UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
Merchants Group, Inc.
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(Name of Registrant as Specified In Its Charter)
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[LOGO] MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 4, 2005
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 2005 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 4, 2005 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 1, 2005
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.
April 1, 2005
MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 4, 2005
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 4, 2005 at
9:00 a.m., Buffalo time (the "Meeting"). A copy of the Company's Annual Report
on Form 10-K for the year ended December 31, 2004 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 1, 2005.
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 the 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
therefore) 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 the Company's Common Stock,
$.01 par value ("Shares"), entitled to vote at the Meeting has been fixed at the
close of business on March 22, 2005. On that date there were 2,114,152 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.
1
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. 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-votes 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 22,
2005.
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
OF BENEFICIAL OWNER OWNED (1) OF CLASS
John D. Weil 256,155(2) 12.1%
200 N. Broadway
St. Louis, Missouri 63102
Merchants Mutual Insurance Company 255,000(3) 12.1%
250 Main Street
Buffalo, New York 14202
Brent D. Baird and others 239,700(4) 11.3%
1350 One M&T Plaza
Buffalo, New York 14203
Franklin Resources, Inc. 190,000(5) 9.0%
777 Mariners Island Blvd.
San Mateo, California 94404
Kahn Brothers & Co., Inc. 111,450(6) 5.3%
555 Madison Avenue
New York, New York 10022
--------------
(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
(2) These shares are owned by Woodbourne Partners, LP, an investment
partnership of which Clayton Management Company is the sole general
partner. Clayton Management has sole voting and investment power over
these shares. John D. Weil owns 100% of the outstanding stock of
Clayton Management. Includes 4,995 shares held in six individual
retirement accounts maintained for the benefit of certain persons
holding limited partnership interests in Woodbourne Partners, LP. Mr.
Weil disclaims beneficial ownership of such shares.
(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
"Services Agreement and Reinsurance Pooling Agreement."
(4) Mr. Baird has sole voting and dispositive powers with respect to 13,600
shares and Mr. Baird, members of the Baird family, and entities owned
or controlled by the Baird family have shared voting and dispositive
power with respect to 226,100 shares.
(5) Franklin Resources, Inc. through its advisory subsidiary, Franklin
Advisory Services, LLC, has sole voting and dispositive power with
respect to the 190,000 shares.
(6) Based on a Schedule 13G/A dated February 2, 2005, 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
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
The following table sets forth the Shares beneficially owned as of
March 22, 2005 (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.
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED (1) OF CLASS (2)
---- ---------------------- ------------
Andrew A. Alberti 0 --
Brent D. Baird 239,700(3) 11.3%
Frank J. Colantuono 1,000 *
Thomas E. Kahn 0(4) --
Henry P. Semmelhack 1,500 *
Robert M. Zak 22,410(5) 1.1%
Kenneth J. Wilson 1,000 *
Directors and officers 265,610 12.6%
as a group (7 persons)
-------------------
* Less than 1% of the amount outstanding.
(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. Unless 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 2,114,152 shares outstanding plus any Shares such person or
the persons 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 4 to table under "Security Ownership of Certain Beneficial
Owners."
(4) See note 2 to table under "Security Ownership of Certain Beneficial
Owners." Mr. Kahn is a Vice President and the Secretary of Clayton
Management.
4
(5) Includes 7,500 Shares that Mr. Zak has the right to acquire under the
Option Plan within 60 days of the date of this Proxy Statement, 2800 shares
that Mr. Zak owns jointly with his spouse, and 1,110 Shares held by the
Merchants Mutual Supplemental Executive Retirement Plan for the benefit of
Mr. Zak. Does not include 255,000 shares owned by Mutual as to which Mr.
Zak disclaims beneficial ownership. Mr. Zak is President and Chief
Executive Officer of Mutual.
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. Directors for each class are elected for three
year terms at the annual meeting in which the term of their class expires. The
Board has set the number of directors at six.
The Board of Directors has determined that all of the directors, other
than Mr. Zak, are independent directors under the American Stock Exchange
Listing Qualifications.
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.
5
The following table sets forth information regarding directors standing
for election and directors whose terms continue beyond the Meeting:
NAME, POSITION AND PRINCIPAL OCCUPATION AND BUSINESS
TENURE WITH THE COMPANY AGE EXPERIENCE FOR PAST FIVE YEARS
----------------------- --- ---------------------------------
DIRECTORS STANDING FOR ELECTION FOR A TERM EXPIRING IN 2008
ANDREW A. ALBERTI 59 President of Cross River International, Inc.,
Director since 1998 an insurance management consulting firm, since 1993;
President of Hanover Management Services Inc., an
insurance management consulting firm, from 1989 to 1993.
Positions in the New York Insurance Department
Liquidation Bureau from 1973 to 1988.
FRANK J. COLANTUONO 56 President and Chief Executive Officer of
Director since 1994 Independent Health Association, Inc.,
a health maintenance organization, from 1984 to 2004.
President Emeritus from 2004 to present.
DIRECTORS WHOSE TERMS EXPIRE IN 2006
HENRY P. SEMMELHACK 68 Chairman, President and Chief Executive
Director since 1987 Officer from 1982 to 2002 of Barrister
Global Services Network, Inc., a computer software and
services company. Private investor since 2002.
ROBERT M. ZAK 47 President and Chief Executive Officer of
Chief Operating Officer MNH and Mutual since November 1, 1995;
since July 1, 1995, Sr. Vice President of MNH and Mutual from
Senior Vice President 1992 to 1995; Chief Financial Officer of the
since 1992, Secretary Company, MNH and Mutual from 1991
since 1990 and Director through 1996; Vice President -- Financial
since 1994 Services of MNH and Mutual from 1989 through 1996;
Secretary of MNH and Mutual from 1990 through
November 1, 1995.
6
DIRECTORS WHOSE TERMS EXPIRE IN 2007
BRENT D. BAIRD 66 President and Chief Executive Officer of
Director since 1995 the Company from 1995 to 2003; private investor since
1991; limited partner of Trubee Collins & Co. (member
firm of New York Stock Exchange, Inc.) from 1983 to 1991.
THOMAS E. KAHN 52 Vice President and Secretary of Clayton
Director since 2000 and Management Company, an investment
Chairman of the Board management company, since 1993.
since May 5, 2004
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:
DIRECTOR COMPANY
-------- -------
Brent D. Baird M&T Bank Corporation
Todd Shipyards Corporation
THE BOARD OF DIRECTORS AND ITS COMMITTEES
THE AUDIT COMMITTEE
-------------------
The Audit Committee consists of Messrs. Semmelhack (Chairman),
Colantuono, and Kahn. As set forth in the Audit Committee charter described
below, the Audit Committee's primary responsibilities fall into three broad
categories:
- first, the Committee is responsible for matters concerning the
relationship between the Company and its independent actuarial
firm and its independent auditor, including their appointment
or removal; reviewing the scope of the independent auditor's
audit services and related fees, as well as any other services
being provided by them to the Company; and determining whether
the independent auditor is independent (based in part on the
annual letter provided to the Company pursuant to Independence
Standards Board Standard No. 1);
- second, the Committee is charged with monitoring the
preparation of quarterly and annual financial reports by the
Company's management, including discussions with management
and the Company's independent auditor about draft annual
financial statements and key accounting and reporting matters;
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- third, the Committee oversees management's implementation of
effective systems of internal controls, including review of
policies relating to legal and regulatory compliance, ethics
and conflicts of interests; and review of the activities and
recommendations of the Company's internal auditing program.
The Audit Committee has implemented procedures to ensure that during
the course of each year it devotes the attention that it deems necessary or
appropriate to each of the matters prescribed by its charter. To carry out its
responsibilities, the Committee met four times during the year ending December
31, 2004. In addition, both the Chairman of the Audit Committee and the
Committee's designated "audit committee financial expert" meet four additional
times with management and the independent auditor prior to the release of
financial results.
The Board of Directors have affirmatively determined that each member
of the Audit Committee currently meets the independence requirements of the
American Stock Exchange, the Securities Exchange Act of 1934, as amended (the
"1934 Act") and the Audit Committee's guidelines promulgated in the Audit
Committee Charter. Each member of the committee is financially literate,
knowledgeable and qualified to review financial statements. The "audit committee
financial expert" identified by the Board is Thomas E. Kahn, CPA, CFA and Vice
President of Clayton Management. Under the rules of the SEC, the designation or
identification of a person as an "audit committee financial expert" does not
impose on that person any duties, obligations, or liability that are greater
than the duties, obligations and liability imposed on that person as a member of
the Audit Committee and the Board of Directors in the absence of that
designation or identification. Moreover, the designation of a person as an audit
committee financial expert does not affect the duties, obligations or liability
of any other member of the Audit Committee or the Board of Directors.
REPORT OF THE AUDIT COMMITTEE
-----------------------------
The following Report of the Audit Committee does not constitute
soliciting material and should not be deemed filed or incorporated by reference
into any other Company filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent the Company specifically incorporates
this Report by reference therein.
The Board of Directors has adopted a written charter for the Committee.
A copy of the charter, which reflects standards set forth in the Securities and
Exchange Commission regulations and American Stock Exchange rules, was an
attachment to the 2004 Proxy Statement. During the year, the Board examined the
composition of the Audit Committee and confirmed that all members of the Audit
Committee are "independent" within the meaning of the American Stock Exchange's
rules.
8
In overseeing the preparation of the Company's financial statements,
the Committee met with both management and the Company's independent auditor to
review and discuss all financial statements prior to their issuance and to
discuss significant accounting issues. Management advised the Committee that all
financial statements were prepared in accordance with generally accepted
accounting principles. The Committee's review included discussion with the
independent auditor of matters required to be discussed pursuant to Statement on
Auditing Standards No. 61 (Communication With Audit Committees) as modified or
supplemented.
With respect to the Company's independent auditor the Committee, among
other issues, discussed with PricewaterhouseCoopers LLP matters relating to its
independence, including the written disclosures and the letter from the
independent auditor to the Committee as required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees) as modified or
supplemented.
Finally, the Committee continued to monitor the scope and adequacy of
the Company's internal auditing program, including the adequacy of staffing and
proposals to strengthen internal procedures and controls where appropriate.
On the basis of these reviews and discussions, the Committee
recommended to the Board of Directors that the Board approve the inclusion of
the Company's audited financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2004 for filing with the Securities
and Exchange Commission.
Members of the Audit Committee: Henry P. Semmelhack, Chairman
Frank J. Colantuono
Thomas E. Kahn
THE NOMINATING COMMITTEE
------------------------
The Nominating Committee consists of Messrs. Kahn (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. The Nominating Committee met once during 2004 in conjunction with
the full Board of Directors.
As of the date of this Proxy Statement, the Nominating Committee does
not have a formal written charter and operates under a series of Nominating
Committee responsibilities and guidelines. Each member of the Nominating
Committee is "independent" as that term is defined in the American Stock
Exchange listing standards. The Nominating Committee has not adopted specific
minimum criteria for director nominees. The Committee identifies nominees by
first evaluating the current members of the Board of Directors willing to
continue in service. Current members of the Board with skills and experience
that are relevant to the Company's business and who are willing to
9
continue in services are considered for re-nomination. If any member of the
Board does not wish to continue in service, or if the Committee decides not to
nominate a member for re-election, the Committee first considers the
appropriateness of the size of the Board. If the Committee determines the board
seat should remain and a vacancy exists, the Committee considers factors that it
deems are in the best interests of the Company and its shareholders in
identifying and evaluating a potential nominee.
PROCEDURE FOR STOCKHOLDERS TO NOMINATE DIRECTORS
------------------------------------------------
Stockholders may nominate a person for election to the Board of
Directors of the Company provided notice is delivered to or mailed and received
by the Secretary of the Company at the Company's executive offices not less than
60 days nor more than 90 days prior to a meeting of stockholders. In the event
that less than 70 days notice or public disclosure of the date of a meeting of
stockholders is given, then the nomination must be received no later than the
10th day following the day on which such notice is mailed to stockholders or
public disclosure was made. The nomination must include information about the
proposed nominee as required to be disclosed in solicitation of proxies for
election of Directors pursuant to Regulation 14A, as amended, under the
Securities and Exchange Act of 1934, and the proposed nominee's written consent
to being named in the proxy statement as a nominee and to serving as Director if
elected.
THE COMPENSATION COMMITTEE
--------------------------
The Compensation Committee consists of Messrs. Colantuono (Chairman),
Alberti, and Kahn. The function of the Compensation Committee is to evaluate the
performance of the officers of the Company and key employees of the Company's
affiliates and, when the Company has officers who are its employees, the
Committee sets the compensation of those officers. The Compensation Committee
met twice during 2004.
BOARD MEMBER ATTENDANCE
-----------------------
During the year ended December 31, 2004, the full Board of Directors
met thirteen 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. The Company encourages its directors to attend annual meetings of the
stockholders, but it has not adopted any formal policy requiring attendance. All
directors attended the last Annual Meeting of Stockholders.
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 $15,000, plus $1,000 for each
meeting of the full Board of Directors and any committee meeting attended.
Effective January 1, 2005, the annual director's fee for the position of
Chairman of the Board was increased to $20,000.
10
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors, executive officers and holders of more than 10% of the
Company's common stock (collectively "Insiders") to file with the Securities and
Exchange Commission reports regarding their ownership and changes in ownership
of the Company's securities. The Company believes that during 2004 its
directors, executive officers and 10% shareowners complied with all Section
16(a) filing requirements. In making this statement the Company has relied upon
examination of the copies of Forms 3, 4 and 5, and amendments thereto, provided
to the Company by, and the written representations of, its directors, executive
officers and 10% shareowners.
MANAGEMENT OF THE COMPANY
-------------------------
SERVICES AGREEMENT AND REINSURANCE POOLING AGREEMENT
----------------------------------------------------
The Company and MNH operate and manage their business in conjunction
with Mutual, a New York domiciled mutual property and casualty insurance
company, under a services agreement (the "Services Agreement") that became
effective January 1, 2003. At December 31, 2004, Mutual owned 12.1% of the
Company's issued and outstanding common stock. The Company and MNH do not have
any operating assets or employees. Under the Services Agreement, Mutual provides
the Company and MNH with the facilities, management and personnel required to
operate their day-to-day business.
The Services Agreement covers substantially the same services
previously provided under a management agreement among the Company, MNH and
Mutual (the "Management Agreement"), which was in effect from 1986 to 2002. The
Services Agreement provides for negotiated fees (subject to periodic adjustment)
for administrative, underwriting, claims and investment management services. The
fee for investment services is based on invested assets managed. The Company and
MNH have the discretion to remove assets from their portfolios managed by
Mutual.
The Services Agreement contains termination provisions that vary based
on the service rendered. Underwriting services may be terminated on one year's
notice, but the termination may not be effective before January 1, 2008.
Administrative services or claims services for claims occurring prior to January
1, 2003 (the inception of the Services Agreement) may be terminated on 6 months
notice. Investment services may be terminated upon one year's notice at any
time.
Effective January 1, 2003, Mutual and MNH agreed to "pool," or share,
underwriting results on their traditional insurance business ("Traditional
Business") by means of a reinsurance pooling agreement (the "Pooling
Agreement"). The Pooling Agreement applies to premiums earned and losses
incurred after the effective date. It does not apply to any new endeavor of
either Mutual or MNH outside of their Traditional Business, unless the companies
agree otherwise.
The Pooling Agreement provides for MNH to cede, or transfer, to Mutual
all of its premiums and risks on its Traditional Business during the term of the
agreement, and then to assume from Mutual a percentage of all of Mutual's and
MNH's Traditional Business (the Pooled Business). MNH assumed 35% and 40% of the
Pooled Business in 2004 and 2003, respectively. MNH's share
11
of the Pooled Business will be reduced to 30% in 2005, though not to exceed
$50.0 million in assumed net written premiums. MNH's share of the Pooled
Business will be reduced to 25% in 2006 and 2007, though not to exceed $42.5
million and $37.5 million in net written premiums, respectively. If the parties
agree, MNH may increase its share, or maximum amount of the Pooled Business for
any year. Mutual retains a share of the risk in MNH's Traditional Business under
Mutual's control pursuant to a profit and loss sharing arrangement in the
Pooling Agreement based on the loss and loss adjustment expense experience of
the Pooled Business. The Company believes the Pooling Agreement and profit (or
loss) sharing feature included therein aligns the interests of MNH and Mutual.
The decreasing amount of Traditional Business assumed under the Pooling
Agreement is intended to provide MNH with the capacity to pursue insurance
opportunities independently of Mutual, thereby reducing its dependence on Mutual
as its only source of business. The Company and MNH are seeking to identify new
business initiatives to employ the available capacity. Generally, the new
business initiatives are expected to be in lines of business which are
complementary to the Traditional Business underwritten through the Pooling
Agreement with the Mutual.
The Pooling Agreement may be terminated by either party at the
beginning of any calendar year on or after January 1, 2008 upon not less than 6
months notice. However, the Pooling Agreement may be terminated effective as of
January 1, 2006 or 2007 upon 6 months notice, but only by MNH and only if the
ratio of net losses and loss adjustment expenses to net earned premiums on a
cumulative basis from the inception of the Pooling Agreement exceeds 76%, as of
the date notice is given.
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 Services Agreement by officers who are also officers of
Mutual.
12
EXECUTIVE OFFICERS
------------------
The following is a listing of the Company's executive officers.
NAME, POSITION AND PRINCIPAL OCCUPATION AND BUSINESS
TENURE WITH THE COMPANY AGE EXPERIENCE FOR PAST FIVE YEARS
----------------------- --- ---------------------------------
Robert M. Zak 47 See table under "Information Concerning
Chief Operating Officer Directors and Nominees."
since 1995, Senior
Vice President since 1992,
and Director since 1994
Edward M. Murphy 54 Vice President and Chief Investment Officer
Vice President, of the Company, Mutual and MNH since
Chief Investment Officer and 1991; Assistant Vice President of Mutual
Assistant Secretary since 1991 and MNH from 1989 to 1991.
Kenneth J. Wilson 57 Vice President, Treasurer and Chief
Vice President, Financial Officer of the Company, Mutual
Treasurer, and Chief Financial and MNH since 1996; President and Chief
Officer since 1996 Executive Officer of Carbadon Corp. and its
and Secretary since 1999 operating subsidiary, Empire of America Realty Credit Corp.,
from December 1995 to December 1996 and Chief
Financial Officer from November 1992 to December 1996.
There are no family relationships between any of the directors or
executive officers of the Company.
EXECUTIVE COMPENSATION
----------------------
The executive officers of the Company and its wholly-owned subsidiary,
MNH, also serve as executive officers of Mutual as described above under
"Services Agreement and Reinsurance Pooling Agreement." Mutual pays the salaries
and other benefits of these executive officers, a portion of which is included
in the calculation of the fees charged to MNH by Mutual pursuant to the Services
Agreement.
13
SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth information concerning total
compensation paid during the years ended December 31, 2004, 2003 and 2002 to
persons who served as chief executive officer of the Company at any time during
the most recent year and to other officers whose total base salary and bonus
charged to MNH by Mutual pursuant to the Services Agreement, in 2004 and 2003,
or the Management Agreement in 2002, exceed or are estimated to exceed $100,000
(such persons listed below being the "Named Officers").
Long Term
Annual Compensation (2) Compensation Awards
------------------------------- -------------------
Other Annual
Name and Principal Compen- Securities Underlying All Other
Position(1) Year Salary Bonus sation Options/SARs (#) Compensation
------------------ ---- ------ ----- ------------ --------------------- ------------
Stephen C. June 2004 $220,000 $ -0- $ 24,383 80,000 $20,000 (3)
President & Chief 2003 $240,000 $ -0- $ 26,393 80,000 $ -0-
Executive Officer (5) 2002 $180,000 $ -0- $ 89,485 80,000 $ -0-
Robert M. Zak 2004 $ (2) $ -0- $ -0- -0- $ (2)
Chief Operating Officer 2003 $ (2) $ -0- $ -0- -0- $ (2)
2002 $132,773 $ -0- $ -0- -0- $ 9,024 (4)
Kenneth J. Wilson 2004 $ (2) $ -0- $ -0- -0- $ (2)
Chief Financial Officer 2003 $ (2) $ -0- $ -0- -0- $ (2)
2002 $ 73,868 $ -0- $ -0- -0- $ 7,448 (4)
(1) Until his resignation on November 30, 2004 Mr. June served as Executive
Vice President and Chief Operating Officer of MNH since April 1, 2002
and as President and Chief Executive Officer of the Company since May
7, 2003. Since November 30, 2004, Mr. Zak has assumed the duties of the
principal executive officer of the Company. Thomas E. Kahn was
appointed Chairman of the Board in May 2004. Mr. Kahn receives no
compensation for serving in this capacity other than his director fees.
(2) Under the Services Agreement, effective January 1, 2003, salaries for
officers who are employees of Mutual were no longer charged on a
pro-rata basis to MNH, as they were under the Management Agreement.
Salaries are allocated by Mutual to the various services
(administrative, underwriting, claims and investments) provided by
Mutual pursuant to the Services Agreement and, where applicable, are
used to determine the fees charged to MNH. As such the exact
compensation for Mr. Zak and Mr. Wilson charged to MNH for services
rendered is not determinable. Based on information provided by Mutual,
an estimate of Mr. Zak's and Mr. Wilson's salary for 2004 and 2003
charged to MNH pursuant to the Services Agreement was $114,000 and
$125,000, respectively for Mr. Zak and $67,000 and $77,000,
respectively for Mr. Wilson.
The total compensation (the sum of all columns in the summary
compensation table except Options/SARs) paid to Mr. Zak by Mutual was
$304,939 for 2002. For Mr. Wilson, total compensation paid by Mutual
was $179,960 for 2002. The Company and MNH paid 46.5% of 2002
compensation pursuant to the expense allocation provisions of the
Management Agreement.
14
(3) Represents one-twelfth of the payments Mr. June is to receive in
accordance with his Separation Agreement.
(4) Represents the Company's and MNH's share of Mutual's contributions for
Mr. Zak's and Mr. Wilson's benefit to the Merchants Mutual Capital
Accumulation Plan for 2002.
(5) See "Employment and Separation Agreements".
OPTIONS/STOCK APPRECIATION RIGHTS (SAR), EXERCISES AND YEAR END VALUE
---------------------------------------------------------------------
The Company's Option Plan expired by its terms in 1996 and therefore
there were no options granted in 2004. The SAR grants are based on Mr. June's
employment contract which was executed in 2002. The following table summarizes
information with respect to option/SAR exercises and exercisable options/SAR
held by the Named Officers as of December 31, 2004. Valuations are based upon
the closing price of the Company's Shares on the American Stock Exchange on
December 31, 2004 ($24.00). No shares were acquired during the fiscal year on
exercise of options granted under the Option Plan.
AGGREGATED OPTION/SAR EXERCISES WITH LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
Value of Unexercised
Number of Unexercised In-The-Money
Shares Acquired Value Options/SARs at FY-End(#) Options/SARs at FY-End ($)
Name On Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- --------------------------
Stephen C. June 80,000 (1) $174,800 80,000 / 0 $ 0 / 0
Robert M. Zak N/A N/A 7,500 / 0 $22,500 / 0
--------------------
(1) Represents the number of shares with respect to which the SARs were
exercised. No shares were acquired upon exercise.
EMPLOYMENT AND SEPARATION AGREEMENTS
------------------------------------
MNH entered into an Employment Agreement with Mr. June effective April
1, 2002 (the "Employment Agreement"), under which he was employed as Chief
Operating Officer and Executive Vice President of MNH, the operating subsidiary
of the Company. On May 7, 2003 Mr. June was appointed President and Chief
Executive Officer of the Company. Under the Employment Agreement Mr. June was
entitled to receive: a monthly salary of $20,000; contributions to a 401(k) plan
equal to the amounts paid for senior officers of Mutual; health insurance, life
insurance and sick leave equivalent to amounts for senior officers of Mutual;
the use of an automobile; and, the use of a corporate apartment at a monthly
rent not to exceed $1,300, plus the cost of utilities and up to $450 per month
for the lease of furnishings. In addition, Mr. June was entitled to receive an
annual bonus equal to 80,000 times the difference between the average reported
sale price of the Company's common stock during a period of 20 business days
following the announcement of year-end results and that price determined for a
period of 20 business days after the announcement of year-end results for the
preceding fiscal year provided, however, that the sale price calculated for the
preceding year shall not be less than the highest average sale price used in the
calculation of a bonus applicable to any preceding year.
The Employment Agreement also provided that if Mr. June was terminated
without cause, or as a result of permanent disability or death, then his salary
and bonus, if any, would continue for 12
15
months from the date of termination.
On November 30, 2004, the Company entered into a Separation Agreement
and General Release (the "Separation Agreement") with Mr. June. The Separation
Agreement terminated the Employment Agreement. Under the terms of the Separation
Agreement, Mr. June resigned from his positions as President and Chief Executive
Officer of the Company and from his positions as Chief Operating Officer and
Executive Vice President of MNH. Mr. June resigned from his position as Director
of MNH on November 29, 2004.
The Separation Agreement provides that, notwithstanding his voluntary
resignation, Mr. June will be entitled to receive separation payments in an
amount that he would have been entitled to if he had been terminated without
cause under the Employment Agreement - that is, an amount equal to his salary
($20,000 per month) for twelve months and an amount equal to his bonus under the
Employment Agreement for the fiscal year ended December 31, 2004.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
-------------------------------------------------------
The Compensation Committee of the Board of Directors currently consists
of Messrs. Alberti, Colantuono and Kahn. Under the Services Agreement, 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, and compensated by, Mutual. As such, decisions with
respect to the salary and benefits for the officers of the Company, other than
Mr. June, during the past fiscal year were made by the compensation committee
and Board of Directors of Mutual. Generally, the compensation committee of
Mutual has conferred with the Compensation Committee of the Company prior to
making its determinations concerning compensation of Mutual employees who are
officers of the Company.
The Compensation Committee established the compensation for Mr. June at
the time of his employment under a negotiated Employment Agreement on April 1,
2002, which reflected their assessment of the value of his services and the
responsibilities assigned to him. On November 30, 2004, Mr. June resigned from
his positions as President and Chief Executive Officer of the Company and from
his positions as Chief Operating Officer and Executive Vice President of MNH.
The Compensation Committee approved the terms of the Separation Agreement with
Mr. June. (See "Employment and Separation Agreements.") The Compensation
Committee negotiated the terms of the Separation Agreement with Mr. June.
Submitted by the Compensation Committee of the Company's Board of
Directors:
Frank J. Colantuono, Chairman
Andrew A. Alberti
Thomas E. Kahn
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.
16
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
With respect to members serving on the Company's Compensation Committee
during 2004, there are no "compensation committee interlocks" which the SEC
regulations would require to be disclosed in this Proxy Statement. There is no
"insider participation" which the SEC regulations would require to be disclosed
in this Proxy Statement.
COMPARISON OF CUMULATIVE TOTAL RETURNS
--------------------------------------
The following graph compares the performance of the Company's common
stock with the performance of the Standards & Poor's 500 Composite Stock Price
Index and the NASDAQ Insurance Stock Index over the five-year period extending
through December 31, 2004. The graph assumes that $100 was invested on December
31, 1999 in the Company's common stock, the S&P 500 Index and the NASDAQ
Insurance Stock Index and that all dividends were reinvested.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[GRAPH]
THE COMPANY S&P 500 NASDAQ INSURANCE STOCKS
1999 100.00 100.00 100.00
2000 91.80 90.97 118.51
2001 122.53 80.19 129.54
2002 119.22 62.46 129.41
2003 131.44 80.38 160.08
2004 134.58 89.12 194.74
CERTAIN TRANSACTIONS
--------------------
Mutual provides facilities, employees and services required to conduct
the business of the Company and MNH. See "Services Agreement and Reinsurance
Pooling Agreement."
17
AUDIT COMMITTEE APPOINTMENT OF INDEPENDENT AUDITOR
--------------------------------------------------
The Audit Committee has appointed PricewaterhouseCoopers LLP ("PwC") as
the Company's independent auditor for the year ending December 31, 2005. PwC has
served as the Company's independent auditor since 1981. Services provided to the
Company and its subsidiaries by PwC in 2004 included the examination of the
Company's consolidated financial statements, limited reviews of quarterly
reports, statutory audits of subsidiaries, services related to filings with the
Securities and Exchange Commission, and consultations on various tax and
accounting matters.
AUDIT FEES
----------
The following table sets forth the fees for professional services
rendered by PwC for the audit of the Company's annual financial statements for
the years ended December 31, 2004 and 2003, and for tax fees billed in 2004 and
2003.
2004 2003
---- ----
Audit Fees $137,180 $ 97,700
Audit Related Fees (a) 8,150 0
Tax Fees (b) 3,400 9,250
All Other Fees 0 0
-------- --------
$148,730 $106,950
======== ========
(a) Audit related fees consist primarily of accounting consulting fees in
connection with investigating business opportunities.
(b) Principally tax compliance services and tax advisory fees.
The Audit Committee has considered and determined that the provision of
services by PwC other than professional services rendered for the audit of the
Company's annual financial statements and reviews of financial statements for
quarterly reports is compatible with maintaining the independence of PwC.
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF
---------------------------------------------------------------------------
INDEPENDENT AUDITOR
-------------------
The Audit Committee has adopted a policy to require the pre-approval of
all audit and permissible non-audit services provided by the independent
auditor. These services may include audit services, audit-related services, tax
services and other services.
Representatives of PwC will be present at the annual meeting to respond
to appropriate questions and to make such statements as they may desire.
18
SHAREHOLDER COMMUNICATIONS
--------------------------
Mail can be addressed to directors in care of the Chairman of Merchants
Group, Inc., 250 Main Street, Buffalo, New York 14202. At the direction of the
Board of Directors all mail will be opened and logged in. All mail other than
trivial or obscene items will be forwarded as soon as practical. Mail addressed
to a particular director will be forwarded or delivered to that director. Mail
addressed to "Outside Directors, Non-Management Directors or Board of Directors"
will be forwarded or delivered to the Chairman of the Board. Mail concerning
accounting, internal controls or audit matters will be forwarded to the Chairman
of the Audit Committee immediately.
STOCKHOLDER PROPOSALS
---------------------
Stockholder proposals must be received at the Company's offices no
later than December 1, 2005 in order to be considered for inclusion in the
Company's proxy materials for the 2006 Annual Meeting. Unless the stockholder
notifies the Company before February 15, 2006 of the intent to present a
proposal at the Company's 2006 Annual Meeting, the named proxies will have the
right to exercise discretionary voting authority with respect to the proposal if
it is presented at the meeting without including information regarding the
proposal in its proxy materials.
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
19
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 THOMAS E. KAHN 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 4, 2005, 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
FOR all nominees WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for each nominee listed below [ ]
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 . . . . . . . , 2005
. . . . . . . . . . . .
. . . . . . . . . . . .
(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.