to
purchase the lesser of 1,000 shares or the number of shares
subscribed for, then shares of Conversion Stock will be allocated
among the subscribing Eligible Policyholders in the proportion in
which: (i) the aggregate number of shares subscribed for by each
such Eligible Policyholder bears to (ii) the aggregate number of
shares subscribed for by all Eligible Policyholders; 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 the lesser of 5%
or 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
<PAGE 14> 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. Each
subscribing director, officer or employee will then receive that
number of shares of Conversion Stock equal to the remaining
unallocated shares of Conversion Stock multiplied by a fraction
the numerator of which is the number of points held by such
director, officer or employee and the denominator of which is the
total number of points held by all subscribing directors,
officers and employees.
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
<PAGE 15> 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 the lesser of 5% or 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 percent (34.0%) 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
<PAGE 16> 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
<PAGE 17> 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.
<PAGE 18>
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 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
<PAGE 19> 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.
<PAGE 20>
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
<PAGE 21> 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.
<PAGE 22>
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"),
which plans shall, in accordance with the requirements of the
Act, be subject to approval by the shareholders of the Holding
<PAGE 23> 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.
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). <PAGE 24>
ARTICLES OF AMENDMENT-DOMESTIC BUSINESS CORPORATION
DSCB:15-1915
In compliance with the requirements of 15 Pa.C.S. 1915
(relating to articles of amendment), the undersigned business
corporation, desiring to amend its Articles, hereby states that:
1. The name of the corporation is:
MERCER INSURANCE GROUP, INC.
2. The address of this corporation's current registered office
in this Commonwealth or name of its commercial registered
office provider and the county of venue is:
ONE GLENHARDIE CORPORATE CENTER, 1275 DRUMMERS LANE
WAYNE (CHESTER COUNTY), PENNSYLVANIA 19087
3. The corporation is incorporated under the provisions of the
1988 Business Corporation Law of the Commonwealth
of Pennsylvania.
4. The original date of its incorporation is: NOVEMBER 12, 1997
5. (Check, and if appropriate complete, one of the following):
_X_ The amendment shall be effective upon the filing of
these Articles of Amendment in the Department of State.
___ The amendments shall be effective on:
6. (Check one of the following):
___ The amendment was adopted by the shareholders pursuant
to 15 Pa.C.S. 1914(a) and (b).
_X_ The amendment was adopted by the board of directors
pursuant to 15 Pa.C.S. 1914 (c).
7. _X_ The amendment adopted by the corporation is as set
forth in full in Exhibit A, attached hereto and made a
part hereof.
8. (Check if the amendment restates the Articles):
___ The restated Articles of Incorporation supersede the
original Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused
these Articles of Amendment to be signed by a duly authorized
officer thereof this 24th day of February, 1998.
MERCER INSURANCE GROUP, INC.
BY: /s/ William C. Hart
William C. Hart, President
PAGE 1
<PAGE>
EXHIBIT A
MERCER INSURANCE GROUP, INC.
RESOLVED, that the Articles of Incorporation of the
Company be amended to add the following paragraph in full as
Article EIGHTEENTH:
"EIGHTEENTH: A special meeting of the
shareholders of the Corporation may be called
only by: (i) the Chief Executive Officer,
(ii) the Executive Committee of the Board of
Directors, or (iii) the Board of Directors
pursuant to a resolution adopted by a
majority of the total number of directors
which the Corporation would have if there
were no vacancies on the Board of Directors."
<PAGE 2>
[Form Using Compensation Committee as Trustee]
MERCER INSURANCE GROUP, INC.
Management Recognition
Plan and Trust Agreement
SUMMARY
I. PLAN PURPOSE
This management recognition plan (the "Plan") and its
related trust (the "Trust") is adopted by Mercer Insurance Group,
Inc. (the "Company"). The purpose of the Plan is to retain
employees of the Company with experience and ability in key
positions by providing them with a proprietary interest in the
Company through grants of shares of the common stock, no par
value (the "Common stock"), of the Company. Awards of Common
Stock will be made in recognition of service to the Company and
its subsidiaries as encouragement to continue such contributions
in the future, as well as to more closely align the interests of
the Company's directors and officers with those of the Company's
shareholders by causing all to directly benefit from increases in
shareholder value.
II. PLAN SHARE AWARDS
A. Aggregate Number: The total number of Plan Shares that
may be issued pursuant to the Plan will be equal to the number of
shares of Common Stock that are purchased by the Trust, not to
exceed 4% of the shares of Common Stock issued by the Company in
connection with the conversion of Mercer Mutual Insurance Company
("Mercer") from mutual to stock form. The Trust will acquire
Common Stock with funds contributed to it by the Company.
B. Individual Awards: All directors and executive
officers of the Company, Mercer and Mercer Insurance Company of
New Jersey, Inc. are eligible to receive awards. The
Compensation Committee of the Board of Directors of the Company
will determine which eligible persons will be granted Plan Share
Awards and the number of shares covered by each Plan Share Award.
Such determinations will be based upon the position and
responsibilities of the eligible person, the value of their
services, and any other fact the Compensation Committee deems
relevant.
Plan Share Awards will not be made until the Company's
shareholders have approved the Plan.
C. Conditions Upon Earning of Plan Shares Subject to
Awards: Plan Shares covered by Plan Share Awards are earned
<PAGE 1> (i.e., become vested) at the rate determined by the
Compensation Committee and as provided herein.
Awards are nontransferable and nonassignable.
Recipients of Plan Share Awards may direct the voting of all
vested shares of Plan Shares. Recipients of Plan Share Awards
will receive dividends paid on all Plan Shares subject to such
Plan Share Awards from the date such Plan Shares Awards are
granted.
D. Distribution of Earned Plan Shares: Earned Plan Shares
are distributed to recipients as soon as practicable following
the date on which they are earned. The Plan Trustee may withhold
cash distributions as needed for tax purposes and, if necessary,
can require distributees to provide funds required to satisfy tax
obligations as a condition to distributing Plan Shares.
E. Forfeitures: Plan Shares forfeited in accordance with
Sections 7.01(b) or 7.01(c) will be returned to the pool of Plan
Shares with respect to which additional Plan Share Awards may be
granted.
III. Plan Administration
A. Plan Administration: The Plan will be administered by
the Compensation Committee of the Company's Board of Directors
and a Plan Trustee appointed by the Board. The Board may
designate as Plan Trustee one or more persons or an entity,
subject to replacement by the Board at any time. Expenses of
administering the Plan and the Trust will be borne by the
Company. The Company shall indemnify the Plan Trustee and Board
members as to activities with respect to the Plan.
B. ERISA: The Plan is not "qualified" within the meaning
of the Internal Revenue Code, and is not subject to ERISA's
requirements and restrictions.
C. Duration: The Plan will become effective upon
execution and will continue until the earliest of (1) 21 years
from such Effective Date, (2) the time at which the Board
terminates the Plan, or (3) the time at which all of the Trust
assets have been expended. The Board may amend or terminate the
Plan at any time.
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 The Company hereby establishes the Plan, to be known
as the "Mercer Insurance Group, Inc. Management Recognition
Plan," and the Trust upon the terms and conditions hereinafter
stated in this Agreement.
<PAGE 2>
1.02 The Plan Trustee hereby accepts this Trust and agrees
to hold legal title to the Trust assets existing on the date of
this Agreement and all additions and accretions thereto on the
terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain personnel of
experience and ability in key positions and to provide incentive
for them to make significant contributions to the Company and its
subsidiaries in the future by providing such key employees with a
proprietary interest in the Company.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Agreement
with an initial capital letter, unless the context clearly
indicates otherwise, shall have the meanings set forth below.
Wherever appropriate, the masculine pronoun shall include the
feminine pronoun and the singular shall include the plural. All
terms used herein and not defined shall have the meanings given
such terms in the Joint Plan of Conversion.
3.01 "Agreement" means this Management Recognition Plan and
Trust Agreement between the Company and the Plan Trustee.
3.02 "Beneficiary" means the person or persons designated
by a Recipient to receive any benefits payable under the Plan in
the event of such Recipient's death. Such person or persons
shall be designated in writing on forms provided for this purpose
by the Board and may be changed from time to time by similar
written notice to the Board. In the absence of a written
designation, the Beneficiary shall be the recipient's surviving
spouse, if any, or if none, his estate.
3.03 "Board" means, for purposes of administering the Plan,
the Board of Directors of the Company.
3.04 "Cause" means:
(i) willful violation of any law, rule or
regulation (other than traffic violations or similar
offenses that would not in the Board's good faith reasonable
determination effect the ability to perform and discharge
one's duties to the Company or a subsidiary);
(ii) breach of fiduciary duty involving personal
profit or an act of personal dishonesty in connection with
the performance of one's duties; or
<PAGE 3>
(iii) willful failure to follow the lawful
instructions of the Board of Directors after receipt of
written notice of such instructions, other than a failure
resulting from the incapacity because of physical or mental
illness.
3.05 "Common Stock" means shares of the Company's common
stock, no par value.
3.06 "Company" means Mercer Insurance Group, Inc.
3.07 "Disability" means any physical or mental impairment
which qualifies an employee for disability benefits under the
applicable long-term disability plan maintained by the Company or
a subsidiary or, if no such plan applies to the employee, which
would qualify such employee for disability benefits under the
long-term disability plan maintained by the Company, if such
employee were covered by that Plan.
3.08 "Effective Date" means ___________________, 1998.
3.09 "Eligible Person" means any director or executive
officer of the Company or either of the Insurance Companies.
3.10 "Insurance Companies" means Mercer and Mercer
Insurance Company of New Jersey, Inc., collectively.
3.11 "Mercer" means Mercer Mutual Insurance Company.
3.12 "Plan of Conversion" means the Plan of Conversion
adopted on October 17, 1997 by the Company and Mercer, as amended
and restated as of April 15, 1998.
3.13 "Plan Shares" means shares of Common Stock held in the
Trust and issued or issuable to a Recipient pursuant to the Plan.
3.14 "Plan Share Award" means a right granted under this
Agreement to earn Plan Shares.
3.15 "Plan Share Reserve" means the shares of Common Stock
held by the Trustee as determined pursuant to Sections 5.03 and
5.04.
3.16 "Plan Trustee" means the person(s) or entity nominated
and approved by the Board pursuant to Section 4.01 and 4.02 to
hold legal title to the Plan assets for the purposes set forth
herein.
3.17 "Recipient" means an Eligible Person who receives a
Plan Share Award under the Plan.
3.18 "Retirement" means a termination of employment which
constitutes a "retirement" under any applicable qualified pension
benefit plan maintained by the Company or any subsidiary which
<PAGE 4> employs the Recipient, or, if no such Plan is
maintained, pursuant to the retirement policy of the Company.
3.19 "Trust" means the trust established pursuant to this
Agreement.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role and Powers of the Board. The Plan shall be
administered and interpreted by the Compensation Committee of the
Board. The interpretation and construction by the Compensation
Committee of any provisions of this Agreement or of any Plan
Share Award granted hereunder shall be final and binding.
Subject to the express provisions and limitations of this
Agreement, the Compensation Committee may adopt such rules,
regulations and procedures as it deems appropriate for the Plan's
affairs. The Board shall appoint one or more persons or an
entity to act as Plan Trustee in accordance with this Agreement
and the terms of Article VIII hereof. The Board may reverse or
override any action taken or decision made with respect to the
Plan; provided, however, except as provided in Sections 7.01(b)
or 7.01(c) hereof, that the Board may not revoke any Plan Share
Award already made.
4.02 Limitation on Liability. Neither any member of the
Board nor any Plan Trustee shall be liable for any determination
made in good faith with respect to the Plan or any Plan Shares or
Plan Share Awards granted under the Plan. If a member of the
Board or any Plan Trustee 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, by reason of anything done or not done by him in
such capacity under or with respect to the Plan, the Company
shall indemnify such member or Plan Trustee against expenses
(including, but not limited to, attorneys' fees and
disbursements), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such
action, suit or proceeding if (1) he acted in good faith and in a
manner he reasonably believed to be in the best interests of the
Company (in the case of a member of the Board) or in the best
interests of the beneficiaries of the Trust (in the case of the
Plan Trustee), and (2) with respect to any criminal action or
proceeding, he had no reasonable cause to believe his conduct was
unlawful.
<PAGE 5>
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Board shall
determine the amounts (or the method of computing the amounts) to
be contributed by the Company to the Trust. Such amounts shall
be paid to the Plan Trustee at the time of contribution. No
contributions by Eligible Persons shall be permitted.
5.02 Initial Investment. Any amounts held by the Trust
prior to the purchase of Common Stock shall be invested by the
Plan Trustee in such interest-bearing account or accounts as the
Plan Trustee shall determine to be appropriate.
5.03 Investment of Trust Assets; Conversion; Creation of
Plan Share Reserve. Except as otherwise permitted under this
Agreement, the Plan Trustee shall invest all of the Trust's
assets exclusively in Common Stock of the Company. The Common
Stock initially acquired by the Trust, together with any shares
thereafter acquired by the Trust, shall constitute the "Plan
Share Reserve." Any cash earnings received with respect to
Common Stock held in the Trust subject to the Plan Share Awards
shall be distributed to the individual Recipient.
5.04 Effect of Allocations, Returns and Forfeitures Upon
Plan Share Reserves. Upon the allocation of Plan Share Awards
under Section 6.02, the Plan Share Reserve shall be reduced by
the number of Plan Shares subject to the Plan Share Awards so
allocated. Any Plan Shares subject to a Plan Share Award which
may no longer be earned because of a forfeiture by the Recipient
pursuant to Sections 7.01(b) or 7.01(c) shall be added to the
Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Allocations. The Compensation Committee will
determine which Eligible Persons will be granted Plan Share
Awards and the number of Plan Shares covered by each Plan Share
Award, provided, however, that the number of Plan Shares covered
by such Plan Share Awards may not exceed the number of Plan
Shares in the Plan Share Reserve immediately prior to the grant
of such Plan Share Awards, and provided, further, that in no
event shall any Plan Share Award be made which will violate the
Company's Articles of Incorporation or Bylaws or any applicable
law. In the event Plan Shares are forfeited for any reason, the
Compensation Committee may, from time to time, determine which
Eligible Persons will be granted Plan Share Awards from forfeited
Plan Shares.
In selecting those Eligible Persons to whom Plan Share
Awards will be granted and the number of Plan Shares covered by
such Plan Share Awards, the Compensation Committee shall consider
<PAGE 6> the position and responsibilities of the Eligible
Persons, the value of their services to the Company and/or the
Insurance Companies and any other fact the Compensation Committee
may deem relevant.
6.02 Form of Allocation. Promptly after making a Plan
Share Award, the Compensation Committee shall notify the
Recipient in writing of the grant of the Plan Share Award, the
number of Plan Shares covered by the Plan Share Award, and the
terms upon which the Plan Shares subject to the Plan Share Award
may be earned. The date on which the Compensation Committee so
notifies the Recipient shall be considered the date of grant of
the Plan Share Awards. The Compensation Committee shall maintain
records as to all grants of Plan Share Awards under the Plan.
6.03 Allocations Not Required. Notwithstanding anything to
the contrary in Sections 6.01 and 6.02, no Eligible Person shall
have any right or entitlement to receive a Plan Share Award
hereunder, the grant of Plan Share Awards being at the total
discretion of the Compensation Committee.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Unless the Compensation Committee
shall specifically state otherwise at the time a Plan Share Award
is granted, Plan Shares subject to a Plan Share Award shall be
earned by a Recipient at the rate of twenty percent (20%) of the
aggregate number of Plan Shares covered by the Plan Share Award
at the end of each full twelve month period following the date of
the grant.
(b) Forfeiture Upon Termination of Employment. Except
as set forth in Section 7.01(c) below, the termination of
employment by a Recipient for reasons other than retirement at or
after age 65, in the case of an executive officer of the Company
or either of the Insurance Companies, or 70, in the case of a
director of the Company or either of the Insurance Companies,
death, or disability shall constitute revocation of the
Recipient's unearned Plan Share Award. If the termination of a
Recipient's employment is caused by death or disability, all
unearned Plan Share Awards shall be deemed fully vested.
(c) Revocation for Misconduct. Notwithstanding
anything hereinafter to the contrary, the Compensation Committee
of the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously
awarded under this Plan, to the extent Plan Shares have not been
delivered thereunder to the Recipient, whether or not yet earned,
in the case of a Recipient who is discharged from the employ of
the Company or either of the Insurance Companies for Cause, or
who is discovered after termination of employment to have engaged
<PAGE 7> in conduct that would have justified termination for
Cause, and in the case of a member of the Board, who is removed
from the Board for Cause.
7.02 Payment of Dividends. Cash dividends on earned and
unearned Plan Shares shall be allocated and distributed to a
Recipient when declared and paid by the Company with respect to
all shares.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may
be, as soon as practicable after they have been earned. At the
election of the Recipient, but subject to approval of the
Compensation Committee of the Board, unearned Plan Shares subject
to a Plan Share Award that would otherwise be held by the Trust
may be distributed to the Recipient in the form of restricted
stock subject to forfeiture. A Recipient who receives restricted
stock may vote such shares, will receive any dividends paid
thereon, and will be able to exchange restricted shares for
unrestricted shares as vesting occurs.
(b) Form of Distribution. All Plan Shares, together
with any shares representing stock dividends, shall be
distributed in the form of Common Stock. One share of Common
Stock shall be given for each Plan Share earned and payable.
(c) Withholding. The Plan Trustee may withhold from
any payment or distribution made under this Plan sufficient
amounts of cash or shares of Common Stock to cover any applicable
withholding and employment taxes, and if the amount of such
payment is insufficient, the Plan Trustee may require the
Recipient or Beneficiary to pay to the Plan Trustee the amount
required to be withheld as a condition of delivering the Plan
Shares. The Plan Trustee shall pay over to the Company or either
of the Insurance Companies which employs or employed such
Recipient any such amount withheld from or paid by the Recipient
or Beneficiary.
7.04 Voting of Plan Shares. After a Plan Share Award has
been granted, the Recipient shall be entitled to vote the Plan
Shares which are covered by the Plan Share Award and which have
been earned, subject to rules and procedures adopted by the
Compensation Committee of the Board for this purpose. All shares
of Common Stock held by the Trust as to which Recipients are not
entitled to direct, or have not directed, the voting, shall be
voted by the Plan Trustee in the same manner and proportion as
the trustee of the Company's Employee Stock Ownership Plan trust
votes the Common Stock held therein, except as otherwise provided
in Section 7.03(a) or unless, in the reasonable opinion of the
Trustee's legal counsel, the Trustee's fiduciary duty requires
otherwise.
<PAGE 8>
ARTICLE VIII
TRUST
8.01 Trust. The Plan Trustee shall receive, hold,
administer, invest and make distributions and disbursements from
the Trust in accordance with the provisions of this Agreement and
the applicable directions, rules, regulations, procedures and
policies established by the Compensation Committee pursuant to
this Agreement.
8.02 Management of Trust. It is the intent of this
Agreement that, subject to the provisions of this Agreement, the
Plan Trustee shall have complete authority and discretion with
respect to the management, control and investment of the Trust,
and that the Plan Trustee shall invest all assets of the Trust in
Common Stock to the fullest extent practicable, and except to the
extent that the Plan Trustee determines that the holding of
monies in cash or cash equivalents is necessary to meet the
obligations of the Trust. In performing its duties, the Plan
Trustee shall have the power to do all things and execute such
instruments as may be deemed necessary or proper, including the
following powers:
(a) To invest up to one hundred percent (100%) of all
Trust assets in Common Stock without regard to any law now or
hereafter in force limiting investments by trustees or other
fiduciaries. The investment authorized herein constitutes the
only investment of the Trust, and in making such investment, the
Plan Trustee is authorized to purchase Common Stock from the
Company or from any other source, and such Common Stock so
purchased may be outstanding, newly issued, or treasury shares.
(b) To invest any Trust assets not otherwise invested
in accordance with (a) above in such deposit accounts,
certificates of deposit, obligations of the United States
government or its agencies or such other investments as shall be
considered the equivalent of cash, or to invest in mutual funds
which invest in such securities.
(c) To sell, exchange or otherwise dispose of any
property at any time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of
words indicating that such security is an asset of the Trust (but
accurate records shall be maintained showing that such security
is an asset of the Trust).
(e) To hold cash without interest in such amounts as
may be in the opinion of the Trustee reasonable for the proper
operation of the Plan and the Trust.
(f) To employ brokers, agents, consultants and
accountants. <PAGE 9>
(g) To hire counsel to render advice with respect to
the Plan Trustee's rights, duties and obligations hereunder, and
such other legal services or representation as the Plan Trustee
may deem desirable.
(h) To hold funds and securities representing the
amounts to be distributed to a Recipient or his Beneficiary as a
consequence of a dispute as to the disposition thereof, whether
in a segregated account or held in common with other assets of
the Trust.
Notwithstanding anything herein contained to the
contrary, the Plan Trustee shall not be required to make any
inventory, appraisal or settlement or report to any court, or to
secure any order of court for the exercise of any power herein
contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain
accurate and detailed records and accounts of all transactions of
the Trust, which shall be available at all reasonable times for
inspection by any legally entitled person or entity to the extent
required by applicable law, or any other person determined by the
Board.
8.04 Earnings. All earnings, gains and losses with respect
to Trust assets shall be allocated in accordance with a
reasonable procedure adopted by the Compensation Committee of the
Board.
8.05 Expenses. All costs and expenses incurred in the
operation and administration of this Plan shall be borne by the
Trust to the extent not paid by the Company.
8.06 Notice of Insolvency. By its approval and execution
of this Agreement, the Company represents and agrees that the
Compensation Committee of its Board and its President and Chief
Executive Officer, as from time to time acting, shall have the
fiduciary duty and responsibility, on behalf of the Company's
creditors, to give the Trustee prompt written notice of the
Company's insolvency or bankruptcy and the Trustee shall be
entitled to rely thereon to the exclusion of all directions or
claims to pay benefits thereafter made.
8.07 Definition of Insolvency. The Company shall be deemed
to be insolvent or bankrupt upon the occurrence of any of the
following:
(i) The Company is unable to pay its debts as
they fall due; or
(ii) The Company shall make an assignment for the
benefit of creditors, file a petition in bankruptcy, petition or
apply to any tribunal for the appointment of a custodian,
receiver, liquidator, sequestrator, or any trustee for it or a
substantial part of its assets, or shall commence any case under
<PAGE 10> any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution, or liquidation law or statute
of any jurisdiction (federal or state), whether now or hereafter
in effect; or if there shall have been filed any such petition or
application, or any such case shall have been commenced against
it, in which an order for relief is entered or which remains
undismissed; or the Company by any act or omission shall indicate
its consent to, approval of or acquiescence in any such petition,
application or case or order for relief or the appointment of a
custodian, receiver or any trustee for it or any substantial part
of any of its property, or shall suffer any such custodianship,
receivership, or trusteeship to continue undischarged.
ARTICLE IX
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number
of Plan Shares available for issuance pursuant to Plan Share
Awards and the number of Plan Shares to which any Plan Share
Award relates shall be proportionately adjusted for any increase
or decrease in the total number of outstanding shares of Common
Stock issued subsequent to the Effective Date resulting from any
split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such Common Stock
effected without receipt or payment of consideration, by the
Company.
9.02 Amendment and Termination of Plan. The Board may, by
resolution, at any time amend or terminate the Agreement. Upon
termination, the Company may direct the Plan Trustee to return to
the Company any shares of Common Stock held in the Plan Share
Reserve and any other unallocated assets of the Trust.
Termination or amendment of the Trust shall not affect a
Recipient's right to earn Plan Shares pursuant to previously
granted Plan Share Awards or to the distribution of Common Stock
relating thereto, including earnings thereon. Termination of the
Plan shall not become effective as to previously awarded Plan
Share Awards that remain outstanding on the proposed termination
date unless the Board elects to distribute all unearned Plan
Shares subject to such Plan Share Awards immediately upon such
termination.
9.03 Nontransferable. Plan Share Awards and rights to Plan
Shares shall not be transferable by a Recipient or Beneficiary,
and during the lifetime of the Recipient, Plan Shares may only be
earned by and paid to the Recipient who was notified in writing
of the Plan Share Award by the Compensation Committee of the
Board pursuant to Section 6.02.
9.04 Employment Rights. Neither the Plan nor any grant of
a Plan Share Award or Plan Shares hereunder nor any action taken
by the Plan Trustee or the Compensation Committee of the Board in
connection with the Plan shall create any right on the part of
any Eligible Person to continue in the employ of the Company or
<PAGE 11> either of the Insurance Companies or to continue to sit
on the respective Board of Directors thereof.
9.05 Voting and Dividend Rights. No Recipient shall have
any voting or dividend rights or other rights of a shareholder in
respect of any Plan Shares covered by a Plan Share Award, except
as expressly provided in Sections 7.02 and 7.04 above.
9.06 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the Commonwealth of
Pennsylvania without regard to its conflicts of law rules.
9.07 Effective Date. The date of its execution by the
Company and the Plan Trustee.
9.08 Term of Plan. This Plan shall remain in effect until
the earlier of (1) 21 years from the Effective Date,
(2) termination by the Board, or (3) the distribution of all
assets of the Trust. Termination or amendment of the Plan shall
not affect any Plan Share Awards previously granted, and such
Plan Share Awards shall remain valid and in effect until they
have been earned and paid, or by their terms expire or are
forfeited.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed by its duly authorized officers, effective as of the
_____ day of __________________, 1998.
MERCER INSURANCE GROUP, INC.
By:
Name: William C. Hart
Title: President and Chief
Executive Officer
Attest:
Name: Andrew R. Speaker
Title: Executive Vice
President and
Treasurer
IN WITNESS WHEREOF, the undersigned, GEORGE T. HORNYAK, JR.,
RICHARD U. NIEDT, and RICHARD G. VAN NOY, as members of the
Compensation Committee of the Board of Directors of MERCER
INSURANCE GROUP, INC., hereby execute this Agreement as Plan
Trustee, undertaking to perform the obligations and duties of the
<PAGE 12> Plan Trustee hereunder and consenting to the foregoing
Management Recognition Plan and Trust Agreement.
Signed: __________________________________
George T. Hornyak, Jr.
__________________________________
Richard U. Niedt
__________________________________
Richard G. Van Noy <PAGE 13>
1/98
MERCER INSURANCE GROUP, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(Effective January 1, 1998)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 INTRODUCTION .................................... 1
ARTICLE 2 DEFINITIONS ..................................... 2
ARTICLE 3 ELIGIBILITY ..................................... 8
3.1. Eligibility Generally ........................... 8
3.2. Eligibility Computation Period .................. 8
3.3. Commencement of Participation ................... 8
3.4. Cessation of Participation ...................... 8
3.5. Special Rules for Participation and Vesting
Purposes ........................................ 8
3.6. Years of Service ................................ 8
3.7. Participation upon Reemployment ................. 9
ARTICLE 4 VESTING ......................................... 10
4.1. In General ...................................... 10
4.2. Normal Retirement Date .......................... 10
4.3. Death or Disability ............................. 10
4.4. Forfeiture of Account ........................... 10
ARTICLE 5 CONTRIBUTIONS AND ALLOCATIONS ................... 11
5.1. Company Contributions ........................... 11
5.2. Time and Manner of Contributions ................ 11
5.3. Employee Contributions .......................... 11
5.4. Recovery of Contributions ....................... 11
5.5. Allocation of Employer Contributions ............ 11
5.6. Income on Investments ........................... 12
5.7. Certain Stock Transactions ...................... 12
5.8. Valuation of Trust Fund ......................... 12
ARTICLE 6 MAXIMUM LIMITATION ON ALLOCATIONS ............... 13
6.1. Participation Solely in This Plan ............... 13
6.2. Participation in Another Defined Contribution
Plan ............................................ 14
6.3. Participation in a Defined Benefit Plan ......... 14
6.4. Definitions ..................................... 15
ARTICLE 7 INVESTMENT OF TRUST ASSETS ...................... 17
7.1. Trust ........................................... 17
ARTICLE 8 COMPANY STOCK APPRAISAL ......................... 18
ARTICLE 9 DISTRIBUTIONS ................................... 19
9.1. Termination of Employment ....................... 19
9.2. Death ........................................... 19
9.3. Time of Payment ................................. 20
9.4. Form of Payment ................................. 20
9.5. Direct Rollover ................................. 20
9.6. Diversification Election ........................ 21
9.7. Election to Retain Interests in Plan ............ 22
9.8. Mandatory Distributions ......................... 22
9.9. Dividend Distributions .......................... 23
9.10. Right of First Refusal .......................... 24
9.11. Prohibited Company Stock Transactions ........... 24
ARTICLE 10 RIGHT TO SELL COMPANY STOCK .................... 26
10.1. Put Requirements ................................ 26
ARTICLE 11 VOTING AND TENDER OF COMPANY STOCK ............. 28
11.1. Voting .......................................... 28
11.2. Tender .......................................... 28
11.3. Fiduciary Responsibilities ...................... 29
11.4. Procedures for Voting and Tender ................ 29
ARTICLE 12 ADMINISTRATION ................................. 30
12.1. Fiduciary Responsibilities ...................... 30
12.2. The Administrative Committee .................... 30
12.3. Plan Expenses ................................... 31
12.4. Meetings and Voting ............................. 32
12.5. Compensation .................................... 32
12.6. Claims Procedures ............................... 32
12.7. Liabilities ..................................... 33
ARTICLE 13 AMENDMENTS ..................................... 34
13.1. Right to Amend .................................. 34
13.2. Amendment by Administrative Committee ........... 34
13.3. Plan Merger and Asset Transfers ................. 34
ARTICLE 14 TERMINATION .................................... 35
14.1. Right to Terminate .............................. 35
14.2. Effect of Termination ........................... 35
ARTICLE 15 MISCELLANEOUS .................................. 36
15.1. Non-alienation of Benefits ...................... 36
15.2. Appointment of Guardian ......................... 36
15.3. Satisfaction of Benefit Claims .................. 36
15.4. Controlling Law ................................. 36
15.5. Non-guarantee of Employment ..................... 36
15.6. Severability and Construction of the Plan ....... 36
15.7. No Requirement of Profits ....................... 37
15.8. All Risk on Participants and Beneficiaries ...... 37
ARTICLE 16 TOP-HEAVY PROVISIONS ........................... 38
16.1. Determination of Top-Heavy Status ............... 38
16.2. Super Top-Heavy Plan ............................ 38
16.3. Top-Heavy Definitions ........................... 38
16.4. Top-Heavy Rules ................................. 39
ARTICLE 17 EXEMPT LOANS ................................... 41
17.1. General ......................................... 41
17.2. Terms of Exempt Loan Agreements ................. 41
17.3. Prohibition on Purchase Arrangements ............ 41
17.4. Suspense Account ................................ 42
17.5. Sale of Financed Shares ......................... 43
<PAGE>
ARTICLE 1
INTRODUCTION
The Mercer Insurance Group, Inc. Employee Stock Ownership
Plan (the "Plan") was established by Mercer Insurance Group, Inc.
(the "Company") in order for its employees to participate in the
ownership of the Company. The Plan, effective as of January 1,
1998, is intended to be an employee stock ownership plan within
the meaning of Section 4975(e)(7) of the Internal Revenue Code of
1986, as amended, and is designed to invest primarily in Common
Stock of the Company which meets the requirements for qualifying
employer securities under Code Section 409(l). The purchase of
Company Stock for the Plan may be made with the proceeds of
exempt loans meeting the requirements of Section 54.4975-7(b) of
the Treasury Regulations (including any amendments thereto) and
Section 2550.408(b)-3 of the Department of Labor Regulations
(including any amendments thereto), employer contributions,
dividends on qualified employer securities or a combination
thereof.
PAGE 1
<PAGE>
ARTICLE 2
DEFINITIONS
The following initially capitalized words and phrases
when used herein shall have the meanings set forth below, unless
the context clearly requires otherwise.
2.1. "Account" means the bookkeeping account established
for each Participant which reflects the value of the
Participant's interest in the Plan. This Account shall include a
Company Stock Account, reflecting the number of shares of Company
Stock allocated to the Participant and an Investment Account in
which shall be reflected other investments allocated to the
Participant.
2.2. "Administrative Committee" and "Committee," used
interchangeably, means the named fiduciary of the Plan, which is
appointed by the Board of Directors, as is more fully described
in Article 12.
2.3. "Affiliate" means the Company and any corporation
which is a member of a controlled group of corporations (as
defined in Code Section 414(b)) which includes the Company; any
trade or business (whether or not incorporated) which is under
common control (as defined in Code Section 414(c)) with the
Company; any organization (whether or not incorporated) which is
a member of an affiliated service group (as defined in Code
Section 414(m)) which includes the Company; and any other entity
required to be aggregated with the Company pursuant to
regulations under Code Section 414(o).
2.4. "Beneficiary" means the individual(s) or entities
entitled to receive the Participant's benefits under the Plan in
the event of the Participant's death prior to receiving all
benefits payable under the Plan.
2.5. "Board of Directors" means the Board of Directors of
the Company as constituted from time to time.
2.6. "Break in Service" means a Plan Year during which an
Employee (a) has terminated employment or is no longer employed
with the Company or an Affiliate, and (b) fails to complete more
than five hundred (500) Hours of Service.
2.7. "Code" means the Internal Revenue Code of 1986, as
amended and the regulations promulgated thereunder.
2.8. "Company" means Mercer Insurance Group, Inc. and any
Affiliate which adopts this Plan with the approval of the Board
of Directors of the Company and any successor to the business of
the Company that agrees to assume the Company's obligations under
the Plan.
<PAGE 2>
2.9. "Company Stock" means shares of common stock issued by
the Company that are qualifying employer securities within the
meaning of Code Section 4975(e)(8). For purposes of Code Section
4975(e)(8), "Affiliate," as defined in Section 2.3 of the Plan,
shall be modified in accordance with Code Section 409(l)(4).
2.10. "Compensation" means the actual salary or wages paid
during a Plan Year (including shift differential, draw, overtime
and bonus) to a Participant by the Company for personal services,
and including any salary reduction contributions elected by a
Participant pursuant to any plan maintained by the Company in
accordance with Code Sections 401(k) and 125, but excluding
severance, commissions, the value of any stock options included
in gross income, awards under any nonqualified plans of deferred
compensation and reimbursement for business, travel or
entertainment expenses incurred by the Participant and not
reported to the Internal Revenue Service as wages.
The annual compensation for each Participant taken into
account under the Plan shall not exceed $150,000, as adjusted by
the Secretary or his designate at the same time and in the same
manner as under Code Section 415(d).
2.11. "Disability" shall have the meaning set forth in the
Company's long-term disability plan.
2.12. "Effective Date" means January 1, 1998 which is the
date on which the provisions of this Plan become effective.
2.13. "Employee" means an individual who is employed as a
common law employee by the Company or an Affiliate on a salaried
or hourly basis and with respect to whom the Company or the
Affiliate is required to withhold taxes from remuneration paid to
him or her by the Company or Affiliate for personal services
rendered to the Company, including any officer or director who
shall so qualify. The term shall not include leased employees
within the meaning of Code Section 414(n). Employees shall not
include any individual whose employment with the Company or an
Affiliate is governed by a collective bargaining agreement
between the Company and employee representatives if evidence
exists that retirement benefits were a subject of good faith
bargaining between the parties, and provided such bargaining
agreement does not provide for participation in this Plan.
2.14. "Employer" means the Company.
2.15. "Entry Date" means January 1, April 1, July 1 and
October 1 of each Plan Year.
2.16. "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time, including any
regulations promulgated thereunder.
2.17. "Exempt Loan" means an extension of credit to the
Plan which satisfies the requirements of Treasury Regulations
<PAGE 3> Section 54.4975-7(b) and Department of Labor Regulations
Section 2550.408(b)-3, or any future law or regulation that
modifies either or both of these two regulations and affects the
exemption for such loans to an employee stock ownership plan.
2.18. "Fund" means the assets and all income, gains and
losses thereon held by the Trustee under the Trust Agreement for
the exclusive benefit of Participants and Beneficiaries of the
Plan.
2.19. "Highly Compensated Employee"
(a) Highly Compensated Employee means an Employee
who performs service during the determination year and is
described in one or more of the following groups:
(i) An Employee who is a 5% owner, as
defined in Code Section 416(i)(1)(A)(iii), at any time during the
determination year or the look-back year.
(ii) An Employee who receives compensation
in excess of $80,000 (indexed in accordance with Code
Section 415(d)) during the look-back year.
(iii) An Employee who receives compensation
in excess of $80,000 (indexed in accordance with Code
Section 415(d)) during the look-back year and is a member of the
top-paid group for the look-back year.
(b) For purposes of the definition of Highly
Compensated Employee, the following definitions and rules shall
apply:
(i) The determination year is the Plan Year
for which the determination of who is highly compensated is being
made.
(ii) The look-back year is the 12 month
period immediately preceding the determination year, or if the
Employer elects, the calendar year ending with or within the
determination year.
(iii) The top-paid group consists of the top
20% of employees ranked on the basis of compensation received
during the year. For purposes of determining the number of
employees in the top-paid group, employees described in Code
Section 414(q)(8) and Treasury Regulations Section 1.414(q)-1T
Q&A 9(b) are excluded.
(c) Compensation is compensation within the
meaning of Code Section 415(c)(3), plus, for purposes thereof,
elective or salary reduction contributions to a cafeteria plan,
cash or deferred arrangement under Code Section 401(k) or tax-
sheltered annuity. Employers aggregated under Code <PAGE 4>
Sections 414(b), (c), (m), or (o) are treated as a single
employer.
2.20. "Hours of Service" means:
(a) Performance of Duties. The actual hours for
which an Employee is paid or entitled to be paid by the Company
for the performance of duties;
(b) Nonworking Paid Time. Each hour for which an
Employee is paid or entitled to be paid by the Company on account
of a period of time during which no duties are performed
(irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity,
disability (to the extent not already included in Compensation),
layoff, jury duty, military duty or leave of absence; provided,
however, no more than 501 Hours of Service shall be credited to
an Employee on account of any single continuous period during
which he performed no duties; and provided further that no credit
shall be given for payments made or due under a plan maintained
solely for the purpose of complying with applicable worker's or
unemployment compensation or disability insurance laws or for
payments which solely reimburse an Employee for medical or
medically related expenses incurred by the Employee; and
(c) Maternity, Paternity and FMLA Leave. Solely
for purposes of determining whether a one year Break in Service
(as defined in Section 2.6 of the Plan) has occurred for purposes
of determining eligibility to participate and vesting, each hour
for which an Employee is absent from employment by reason of
(i) pregnancy of the Employee, (ii) birth of a child of the
Employee, (iii) placement of a child in connection with the
adoption of the child by an individual, or (iv) caring for the
child during the period immediately following the birth or
placement for adoption. Hours of Service shall also, for these
limited purposes, include each hour for which an Employee who has
worked for the Company or an Affiliate for at least 12 months and
for at least 1,250 Hours of Service during the year preceding the
start of the leave, is absent from employment on an unpaid family
leave for up to 12 weeks, as provided for in the Family and
Medical Leave Act of 1993 (the "FMLA Leave"), by reason of
(A) the birth or adoption of a child, (B) the care of a spouse,
child or parent with a serious health condition, or (C) his own
serious health condition, provided that such an Employee provides
the Company with a 30-day advance notice if the leave is
foreseeable, and/or medical certification satisfactory to support
his request for leave because of a serious health condition. For
purposes of determining whether an Employee's leave qualifies as
a "FMLA Leave" in order to be credited with Hours of Service
under this Plan, the Family and Medical Leave Act of 1993
("FMLA") and the regulations promulgated thereunder shall apply.
During the period of absence, the Employee shall be credited with
the number of hours that would be generally credited but for such
absence or if the general number of work hours is unknown, eight
Hours of Service for each normal workday during the leave
<PAGE 5> (whether or not approved). These hours shall be
credited to the computation period in which the leave of absence
commences if crediting of such hours is required to prevent the
occurrence of a one year Break in Service in such computation
period, and in other cases, in the immediately following
computation period. The computation period shall be the same as
the relevant period for determining eligibility computation
periods and vesting computation periods. Unless otherwise
required under the FMLA and the regulations promulgated
thereunder, no more than 501 Hours of Service shall be credited
under this paragraph for any single continuous period (whether or
not such period occurs in a single computation period).
(d) Back Pay. Each hour for which back pay,
irrespective of mitigation of damages, is either awarded or
agreed to by the Company; provided, however, Hours of Service
credited under paragraphs (a), (b) and (c) above shall not be
recredited by operation of this paragraph.
(e) Equivalencies. The Administrative Committee
shall have the authority to adopt any of the following
equivalency methods for counting Hours of Service that are
permissible under regulations issued by the Department of Labor:
(i) Working Time; (ii) Periods of Employment; (iii) Earnings; or
(iv) Elapsed Time. The adoption of any equivalency method for
counting Hours of Service shall be evidenced by a certified
resolution of the Committee, which shall be attached to and made
part of the Plan. Such resolution shall indicate the date from
which such equivalency shall be effective.
(f) Miscellaneous. Unless the Administrative
Committee directs otherwise, the methods of determining Hours of
Service when payments are made for other than the performance of
duties and of crediting such Hours of Service to Plan Years set
forth in Department of Labor Regulations Sections 2530.200b-2(b)
and (c), shall be used hereunder and are incorporated by
reference into the Plan.
Participants on military leaves of absence who are not
directly or indirectly compensated or entitled to be compensated
by the Company while on such leave shall be credited with Hours
of Service as required by Section 9 of the Military Selective
Service Act.
Notwithstanding any other provision of this Plan to the
contrary, an Employee shall not be credited with Hours of Service
more than once with respect to the same period of time.
2.21. "Investment Manager" means an investment advisor,
bank or insurance company, meeting the requirements of ERISA
Section 3(38), appointed by the Company to manage the Plan's
assets in accordance with the Trust Agreement.
<PAGE 6>
2.22. "Normal Retirement Date" means the first day of the
calendar month coincident with or following the date on which a
Participant attains age 65.
2.23. "Participant" means an Employee participating in the
Plan in accordance with Article 3.
2.24. "Plan" means the Mercer Insurance Group, Inc.
Employee Stock Ownership Plan, as set forth in this document and
in the Trust Agreement pursuant to which the Fund is maintained,
in each case as amended from time to time.
2.25. "Plan Year" means the calendar year.
2.26. "Suspense Account" means the account established and
maintained to hold Company Stock acquired with the proceeds of an
Exempt Loan and held in the Fund, which Company Stock has not
been allocated to the Accounts of Participants with respect to
the year of such acquisition.
2.27. "Trust Agreement" means the agreement of Trust
established by the Company and the Trustee for purposes of
holding title to the assets of the Plan.
2.28. "Trustee" means Trenton Savings Bank, F.S.B. or an
affiliate thereof, successor thereto or substitute therefor, in
any case as appointed by the Board of Directors of the Company in
accordance with Article 12 to hold legal title to the assets of
the Fund and that expressly agrees to be bound by the terms and
conditions of the Trust Agreement.
2.29. "Valuation Date" shall mean the last business day of
each calendar quarter (March 31, June 30, September 30 and
December 31), and such other more frequent dates as the
Administrative Committee may from time to time establish.
2.30. "Year of Service" means a Plan Year or the
eligibility computation period in which a Participant completes
at least 1,000 Hours of Service.
THE MASCULINE GENDER, WHERE APPEARING IN THE PLAN, SHALL BE
DEEMED TO INCLUDE THE FEMININE GENDER, UNLESS THE CONTEXT CLEARLY
INDICATES TO THE CONTRARY.
PAGE 7
<PAGE>
ARTICLE 3
ELIGIBILITY
3.1. Eligibility Generally. Each Employee who is employed
by the Company on the Effective Date shall be eligible to become
a Participant in the Plan as of the Effective Date provided he
has attained age 21 and has satisfied the requirements of
Section 3.2 of the Plan relating to the completion of an
eligibility computation period.
3.2. Eligibility Computation Period. An Employee's
eligibility computation period shall be the twelve consecutive
month period during which the Employee is credited with 1,000 or
more Hours of Service beginning with the date the Employee first
performs an Hour of Service. Thereafter, the eligibility
computation period of an Employee shall be the Plan Year,
including the Plan Year that includes the first anniversary of
the date of his first Hour of Service.
3.3. Commencement of Participation. Each Employee who has
satisfied the requirements of Section 3.1 of the Plan shall
commence participation in the Plan on the later of the Effective
Date or the Entry Date concurrent with or next following the date
on which he satisfies such requirements.
3.4. Cessation of Participation. An Employee shall cease
to be a Participant upon the earliest of (a) the date on which he
retires under the Plan, (b) the date on which his employment with
the Company terminates for any reason, including death or
Disability, (c) the date on which his employment with the Company
is governed by a collective bargaining agreement that does not
provide for participation in this Plan; or (d) the date on which
he becomes a "leased employee" as defined in Code Section 414(n).
3.5. Special Rules for Participation and Vesting Purposes.
For purposes of determining an Employee's eligibility to
participate in the Plan pursuant to Section 3.1 of the Plan, and
for purposes of determining his Years of Service and vested
interest pursuant to this Section 3.5 and Section 4.1 of the
Plan, respectively, Hours of Service shall include an Employee's
Hours of Service (a) with an Affiliate after it became an
Affiliate hereunder, (b) while a "leased employee" as defined in
Code Section 414(n) with the Company or an Affiliate after it
became an Affiliate, (c) while an employee covered by the terms
of a collective bargaining agreement that does not provide for
participation in this Plan, or (d) with the Company prior to the
Effective Date provided such Employee was eligible to participate
in this Plan on the Effective Date in accordance with
Section 3.1.
3.6. Years of Service. A participant's vested interest in
his Account shall be based on his Years of Service. Subject to
<PAGE 8> the reemployment provisions of Section 3.7 of the Plan,
a Participant or Employee shall be credited with a Year of
Service for each Plan Year in which he is credited with 1,000 or
more Hours of Service with the Company.
3.7. Participation upon Reemployment. Upon the
reemployment of any person after the Effective Date who had
previously been employed by the Company on or after the Effective
Date, the following rules shall apply in determining his
participation in the Plan and his Years of Service under
Section 3.5 of the Plan:
(a) No Prior Participation. If the reemployed
Employee was not a Participant in the Plan during his prior
period of employment and the reemployed Employee incurred a one-
year Break in Service, he must meet the requirements of
Section 3.1 of the Plan for participation in the Plan as if he
were a new Employee. If the reemployed Employee was not a
Participant in the Plan during his prior period of employment and
the reemployed Employee did not incur a one-year Break in
Service, all Service with the Company before termination of
employment and after re-employment will be aggregated for
purposes of meeting the requirements of Section 3.1 of the Plan
for participation in the Plan. For purposes of this Article 3,
the term one-year Break in Service means a twelve consecutive
month period during which the Employee does not perform at least
500 hours of service.
(b) Prior Participation. If the reemployed
Employee was a Participant in the Plan during his prior period of
employment, he shall be entitled to resume participation in the
Plan on the date of his reemployment.
(c) Years of Service. Upon reemployment
following a Break in Service, any Employee who was entitled to a
nonforfeitable (vested) benefit as of the date of his original
Break in Service will have his Years of Service before and after
the Break in Service aggregated. Any Employee who was not
eligible for a nonforfeitable (vested) benefit under this Plan at
the date of his original Break in Service will have his Years of
Service before the Break in Service aggregated with his Years of
Service after the Break in Service unless the period commencing
with the date of his termination of employment and ending with
the date of his reemployment exceeds the greater of (i) his Years
of Service prior to the Break in Service or (ii) five years.
PAGE 9
<PAGE>
ARTICLE 4
VESTING
4.1. In General. Each Participant shall have a vested
interest in his Account, if any, in accordance with the following
vesting schedule:
Years of Service
After the Effective Date Vested Percentage
0-5 Years of Service 0%
5 or more Years of Service 100%
For purposes of determining an Employee's vested
interest under this Section 4.1, an Employee's Years of Service
shall be disregarded as permitted by Code Section 411(a)(4)(D).
4.2. Normal Retirement Date. Notwithstanding the
provisions of Section 4.1 of the Plan, a Participant who
terminates employment on or after his Normal Retirement Date,
shall be 100 percent vested in his Account.
4.3. Death or Disability. Notwithstanding the provisions
of Section 4.1 of the Plan, if a Participant's employment is
terminated on account of death or Disability, he shall be
100 percent vested in his Account.
4.4. Forfeiture of Account. If a Participant terminates
employment prior to the time he is 100 percent vested in his
Account for a reason other than death, Disability, or Normal
Retirement, then the non-vested amount shall be immediately
forfeited and allocated as of the end of the Plan Year in which
the Participant incurs a one-year Break in Service. Forfeitures
shall be allocated to the Accounts of Participants who were
employed by the Company on the last day of the Plan Year with
respect to which forfeitures are allocated in the ratio that the
Compensation of each Participant for such Plan Year bears to the
total Compensation of all such Participants for such Plan Year.
PAGE 10
<PAGE>
ARTICLE 5
CONTRIBUTIONS AND ALLOCATIONS
5.1. Company Contributions. For each Plan Year, the
Company may contribute cash or shares of Company Stock, or both,
in such amounts as may be determined by the Board of Directors.
In no event, however, shall Company contributions made under this
Section 5.1 exceed fifteen percent (15%) of each Participant's
Compensation, except to the extent Company contributions are used
to pay the interest on an Exempt Loan.
In the event shares of Company Stock are sold to the
Trustee for a Plan Year, the fair market value of such Company
Stock shall be determined in accordance with the provisions of
Article 8. Employer contributions made under this Section 5.1
shall be transferred to the Trustee no later than the due date
(including extensions) for filing the Company's Federal income
tax return.
5.2. Time and Manner of Contributions. All Company
contributions shall be paid directly to the Trustee, and a
contribution for any Plan Year shall be made not later than the
date prescribed by law for filing the Company's Federal income
tax return (including extensions, if any) for the Company's
taxable year that ends within or with that Plan Year.
5.3. Employee Contributions. Participants are neither
permitted nor required to make contributions to the Plan.
5.4. Recovery of Contributions. The Company may recover
contributions to the Plan, only as set forth in this Section 5.4.
(a) Contributions made to the Plan shall be
conditioned upon the initial and continuing qualification of the
Plan. If the Plan is determined to be disqualified,
contributions made in respect of any period subsequent to the
effective date of such disqualification shall be returned to the
Company.
(b) Contributions made to the Plan shall be
conditioned upon their deductibility under the Code. To the
extent that a deduction is disallowed for any contribution, such
amount shall be returned to the Company within one year after the
disallowance of the deduction.
(c) If a contribution, or any part thereof, is
made on account of a mistake of fact, the amount of the
contribution attributable to such mistake shall be returned to
the Company within one year after it is made.
5.5. Allocation of Employer Contributions. Subject to the
limitations set forth in Article 6, Employer contributions made
<PAGE 11> to the Trust in the form of cash or Company Stock for a
Plan Year shall be allocated to the Accounts of Participants in
the ratio of the Compensation of each Participant for the Plan
Year to the total Compensation of all Participants for the Plan
Year, provided that the Participant has completed 1,000 Hours of
Service and is actively employed on the last date of the Plan
Year.
5.6. Income on Investments. The income, gains, and losses
attributable to investments under the Plan shall be allocated
annually or at such other times as the Administrative Committee
may determine to the Accounts of Participants and Beneficiaries
who have undistributed balances in their Accounts on the
Valuation Date, in proportion to the amounts in the Accounts
immediately after the preceding Valuation Date, but after first
reducing each Account by any distributions, withdrawals or
transfers from the Trust during the interim period and increasing
each Account by any transfers to the Trust and by contributions
made to the Trust during the interim period.
Distributions from the Plan shall include income,
gains, and losses accrued as of the coincident or immediately
preceding Valuation Date, and shall not be adjusted
proportionately to reflect any income, gains, or losses accrued
after that Valuation Date. All valuations shall be based on the
fair market value of the assets in the Trust on the Valuation
Date.
5.7. Certain Stock Transactions. Shares of Company Stock
received by the Trustee as a result of a stock split, dividend,
conversion, or as a result of a reorganization or other
recapitalization of the Company shall be allocated as of the day
on which such shares are received by the Trustee in the same
manner as the shares of Company Stock to which they are
attributable are then allocated.
5.8. Valuation of Trust Fund. As of each Valuation Date,
the Trustee shall determine the fair market value of the Trust,
after deducting withdrawals, distributions, and any expenses of
Plan administration paid out of the Trust, and including any
contributions allocated to Participants' Accounts, for the
valuation period ending on the Valuation Date. In determining
value, the Trustee may use such generally accepted methods as the
Trustee, in its discretion, deems advisable, which, in the case
of Company Stock shall be in accordance with the provisions of
Article 8.
PAGE 12
<PAGE>
ARTICLE 6
MAXIMUM LIMITATION ON ALLOCATIONS
6.1. Participation Solely in This Plan.
(a) If the Participant does not participate in,
and has never participated in another plan qualified under Code
Section 401(a) that is maintained by the Employer, or a welfare
benefit fund (as defined in Code Section 419(e)) maintained by
the Employer, or an individual medical account (as defined in
Code Section 415(l)(2)) maintained by the Employer, which
provides an Annual Addition, the amount of Annual Additions which
may be credited to the Participant's Account for any Limitation
Year shall not exceed the lesser of the Maximum Permissible
Amount or any other limitation contained in the Plan. If the
Company's contribution that would otherwise be contributed or
allocated to the Participant's Account would cause the Annual
Additions for the Limitation Year to exceed the Maximum
Permissible Amount, the excess amounts in the Participant's
Account must be allocated and reallocated to other Participants.
If the allocation or reallocation of the excess amounts cause the
Maximum Permissible Amount to be exceeded with respect to each
Participant for the Limitation Year, then these amounts must be
held unallocated in a Code Section 415 suspense account. If a
Code Section 415 suspense account is in existence at any time
during a Limitation Year pursuant to this Section 6.1, it will
not participate in the allocation of the Trust's investment gains
and losses. If a suspense account is in existence at any time
during a particular Limitation Year, other than the Limitation
Year described in the preceding sentence, all amounts in the Code
Section 415 suspense account must be allocated and reallocated to
Participants' Accounts (subject to the Maximum Permissible
Amount) before any Employer contributions may be made to the Plan
for that Limitation Year.
(b) Prior to determining the Participant's actual
Compensation for the Limitation Year, the Company may determine
the Maximum Permissible Amount for a Participant on the basis of
a reasonable estimation of the Participant's Compensation for the
Limitation Year, uniformly determined for all Participants
similarly situated.
(c) As soon as is administratively feasible after
the end of the Limitation Year, the Maximum Permissible Amount
for the Limitation Year will be determined on the basis of the
Participant's actual Compensation for the Limitation Year.
(d) If, after determining the Participant's
actual Compensation or, if as a result of an allocation of
forfeitures, there is an amount in excess of the Maximum
Permissible Amount allocated to a Participant's Account, the
<PAGE 13> excess shall be allocated in the same manner as
provided for in Section 6.2(a) of the Plan.
6.2. Participation in Another Defined Contribution Plan.
(a) This Section 6.2 applies if a Participant is
also covered under another defined contribution plan or a welfare
benefit fund (as defined in Code Section 419(e)) or an individual
medical account (as defined in Code Section 415(l)(2) maintained
by the Employer which provides an Annual Addition during any
Limitation Year. If the Participant participates in one or more
such plans, all reductions in Annual Additions shall be made
under such plans and not under this Plan. In the event that,
notwithstanding the preceding sentence, the Annual Additions to
be credited under this Plan should exceed the Maximum Permissible
Amount, the Annual Additions which would otherwise be credited to
the Participant's Account under any other such plan shall be
reduced prior to making any reduction hereunder, which reduction
shall be made to the maximum extent possible under this Plan and
shall be reduced in the manner set forth in Section 6.1 of the
Plan.
6.3. Participation in a Defined Benefit Plan.
(a) In the event a Participant participates in a
defined benefit plan or plans maintained by the Employer as well
as this Plan, the sum of the Defined Benefit Plan Fraction and
the Defined Contribution Plan Fraction will not exceed 1.0 for
any Limitation Year. If there is an excess, appropriate
adjustments to the Participant's benefits under defined benefit
plans maintained by the Employer shall be made prior to making
any adjustments to a Participant's Account under this Plan.
(b) For purposes of this Section 6.3, the Defined
Benefit Plan Fraction for any Limitation Year is a fraction:
(i) the numerator of which is the projected
annual benefit of the Participant (as determined under Code
Section 415) under all defined benefit plans of the Employer
(determined as of the close of the year); and
(ii) the denominator of which is the lesser
of --
(A) the product of 1.25 multiplied by
the dollar limitation in effect under Code Section 415(b)(1)(A);
(B) the product of 1.4 multiplied by
the amount which may be taken into account under Code Section
415(b)(1)(B) with respect to such individual under the defined
benefit plan for such year.
(c) For purposes of this Section 6.3, the Defined
Contribution Plan Fraction for any Limitation Year is a fraction
<PAGE 14>
(i) the numerator of which is the sum of the
Annual Additions to the Participant's accounts under all defined
contribution plans of the Employer as of the close of such year;
and
(ii) the denominator of which is the sum of
the lesser of the following amounts determined for such year and
for each prior Year of Service with the Employer:
(A) the product of 1.25 multiplied by
the dollar limitation in effect under Code Section 415(c)(1)(A);
(B) the product of 1.4 multiplied by
the amount which may be taken into account under Code Section
415(c)(1)(B) for the Participant for such year.
6.4. Definitions. The following definitions apply solely
for purposes of this Article 6.
(a) Annual Additions means the sum of the
following amounts credited to a Participant's Account for the
Limitation Year:
(i) employer contributions
(ii) employee contributions
(iii) forfeitures
(iv) amounts allocated to an individual
medical account (as defined in Code Section 415(l)(2)) which is
part of a pension or annuity plan maintained by the Employer
which are treated as Annual Additions to a defined contribution
plan, and
(v) amounts derived from contributions paid
or accrued, which are attributable to post-retirement medical
benefits, allocated to the separate account of a key employee, as
defined in Code Section 419A(d)(3), under a welfare benefit fund
maintained by the Employer which are treated as Annual Additions
to a defined contribution plan.
(vi) Excess amounts applied to reduce
Employer contributions under Sections 6.2 or 6.1 of the Plan in
the Limitation Year will be Annual Additions for such Limitation
Year.
(b) Compensation means wages, salary and other
remuneration for personal services required to be reported
pursuant to Code Sections 6041(d) and 6051(a)(3) except that
Compensation will be determined without regard to any rules under
Code Section 3401(a) that limit remuneration based upon the
nature or location of the services performed.
<PAGE 15>
GAR Employer means the Company and all members of
a controlled group of corporations (as defined in Code
Section 414(b) and modified by Code Section 415(h)) all commonly
controlled trades or businesses (as defined in Code
Section 414(c) as modified by Code Section 415(h)), any
affiliated service group (as defined in Code Section 414(m)) of
which the Company is a part, and any other entity required to be
aggregated with the Employer pursuant to regulations under Code
Section 414(o).
(d) Limitation Year means the calendar year.
(e) Maximum Permissible Amount means the Maximum
Annual Additions that may be contributed or allocated to a
Participant's Account for any Limitation Year. Such amount shall
not exceed the lesser of:
(i) $30,000 (or if greater, 1/4 of the
dollar limitation in effect under Code Section 415(b)(1)(A)), or
(ii) 25 percent of the Participant's
Compensation for the Limitation Year.
The Maximum Permissible Amount shall be pro-rated in
the case of any Limitation Year of less than 12 months created by
the changing of the Limitation Year.
If no more than one-third of Company contributions to
the Plan for a Plan Year which are deductible under Code Section
404(a)(9) are allocated to the Accounts of Participants who are
Highly Compensated Employees, there shall be excluded in
determining the Maximum Permissible Amount of each Participant
for such Plan Year (A) the contributions applied to the payment
of interest on an Exempt Loan; and (B) any forfeitures of Company
contributions if the forfeited contributions were Company Stock
acquired with the proceeds of an Exempt Loan.
PAGE 16
<PAGE>
ARTICLE 7
INVESTMENT OF TRUST ASSETS
7.1. Trust.
(a) All assets of the Plan shall be held in the
Trust. To the extent the Trustee deems practical, the Trustee
shall use all available cash, as directed by the Administrative
Committee, to purchase Company Stock in open market transactions,
from other stockholders or to buy newly issued Company Stock from
the Company. If the purchase is from the Company or a
Disqualified Person, such purchase shall be for adequate
consideration and no commission is to be charged with respect to
the purchase. If no such stock is available for purchase, or if
the Trustee determines that the purchase of such additional stock
is not practical, the Trustee shall invest in other securities or
property, real or personal, consistent with the requirements of
Title I of ERISA. These other securities, property and cash
shall be held by the Trustee in the Investment Fund. The
Investment Fund income shall be allocated as of each Valuation
Date to Participant's Investment Accounts in proportion to the
balance in these accounts at the beginning of the year.
(b) For purposes of this Article 7, Article 9,
Article 10 and Article 17, the term "Disqualified Person" means a
person defined in Code Section 4975(e), including but not limited
to (i) a fiduciary of the Plan; (ii) a person providing services
to the Plan; (iii) an owner of 50% or more of the combined voting
power or value of all classes of stock of the Company entitled to
vote or the total value of shares of all classes of stock of the
Company and certain members of such owner's family; or (iv) an
officer, director, 10% or greater shareholder or highly
compensated employee (who earns 10% or more of the yearly wages)
of the Company.
PAGE 17
<PAGE>
ARTICLE 8
COMPANY STOCK APPRAISAL
The fair market value of Company Stock shall be
determined, on any relevant day, as follows: (a) if such stock
is then traded in the over-the-counter market, the closing sale
price (as reported in the National Market System by NASDAQ with
respect to such stock) for the most recent date (including such
relevant day) during which a trade in such stock has occurred, or
(b) if such stock is then traded on a national securities
exchange, the closing sale price for the most recent date
(including such relevant date) during which a trade in such stock
has occurred. In accordance with the provisions of Code Section
401(a)(28)(C), if Company stock is not actively traded in the
over-the-counter market, or on a national securities exchange, a
valuation of Company stock required to be made under this Plan
shall be made by an independent appraiser who satisfies
requirements similar to those contained in regulations issued
under Code Section 170(a)(1).
PAGE 18
<PAGE>
ARTICLE 9
DISTRIBUTIONS
9.1. Termination of Employment. In the event of the
Participant's termination of employment for any reason (including
attaining his Normal Retirement Date, attainment of age 55 and
the completion of Five Years of Service or on account of death or
Disability), a Participant shall be entitled to a distribution of
all amounts determined under Article 4 that are credited to his
Account at the times set forth in this Article 9.
9.2. Death. Upon the death of a Participant, all amounts
credited to his Account shall be distributed to his Beneficiary,
determined in accordance with this Section 9.2.
(a) The Administrative Committee may require such
proof of death and such other evidence of the right of any person
to receive payment of the Account of a deceased Participant as
the Administrative Committee deems necessary. The Administrative
Committee's determination of death and of the right of any person
to receive payment shall be conclusive and binding on all
parties.
(b) The Beneficiary upon the death of a
Participant shall be his spouse; provided, however, that the
Participant may designate, on a form provided by the
Administrative Committee for such purpose, a Beneficiary other
than his spouse, if:
(i) the spouse has waived the right to be
the Participant's Beneficiary in the manner set forth in
subsection (c) of this Section 9.2; or
(ii) the Participant has established to the
satisfaction of the Administrative Committee that he has no
spouse or that his spouse cannot be located.
(c) Any consent by a Participant's spouse to
waive a death benefit must be filed with the Administrative
Committee in writing, in a manner, and on a form provided by the
Committee for such purpose. The spouse's consent must
acknowledge the effect of the consent and must be witnessed by a
notary public. The designation of a Beneficiary other than
spouse made by a married Participant must be consented to by his
spouse and may be revoked by the Participant in writing without
the consent of the spouse. Any new beneficiary designation must
comply with the requirements of this subsection (c). A former
spouse's waiver shall not be binding on a new spouse.
(d) In the event the designated Beneficiary fails
to survive the Participant, or if such designation shall be
ineffective for any reason, the Participant's Account shall be
<PAGE 19> paid in the following order of priority: first to the
Participant's surviving spouse, if any; second, if there is no
surviving spouse, to the Participant's surviving children, if
any, in equal shares; third, if there is neither a surviving
spouse nor surviving children, to the legal representatives of
the estate of the Participant.
9.3. Time of Payment.
(a) The distribution of a Participant's Account
shall begin as soon as administratively feasible, but not later
than 60 days after the end of the Plan Year, in which his date of
termination of employment occurred.
(b) The distribution of the Participant's Account
balance will be in one lump sum.
9.4. Form of Payment. Distributions of a Participant's
Account balance under this Article 9 shall be made in Company
Stock unless the distributee elects cash.
Such distributions shall be the fair market value of each
share multiplied by the number of shares credited to the
Participant's Account, with appropriate adjustments to reflect
intervening stock dividends, stock splits, stock redemptions, or
similar changes to the number of outstanding shares. The fair
market value of a share shall be determined as of the Valuation
Date immediately preceding the date the distribution is made or,
in the case of a transaction between the Plan and a Disqualified
Person, determined as of the date of the transaction.
9.5. Direct Rollover.
(a) Notwithstanding any provision of the Plan to
the contrary that would otherwise limit a distributee's election
under this Article 9, a distributee may elect, at the time and in
the manner prescribed by the Plan Administrator, to have any
portion of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a direct
rollover.
For purposes of this Section 9.5, the
following definitions apply:
"Eligible rollover distribution". An eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an eligible
rollover distribution does not include: any distribution that is
one of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
Beneficiary, or for a specified period of ten years or more, or
any distribution to the extent such distribution is required
under Code Section 401(a)(9); or the portion of any distribution
<PAGE 20> that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation
with respect to employer securities).
"Eligible retirement plan". An eligible retirement
plan is an individual retirement account described in Code
Section 408(a), an individual retirement annuity described in
Code Section 408(b), an annuity plan described in Code Section
403(a), or a qualified trust described in Code Section 401(a),
that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
"Distributee". A distributee includes an employee or
former employee. In addition, the employee's or former
employee's surviving spouse and the employee's or former
employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in Code
Section 414(p), are distributees with respect to the interest of
the spouse or former spouse.
"Direct rollover". A direct rollover is a payment by
the plan to the eligible retirement plan specified by the
distributee.
9.6. Diversification Election. Notwithstanding any
provision of this Article to the contrary, effective for Plan
Years commencing on or after January 1, 2007, a Participant who
has attained age 55 and completed at least ten years of
participation in this Plan may elect in writing, on a form
provided by the Administrative Committee for such purpose, within
ninety days after the close of each Plan Year during the
Qualified Election Period, to direct the investment of a portion
of his interest in the Company Stock Account not in excess of 25
percent of such interest, less amounts subject to all prior
elections under this Section 9.6 as a transfer to the applicable
Mercer Insurance Group, Inc. defined contribution plan which
permits Participants to make investment elections. Upon a
Participant's election to diversify a portion of his interest in
the Company Stock Account, Company Stock in an amount equal to
the portion so elected, valued as of the Valuation Date
concurrent with or immediately preceding the date of such
election will be transferred to the applicable Mercer Insurance
Group, Inc. defined contribution plan which permits Participants
to make investment elections. A participant may then make
investment elections among the several funds. Starting from the
sixth Plan Year during the Qualified Election Period of a
Participant, 50 percent shall be substituted for 25 percent in
the preceding sentence.
For purposes of this Section 9.6, "Qualified Election
Period" means, with respect to a Participant, the period
beginning with the later of (a) the Plan Year in which the
Participant attains age 55 or (b) the Plan Year in which the
<PAGE 21> Participant completes at least ten years of
participation in the Plan and ending with the year in which the
Participant terminates his employment for any reason.
9.7. Election to Retain Interests in Plan. No distribution
shall be made to a Participant before his Normal Retirement Date
unless (a) the Participant's prior written consent to the
distribution has been obtained by the Administrative Committee,
or (b) the value of the Participant's Account does not exceed
$3,500 as of the date of the event giving rise to the
distribution.
9.8. Mandatory Distributions.
(a) Subject to the provisions of Section 9.3 of
the Plan, unless a Participant otherwise elects in writing,
payment of benefits under this Plan shall commence not later than
sixty days after the close of the Plan Year in which the latest
of the following dates occur:
(i) the date on which the Participant
attains age 65;
(ii) the 10th anniversary of the date on
which the Participant commenced participation in the Plan; or
(iii) the date the Participant terminates
employment with the Company.
(b) (i) Any provision of this Plan to the
contrary notwithstanding, all amounts credited to a Participant's
Account shall commence to be distributed not later than April 1
of the calendar year following the calendar year in which the
Participant attains age 70-1/2, whether or not the Participant has
terminated employment. Any subsequent distributions for other
distribution calendar years, including the minimum distribution
for the distribution calendar year in which the Participant's
initial minimum distribution on April 1 occurs, will be made in a
lump-sum on or before December 31 of that distribution calendar
year. All such distributions shall be made in accordance with
the rules set forth in Code Section 401(a)(9), including the
minimum distribution incidental requirements of Treasury
Regulations Section 1.401(a)(9)-2.
(ii) In the event the Participant dies after
distributions have commenced under this Article 9 but before his
entire Account is distributed, the remaining portion of his
Account shall be distributed at least as rapidly as under the
method of distribution being used as of the date of his death.
(iii) In the event the Participant dies
before distributions under this Article 9 have commenced, then,
unless the Beneficiary of the Participant is his spouse or a
designated Beneficiary, the entire balance in the Account of the
Participant shall be distributed on or before the December 31 of
<PAGE 22> the calendar year in which occurs the fifth anniversary
of the death of such Participant.
The preceding paragraph shall not apply if either
condition of (A) or (B) as set forth below are satisfied:
(A) If the Participant's designated
Beneficiary is the surviving spouse of such Participant or former
Participant, such distribution shall not be required to begin
prior to the date on which the Participant or former Participant
would have attained age 70 1/2, and at such time may be
distributed over the life expectancy of such spouse (if the
surviving spouse dies prior to commencement of distributions to
such spouse, then this subsection (A) shall be applied as if the
surviving spouse were the Participant or former Participant);
(B) If the Participant or former
Participant's distribution, or any portion thereof, is payable to
a designated Beneficiary, such distribution or portion thereof
may be distributed in accordance with regulations over the life
of such designated Beneficiary (or over, a period not extending
beyond the life expectancy of such designated Beneficiary) if
such distribution or portion thereof begins not later than one
year following the Participant or former Participant's death or
such later date as may be prescribed by regulations. For
purposes of subsections (A) and (B), life expectancy shall be
calculated in accordance with the provisions of Code Section 72.
Life expectancy of a surviving spouse may be calculated annually,
however. In the case of any other designated Beneficiary, life
expectancy must be calculated at the time payment first
commences.
Any amount payable to a child pursuant to the death of
a Participant or former Participant shall be treated as if it
were payable to the Participant's or former Participant's
surviving spouse if such amount would become payable to the
surviving spouse upon such child reaching majority (or other
designated event permitted by regulations).
Any distribution required under the incidental death
benefit requirements of Code Section 401(a)(9) shall be treated
as a distribution required under this Section of 9.8.
9.9. Dividend Distributions.
(a) Any cash dividends on Company Stock acquired
with the proceeds of an Exempt Loan and held in Suspense Account
shall be applied first to repay the principal and, at the
Committee's discretion, the interest, of the Exempt Loan. In
addition, if any cash dividends on shares of such Company Stock
allocated to Participant's Accounts are used to pay the principal
and/or the interest of the Exempt Loan at the Committee's
discretion, Company Stock with a fair market value not less than
the amount of the dividends so used must be allocated to the
<PAGE 23> Participants' Accounts to which such cash dividends
would have been allocated.
(b) After the payment of the principal and the
interest of the Exempt Loan, any remaining cash dividends on
Company Stock may be used to purchase Company Stock or allocated
to Accounts of Participants to subsection (c) below.
(c) In the case of any cash dividends on Company
Stock that are allocable to the Accounts of Participants with
respect to vested shares, they may be paid currently (or within
ninety days after the end of the Plan Year in which the dividends
are paid to the Trust) as cash, or the Company may pay such
dividends directly to the Participants' Accounts as the
Administrative Committee may determine.
9.10. Right of First Refusal. In the event a Participant
(or former Participant) or his Beneficiary desires to sell to a
third person Company Stock he received as a distribution from the
Plan, the Participant must first offer the Company, then the
Plan, the right to purchase his Company Stock at a price and on
such terms not less favorable to the Participant than the greater
of (a) the price established by a bona fide offer or (b) the fair
market value of the Company Stock using the value determined as
of the most recent Valuation Date. The right of the Company and
the Plan to purchase such stock shall lapse on the 14th day after
the Participant or former Participant or Beneficiary gives
written notice to the Company or the Plan of the fact that he has
received an offer from a third party to purchase his Company
Stock and of the price and other terms of such offer.
9.11. Prohibited Company Stock Transactions.
(a) No portion of the assets of the Plan
attributable to (or allocable in lieu of) Company Stock acquired
by the Plan in a sale to which Code Section 1042 applies may be
allocated to the Account of (i) any Qualifying Selling
Shareholder during the Nonallocation Period, or (ii) any other
person who owns more than 25 percent of (A) any class of
outstanding stock of the Company or any of its Affiliates, or
(B) the total value of any class of outstanding stock of the
Company or any of its Affiliates. For purposes of this Section,
the definition of "Affiliate" under Section 2.3 of the Plan shall
be modified in accordance with Code Section 409(l)(4).
(b) For purposes of this Section 9.11, the
following initially capitalized words shall carry the following
meanings:
(i) "Qualifying Selling Shareholder" means
any shareholder of Company Stock who makes an election under Code
Section 1042(a) with respect to Company Stock, or any individual
who is related to (within the meaning of Code Section 267(b)) the
shareholder of Company Stock as defined above. The term shall
not include any lineal descendant of such shareholder or if the
<PAGE 24> aggregate amount allocated to the benefit of all such
lineal descendants during the Nonallocation Period does not
exceed more than 5 percent of Company Stock (or amounts allocated
in lieu thereof) held by the Plan which are attributable to a
sale to the Plan by any person related to such descendants
(within the meaning of Code Section 267(c)(4)) in a transaction
to which Code Section 1042 applied.
(ii) "Nonallocation Period" means the period
beginning on the date of the sale of Company Stock and ending on
the later of the date which is 10 years after the date of the
sale, or the date of the Plan allocation attributable to the
final payment of acquisition indebtedness incurred in connection
with such sale.
PAGE 25
<PAGE>
ARTICLE 10
RIGHT TO SELL COMPANY STOCK
10.1. Put Requirements.
(a) In the event Company Stock is distributed and
is not publicly traded in the over-the-counter market or on a
national securities exchange at the time of distribution, the
Participant, former Participant, or Beneficiary may have an
option (the "Put") to require the Company to purchase all of the
shares actually distributed to him. The Put may be exercised at
any time during the Option Period (as defined in subsection (f)
below) by giving the Administrative Committee and the Company
written notice of the election to exercise the Put. The Put may
be exercised by a former Participant or a Beneficiary only during
the Option Period with respect to which the former Participant or
Beneficiary receives a distribution of Company Stock.
(b) (i) The price paid for Company Stock sold to
the Plan or the Company pursuant to the Put shall be the fair
market value of each share multiplied by the number of shares to
be sold under the Put, with appropriate adjustments to reflect
intervening stock dividends, stock splits, stock redemptions, or
similar changes to the number of outstanding shares. The fair
market value of a share shall be determined (A) as of the
Valuation Date immediately preceding the date the Put is
exercised, or (B) in the case of a transaction between the Plan
and a Disqualified Person, determined as of the date of the
transaction.
(ii) If the distribution of Company Stock to
a former Participant or Beneficiary constituted a distribution
within one taxable year of the balance of his Account, the
Company reserves the right to establish guidelines to be
exercised in a uniform and nondiscriminatory manner, to make
payment for the shares subject to the Put on an installment basis
in substantially equal annual, quarterly or monthly payments over
a period not to exceed five years, such period beginning no later
than thirty days after exercise of the Put. The Company shall
pay reasonable interest at least annually on the unpaid balance
of the price and shall provide to the former Participant or
Beneficiary adequate security with respect to the unpaid balance.
If the distribution was part of an installment distribution, the
Company shall pay the Participant in cash within thirty days
after exercise of the Put.
(c) The Put shall not be assignable, except that
the Participant's or former Participant's legal representative
(in the event of a Participant's incapacity) or, in the event of
a Participant's or former Participant's death, his Beneficiary
shall be entitled to exercise the Put during the Option Period
for which it is applicable. <PAGE 26>
(d) The Trustee (on behalf of the Plan) in its
discretion, may assume the Company's obligations under this
Section at the time a Participant, former Participant, or
Beneficiary exercises the Put, with the Company's consent. If
the Trustee assumes the Company's obligations, the provisions of
this Section that apply to the Company shall also apply to the
Trustee.
(e) The Administrative Committee shall notify
each Participant, former Participant, and Beneficiary who is
eligible to exercise the Put of the fair market value of each
share of Company Stock as soon as practicable following its
determination. The Administrative Committee shall send all
notices required under this Section to the last known address of
a Participant, former Participant, or Beneficiary, and it shall
be the duty of those persons to inform the Administrative
Committee of any changes in address.
(f) For purposes of this Section, the "Option
Period" is the period of sixty days following the day on which a
Participant, former Participant, or Beneficiary receives a
distribution. If such person does not exercise the Put during
that sixty-day period, the Option Period shall also be the sixty-
day period beginning on the first anniversary of the day on which
he received a distribution. Notwithstanding the preceding
sentences, when Company Stock is acquired with the proceeds of an
Exempt Loan, the "Option Period" shall be the fifteen (15) month
period beginning on the date such Company Stock is distributed to
a Participant (or his Beneficiary). Such 15-month period shall
be extended by a period equal to the number of days, if any,
during which the Company is precluded from honoring the put
option by reason of applicable federal or state law.
PAGE 27
<PAGE>
ARTICLE 11
VOTING AND TENDER OF COMPANY STOCK
11.1. Voting.
(a) All shares of Company Stock held in the Trust
shall be voted by the Trustee.
(b) Each Participant and Beneficiary shall be
entitled to direct the Trustee as to the manner in which Company
Stock allocated to his Account is to be voted on any and all
matters which may be presented to the shareholders of Company
Stock.
(c) With respect to (i) allocated Company Stock
as to which no direction is received, (ii) unallocated shares of
Company Stock in the Suspense Account and (iii) allocated shares
of Company Stock that are not subject to voting right pass
through requirement under Code Section 409(e), the Trustee shall
vote such shares in proportion to the response received from
Participants and Beneficiaries for allocated shares under (b)
above. In exercising such discretion, the Trustee shall comply
with its fiduciary duties as required by ERISA.
11.2. Tender.
(a) The Trustee shall not sell, alienate,
encumber, pledge, transfer or otherwise dispose of any Company
Stock; except (i) as specifically provided for in the Plan or a
Trust Agreement, or (ii) in the case of a "tender or exchange
offer", as set forth in subsection (b) of this Section 11.2.
For purposes of this Article 11, the term "tender or
exchange offer" shall mean: (A) any offer for, or request for or
invitation for tenders or exchanges of, or offers to purchase or
acquire any shares of Company Stock that is directed generally to
shareholders of the Company, or (B) any transaction involving
Company Stock which may be defined as a "tender offer" under
proposed or final rules or regulations promulgated by the
Securities and Exchange Commission.
(b) (i) In the event of a tender or exchange
offer, each Participant or, if the Participant is not alive, his
Beneficiary, shall have the right to determine confidentially
whether to tender or exchange any whole and fractional shares of
Company Stock allocated to his Account and shall be entitled to
instruct the Trustee as to the tender of such shares. Upon
receipt of such instructions, the Trustee shall act with
respect to such Company Stock as instructed. With respect to
Company Stock as to which no instruction is received and shares
of Company Stock in the Suspense Account, the Trustee shall
tender such shares in proportion to the response received from
<PAGE 28> Participants and Beneficiaries as to allocated shares
of Company Stock. In exercising such discretion, the Trustee
shall comply with its fiduciary requirements of ERISA.
(ii) All shares of Company Stock held in the
Fund and not tendered pursuant to subsection (b)(i) of this
Section 11.2, including allocated shares for which no
instructions are received, shall continue to be held by the
Trustee.
(iii) Any shares of Company Stock not
tendered by a Participant or Beneficiary pursuant to
subsection (b)(i) of this Section 11.2 shall continue to be held
by the Trustee in such Participant's or Beneficiary's Account.
The Account of each Participant or Beneficiary tendering shares
of Company Stock pursuant to subsection (b)(i) of this
Section 11.2 shall be credited with the cash received by the
Trustee in exchange for the shares tendered from such
Participant's or Beneficiary's Account.
11.3. Fiduciary Responsibilities.
Each Participant shall be a "named fiduciary," within
the meaning of ERISA Section 402(a), with respect to the voting
and tender of Company Stock pursuant to Sections 11.1 and 11.2 of
the Plan.
11.4. Procedures for Voting and Tender.
(a) The Administrative Committee shall establish
and maintain procedures by which Participants and Beneficiaries
shall be (i) timely notified of their right to direct the voting
and tender of Company Stock allocated to their Accounts and the
manner in which any such directions are to be conveyed to the
Trustee, and (ii) given information relevant to making such
decisions. No directions shall be honored by the Trustee unless
timely and properly conveyed in accordance with such procedures.
(b) Voting instructions received from
Participants and Beneficiaries shall be held in confidence by the
Trustee or its delegate for this purpose and shall not be
divulged to the Company or to any officer or employee of the
Company or to any other person.
PAGE 29
<PAGE>
ARTICLE 12
ADMINISTRATION
12.1. Fiduciary Responsibilities. A fiduciary shall have
only those specific powers, duties, responsibilities and
obligations as are specifically given him under the Plan or the
Trust. The Company shall have sole responsibility to make the
contributions provided for under the Plan and, by action of the
Board of Directors, to amend or terminate, in whole or in part,
the Plan or the Trust. The Board of Directors shall have sole
responsibility to appoint and remove members of the
Administrative Committee and the Trustees of the Plan. The
Administrative Committee shall have sole responsibility for the
general administration of this Plan and for the investment
policies of the Plan, for the selection of the Plan's investment
funds pursuant to the Plan, and for the appointment and removal
of any Investment Manager. Subject to the provisions of the Plan
and the Trust Agreement, the Trustee shall have sole
responsibility for the administration of the Trust and the
management of the assets held in the Trust, as set forth in the
Plan and the Trust. It is intended that each fiduciary shall be
responsible for the proper exercise of his own powers, duties,
responsibilities, and obligations and, except as otherwise
provided by law, shall not be responsible for any act or failure
to act by another fiduciary. A fiduciary may serve in more than
one fiduciary capacity with respect to the Plan. A fiduciary of
the Plan who is also an Employee shall not be compensated in his
capacity as fiduciary.
12.2. The Administrative Committee. Any member of the
Administrative Committee may resign with sixty (60) days advance
written notice to the Board of Directors. The Administrative
Committee shall select a Chairman and a Secretary to keep records
or to assist it in the discharge of its responsibilities. The
Administrative Committee shall have such duties and powers as are
necessary to discharge its responsibilities under the Plan,
including, but not limited to, the following:
(a) To require any person to furnish such
information as it requests for the purpose of the proper
administration of the Plan;
(b) To make and enforce such rules and
regulations and prescribe the use of such forms as it deems
necessary for the efficient administration of the Plan;
(c) To construe and interpret the Plan, including
the right to determine eligibility for participation, eligibility
for payment, the amount of benefits payable, the timing of
distributions and all other issues arising under the Plan as well
as the right to remedy possible ambiguities, inconsistencies or
omissions; provided, however, that all such interpretations and
<PAGE 30> decisions shall be applied in a uniform manner to all
similarly situated Participants and Beneficiaries;
(d) To employ and rely upon such advisors
(including attorneys, independent public accountants, investment
advisors and enrolled actuaries) as it deems appropriate or
helpful in connection with the operation and administration of
the Plan;
(e) To maintain complete records of the
administration of the Plan;
(f) To prepare and file with the appropriate
governmental agencies such reports as required from time to time
with respect to the Plan under ERISA, the Code, or other laws and
regulations governing the administration of the Plan;
(g) To furnish or disclose to Participants,
Employees who may become Participants, and Beneficiaries
information about the Plan and statements of accrued benefits
under the Plan, in accordance with ERISA, the Code, or other laws
and regulations governing the administration of the Plan;
(h) To delegate to one or more members of the
Administrative Committee, or to persons other than Administrative
Committee members, any authority, duty or responsibility
pertaining to the administration or operation of the Plan;
provided, however, that each such delegation shall be made by a
written instrument authorized by the Administrative Committee and
maintained with the records of the Plan. If any person other
than an Employee is so designated, such person must acknowledge
in writing his acceptance of the duties and responsibilities
delegated to him. All such instruments and acknowledgements
shall be considered a part of the Plan;
(i) To determine, pursuant to procedures adopted
by it, whether a state domestic relations order served upon the
Plan is a "qualified domestic relations order" (as defined in
Code Section 414(p)); to place in escrow any benefits payable in
the period during which the Administrative Committee determines
the status of an order; and to take any necessary action to
administer distributions under the terms of a "qualified domestic
relations order";
(j) To discharge any responsibilities which are
allocated to the Administrative Committee elsewhere in this Plan.
All decisions and interpretations of the Administrative
Committee shall be binding and shall be entitled to the maximum
deference permitted under the law.
12.3. Plan Expenses. The Company shall pay all expenses
authorized and incurred by the Administrative Committee, except
to the extent such expenses are paid from assets of the Trust.
<PAGE 31>
12.4. Meetings and Voting. The Administrative Committee
shall act by a majority vote of its respective members at a
meeting or, by written consent of a majority of its members,
without a meeting. The Administrative Committee shall hold
meetings, as deemed necessary by them, although any member may
call a special meeting of his committee by giving reasonable
notice to the other members. The Secretary of the Administrative
Committee shall have authority to give certified notice in
writing of any action taken by his committee.
12.5. Compensation. The members of the Administrative
Committee, if Employees, shall serve without compensation.
12.6. Claims Procedures.
(a) Any Participant or Beneficiary ("Claimant")
may file a written claim for a benefit under the Plan with the
Administrative Committee or with a person named by the
Administrative Committee to receive such claims;
(b) In the event of a denial or limitation of any
benefit or payment due or requested by any Claimant, such
Claimant shall be given a written notification containing
specific reasons for the denial or limitation of his benefit.
The written notification shall contain specific reference to the
pertinent Plan provisions on which the denial or limitation is
based. In addition, it shall contain a description of any
additional material or information necessary for the Claimant to
perfect a claim and an explanation of why such material or
information is necessary. Further, the notification shall
provide appropriate information as to the steps to be taken if
the Claimant wishes to submit his claim for review. This written
notification shall be given to a Claimant within ninety days
after receipt of his claim by the Administrative Committee (or
its delegatee to receive such claims), unless special
circumstances require an extension of time for processing the
claim. If such an extension of time is required, written notice
of the extension shall be furnished to the Claimant prior to the
termination of the ninety-day period and such notice shall
indicate the special circumstances which make the postponement
appropriate;
(c) In the event of a denial or limitation of
benefits, the Claimant or his duly authorized representative
shall be permitted to review pertinent documents and to submit
issues and comments in writing to the Administrative Committee.
In addition, the Claimant or his duly authorized representative
may make a written request for a full and fair review of his
claim and its denial by the Administrative Committee; provided,
however, that such written request must be received by the
Administrative Committee (or its delegatee to receive such
requests) within sixty days after receipt by the Claimant of
written notification of the denial or limitation. The sixty-day
requirement may be waived by the Administrative Committee in
appropriate cases; and <PAGE 32>
(d) (i) A decision shall be rendered by the
Administrative Committee within sixty days after the receipt of
the request for review; provided, however, that where special
circumstances require an extension of time for processing the
decision, it may be postponed, on written notice to the Claimant
(prior to the expiration of the initial sixty-day period) for an
additional sixty days, but in no event shall the decision be
rendered more than one hundred and twenty days after the receipt
of such request for review.
(ii) Notwithstanding subsection (d)(i) of
this Section 12.6, if the Administrative Committee holds
regularly scheduled meetings at least quarterly to review such
appeals, a Claimant's request for review shall be acted upon at
the meeting immediately following the receipt of the Claimant's
request unless such request is filed within thirty days preceding
such meeting. In such instance, the decision shall be made no
later than the date of the second meeting following the receipt
of such request by the Administrative Committee (or its delegatee
to receive such requests). If special circumstances require a
further extension of time for processing a request, a decision
shall be rendered not later than the third meeting of the
Administrative Committee following the receipt of such request
for review, and written notice of the extension shall be
furnished to the Claimant prior to the commencement of the
extension.
(iii) Any decision by the Administrative
Committee shall be furnished to the Claimant in writing and in a
manner calculated to be understood by the Claimant and shall set
forth the specific reason(s) for the decision and the specific
Plan provision(s) on which the decision is based.
12.7. Liabilities. The Administrative Committee, each
member or former member of such Committee, and each person to
whom duties and responsibilities have been delegated under the
Plan shall be indemnified and held harmless by the Company, to
the fullest extent permitted by ERISA, other applicable laws, and
the charter and By-laws of the Company.
PAGE 33
<PAGE>
ARTICLE 13
AMENDMENTS
13.1. Right to Amend. Except as otherwise set forth in this
Article 13 or as may be required by law, the Board of Directors
reserves the right to amend the Plan at any time and in any
manner, without prior notification, consultation, or bargaining
with any Employee or representative of Employees by written
resolution of the Board of Directors adopted at a duly convened
meeting of the Board of Directors in accordance with the By-Laws
of the Company and the laws of the Commonwealth of Pennsylvania.
To the extent required by the Code or ERISA, no amendment to the
Plan shall decrease a Participant's benefit or eliminate an
optional form of distribution. No amendment shall make it
possible for any assets of the Plan to be used for or diverted to
any purposes other than for the exclusive benefit of Participants
and Beneficiaries.
13.2. Amendment by Administrative Committee. The
Administrative Committee may adopt any ministerial and
nonsubstantive amendment it deems necessary or appropriate to
(a) facilitate the administration, management and interpretation
of the Plan, (b) conform the Plan to current practice, or
(c) cause the Plan and its related Trust to qualify under Code
Sections 401(a)(1), 501(a) and 4975(e)(7) or to comply with ERISA
or any other applicable laws; provided that such amendment does
not have any material effect on the estimated cost to the Company
of maintaining the Plan.
13.3. Plan Merger and Asset Transfers. No assets of the
Trust shall be merged or consolidated with, nor shall any assets
or liabilities be transferred to any other plan, unless the
benefits payable to each Participant or Beneficiary, if this Plan
were terminated immediately after such action, would be equal to
or greater than the benefits such individuals would have been
entitled to receive if this Plan had been terminated immediately
before such action.
PAGE 34
<PAGE>
ARTICLE 14
TERMINATION
14.1. Right to Terminate. While the Company intends the
Plan to be permanent, the Board of Directors reserves the right
to terminate the Plan at any time, without prior notification,
consultation, or bargaining with any Employee or representative
of Employees by written resolution of the Board of Directors
adopted at a duly convened meeting of the Board of Directors in
accordance with the By-laws of the Company and the laws of the
Commonwealth of Pennsylvania.
14.2. Effect of Termination. If the Plan is terminated,
contributions shall cease, and the assets remaining in the Trust,
after payment of any expenses, including expenses of
administration or liquidation, shall be retained in the Trust for
distribution in accordance with the terms of the Plan. Upon
termination (including a partial termination), or upon the
complete discontinuance of contributions by the Company, all
Participants shall be 100 percent vested in their Accounts.
PAGE 35
<PAGE>
ARTICLE 15
MISCELLANEOUS
15.1. Non-alienation of Benefits. Except to the extent set
forth in a "qualified domestic relations order" (as defined in
Code Section 414(p)), or as otherwise permitted or required by
law, no distribution or payment under this Plan to any
Participant or Beneficiary, or assets held in the Trust or Plan,
shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, whether
voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge
shall be void. Nor shall any such distribution or payment be
subject to the debts, contracts, liabilities, engagements or
torts of any person entitled to such distribution or payment.
15.2. Appointment of Guardian. Where it is established to
the satisfaction of the Administrative Committee that a guardian
has been duly appointed on behalf of a person entitled to a
distribution under the Plan, the Administrative Committee may
cause payment to be made to the guardian for the benefit of the
entitled person. The Administrative Committee shall have no
responsibility with respect to the application of amounts so
paid.
15.3. Satisfaction of Benefit Claims. The assets of the
Trust shall be the sole source of benefits under this Plan, and
each Participant or any other person who shall claim the right to
any payment or benefit under this Plan shall be entitled to look
only to the Trust for such payment or benefit, and shall not have
any right, claim or demand against the Company or any officer or
director of the Company. Such Participant or person shall not
have a right to or interest in any assets of the Trust, except as
provided from time to time under this Plan.
15.4. Controlling Law. The provisions of the Plan shall be
construed, administered and enforced under the laws of the United
States and the Commonwealth of Pennsylvania.
15.5. Non-guarantee of Employment. Nothing contained in
this Plan shall be construed as a contract of employment between
the Company and any Employee, or as a right of any Employee to be
continued in the employment of the Company or as a limitation of
the right of the Company to discharge any of its Employees, with
or without cause.
15.6. Severability and Construction of the Plan.
(a) If any provision of the Plan or the
application of it to any circumstance(s) or person(s) is invalid,
the remainder of the Plan and the application of such provision
to other circumstances or persons shall not be affected thereby.
<PAGE 36>
(b) Unless the context otherwise indicates, the
masculine wherever used shall include the feminine and neuter;
the singular shall include the plural; and words such as
"herein", "hereof," "hereby," "hereunder" and words of similar
import shall refer to the Plan as a whole and not any particular
part of it.
15.7. No Requirement of Profits. Contributions may be made
to the Plan without regard to current or accumulated profits of
the Company.
15.8. All Risk on Participants and Beneficiaries. Each
Participant and Beneficiary shall assume all risk in connection
with any decrease in the value of the assets of the Trust and the
Participants' and Beneficiaries' Accounts.
PAGE 37
<PAGE>
ARTICLE 16
TOP-HEAVY PROVISIONS
16.1. Determination of Top-Heavy Status.
(a) Any provision of this Plan to the contrary
notwithstanding, for any Plan Year commencing after December 31,
1983, in which the Plan is a Top-Heavy Plan or a Super Top-Heavy
Plan, the provisions of this Article shall apply. The provisions
of this Article shall have effect only to the extent required
under Code Section 416. This Plan shall be deemed a Top-Heavy
Plan only with respect to any Plan Year in which, as of the
Determination Date, the aggregate of the Accounts of Key
Employees under the Plan exceeds 60 percent of the aggregate of
the Accounts of all Employees under the Plan.
(b) If the Plan is not included in a Required
Aggregation Group with other plans, then it shall be Top-Heavy
only if (i) when considered by itself it is a Top-Heavy Plan and
(ii) it is not included in a Permissive Aggregation Group that is
not a Top-Heavy Group.
(c) If the Plan is included in a Required
Aggregation Group with other plans, it shall be Top-Heavy only if
the Required Aggregation Group, including any permissively
aggregated plans, is Top-Heavy.
16.2. Super Top-Heavy Plan. This Plan shall be a Super Top-
Heavy Plan if it would be a Top-Heavy Plan if 90 percent were
substituted for 60 percent.
16.3. Top-Heavy Definitions. Solely for purposes of this
Article, the following words and phrases shall have the following
meaning;
(a) "Aggregation Group or Top Heavy Group" means
either a Required Aggregation Group or a Permissive Aggregation
Group.
(b) "Determination Date" means, with respect to
any Plan Year, the last day of the preceding Plan Year or in the
case of the first Plan Year of any plan, the last day of such
Plan Year or such other date as permitted under rules issued by
the U.S. Department of the Treasury.
(c) "The Company" means and all members of a
controlled group of corporations (as defined in Code Section
414(b) as modified by Code Section 415(h)), all commonly
controlled trades or businesses (as defined in Code Section
414(c) as modified by Code Section 415(h)), or affiliated service
groups (as defined in Code Section 414(m)) of which the Company
is a part. <PAGE 38>
(d) "Key Employee" means any employee or former
employee (and the Beneficiaries of such employee) who at any a
time during the period of five years ending on the Determination
Date was an officer of the Company if such individual's annual
compensation (as defined in Treasury Regulations Section 1.415-
2(d)) exceeds 50 percent of the dollar limitation under Code
Section 415(b)(1)(A); an employee who is an owner (or person
considered an owner under Code Section 318) of one of the ten
largest interests in the Company if such individual's
compensation exceeds 100 percent of the dollar limitation under
Code Section 415(c)(1)(A); an owner of 5 percent of the Company;
or an owner of 1 percent of the Company who has annual
compensation of more than $150,000. The determination of who is
a Key Employee will be made in accordance with Code
Section 416(i). A Non-Key Employee means any Employee who is not
a Key Employee.
(e) "Permissive Aggregation Group" means a
Required Aggregation Group plus any other plans maintained and
selected by the Company; provided that all such plans when
considered together satisfy the requirements of Code Sections
401(a)(4) and 410.
(f) "Required Aggregation Group" means each
qualified plan of the Company in which at least one Key Employee
participates or which enables any plan in which a Key Employee
participates to meet the requirements of Code Sections 401(a)(4)
or 410.
(g) "Valuation Date" means, for purposes of
determining if the Plan is Top-Heavy, the most recent Valuation
Date in the period of twelve months ending on the Determination
Date.
16.4. Top-Heavy Rules. For any year in which a Plan is
determined to be a Top-Heavy Plan or a Super Top-Heavy Plan the
following rules shall apply:
(a) For each Plan Year in which the Plan is Top-
Heavy or Super Top-Heavy, minimum contributions for a Participant
who is a Non-Key Employee shall be required to be made on behalf
of each Participant who is employed by the Company on the last
day of the Plan Year. The amount of the minimum contribution
shall be the lesser of the following percentage of compensation:
(i) 3 percent, or
(ii) the highest percentage at which
Contributions are made under the Plan for the Plan Year on behalf
of any Key Employee.
(A) For purposes of this paragraph
(ii), all defined contribution plans included in a Required
Aggregation Group shall be treated as one plan.
<PAGE 39>
(B) This paragraph (ii) shall not apply
if the Plan is included in a Required Aggregation Group and the
Plan enables a defined benefit plan included in the Required
Aggregation Group to meet the requirements of Code Sections
401(a)(4) or 410.
(C) If the highest percentage at which
Contributions are made under the Plan for a top-heavy Plan Year
on behalf of Key Employees is less than 3%, the amounts
contributed as a result of a salary reduction agreement must be
included in determining Contributions made on behalf of Key
Employees.
This subsection (a) shall not apply to the extent a
Participant other than a Key Employee is covered by any other
qualified plan(s) of the Company and the Company has provided
that the minimum contribution requirements applicable to this
Plan will be satisfied by the other plan(s).
(b) For any Plan Year in which the Plan is Top -
Heavy or Super Top-Heavy, only the first $150,000 (or such larger
amount as may be prescribed in rules issued by the U.S.
Department of the Treasury) of a Participant's annual
compensation shall be taken into account for purposes of
determining employer contributions under this Plan.
(c) The contributions made to the Plan by the
Company on behalf of a Participant shall be fully vested at all
times.
(d) For any Plan Year in which the Plan is Super
Top-Heavy, or for any Plan Year in which the Plan is Top-Heavy
and the additional minimum contributions or benefits required
under Code Section 416(h) are not provided, the dollar
limitations in the denominator of the Defined Benefit Fraction
and Defined Contribution Fraction (as defined in Article 6 of
this Plan) shall be multiplied by 100 percent rather than
125 percent. If the application of the provisions of this
Section 16.4 would cause any Participant to exceed 1.0 for any
Limitation Year, then the application of this Section shall be
suspended as to such Participant until such time as it no longer
exceeds 1.0. During the period of such suspension, appropriate
adjustments to the Participant's benefits under defined benefit
plans maintained by the Employer shall be made prior to making
any adjustments to a Participant's Account under this Plan.
(e) The vesting schedule when the Plan is Top-
Heavy is as follows:
Years of Service
After the Effective Date Vested Percentage
0-3 Years of Service 0%
3 or more Years of Service 100%
PAGE 40
<PAGE>
ARTICLE 17
EXEMPT LOANS
17.1. General. The Trustee shall have the authority and
discretion to borrow money from a Disqualified Person, or another
source which is guaranteed by a Disqualified Person for the
purpose of (a) purchasing Company Stock, or (b) repaying a prior
Exempt Loan. Any Exempt Loan shall satisfy all of the
requirements of this Article 17.
17.2. Terms of Exempt Loan Agreements. All Exempt Loans
shall satisfy the following requirements:
(a) The loan shall be primarily for the benefit
of Participants and their Beneficiaries;
(b) The loan shall be for a specified term and
shall bear no more than a reasonable rate of interest.
(c) The collateral pledged by the Trustee shall
consist only of the Company Stock purchased with the borrowed
funds, or Company Stock that was pledged as collateral in
connection with a prior Exempt Loan that was repaid with the
proceeds of the current Exempt Loan.
(d) Under the terms of the agreement, the lender
shall have no recourse against the Trust, or any of its assets,
except with respect to the collateral and contributions (other
than contributions of Company Stock) by the Company that are made
to satisfy its obligations under the loan agreement and earnings
attributable to such collateral and such contributions.
(e) The payments made on the loan during a Plan
Year shall not exceed an amount equal to the sum of such
contributions and the earnings received during or prior to the
year less such payments on the exempt loan in prior years.
(f) In the event of default, the value of the
assets transferred in satisfaction of the loan shall not exceed
the amount of default; moreover, if the lender is a Disqualified
Person, the loan agreement shall provide for a transfer of assets
upon default only upon and to the extent of the failure of the
Plan to meet the payment schedule of the loan.
17.3. Prohibition on Purchase Arrangements. Except as
hereinafter provided in this Article 17, no Company Stock
acquired with the proceeds of an Exempt Loan shall be subject to
a put, call, or other option, or buy-sell or similar arrangement
while held by and when distributed from the Trust, whether or not
at the time of distribution the Plan is an employee stock
ownership plan. These protections and rights which attach to
<PAGE 41> Company Stock acquired with the proceeds of an Exempt
Loan shall not be terminable.
17.4. Suspense Account.
(a) If the Trust has entered into an Exempt Loan,
each Participant Account shall be adjusted for the payment of the
Exempt Loan in the manner set forth in the Trust Agreement.
Company contributions made to the Trust in the form of Company
Stock purchased with the proceeds of an Exempt Loan shall be held
in the Suspense Account as the collateral for that Exempt Loan.
Such stock shall be released from the Suspense Account on a
pro-rata basis according to the amount of the payment on the
Exempt Loan for the Plan Year, determined under one of the
following two alternative formulas in the discretion of the
Administrative Committee:
(i) for each Plan Year during the duration
of the Exempt Loan, the number of shares of Company Stock
released shall equal the number of such shares held in the
Suspense Account immediately before release for the current Plan
Year multiplied by a fraction, the numerator of which is the
amount of principal and interest paid for the year and the
denominator of which is the sum of the numerator plus the
remaining principal and interest to be paid for all future years.
The number of future years under the Exempt Loan must be
definitely ascertainable and must be determined without taking
into account any possible extensions or renewal periods. If the
interest rate under the loan is variable, the interest to be paid
in future years must be computed by using the interest rate
applicable as of the end of the Plan Year. If the collateral
includes more than one class of Company Stock, the number of
shares of each class to be released for a Plan Year must be
determined by applying the same fraction to each class; or
(ii) for each Plan Year during the duration
of the Exempt Loan, the number of shares of Company Stock
released is determined solely with reference to the principal
payment of the Exempt Loan. If Company Stock in the Suspense
Account is released in accordance with this subsection (ii),
(A) the Exempt Loan must provide for annual payments of principal
and interest at a cumulative rate that is not less rapid at any
time than level annual payments of such amounts for 10 years; and
(B) interest included in any payment is disregarded only to the
extent that it would be determined to be interest under standard
loan amortization tables.
This subsection (ii) will not be applicable if by
reason of a renewal, extension, or refinancing, the sum of the
expired duration of the Exempt Loan, the renewal period, the
extension period, and the duration of a new Exempt Loan exceeds
10 years.
(b) Shares of Company Stock released in
accordance with Section 17.4(a) of the Plan shall then be
<PAGE 42> allocated to the Accounts of Participants first, in an
amount equal in value to any dividends paid on shares previously
allocated to Participant's Accounts that are used to repay the
Exempt Loan. The remaining shares of such stock shall be
allocated to the Accounts of Participants in the same manner as
described in Section 5.5.
17.5. Sale of Financed Shares. In the event the Plan
receives an offer to participate in a corporate transaction
(i.e., a stock sale, asset sale, merger or consolidation) before
all the shares of Company Stock have been released from the
Suspense Account, the Trustee may enter into an agreement for the
sale of all Company Stock which is not allocated to the accounts
of Participants, and use the proceeds thereof to repay an Exempt
Loan. Any proceeds of the sale of unallocated Company Stock
which is not required to repay the Exempt Loan, will be allocated
as earnings to Participant's Accounts.
PAGE 43
<PAGE>
IN WITNESS WHEREOF, Mercer Insurance Group, Inc. has
caused this Plan to be duly executed under seal this 11th day of
March, 1998.
MERCER INSURANCE GROUP, INC.
By/s/ William C. Hart
William C. Hart, President and
Chief Executive Officer
Attest:
/s/ Andrew R. Speaker
Andrew R. Speaker,
Executive Vice-President,
Chief Operating Officer,
Chief Financial Officer and
Treasurer
[SEAL] <PAGE 44>
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<ARTICLE> 7
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<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 DEC-31-1997
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<CASH> 2,958 2,707
<RECOVER-REINSURE> 874 1,074
<DEFERRED-ACQUISITION> 3,329 3,019
<TOTAL-ASSETS> 74,697 74,085
<POLICY-LOSSES> 31,190 31,872
<UNEARNED-PREMIUMS> 14,707 14,723
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0 0
0 0
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<INCOME-TAX> 320 1,001
<INCOME-CONTINUING> 696 2,217
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<NET-INCOME> 696 2,217
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