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 September 30, 1997 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 No The number of shares outstanding of the issuer's common stock as of November 12, 1997 is 5,253,813. FARM FAMILY HOLDINGS, INC. & SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements of Farm Family Holdings, Inc. & Subsidiaries (unaudited) Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 Consolidated Statements of Income Three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 Consolidated Statements of Cash Flow Nine months ended September 30, 1997 and 1996 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) September 30, 1997 December 31, 1996 - --------------------------------------------------------------------------------------------------------------- Assets Investments: Fixed Maturities Available for sale, at fair value (Amortized cost: $239,393 in 1997 and $214,226 in 1996 ) $247,807 $219,188 Held to maturity, at amortized cost (Fair value: $9,456 in 1997 and $9,973 in 1996) 9,181 9,782 Equity securities Available for sale, at fair value (Cost: $3,149 in 1997 and $2,546 in 1996) 4,077 7,908 Mortgage loans 1,682 1,745 Other invested assets 620 748 Short-term investments 6,635 5,333 - --------------------------------------------------------------------------------------------------------------- Total investments 270,002 244,704 - --------------------------------------------------------------------------------------------------------------- Cash 3,747 4,110 Insurance receivables: Reinsurance receivables 11,419 10,743 Premiums receivable, net 32,100 22,663 Deferred acquisition costs 12,746 10,682 Accrued investment income 4,778 4,861 Deferred income tax asset, net 2,863 1,520 Prepaid reinsurance premiums 2,216 1,944 Receivable from affiliates, net 16,632 16,133 Other assets 2,777 2,052 - --------------------------------------------------------------------------------------------------------------- Total Assets $359,280 $319,412 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- LIABILITIES aND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $150,297 $141,220 Unearned premium reserve 68,529 55,945 Reinsurance premiums payable 2,914 641 Accrued expenses and other liabilities 11,808 9,561 Debt 1,277 1,304 - --------------------------------------------------------------------------------------------------------------- Total liabilities 234,825 208,671 - --------------------------------------------------------------------------------------------------------------- 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 20,191 5,838 Net unrealized investment gains 6,071 6,710 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 124,455 110,741 - --------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $359,280 $319,412 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements. FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------- Revenues: Premiums $38,457 $33,015 $109,191 $96,881 Net investment income 4,603 4,132 13,529 11,635 Realized investment gains (losses), net 188 (102) 5,649 (25) Other income 234 219 719 689 - --------------------------------------------------------------------------------------------------------------- Total revenues 43,482 37,264 129,088 109,180 - --------------------------------------------------------------------------------------------------------------- Losses and Expenses: Losses and loss adjustment expenses 26,701 23,089 76,421 71,842 Underwriting expenses 10,605 9,120 30,803 27,087 Interest expense 25 33 77 141 Dividends to policyholders 65 43 177 156 - --------------------------------------------------------------------------------------------------------------- Total losses and expenses 37,396 32,285 107,478 99,226 - --------------------------------------------------------------------------------------------------------------- Income before federal income tax expense and extraordinary item 6,086 4,979 21,610 9,954 Federal income tax expense 2,009 1,517 7,257 3,136 - --------------------------------------------------------------------------------------------------------------- Income before extraordinary item 4,077 3,462 14,353 6,818 Extraordinary item - demutualization expenses - 126 - 1,543 - --------------------------------------------------------------------------------------------------------------- Net income $4,077 $3,336 $14,353 $5,275 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Net income before extraordinary item per share-primary $0.77 $0.75 $2.73 $1.92 - --------------------------------------------------------------------------------------------------------------- Net income before extraordinary item per share-fully diluted $0.77 $0.75 $2.70 $1.92 - --------------------------------------------------------------------------------------------------------------- Net income per share-primary $0.77 $0.72 $2.73 $1.48 - --------------------------------------------------------------------------------------------------------------- Net income per share-fully diluted $0.77 $0.72 $2.70 $1.48 - --------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding-primary 5,286,348 4,641,411 5,264,658 3,553,150 - --------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding-fully diluted 5,317,828 4,641,411 5,317,828 3,553,150 - --------------------------------------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements. FARM FAMILY HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) (Unaudited) For the Nine Months Ended September 30, 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $14,353 $5,275 - ----------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Realized investment (gains) losses (5,649) 25 Amortization of bond discount 258 99 Deferred income taxes (997) (291) Extraordinary item - demutualization expenses - 1,543 Changes in: Reinsurance receivables (676) 3,459 Premiums receivable (9,437) (3,643) Deferred acquisition costs (2,064) (772) Accrued investment income 83 36 Prepaid reinsurance premiums (272) (243) Receivable from affiliates (499) (775) Other assets (725) 113 Reserves for losses and loss adjustment expenses 9,077 112 Unearned premium reserve 12,584 5,652 Reinsurance premiums payable 2,273 (1,660) Accrued expenses and other liabilities 2,247 (5) - ----------------------------------------------------------------------------------------------------------------- Total adjustments 6,203 3,650 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities before extraordinary item 20,556 8,925 Extraordinary item - demutualization expenses - (1,543) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 20,556 7,382 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTiNG ACTIVITIES Proceeds from sales: Fixed maturities available for sale 3,514 5,450 Other invested assets (169) 144 Equity securities 6,257 - Investment collections: Fixed maturities available for sale 13,542 7,238 Fixed maturities held to maturity 582 2,289 Mortgage loans 62 56 Investment purchases: Fixed maturities available for sale (42,425) (44,304) Fixed maturities held to maturity - (1,903) Equity securities (1,081) - Change in short-term investments, net (1,302) (6,148) Change in other invested assets 128 259 - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (20,892) (36,919) - ----------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Principal payments on debt (27) (26) Proceeds from IPO and Subscription Offerings - 44,880 Demutualization payments to Policyholders and Noteholders - (12,842) IPO Expenses paid - (941) - ----------------------------------------------------------------------------------------------------------------- Net ash provided by (used in) financing activities (27) 31,071 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (363) 1,534 Cash, beginning of period 4,110 2,410 - ----------------------------------------------------------------------------------------------------------------- Cash, end of period $3,747 $3,944 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- 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 subsidiary, Farm Family Casualty Insurance Company ("Farm Family Casualty"), (collectively referred to as the "Company"). Farm Family Holdings was incorporated under Delaware law on February 12, 1996 for the purpose of becoming the parent holding company of Farm Family Casualty under a Plan of Reorganization and Conversion (the "Plan"). On July 26, 1996, Farm Family Holdings completed its initial public offering of 2,470,000 shares of its common stock. Concurrent with the consummation of Farm Family Holdings' initial public offering, Farm Family Mutual Insurance Company converted from a mutual property and casualty insurance company to a stockholder owned property and casualty insurance company and became a wholly owned subsidiary of Farm Family Holdings pursuant to the Plan. Also, Farm Family Mutual Insurance Company was renamed Farm Family Casualty Insurance Company. In addition to the 2,470,000 shares sold in the initial public offering and the 315,826 shares sold in the underwriters' over-allotment, Farm Family Holdings distributed 2,253,813 shares to policyholders and surplus note holders, and sold 214,174 shares in a subscription offering. As a result, Farm Family Holdings had 5,253,813 shares outstanding as of July 26, 1996. The per share information presented on the accompanying consolidated statements of income gives effect in the three month and nine month periods ended September 30, 1996 to the allocation of 3,000,000 shares of common stock to eligible policyholders on July 26, 1996 pursuant to the Plan. 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 September 30, 1997, and the consolidated results of operations for the three month and nine month periods ended September 30, 1997 and 1996. These consolidated financial statements shuld be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report to stockholders. 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. 2. Future Application of Accounting Standards Statement of Financial Accounting Standards Statement No. 128 - "Earnings Per Share" is effective for financial statements issued for periods ending after December 15, 1997. This statement simplifies the computation of earnings per share (EPS) by replacing the "primary" EPS requirements with a "basic" EPS computation based upon weighted-average shares outstanding. This new standard requires a reconciliation of the numerator and denominator of the diluted EPS computation. The Company currently uses the treasury stock method in determining weighted average shares outstanding for primary and fully diluted EPS. The following represents the basic and dilutive earnings per share amounts had the Company been required to adopt this statement for the periods ended September 30, 1997 and 1996: Three months ended Nine months ended September 30, September 30, 1997 1996 1997 1996 ----------------------------------------------------------- Net Income $4,077,000 $3,336,000 $14,353,000 $5,275,000 ----------------------------------------------------------- Weighted average shares for basic EPS 5,253,813 4,641,411 5,253,813 3,553,150 Effect of dilutive stock options 32,535 - 10,845 - ----------------------------------------------------------- Weighted average shares and assumed exercise of stock options for dilutive EPS 5,286,348 4,641,411 5,264,658 3,553,150 ----------------------------------------------------------- Basic EPS $0.78 $0.72 $2.73 $1.48 ----------------------------------------------------------- Dilutive EPS $0.77 $0.72 $2.73 $1.48 ----------------------------------------------------------- 3. Omnibus Securities Plan At the Annual Meeting of Stockholders held on April 22, 1997, the Company adopted the Omnibus Securities Plan (the "Plan") under which up to 500,000 shares of common stock are available for award. Stock options granted under the Plan may be either incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"). For ISOs, the option price may be no less than the fair market value on the date of grant. For NQSOs, the option price may be no less than 85% of the fair market value on the date of grant. On April 22, 1997, 215,000 NQSOs were granted. These NQSOs may be exercised no earlier than July 26, 1999 and no later than the tenth anniversary of the date of the Company's 1997 Annual Meeting of Stockholders. These NQSOs vest in equal amounts over a three year period and have an exercise price of $22.56 per share. The following table summarizes option information: Shares Outstanding as of January 1, 1997 - Granted 215,000 Exercised - Canceled 5,000 ----------- Outstanding at end of period 210,000 ----------- Options exercisable at end of period - Options available for future grant 290,000 Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation Plans" is effective for fiscal years beginning after December 15, 1995. The Company has elected to apply Accounting Principles Board Opinion No. 25 in accounting for its stock-based compensation arrangements. 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 subsidiary, Farm Family Casualty Insurance Company ("Farm Family Casualty") (collectively referred to as the "Company"). The operations of the Company are also 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 nine month periods ended September 30, 1997 and 1996, 36.6% and 38.7%, respectively, of the Company's direct written premiums were derived from policies written in New York and, for the same periods, 25.7% and 22.4%, 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 Certain statements made herein or elsewhere by or on behalf of the Company that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, earnings, capital structure and other financial items, (ii) statements of the plans and objectives of the Company or its management, (iii) statements of future economic performance and (iv) 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. Such risks and uncertainties include, but are not limited to, the following: 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 on the Company's investment portfolio and other risks included in this Report on Form 10-Q and other risk factors listed from time to time in the Company's Securities and Exchange Commission Filings. In addition, forward-looking statements are based on management's knowledge and judgment as of the date that such statements are made. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Results of Operations The Three Months Ended September 30, 1997 Compared to the Three Months Ended September 30, 1996 Premiums - -------- Premium revenue increased $5.5 million or 16.5%, during the three months ended September 30, 1997 to $38.5 million from $33.0 million for the same period in 1996. The increase in premium revenue in 1997 resulted from an increase of $5.0 million in earned premiums on additional business directly written by the Company, as well as an increase of $1.7 million in earned premiums assumed which was offset by an increase of $1.2 million in earned premiums ceded to reinsurers and not retained by the Company. The $5.0 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $4.3 million, or 14.0%, 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). Net written premiums increased 25.5% to $41.8 million for the three months ended September 30, 1997 compared to $33.3 million for the same period in 1996. The increase in net written premiums is primarily attributable to the growth in direct writings to customers of $6.3 million 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, West Virginia, Connecticut, Delaware, Rhode Island, Maine and Vermont. Direct writings for the third quarter of 1997 increased primarily as a result of an increase in writings of all of the Company's primary products and to a lesser extent as a result of an increase of $0.5 million in involuntary assigned risk automobile business in New Jersey and the Company's re-entry into the Massachusetts workers' compensation market which added an additional $0.5 million. Net Investment Income - --------------------- Net investment income increased $0.5 million or 11.4% to $4.6 million for the three months ended September 30, 1997 from $4.1 million for the same period in 1996. The increase in net investment income was primarily the result of an increase in average cash and invested assets (at amortized cost) of approximately $39.3 million, or 18.1% for the three months ended September 30, 1997 compared to the three months ended September 30, 1996. The increase in average cash and invested assets was primarily attributable to available cash flow from operations. The return realized on the Company's cash and investments was 7.2% for the three months ended September 30, 1997 and 7.6% for the same period in 1996. The decrease in the return realized on the Company's cash and invested assets was primarily attributable to an increase in investments in tax exempt securities. In addition, the return on the Company's cash and investments decreased during the three months ended September 30, 1997 compared to the same period in 1996 as a result of the Company's investment in fixed maturities with a slightly lower rate of return due to a reduction in interest rates. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $3.6 million, or 15.6%, to $26.7 million for the three months ended September 30, 1997 from $23.1 million for the same period in 1996. Loss and loss adjustment expenses were 69.4% of premium revenue for the three months ended September 30, 1997 compared to 69.9% of premium revenue for the same period in 1996. The decrease in loss and loss adjustment expenses as a percent of premium revenue was primarily attributable to a greater relative increase in earned premiums than in loss and loss adjustment expenses. Losses believed to be weather related aggregated $1.2 million in the three months ended September 30, 1997 compared to $0.7 million for the same period in 1996. Underwriting Expenses - --------------------- Underwriting expenses increased $1.5 million, or 16.3%, to $10.6 million for the three months ended September 30, 1997 from $9.1 million for the same period in 1996. For the three months ended September 30, 1997 and September 30, 1996 underwriting expenses were 27.6% of premium revenue. Federal Income Tax Expense - -------------------------- Federal income tax expense increased $0.5 million to $2.0 million in 1997 from $1.5 million in 1996. Federal income tax expense was 33.0% of income before federal income tax expense and extraordinary item for the three months ended September 30, 1997 compared to 30.5% for the same period in 1996. The increase in federal income tax as a percentage of income before federal income tax expense was primarily attributable to an increase in taxable income. Net Income - ---------- Net income increased $0.8 million to $4.1 million for the three months ended September 30, 1997 from $3.3 million for the same period in 1996 primarily as a result of the foregoing factors. The Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September 30, 1996 Premiums - -------- Premium revenue increased $12.3 million or 12.7%, during the nine months ended September 30, 1997 to $109.2 million from $96.9 million for the same period in 1996. The increase in premium revenue in 1997 resulted from an increase of $12.5 million in earned premiums on additional business directly written by the Company, and an increase of $2.5 million in earned premiums assumed which was offset by an increase of $2.7 million in earned premiums ceded to reinsurers and not retained by the Company. The $12.5 million increase in earned premiums on additional business directly written by the Company was primarily attributable to an increase of $11.2 million, or 12.9%, in earned premiums from the Company's primary products (personal and commercial automobile products other than assigned risk business, the Special Farm Package, businessowners products, homeowners products, and Special Home Package) The number of policies in force related to the Company's primary products increased by 11.4% to approximately 124,100 as of September 30, 1997 from approximately 111,400 as of September 30, 1996 and the average premium earned for each such policy increased by 1.3% during the nine months ended September 30, 1997 compared to the same period in 1996. Net written premiums increased 18.8% to $121.5 million for the nine months ended September 30, 1997 compared to $102.3 million for the same period in 1996. The increase in net written premiums is primarily attributable to the growth in direct writings to customers of $16.1 million and, to a lesser extent, an increase in the Company's voluntary assumed reinsurance business. Geographically, the increase in the Company's direct writings come from New Jersey, New York, Massachusetts, Connecticut, West Virginia, Delaware, Rhode Island and Vermont. In addition, direct writings of all the Company's primary products, particularly personal automobile, increased during the first nine months of 1997. During the nine months ended September 30, 1997, the Company wrote approximately $1.4 million of assigned risk automobile business in New Jersey and $1.4 million in workers compensation business in Massachusetts. Net Investment Income - --------------------- Net investment income increased $1.9 million or 16.3% to $13.5 million for the nine months ended September 30, 1997 from $11.6 million for the same period in 1996. The increase in net investment income was primarily the result of an increase in average cash and invested assets (at amortized cost) of approximately $34.0 million, or 15.8% for the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996. The increase in average cash and invested assets was primarily attributable to available cash flow from operations. The return realized on the Company's cash and investments was 7.2% for the nine months ended September 30, 1997 and September 30, 1996. Losses and Loss Adjustment Expenses - ----------------------------------- Losses and loss adjustment expenses increased $4.6 million, or 6.4%, to $76.4 million for the nine months ended September 30, 1997 from $71.8 million for the same period in 1996. Loss and loss adjustment expenses were 70.0% of premium revenue for the nine months ended September 30, 1997 compared to 74.2% of premium revenue for the same period in 1996. The decrease in loss and loss adjustment expenses as a percent of premium revenue was primarily attributable to the reduction in weather related losses. Losses believed to be weather related aggregated $4.4 million in the nine months ended September 30, 1997 compared to $9.4 million for the same period in 1996. Underwriting Expenses - --------------------- Underwriting expenses increased $3.7 million, or 13.7%, to $30.8 million for the nine months ended September 30, 1997 from $27.1 million for the same period in 1996. For the nine months ended September 30, 1997, underwriting expenses were 28.2% of premium revenue compared to 28.0% for the same period in 1996. The underwriting expense ratio of 28.2% for the nine months ended September 30, 1997 was less than the underwriting expense ratio of 29.2% for the year ended December 31, 1996. Federal Income Tax Expense - -------------------------- Federal income tax expense increased $4.1 million to $7.2 million in 1997 from $3.1 million in 1996. Federal income tax expense was 33.6% of income before federal income tax expense and extraordinary item for the nine months ended September 30, 1997 compared to 31.5% for the same period in 1996. Realized Investment Gains - ------------------------- Realized investment gains increased to $5.6 million for the nine months ended September 30, 1997. The increase in realized investment gains was primarily attributable to the sale of a common stock investment. Net Income - ---------- Net income increased $9.1 million to $14.4 million for the nine months ended September 30, 1997 from $5.3 million for the same period in 1996 primarily as a result of the foregoing factors and the impact of $1.5 million of expenses in the first quarter of 1996 related to the demutualization of Farm Family Casualty which the Company has identified as an extraordinary item. Liquidity and Capital Resources - ------------------------------- Net cash provided by operating activities was $20.6 million and $7.4 million during the nine month periods ended September 30, 1997 and 1996, respectively. The increase in net cash provided by operating activities during the nine months ended September 30, 1997 was primarily attributable to the increase in net income and a decrease in payments for losses and loss adjustment expenses. Net cash used in investing activities was $20.9 million during the nine months ended September 30, 1997 compared to net cash used in investing activities of $36.9 million for the same period in 1996 primarily as a result of an increase in proceeds from sales as well as collections from investments that matured during the nine month period ended September 30, 1997. The Company has in place unsecured lines of credit with two banks under which it may borrow up to $12.0 million. At September 30, 1997, no amounts were outstanding on these lines of credit. In addition, at September 30, 1997, 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. The principal and interest on the surplus notes are repayable only with the approval of the Superintendent of Insurance of New York State. Future Application of Accounting Standards Financial Accounting Standards Board Statement No. 128 - "Earnings Per Share." is effective for financial statements issued for periods ending after December 15, 1997 and simplifies the computation of earnings per share (EPS) by replacing the "primary" EPS requirements with a "basic" EPS computation based upon weighted-average shares outstanding. This new standard requires a reconciliation of the numerator and denominator of the diluted EPS computation. The following represents the basic and dilutive earnings per share amounts had the Company been required to adopt this statement for the periods ended September 30, 1997 and 1996: Three months ended Nine months ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net Income $4,077,000 $3,336,000 $14,353,000 $5,275,000 Weighted average shares for basic EPS 5,253,813 4,641,411 5,253,813 3,553,150 Effect of dilutive stock options 32,535 - 10,845 - ----------------------------------------------------------- Weighted average shares and assumed exercise of stock options for dilutive EPS 5,286,348 4,641,411 5,264,658 3,553,150 ----------------------------------------------------------- Basic EPS $0.78 $0.72 $2.73 $1.48 ----------------------------------------------------------- Dilutive EPS $0.77 $0.72 $2.73 $1.48 ----------------------------------------------------------- Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation Plans" is effective for fiscal years beginning after December 15, 1995. The Company has elected to apply Accounting Principles Bulletin Opinion No. 25 in accounting for its stock-based compensation arrangements. Item 6: Exhibits and Reports on Form 8-K EXHIBIT INDEX FARM FAMILY HOLDINGS, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 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. 10.12 Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, Farm Family Holdings, Inc. Officer Severance Pay Plan Effective July 29, 1997 11 Computation of Earnings per Share *Incorporated by reference to Registration Statement No. 333-4446 Exhibit 11. Statement re computation of per share earnings FARM FAMILY HOLDINGS, INC. COMPUTATION OF EARNINGS PER SHARE Three months Nine months ended ended September 30, September 30, 1997 1996 1997 1996 ------------------------------------------------- Primary Average shares outstanding 5,253,813 4,641,411 5,253,813 3,553,150 Net effect of dilutive stock options based on the treasury stock method using average market price 32,535 - 10,845 - ------------------------------------------------- Weighted average shares outstanding-primary 5,286,348 4,641,411 5,264,658 3,553,150 ------------------------------------------------- Net income available to common shareholders (In thousands) $4,077 $3,336 $14,353 $5,275 ------------------------------------------------- Net income per share-primary $0.77 $0.72 $2.73 $1.48 ------------------------------------------------- Fully Diluted Average shares outstanding 5,253,813 4,641,411 5,253,813 3,553,150 Net effect of dilutive stock options based on the treasury stock method using stock price at end of period 64,015 - 64,015 - ------------------------------------------------- Weighted average shares outstanding-fully diluted 5,317,828 4,641,411 5,317,828 3,553,150 ------------------------------------------------- Net income available to common shareholders (In thousands) $4,077 $3,336 $14,353 $5,275 ------------------------------------------------- Net income per share-fully diluted $0.77 $0.72 $2.70 $1.48 ------------------------------------------------- Reports on Form 8-K A report on Form 8-K was filed on July 30, 1997 reporting a press release issued announcing the Company's operating results for the three months and the nine months ended September 30, 1997. No financial statements were filed with the 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) November 13, 1997 By:/s/ Philip P. Weber - ------------------------- -------------------------------------------------- (Date) Philip P. Weber, President & Chief Executive Officer (Principal Executive Officer) November 13, 1997 By:/s/ Timothy A. Walsh - ------------------------- ---------------------------------------------------- (Date) Timothy A. Walsh, Executive Vice President - Finance & Treasurer (Principal Financial & Accounting Officer) Exhibit 10.12 SUMMARY PLAN DESCRIPTION FARM FAMILY LIFE INSURANCE COMPANY FARM FAMILY CASUALTY INSURANCE COMPANY FARM FAMILY HOLDINGS, INC. OFFICER SEVERANCE PAY PLAN Effective July 29, 1997 Purpose Farm Family Life Insurance Company (hereinafter referred to as "Life"), Farm Family Casualty Insurance Company (hereinafter referred to as "Casualty") and Farm Family Holdings, Inc. (hereinafter referred to as "Holdings") have adopted a severance pay plan effective August 1, 1994 and amended July 29, 1997, the purpose of which is to provide financial benefits to officers of Life, Casualty or Holdings who lose their positions involuntarily under Severance Qualifying Conditions. Eligible Officers All officers of Life, Casualty and Holdings (hereinafter collectively referred to as the Companies) are eligible for severance benefits under this plan. Definitions 1. Cause: An officer's: (a) felony conviction or the failure of an officer to contest prosecution for a felony; (b) willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of Life, Casualty or Holdings; (c) theft, participation in any material fraudulent conduct, or other acts involving material misappropriation of property; (d) habitual drunkenness or habitual drug abuse; (e) material and willful disclosure of any confidential information; (f) unlawful discrimination and/or unlawful sexual harassment by an officer; (g) serious breach of Life's, Casualty's or Holding's policies; or (h) continuing inattention to or continuing neglect of the duties to be performed by an officer which inattention or neglect is not the result of illness or accident. 2. Change in Control: A change in control of Life, Casualty or Holdings of a nature that would be required to be reported in response to Item 6(e) of schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not Life, Casualty or Holdings is subject to the Exchange Act at such time; provided, however, that without limiting the generality of the foregoing, a Change in Control will in any event be deemed to occur if and when: (a) any person (as such term is used in paragraphs 13(d) and 14(d)(2) of the Exchange Act, hereinafter in this definition, "Person"), other than Life, Casualty or Holdings, or a subsidiary of Life, Casualty or Holdings or employee benefit plan of Life, Casualty or Holdings, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of Life, Casualty or Holdings representing more than twenty-five percent (25%) of the combined voting power of Life's, Casualty's, or Holding's then outstanding securities; (b) stockholders approve a merger, consolidation or other business combination (a "Business Combination") other than a Business Combination in which holders of common stock of Life, Casualty or Holdings immediately prior to the Business Combination have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the Business Combination as immediately before; (c) stockholders approve either (i) an agreement for the sale or disposition of all or substantially all of Life's, Casualty's, or Holding's assets to any entity that is not a subsidiary of one of said Companies, or (ii) a plan of complete liquidation; or (d) the persons who were members of the Board of Directors immediately before a tender offer by any Person other than Life, Casualty or Holdings or a subsidiary of Life, Casualty or Holdings, or before a merger, consolidation or contested election, or before any combination of such transactions, cease to constitute a majority of the Board of Directors as a result of such transaction or transactions. 3. Salary: The highest rate of wages, salaries and fees for professional services, and other amounts received by an officer for personal services actually rendered in the course of employment with the Companies within the last 2 years, on an annualized basis. Salary does include taxable reimbursements or other expense allowances, fringe benefits (cash and non cash), and moving expenses. Salary does not include: (a) any bonus paid to the officer whether paid pursuant to an annual incentive plan or otherwise; (b) any distribution from a plan of deferred compensation; (c)amounts, realized from the exercise of a non qualified stock option, or when restricted stock (or property) held by an officer either becomes freely transferable or is no longer subject to substantial risk of forfeiture; and (d) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option. Severance Qualifying Conditions An Eligible Officer whose employment with Life, Casualty or Holdings is terminated, is eligible for severance benefits, if his or her employment is terminated under the following conditions ("Severance Qualifying Conditions"): The officer's employment with Life, Casualty or Holdings is involuntarily terminated due to (i) the officer not satisfactorily performing the duties of his or her position with such Company; (ii) the elimination of the officer's position and the officer is not offered another position of comparable responsibility and compensation with Life, Casualty or Holdings; or (iii) the result of a Change in Control of Life, Casualty or Holdings and the officer is not offered a position of comparable responsibility and compensation by the acquiring or resulting company; AND The officer executes a release of all claims against Life, Casualty and Holdings acceptable to Life, Casualty and Holdings. The termination of an officer's employment with Life, Casualty or Holdings, for any of the following reasons shall not be treated as a Severance Qualifying Condition: 1. If an officer resigns, abandons his or her job, fails to return from an approved leave of absence or initiates termination on any similar basis; or 2. If an officer is terminated for Cause. The decision of whether an officer's termination is a Severance Qualifying Condition shall be determined solely at the Companies' discretion. Policy The Companies will pay severance pay equal to the greater of: 1. one week's Salary for each Year of Service or 2. (i) 36 months Salary in the case of the Chief Executive Officer; (ii) 24 months Salary in the case of an Executive Vice President; (iii) 12 months Salary in the case of a Senior Vice President; and (iv) 6 months Salary in the case of any officer other than the Chief Executive Officer, Executive Vice Presidents, and Senior Vice Presidents to an Eligible Officer who meets the Severance Qualifying Conditions set forth above. Any bonuses or performance or merit reviews that are pending or in process shall not affect the amount of any officer's severance benefits. In the event an officer becomes eligible for severance benefits due to a Severance Qualifying Event with respect to Life, Casualty or Holdings or any combination of the Companies less than all three of the Companies, then Salary shall include only the amount of Salary which would be allocated to the company for which there is a Severance Qualifying Event for the Eligible Officer pursuant to the Amended and Restated Expense Sharing Agreement dated February 14, 1996 or any successor agreement thereto. Year of Service shall mean a period of 12 months during which the individual is an officer and/or employee of Life, Casualty or Holdings and does not include any service as: A leased employee; An independent contractor; or An employee or agent of the Company compensated pursuant to an agent's training allowance program, agent's, independent agent's, regional manager's contract or other contract of the same general character. The decision of how benefits will be paid will be made by the Companies in their sole discretion. The Companies will pay all benefits under this plan from their general assets. Review of Denial of Benefits/Appeal Process If an officer does not receive benefits to which the officer thinks he or she is entitled, the officer may file a claim for those benefits. The Vice President-Human Resources will rule on the claims within 60 days of receipt of the claim. In the case of claims made by the Vice President-Human Resources, the Chief Executive Officer of the Companies shall make such review and determination. If claims are denied, in whole or in part, the officer will be notified in writing. A copy of the ruling and a statement supporting the decision will be given to the officer. The notice will indicate why the claims were denied, and either describe any additional information necessary to grant a claim or instruct the officer on how to appeal the denial. After an officer receives notice of denial of his or her claims, the officer may appeal to the Plan Administrator, in writing within 60 days. If the officer does not make an appeal within 60 days, the original decision will become final. The officer may include in the written appeal any reasons for appeal and any information to support the officer's rights to benefits. The Plan Administrator will then reexamine all the facts and come to a final decision. The officer will be notified of this decision within 60 days of the time that the officer submits the written appeal, unless there are special circumstances, such as a hearing. The officer will be notified if an extension is required. However, in no case will the officer receive the Plan Administrator's decision later than 120 days after the appeal is submitted. The notice of final decision will include specific reasons for the decision and identify the plan provisions relied upon. Amendment or Termination of the Plan The Companies reserve the right to amend or terminate the plan at any time, with or without advance notice, by action of the Board of Directors. Provided, however, that no amendment or termination of the plan will reduce the amount the Companies agree to pay officers covered by the Plan at the time of the amendment or termination, in the event of a Severance Qualifying Condition below the following amounts: (i) 36 months Salary in the case of the Chief Executive Officer; (ii) 24 months Salary in the case of an Executive Vice President; (iii)12 months Salary in the case of a Senior Vice President; and (iv) 6 months Salary in the case of an officer other than the Chief Executive Officer, Executive Vice Presidents and Senior Vice Presidents. Further, it is provided, that no amendment or termination of the plan adversely affecting the right of any officer to severance pay hereunder due to a Change in Control of Life, Casualty or Holdings, shall be effective if made after the Board of Directors has approved such Change in Control. Employee rights under ERISA As a participant in this plan, officers are entitled to certain rights and protection under ERISA. ERISA provides that all plan participants shall be entitled to: Examine, free of charge, at the administrative office in their geographic area, all plan documents and copies of all documents filed by the plan with the U.S. Department of Labor. Obtain copies of all plan documents and other plan information upon written request to the plan administrator. The plan administrator may make a reasonable charge for the copies. In addition to creating rights for the plan participants, ERISA imposes obligations on the people who are responsible for the operation of the plan. The people who operate the plan, called "fiduciaries" of the plan, have a duty to do so prudently and in the interest of all plan participants and beneficiaries. No one, including the Companies or any other person, may discriminate against employees to prevent them from obtaining a benefit or exercising their rights under ERISA. If a claim for a benefit is denied in whole or in part, an employee must receive a written explanation of the reason for the denial. Employees also have the right to have the plan administrator review and reconsider any claim. Under ERISA, there are steps employees can take to enforce the above rights. For instance, if a participant in the plan requests materials from the plan administrator and does not receive them within thirty days, the participant may file suit in a federal court. In such a case, the court may require the plan administrator to provide the materials and pay up to $100 a day until the participant receives the materials, unless the materials were not sent because of reasons beyond the control of the plan administrator. If a claim for benefits is denied or ignored, in whole or in part, the participant may file suit in a state or federal court. If any employee is discriminated against for asserting that person's rights, assistance may be sought from the U.S. Department of Labor or the participant may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the participant is successful, the court may order the person sued to pay these costs and fees. If the participant loses, the court may order that person to pay these costs and fees, for example, if it finds a claim is frivolous. If a participant has any questions about the plan, the participant should contact the Human Resources Department of the Companies. If a participant has any questions about this statement or about his or her rights under ERISA, the nearest area office of the Labor-Management Services Administration, U.S. Department of Labor, should be contacted. General Information. Officers should note the following information about the severance plan: Plan Sponsor. The Plan is sponsored by: Farm Family Life Insurance Company Farm Family Casualty Insurance Company Farm Family Holdings, Inc. P.O. Box 656 Albany, New York 12201-0656 Telephone Number (518) 431-5000 Plan Administrator: Farm Family Life Insurance Company is the plan administrator. The plan administrator makes the rules and regulations necessary to administer the plan. The plan administrator shall have the responsibility and discretionary authority to interpret the terms of this plan, to determine eligibility for benefits and to determine the amount of the benefits. The interpretations and determinations of the plan administrator shall be final and binding. Agent for legal process: The Vice President-Human Resources of Life and Casualty shall be the agent for service of legal process for all of the Companies. Any communications should be sent to the following address: Vice President-Human Resources Farm Family Life Insurance Company Farm Family Casualty Insurance Company Route 9W Glenmont, NY 12077 Mailing Address: P.O. Box 656 Albany, NY 12201-0656 Legal process may also be served on the plan administrator at the following address: Farm Family Life Insurance Company Attn.: Human Resources Department Route 9W Glenmont, NY 12077 Mailing Address: P.O. Box 656 Albany, NY 12201-0656 Plan year: The records of the plan are kept on a calendar year basis. Identification number: If an officer needs to discuss the plan with a federal government agency, he or she should reference the plan number 510. The Company's employer identification numbers are: Farm Family Life Insurance Company 14-1400831 Farm Family Casualty Insurance Company 14-1415410 Farm Family Holdings, Inc. 14-1789227