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
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MERCHANTS GROUP, INC.
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(Name of Registrant as Specified In Its Charter)
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[MERCHANTS GROUP, INC. LOGO] MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 5, 2004
To the Stockholders:
NOTICE IS HEREBY GIVEN that the 2004 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, 2004 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
STEPHEN C. JUNE
President and
Chief Executive Officer
Date: April 1, 2004
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, 2004
MERCHANTS GROUP, INC.
250 MAIN STREET
BUFFALO, NEW YORK 14202
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 5, 2004
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, 2004 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, 2003 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, 2004.
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,
1
2004. 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 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 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,
2004.
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
--------------
(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) 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
2
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.
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, 2004 (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 *
Richard E. Garman 92,000 4.4%
Thomas E. Kahn 0 (4) --
Henry P. Semmelhack 1,500 *
Robert M. Zak 22,410 (5) 1.1%
Stephen C. June 0 --
Kenneth J. Wilson 1,000 *
Directors and officers 357,610 16.9%
as a group (9 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 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 2,114,152 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 4 to table under "Security Ownership of Certain Beneficial
Owners."
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(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.
(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 and 1,110
Shares held by the Merchants Mutual Supplemental Executive Retirement Plan
for the benefit of Mr. Zak.
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 approved a reduction in the
number of directors to six effective with the retirement of Mr. Garman after the
Annual Meeting on May 5, 2004. This requires the rebalancing of the Board to
have an equal number of directors in each class. As such Mr. Kahn, who is
currently serving a term that expires in 2006, has been nominated to stand for
election this year for a term expiring in 2007. If elected, he will resign from
the term expiring in 2006.
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.
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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 2007
BRENT D. BAIRD 65 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 51 Vice President and Secretary of Clayton
Director since 2000 Management Company, an investment
management company, since 1993.
DIRECTORS WHOSE TERMS EXPIRE IN 2005
ANDREW A. ALBERTI 58 President of Cross River International,
Director since 1998 Inc., an insurance management consulting
firm, since 1993; President of Hanover
Management Services Inc., an insurance
management consulting firm, from 1989 to
1993.
FRANK J. COLANTUONO 55 President and Chief Executive Officer of
Director since 1994 Independent Health Association, Inc.,
a health maintenance organization, since
1984.
DIRECTORS WHOSE TERMS EXPIRE IN 2006
THOMAS E. KAHN 51 Vice President and Secretary, Clayton
Director since 2000 Management Company, an investment
(see statement under management company, since 1993.
"Information Concerning
Directors and Nominees")
HENRY P. SEMMELHACK 67 Chairman since 1982, President and Chief
Director since 1987 Executive Officer from 1982 to 2002 of
Barrister Global Services Network, Inc.,
a computer software and services
company.
6
ROBERT M. ZAK 46 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
Senior Vice President from 1992 to 1995; Chief Financial
since 1992, Secretary Officer of the Company, MNH and Mutual
since 1990 and Director from 1991 through 1996; Vice President
since 1994 -- Financial Services of MNH and Mutual
from 1989 through 1996; Secretary of MNH
and Mutual from 1990 through November 1,
1995.
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 Allied Healthcare Products, Inc.
First Carolina Investors, Inc.
M&T Bank Corporation
Todd Shipyards Corporation
Henry P. Semmelhack Barrister Global Services Network, Inc.
COMMITTEES
The Audit Committee consists of Messrs. Semmelhack (Chairman), Colantuono,
Garman and Kahn. As set forth in the Audit Committee charter attached as Exhibit
A, 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 auditors' 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, 2003. In addition, 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.
Each member of the Audit Committee 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
Charter. Each member of the committee is financially literate, knowledgeable and
qualified to review financial statements. The "audit committee financial expert"
designated by the Board is Thomas E. Kahn, CPA, CFA and Vice President of
Clayton Management.
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. 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 Nominating Committee met once during 2003 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 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
8
Committee considers factors that it deems are in the best interests of the
Company and its shareholders in identifying and evaluating a potential nominee.
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 sets the compensation of these officers who are employees of the
Company. The Compensation Committee met twice during 2003.
During the year ended December 31, 2003, the full Board of Directors met
nine 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.
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, is reproduced
in Exhibit A of this 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.
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.
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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, 2003 for filing with the Securities and Exchange
Commission.
Members of the Audit Committee: Henry P. Semmelhack, Chairman
Frank J. Colantuono
Richard E. Garman
Thomas E. Kahn
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 2003 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.
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, 2003, Mutual owned 12.1% of the Company's
issued and outstanding common stock. The Company and MNH do not have any
operating assets and MNH has only one employee. 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. Claims
services may be terminated on 6 months notice, but not before January 1, 2005.
Administrative or investment services may be terminated upon one year's notice
at any time.
10
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 40% of the Pooled
Business in 2003. MNH's share of the Pooled Business will be reduced to 35% in
2004, though not to exceed $59.5 million in assumed net written premiums, and 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. Though potential initiatives have been
identified by the Company, none have been implemented because they have been
deemed unattractive or are currently being investigated.
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.
11
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.
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
----------------------- --- ------------------------------
Richard E. Garman 73 President and Chief Executive Officer of
Chairman of the Board Newbery Alaska Co. Inc., an electrical
since July 1, 1995 contractor, since 1985, managing partner
of R.E.G. LLC, a private investment
company, since 2000 and General Partner
of R&P Oak Hill, a real estate
management company, since 2000.
President and Chief Executive Officer of
A.B.C. Paving Co., Inc., a general
construction contractor, from 1965 to
2000, and of Buffalo Crushed Stone,
Inc., an operator of quarries and
asphalt production facilities, from 1978
to 2000.
Stephen C. June 48 Executive Vice President and Chief
President and Chief Executive Operating Officer of MNH since October
Officer since May 7, 2003, 2001; Consultant to MNH from May 2001 to
Chief Operating Officer and October 2001; General Counsel and
Executive Vice President of Secretary to North Pointe Financial
MNH since 2001 (1) Services, Inc., North Pointe Insurance
Company and all subsidiaries from 1990
to 2001; Sr. Vice President - Legal
Affairs (US) of Queensway Financial
Holdings, Limited, from 1999 to 2001.
Robert M. Zak 46 See table under "Information Concerning
Chief Operating Officer Directors and Nominees."
since 1995, Senior
Vice President since 1992,
and Director since 1994
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Edward M. Murphy 53 Vice President and Chief Investment
Vice President, Officer of the Company, Mutual and MNH
Chief Investment Officer and since 1991; Assistant Vice President of
Assistant Secretary since 1991 Mutual and MNH from 1989 to 1991.
Kenneth J. Wilson 56 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
and Secretary since 1999 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.
(1) See "Consulting and Employment Agreements".
There are no family relationships between any of the directors or
executive officers of the Company.
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 "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.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning total compensation
paid during the years ended December 31, 2003, 2002 and 2001 to Mr. June and to
other officers whose total base salary and bonus charged to MNH by Mutual
pursuant to the Services Agreement, in 2003, or the Management Agreement, 2002
and 2001, exceed or are estimated to exceed $100,000 (such persons listed below
being the "Named Officers").
Annual Compensation (2) Long Term
------------------------ Compensation Awards
Other Annual -------------------
Name and Principal Compen- Securities Underlying All Other
Position (1) Year Salary Bonus sation Options/SARs (#) Compensation (3)
------------ ---- ------ ----- ------ ---------------- ----------------
Stephen C. June 2003 $240,000 $ -0- $ 26,393 80,000 $ -0-
President & Chief 2002 $180,000 $ -0- $ 89,485 80,000 $ -0-
Executive Officer (4) 2001 $ -0- $ -0- $154,000 -0- $ -0-
Robert M. Zak 2003 $ (2) $ -0- $ -0- -0- $ (2)
Chief Operating Officer 2002 $132,773 $ -0- $ -0- -0- $9,024
2001 $157,770 $ -0- $ -0- -0- $9,713
Kenneth J. Wilson 2003 $ (2) $ -0- $ -0- -0- $ (2)
Chief Financial Officer 2002 $ 73,868 $ -0- $ -0- -0- $7,448
2001 $ 91,735 $ -0- $ -0- -0- $8,853
13
(1) Since April 1, 2002 Mr. June has served as Executive Vice President and
Chief Operating Officer of MNH and since May 7, 2003 he has also served as
President and Chief Executive Officer of the Company. Richard E. Garman
was appointed Chairman of the Board in 1995. Mr. Garman 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
2003 charged to MNH pursuant to the Services Agreement was $125,000 and
$77,000, respectively.
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
and $291,782 for 2001. For Mr. Wilson, total compensation paid by Mutual
was $179,960 for 2002 and $175,241 for 2001. The Company and MNH paid
46.5% of 2002 compensation and 57.4% of 2001 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 Mr.
Zak's and Mr. Wilson's benefit to the Merchants Mutual Capital
Accumulation Plan for 2002 and 2001.
(4) See "Consulting and Employment Agreements".
14
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 2003. 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, 2003. Valuations are based upon
the closing price of the Company's Shares on the American Stock Exchange on
December 31, 2003 ($23.82). No shares were acquired during the fiscal year on
exercise of options granted under the Option Plan.
AGGREGATED OPTION/SAR EXERCISES WITH LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
Value of Unexercised
Number of Unexcerised In-The-Money
Shares Acquired Value Options/SARs at FY-End(#) Options/SARs at FY-End ($)
Name On Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
Stephen C. June 80,000 (1) $61,360 80,000 / 0 $99,200 / 0
Robert M. Zak N/A N/A 7,500 / 0 $21,150 / 0
--------------------
(1) Represents the number of shares with respect to which the SARs were
exercised. No shares were acquired upon exercise.
CONSULTING AND EMPLOYMENT AGREEMENTS
MNH entered into a Consulting Agreement with Stephen C. June as of May 7,
2001. Under the Consulting Agreement, Mr. June provided consulting, advisory and
related services from time to time as required by MNH. Under the Consulting
Agreement, MNH paid Mr. June a $22,000 monthly fee, which was prorated for
partial months of service. The Consulting Agreement also provided for
reimbursement of reasonable and necessary expenses related to the performance of
the services. The initial term of the Consulting Agreement was from May 7 to
September 7, 2001, and it was extended from month to month until April 1, 2002.
MNH entered into an Employment Agreement with Mr. June effective April 1,
2002, under which he is employed as Chief Operating Officer and Executive Vice
President of MNH. On May 7, 2003 Mr. June was appointed President and Chief
Executive Officer of the Company. The Employment Agreement runs from April 1,
2002 to March 31, 2005, and automatically renews for one-year terms thereafter
unless MNH provides Mr. June with six months prior written notice of
non-renewal. In general, the Employment Agreement provides that MNH will pay to
Mr. June: 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 will 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.
15
The Employment Agreement also provides that if Mr. June is terminated
without cause, or as a result of permanent disability or death, then his salary
and bonus, if any, will continue for 12 months from the date of termination.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Alberti, Colantuono and Kahn. Because (1) under the Services Agreement
Mutual provides the facilities and personnel necessary to manage the Company's
day-to-day business, and (2) certain executive officers of the Company and MNH,
other than Mr. June, are also executive officers of, and compensated by, Mutual,
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 (see "Consulting and Employment Agreements.")
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
With respect to members serving on the Company's Compensation Committee
during 2003, 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.
16
COMPARISON OF CUMULTATIVE 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, 2003. The graph assumes that $100 was invested on December 31, 1998
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
[FIVE-YEAR CUMULATIVE TOTAL RETURN CHART]
1998 1999 2000 2001 2002 2003
The Company 100.00 96.53 88.61 118.28 115.09 126.88
S&P Index 100.00 120.89 109.97 96.94 75.51 97.17
NASDAQ Insurance Stocks Index 100.00 108.12 128.14 140.07 139.92 173.09
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."
Independent Health Association, Inc. is a health maintenance organization
that provides benefits to employees of Mutual. Frank J. Colantuono, a director
of the Company, is the President and Chief Executive Officer of Independent
Health. For the year ended December 31, 2003 Mutual paid $492,258 in health care
premiums to Independent Health. Based on information provided by Mutual, the
Company estimates that $197,000 of the fees paid by MNH pursuant to the Services
Agreement were attributable to premiums paid by Mutual to Independent Health.
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, 2004. PwC has
served as the Company's independent auditor since 1981. Services provided to the
Company and its subsidiaries by PwC in 2003 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, 2003 and 2002, and for tax fees billed in 2003 and 2002. The
fees for 2002 reflect the portion of the fees for services rendered by PwC
allocated to the Company and MNH in accordance with the Management Agreement in
effect at that time.
2003 2002
---- ----
Audit Fees $ 97,700 $ 68,588
Audit Related Fees (a) 0 3,255
Tax Fees (b) 9,250 2,023
All Other Fees 0 0
-------- --------
$106,950 $ 73,866
======== ========
(a) 2002 audit fees relating to Mutual's employee benefit plan were prorated
and charged to MNH in accordance with the Management Agreement. Under the
Services Agreement in 2003 the fees were not directly charged or pro-rated
but are included in the determination of the fees charged to MNH by
Mutual.
(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 President 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, 2004 in order to be considered for inclusion in the Company's
proxy materials for the 2005 Annual Meeting. Unless the stockholder notifies the
Company before February 15, 2005 of the intent to present a proposal at the
Company's 2005 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
STEPHEN C. JUNE
President and Chief Executive Officer
Buffalo, New York
19
EXHIBIT A
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
PURPOSE:
The primary purpose of the Audit Committee (the "Committee") is to assist the
Board of Directors (the "Board") in fulfilling its responsibility to oversee
management's conduct of the Company's financial reporting process. This will be
accomplished by viewing the financial reports and other financial information
provided by the Company to any governmental or regulatory body, the public, or
other users thereof, the Company's systems of internal accounting and financial
controls, the annual independent audit of the Company's financial statements and
the Company's legal compliance and ethics programs as established by management
and the Board.
COMPOSITION, ELECTION AND MEETINGS
The Committee shall be comprised of three or more directors, who shall be
elected by the Board and who shall serve until their successors are duly elected
and qualified. The Board shall in the exercise of its business judgment
determine that the Committee's composition meets the requirements of the Audit
Committee Policy of the American Stock Exchange ("AMEX"), that all of the
members of the Committee are "independent" within the meaning of that policy
(see Appendix A), and that the members of the Committee will be persons:
- Who have no relationship to the Company that may interfere with the
exercise of their independence from management and the Company; and
- Who are able to read and understand fundamental financial statements,
including the Company's balance sheet, income statement, and cash flow
statement.
The Board shall seek to appoint at least one member to the Committee whom it
determines has the qualifications of an "audit committee financial expert." In
order to be considered an audit committee financial expert, a person must have
the following attributes:
1) An understanding of generally accepted accounting principles and
financial statements;
2) The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
3) Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Company's financial statements, or experience actively
supervising one or more persons engaged in such activities;
4) An understanding of internal controls and procedures for financial
reporting; and
20
5) An understanding of audit committee functions.
An audit committee financial committee expert must have acquired such attributes
through any one or more of the following:
1) Education and experience as a principal financial officer, principal
accounting officer, controller, public accountant or auditor or
experience in one or more positions that involve the performance of
similar functions;
2) Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant, auditor
or person performing similar functions;
3) Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
4) Other relevant experience.
The members of the Committee shall be elected by the Board to serve a one-year
term. Members may be re-elected for successive terms.
The Chairman of the Committee shall be elected by the members of the Audit
Committee. The Chairman may be re-appointed for consecutive terms.
The Committee will meet at least four times a year on a regular basis and call
special meetings as may be determined by the Chairman of the Committee:
- The meetings will be attended by Committee members and the internal
auditor;
- The Committee may request any officer or employee of the Company or
the Company's outside counsel or independent auditor to attend any
meeting of the Committee or to meet with any members of, consultants
of the Committee.
- The Committee shall meet periodically with management, the internal
auditors and the independent auditor in separate executive sessions.
Minutes of each Committee meeting will be prepared, distributed to each member
of the Board, reviewed by the Chairman of the Committee at the next Board
meeting and after approved by the Board, kept by the Company's secretary for
permanent filing.
In discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities and personnel of the Company and the power to retain outside counsel,
auditors, actuaries or other experts for this purpose. The Board and Committee
are in place to represent the Company's shareholders and the policyholders of
Merchants Insurance Company of New Hampshire, Inc.; accordingly the outside
auditor and actuary are ultimately accountable to the Board and the Committee.
21
AUTHORITY AND KEY RESPONSIBILITIES
The Committee's job is one of oversight and it recognizes that management is
responsible for preparing the Company's financial statements and that the
outside auditors are responsible for auditing those financial statements.
Additionally, the Committee recognizes that financial management, the internal
audit staff, and the outside auditor are able to spend more time and have more
detailed knowledge and information on the Company than do Committee members;
consequently, in carrying out its oversight responsibilities, the Committee does
not provide any expert or special assurance as to the Company's financial
statements or any professional certification as to the outside auditor's work.
The following functions shall be the common recurring activities of the
Committee in carrying out its oversight function. These functions are set forth
as a guide with the understanding that the Committee may diverge from this guide
as appropriate given the circumstances.
APPOINTMENT OF INDEPENDENT AUDITORS, ACTUARIES AND CONSULTANTS
- The Committee shall be directly responsible for the appointment,
compensation, retention and oversight of the work of any registered public
accounting firm engaged (including resolution of disagreements between
management and the auditor regarding financial reporting) for the purpose
of preparing or issuing an audit report or performing other audit, review,
or attest services for the Company, and each such registered public
accounting firm shall report directly to the Committee.
- The Committee shall annually consider and recommend to the Board of
Directors the appointment of the independent actuarial firm to be engaged,
including the fees to be paid.
- The Committee shall have the authority to engage independent counsel and
other advisers, as it determines necessary to carry out its duties. The
Company shall provide for appropriate funding, as determined by the
Committee, in its capacity as a committee of the Board, for payment of:
1. Compensation to any registered public accounting firm engaged for
the purpose of preparing or issuing an audit report or performing
other audit, review or attest services for the Company;
2. Compensation to any advisers employed by the Committee under this
paragraph; and
3. Ordinary administrative expenses of the Committee that are necessary
or appropriate in carrying out its duties.
FINANCIAL STATEMENT AND DISCLOSURE MATTERS
The committee shall to the extent it deems necessary or appropriate:
22
- Review and discuss with management and the independent auditor the annual
audited financial statements, including disclosures made in the
management's discussion and analysis, and recommend to the Board whether
the audited financial statements should be included in the Company's Form
10-K. The discussion will include the auditors' judgment about the
quality, not just the acceptability, of the Company's accounting
principles as applied in its financial reporting. The discussion should
also include such issues as the clarity of the Company's financial
disclosures and degree of aggressiveness or conservatism of the Company's
accounting judgments and underlying estimates and other significant
decisions made by management in preparing the financial disclosure and the
view of the outside auditors with respect to those matters.
- Review and discuss with management and the independent auditor the
Company's quarterly financial statements prior to the filing of its Form
10-Q, including the results of the independent auditor's review of the
quarterly financial statements.
- Discuss with management and the independent auditor significant financial
reporting issues and judgments made in connection with the preparation of
the Company's financial statements, including any significant changes in
the Company's selection or application of accounting principles, any major
issues as to the adequacy of the Company's internal controls and any
special steps adopted in light of material control deficiencies.
- Review and discuss reports from the independent auditors on:
1. All critical accounting policies and practices to be used.
2. All alternative treatments of financial information within generally
accepted accounting principles that have been discussed with
management, ramifications of the use of such alternative disclosures
and treatments, and the treatment preferred by the independent
auditor.
3. Other material written communications between the independent
auditor and management, such as any management letter or schedule of
unadjusted differences.
- Discuss with management the Company's earnings press releases, including
the use of "pro forma" or "adjusted" non-GAAP information.
- Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives as well as off-balance sheet
structures on the Company's financial statements.
- Discuss with management the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures.
- Discuss with the independent auditor the matters required to be discussed
by Statement on Auditing Standards No. 61, as amended by SAS 90 and
modified from time to time, relating to the conduct of the audit.
Including any difficulties encountered in the course of the audit
23
work, any restrictions on the scope of activities or access to requested
information, and any significant disagreements with management.
- Review disclosures made to the Audit Committee by the Company's CEO and
CFO during their certification process for the Form 10-K and Form 10-Q
about any significant deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud involving management
or other employees who have a significant role in the Company's internal
controls.
- Direct the preparation of the report required by the rules of the SEC to
be included in the Company's annual proxy statement.
- Review the results of loss and loss adjustment expense reserve reviews
performed by the outside actuarial firm.
- Annually review the reinsurance program with senior management.
- Review any audit committee member related party transactions.
OVERSIGHT OF THE COMPANY'S RELATIONSHIP WITH THE INDEPENDENT AUDITOR
The committee shall to the extent it deems necessary or appropriate:
- Review and evaluate the lead partner of the independent auditor team.
- Obtain and review a report from the independent auditor at least annually
regarding all relationships between the independent auditor and the
Company together with any other matters required to be included by
Independence Standards Board Standard No. 1 as modified from time to time.
- Evaluate the qualifications, performance and independence of the
independent auditor, including considering how the provision of permitted
non-audit services affects the auditor's independence, and taking into
account the opinions of management and internal auditors. The Audit
Committee shall present its conclusions with respect to the independent
auditor to the Board.
- Ensure the rotation of the lead (or coordinating) audit partner having
primary responsibility for the audit and the audit partner responsible for
reviewing the audit as required by law.
- Recommend to the Board policies for the Company's hiring of employees or
former employees of the independent auditor who participated in any
capacity in the audit of the Company.
24
- As deemed necessary, discuss with the national office of the independent
auditor issues on which they were consulted by the Company's audit team
and matters of audit quality and consistency.
- Meet with the independent auditor prior to the audit to discuss the
planning and staffing of the audit.
OVERSIGHT OF THE COMPANY'S INTERNAL AUDIT FUNCTION
The committee shall to the extent it deems necessary or appropriate:
- Review the appointment and replacement of the senior internal auditing
executive.
- Review the significant reports to management prepared by the internal
auditing department and management's responses.
- Discuss with the independent auditor and management the internal audit
department responsibilities, budget and staffing and any recommended
changes in the planned scope of the internal audit.
COMPLIANCE OVERSIGHT RESPONSIBILITIES
The committee shall to the extent it deems necessary or appropriate:
- Obtain from the independent auditor assurance that Section 10A(b) of the
Exchange Act has not been implicated.
- Review and assess annually the Company's "Ethics and Conflict of Interest"
policy and with the approval of the Board, implement changes/revisions as
necessary. Recommend and where necessary supervise investigations into
compliance when deemed appropriate.
- Discuss with management and the independent auditor any correspondence
with regulators or governmental agencies and any published reports which
raise material issues regarding the Company's financial statements or
accounting policies.
- Discuss with the Company's legal counsel legal matters that may have a
material impact on the financial statements or the Company's compliance
policies.
- Establish procedures for:
1. the receipt, retention, and treatment of complaints received by the
Company regarding accounting, internal accounting controls, or
auditing matters.
2. the confidential, anonymous submission by employees of the Company
of concerns regarding questionable accounting or auditing matters.
25
None of the above responsibilities should be construed to limit the right of the
Committee to inquire into any area of the Company which it may deem necessary to
fulfill its responsibilities. The Committee has the authority to retain outside
counsel or other advisors it deems necessary.
LIMITATION OF COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements and disclosures are
complete and accurate and are in accordance with generally accepted accounting
principles and applicable rules and regulations. These are the responsibilities
of management and the independent auditor.
The Committee shall review the adequacy of this Charter on an annual basis and
propose to the Board any recommended changes.
26
AUDIT COMMITTEE
APPENDIX (A)
INDEPENDENT DIRECTORS.
AMEX rules require that each member of the Audit Committee must (a) satisfy the
independence standards of Rule 10A-3 under the Securities Exchange Act of 1934
(the "1934 Act"), and (b) be affirmatively determined by the Board of Directors
not to have a material relationship with the Company that would interfere with
the exercise of independent judgment. The AMEX rules further provide the
following non-exclusive list of persons who shall not be considered independent:
(1) a director who is, or during the past three years was, employed by
the Company or by any parent or subsidiary of the Company, other
than prior employment as an interim Chairman or CEO;
(2) a director who accepts or has an immediate family member who accepts
any payment form the Company or any parent or subsidiary of the
Company in excess of $60,000 during the current or any of the past
three fiscal years, other than compensation for board service,
payments arising solely from investments in the Companies
securities, compensation paid to an immediate family member who is a
non-executive employee of the Company or a parent or subsidiary of
the Company, compensation received for former service as an interim
Chairman or CEO, benefits under a tax-qualified retirement plan,
nondiscretionary compensation, or loans permitted under Section
13(k) of the 1934 Act;
(3) a director who is an immediate family member of an individual who
is, or has been in any of the past three years, employed by the
Company or any parent or subsidiary of the Company as an executive
officer;
(4) a director who is, or has an immediate family member who is, a
partner in, controlling shareholder or executive officer of, any
organization to which the Company made, or from which the Company
received, payments (other than those arising solely from investments
in the Company's securities or payment under non-discretionary
charitable contribution matching programs) that exceed 5% of the
organization's consolidated gross revenues for that year, or
$200,000, whichever is more, in any of the most recent three fiscal
years; or
(5) a director who is, or has an immediate family member who is, a
current partner of the Company's outside auditor, or was a partner
or employee of the Company's outside auditor who worked on the
Company's audit at any time during any of the past three years.
Notwithstanding (b) above, one director who is not independent under (b)
but who satisfies the requirements of Rule 10A-3 under the 1934 Act and is not a
current officer or employee or
27
immediate family member of such an officer or employee, may be appointed to the
Audit Committee, if the Board of Directors, under exceptional and limited
circumstances, determines that membership on the committee by the individual is
required by the best interests of the Company and its shareholders, and the
Board discloses, in the next annual proxy statement (or in the next annual
report on SEC Form 10-K or equivalent if the Company does not file an annual
proxy statement) subsequent to such determination, the nature of the
relationship and the reasons for that determination. A director appointed to the
Audit Committee pursuant to this exception may not serve for in excess of two
consecutive years and may not chair the Audit Committee.
28
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 STEPHEN C. JUNE 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, 2004, 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 | |
Brent D. Baird and Thomas E. Kahn
(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 ............................, 2004
........................................
........................................
(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.