<PAGE> 1
===============================================================================
SCHEDULE 14A
(RULE 14A)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14A-6(E)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
MERCHANTS GROUP, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: ______
(2) Aggregate number of securities to which transaction applies: _________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ___________
(4) Proposed maximum aggregate value of transaction:______________________
(5) Total fee paid: ______________________________________________________
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ______________________________________________
(2) Form, Schedule or Registration Statement No.: ________________________
(3) Filing Party: ________________________________________________________
(4) Date Filed: __________________________________________________________
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<PAGE> 2
[LOGO HERE]
MERCHANTS GROUP, INC.
250 Main Street
Buffalo, New York 14202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 1995
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 1995 Annual Meeting of Stockholders of
Merchants Group, Inc. (the "Company") will be held at the Company's offices, 250
Main Street, Buffalo, New York, on Wednesday, May 10, 1995 at 8:00 a.m., Buffalo
time, for the following purposes:
1. To elect three directors for a term of three years.
2. To transact such other business, including the stockholder proposal set
forth in this Proxy Statement, as may properly come before the meeting
or any adjournment thereof.
The prompt return of your proxy will avoid delay and save the expense
involved in further communication. You may revoke the proxy any time prior to
its exercise, and the giving of your proxy will not affect your right to vote in
person at the meeting.
By Order of the Board of Directors
ROBERT M. ZAK
Secretary
Date: April 7, 1995
STOCKHOLDERS ARE URGED TO VOTE BY SIGNING, DATING AND RETURNING THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, TO WHICH NO POSTAGE NEED BE
AFFIXED IF MAILED IN THE UNITED STATES.
<PAGE> 3
April 7, 1995
MERCHANTS GROUP, INC.
250 Main Street
Buffalo, New York 14202
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 1995
The following information is furnished in connection with the Annual
Meeting of Stockholders of Merchants Group, Inc. (the "Company") to be held at
the Company's offices, 250 Main Street, Buffalo, New York, on May 10, 1995 at
8:00 a.m., Buffalo time (the "Meeting"). A copy of the Company's Annual Report
to Stockholders for the fiscal year ended December 31, 1994 accompanies this
Proxy Statement. Additional copies of the Annual Report, Notice, Proxy Statement
and form of proxy may be obtained from the Company's Secretary, 250 Main Street,
Buffalo, New York 14202. This Proxy Statement will first be sent to stockholders
on or about April 7, 1995.
SOLICITATION AND REVOCABILITY OF PROXIES
The enclosed proxy for the Meeting is being solicited by the directors of
the Company. The proxy may be revoked by a stockholder at any time prior to the
exercise thereof by filing with the Secretary of the Company a written
revocation or a duly executed proxy bearing a later date. The proxy may also be
revoked by a stockholder attending the Meeting, withdrawing such proxy and
voting in person.
The cost of soliciting the proxies on the enclosed form will be paid by the
Company. In addition to the use of the mails, proxies may be solicited by the
directors and their agents (who will receive no additional compensation
therefor) by means of personal interview, telephone or telegraph, and it is
anticipated that banks, brokerage houses and other institutions, nominees or
fiduciaries will be requested to forward the soliciting material to their
principals and to obtain authorization for the execution of proxies. The Company
may, upon request, reimburse banks, brokerage houses and other institutions,
nominees and fiduciaries for their expenses in forwarding proxy material to
their principals. The Company has retained Beacon Hill Partners, Inc. to assist
it with the solicitation of proxies and will pay Beacon Hill Partners, Inc. a
fee of $3,000 plus reimbursement of out-of-pocket expenses for its services.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The record date for determining shares of Common Stock, $.01 par value
("Shares"), entitled to vote at the Meeting has been fixed at the close of
business on March 17, 1995. On such date there were 3,158,188 Shares
outstanding, entitled to one vote each. A majority of the outstanding Shares,
present in person or by proxy, will constitute a quorum at the Meeting.
Abstentions, broker non-votes and withheld votes will be
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<PAGE> 4
considered as being present at the Meeting. The vote of a plurality of Shares
present at the Meeting is required for election of directors and a majority of
the Shares present at the Meeting will be required to adopt the stockholder
proposal.
<TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
To the best of the Company's knowledge, no person or group (as those terms
are used in Section 13(d)(3) of the Securities Exchange Act of 1934)
beneficially owned as of January 20, 1995 (unless otherwise indicated) more than
5% of the Shares outstanding except for the persons named in the following
table.
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
-------------------- ------------------ --------
<S> <C> <C>
Mellon Bank Corporation..................... 387,000(1) 12.3%
One Mellon Bank Center
Pittsburgh, Pennsylvania 15258
Tweedy, Browne Company L.P.................. 284,365(2) 9.0
52 Vanderbilt Avenue
New York, NY 10017
Brent D. Baird and others................... 279,100(3) 8.8
1350 One M&T Plaza
Buffalo, New York 14203
FMR Corp.................................... 261,500(4) 8.3
82 Devonshire Street
Boston, Massachusetts 02109
Merchants Mutual Insurance Company.......... 255,000(5) 8.1
250 Main Street
Buffalo, New York 14202
Marvin C. Schwartz.......................... 197,900(6) 6.3
605 Third Avenue
New York, New York 10158
<FN>
- - ---------------
(1) Based upon an amended Schedule 13G dated February 9, 1995, which indicated
that as of December 31, 1994 Mellon Bank Corporation ("Mellon") had sole
voting power with respect to 384,000 Shares, sole dispositive power with
respect to 202,000 Shares and shared dispositive power with respect to
185,000 Shares. These Shares are held by subsidiaries of Mellon, including
The Boston Company Advisors, Inc., The Boston Company Financial Strategies,
Inc., Boston Safe Deposit and Trust Company, Mellon Bank, N.A., and The
Dreyfus Corporation.
(2) Based on a Schedule 13D most recently amended on February 28, 1994, which
indicated Tweedy, Browne Company L.P. ("TBC") had sole voting power with
respect to 253,980 Shares and shared dispositive power with respect to all
these Shares. Does not include a total of 8,600 Shares beneficially owned by
partnerships in which certain partners of TBC are also partners, in which
TBC disclaims beneficial ownership.
(3) Based on an amended Schedule 13D dated March 30, 1995 filed by Mr. Baird,
members of the Baird family, persons with personal relationships with
members of the Baird family, and entities owned or
2
<PAGE> 5
controlled by the Baird family. The filing persons with respect to this
amended Schedule 13D are: (i) Brent D. Baird, individually and as trustee
f/b/o Jane D. Baird, 15,000 Shares; (ii) Aires Hill Corp., 47,000 Shares;
(iii) Anne S. Baird, individually and as trustee f/b/o Cameron D. Baird,
2,100 Shares; (iv) Jane D. Baird, 13,000 Shares; (v) Bridget B. Baird, as
successor trustee, 14,000 Shares; (vi) The Cameron Baird Foundation, 30,000
Shares; (vii) Brian D. Baird, as successor trustee, 1,000 Shares; (viii)
Citizens Growth Properties, 19,000 Shares; (ix) Susan R. O'Connor, 2,000
Shares; (x) Cinnamon Investments Ltd., 7,000 Shares; (xi) Bruce C. Baird,
5,000 Shares; (xii) Cameron D. Baird, 4,000 Shares; (xiii) David M. Stark,
as successor trustee, 2,000 Shares; (xiv) Ruth R. Senturia, 1,000 Shares;
(xv) First Carolina Investors, Inc., 115,000 Shares; and (xvi) Belmont
Contracting Co., Inc., 2,000 Shares.
(4) Based on an amended Schedule 13G dated February 13, 1995, which indicated
that FMR Corp. had sole dispositive power with respect to these Shares as of
December 31, 1994.
(5) Merchants Mutual Insurance Company ("Mutual") operates its business in
conjunction with the Company and Merchants Insurance Company of New
Hampshire, Inc. ("MNH"), the Company's wholly-owned subsidiary. See
"Management Agreement."
(6) Based on a Schedule 13D dated January 13, 1994, which indicated Mr. Schwartz
had sole voting and dispositive power with respect to 149,900 Shares and
shared dispositive power with respect to 48,000 Shares.
</TABLE>
The Company is subject to statutes governing insurance holding company
systems. Under the terms of the applicable New Hampshire statute, any person or
entity desiring to effect a purchase or other acquisition of the Company's
securities that would result in such person or entity owning 10% or more of the
Company's outstanding voting securities would be required to obtain the approval
of the New Hampshire Insurance Department prior to the purchase or other form of
acquisition.
<TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the Shares beneficially owned as of March
28, 1995 (unless otherwise indicated) by each director and nominee for election
as director and each executive officer listed in the Summary Compensation Table.
Unless otherwise stated, each person has sole voting and investment power with
respect to the Shares set forth in the table.
<CAPTION>
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS (1)
-------------------------------------- ------------------ ------------
<S> <C> <C>
Brent D. Baird........................ 279,100(2) 8.84%
Lawrence P. Castellani................ 1,000(3) .03
Frank J. Colantuono................... 1,000 .03
Richard E. Garman..................... 52,000(4) 1.65
James F. Marino....................... 67,458(5) 2.10
Henry P. Semmelhack................... 700 .02
Robert M. Zak......................... 11,960(6) .37
Directors and officers as a group..... 417,618 12.98
3
<PAGE> 6
<FN>
- - ---------------
(1) Percentage calculations for each individual and group in the table are based
on 3,158,188 Shares outstanding plus any Shares such person has the right to
acquire within 60 days of the date of this Proxy Statement under the
Merchants Group, Inc. 1986 Stock Option Plan, as amended (the "Option
Plan").
(2) See note 3 to table under "Security Ownership of Certain Beneficial Owners."
(3) These Shares are held by Mr. Castellani's minor children.
(4) Includes 40,000 Shares owned by a corporation of which Mr. Garman is chief
executive officer and majority shareholder.
(5) Includes (i) 47,658 Shares that Mr. Marino has the right to acquire pursuant
to the Option Plan within 60 days of the date of this Proxy Statement, (ii)
100 Shares held by Mr. Marino's child and (iii) 7,450 Shares held by the
Merchants Mutual Supplemental Executive Retirement Plan for the benefit of
Mr. Marino.
(6) Includes (i) 9,750 Shares that Mr. Zak has the right to acquire under the
Option Plan within 60 days of the date of this Proxy Statement and (ii)
1,110 Shares held by the Merchants Mutual Supplemental Executive Retirement
Plan for the benefit of Mr. Zak.
</TABLE>
ELECTION OF DIRECTORS
INFORMATION CONCERNING DIRECTORS AND NOMINEES
The Company's Certificate of Incorporation provides that the number of
directors of the Company shall be not less than five and not more than fifteen
and that the directors shall be divided into three classes, each class
containing as nearly equal a number of directors as possible, with one class
standing for election each year. The Board has set the number of directors at
seven.
The directors recommend a vote FOR the three directors standing for
election listed below. Except where authority to do so has been withheld, it is
the intention of the persons named in the accompanying form of proxy to vote at
the Meeting FOR these nominees. Although the directors do not contemplate that
any nominee will be unable to serve, if such a situation arises prior to the
Meeting, the enclosed proxy will be voted in accordance with the best judgment
of the person or persons voting the proxy.
<TABLE>
The following table sets forth information regarding directors standing for
election and directors whose terms continue beyond the Meeting:
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME, POSITION AND BUSINESS EXPERIENCE FOR
TENURE WITH THE COMPANY AGE PAST FIVE YEARS
----------------------- --- -------------------------
<S> <C> <C>
DIRECTORS STANDING FOR ELECTION
Brent D. Baird 56 Private investor since 1991; limited partner
Director since 1995 of Trubee, Collins & Co. (member firm of New
York Stock Exchange, Inc.) from 1983 to 1991.
Richard E. Garman 64 President and Chief Executive Officer of
Director since 1987 A.B.C. Paving Company (a construction company)
for more than five years.
James F. Marino 51 Chairman of the Board, President and Chief
Director, Chairman of the Board, Executive Officer of the Company since 1986;
President and Chief Executive President and Chief Executive Officer of
Officer since 1986 Mutual and MNH since 1981.
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<PAGE> 7
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME, POSITION AND BUSINESS EXPERIENCE FOR
TENURE WITH THE COMPANY AGE PAST FIVE YEARS
----------------------- --- --------------------------
<S> <C> <C>
DIRECTORS WHOSE TERMS EXPIRE IN 1996
Lawrence P. Castellani 49 President and Chief Executive Officer of Tops
Director since 1987 Markets, Inc. (an operator of supermarkets and
convenience stores) since 1991; President and
Chief Operating Officer of Tops Markets, Inc.
until 1991.
Frank J. Colantuono 46 President and Chief Executive Officer of
Director since 1994 Independent Health Association, Inc. (a health
maintenance organization) for more than five
years.
DIRECTORS WHOSE TERMS EXPIRE IN 1997
Henry P. Semmelhack 58 President and Chief Executive Officer of
Director since 1987 Barrister Information Systems Corporation (a
manufacturer and marketer of computer systems
for law firms) for more than five years.
Robert M. Zak 37 Senior Vice-President of MNH and Mutual since
Senior Vice-President since 1992, 1992; Chief Financial Officer of MNH and
Chief Financial Officer since 1991, Mutual since 1991; Vice-President -- Financial
Secretary since 1990, Treasurer Services of MNH and Mutual from 1989 to 1992;
since 1988 and Director since 1994 Treasurer of MNH and Mutual since 1988;
Secretary of MNH and Mutual since 1990.
</TABLE>
<TABLE>
OTHER DIRECTORSHIPS
The nominees to and members of the Company's Board of Directors who will
continue to serve as directors after the Meeting serve on the Boards of
Directors of the following publicly-held companies:
<CAPTION>
DIRECTOR COMPANY
------------------- ------------------------------------------
<S> <C>
Brent D. Baird Exolon-ESK, Inc.
First Carolina Investors, Inc.
First Empire State Corporation
Oglebay Norton Company
Todd Shipyards Corporation
Richard E. Garman First Empire State Corporation
Henry P. Semmelhack Barrister Information Systems Corporation
Comptek Research, Inc.
</TABLE>
COMMITTEES
After the Company restructured its Board of Directors at the 1994 Annual
Meeting to reduce the number of directors from nine to five, the Company's
disinterested directors at that time -- Messrs. Castellani, Garman and
Semmelhack -- became the members of all of the Company's standing committees
listed below. The Company has recently appointed two additional disinterested
directors, and, after the Annual Meeting, it will change the membership on the
standing committees to include those two directors on committees.
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<PAGE> 8
The functions performed by the Audit Committee consist principally of
conferring with and reviewing the reports of the Company's independent
accountants and independent actuaries and bringing to the entire Board of
Directors for review those items which the Audit Committee believes merit such
review. The Audit Committee met five times during the fiscal year ended December
31, 1994.
The Nominating Committee's functions are to seek out, screen, interview and
present to the entire Board of Directors qualified director candidates. The
functions of the Nominating Committee were performed by the Board of Directors
during 1994. Suggestions of stockholders for nominees will be considered if they
are forwarded to the Nominating Committee in writing with information regarding,
and a written consent of, the person suggested, in accordance with procedures
set forth in the Company's By-Laws.
The function of the Compensation Committee is to evaluate the performance
of key employees of the Company and its affiliates and, based upon its
evaluation, to grant options under the Company's 1986 Stock Option Plan
described below. The Compensation Committee did not meet during the fiscal year
ended December 31, 1994.
During the fiscal year ended December 31, 1994, the full Board of Directors
met 16 times. Each director attended at least 75% of the total number of
meetings of the Board and of all committees of the Board on which he served.
SECTION 16 COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors,
officers and more than 10% shareholders ("insiders") of publicly-held companies
to file reports with the Securities and Exchange Commission ("SEC") within ten
days after the end of any month in which an insider engaged in a transaction in
such company's securities. Under rules promulgated by the SEC, the Company is
required to disclose any failures to file or late filings under Section 16(a) by
its insiders. The Company is not aware of any failures to file or late filings
by any insider during 1994.
MANAGEMENT AGREEMENT
The Company is a holding company which offers property and casualty
insurance through MNH. The Company and MNH operate and manage their business in
conjunction with Mutual under a management agreement which was entered into as
of September 29, 1986 (the "Management Agreement"). The Company has operated
under the Management Agreement since it commenced doing business. The Company
and MNH do not have any significant operating assets and have no employees.
Under the Management Agreement, Mutual provides the Company and MNH with the
facilities, management and personnel required to operate their day-to-day
business, including investment management. All costs incurred by Mutual with
respect to underwriting expenses are shared pro rata between Mutual and MNH
based upon their annual direct premiums written, and unallocated loss adjustment
expenses are allocated on the basis of the number of claims outstanding each
month that are attributable to each company. All of Mutual's, the Company's and
MNH's common investment expenses are shared pro rata based upon the average book
value of the invested assets of each company. MNH also pays Mutual an annual
management fee of $50,000. The Management Agreement requires the Company and MNH
to pay Mutual 110% of Mutual's costs of providing them with non-insurance
related services, and requires the Company to pay Mutual an annual fee of one
half of one percent (.5%) of the average book value of the Company's invested
assets exclusive of the Company's shares of MNH. Since the inception of the
Management Agreement, Mutual has not provided the Company or MNH with any
non-insurance related services. For the year ended December 31, 1994,
approximately 65.4%
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<PAGE> 9
of the aggregate expenses of the combined businesses of Mutual, MNH and the
Company were allocated to MNH and the Company.
The Management Agreement contains the following provisions designed to
prevent conflicts of interest or to resolve them on an equitable basis should
they occur:
(A) In the event that its officers submit and recommend to the Board
of any company any business opportunity, the officers of that company shall
cause the same opportunity to be presented to the Boards of each of the
other companies. If two or more of the companies determine to participate,
the provisions of subparagraph (B) will govern. Notwithstanding the
foregoing provisions, a company need not present a business opportunity to
another company in the following instances: (a) the purchase or sale on the
open market of marketable securities at the market price for that issue or
comparable issues; or (b) if a company proposes to purchase securities
issued by it; or (c) if in the good faith judgment of the common officers
such opportunity does not meet the investment policies or objectives or the
underwriting or claims guidelines of the other companies or is inconsistent
with the cash flow or tax situation of the other companies; or (d) if the
opportunity involves property in which the investing company has an
existing interest and the latter company has none.
(B) If required by subparagraph (A), whenever two or more of the
companies shall concurrently engage in a common opportunity under
circumstances in which it appears likely that the price or other
consideration to be paid or received will not be equal for all property to
be acquired or disposed of in a single transaction, the property will be
acquired or disposed of in such a manner that, as nearly as feasible, each
company will participate in each transaction in proportion to the total
amount of such property which its Board has determined to acquire or
dispose of until each company has acquired or disposed of the total amount
of that property which its Board had determined to acquire or dispose of.
In the event that the Boards have not determined in advance the total
amount to be acquired or disposed of or the participating companies desire
in the aggregate to acquire more than is available, the participation of
each company in each transaction will be proportionate to its total assets
as shown on its balance sheet as at the close of its quarterly fiscal
period ended on or prior to the date of that transaction, or if that
balance sheet is not available, as at the close of the latest quarterly
fiscal period for which a balance sheet is available. The provisions of
this subparagraph may be modified with respect to a particular transaction
by the Board of each company if it appears that such modification is
required in the interests of fairness, but any such modification must be
approved by majorities of the directors of each company participating in
the transaction, including a majority of the directors of each
participating company who are not officers, directors or controlling
persons of any other company participating in the transaction
("disinterested directors") or, in the absence of such disinterested
directors, by a vote of the shareholders or policyholders of each company.
(C) No company (Mutual, the Company or MNH) will sell any property or
security to, or purchase any property or security from, any other company,
if in the good faith judgment of the common officers such sale or purchase
is a material transaction to any company a party to the sale or purchase,
unless that sale or purchase is approved and determined to be fair to each
company in the transaction by majorities of the directors of each company
participating in the transaction, including a majority of the disinterested
directors of each company or, in the absence of such disinterested
directors, by a vote of the shareholders or policyholders of each company.
Any change or amendment to, or modification of, the Management Agreement
must be approved by the New York Insurance Department. The Management Agreement
may be terminated by any party to the
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<PAGE> 10
agreement upon five years' written notice to all of the other parties. Mutual
and MNH have jointly developed and paid for all accounting, computer and
insurance marketing systems used in their businesses. In the event of
termination of the Management Agreement, each company has the right, at no cost,
to obtain copies of all these systems, together with the right to use these
systems in perpetuity.
Mutual controls (as that term is used in the New Hampshire Insurance Law)
the Company by reason of the combination of Mutual's ownership of Shares of the
Company, the presence of two directors of Mutual on the Company's seven-person
Board of Directors, and the management of the day-to-day business of the Company
and MNH by officers who are also officers of Mutual pursuant to the Management
Agreement.
Compensation of Directors. Messrs. Marino and Zak, who are directors and
officers of the Company and MNH, are not separately compensated for their
services as directors. All other directors of the Company receive an annual
director's fee of $9,000, plus $500 for each meeting of the full Board of
Directors and of any committee attended.
<TABLE>
EXECUTIVE OFFICERS
The following is a listing of the Company's executive officers. The
executive officers also serve as executive officers of each of Mutual and MNH.
See "Management Agreement."
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME, POSITION AND BUSINESS EXPERIENCE FOR
TENURE WITH THE COMPANY AGE PAST FIVE YEARS
----------------------- --- ------------------------
<S> <C> <C>
James F. Marino 51 See Table under "Information Concerning
Chairman of the Board and Chief Directors and Nominees."
Executive Officer since 1986
Robert M. Zak 37 See Table under "Information Concerning
Senior Vice-President since 1992, Directors and Nominees."
Chief Financial Officer since 1991,
Secretary since 1990, Treasurer
since 1988 and Director since 1994
Edward M. Murphy 44 Vice-President -- Investments of Mutual and
Vice-President Investments and MNH since 1991; Assistant Vice President of
Assistant Secretary since 1991 Mutual and MNH from 1989 to 1991.
</TABLE>
There are no family relationships between any of the directors or executive
officers of the Company.
EXECUTIVE COMPENSATION
The executive officers of the Company and its wholly-owned subsidiary, MNH,
also serve as executive officers of Mutual as described above under "Management
Agreement." Mutual pays the salaries and other benefits of the executive
officers, and the Company and MNH are allocated a portion of those salaries and
other benefits in accordance with the Management Agreement.
Summary Compensation Table. The following table summarizes the Company's
and MNH's share of compensation paid during the years ended December 31, 1994,
1993 and 1992 to the Company's Chief
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<PAGE> 11
Executive Officer and all other executive officers whose total base salary and
bonus from Mutual for 1994 exceeded $100,000 (the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
------------------------------------ --------------
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4)
- - ---------------------------- ---- -------- ------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James F. Marino 1994 $215,608 $ -0- $ 5,634 -0- $17,854
Chairman and Chief 1993 $182,933 31,250 18,296 -0- 40,300
Executive Officer 1992 $171,315 -0- 13,423 10,000 38,173
Robert M. Zak 1994 $ 90,428 $ -0- $ -0- -0- $11,500
Senior Vice-President, 1993 $ 76,503 15,625 2,379 -0- 13,716
Chief Financial Officer 1992 $ 63,311 -0- 2,416 5,000 11,507
and Secretary
<FN>
- - ---------------
(1) The total compensation (the sum of all columns in the summary compensation
table except Options/SARs) paid to Mr. Marino by Mutual was $365,590 for
1994, $436,445 for 1993 and $365,427 for 1992. For Mr. Zak, total
compensation from Mutual was $155,853 for 1994, $173,155 for 1993 and
$126,614 for 1992. The Company and MNH paid 65.4% of 1994 compensation,
62.5% of 1993 compensation and 61% of 1992 compensation pursuant to the
expense allocation provisions of the Management Agreement.
(2) This represents the Company's and MNH's share of the amount paid to the
Named Officer as reimbursement for payment of taxes incurred as a result of
Mutual's contribution to the Merchants Mutual Supplemental Executive
Retirement Plan.
(3) Granted under the Merchants Group, Inc. 1986 Stock Option Plan, as amended.
(4) Represents the Company's and MNH's share of Mutual's contributions for the
Named Officer's benefit to the Merchants Mutual Supplement Executive
Retirement Plan and the Merchants Mutual Insurance Company Capital
Accumulation Plan.
</TABLE>
Option Grants. No options were granted to the Named Officers during 1994.
Option Exercises and Year End Value. None of the Named Officers exercised
any options during the year ended December 31, 1994. The following table shows
the value of "in-the-money" exercisable and unexercisable options held by the
Named Officers as of December 31, 1994. Valuations are based upon the closing
price of the Company's Shares on the American Stock Exchange on December 30,
1994 ($15.125).
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FY-END(#) AT FY-END($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- - ---------------- --------------- -------------
<S> <C> <C>
James F. Marino 46,318/ $ 203,281/
2,500 $ 1,875
Robert M. Zak 8,500/ $ 34,125/
2,500 $ 1,875
</TABLE>
Employment Agreements. Mr. Marino has an employment agreement with Mutual
which expires on December 31, 1996; the term of the agreement is extended one
year on each December 31 unless notice is
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<PAGE> 12
given by Mr. Marino or Mutual prior to December 31. The agreement provides that
Mr. Marino shall receive an annual salary of not less than $315,000. Mr. Zak has
an employment agreement with Mutual which expires on May 31, 1997; the term of
the agreement is extended one year on each May 31 unless notice is given by Mr.
Zak or Mutual prior to May 31. The agreement provides that Mr. Zak shall receive
an annual salary of not less than $140,000.
Both Mr. Marino's and Mr. Zak's (an "executive") agreements provide that in
the event there is a "change in control" (as defined) involving Mutual, the
Company or MNH and within two years after the change in control an executive's
employment is terminated other than for "good reason" or his death or "total
disability," the executive will be entitled to a severance benefit equal to 2.9
times the average of the aggregate annual compensation paid by Mutual to him
during the previous five calendar years. The severance benefit shall be paid
immediately in a lump sum discounted by an interest rate equal to the then prime
rate, assuming that such payment would have been made in equal semi-monthly
installments over a period of 36 months.
Compensation Committee Report. The Compensation Committee of the Board of
Directors consists of Messrs. Castellani, Garman and Semmelhack. The primary
obligation of the Compensation Committee is to evaluate the performance of key
employees of the Company and its affiliates for the purpose of determining
whether to grant options under the Option Plan. Because of the structure of the
Management Agreement under which (i) Mutual provides the facilities and
personnel necessary to manage the Company's day-to-day business and (ii) the
executive officers of the Company and MNH are also executive officers of Mutual
and are compensated by Mutual, decisions with respect to the salary and benefits
for the officers of the Company are made by the Compensation Committee of Mutual
and the Board of Directors of Mutual.
The Compensation Committee believes that long term stock-based incentive
compensation encourages senior management to operate in a manner consistent with
the interests of the Company's stockholders. In determining the number of
options to be granted to an executive, the Compensation Committee takes into
account the executive's current salary, the amount of stock-based compensation
previously granted to the executive, the executive's duties and performance and
competitive industry practices. No options were granted by the Company during
1994.
LAWRENCE P. CASTELLANI
RICHARD E. GARMAN
HENRY P. SEMMELHACK
This Compensation Committee Report shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement or portions thereof into any filing under the Securities Act of 1933,
as amended, or under the Securities Exchange Act of 1934, as amended, and shall
not otherwise be deemed filed under such Acts.
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<PAGE> 13
Performance Comparison. Set forth below is a line graph comparing the
yearly percentage change in cumulative stockholder return on the Company's
Shares with the cumulative return on the Standard & Poor's 500 and the NASDAQ
Insurance Stocks indices for the five year period beginning January 1, 1990 and
ending December 31, 1994.
<TABLE>
<CAPTION>
(DOLLARS)
NASDAQ
Measurement Period Insurance
(Fiscal Year Covered) The Company S&P 500 Stocks
--------------------- ----------- ------- ---------
<S> <C> <C> <C>
1989 100 100 100
1990 87.21 96.89 84.68
1991 138.37 126.42 119.37
1992 136.05 136.05 161.56
1993 147.42 149.76 172.80
1994 142.97 151.45 162.80
</TABLE>
CERTAIN TRANSACTIONS
Mutual provides facilities, employees and all services required to conduct
the business of the Company and MNH. See "Management Agreement."
Effective January 1, 1993, Mutual and MNH entered into a quota share
reinsurance agreement under which MNH assumes 10% of Mutual's direct voluntary
written premium and related losses in exchange for a reinsurance commission of
35%. The agreement also provides for MNH to pay a contingent commission to
Mutual equal to any underwriting profit on the premiums assumed. Transactions
are settled in cash on a monthly basis.
On November 1, 1994, Mutual filed an application with the New York
Insurance Department (the "Department") to convert from a mutual to a stock
corporation under the New York law that permits a mutual insurance company to
demutualize. In such a demutualization, a mutual insurance company's
policyholders and surplus note holders are entitled to receive their equitable
share of that company's appraised fair market value in cash or securities or a
combination thereof. Mutual's application is currently pending with
11
<PAGE> 14
the Department and must ultimately be approved by the Department and by Mutual's
policyholders after the Department has determined Mutual's fair market value
based upon an independent appraisal. The Company has advised Mutual and the
Department of its interest in sponsoring Mutual's demutualization, and Mutual
has granted the Company a right of first refusal in that regard. The Company
would consider acquiring Mutual if it determines that the appraised value is
acceptable and it has sufficient capital to fund the acquisition. In the event
the Company is not able to acquire Mutual at a price, on terms or in a time
frame acceptable to the Company, the Company may elect to develop its own
management structure and might, therefore, terminate the Management Agreement,
subject to its required five year notice provision, or request that Mutual and
the Department agree to amend the Management Agreement. Such an amendment might
include, but not be limited to, a shortening of the termination period.
STOCKHOLDER PROPOSAL
Management has been informed that Alan R. Kahn, beneficial owner of 500
shares whose address can be obtained by making a written or oral request to the
Company's Secretary, intends to offer the following proposal at the Meeting:
RESOLVED, that the Company's stockholders assembled at the 1995 Annual
Meeting hereby strongly recommend that our Board of Directors conduct an
immediate exhaustive search for a buyer of the Company, using the services of an
independent investment banking firm, and submit the highest resulting offer to
stockholders for approval within twelve months of this Annual Meeting date.
STATEMENT OF STOCKHOLDER IN SUPPORT OF PROPOSAL
Our company is probably worth a substantial premium to its stated book
value of $21.75 per share (at 9/30/94) in any merger or acquisition. At last
year's annual stockholders' meeting, a proposal similar to this one was
supported by 24% of all shares outstanding, and our management garnered the
votes of only a minority of shares outstanding to oppose that proposal. Clearly,
a large number of Merchants Group stockholders are displeased with the status
quo and believe a sale of our company is the best way to earn a satisfactory
return on our investment.
Despite stockholders' strong interest in earning a good return on
investment and in effective board representation to that end, our board of
directors has continued to appear insensitive to stockholder interests. Our
directors are part of an interlocking directorship including directors of our
company and its "parent," Merchants Mutual Insurance Company. As a result, our
board faces conflicts of interest which seem to have compromised our directors'
objectivity and loyalty to stockholders. Examples of our board's poor
representation of stockholder interests follow:
1. In January 1993, Merchants Mutual caused our company to
unilaterally relinquish a claim of $35 million against Merchants Mutual.
This transaction was tremendously beneficial to Merchants Mutual (our
"parent" company); however, it was inimical to our interests as Merchants
Group stockholders. Our directors appear to have sacrificed our interests
to benefit the parent.
2. In June 1993, Merchants Mutual forced our company to issue
1,061,425 new shares of stock at a huge discount from our company's book
value. This unnecessary transaction diluted the interests of Merchants
Group stockholders. As a result, the per-share book value and earnings of
Merchants Group are much lower now than they were before the underwriting.
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<PAGE> 15
3. In July 1994, our management "suddenly discovered" a $7.5 million
error which had supposedly accrued over many years, and caused our company
to pay $3.1 million to Merchants Mutual.
These illustrative events raise serious doubt about our board's ability to
uphold the interests of all Merchants Group stockholders. Our board's
conflicting interests appear to have been resolved unfavorably for stockholders
in 1993 and 1994. An independent board without conflicts of interest would have
been highly unlikely, in this stockholder's opinion, to unilaterally relinquish
a large claim against our parent company or to approve the dilutive stock issue
in 1993.
Our board has offered arguments and excuses supporting its actions in
recent years, and will undoubtedly do so again at any stockholders' meeting. But
the aforementioned incidents, suggest that the only way for stockholders to
realize a satisfactory return on our investment is to aggressively pursue a sale
of our company for fair value.
COMPANY'S RESPONSE AND RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST THE
STOCKHOLDER PROPOSAL. -------
Your Company continues to pursue its strategic plan to maximize shareholder
value by operating its business more efficiently, and by growth through
increasing the business written by existing agents, developing new insurance
products and new relationships with larger agents that include significant
premium commitments and by making selective acquisitions of other insurance
companies or blocks of business that will either increase the Company's market
share in existing markets or allow the Company to expand into new markets in
which the Company believes it can operate profitably. With respect to possible
acquisitions, the Company has what it believes to be a unique opportunity to
acquire Mutual by sponsoring Mutual's conversion to a stock company. The Company
announced in August 1994 that it had advised Mutual of the Company's interest in
sponsoring a demutalization and is actively pursuing that opportunity. The
Company believes that Mr. Kahn's proposal would adversely affect your Company's
prospects of acquiring Mutual on acceptable terms. The Company has also searched
for other insurance companies or blocks of business to acquire, and in November
1993 retained an independent investment banking firm to assist the Company in
searching for and studying acquisition candidates that would fulfill the
Company's strategic goals. The Company believes that its strategic plan will
allow it to grow and believes that it will result in an increase in earnings,
which will have a corresponding positive impact on stockholder value.
Mr. Kahn cites three instances where he suggests the Board's alleged
conflicts of interest were detrimental to the Company and its stockholders. What
he fails to acknowledge is the fact that in any transaction in which there was a
potential conflict of interest between the Company and Mutual, the Company's
interests were represented and protected by disinterested directors (that is,
directors who have no connection with Mutual). These directors had separate,
independent counsel. The three instances cited by Mr. Kahn are actually prime
examples of how the Company's disinterested directors have protected the
interests of the Company's stockholders.
Mr. Kahn claims that the Company "unilaterally relinquished" a "$35 million
claim" against Mutual in connection with the purchase from the Federal Deposit
Insurance Corporation ("FDIC") of a surplus note issued by Mutual. The facts
regarding that transaction are to the contrary. On January 27, 1993, after
almost two years of intense, arm's-length negotiations with the FDIC, MNH
purchased from the FDIC a surplus note issued by Mutual to Goldome, a bank which
was seized by the FDIC in May 1991. The note was in the original principal
amount of $14,000,000 and had accrued and unpaid annual return of $21,000,000.
That note was more in the nature of an equity investment than a traditional debt
instrument. It was not collateralized
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<PAGE> 16
and no payments could be made without the consent of the Department. The FDIC
had an independent appraisal done of the fair market value of the note, and
based on that appraisal, after a series of offers and counteroffers, agreed to
sell the note to MNH for $1,350,000. However, before MNH could purchase the note
it had to receive the consent of insurance regulators and Mutual, who
conditioned their consent on the note being amended to reduce the total amount
of the note to the amount actually paid by MNH to acquire the note. Contrary to
what Mr. Kahn claims, the Company did not "unilaterally relinquish" any claims;
it received exactly what it paid for and to demand anything more would not have
been acceptable to the parties whose consent was required. The disinterested
members of the Company's Board carefully considered this transaction, and
decided that it was important to purchase the note because of the risk that the
FDIC might sell the note to an unknown third party who might compel Mutual to
take actions that would adversely affect the Company and the presence of whom
might disrupt the relationships between MNH and its independent insurance
agents. Furthermore, the directors believed that the purchase of the note was in
the Company's best interest because the holder of the note is eligible to
participate in any demutualization by Mutual.
Mr. Kahn also claims that the Company's 1993 public offering was "forced"
upon the Company by Mutual and that the shares were sold at too low a price. The
Company believed it was appropriate to access the capital markets in order to
enhance its capability to expand its insurance business while remaining within
the insurance industry's premiums-to-surplus guidelines and improve its
performance with respect to the then recently proposed risk-based capital (RBC)
requirements. The Company also believes that the capital raised in the public
offering allowed MNH to retain its A- rating from A.M. Best Company. The
additional capital gives your Company the financial flexibility to proceed with
its strategic plan described above. Finally, the offering also gave the Company
the flexibility to begin to pay a quarterly cash dividend on its common shares.
The July 1994 payment by the Company to Mutual is cited by Mr. Kahn as
another example of conflicts causing the Board to make decisions not in the best
interests of the Company. This payment related to Mutual's failure to bill MNH
for a portion of MNH's share of "assigned risk" automobile losses during the
period from January 1, 1985 through June 30, 1994. Mr. Kahn again fails to
acknowledge how that issue was handled and the result achieved for the Company
by its disinterested directors. The Company's disinterested directors once again
protected the interests of the Company, settling a $7,500,000 claim for
$3,135,000 after extensive negotiations with disinterested directors of Mutual,
with both parties represented by separate counsel.
The Company believes that all of its directors have served the Company
well, and has taken steps to increase the number of disinterested directors on
the Board. At the annual meeting of stockholders last year, the Company
restructured its Board, reducing the number of directors from nine to five, with
only two of these directors being affiliated with Mutual. Since then, the
Company has added two additional disinterested members, giving the Company five
disinterested directors out of a total of seven -- hardly the interlocking Board
portrayed by Mr. Kahn.
The proponent would have your Company abandon its strategic plan and put
the Company up for sale, irrespective of whether the next twelve months is an
opportune time to sell the Company. He would arbitrarily direct the Board to
submit a short-term sale of the Company to the stockholders irrespective of
whether the Board believed that the offer was adequate or fair. Mr. Kahn does
not consider the potential negative effect of such conduct on the Company or its
stockholders. He fails to address the negative impact that a sale, or the
prospect of a sale, of the Company would have on MNH's distribution system under
which the same independent insurance agencies represent both MNH and Mutual. He
does not take into account the Company's and MNH's relationship with insurance
regulatory agencies. Such a drastic approach is not in the
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<PAGE> 17
best interests of the Company or its stockholders, and your Board of Directors
respectfully urges you to vote against the proposal.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The Board of Directors has not yet appointed a firm to act as auditors for
the fiscal year ending December 31, 1995. Price Waterhouse LLP has audited the
accounts of the Company since its formation. A representative of Price
Waterhouse LLP is expected to be present at the Meeting and will have an
opportunity to make a statement, if the representative so desires, and will be
available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
Stockholder proposals must be received at the Company's offices no later
than December 8, 1995 in order to be considered for inclusion in the Company's
proxy materials for the 1996 Annual Meeting.
OTHER MATTERS
So far as the Company is aware, no matters other than those outlined in
this Proxy Statement will be presented to the Meeting for action on the part of
the stockholders. If any other matters are properly brought before the Meeting,
it is the intention of the persons named in the accompanying proxy to vote
thereon the Shares to which the proxy relates in accordance with their best
judgment.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT M. ZAK
Secretary
Buffalo, New York
15
<PAGE> 18
MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
P
R THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
O
X The undersigned hereby appoints JAMES F. MARINO and ROBERT M. ZAK,
Y and each or either of them, Proxies for the undersigned, with full
power of substitution, to vote all shares of Common Stock, $.01 par
value, of Merchants Group, Inc. which the undersigned would be
entitled to vote at the Annual Meeting of Stockholders to be held
on Wednesday, May 10, 1995, at the Company's offices, 250 Main
Street, Buffalo, New York, at 8:00 a.m., Buffalo time, or any
adjournments thereof, and directs that the shares represented by
this Proxy shall be voted as indicated on the reverse side:
Election of Directors, Nominees: (change of address)
Brent D. Baird, Richard E. Garman and
James F. Marino ____________________
____________________
____________________
____________________
(If you have written
in the above space,
please mark the
corresponding box
on the reverse side
of this card.)
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE
REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE
WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT VOTE YOUR
SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
SEE REVERSE
SIDE
<PAGE> 19
<TABLE>
<S> <C> <C>
/ X / PLEASE MARK YOUR SHARES IN YOUR NAME
VOTES AS IN THIS
EXAMPLE.
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Stockholder pro- / / / / / / 3. In their discretion, the
Directors posal regarding Proxies are authorized to vote
(see reverse) search for buyer upon such other business as may
for Company properly come before the Meeting
For, except vote withheld from the THE BOARD OF DIRECTORS RECOMMENDS A VOTE or any adjournments thereof.
following nominee(s): AGAINST THIS PROPOSAL.
THE SHARES REPRESENTED BY
- - ------------------------------------- THIS PROXY WILL BE VOTED AS
DIRECTED BY THE STOCKHOLDER. THE
BOARD OF DI RECTORS FAVORS A VOTE
FOR PROPOSAL 1 AND AGAINST
PROPOSAL 2. IF NO DIRECTION IS
MADE, THE PROXY WILL BE VOTED FOR
PROPOSAL 1 AND AGAINST PROPOSAL 2.
Change / / Please date and sign name
of exactly as it appears and return
Address this Proxy promptly in the
enclosed envelope, which requires
Attend / / no postage if mailed in the
Meeting United States.
SIGNATURE(S) __________________________________________________________________________ DATE ________________
SIGNATURE(S) __________________________________________________________________________ DATE ________________
NOTE: Joint owners should each sign. Executors, administrators, trustees, guardians and corporate officers should
give title.
</TABLE>
