-----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, A2Mri9QJe/y9ozlACL32Nz0NZM4e6q6Gf7qXLHKWsTmAmV/LIYMcHZE0kvPTdrkf AxhbINv6tSBOWjKFJYT0AA== 0001013564-98-000017.txt : 19981021 0001013564-98-000017.hdr.sgml : 19981021 ACCESSION NUMBER: 0001013564-98-000017 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981020 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/A SEC ACT: SEC FILE NUMBER: 001-11941 FILM NUMBER: 98728027 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/A 1 FARM FAMILY HOLDINGS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 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 August 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 June 30, 1998 and December 31, 1997 Consolidated Statements of Income and Comprehensive Income Three months ended June 30, 1998 and 1997 and the six months ended June 30, 1998 and 1997 Consolidated Statements of Cash Flow Six months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands) (Unaudited) June 30, 1998* December 31, 1997* - ------------------------------------------------------------------------------------------------------------------ Assets Investments: Fixed Maturities Available for sale, at fair value (Amortized cost: $259,404 in 1998 and $248,984 in 1997 ) $269,825 $259,199 Held to maturity, at amortized cost (Fair value: $8,949 in 1998 and $9,194 in 1997) 8,471 8,855 Equity securities Available for sale, at fair value (Cost: $3,363 in 1998 and 1997) 4,841 4,521 Mortgage loans 728 1,660 Other invested assets 458 553 Short-term investments 8,172 5,643 - ------------------------------------------------------------------------------------------------------------------ Total investments 292,495 280,431 - ------------------------------------------------------------------------------------------------------------------ Cash 5,523 5,841 Insurance receivables: Reinsurance receivables 17,513 12,343 Premiums receivable, net 33,472 28,141 Deferred acquisition costs 13,437 12,613 Accrued investment income 5,351 5,408 Deferred income tax asset, net 4,992 4,422 Prepaid reinsurance premiums 505 2,044 Receivable from affiliates, net 17,690 17,786 Other assets 3,404 2,202 - ------------------------------------------------------------------------------------------------------------------ Total Assets $394,382 $371,231 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ LIABILITIES aND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $168,411 $156,622 Unearned premium reserve 72,650 66,069 Reinsurance premiums payable 2,122 2,564 Accrued expenses and other liabilities 21,892 21,474 Debt - 1,268 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 265,075 247,997 - ------------------------------------------------------------------------------------------------------------------ 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 92,906 92,906 Retained earnings 28,616 22,883 Accumulated other comprehensive income 7,732 7,392 - ------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 129,307 123,234 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $394,382 $371,231 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ See accompanying notes to Consolidated Financial Statements. *Amounts have been restated for certain items as more fully described in Note 2-Prior Period Adjustments.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME ($ in thousands, except per share data) (Unaudited) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998* 1997* 1998* 1997* - ------------------------------------------------------------------------------------------------------------------------------------ Revenues: Premiums $44,929 $35,761 $87,744 $70,734 Net investment income 4,751 4,510 9,518 8,926 Realized investment gains, net 216 5,551 342 5,461 Other income 264 265 483 485 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 50,160 46,087 98,087 85,606 - ------------------------------------------------------------------------------------------------------------------------------------ Losses and Expenses: Losses and loss adjustment expenses 33,988 25,023 66,127 49,720 Underwriting expenses 12,117 10,486 23,591 20,976 Interest expense - 26 25 52 Dividends to policyholders 5 74 55 112 - ------------------------------------------------------------------------------------------------------------------------------------ Total losses and expenses 46,110 35,609 89,798 70,860 - ------------------------------------------------------------------------------------------------------------------------------------ Income before federal income tax expense 4,050 10,478 8,289 14,746 Federal income tax expense 1,339 3,506 2,556 4,980 - ------------------------------------------------------------------------------------------------------------------------------------ Net income 2,711 6,972 5,733 9,766 - ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income, net of tax: Unrealized holding gain (loss) arising during the period (net of deferred tax of ($236), ($1,600), ($290) and $32 438 2,972 538 (59) respectively) Reclassification adjustment for gains (losses) included in net income (net of tax expense (benefit) of $35, $1,800, $107 and $1,781 (65) (3,343) (198) (3,307) respectively) - ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income 373 (371) 340 (3,366) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income $3,084 $6,601 $6,073 $6,400 - ------------------------------------------------------------------------------------------------------------------------------------ Per Common Share: Basic earnings per common share $ 0.52 $1.33 $1.09 $1.86 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per common share $ 0.51 $1.33 $1.08 $1.86 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Basic weighted average shares outstanding 5,253,813 5,253,813 5,253,813 5,253,813 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted weighted average shares outstanding 5,313,386 5,253,813 5,307,442 5,253,813 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to Consolidated Financial Statements. *Amounts have been restated for certain items as more fully described in Note 2-Prior Period Adjustments.
FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) (Unaudited) For the Six Months Ended June 30, 1998* 1997* - ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $5,733 $9,766 - ------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains (342) (5,461) Amortization of bond discount 145 95 Deferred income taxes (753) (776) Changes in: Reinsurance receivables (5,170) (860) Premiums receivable (5,331) (7,527) Deferred acquisition costs (824) (1,192) Accrued investment income 57 (391) Prepaid reinsurance premiums 1,539 (417) Receivable from affiliates 96 205 Other assets (1,202) (512) Reserves for losses and loss adjustment expenses 11,789 5,019 Unearned premium reserve 6,581 9,364 Reinsurance premiums payable (442) 1,557 Accrued expenses and other liabilities 417 3,150 - ------------------------------------------------------------------------------------------------------------------------- Total adjustments 6,560 2,254 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,293 12,020 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from sales: Fixed maturities available for sale 408 3,514 Equity securities - 5,954 Investment collections: Fixed maturities available for sale 22,925 7,334 Fixed maturities held to maturity 367 569 Mortgage loans 932 41 Investment purchases: Fixed maturities available for sale (33,541) (26,880) Equity securities - (1,038) Change in short-term investments, net (2,529) (121) Change in other invested assets 95 (62) - ------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (11,343) (10,689) - ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Principal payments on debt (1,268) (19) - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (1,268) (19) - ------------------------------------------------------------------------------------------------------------------------- Net decrease in cash (318) 1,312 Cash, beginning of period 5,841 4,110 - ------------------------------------------------------------------------------------------------------------------------- Cash, end of period $5,523 $5,422 - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements. *Amounts have been restated for certain items as more fully described in Note 2-Prior Period Adjustments.
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 June 30, 1998, and the consolidated results of operations for the three months and the six months ended June 30, 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. Prior Period Adjustments Previously, the Company accounted for its extended earnings program pursuant to Statement of Financial Accounting Standards No. 5. The restatement of certain amounts within the Company's consolidated financial statements relates to the Company's retroactive adoption effective January 1, 1994 of Statement of Financial Accounting Standards No. 112 "Employers' Accounting for Postemployment Benefits" ("Statement 112") to account for the Company's extended earnings program with its agents and agency managers. Pursuant to agreements between the Company and its agents and agency managers (collectively referred to hereafter as "agents"), subject to certain conditions including length of service, confidentiality, and non-competition, certain agents 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 by deductions from the commissions earned by successor agents who have assumed the right to service the books of business previously serviced by eligible former agents subsequent to the termination of the former agent's association with the Company. The Company has restated certain amounts within its consolidated financial statements as of June 30, 1998 and December 31, 1997 and for the three months and the six months ended June 30, 1998 and 1997. The following table presents the restated and previously reported amounts: (Dollars in thousands, except per share data)
June 30, 1998 December 31, 1997 Previously Previously Reported Restated Reported Restated Balance Sheet: Deferred income tax asset, net $1,881 $4,992 $1,469 $4,422 Total assets 391,271 394,382 368,278 371,231 Accrued expenses and other liabilities 11,735 21,892 11,828 21,474 Total liabilities 254,918 265,075 238,351 247,997 Stockholders' equity 136,353 129,307 129,927 123,234 Total liabilities and stockholders' equity 391,271 394,382 368,278 371,231
For the three months ended June 30, For the six months ended June 30, 1998 1997 1998 1997 ----- ----- ----- ---- Previously Previously Previously Previously Reported Restated Reported Restated Reported Restated Reported Restated Statements of Income: Underwriting expenses $11,868 $12,117 $10,107 $10,486 $23,081 $23,591 $20,197 $20,976 Federal income tax expense 1,421 1,339 3,637 3,506 2,713 2,556 5,249 4,980 Net income 2,878 2,711 7,220 6,972 6,086 5,733 10,276 9,766 Per share data: Net income-Basic $0.55 $0.52 $1.37 $1.33 $1.16 $1.09 $1.96 $1.86 Net income-Diluted $0.54 $0.51 $1.37 $1.33 $1.15 $1.08 $1.96 $1.86
3. 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 Six months ended June 30, ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income available to common stockholders $2,711,000 $6,972,000 $5,733,000 $9,766,000 -------------------------------------------------------- Weighted average number of shares in basic earnings per share 5,253,813 5,253,813 5,253,813 5,253,813 Effect of stock options 59,573 --- 53,629 --- -------------------------------------------------------- Weighted average number of shares in diluted earnings per share 5,313,386 5,253,813 5,307,442 5,253,813 -------------------------------------------------------- Basic net income per share $0.52 $1.33 $1.09 $1.86 -------------------------------------------------------- Diluted net income per share $0.51 $1.33 $1.08 $1.86 --------------------------------------------------------
4. Future Application of Accounting Standards In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("Statement 131") effective for years beginning after December 15, 1997. The adoption of Statement 131 will result in revised and additional disclosures but will have no effect on the financial position, results of operations, or liquidity of the Company. In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("Statement 132") effective for years beginning after December 15, 1997. Statement 132 revises the disclosure requirements but does not change the measurement or recognition of pensions and other post retirement benefits. The adoption of Statement 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. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, which is effective for the year beginning January 1, 2000, establishes accounting and reporting standards for derivative instruments and for hedging activities. Statement 133 requires a company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management is evaluating the impact this statement may have on the Company's financial statements. 5. 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 six months ended June 30, 1998 and 1997, approximately 62% 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 (collectively referred to hereafter as "agents"), subject to certain conditions including length of service, confidentiality, and non-competition, certain agents 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 by deductions from the commissions earned by successor agents who have assumed the right to service the books of business previously serviced by eligible former agents subsequent to the termination of the former agent's association with the Company. As described in note 2 - Prior Period Adjustments, the Company has recorded a $10,157,000 liability for the extended earnings program (the "Program") in accordance with Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("Statement 112") to account for the Program. During the third quarter of 1998, the Company intends to modify the agreements with its agents to include revised conditions under which eligible agents may receive extended earnings payments. In addition to the conditions described previously, extended earnings will be paid only if a successor agent(s) assumes the right to service the book of business of the eligible former agent and agrees to become primarily responsible for making the extended earnings payments. In the event that no successor agent(s) assumes the right to service the book of business of an eligible former agent, the Company has no obligation to make the extended earnings payments. The Company has no intention to waive this provision of its agreements with its agents. As a result, the successor agent(s), not the Company, will be the primary obligor responsible for extended earnings payments. Since the inception of the Program in 1986, the Company has always been able to identify successor agents willing to assume the rights to service such books of business. The Company will act as guarantor of the amounts payable to eligible former agents who have terminated their association with the Company by successor agents who agree to make the extended earnings payments. The Company expects to enforce the terms of the guarantee in the event of default by a successor agent. When the Company's modified agreements with its agents become effective, which the Company expects to be during the third or fourth quarter of 1998, approximately $6,319,000 of the Company's Statement 112 liability will be extinguished and the Company expects to record a net gain on this extinguishment of approximately $4,171,000 ($6,319,000 less taxes of $2,148,000). The Company is primary liable for its remaining Statement 112 liability which will be approximately $3,838,000 and represents the aggregate amount owed by the Company to eligible former agents that have terminated their association with the Company and are currently receiving extended earnings payments. The Company's remaining Statement 112 liability is being funded by deductions from the commissions earned by successor agents who have assumed the right to service the books of business previously serviced by eligible former agents who have terminated their association with the Company pursuant to agreements with such agents. Funding from successor agents is subject to the ability of the successor agents to generate sufficient commissions to satisfy the liability. Many computer programs upon which the Company relies were created using 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 produce erroneous results by or at the beginning of the year 2000. The Company's overall plan for dealing with the Year 2000 problem covers Information Technology ("IT") systems, non-IT systems, and third party providers. The Company has established a dedicated Year 2000 team to lead the Company's activities relating to its Year 2000 issues. The Company's current state of readiness with respect to each of these elements is discussed below. All IT systems that the Company considers to be critical at this time have been evaluated for Year 2000 problems. Management of the Company believes that these systems will have been diagnosed, modified and tested by the end of 1998. The Company is currently testing the operation of IT systems working together in an integrated test environment that replicates the Company's live environment. This test exercises software and hardware using dates advanced to Year 2000 and beyond. There can be no assurances that testing will discover all potential Year 2000 problems or that it will not reveal additional material problems that will have to be resolved. Non-IT systems typically include embedded technology such as microcontrollers. The Company's non-IT systems include machinery and equipment in its buildings, such as elevators, telephone equipment, HVAC, security and alarm systems, copiers, fax machines, and print shop/mail room equipment. The Company is reviewing these systems for Year 2000 compliance with the third party providers the Company uses to service and maintain this equipment. The Company uses a variety of third party providers in the normal course of conducting its day to day operations. Year 2000 problems may result in a loss of service from these providers. The Company believes loss of electric power, phone, banking, mail or certain outsourced processing services could have an immediate and critical adverse material impact on the Company's operations. The Company is contacting each of its third party providers to determine if the provider is Year 2000 compliant. If a provider is not currently Year 2000 compliant, and its plans to become Year 2000 compliant are uncertain, then the Company intends to seek other providers. The Company's incremental costs to address the Year 2000 issues did not have a material impact on the Company's operations in 1997 or during the six months ended June 30, 1998, and are not expected to have a material impact in the remainder of 1998 or 1999. The work of finding, correcting and testing the Company's software for Year 2000 issues has been done primarily by the Company's existing IT staff. Correction of Year 2000 issues is a high priority project and other IT projects have been deferred due to Year 2000 efforts; however, the Company does not believe the deferral of other IT projects has had a material effect on financial condition or results of operations in 1997 or during the six months ended June 30, 1998. The Company's IT staff has continued to work on other high priority projects concurrent with the Year 2000 project. The Company believes that its most reasonably likely worst case Year 2000 scenario will include these elements: (1) one or more of the Company's third party providers will be unable to provide the services expected, and (2) one or more parts of the Company's processing software will operate incorrectly. The Company believes that its testing of its critical hardware and software will reveal any significant Year 2000 problems, that such problems will be capable of remediation, and that the Company's software and hardware will perform substantially as planned when Year 2000 processing begins. Because of the progress which has been made toward achieving Year 2000 compliance, the Company has not made specific contingency plans. If adverse development of the Company's plans or knowledge of outside providers' non-compliance becomes evident, the Company will develop and implement contingency plans as required. Despite the Company's efforts to address its Year 2000 issues, there can be no assurances that Year 2000 related failures of the Company's software, or that Year 2000 related failures by third parties with which the Company interacts, will not have a material adverse effect on the Company. 6. 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 had, 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 June 30, 1998, as if the acquisition had occurred as of June 30, 1998. The pro forma consolidated statements of income combines the operations of the Company and Farm Family Life for the six months ended June 30, 1998 and for the year ended December 31, 1997 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 (see Note 1). 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 June 30, 1998 ($ in thousands)
Pro Forma Farm Family Farm Family Adjustments Holdings Life Dr. Cr. Pro Forma ASSETS Investments Fixed maturities Available for sale $269,825 $707,719 $ $ $977,544 Held to maturity, at amortized cost 8,471 8,471 Equity securities 4,841 41,121 45,962 Mortgage loans 728 13,259 13,987 Policy loans 29,842 29,842 Other invested assets 458 624 1,082 Short-term investments 8,172 5,082 13,254 ----------------------------------------------------------------------------- Total investments 292,495 797,647 1,090,142 ----------------------------------------------------------------------------- Cash 5,523 525 6,048 Insurance receivables: Reinsurance receivables 17,513 810 18,323 Premiums receivable 33,472 (D) 102 33,370 Deferred acquisition costs 13,437 28,375 (B) 28,375 13,437 Present value of future profits (B)18,229 18,229 Accrued investment income 5,351 13,491 18,842 Property and equipment, net 12,262 (B) 4,281 16,543 Deferred income tax asset, net 4,992 4,992 Prepaid reinsurance premiums 505 505 Receivable from affiliates, net 17,690 (D) 17,690 0 Other assets 3,404 2,189 (E) 247 (A) 1,400 4,440 ----------------------------------------------------------------------------- Total Assets $394,382 $855,299 $22,757 $47,567 $1,224,871 ----------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $168,411 $ $ $ $168,411 Future policy and contract benefits 215,978 215,978 Funds on deposit from policyholders 420,579 (B) 2,209 418,370 Unearned premium reserve 72,650 72,650 Accrued dividends to policyholders 5,683 5,683 Reinsurance premiums payable 2,122 2,122 Deferred income tax liability 36,755 (B) 1,276 35,479 Payable to affiliate 17,792 (D) 17,792 0 Accrued expenses and other liabilities 21,892 4,234 (B)(E) 347 26,473 Debt Participating policyholders' interest 113,858 113,858 ----------------------------------------------------------------------------- Total liabilities 265,075 814,879 21,277 347 1,059,024 ----------------------------------------------------------------------------- Commitments and contingencies Mandatory redeemable preferred stock (A) 5,846 5,846 Stockholders' equity: Common stock 53 3,001 (C) 3,001 (A) 8 61 Additional Paid in Capital 92,906 (A) 30,686 123,592 Retained earnings 28,616 35,585 (C) 35,585 28,616 Accumulated other comprehensive income 7,732 1,834 (C) 1,834 7,732 ----------------------------------------------------------------------------- Total stockholders' equity 129,307 40,420 40,420 30,694 160,001 ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $394,382 $855,299 $61,697 $36,887 $1,224,871 ----------------------------------------------------------------------------- See accompanying notes to unaudited pro forma consolidated balance sheet.
Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Balance Sheet June 30, 1998 ($ 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 $960 to be paid by Farm Family Life in the acquisition on behalf of the selling stockholders) Series A Preferred stock ($5,846) Unregistered common stock issued (772,166 shares issued, $.01 par value) in the acquisition assuming an average closing price of $39 3/4 if the closing had occurred on August 10, 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 (30,686) Expenses relating to acquisition 1,400 (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 a current appraisal of the estimated fair market value of the building. In addition, based on information contained in the current appraisal and an evaluation of the current condition of the building, the estimated useful life has been changed to 20 years $4,281 Elimination of historical deferred acquisition costs (28,375) Adjustment to record present value of future profits calculated based on a discount rate equal to each year's earned rate for traditional insurance products, which range from 8% to 9%, and each year's credited rate for annuities and universal life products, which range from 6% to 7%, less the excess of net assets acquired over the purchase price. The earned rate for traditional life insurance products and the credited rate for annuities and universal life products is the rate used by Farm Family Life to credit interest to policyholders' funds held by these products. The amount of interest accrued on the unamortized present value of future profits balance during the year was $0.4 million. The interest accrual rate was 6.5% for universal life products, 6.3% for annuities, and 9.0% for traditional life products. For traditional insurance products, the present value of future profits is amortized, with interest in proportion to the ratio of estimated annual revenues over the contract period. For universal life contracts and annuity contracts, the present value of future profits is amortized at a constant rate based upon the amount expected to be realized over the life of the contracts, which is reevaluated annually. For most life insurance, a 15-year to 40-year amortization period is used, and a 20-year period is used for annuities. Approximately $2.1 million is expected to be amortized during each 18,229 of the years ended December 31, 1998, 1998, 2000, 2001 and 2002. 18,229 Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Balance Sheet June 30, 1998 ($ in thousands) Liabilities Adjustment to reflect the net deferred tax benefit of purchase accounting adjustments using a statutory rate of 34% 1,276 Adjustment to record liability for Guaranty Funds (100) Adjustment of carrying amount of funds on deposit from policyholders based on fair market value. Policyholder funds held at variable rates are carried at their account value which approximates fair value. The fair value of policyholder funds held at fixed rates is the present value of the funds calculated using current market rates. 2,209 (C) Adjustment to eliminate Farm Family Life's stockholder's equity (D) Adjustment to eliminate intercompany balances (E) Adjustment to accrue additional expenses relating to the acquisition expected to be incurred 247 Farm Family Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Income For the six months ended June 30, 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 $87,744 $3 $ $ $87,747 Premiums from life and health operations 15,531 15,531 Net investment income 9,518 27,798 37,316 Realized investment gains (losses), net 342 1,707 2,049 Policy and contract charges 2,406 2,406 Other income 483 493 (c) 434 542 ------------------------------------------------------------------------ Total revenues 98,087 47,938 434 145,591 ------------------------------------------------------------------------ Losses, Benefits and Expenses: Losses and loss adjustment expenses 66,127 900 67,027 Benefits to policyholders 13,292 13,292 Underwriting & operating expenses 23,591 4,070 (a) 72 (c) 434 27,299 Non-recurring charges 176 176 Interest credited to policyholders 11,312 11,312 Amortization of policy acquisition costs 3,583 (a) 3,583 0 Amortization of present value of future profits (a) 899 899 Interest expense 25 25 Dividends to policyholders 55 55 Participating policyholders' interest 12,261 (a) 3,168 (a) 773 14,656 ------------------------------------------------------------------------ Total losses and expenses 89,798 45,594 4,139 4,790 134,741 ------------------------------------------------------------------------ Income before federal income tax expense 8,289 2,344 4,573 4,790 10,850 Federal income tax expense 2,556 786 (b) 73 3,415 ------------------------------------------------------------------------ Net Income before preferred stock dividends 5,733 1,558 4,646 4,790 7,435 Preferred stock dividends (a) 184 184 ------------------------------------------------------------------------ Net Income applicable to common shareholders $5,733 $1,558 $4,830 $4,790 $7,251 ------------------------------------------------------------------------ Net Income per Common Share - Basic $1.09 $1.20 -------------- -------------- Net Income per Common Share - Diluted $1.08 $1.19 -------------- -------------- Weighted average shares - Basic 5,253,813 (d) 772,166 6,025,979 -------------- -------------- Weighted average shares - Diluted 5,307,442 (d) 772,166 6,079,608 -------------- -------------- See accompanying notes to unaudited pro forma consolidated statements of income.
Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Statements of Income For the six months ended June 30, 1998 ($ 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 an adjustment of the fair market value of the building based on a current appraisal and a change in the estimated useful life of the building to 20 years based on information contained in the current appraisal and an evaluation of the current condition of the building. $72 Adjustment to reverse amortization of deferred acquisition costs (3,583) Participating policyholders' share of amortization of deferred acquisition costs 3,168 Adjustment to record amortization of present value of future profits 899 Participating policyholders' share of amortization of present value of future profits (773) Series A Preferred stock dividends on estimated fair value of $5,846 of preferred stock at a rate of 6 1/8% per annum 184 (b) Adjustment to reflect the federal income tax effect of item (a) above using statutory rate of 34% 73 (c) Adjustment to eliminate intercompany balances 434 (d) Adjustment to reflect estimated additional shares of common stock issued in the acquisition assuming an average closing price of $39 3/4 if the closing had occurred on August 10, 1998. The actual average closing price and the actual number of shares of common stock that will be issued to the selling stockholders may vary significantly from these amounts. 772,166
Farm Family Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Income For the year ended December 31, 1997 ($ 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 30,505 30,505 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 173,723 103,597 808 276,512 ------------------------------------------------------------------------ Losses, Benefits and Expenses: Losses and loss adjustment expenses 103,301 9,975 113,276 Benefits to policyholders 26,843 26,843 Underwriting & operating expenses 43,320 7,747 (a) 158 (c) 808 50,417 Non-recurring charges 707 707 Interest credited to policyholders 24,813 24,813 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 Participating policyholders' interest 21,616 (a) 5,994 (a) 1,929 25,681 ------------------------------------------------------------------------ Total losses and expenses 147,005 98,553 8,385 9,589 244,354 ------------------------------------------------------------------------ Income before federal income tax expense 26,718 5,044 9,193 9,589 32,158 Federal income tax expense 9,218 1,704 (b) 135 11,057 ------------------------------------------------------------------------ Net Income before preferred stock dividends 17,500 3,340 9,328 9,589 21,101 Series A Preferred stock dividends (a) 359 359 ------------------------------------------------------------------------ Net Income applicable to common shareholders $17,500 $3,340 $9,687 $9,589 $20,742 ------------------------------------------------------------------------ Net Income per Common Share - Basic $3.33 $3.44 --------------- -------------- Net Income per Common Share - Diluted $3.32 $3.43 --------------- -------------- Weighted average shares - Basic 5,253,813 (d) 773,434 6,027,247 --------------- -------------- Weighted average shares - Diluted 5,270,947 (d) 773,434 6,044,381 --------------- --------------
Farm Family Holdings, Inc. Notes to Unaudited Pro Forma Consolidated Statements of Income For the year ended December 31, 1997 ($ 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 an adjustment of the fair market value of the building based on a current appraisal and a change in the estimated useful life of the building to 20 years based on information contained in the current appraisal and an evaluation of the current condition of the building. $158 Adjustment to reverse amortization of deferred acquisition costs (6,852) Participating policyholders' share of amortization of deferred acquisition costs 5,994 Adjustment to record amortization of present value of future profits 2,233 Participating policyholders' share of amortization of present value of future profits (1,929) 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% 135 (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 $39 3/4 if the closing had occurred on August 10, 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. 773,434 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 six month periods ended June 30, 1998 and 1997, 34.2% and 36.5%, respectively, of the Company's direct written premiums were derived from policies written in New York and, for the same periods, 27.8% and 25.2%, 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. Many computer programs upon which the Company relies were created using 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 produce erroneous results by or at the beginning of the year 2000. The Company's overall plan for dealing with the Year 2000 problem covers Information Technology ("IT") systems, non-IT systems, and third party providers. The Company has established a dedicated Year 2000 team to lead the Company's activities relating to its Year 2000 issues. See Note 5 to the accompanying consolidated financial statements for further discussion on Year 2000. As described in Note 2 to the Company's Notes to Consolidated Financial Statements, the Company has implemented the guidance of Statement of Financial Accounting Standards No. 112 ("Statement 112") to account for its extended earnings program with its agents and agency managers. As a result, the Company has restated certain amounts within the Company's consolidated financial statements relating to the retroactive adoption of Statement 112. 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 contain 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 adoption of the guidance provided in Statement 112 and estimates of the potential impact of the restatement of the Company's financial statements, 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, statements regarding the Company's ability to successfully address its year 2000 issues and the estimated impact thereof on the Company's future financial condition and results of operations, 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 finalization of the Company's calculation of its liability pursuant to Statement 112 and the resulting impact thereof on the Company's financial statements, 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 June 30, 1998 Compared to the Three Months Ended June 30, 1997 Premiums - -------- Premium revenue increased $9.2 million or 25.6%, during the three months ended June 30, 1998 to $44.9 million from $35.8 million for the same period in 1997. The increase in premium revenue in 1998 resulted from an increase of $5.5 million in earned premiums on additional business directly written by the Company, an increase of $2.3 million in earned premiums from assumed reinsurance business and a decrease of $1.4 million in earned premiums ceded to reinsurers and not retained by the Company. The $5.5 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $4.9 million, or 14.8%, 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 $0.6 million in earned premiums from the Company's workers' compensation business. As of June 30, 1998, the Company had a total of approximately 161,500 policies in force. The number of policies in force related to the Company's primary products increased by 11.3% to approximately 133,600 as of June 30, 1998 from approximately 120,000 as of June 30, 1997 and the average premium earned for each such policy increased by 3.5% during the three months ended June 30, 1998 compared to the same period in 1997. Net written premiums increased 13.1% to $48.6 million for the three months ended June 30, 1998 compared to $43.0 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 primarily 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 second quarter of 1998. During the three months ended June 30, 1998, premiums from the Company's direct writings (excluding assigned risk automobile business premiums received by the Company) increased $5.5 million compared to the same period in 1997. Direct writings in New Jersey accounted for $2.2 million ($1.7 million of which represents increased personal automobile business) of the Company's $5.5 million increase in direct writings during the three months ended June 30, 1998 compared to the same period in 1997. Net Investment Income - --------------------- Net investment income increased $0.3 million or 5.3% to $4.8 million for the three months ended June 30, 1998 from $4.5 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 $37.7 million, or 15.2% from June 30, 1998 compared to June 30, 1997. The return realized on the Company's cash and investments was 6.7% for the three months ended June 30, 1998 and 7.3% 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 greater after tax return. The taxable equivalent yield on the Company's investment portfolio was 7.1% and 7.5% for the three months ended June 30, 1998 and 1997, respectively. Realized Investment Gains - ------------------------- Realized investment gains decreased $5.3 million to $0.3 million for the three months ended June 30, 1998 as compared to $5.6 million for the same period in 1997. Realized investment gains in the second quarter of 1997 were primarily attributable to a realized gain on the sale of a common stock investment. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $9.0 million, or 35.8%, to $34.0 million for the three months ended June 30, 1998 from $25.0 million for the same period in 1997. Loss and loss adjustment expenses were 75.6% of premium revenue for the three months ended June 30, 1998 compared to 70.0% 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 second quarter of 1998. Losses believed to be weather related incurred on the Company's direct written business in the northeast aggregated $2.7 million in the three months ended June 30, 1998 compared to $1.1 million for the same period in 1997. In addition, the Company incurred losses of approximately $500,000 as a result of severe weather which impacted certain midwestern risks which the Company reinsures. Underwriting Expenses - --------------------- Underwriting expenses increased $1.6 million, or 15.6%, to $12.1 million for the three months ended June 30, 1998 from $10.5 million for the same period in 1997. For the three months ended June 30, 1998, underwriting expenses were 27.0% of premium revenue compared to 29.3% for the same period in 1997. The reduction in the Company's underwriting expense ratio was primarily attributable to a smaller relative increase in overhead expenses than in premium revenue for the period and the Company's continued expense management initiatives which began in 1998. Federal Income Tax Expense - -------------------------- Federal income tax expense decreased $2.2 million to $1.3 million in 1998 from $3.5 million in 1997. Federal income tax expense was 33.1% of income before federal income tax expense for the three months ended June 30, 1998 compared to 33.5% for the same period in 1997. Net Income - ---------- Net income decreased $4.3 million to $2.7 million for the three months ended June 30, 1998 from $7.0 million for the same period in 1997 primarily as a result of the foregoing factors. The Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997 Premiums - -------- Premium revenue increased $17.0 million or 24.0%, during the six months ended June 30, 1998 to $87.7 million from $70.7 million for the same period in 1997. The increase in premium revenue in 1998 resulted from an increase of $11.4 million in earned premiums on additional business directly written by the Company, an increase of $2.4 million in earned premiums from assumed reinsurance business and a decrease of $3.2 million in earned premiums ceded to reinsurers and not retained by the Company. The $11.4 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $9.7 million, or 15.2%, 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 $1.3 million in earned premiums from the Company's workers' compensation business and an increase of $0.4 million in earned premiums from the Company's other products. As of June 30, 1998, the Company had a total of approximately 161,500 policies in force. The number of policies in force related to the Company's primary products increased by 11.3% to approximately 133,600 as of June 30, 1998 from approximately 120,000 as of June 30, 1997 and the average premium earned for each such policy increased by 3.5% during the six months ended June 30, 1998 compared to the same period in 1997. Net written premiums increased 20.4% to $96.0 million for the six months ended June 30, 1998 compared to $79.7 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 primarily 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 six months ended June 30, 1998. During the six months ended June 30, 1998, premiums from the Company's direct writings (excluding assigned risk automobile business premiums received by the Company) increased $11.5 million compared to the same period in 1997. Direct writings in New Jersey accounted for $5.3 million ($4.0 million of which represents increased personal automobile business) of the Company's $5.5 million increase in direct writings during the six months ended June 30, 1998 compared to the same period in 1997. Net Investment Income - --------------------- Net investment income increased $0.6 million or 6.6% to $9.5 million for the six months ended June 30, 1998 from $8.9 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 $37.7 million, or 15.2% from June 30, 1998 compared to June 30, 1997. The return realized on the Company's cash and investments was 6.8% for the six months ended June 30, 1998 and 7.4% 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. The taxable equivalent yield on the Company's investment portfolio was 7.1% and 7.4% for the six months ended June 30, 1998 and 1997. Realized Investment Gains - ------------------------- Realized investment gains decreased $5.2 million to $0.3 million for the six months ended June 30, 1998 as compared to $5.5 million for the same period in 1997. Realized investment gains in the six months ended June 30, 1997 were primarily attributable to a realized gain on the sale of a common stock investment. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $16.4 million, or 33.0%, to $66.1 million for the six months ended June 30, 1998 from $49.7 million for the same period in 1997. Loss and loss adjustment expenses were 75.4% of premium revenue for the six months ended June 30, 1998 compared to 70.3% 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 six months ended June 30, 1998 compared to the same period in 1997. Losses believed to be weather related incurred on the Company's direct written business in the northeast aggregated $6.8 million in the six months ended June 30, 1998 compared to $3.2 million for the same period in 1997. In addition, the Company incurred losses of approximately $500,000 as a result of severe weather which impacted certain midwestern risks which the Company reinsures. The increase in weather related losses was primarily attributable to severe ice storms during the first three months of 1998 which impacted the upstate New York and Maine territories in which the Company writes business, and tornadoes and severe thunder storms during the second quarter of 1998, which impacted direct insures in the northeast. Underwriting Expenses - --------------------- Underwriting expenses increased $2.6 million, or 12.5%, to $23.6 million for the six months ended June 30, 1998 from $21.0 million for the same period in 1997. For the six months ended June 30, 1998, underwriting expenses were 26.9% of premium revenue compared to 29.7% for the same period in 1997. The reduction in the Company's underwriting expense ratio was primarily attributable to a smaller relative increase in overhead expenses than in premium revenue for the period and the Company's continued expense management initiatives which began in 1998. Federal Income Tax Expense - -------------------------- Federal income tax expense decreased $2.4 million to $2.6 million in 1998 from $5.0 million in 1997. Federal income tax expense was 30.8% of income before federal income tax expense for the six months ended June 30, 1998 compared to 33.8% for the same period in 1997. The decrease in the Company's federal income tax expense as a percentage of income before federal income tax expense for the six months ended June 30, 1998 as compared to the same period in 1997 was primarily attributable to an increase in tax exempt interest income earned on the Company's investments reflecting the Company's increased investment in tax exempt fixed maturities. Net Income - ---------- Net income decreased $4.1 million to $5.7 million for the six months ended June 30, 1998 from $9.8 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 $12.3 million and $12.0 million during the six month periods ended June 30, 1998 and 1997, respectively. The increase in net cash provided by operating activities was primarily attributable to an increase in reserves for losses and loss adjustment expenses which was partially offset by an increase in reinsurance receivables, as well as a decrease in reserves for unearned premiums. Net cash used in investing activities was $11.3 million during the six months ending June 30, 1998 compared to $10.7 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 investment purchases, as well as 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 June 30, 1998, no amounts were outstanding on the lines of credit, each of which has an annual interest rate equal to such bank's prime rate. On April 1, 1998, Farm Family Casualty redeemed $1.3 million principal amount of surplus notes bearing interest at a rate of eight percent per annum. Future Application of Accounting Standards In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("Statement 131") effective for years beginning after December 15, 1997. The adoption of Statement 131 will result in revised and additional disclosures but will have no effect on the financial position, results of operations, or liquidity of the Company. In February of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("Statement 132") effective for years beginning after December 15, 1997. Statement 132 revises the disclosure requirements but does not change the measurement or recognition of pensions and other post retirement benefits. The adoption of Statement 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. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, which is effective for the year beginning January 1, 2000, establishes accounting and reporting standards for derivative instruments and for hedging activities. Statement 133 requires a company to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Management is evaluating the impact this statement may have on the Company's financial statements. Item 4. Submission of Matters to a Vote of Security Holders. Farm Family Holdings' annual meeting of Stockholders was held on April 28, 1998. At the meeting, (i) eight persons were elected as directors of Farm Family Holdings, and (ii) the appointment of Coopers & Lybrand L.L.P. as Farm Family Holdings' independent auditors for the year 1998 was ratified. The number of votes cast for, against or withheld, and the number of abstentions with respect to each such matter is set forth below.
For Against/Withheld Abstained Election of Directors: Nominee Wayne R. Bissonette 3,684,702 15,378 Joseph E. Calhoun 3,685,460 14,620 Gordon H. Gowen 3,684,297 15,783 Jon R. Greenwood 3,685,817 14,263 Frank W. Matheson 3,685,426 14,654 John P. Moskos 3,682,676 17,404 Norma R. O'Leary 3,685,921 14,159 John I. Rigolizzo, Jr. 3,684,711 15,369 Ratification of Auditors: 3,666,725 4,267 29,088
Item 5. Other information Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows the Company to use discretionary voting authority to vote on matters coming before an annual meeting of stockholders, if the Company does not have notice of the matter at least 45 days before the date corresponding to the date on which the Company first mailed its proxy materials for the prior year's annual meeting of stockholders or the date specified by an overriding advance notice provision in the Company's by-laws. The Company's by-laws contain such an advance notice provision. The Company's by-laws provide, in general, that a proposal for action to be presented by a stockholder at an annual meeting shall be out of order unless the proposal is specified in the notice of meeting given by or at the direction of the Board of Directors or unless the proposal shall have been submitted in writing (in the form specified in the by-laws) to the Secretary of the Company and received at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting. In addition to any other applicable requirements, the Company's by-laws also provide, in general, that if a stockholder intends to make a nomination for the election of directors at an annual meeting, the Secretary of the Company must receive written notice (in the form specified in the by-laws) of such intention not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting. For the Company's Annual Meeting of Stockholders expected to be held on April 27, 1999, stockholders must submit such written notice to the Secretary of the Company not earlier than January 28, 1999 or later than February 27, 1999. The foregoing is only a summary of the detailed provisions of the by-laws and is qualified by reference to the text thereof. Stockholders wishing to submit a proposal should review the by-law requirements regarding proposals by stockholders and should communicate with the Secretary of Farm Family Holdings, Inc., P.O. Box 656, Albany, New York, 12201-0656, if sent by mail, or 344 Route 9W, Glenmont, New York 12077, if by hand, express mail or overnight courier, for further information. This requirement is separate and apart from the Securities and Exchange Commission's requirements that a stockholder must meet in order to have a stockholder proposal included in the Company's proxy statement under Rule 14a-8. For the Company's Annual Meeting of Stockholders expected to be held on April 27, 1999, any stockholder who wishes to submit a proposal for inclusion in the Company's proxy materials pursuant to Rule 14a-8 must submit such proposal to the Secretary of the Company on or before November 20, 1998. Item 6: Exhibits and Reports on Form 8-K EXHIBIT INDEX FARM FAMILY HOLDINGS, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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. 4.1 Rights agreement, dated as of July 29, 1997, between the Company and The Bank of New York(incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 1997) 10.1 Amendment No.1 to Amended and Restated Option Purchase Agreement dated as of April 28, 1998 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 1998) *Incorporated by reference to Registration Statement No. 333-4446 Reports on Form 8-K - ------------------- A report on Form 8-K was filed on April 6, 1998 reporting a press release issued announcing that its wholly owned subsidiary, Farm Family Casualty Insurance Company, exercised its right to redeem all outstanding debt as of April 1, 1998. A report on Form 8-K was filed on April 29, 1998 reporting a press release issued announcing the Company's operating results for the quarter ended March 31, 1998. A report on Form 8-K was filed on May 5, 1998 reporting a press release regarding the Company's decision to exercise its option to acquire Farm Family Life Insurance Company. A report on Form 8-K was filed on June 26, 1998 reporting a press release announcing that it estimated catastrophic losses from tornadoes and severe thunder storms of approximately $2.0 million pre-tax for the second quarter of 1998. No financial statements were filed with these Form 8-K's. 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) October 20, 1998 By: /s/ Philip P. Weber - --------------- ---------------------------------------------------------------- (Date) Philip P. Weber, President & Chief Executive Officer Principal Executive Officer) October 20, 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 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 269,825 8,471 8,949 4,841 728 0 292,495 5,523 17,513 13,437 394,382 168,411 72,650 21,892 0 0 0 0 53 7,732 394,382 87,744 9,518 342 483 66,127 23,591 0 8,289 2,556 5,733 0 0 0 5,733 1.09 1.08 127,568 67,946 (1,817) 23,964 33,238 136,495 0
EX-27 3 FDS --
7 0001013564 Farm Family Holdings, INc. 1,000 6-MOS Dec-31-1997 JUN-30-1997 234,654 9,197 9,431 3,874 1,704 0 255,580 5,422 11,603 30,190 347,307 146,239 65,309 20,824 0 1,285 0 0 53 3,344 347,307 70,734 8,926 5,461 486 49,720 20,976 0 14,746 4,980 9,766 0 0 0 9,766 1.86 1.86 114,383 51,053 (1,334) 15,974 28,108 120,020 0
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