<PAGE> 1
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- --------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14A-101)
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 Rule 14a-11(c) or Rule 14a-12.
</TABLE>
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] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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.
MERCHANTS LOGO 250 Main Street
Buffalo, New York 14202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 5, 1999
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 1999 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 5, 1999 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: March 31, 1999
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
March 31, 1999
MERCHANTS GROUP, INC.
250 Main Street
Buffalo, New York 14202
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 5, 1999
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 5, 1999 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, 1998 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 March 31, 1999.
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 or telephone, 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 12, 1999. On that date there were 2,829,152 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
regardless of whether a broker with discretionary voting authority fails to
exercise its discretionary voting authority with respect to any particular
matter. 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
1
<PAGE> 4
Meeting is required for election of directors, which is the only matter
scheduled to be voted on at the Meeting. For voting purposes, all votes cast
"for," "against," or "withhold authority" will be counted in accordance with the
instructions as to each item. Broker non-notes will not be counted for any item.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company believes that the following persons and groups were the
beneficial owners of more than 5% of the outstanding Shares as of March 12,
1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF CLASS
------------------- --------------------- --------
<S> <C> <C>
Marvin C. Schwartz....................................... 289,200(2) 10.2%
605 Third Avenue
New York, New York 10158
Brent D. Baird and others................................ 282,100(3) 10.0%
1350 One M&T Plaza
Buffalo, New York 14203
Franklin Resources, Inc.................................. 258,300 9.1%
777 Mariners Island Blvd
San Mateo, California 94404
Merchants Mutual Insurance Company....................... 255,000(4) 9.0%
250 Main Street
Buffalo, New York 14202
John D. Weil............................................. 234,000 8.3%
200 N. Broadway
St. Louis, Missouri 63102
Tweedy, Browne Company L.P............................... 228,420(5) 8.1%
52 Vanderbilt Avenue
New York, New York 10017
Kahn Brothers Co., Inc................................... 156,775(6) 5.5%
555 Madison Avenue
New York, New York 10022
Donald Smith & Co., Inc.................................. 155,000 5.5%
East 80, Route 4
Paramus, New Jersey 07652
</TABLE>
- ---------------
(1) The beneficial ownership information presented is based upon information
furnished by each person or contained in filings made with the Securities
and Exchange Commission. Except as otherwise indicated, each person has sole
voting and investment power with respect to the Shares indicated.
(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.
2
<PAGE> 5
(3) 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.
(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 13D most recently amended on August 11, 1998, which
indicated Tweedy, Browne Company L.P. ("TBC") had sole voting power with
respect to 219,114 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.
(6) 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.
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 an acquisition of the Company's securities that would
result in that 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 acquisition.
3
<PAGE> 6
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the Shares beneficially owned as of March
12, 1999 (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(1) OF CLASS(2)
---- --------------------- -----------
<S> <C> <C>
Andrew A. Alberti...................................... 0 --
Brent D. Baird......................................... 282,100(3) 9.97%
Frank J. Colantuono.................................... 1,000 .04%
Richard E. Garman...................................... 92,000(4) 3.25%
Henry P. Semmelhack.................................... 1,700 .06%
Robert M. Zak.......................................... 20,335(5) .72%
Edward M. Murphy....................................... 8,850(6) .31%
Kenneth J. Wilson...................................... 800 .03%
Directors and officers as a group...................... 406,785 14.38%
</TABLE>
- ---------------
(1) The beneficial ownership information presented is based upon information
furnished by each person or contained in filings made with the Securities
and Exchange Commission. Except as otherwise indicated, each person has sole
voting and investment power with respect to the Shares indicated.
(2) Percentage calculations for each individual and group in the table are based
on 2,829,152 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").
(3) See note 3 to table under "Security Ownership of Certain Beneficial Owners."
(4) Includes 80,000 Shares owned by a corporation of which Mr. Garman is chief
executive officer and majority shareholder.
(5) Includes 10,625 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.
(6) Includes 6,000 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. The Board has set the number of directors at
six.
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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>
NAME, POSITION AND PRINCIPAL OCCUPATION AND BUSINESS
TENURE WITH THE COMPANY AGE EXPERIENCE FOR PAST FIVE YEARS
----------------------- --- ---------------------------------
<S> <C> <C>
DIRECTOR STANDING FOR ELECTION FOR A TERM EXPIRING IN 2002
Andrew A. Alberti 52 President of Cross River International, Inc., an
Director since insurance management consulting firm, since 1993;
January 29, 1998 President of Hanover Management Services Inc., an
insurance management consulting firm from 1989 to 1993;
various positions in the New York Insurance Department
Liquidation Bureau from 1973 to 1988.
Frank J. Colantuono 50 President and Chief Executive Officer of Independent
Director since 1994 Health Association, Inc. (a health maintenance
organization)
DIRECTORS WHOSE TERMS EXPIRE IN 2000
Henry P. Semmelhack 62 President, Chief Executive Officer and Chairman of
Director since 1987 Barrister Information Systems Corporation (a computer
software and services company)
Robert M. Zak 41 President and Chief Executive Officer of MNH and Mutual
Chief Operating Officer since November 1, 1995; Senior Vice President of MNH and
since July 1, 1995, Mutual from 1992 to 1995; Chief Financial Officer of the
Senior Vice President since Company, MNH and Mutual from 1991 through 1996; Vice
1992, President -- Financial Services of MNH and Mutual from
Secretary since 1990 and 1989 through 1996; Secretary of MNH and Mutual from 1990
Director since 1994 through November 1, 1995.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
Brent D. Baird 60 Private investor since 1991; limited partner of Trubee,
Director since 1995 and Collins & Co. (member firm of New York Stock Exchange,
President and Chief Executive Inc.) from 1983 to 1991.
Officer
since July 1, 1995
Richard E. Garman 68 President and Chief Executive Officer of A.B.C. Paving
Director since 1987 Company (a construction company).
and Chairman of the Board
since July 1, 1995
</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 Barrister Information Systems Corporation
Exolon-ESK, Inc.
Ecology and Environment, Inc.
First Carolina Investors, Inc.
M&T Bank Corporation
Todd Shipyards Corporation
Richard E. Garman M&T Bank 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. 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
1998.
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 met once during
1998 in conjunction with the full Board of Directors.
The Compensation Committee consists of Messrs. Baird and Colantuono. 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 met once during 1998 in conjunction with the full Board
of Directors.
During the fiscal year ended December 31, 1998, the full Board of Directors
met seven times. Each of the 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(a) BENEFICIAL OWNERSHIP REPORTING 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 (collectively, "Insiders") 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 SEC, Insiders are required
to furnish to the Company copies of all Section 16(a) reports they file, and the
Company is required to disclose any failures to file or late filings by
Insiders. Based solely on the reports
6
<PAGE> 9
furnished to the Company and written representations that no other filings were
required, the Company believes that all Section 16(a) reporting requirements
applicable to Insiders were complied with in 1998.
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, 1998, approximately 65.2% 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 that are
intended to limit 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 (Mutual, the Company or MNH) 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
7
<PAGE> 10
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 the
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 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 the 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 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
provides that it may be terminated by any party upon five years' written notice
to all of the other parties.
On July 23, 1998, the Company and MNH gave written notice of termination to
Mutual. 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 under the Management Agreement by officers who are also officers of
Mutual.
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.
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<PAGE> 11
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 68 See table under "Information Concerning
Chairman of the Board Directors and Nominees."
since July 1, 1995
Brent D. Baird 60 See table under "Information Concerning
Director since 1995 and Directors and Nominees."
President and Chief Executive
Officer since July 1, 1995
Robert M. Zak 41 See table under "Information Concerning
Chief Operating Officer Directors and Nominees."
since July 1, 1995, Senior
Vice President since 1992,
Secretary since 1990 and
Director since 1994
Edward M. Murphy 48 Vice President -- Investments of the
Vice President -- Company, Mutual and MNH since 1991;
Investments and Assistant Assistant Vice President of Mutual and MNH
Secretary since 1991 from 1989 to 1991.
Kenneth J. Wilson 51 Vice President, Treasurer and Chief
Vice President, Financial Officer of the Company, Mutual and
Treasurer and Chief Financial MNH since December 30, 1996; President and
Officer since December 30, 1996 Chief Executive 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.
</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, 1998, 1997 and 1996 to the
Company's Chief Executive Officer and all other executive officers whose total
base salary and bonus from Mutual for 1998 exceeded $100,000 (the "Named
Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION(2) ---------------------
NAME AND ------------------ SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY BONUS OPTIONS/SARS (#) COMPENSATION(3)
--------------------- ---- -------- ------ --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert M. Zak 1998 $155,603 -0- -0- $11,785
Chief Operating Officer 1997 $131,622 -0- -0- $11,894
1996 $135,041 -0- 7,500 $ 7,239
Edward M. Murphy 1998 $ 87,712 -0- -0- $10,402
Vice President 1997 $ 77,905 $5,079 -0- $ 9,083
Investments 1996 $ 74,693 -0- 4,000 $ 4,895
Kenneth J. Wilson 1998 $ 95,952 -0- -0- $11,021
Chief Financial Officer 1997 $ 85,712 -0- -0- $ 120
</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 $284,971 for 1998,
$226,045 for 1997, and $217,887 for 1996. For Mr. Murphy, total compensation
from Mutual was $164,298 for 1998, $145,010 for 1997 and $121,881 for 1996.
For Mr. Wilson, total compensation from Mutual was $177,569 for 1998 and
$135,188 for 1997. The Company and MNH paid 65.2% of 1998 compensation,
63.5% of 1997 compensation and 65.3% of 1996 compensation pursuant to the
expense allocation provisions of the Management Agreement.
(3) Represents the Company's and MNH's share of Mutual's contributions for the
Named Officer's benefit to the Merchants Mutual Insurance Company Capital
Accumulation Plan.
OPTION GRANTS, EXERCISES AND YEAR END VALUE
The Company's 1986 Stock Option Plan expired by its terms in 1996, and,
therefore, there were no options granted in 1998. No options were exercised by
the Named Officers in 1998. The following table summarizes information with
respect to exercisable and unexercisable options held by the Named Officers as
of December 31, 1998. Valuations are based upon the closing price of the
Company's Shares on the American Stock Exchange on December 31, 1998 ($20.56).
10
<PAGE> 13
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END(#) AT FY-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Robert M. Zak..................................... 14,625/1,875 $75,688/$-0-
Edward M. Murphy.................................. 6,000/1,000 $18,563/$-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 was extended one year on each May 31 unless notice was given by Mr.
Zak or Mutual prior to May 31. No such notice was given and the current
expiration date is May 31, 2000. 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. Mr. Murphy and Mr. Wilson do not
have an employment agreement with the Company or Mutual but prior to March 1,
1999 each had 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.
MUTUAL EMPLOYEE RETENTION AGREEMENTS
As of March 1, 1999, Mutual entered into Employee Retention Agreements
("Retention Agreements") with a number of its employees, including each of the
Named Officers other than Mr. Zak. Mutual has advised the Company that it has an
understanding with Mr. Zak regarding the terms described below of a Retention
Agreement that it intends to enter into with him. The Retention Agreements
provide for a "Protection Period" that runs from March 1, 1999 through December
31, 2003, and provide benefits to the employee if there is a termination of the
individual's employment with Mutual during the Protection Period for any reason
other than: (1) death; (2) total disability; (3) voluntary termination by the
employee; (4) termination by Mutual for "good cause" (which term includes among
other things, dishonesty, fraud, breach of trust, substantial misconduct, or a
material breach of covenants of confidentiality and not to compete); or (5)
repeated failure of the employee to perform his or her duties or consistent
failure to perform his or her duties in a manner acceptable to Mutual
(hereinafter, a "Covered Termination").
The Retention Agreements provide that if a Covered Termination occurs, then
during a salary continuation period after the termination (which period will be
34 months in the case of Mr. Zak and 24 months in the case of Mr. Murphy and Mr.
Wilson) the employee will be paid his or her salary, and Mutual will continue
the life
11
<PAGE> 14
insurance, health and accident insurance, and disability and medical
reimbursement plans (collectively, "Insurance Plans") that applied to the
employee. During the salary continuation period the employee will not be
considered an employee for purposes of retirement and bonus plans.
The Retention Agreements also provide that if there is a "change in
control" during the Protection Period, and within two years thereafter (1) the
employee's employment is terminated by Mutual for other than "good cause,"
death, or total disability, or (2) the employee's employment is terminated by
the employee based upon the occurrence of any of a list of material changes in
the terms and conditions of his or her employment, then the employee shall be
entitled to a severance benefit and continuation of his or her Insurance Plans
for a number of months (34 months in the case Mr. Zak and 24 months in the case
of Mr. Murphy and Mr. Wilson). The severance payment is equal to the employee's
current annual base salary and three-year average incentive compensation
multiplied by a factor (2.9 in the case of Mr. Zak and 2.0 in the case of Mr.
Murphy and Mr. Wilson).
Generally, a "change of control" is defined to include a change of control
of any of Mutual, the Company or MNH (a "Merchants Company"), and includes: (1)
any person or group (other than, a Merchants Company) obtaining 25% or more of
the voting power for the election of the directors of a Merchants Company; (2)
any merger or consolidation of a Merchants Company, or any sale, lease or
exchange of a substantial part of the assets of a Merchants Company (other than,
to a Merchants Company) which does not result in the holders of voting stock of
a Merchants Company immediately prior to a merger or consolidation holding
greater than 50% of the voting stock of the survivor, or in the case of a sale,
lease or exchange, none of the Merchants Companies owning greater than 50% of
the voting stock of the other person; or (3) during any period of two
consecutive years the entire Board of Directors of any Merchants Company shall
cease to constitute a majority of that Board, unless the election or nomination
for election by that company's shareholders or policyholders was approved by at
least two-thirds of the directors then still in office who were directors at the
beginning of the period.
The Retention Agreements also provide that the employee will not use or
disclose to any third party any confidential information or trade secrets of any
Merchants Company, and provide the employee will not compete with any Merchants
Company while employed by a Merchants Company or during the first 90 days of any
period in which he or she is receiving salary continuation payments.
The Retention Agreements provide that severance payments made under them
shall be in lieu of any payments provided for in any prior severance agreement,
employment agreement or similar agreement (a "Severance Agreement"), and that
the Retention Agreements void any Severance Agreement.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Baird and Colantuono. The Compensation Committee evaluates the
performance of the Company's officers and key employees of the Company's
affiliates for the purpose of determining whether their compensation as set by
Mutual is appropriate. 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.
Generally, the Compensation Committee and the Board of Directors of Mutual
have conferred with the President of the Company prior to making their
determinations concerning compensation of their employees who are officers of
the Company.
12
<PAGE> 15
By letter dated October 26, 1998, the Chairman of the Compensation
Committee of Mutual advised the President of the Company that the Board of
Mutual had accepted the recommendation of Mutual's Compensation Committee to put
in place the Retention Agreements described above, but asked for the benefit of
the Company's review before it proceeded. The President of the Company responded
by letter dated October 30, 1998 that is was opposed to Mutual entering into the
agreements, that the benefits proposed were excessive both as to amounts and
numbers of officers to receive benefits, that Mutual and its Board were in a
position of apparent conflicts of interest in seeking to take steps to make the
Company and MNH less attractive to other potential buyers while at the same time
Mutual might be seeking to purchase a larger stake in the Company, that Mutual
should be on notice that any costs associated with the Retention Agreements are
not expenses for which the Company and MNH have a proportionate responsibility
under the Management Agreement, and that the Company and MNH would not pay any
of the costs of the Retention Agreements.
During the period from October 1998 through February 1999, the Compensation
Committee and the Board of Directors of Mutual exchanged a number of
communications with the President of the Company regarding the Retention
Agreements. Generally, the communications by the representatives of Mutual
maintained that the Retention Agreements were necessary to maintain an effective
group of employees in light of the five-year notice of termination of the
Management Agreement that had been given by the Company. Generally, the
communications by the President of the Company strongly opposed the imposition
of the Retention Agreements for the reasons described above, affirmed his belief
that the termination notice did not create a need for the Retention Agreements,
and stated that, if adopted, the Company and MNH would not be responsible for
expenses under the agreements. By letter dated February 26, 1999, the
representatives of Mutual advised the Company that they had adopted the
Retention Agreements.
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
During 1998, Brent D. Baird and Frank J. Colantuono served on the Company's
Compensation Committee. 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.
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<PAGE> 16
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 & Poor's 500 and the NASDAQ Insurance Stock indices
for the five year period beginning January 1, 1994 and ending December 31, 1998.
<TABLE>
<CAPTION>
NASDAQ
Insurance
The Company S&P 500 Stocks
----------- ------- ---------
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 97.28 101.32 94.11
1995 115.53 139.52 133.71
1996 121.72 170.31 155.74
1997 141.32 227.12 195.66
1998 138.00 292.04 199.95
</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 1998 under this
agreement, and in December 1998, 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 1999,
while retaining the right to resume such cessions, up to the 10% level, for
subsequent years.
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<PAGE> 17
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, 1999. PricewaterhouseCoopers LLP has audited
the accounts of the Company since the Company's formation in 1986. A
representative of PricewaterhouseCoopers 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 3, 1999 in order to be considered for inclusion in the Company's
proxy materials for the 2000 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
15
<PAGE> 18
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 5, 1999, 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:
1. ELECTION OF DIRECTORS
<TABLE>
<S> <C>
WITHHOLD AUTHORITY
FOR all nominees to vote for each nominee listed
(except as marked to the contrary below) [ ] below [ ]
</TABLE>
Andrew A. Alberti and Frank J. Colantuono
(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................., 1999
............................
............................
(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.
