-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SgcUQzYZ71rSKe22ibjZ/9PVmV9Sq/QOKe5KZbVKrRv3biusZMNLFI+vR1ZlbGc0 9N/Yy/I02FexqOeUfZlGQw== 0001013564-98-000011.txt : 19980515 0001013564-98-000011.hdr.sgml : 19980515 ACCESSION NUMBER: 0001013564-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARM FAMILY HOLDINGS INC CENTRAL INDEX KEY: 0001013564 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 141789227 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11941 FILM NUMBER: 98620712 BUSINESS ADDRESS: STREET 1: 344 RT 9W CITY: GLENMONT STATE: NY ZIP: 12077 BUSINESS PHONE: 5184315000 MAIL ADDRESS: STREET 1: PO BOX 656 CITY: ALBANY STATE: NY ZIP: 12201 10-Q 1 FARM FAMILY HOLDINGS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1998 Commission File No. 1-11941 FARM FAMILY HOLDINGS, INC. A Delaware Corporation IRS No. 14-1789227 344 Route 9W, Glenmont, New York 12077-2910 Registrant's telephone number: (518) 431-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / / The number of shares outstanding of the issuer's common stock as of May 13, 1998 is 5,253,813. FARM FAMILY HOLDINGS, INC. INDEX Part I. Financial Information Item 1. Financial Statements of Farm Family Holdings, Inc. (unaudited) Consolidated Balance Sheets March 31, 1998 and December 31, 1997 Consolidated Statements of Income and Comprehensive Income Three months ended March 31, 1998 and 1997 Consolidated Statements of Cash Flow Three months ended March 31, 1998 and 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information Item 6. Exhibits and Reports on Form 8-K FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands)
(Unaudited) March 31, 1998 December 31, 1997 - --------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed Maturities Available for sale, at fair value (Amortized cost: $250,002 in 1998 and $248,984 in 1997 ) $259,956 $259,199 Held to maturity, at amortized cost (Fair value: $8,949 in 1998 and $9,194 in 1997) 8,602 8,855 Equity securities Available for sale, at fair value (Cost: $3,363 in 1998 and 1997) 4,730 4,521 Mortgage loans 745 1,660 Other invested assets 544 553 Short-term investments 11,609 5,643 - --------------------------------------------------------------------------------------------------------------- Total investments 286,186 280,431 - --------------------------------------------------------------------------------------------------------------- Cash 5,327 5,841 Insurance receivables: Reinsurance receivables 15,630 12,343 Premiums receivable, net 31,912 28,141 Deferred acquisition costs 13,401 12,613 Accrued investment income 4,820 5,408 Deferred income tax asset, net 1,435 1,469 Prepaid reinsurance premiums 643 2,044 Receivable from affiliates, net 18,191 17,786 Other assets 3,194 2,202 - --------------------------------------------------------------------------------------------------------------- Total Assets $380,739 $368,278 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- LIABILITIES aND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $163,498 $156,622 Unearned premium reserve 69,119 66,069 Reinsurance premiums payable 1,640 2,564 Accrued expenses and other liabilities 12,116 11,828 Debt 1,264 1,268 - --------------------------------------------------------------------------------------------------------------- Total liabilities 247,637 238,351 - --------------------------------------------------------------------------------------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock $.01 par value 1,000,000 shares authorized and no shares issued and outstanding - - Common stock $.01 par value 10,000,000 shares authorized and 5,253,813 shares issued and outstanding 53 53 Additional Paid in Capital 98,140 98,140 Retained earnings 27,550 24,342 Accumulated other comprehensive income 7,359 7,392 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 133,102 129,927 - --------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $380,739 $368,278 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME ($ in thousands, except per share data)
(Unaudited) Three Months Ended March 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Revenues: Premiums $42,815 $34,973 Net investment income 4,767 4,416 Realized investment gains (losses), net 126 (90) Other income 219 220 - ----------------------------------------------------------------------------------------------------------------- Total revenues 47,927 39,519 - ----------------------------------------------------------------------------------------------------------------- Losses and Expenses: Losses and loss adjustment expenses 32,139 24,697 Underwriting expenses 11,213 10,090 Interest expense 25 26 Dividends to policyholders 50 38 - ----------------------------------------------------------------------------------------------------------------- Total losses and expenses 43,427 34,851 - ----------------------------------------------------------------------------------------------------------------- Income before federal income tax expense 4,500 4,668 Federal income tax expense 1,292 1,612 - ----------------------------------------------------------------------------------------------------------------- Net income 3,208 3,056 - ----------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax: Unrealized holding gain (loss) arising during the period (net of deferred tax of ($53) and $1,632, respectively) 100 (3,031) Reclassification adjustment for gains (losses) included in net income (net of tax expense (benefit) of $72 and ($19), respectively) (133) 36 - ----------------------------------------------------------------------------------------------------------------- Other comprehensive income (33) (2,995) - ----------------------------------------------------------------------------------------------------------------- Comprehensive income $3,175 $61 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Per Common Share: Basic earnings per common share $0.61 $0.58 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $0.61 $0.58 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Basic weighted average shares outstanding 5,253,813 5,253,813 - ----------------------------------------------------------------------------------------------------------------- Diluted weighted average shares outstanding 5,301,498 5,253,813 - ----------------------------------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)
(Unaudited) For the Three Months Ended March 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $3,208 $3,056 - ------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses (126) 90 Amortization of bond discount 76 48 Deferred income taxes 52 (160) Changes in: Reinsurance receivables (3,287) 342 Premiums receivable (3,771) (2,891) Deferred acquisition costs (788) (39) Accrued investment income 588 388 Prepaid reinsurance premiums 1,401 (447) Receivable from affiliates (405) 54 Other assets (991) 57 Reserves for losses and loss adjustment expenses 6,876 1,985 Unearned premium reserve 3,050 2,198 Reinsurance premiums payable (924) 1,418 Accrued expenses and other liabilities 288 1,700 - ------------------------------------------------------------------------------------------------------------------------- Total adjustments 2,039 4,743 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,247 7,799 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTiNG ACTIVITIES: Proceeds from sales: Fixed maturities available for sale - 3,514 Investment collections: Fixed maturities available for sale 14,553 3,303 Fixed maturities held to maturity 239 207 Mortgage loans 915 20 Investment purchases: Fixed maturities available for sale (15,507) (15,528) Fixed maturities held to maturity - (131) Equity securities - (56) Change in short-term investments, net (5,966) 784 Change in other invested assets 9 (125) - ------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (5,757) (8,012) - ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Principal payments on debt (4) (11) - ------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (4) (11) - ------------------------------------------------------------------------------------------------------------------------- Net decrease in cash (514) (224) Cash, beginning of period 5,841 4,110 - ------------------------------------------------------------------------------------------------------------------------- Cash, end of period $5,327 $3,886 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company"). The primary subsidiary of Farm Family Holdings is Farm Family Casualty Insurance Company ("Farm Family Casualty"). The operations of the Company are closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life"), and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. In the opinion of management, these statements contain all adjustments including normal recurring accruals, which are necessary for a fair presentation of the consolidated financial position at March 31, 1998, and the consolidated results of operations for the three months ended March 31, 1998 and 1997. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for a full fiscal year. The year end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Comprehensive Income", which established standards for the reporting and disclosure of comprehensive income and its components, and restated prior period financial statements to conform to this reporting standard. 2. Earnings Per Share The following table presents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
Three months ended March 31, 1998 1997 ----------------------------------- Net income available to common stockholders $3,208,000 $3,056,000 ----------------------------------- Weighted average number of shares in basic earnings per share 5,253,813 5,253,813 Effect of stock options 47,685 --- ----------------------------------- Weighted average number of shares in diluted earnings per share 5,301,498 5,253,813 ----------------------------------- Basic net income per share $0.61 $0.58 ----------------------------------- Diluted net income per share $0.61 $0.58 -----------------------------------
3. Future Application of Accounting Standards In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement (SFAS) 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for years beginning after December 15, 1997. SFAS 132 revises the disclosure requirements but does not change the measurement or recognition of pensions and other post retirement benefits. The adoption of SFAS 132 will result in revised and additional disclosures but will have no effect on the financial position, results of operations, or liquidity of the Company. 4. Contingencies The Company is party to numerous legal actions arising in the normal course of business. Management believes that resolution of these legal actions will not have a material adverse effect on its consolidated financial condition. Catastrophes are an inherent risk in the property and casualty insurance industry and could produce significant adverse fluctuations in the Company's results of operations and financial condition. The Company is subject to a concentration of risk within the Northeastern United States. For the three months ended March 31, 1998 and 1997, approximately 62% and 60%, respectively, of the Company's direct premiums were written in the states of New York and New Jersey. As a result of the concentration of the Company's business in the states of New York and New Jersey, and more generally, in the Northeastern United States, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States, despite the Company's reinsurance program designed to mitigate the impact of these factors. As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. The amount of future losses or assessments from residual market mechanisms can not be predicted with certainty and could have a material adverse effect on the Company's future results of operations. Pursuant to agreements between the Company and its agents and agency managers, subject to certain conditions including length of service and profitability, certain agents and agency managers are eligible to receive monthly extended earnings payments for a period of up to eight years subsequent to the termination of their association with the Company. Historically, such payments have been funded from commissions earned on the agent's or agency manager's book of business subsequent to the termination of the agent's association with the Company in accordance with the Company's agreement with the successor agents and agency managers. In the event that such commissions are insufficient to fund the extended earnings payments, the Company would be responsible for such payments. The aggregate outstanding amount of the extended earnings payments which former agents and agency managers are entitled to receive for a period of up to eight years subsequent to March 31, 1998 is $4,708,626. Many of the Company's existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many of these computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations . Therefore, the Company must also coordinate with other entities with which it interacts to ensure these entities are also addressing the Year 2000 issue. If not successfully addressed, the Year 2000 issue could have material adverse consequences on the Company. The Company has an on-going, enterprise-wide project to address its Year 2000 issue. During 1998, the Company will perform system-wide testing to support its plan of having policy administration systems Year 2000 compliant by December 31, 1998. Year 2000 work on remaining systems will continue through 1999. In addition, the Company has contacted other entities on which it relies to process and support its business. The Company will react to their plans to achieve Year 2000 compliance and will adjust operations as required. The Company believes it will successfully address its Year 2000 issue without material adverse consequences to the Company. However, there can be no assurance that other entities with which the Company interacts will achieve Year 2000 compliance or that the failure by such entities to achieve Year 2000 compliance would not have a material adverse effect on the Company. 5. Acquisition of Farm Family Life Farm Family Holdings entered into an Option Purchase Agreement with the shareholders of Farm Family Life pursuant to which Farm Family Holdings has, for a two-year period commencing on July 26, 1996, the option to acquire Farm Family Life subject to certain conditions. On February 26, 1998, the Board of Directors of Farm Family Holdings approved the exercise of the option to acquire Farm Family Life and its wholly owned subsidiary United Farm Family. Under the terms of the Option Purchase Agreement, Farm Family Holdings will pay an exercise price of $37.5 million to acquire Farm Family Life, consisting of $31.5 million of common stock of Farm Family Holdings, and $6 million stated value of 6-1/8% voting preferred stock of Farm Family Holdings, less certain expenses to be paid by Farm Family Life in the acquisition on behalf of the shareholders of Farm Family Life. The proposed acquisition of Farm Family Life is subject to the approval of the shareholders of Farm Family Holdings and receipt of all required governmental approvals. Management expects that the acquisition of Farm Family Life will be brought to the shareholders of Farm Family Holdings for their approval in 1998. The following unaudited pro forma consolidated financial information reflects the acquisition by the Company of Farm Family Life under the purchase method of accounting. The pro forma consolidated balance sheet combines balance sheets of the Company and Farm Family Life as of March 31, 1998, as if the acquisition had occurred as of March 31, 1998. The pro forma consolidated statements of income combines the operations of the Company and Farm Family Life for the year ended December 31, 1997 and the three months ended March 31, 1998 as if the acquisition had occurred on January 1, 1997 The pro forma adjustment and pro forma combined amounts are provided for informational purposes only and are not necessarily indicative of the actual financial position or results of operations that would have been achieved had the acquisition been consummated at the dates indicated or of future results. The pro forma financial statements should be read in conjunction with the historical financial statements of the Company and Farm Family Life. The pro forma financial statements are based upon available information and certain assumptions that the Company believes are reasonable in the circumstances. The Company's preliminary allocation of purchase price was based upon the estimated fair value of assets acquired and liabilities assumed. The actual allocation will be based upon valuations as of the closing date of the acquisition and, accordingly, the final allocations will be different from the amounts herein. Farm Family Holdings, Inc. Unaudited Pro Forma Consolidated Balance Sheet March 31, 1998 ($ in thousands)
Pro Forma Farm Family Farm Family Adjustments Holdings Life Dr. Cr. Pro Forma -------- ---- --- --- --------- ASSETS Investments Fixed maturities Available for sale $259,956 $698,929 $ $ $958,885 Held to maturity, at amortized cost 8,602 8,602 Equity securities 4,730 40,393 45,123 Mortgage loans 745 13,361 14,106 Policy loans 29,386 29,386 Other invested assets 544 724 1,268 Short-term investments 11,609 6,582 18,191 ------------------------------------------------------------------------- Total investments 286,186 789,375 1,075,561 ------------------------------------------------------------------------- Cash 5,327 1,378 6,705 Insurance receivables: Reinsurance receivables 15,630 1,960 17,590 Premiums receivable 31,912 (D) 107 31,805 Deferred acquisition costs 13,401 30,661 (B) 30,661 13,401 Present value of future profits (B) 20,941 20,941 Accrued investment income 4,820 12,765 17,585 Property and equipment, net 12,416 (B) 4,235 16,651 Deferred income tax asset, net 1,435 1,435 Prepaid reinsurance premiums 643 643 Receivable from affiliates, net 18,191 (D) 18,191 0 Other assets 3,194 1,827 (A) 824 4,197 ------------------------------------------------------------------------- Total Assets $380,739 $850,382 $25,176 $49,783 $1,206,514 ------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $163,498 $ $ $ $163,498 Future policy and contract benefits 216,619 216,619 Funds on deposit from policyholders 423,112 (B) 2,251 420,861 Unearned premium reserve 69,119 69,119 Accrued dividends to policyholders 5,023 5,023 Reinsurance premiums payable 1,640 1,640 Deferred income tax liability 33,780 (B) 1,133 32,647 Payable to affiliate 18,298 (D) 18,298 0 Accrued expenses and other liabilities 12,116 4,800 (B) 100 17,016 Debt 1,264 1,264 Participating policyholders' interest 109,125 109,125 ------------------------------------------------------------------------- Total liabilities 247,637 810,757 21,682 100 1,036,812 ------------------------------------------------------------------------- Commitments and contingencies Mandatory redeemable preferred stock (A) 5,856 5,856 Stockholders' equity: Common stock 53 3,001 (C) 3,001 (A) 8 61 Additional Paid in Capital 98,140 (A) 30,736 128,876 Retained earnings 27,550 34,931 (C) 34,931 27,550 Accumulated other comprehensive income 7,359 1,693 (C) 1,693 7,359 ------------------------------------------------------------------------- Total stockholder's equity 133,102 39,625 39,625 30,744 163,846 ------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $380,739 $850,382 $61,307 $36,700 $1,206,514 ------------------------------------------------------------------------- See accompanying notes to unaudited pro forma consolidated balance sheet
Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Balance Sheet March 31, 1998 ($ in thousands) (A) The following pro forma adjustments reflect the funding of the acquisition and consideration given ($37,500 less certain expenses currently estimated to be equal to approximately $900 to be paid by Farm Family Life in the acquisition on behalf of the selling stockholders) Series A Preferred stock ($5,856) Unregistered common stock issued (824,650 shares issued, $.01 par value) in the acquisition assuming an average closing price of $37 9/32 if the closing had occurred on April 6, 1998. The actual average closing price and the actual number of shares of Common Stock that will be issued to the selling stockholders may vary significantly from these amounts. (8) Paid in capital (30,736) Expenses relating to acquisition 824 (B) The following pro forma adjustments result from the allocation of the purchase price for the acquisition based on the fair value of the underlying net assets acquired. Assets ------ Adjustment of carrying amount of properties occupied by Farm Family Life based on the estimated fair market value $4,235 Elimination of historical deferred acquisition costs (30,661) Adjustment to record present value of future profits 20,941 Liabilities ----------- Adjustment to reflect the net deferred tax benefit of purchase accounting adjustments using a statutory rate of 34% 1,133 Adjustment to record liability for Guaranty Funds (100) Adjustment of carrying amount of funds on deposit from Policyholders based on fair market value 2,251 (C) Adjustment to eliminate Farm Family Life's stockholder's equity (D) Adjustment to eliminate intercompany balances Farm Family Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Income For the three months ended March 31, 1998 ($ in thousands, except per share data)
Pro Forma Farm Family Farm Family Adjustments Holdings Life Dr. Cr. Pro Forma -------- ---- --- --- --------- Revenues: Premiums from property/casualty operations $42,815 $0 $ $ $42,815 Premiums from life and health operations 8,818 8,818 Net investment income 4,767 13,889 18,656 Realized investment gains (losses), net 126 663 789 Policy and contract charges 1,167 1,167 Other income 219 264 (c) 217 266 ------------------------------------------------------------------------ Total revenues 47,927 24,801 217 72,511 ------------------------------------------------------------------------ Losses, Benefits and Expenses: Losses and loss adjustment expenses 32,139 469 32,608 Benefits to policyholders 9,228 9,228 Underwriting & operating expenses 11,213 1,994 (a) 37 (c) 217 13,027 Non-recurring charges 92 92 Interest credited to policyholders 5,394 5,394 Amortization of policy acquisition costs 1,782 (a) 1,782 0 Amortization of present value of future profits (a) 516 516 Interest expense 25 25 Dividends to policyholders 50 50 ------------------------------------------------------------------------ Total losses and expenses 43,427 18,959 553 1,999 60,940 ------------------------------------------------------------------------ Income before federal income tax expense 4,500 5,842 770 1,999 11,571 Federal income tax expense 1,292 1,957 (b) 417 3,666 ------------------------------------------------------------------------ Income before participating policyholders' interest 3,208 3,885 1,187 1,999 7,905 Participating policyholders' interest 2,981 (a) 1,042 (a) 293 3,730 ------------------------------------------------------------------------ Income before preferred stock dividends 3,208 904 2,229 2,292 4,175 Preferred stock dividends (a) 90 90 ------------------------------------------------------------------------ Income applicable to common shareholders $3,208 $904 $2,319 $2,292 4,085 ------------------------------------------------------------------------ Net Income per Common Share - Basic $0.61 $0.67 -------------- -------------- Net Income per Common Share - Diluted $0.61 $0.67 -------------- -------------- Weighted average shares - Basic 5,253,813 (d) 824,650 6,078,463 -------------- -------------- Weighted average shares - Diluted 5,301,498 (d) 824,650 6,126,148 -------------- -------------- See accompanying notes to unaudited pro forma consolidated statements of income
Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Statements of Income For the three months ended March 31, 1998 ($ in thousands, except per share data) (a) Adjustment resulting from the allocation of the purchase price for the acquisition based on the estimated fair value of the underlying net assets are as follows: Additional depreciation expense incurred due to write up of building and a change in the useful life of the building to 20 years as of 1/1/97 $37 Adjustment to reverse amortization of deferred acquisition costs (1,782) Participating policyholders' share of amortization of deferred acquisition costs, net of taxes at a statutory rate of 34% 1,042 Adjustment to record amortization of present value of future profits 516 Participating policyholders' share of amortization of present value of future profits net of taxes at a statutory rate of 34% (293) Series A Preferred stock dividends on estimated fair value of $5,856 of preferred stock at a rate of 6 1/8% per annum 90 (b) Adjustment to reflect the federal income tax effect of item (a) above using statutory rate of 34% 417 (c) Adjustment to eliminate intercompany balances 217 (d) Adjustment to reflect estimated additional shares of common stock issued in the acquisition assuming an average closing price of $37 9/32 if the closing had occurred on April 6, 1998. The actual average closing price and the actual number of shares of common stock that will be issued to the selling stockholders may vary significantly from these amounts. 824,650 Farm Family Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Income For the year ended December 31, 1997 ($ in thousands, except per share data)
Pro Forma Farm Family Farm Family Adjustments Holdings Life Dr. Cr. Pro Forma -------- ---- --- --- --------- Revenues: Premiums from property/casualty operations $149,220 $9,020 $ $ $158,240 Premiums from life and health operations 33,356 33,356 Net investment income 18,077 54,964 73,041 Realized investment gains (losses), net 5,406 2,914 8,320 Policy and contract charges 5,041 5,041 Other income 1,020 1,153 (c) 808 1,365 --------------------------------------------------------------------- Total revenues 173,723 106,448 808 279,363 --------------------------------------------------------------------- Losses, Benefits and Expenses: Losses and loss adjustment expenses 103,301 9,975 113,276 Benefits to policyholders 31,568 31,568 Underwriting & operating expenses 41,787 7,747 (a) 158 (c) 808 48,884 Non-recurring charges 707 707 Interest credited to policyholders 24,282 24,282 Amortization of policy acquisition costs 6,852 (a) 6,852 0 Amortization of present value of future profits (a) 2,233 2,233 Interest expense 102 102 Dividends to policyholders 282 282 --------------------------------------------------------------------- Total losses and expenses 145,472 81,131 2,391 7,660 221,334 --------------------------------------------------------------------- Income before federal income tax expense 28,251 25,317 3,199 7,660 58,029 Federal income tax expense 9,747 8,548 (b) 1,517 19,812 --------------------------------------------------------------------- Income before participating policyholders' interest 18,504 16,769 4,716 7,660 38,217 Participating policyholders' interest 13,429 (a) 3,956 (a) 1,273 16,112 --------------------------------------------------------------------- Income before preferred stock dividends 18,504 3,340 8,672 8,933 22,105 Series A Preferred stock dividends (a) 359 359 --------------------------------------------------------------------- Income applicable to common shareholders $18,504 $3,340 $9,031 $8,933 21,746 --------------------------------------------------------------------- Net Income per Common Share - Basic $3.52 $3.58 --------------- ------------ Net Income per Common Share - Diluted $3.51 $3.57 --------------- ------------ Weighted average shares - Basic 5,253,813 (d) 824,650 6,078,463 --------------- ------------ Weighted average shares - Diluted 5,270,947 (d) 824,650 6,095,597 --------------- ------------ See accompanying notes to unaudited pro forma consolidated statements of income
Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Statements of Income For the year ended December 31, 1997 ($ in thousands, except per share data) (a) Adjustment resulting from the allocation of the purchase price for the Acquisition based on the estimated fair value of the underlying net assets are as follows: Additional depreciation expense incurred due to write up of building and a change in the useful life of the building to 20 years as of 1/1/97 $158 Adjustment to reverse amortization of deferred acquisition costs (6,852) Participating policyholders' share of amortization of deferred acquisition costs, net of taxes at a statutory rate of 34% 3,956 Adjustment to record amortization of present value of future profits 2,233 Participating policyholders' share of amortization of present value of future profits net of taxes at a statutory rate of 34% (1,273) Series A Preferred stock dividends on estimated fair value of $5,856 of preferred stock at a rate of 6 1/8% per annum 359 (b) Adjustment to reflect the federal income tax effect of item (a) above using statutory rate of 34% 1,517 (c) Adjustment to eliminate intercompany balances 808 (d) Adjustment to reflect estimated additional shares of Common Stock issued in the acquisition assuming an average closing price of $37 9/32 if the closing had occurred on April 6, 1998. The actual average closing price and the actual number of shares of common Stock that will be issued to the selling stockholders may vary significantly from these amounts. 824,650 Management's Discussion and Analysis of Financial Condition and Results of Operations. General The following discussion includes the operations of Farm Family Holdings, Inc. ("Farm Family Holdings") and its wholly owned subsidiaries (collectively referred to as the "Company"). The primary subsidiary of Farm Family Holdings is Farm Family Casualty Insurance Company ("Farm Family Casualty"). The operations of the Company are closely related with those of its affiliates, Farm Family Life Insurance Company ("Farm Family Life"), and Farm Family Life's wholly owned subsidiary, United Farm Family Insurance Company ("United Farm Family"). Farm Family Casualty is a specialized property and casualty insurer of farms, other generally related businesses and residents of rural and suburban communities primarily in the Northeastern United States. Farm Family Casualty provides property and casualty insurance coverages to members of the state Farm Bureau(R) organizations in New York, New Jersey, Delaware, West Virginia and all of the New England states. Membership in a state Farm Bureau organization is a prerequisite for voluntary insurance coverage (except for employees of the Company and its affiliates). The Company's operating results are subject to significant fluctuations from period to period depending upon, among other factors, the frequency and severity of losses from weather related and other catastrophic events, the effect of competition and regulation on the pricing of products, changes in interest rates, general economic conditions, tax laws and the regulatory environment. As a condition of its license to do business in various states, the Company is required to participate in a variety of mandatory residual market mechanisms (including mandatory pools) which provide certain insurance (most notably automobile insurance) to consumers who are otherwise unable to obtain such coverages from private insurers. In all such states, residual market premium rates are subject to the approval of the state insurance department and have generally been inadequate. The amount of future losses or assessments from residual market mechanisms cannot be predicted with certainty and could have a material adverse effect on the Company's results of operations. For the three month periods ended March 31, 1998 and 1997, 33.2% and 36.3%, respectively, of the Company's direct written premiums were derived from policies written in New York and, for the same periods, 28.4% and 23.8%, respectively, were derived from policies written in New Jersey. For these same periods, no other state accounted for more than 10.0% of the Company's direct written premiums. As a result, the Company's results of operations may be significantly affected by weather conditions, catastrophic events and regulatory developments in these two states and in the Northeastern United States generally. Safe Harbor Statement under The Private Securities Litigation Reform Act of 1995: - -------------------------------------------------------------------------------- With exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current knowledge, expectations, estimates, beliefs and assumptions. The forward-looking statements in this Form 10-Q include, but are not limited to, statements with respect to the Company's potential acquisition of Farm Family Life, the impact of the potential acquisition of Farm Family Life on the earnings and shareholder value of the Company, projections of revenue, earnings, capital structure and other financial items, statements of the plans and objectives of the Company or its management, and statements of future economic performance and assumptions underlying statements regarding the Company or its business. Readers are hereby cautioned that certain events or circumstances could cause actual results to differ materially from those estimated, projected, or predicted. The forward-looking statements in this Form 10-Q are not guarantees of future performance and are subject to a number of important risks and uncertainties, many of which are outside the Company's control, that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, the results of operations of the Company and Farm Family Life, fluctuations in the market value of shares of the Company's common stock, the satisfaction of the closing conditions set forth in the Amended and Restated Option Purchase Agreement (which conditions include, but are not limited to, the approval of the Company's shareholders and receipt of all required government approvals), exposure to catastrophic loss, geographic concentration of loss exposure, general economic conditions and conditions specific to the property and casualty insurance industry, including its cyclical nature, regulatory changes and conditions, rating agency policies and practices, competitive factors, claims development and the impact thereof on loss reserves and the Company's reserving policy, the adequacy of the Company's reinsurance programs, developments in the securities markets and the impact thereof on the Company's investment portfolio, factors relating to the Company's ability to successfully address its Year 2000 issues and other risks listed from time to time in the Company's Securities and Exchange Commission filings, including the Form 10-K filed for the fiscal year ended December 31, 1997 and the Prospectus dated July 22, 1996. Accordingly, there can be no assurance that actual results will conform to the forward-looking statements in this Form 10-Q. Results of Operations - --------------------- The Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31, 1997 Premiums - -------- Premium revenue increased $7.8 million or 22.4%, during the three months ended March 31, 1998 to $42.8 million from $35.0 million for the same period in 1997. The increase in premium revenue in 1998 resulted from an increase of $5.9 million in earned premiums on additional business directly written by the Company, and an increase of $0.1 million in earned premiums from assumed business and a decrease of $1.8 million in earned premiums ceded to reinsurers and not retained by the Company. The $5.9 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $4.8 million, or 15.6%, in earned premiums from the Company's primary products (personal and commercial automobile products other than assigned risk automobile business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package), as well as an increase of $0.7 million in earned premiums from the Company's workers' compensation business. The Company has approximately 158,600 total policies in force. The number of policies in force related to the Company's primary products increased by 11.7% to approximately 130,600 as of March 31, 1998 from approximately 116,900 as of March 31, 1997 and the average premium earned for each such policy increased by 3.4% during the three months ended March 31, 1998 compared to the same period in 1997. Net written premiums increased 28.9% to $47.4 million for the three months ended March 31, 1998 compared to $36.7 million for the same period in 1997. The increase in net written premiums is primarily attributable to the growth in direct writings to customers, a decrease in written premium ceded to reinsurers and, to a lesser extent, an increase in the Company's voluntary assumed reinsurance business. Geographically, the increase in the Company's direct writings came from New Jersey, New York, Massachusetts, Connecticut, Delaware, West Virginia, and Rhode Island. In addition, direct writings of all the Company's primary products, particularly personal automobile, increased during the first quarter of 1998. Net Investment Income - --------------------- Net investment income increased $0.4 million or 7.9% to $4.8 million for the three months ended March 31, 1998 from $4.4 million for the same period in 1997. The increase in net investment income was primarily the result of an increase in average cash and invested assets (at amortized cost) of approximately $44.3 million, or 18.8% from March 31, 1998 compared to March 31, 1997. The return realized on the Company's cash and investments was 6.9% for the three months ended March 31, 1998 and 7.5% for the same period in 1997. The reduction in the return realized on the Company's cash and invested assets is primarily attributable to an increase in investment in tax-exempt bonds which provide for a larger after tax return. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $7.4 million, or 30.1%, to $32.1 million for the three months ended March 31, 1998 from $24.7 million for the same period in 1997. Loss and loss adjustment expenses were 75.1% of premium revenue for the three months ended March 31, 1998 compared to 70.6% of premium revenue for the same period in 1997. The increase in loss and loss adjustment expenses as a percent of premium revenue was primarily attributable to the increase in weather related losses during the first three months of 1998. Losses believed to be weather related aggregated $4.1 million in the three months ended March 31, 1998 compared to $2.1 million for the same period in 1997. The increase in weather related losses was primarily attributable to severe ice storms which impacted the upstate New York and Maine territories in which the Company writes business. Underwriting Expenses - --------------------- Underwriting expenses increased $1.1 million, or 11.1%, to $11.2 million for the three months ended March 31, 1998 from $10.1 million for the same period in 1997. For the three months ended March 31, 1998, underwriting expenses were 26.2% of premium revenue compared to 28.9% for the same period in 1997. The decrease in underwriting expenses as a percent of premium revenue was primarily attributable to a greater relative increase in the Company's premium revenue than in the level of overhead expenses, as well as the continuation of a company-wide expense management program. Federal Income Tax Expense - -------------------------- Federal income tax expense decreased $0.3 million to $1.3 million in 1998 from $1.6 million in 1997. Federal income tax expense was 28.7% of income before federal income tax expense for the three months ended March 31, 1998 compared to 34.5% for the same period in 1997. Net Income - ---------- Net income increased $0.1 million to $3.2 million for the three months ended March 31, 1998 from $3.1 million for the same period in 1997 primarily as a result of the foregoing factors. Liquidity and Capital Resources - ------------------------------- Net cash provided by operating activities was $5.2 million and $7.8 million during the three month periods ended March 31, 1998 and 1997, respectively. The decrease in net cash provided by operating activities during the three months ended March 31, 1998 was primarily attributable to an increase of $2.6 million of loss and loss adjustment expenses paid to $25.3 million from $22.7 million for the three months ended March 31, 1998 and 1997, respectively. Net cash used in investing activities was $5.8 million during the three months ending March 31, 1998 compared to $8.0 million for the same period in 1997 primarily as a result of an increase in investment collections from fixed maturities, which was partially offset by an increase in short-term investments by the Company. The Company has in place unsecured lines of credit with two banks under which it may borrow up to $12.0 million. At March 31, 1998, no amounts were outstanding on either of the lines of credit. In addition, at March 31, 1998, Farm Family Casualty had $1.3 million principal amount of surplus notes outstanding. The surplus notes bear interest at the rate of eight percent per annum and have no maturity date. Farm Family Casualty redeemed all of the surplus notes on April 1, 1998. Future Application of Accounting Standards - ------------------------------------------ In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement (SFAS) 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for years beginning after December 31, 1997. SFAS 132 revises the disclosure requirements but does not change the measurement or recognition of pensions and other post retirement benefits. The adoption of SFAS 132 will result in revised and additional disclosures but will have no effect on the financial position, results of operations, or liquidity of the Company. Item 6: Exhibits and Reports on Form 8-K EXHIBIT INDEX FARM FAMILY HOLDINGS, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 Exhibit Number Document Description *2.1 Plan of Reorganization and Conversion dated February 14, 1996 as amended by Amendment No. 1, dated April 23, 1996 *3.1 Certificate of Incorporation of Farm Family Holdings, Inc. *3.2 Bylaws of Farm Family Holdings, Inc. *Incorporated by reference to Registration Statement No. 333-4446 Reports on Form 8-K A report on Form 8-K was filed on January 28, 1998 reporting a press release issued announcing that a committee of its independent directors and a committee representing the shareholders of Farm Family Life negotiated a revision of the form of consideration to be paid, under the Option Purchase Agreement pursuant to which Farm Family Holdings has an option of acquire Farm Family Life. A report on Form 8-K was filed on February 27, 1998 reporting a press release issued announcing the Company's operating results for the quarter ended and the year ended December 31, 1997. No financial statements were filed with either Form 8-K. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FARM FAMILY HOLDINGS, INC. (Registrant) May 14, 1998 By: /s/ Philip P. Weber - ------------ ---------------------------------------------------------------- (Date) Philip P. Weber, President & Chief Executive Officer (Principal Executive Officer) May 14, 1998 By: /s/ Timothy A. Walsh - ------------ ---------------------------------------------------------------- (Date) Timothy A. Walsh, Executive Vice President - Finance & Treasurer (Principal Financial & Accounting Officer) EX-27 2 FDS --
7 0001013564 Farm Family Holdings, Inc. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 259,956 8,602 8,949 4,730 745 0 286,186 5,327 15,630 13,401 380,739 163,498 69,119 12,116 0 0 0 0 53 7,359 380,739 42,815 4,767 126 219 32,139 11,213 0 4,500 1,292 3,208 0 0 0 3,208 0.61 0.61 127,568 34,132 (1,991) 8,232 19,158 132,319 0
-----END PRIVACY-ENHANCED MESSAGE-----