<PAGE> 1
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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)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] 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
MERCHANTS GROUP, INC.
Merchant Logo 250 Main Street
Buffalo, New York 14202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 1997
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders of
Merchants Group, Inc. (the "Company") will be held at the Company's offices at
250 Main Street, Buffalo, New York, on Wednesday, May 7, 1997 at 9:00 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
Senior Vice President and
Chief Operating Officer
Date: April 4, 1997
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 4, 1997
MERCHANTS GROUP, INC.
250 Main Street
Buffalo, New York 14202
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 7, 1997
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 at 250 Main Street, Buffalo, New York, on May 7, 1997 at
9:00 a.m., Buffalo time (the "Meeting"). A copy of the Company's Annual Report
to Stockholders for the fiscal year ended December 31, 1996 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 4, 1997.
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 21, 1997. On such date there were 2,999,602 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) of the Securities Exchange Act of 1934) beneficially
owned as of February 15, 1997 (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.................................. 297,900(1) 9.9%
1350 One M&T Plaza
Buffalo, New York 14203
Marvin C. Schwartz......................................... 289,200(2) 9.6%
605 Third Avenue
New York, New York 10158
Tweedy, Browne Company L.P................................. 284,365(3) 9.5%
52 Vanderbilt Avenue
New York, New York 10017
Merchants Mutual Insurance Company......................... 255,000(4) 8.5%
250 Main Street
Buffalo, New York 14202
Franklin Resources, Inc.................................... 254,500(5) 8.5%
777 Mariners Island Blvd.
San Mateo, California 94404
John D. Weil............................................... 234,000(6) 7.8%
200 N. Broadway
St. Louis, Missouri 63102
Kahn Brothers & Co., Inc................................... 162,030(7) 5.4%
555 Madison Avenue
New York, New York 10022
Donald Smith & Co., Inc.................................... 155,000(8) 5.2%
East 80, Route 4
Paramus, New Jersey 07652
</TABLE>
- ---------------
(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) Aries 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, 10,800
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
2
<PAGE> 5
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 May 6, 1996, which
indicated Mr. Schwartz had sole voting and dispositive power with respect to
211,700 Shares and shared dispositive power with respect to 77,500 Shares.
(3) Based on a Schedule 13D most recently amended on February 24, 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.
(4) 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."
(5) 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.
(6) Based on a Schedule 13D most recently amended on January 31, 1997, which
indicated Mr. Weil had sole voting and dispositive power with respect to
these Shares.
(7) Based on a Schedule 13G dated February 5, 1997, which indicated Kahn
Brothers & Co., Inc. had shared dispositive power but no voting power with
respect to these Shares.
(8) Based on a Schedule 13G dated February 7, 1997, which indicated Donald Smith
& Co., Inc. had sole voting and dispositive power with respect to these
Shares.
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.
3
<PAGE> 6
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the Shares beneficially owned as of March
21, 1997 (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........................................... 297,900(2) 9.93%
Frank J. Colantuono...................................... 1,000 .03%
Richard E. Garman........................................ 92,000(3) 3.07%
Henry P. Semmelhack...................................... 1,700 .06%
Robert M. Zak............................................ 16,085(4) .53%
Edward M. Murphy......................................... 6,750(5) .22%
Kenneth J. Wilson........................................ 500 .02%
Directors and officers as a group........................ 415,935 13.86%
</TABLE>
- ---------------
(1) Percentage calculations for each individual and group in the table are based
on 2,999,602 Shares outstanding plus any Shares such person or the person in
such group 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) Includes 80,000 Shares owned by a corporation of which Mr. Garman is chief
executive officer and majority shareholder.
(4) Includes 10,875 Shares that Mr. Zak has the right to acquire under the
Option Plan within 60 days of the date of this Proxy Statement and 1,110
Shares held by the Merchants Mutual Supplemental Executive Retirement Plan
for the benefit of Mr. Zak.
(5) Includes 4,000 Shares that Mr. Murphy has the right to acquire under the
Option Plan within 60 days of the date of this Proxy Statement and 250
Shares held by his spouse, in which he disclaims beneficial ownership.
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. Throughout 1996 the Board of Directors
consisted of six directors. On January 30, 1997, Lawrence P. Castellani, who had
been a director since 1987 and whose term as a director was to expire in 1999,
resigned as a director due to time constraints of his position as President and
Chief Executive Officer of Tops Markets, Inc. The Board has decided not to fill
this vacancy at this time, and has set the number of directors at five.
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<PAGE> 7
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
NAME, POSITION AND AND BUSINESS EXPERIENCE
TENURE WITH THE COMPANY AGE FOR PAST FIVE YEARS
- ---------------------------------- ---- ------------------------------------------------
<S> <C> <C>
DIRECTORS STANDING FOR ELECTION FOR A TERM EXPIRING IN 2000
Henry P. Semmelhack 60 President, Chief Executive Officer and Chairman
Director since 1987 of Barrister Information Systems Corporation (a
computer software and services company).
Robert M. Zak 39 President and Chief Executive Officer of MNH and
Chief Operating Officer since Mutual since November 1, 1995; Senior Vice
July 1, 1995, Senior Vice President of MNH and Mutual from 1992 to 1995;
President since 1992, Secretary Chief Financial Officer of the Company, MNH and
since 1990 and Director since Mutual from 1991 through 1996; Vice
1994 President -- Financial Services of MNH and
Mutual from 1989 to 1992; Treasurer of MNH and
Mutual from 1988 through 1996; Secretary of MNH
and Mutual from 1990 through November 1, 1995.
DIRECTORS WHOSE TERMS EXPIRE IN 1998
Brent D. Baird 58 Private investor since 1991; limited partner of
Director since 1995 and Trubee, Collins & Co. (member firm of New York
President and Chief Executive Stock Exchange, Inc.) from 1983 to 1991.
Officer since July 1, 1995
Richard E. Garman 66 President and Chief Executive Officer of A.B.C.
Director since 1987 and Chairman Paving Company (a construction company).
of the Board since July 1, 1995
DIRECTOR WHOSE TERM EXPIRES IN 1999
Frank J. Colantuono 48 President and Chief Executive Officer of
Director since 1994 Independent Health Association, Inc. (a health
maintenance organization).
</TABLE>
5
<PAGE> 8
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), Colantuono and Garman; Mr. Castellani was a member prior
to his resignation. 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 three times during 1996.
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
1996.
The Compensation Committee consists of Messrs. Baird and Colantuono; Mr.
Castellani was a member and Chairman of the Committee prior to his resignation.
The function of the Compensation Committee is to evaluate, in conjunction with
the Compensation Committee of Mutual's Board of Directors, the performance of
the officers of the Company and key employees of the Company's affiliates. The
Compensation Committee also administered the Company's 1986 Stock Option Plan
which expired by its terms in 1996. The Compensation Committee met once during
1996 in conjunction with the full Board of Directors.
During the fiscal year ended December 31, 1996, the full Board of Directors
met twelve times. All incumbent directors 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 the Company's
directors and officers, and persons who own more than 10% of the Company's
Common Stock to file reports with the Securities and Exchange Commission ("SEC")
and the American Stock Exchange within ten days after the end of any month in
which they engaged in a transaction in the Company's securities. Under rules
promulgated by the
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<PAGE> 9
SEC, the Company is required to disclose any failures to file or late filings
under Section 16(a) by its insiders. Based solely on review of information
furnished to the Company, reports filed through the Company, and written
representations that no Forms 5 were required, the Company believes that all
Section 16(a) filing requirements applicable to its directors and officers were
complied with during 1996.
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 in
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, 1996, approximately 65.3% 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
7
<PAGE> 10
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 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 five-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
NAME, POSITION AND AND BUSINESS EXPERIENCE
TENURE WITH THE COMPANY AGE FOR PAST FIVE YEARS
- --------------------------------------- ---- ------------------------------------------------
<S> <C> <C>
Richard E. Garman 66 See table under "Information Concerning
Chairman of the Board since July 1, Directors and Nominees."
1995
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, POSITION AND AND BUSINESS EXPERIENCE
TENURE WITH THE COMPANY AGE FOR PAST FIVE YEARS
- --------------------------------------- ---- ------------------------------------------------
<S> <C> <C>
Brent D. Baird 58 See table under "Information Concerning
Director since 1995 and President and Directors and Nominees."
Chief Executive Officer since July 1,
1995
Robert M. Zak 39 See table under "Information Concerning
Chief Operating Officer since July 1, Directors and Nominees."
1995, Senior Vice President since
1992, Secretary since 1990 and
Director since 1994
Edward M. Murphy 46 Vice President -- Investments of Mutual and MNH
Vice President -- Investments and since 1991; Assistant Vice President of Mutual
Assistant Secretary since 1991 and MNH from 1989 to 1991.
Kenneth J. Wilson 49 Vice President, Treasurer and Chief Financial
Vice President, Treasurer and Chief Officer of the Company, Mutual and MNH since
Financial Officer since December 30, December 30, 1996; President and Chief Executive
1996 Officer of Carbadon Corp., and its operating
subsidiary Empire of America Realty Credit
Corp., from December 1995 to December 1996 and
Chief Financial Officer from November 1992 to
December 1996; and Senior Treasury Manager for
Marine Midland Bank from 1989 to November 1992.
</TABLE>
There are no family relationships between any of the directors or executive
officers of the Company.
9
<PAGE> 12
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, 1996,
1995 and 1994 to the Company's Chief Executive Officer and all other executive
officers whose total base salary and bonus from Mutual for 1996 exceeded
$100,000 (the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(2) COMPENSATION AWARDS
---------------------------------- -------------------
OTHER ANNUAL SECURITIES
NAME AND COMPENSATION UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY BONUS (3) OPTIONS/SARs(#) COMPENSATION(4)
- ------------------------ ---- -------- ----- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Zak 1996 $135,041 -0- -0- 7,500 $ 7,239
Chief Operating 1995 $103,140 -0- $ 3,075 -0- $10,207
Officer 1994 $ 89,184 -0- -0- -0- $11,341
Edward M. Murphy 1996 $ 74,693 -0- -0- 4,000 $ 4,895
Vice President 1995 $ 67,618 -0- -0- -0- $ 3,932
Investments 1994 $ 64,307 -0- -0- -0- $ 7,189
</TABLE>
- ---------------
(1) Mr. Zak became Chief Operating Officer on July 1, 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 $217,887 for 1996,
$175,073 for 1995 and $155,853 for 1994. For Mr. Murphy, total compensation
from Mutual was $121,881 for 1996, $107,595 for 1995 and $110,847 for 1994.
The Company and MNH paid 65.3% of 1996 compensation, 66.5% of 1995
compensation and 64.5% of 1994 compensation pursuant to the expense
allocation provisions of the Management Agreement.
(3) Represents the Company's and MNH's share of the amount paid to the Named
Officer as reimbursement for payment of taxes incurred as a result of
Mutual's contribution to the Merchants Mutual Supplemental Executive
Retirement Plan.
(4) Represents the Company's and MNH's share of Mutual's contributions for the
Named Officer's benefit to the Merchants Mutual Supplement Executive
Retirement Plan and the Merchants Mutual Insurance Company Capital
Accumulation Plan.
10
<PAGE> 13
Option Grants. The following table provides information on grants of stock
options made during the 1996 fiscal year to the Named Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK PRICE
--------------------------------------------------------------------------------- APPRECIATION
NUMBER OF SECURITIES % OF TOTAL OPTIONS/SARs EXERCISE OR FOR OPTION TERM(3)
UNDERLYING OPTIONS/SARs GRANTED TO EMPLOYEES IN BASE PRICE ---------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/Sh)(2) EXPIRATION DATE 5%($) 10%($)
- ------------------------------------------- ----------------------- ----------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Zak....... 7,500 14% $ 21.00 2-21-06 $218,400 $347,700
Edward M. Murphy.... 4,000 8% $ 21.00 2-21-06 $116,480 $185,440
</TABLE>
- ---------------
(1) All of the options reflected in the table are ten year options and become
exercisable at the rate of 25% per year beginning on the first anniversary
of the date of grant.
(2) The closing price of the Company's common stock on the American Stock
Exchange on February 22, 1996, the date these options were granted, was
$17 7/8.
(3) These amounts represent certain assumed rates of appreciation only. At an
assumed annual rate of appreciation of 5%, the market price of the Company's
common stock on the date of grant ($17 7/8) would increase to approximately
$29.12 and at 10% would increase to approximately $46.36. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Company's common stock and overall market conditions. There can be no
assurance that the amounts reflected in this table will be achieved.
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, 1996. Valuations are based
upon the closing price of the Company's Shares on the American Stock Exchange on
December 31, 1996 ($18.50).
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARs OPTIONS/SARs
SHARES ACQUIRED VALUE AT FY-END(#) AT FY-END($)
NAME ON EXERCISE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------- --------------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert M. Zak.................. 2,000 $16,250 10,875/5,625 $ 57,125/$-0-
Edward M. Murphy............... 0 0 4,000/3,000 $ 12,375/$-0-
</TABLE>
Employment and Severance Agreements. Mr. Zak has an employment agreement
with Mutual dated as of June 1, 1994 which originally expired 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. No such notice has
been given and the current expiration date is May 31, 1999. 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 by Mutual other than for "good cause" or as a result of
his death or "total disability," or he declares his employment terminated for
"good reason," 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 paid immediately
in a lump sum discounted by an interest rate equal to the then prime rate.
11
<PAGE> 14
Mr. Murphy does not have an employment agreement but he does have an
agreement with Mutual that 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 his employment is terminated by Mutual other than for "good
cause" or as a result of his death or "total disability," or he declares his
employment terminated for "good reason," he will be entitled to a severance
benefit equal to one year's salary.
Compensation Committee Report. The Compensation Committee of the Board of
Directors currently consists of Messrs. Baird and Colantuono. The primary
obligation of the Compensation Committee is to evaluate the performance of the
Company's officers and key employees of the Company's affiliates for the purpose
of determining whether to grant options under the Option Plan. Because of the
structure of the Management Agreement under which Mutual provides the facilities
and personnel necessary to manage the Company's day-to-day business, and 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 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 1996 the Company granted a total
of 53,000 options to officers of the Company and officers and senior managers of
the Company's affiliates, of which 7,500 were granted to Mr. Zak and 4,000 were
granted to Mr. Murphy. In determining the number of options to be granted, the
Compensation Committee took 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 the number of shares of the Company's
common stock owned by the executive. The Option Plan expired by its terms in
1996, and the Compensation Committee intends to consider whether a new stock
option plan should be adopted in 1997, subject to shareholder approval at the
1998 annual meeting.
Submitted by the Compensation Committee of the Company's Board of
Directors:
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.
Compensation Committee Interlocks and Insider Participation. There are no
"compensation committee interlocks" which the SEC regulations would require to
be disclosed in this Proxy Statement. As stated in note (1) to the Summary
Compensation Table above, Mr. Baird, who is a member of the Compensation
Committee, serves as the Company's President and Chief Executive Officer but
does not receive any compensation for serving in those capacities. There is no
other "insider participation" which the SEC regulations would require to be
disclosed in this Proxy Statement.
Performance Comparison. Set forth below is a line graph comparing the
yearly percentage change in cumulative total stockholder return on the Company's
Shares with the cumulative total return on the Standard
12
<PAGE> 15
& Poor's 500 and the NASDAQ Insurance Stock indices for the five year period
beginning January 1, 1992 and ending December 31, 1996.
<TABLE>
<CAPTION>
Measurement Period NASDAQ Insurance
(Fiscal Year Covered) The Company S&P 500 Stocks
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 98.32 107.61 135.34
1993 106.54 118.42 144.76
1994 103.64 119.97 136.23
1995 123.11 165.00 193.56
1996 129.70 201.42 225.45
</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 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. 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. The agreement allows Mutual to reduce its cessions to MNH for any
calendar year. Mutual did not cede any premiums to MNH in 1996 under this
agreement, and in December 1996, 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 1997,
while retaining the right to resume such cessions, up to the 10% level, for
subsequent years.
MNH owns a Surplus Agreement in the principal amount of $1,350,000 issued
by Mutual under the section of the New York Insurance Law which allows Mutual to
carry the funds represented by that Agreement as equity rather than debt for
statutory accounting purposes. MNH acquired this investment in
13
<PAGE> 16
1993 from the Federal Deposit Insurance Corporation which was acting in its
capacity as the receiver of the original owner. In December 1996 Mutual, with
the consent of the New York Insurance Department, paid MNH $203,000 in payment
of all accrued dividends on the investment through October 1996.
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, 1997. Price Waterhouse LLP, has audited the
accounts of the Company since the Company's formation in 1986. 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 5, 1997 in order to be considered for inclusion in the Company's
proxy materials for the 1998 Annual Meeting.
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
Senior Vice President and
Chief Operating Officer
Buffalo, New York
14
<PAGE> 17
MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints BRENT D. BAIRD and ROBERT M. ZAK, 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 7, 1997, at 250 Main Street, Buffalo, New York, at
9:00 a.m., Buffalo time, or any adjournments thereof, and directs that the
shares represented by this Proxy shall be voted as indicated:
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS
WITHHOLD AUTHORITY
FOR all nominees to vote for each nominee listed
(except as marked to the contrary below) [ ] below [ ]
</TABLE>
Henry P. Semmelhack and Robert M. Zak
(INSTRUCTION: To withhold authority to vote for any individual nominee(s),
strike a line through the nominee's name in the list above.)
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting or any adjournments
thereof.
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.
Dated................., 1997
............................
............................
(Signature of Stockholder)
Please date and sign name
exactly as name appears and
return this Proxy promptly
in the enclosed envelope,
which requires no postage if
mailed in the United States.
