<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:
<TABLE>
<S> <C>
/ / 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
</TABLE>
MERCHANTS GROUP, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MERCHANT'S GROUP, INC.
(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:___________________________________________________________
================================================================================
<PAGE> 2
[Logo] MERCHANTS GROUP, INC.
250 Main Street
Buffalo, New York 14202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 8, 1996
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of Stockholders of
Merchants Group, Inc. (the "Company") will be held at the Hyatt Regency, Two
Fountain Plaza, Buffalo, New York, on Wednesday, May 8, 1996 at 8:00 a.m.,
Buffalo time, for the following purposes:
1. To elect two directors for a term of three years.
2. To transact such other business 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
Chief Operating Officer
and Secretary
Date: April 5, 1996
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 5, 1996
MERCHANTS GROUP, INC.
250 Main Street
Buffalo, New York 14202
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 8, 1996
The following information is furnished in connection with the Annual
Meeting of Stockholders of Merchants Group, Inc. (the "Company") to be held at
the Hyatt Regency, Two Fountain Plaza, Buffalo, New York, on May 8, 1996 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, 1995 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 5, 1996.
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.
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 15, 1996. On such date there were 3,214,519 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 considered as being
present at the Meeting. The vote of a plurality of Shares present at the Meeting
is required for election of directors, which is the only matter scheduled to be
voted on at the Meeting.
1
<PAGE> 4
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 February 15, 1996 (unless otherwise indicated) more
than 5% of the Shares outstanding except for the persons named in the following
table.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
----------------------------------------------------------- ------------------ --------
<S> <C> <C>
Brent D. Baird and others.................................. 319,100(1) 9.9%
1350 One M&T Plaza
Buffalo, New York 14203
Tweedy, Browne Company L.P................................. 284,365(2) 8.8%
52 Vanderbilt Avenue
New York, New York 10017
Merchants Mutual Insurance Company......................... 255,000(3) 7.9%
250 Main Street
Buffalo, New York 14202
Franklin Resources, Inc.................................... 254,500(4) 7.9%
777 Mariners Island Blvd.
San Mateo, California 94404
Marvin C. Schwartz......................................... 197,900(5) 6.2%
605 Third Avenue
New York, New York 10158
FMR Corp................................................... 195,100(6) 6.1%
82 Devonshire Street
Boston, Massachusetts 02109
<FN>
- ---------------
(1) Based on information provided by Brent D. Baird, which updated an amended
Schedule 13D filed on March 30, 1995 by Mr. Baird, members of the Baird
family, persons with personal relationships with members of the Baird
family, and entities owned or controlled by the Baird family. The filing
persons with respect to this amended Schedule 13D and the number of Shares
beneficially owned 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, 15,000 Shares; (v) Bridget B. Baird, as
successor trustee, 14,000 Shares; (vi) The Cameron Baird Foundation, 32,000
Shares; (vii) Brian D. Baird, as successor trustee, 1,000 Shares; (viii)
Citizens Growth Properties, 30,000 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., 135,000 Shares; (xvi) Belmont
Contracting Co., Inc., 2,000 Shares; and (xvii) Trubee Collins & Co.
Retirement Fund f/b/o Brent D. Baird, 5,000 Shares.
(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
</TABLE>
2
<PAGE> 5
owned by partnerships in which certain partners of TBC are also partners, in
which TBC disclaims beneficial ownership.
(3) 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."
(4) Based on a Schedule 13G dated February 12, 1996, which indicated that
Franklin Resources, Inc. had sole voting power and shared dispositive power
with respect to these Shares as of December 31, 1995.
(5) 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.
(6) Based on an amended Schedule 13G dated February 14, 1996, which indicated
that FMR Corp. had sole dispositive power with respect to these Shares as of
December 31, 1995.
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.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the Shares beneficially owned as of March
15, 1996 (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.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED OF CLASS (1)
-------------------------------------------------------- ------------------ ------------
<S> <C> <C>
Brent D. Baird.......................................... 319,100(2) 9.93%
Lawrence P. Castellani.................................. 1,000(3) .03%
Frank J. Colantuono..................................... 1,000 .03%
Richard E. Garman....................................... 92,000(4) 2.86%
Henry P. Semmelhack..................................... 1,700 .05%
Robert M. Zak........................................... 14,210(5) .44%
Edward M. Murphy........................................ 5,350(6) .17%
Directors and officers as a group....................... 434,360(7) 13.45%
<FN>
- ---------------
(1) Percentage calculations for each individual and group in the table are based
on 3,214,519 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 1 to table under "Security Ownership of Certain Beneficial Owners."
(3) These Shares are held by Mr. Castellani's minor children.
(4) Includes 80,000 Shares owned by a corporation of which Mr. Garman is chief
executive officer and majority shareholder.
</TABLE>
3
<PAGE> 6
(5) Includes (i) 11,000 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.
(6) Includes (i) 3,000 Shares that Mr. Murphy has the right to acquire under the
Option Plan within 60 days of the date of this Proxy Statement and (ii) 250
Shares held by his spouse, in which he disclaims beneficial ownership.
(7) Does not include 67,268 Shares (2.1%) beneficially owned as of September 25,
1995 by James F. Marino, who resigned as a Director, President and Chief
Executive Officer of the Company on June 30, 1995.
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
six.
The directors recommend a vote FOR the two 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.
The following table sets forth information regarding directors standing for
election and directors whose terms continue beyond the Meeting:
<TABLE>
<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 FOR A TERM EXPIRING IN 1999
Lawrence P. Castellani 50 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 47 President and Chief Executive Officer of
Director since 1994 Independent Health Association, Inc. (a health
maintenance organization) for more than five
years.
</TABLE>
4
<PAGE> 7
<TABLE>
<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 1997
Henry P. Semmelhack 59 President and Chief Executive Officer of
Director since 1987 Barrister Information Systems Corporation (a
computer software and services company) for
more than five years.
Robert M. Zak 38 President and Chief Executive Officer of MNH
Chief Operating Officer since July and Mutual since November 1, 1995; Senior
1, 1995, Senior Vice-President Vice-President of MNH and Mutual since 1992;
since 1992, Chief Financial Officer Chief Financial Officer of MNH and Mutual
since 1991, Secretary since 1990, since 1991; Vice-President -- Financial
Treasurer since 1988 and Director Services of MNH and Mutual from 1989 to 1992;
since 1994 Treasurer of MNH and Mutual since 1988;
Secretary of MNH and Mutual from 1990 through
November 1, 1995.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Brent D. Baird 57 Private investor since 1991; limited partner
Director since 1995 and President of Trubee, Collins & Co. (member firm of New
and Chief Executive Officer since York Stock Exchange, Inc.) from 1983 to 1991.
July 1, 1995
Richard E. Garman 65 President and Chief Executive Officer of
Director since 1987 and Chairman of A.B.C. Paving Company (a construction company)
the Board since July 1, 1995 for more than five years.
</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:
<TABLE>
<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
The Audit Committee of the Board of Directors consists of Messrs.
Semmelhack (Chairman), Castellani, Colantuono and Garman. The functions
performed by the Audit Committee consist principally of conferring with and
reviewing the reports of the Company's independent accountants and independent
5
<PAGE> 8
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
three times during 1995.
The Nominating Committee consists of Messrs. Garman (Chairman), Baird and
Semmelhack. The Nominating Committee's function is to seek out, screen,
interview and present to the entire Board of Directors qualified director
candidates. 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 Nominating Committee did not meet during
1995.
The Compensation Committee consists of Messrs. Castellani (Chairman), Baird
and Colantuono. The function of the Compensation Committee is to evaluate the
performance of key employees of the Company and its affiliates and to grant
options under the Company's 1986 Stock Option Plan based upon its evaluation.
The Compensation Committee did not meet during 1995.
During the fiscal year ended December 31, 1995, the full Board of Directors
met 17 times. All directors, with the exception of Mr. Castellani, 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 has a compliance program to assist its executive
officers and directors in complying with their reporting requirements under
Section 16(a). Except as described below, the Company is not aware of any
failures to file or late filings by any insider during 1995. Henry P.
Semmelhack, a Director of the Company, purchased 1,000 shares of the Company's
common stock in August 1995 and reported that purchase to the Company at the end
of August in accordance with the Company's compliance program; however, due to
an inadvertent oversight by the Company, that purchase was not reported to the
SEC until October 27, 1995.
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
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<PAGE> 9
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, 1995,
approximately 66.5% 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 and 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
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<PAGE> 10
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 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 one director of Mutual on the Company's six-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. Mr. Zak, who is a director and officer of the
Company and MNH, is not separately compensated for his services as a director.
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 any committee
meeting attended.
EXECUTIVE OFFICERS
The following is a listing of the Company's executive officers.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME, POSITION AND BUSINESS EXPERIENCE FOR
TENURE WITH THE COMPANY AGE PAST FIVE YEARS
- ------------------------------------- --- --------------------------------------------
<S> <C> <C>
Richard E. Garman 65 See table under "Information Concerning
Chairman of the Board since July 1, Directors and Nominees."
1995
Brent D. Baird 57 See table under "Information Concerning
Director since 1995 and President Directors and Nominees."
and Chief Executive Officer since
July 1, 1995
Robert M. Zak 38 See table under "Information Concerning
Chief Operating Officer since July Directors and Nominees."
1, 1995, Senior Vice-President
since 1992, Chief Financial Officer
since 1991, Secretary since 1990,
Treasurer since 1988 and Director
since 1994
Edward M. Murphy 45 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.
8
<PAGE> 11
EXECUTIVE COMPENSATION
Certain of 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
these 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, 1995,
1994 and 1993 to the Company's Chief Executive Officer and all other executive
officers whose total base salary and bonus from Mutual for 1995 exceeded
$100,000 (the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(2) COMPENSATION
NAME AND ------------------------------------ AWARDS
PRINCIPAL OTHER ANNUAL ------------ ALL OTHER
POSITION(1) YEAR SALARY BONUS COMPENSATION(3) OPTIONS/SARS COMPENSATION(4)
- ------------------- ----- -------- ------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Zak 1995 $103,140 -0- $ 3,075 -0- $10,207
Chief Operating 1994 $ 89,184 -0- -0- -0- $11,341
Officer 1993 $ 76,503 $15,625 $ 2,379 -0- $13,716
Edward M. Murphy 1995 $ 67,618 -0- -0- -0- $ 3,932
Vice-President 1994 $ 64,307 -0- -0- -0- $ 7,189
Investments 1993 $ 53,479 $ 3,150 -0- -0- $ 5,790
James F. Marino(5) 1995 $708,883 -0- $21,026 -0- $22,199
1994 $201,686 -0- -0- -0- $23,165
1993 $182,933 $31,250 $18,296 -0- $40,300
<FN>
- ---------------
(1) Mr. Zak became Chief Operating Officer on July 1, 1995; see table under
"Information Concerning Directors and Nominees." Mr. Marino resigned as a
Director and as President and Chief Executive Officer of the Company and MNH
on June 30, 1995. Richard E. Garman was appointed Chairman of the Board, and
Brent D. Baird was appointed President and Chief Executive Officer,
effective July 1, 1995. Neither Mr. Garman nor Mr. Baird receives any
compensation for serving in these capacities.
(2) The total compensation (the sum of all columns in the summary compensation
table except Options/SARs) paid to Mr. Zak by Mutual was $175,073 for 1995,
$155,853 for 1994 and $173,155 for 1993. For Mr. Murphy, total compensation
from Mutual was $107,595 for 1995, $110,847 for 1994 and $99,830 for 1993.
For Mr. Marino, total compensation received by him as an employee of Mutual
was $1,130,990 for 1995, $348,606 for 1994 and $436,445 for 1993. The
Company and MNH paid 66.5% of 1995 compensation, 64.5% of 1994 compensation
and 62.5% of 1993 compensation pursuant to the expense allocation provisions
of the Management Agreement.
(3) 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.
(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>
9
<PAGE> 12
(5) In connection with James F. Marino's resignation as the President and Chief
Executive Officer of the Company and Mutual on June 30, 1995, he entered
into an agreement with Mutual whereby he received a severance payment on
June 30, 1995 from Mutual of $900,921 which included payment for all
benefits he was entitled to under his employment agreement with Mutual. Of
that amount, $599,112 is included in Mr. Marino's salary for 1995 in the
above table. In addition, Mr. Marino will be paid a consulting fee payable
over time by Mutual as follows: $150,000 which was paid on June 30, 1995,
$150,000 which was paid on January 2, 1996, and five equal payments of
$64,000 payable on each January 2 from 1997 through 2001. The Company's
share of the consulting payment made in 1995, as calculated under the
Management Agreement, was $99,750, none of which is included in the above
table.
Option Grants. No options were granted to the Named Officers during 1995.
Option Exercises and Year End Value. The following table summarizes
information with respect to option exercises and exercisable and unexercisable
options held by the Named Officers as of December 31, 1995. Valuations are based
upon the closing price of the Company's Shares on the American Stock Exchange on
December 29, 1995 ($17.75).
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED ON VALUE AT FY-END(#) AT FY-END($)
NAME EXERCISE REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------- ----------- ------------ -------------------------- --------------------------
<S> <C> <C> <C> <C>
James F. Marino................. 47,568 $373,053 0/0 $0/0
Robert M. Zak................... 0 0 9,750/1,250 $60,656/$4,219
Edward M. Murphy................ 0 0 2,250/750 $7,593/$2,531
</TABLE>
Employment Agreement. Mr. Zak has an employment agreement with Mutual dated
as of June 1, 1994 which expires on May 31, 1997; during that period 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. The agreement provides that if Mr.
Zak is terminated by Mutual for any reason other than (i) for "good cause" or
(ii) as a result of his death or "total disability" or (iii) following a "change
in control" involving Mutual, the Company or MNH, he will receive a severance
benefit equal to the greater of the total of his then annual salary through the
end of his employment agreement or two times the aggregate annual compensation
paid to him by Mutual during the calendar year preceding the date of
termination. Mr. Zak's agreement also provides that in the event there is a
"change in control" involving Mutual, the Company or MNH and within two years
after the change in control Mr. Zak's employment is terminated other than for
"good reason" or his death or "total disability," he 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.
These severance benefits shall be immediately paid in a lump sum discounted by
an interest rate equal to the then prime rate.
Compensation Committee Report. The Compensation Committee of the Board of
Directors consists of Messrs. Castellani, Baird and Colantuono. 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) certain
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
10
<PAGE> 13
Company during the past fiscal year were made by the compensation committee of
Mutual and the Board of Directors of Mutual with prior consultation with the
Company's Compensation Committee.
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. Based on the Company's financial performance in
1995, no options were granted by the Company during 1995.
Submitted by the Compensation Committee of the Company's Board of
Directors:
Lawrence P. Castellani
Brent D. Baird
Frank J. Colantuono
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.
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
Stock indices for the five year period beginning January 1, 1991 and ending
December 31, 1995.
<TABLE>
<CAPTION>
NASDAQ
Measurement Period Insurance
(Fiscal Year Covered) The Company S&P 500 Stocks
<S> <C> <C> <C>
1990 100.00 100.00 100.00
1991 158.67 130.40 140.97
1992 156.00 140.32 190.79
1993 169.04 154.41 204.07
1994 164.44 156.44 192.04
1995 195.34 215.16 272.86
</TABLE>
11
<PAGE> 14
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 assumed 10% of Mutual's direct voluntary
written premiums 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. Mutual pays the
ceded premiums, net of commissions and paid losses, to MNH on a monthly basis
and MNH invests these funds and earns investment income. To the extent
commissions and paid losses exceed premiums, MNH is required to pay the net
monthly balance to Mutual. The agreement may be terminated by either party
effective as of any January 1, with the prior approval of the New York
Superintendent of Insurance, upon six months' notice to the other party. In
addition, the agreement may be terminated by MNH at any time if any amount
payable to MNH by Mutual becomes more than 90 days overdue or if there is a
change in control of Mutual approved by the New York Superintendent of
Insurance. In December 1995, Mutual notified MNH that it was not terminating the
agreement but was exercising its right under the agreement to eliminate all
cessions of its voluntary direct written premium to MNH for calendar year 1996,
while retaining the right to resume such cessions, up to the 10% level, for
subsequent years.
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 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.
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, 1996. 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 6, 1996 in order to be considered for inclusion in the Company's
proxy materials for the 1997 Annual Meeting.
12
<PAGE> 15
OTHER MATTERS
So far as the Management 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
Chief Operating Officer
and Secretary
Buffalo, New York
13
<PAGE> 16
MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
P
The undersigned hereby appoints BRENT D. BAIRD and ROBERT M. ZAK,
R and each or either of them, Proxies for the undersigned, with full
power of substitution, to vote all shares of Common Stock, $.01 par
O value, of Merchants Group, Inc. which the undersigned would be
entitled to vote at the Annual Meeting of Stockholders to be held
X on Wednesday, May 8, 1996, at the Hyatt Regency, Two Fountain
Plaza, Buffalo, New York, at 8:00 a.m., Buffalo time, or any
Y adjournments thereof, and directs that the shares represented by
this Proxy shall be voted as indicated on the reverse side:
<TABLE>
<S> <C>
Election of Directors, Nominees: (change of address)
Lawrence P. Castellani and Frank J. Colantuono _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
(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 |
--------------------
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DETACH CARD
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C> <C> <C>
X PLEASE MARK YOUR SHARES IN YOUR NAME
VOTES AS IN THIS
EXAMPLE.
FOR WITHHELD 2. In their discretion,
1. Election of / / / / the Proxies are authorized
Directors to vote upon such other
(see reverse) business as may properly come before the
Meeting or any adjournments thereof.
For, except vote withheld from the following nominee(s):
THE SHARES REPRESENTED BY THIS
_______________________________________________________ PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER. THE BOARD OF DIRECTORS FAVORS A
VOTE FOR PROPOSAL 1. IF NO DIRECTION IS MADE,
THE PROXY WILL BE VOTED FOR PROPOSAL 1.
Change Please date and sign name exactly as it
of / / appears and return this Proxy promptly in the
Address enclosed envelope, which requires no
postage if mailed in the United States.
Attend / /
Meeting
SIGNATURE(S) _________________________________________________ DATE ____________
SIGNATURE(S) _________________________________________________ DATE ____________
NOTE: Joint owners should each sign. Executors, administrators, trustees,
guardians and corporate officers should give title.
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DETACH CARD
</TABLE>
