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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
FARM FAMILY HOLDINGS, INC.
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(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was
determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form of schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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<PAGE>
February 17, 1999
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"Special Meeting") of Farm Family Holdings, Inc. (the "Company") to be held on
March 25, 1999 at 9:00 a.m., New York time, at the corporate headquarters of the
Company, 344 Route 9W, Glenmont, New York. At the Special Meeting, stockholders
of the Company will be asked to consider and vote upon a proposal to approve and
adopt an Option Purchase Agreement, amended as of January 14, 1999 (the "Option
Purchase Agreement") and a proposal to approve the consummation of the
transactions contemplated therein.
Under the Option Purchase Agreement, the Company would acquire (the
"Acquisition") all of the outstanding capital stock of Farm Family Life
Insurance Company, a New York life insurance company (the "Life Company") from
the Farm Bureaus(R) or their affiliates in the ten states in which the Life
Company's business is concentrated (the "Selling Stockholders"), at a purchase
price of $37.5 million, less certain expenses (the "Exercise Price"), payable in
shares of common stock, par value $.01 per share ("Common Stock"), of the
Company equal to $31.5 million (less certain expenses) and shares of 6 1/8%
Preferred Stock, Series A, par value $.01 per share ("Series A Preferred
Stock"), of the Company equal to $6 million (less certain expenses).
The Acquisition was originally approved by the Company's stockholders on
December 2, 1998. The closing of the Acquisition was scheduled to occur on
December 7, 1998, but was delayed when it was determined that in order for
certain Selling Stockholders to provide unqualified opinions of counsel required
by the Option Purchase Agreement as a condition to closing, such Selling
Stockholders or their respective parent entities would need to obtain approval
of the Acquisition from their members. As a result of this delay, the Option
Purchase Agreement was amended to, among other things, fix the price used to
determine the number of shares issued as if the closing had occurred on December
7, 1998, subject to a collar mechanism described below. The Company is now
asking its stockholders to approve and adopt the Option Purchase Agreement, as
so amended, and the consummation of the transactions contemplated therein.
Under the revised terms of the Option Purchase Agreement, the price used to
determine the number of shares issued in the Acquisition would be fixed at
$35.72, unless the closing price of the Company's Common Stock on the New York
Stock Exchange, Inc. on the last trading day prior to the closing of the
Acquisition (the "Closing Price") is greater than $42.86 or equal to or less
than $25.00. If the Closing Price is greater than $42.86 or equal to or less
than $25.00, the price used to determine the number of shares of stock to be
issued in the Acquisition will be equal to $35.72 divided by a factor. The
factor will be equal to 1.2 (if the Closing Price is greater than $42.86) or 0.7
(if the Closing Price is equal to or less than $25.00) multiplied by $35.72
divided by the Closing Price. If the Closing Price is $25.00 or less, the
Company also will have the option to terminate the Option Purchase Agreement.
Assuming the price used to determine the number of shares in the
Acquisition is $35.72, the Company would issue approximately 856,021 shares of
Common Stock and 163,052 shares of Series A Preferred Stock to the Selling
Stockholders, representing 14.01% of the total number of shares of Common Stock
outstanding after the Acquisition and 16.25% of the combined voting power of the
stockholders of the Company after the Acquisition. The Series A Preferred Stock
will be entitled to one vote per share in the election of directors and on all
matters on which holders of Common Stock are entitled to vote, not voting
separately as a class but together with all other stockholders.
The closing of the Acquisition is expected to occur on the fifth business
day following the Special Meeting, unless another date is agreed to by the
parties. As a result of fluctuations in the market price of the Common Stock,
the Closing Price may be greater than $42.86 or equal to or less than $25.00. In
such case, the price used to compute the number of shares of Common Stock and
Series A Preferred Stock to be issued to the Selling Stockholders, and the
number of shares actually issued at the closing, would be more or less than
those illustrated above and throughout this document.
A Notice of Special Meeting, a Proxy Statement and a form of proxy for the
Special Meeting are enclosed. The Proxy Statement describes in more detail the
Life Company, the Option Purchase Agreement and the Acquisition. Please give
this information your careful attention.
Salomon Smith Barney has delivered a written opinion to the Board of
Directors that, as of the date of this Proxy Statement, and subject to the
qualifications set forth in such opinion, the consideration to be paid by the
Company in connection
<PAGE>
with the Acquisition is fair from a financial point of view to the Company. For
purposes of its opinion, Salomon Smith Barney assumed and did not opine that the
aggregate value of the Series A Preferred Stock to be issued in the Acquisition
is equal to the aggregate stated value of $6 million and that the aggregate
value of the Common Stock to be issued in the Acquisition is equal to $31.5
million. The Proxy Statement contains a detailed description of Salomon Smith
Barney's fairness opinion and the analyses underlying the opinion.
The Board of Directors of the Company has approved the Option Purchase
Agreement and the Company's exercise of the option to acquire the Life Company
and recommends that the stockholders of the Company vote FOR approval of the
Option Purchase Agreement and the consummation of the transactions contemplated
therein.
The effectiveness of the proposal relating to the consummation of the
transactions contemplated by the Option Purchase Agreement is conditioned upon
the approval of the proposal relating to the adoption of the Option Purchase
Agreement.
Whether or not you plan on attending the Special Meeting, we urge you to
complete, date and sign the enclosed proxy card and return it in the
postage-paid envelope provided as soon as possible. If you plan on attending the
Special Meeting, please check the appropriate box on the attached proxy card.
Thank you for your continued interest in and commitment to Farm Family
Holdings, Inc.
Sincerely,
/s/ William M Stamp, Jr.
William M. Stamp, Jr.
Chairman of the Board
<PAGE>
FARM FAMILY HOLDINGS, INC.
344 ROUTE 9W
GLENMONT, NEW YORK 12077
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 25, 19997
To the Stockholders of Farm Family Holdings, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Special
Meeting") of Farm Family Holdings, Inc., a Delaware corporation (the "Company"),
will be held at the corporate headquarters of the Company at 344 Route 9W,
Glenmont, New York, on Thursday, March 25, 1999 at 9:00 a.m., New York time, for
the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Amended and Restated Option Purchase Agreement, dated as of February
26, 1998, as amended by Amendment No. 1, dated as of April 28, 1998,
and Amendment No. 2, dated as of January 14, 1999 (as so amended, the
"Option Purchase Agreement"), among the Company and the stockholders
(collectively, the "Selling Stockholders") of Farm Family Life
Insurance Company (the "Life Company").
2. To consider and vote upon a proposal to approve the
consummation of the transactions contemplated in the Option Purchase
Agreement, including the Company's acquisition (the "Acquisition") of
all of the outstanding capital stock of the Life Company at a purchase
price of $37.5 million, less certain expenses, payable in shares of
the Company's common stock, par value $.01 per share ("Common Stock"),
and 6 1/8% Preferred Stock, Series A, par value $.01 per share
("Series A Preferred Stock"). A copy of the Option Purchase Agreement
is attached as Annex A to the accompanying Proxy Statement and is
incorporated by reference herein.
3. To transact such other business as may properly come before
the Special Meeting or any adjournments or postponements thereof.
The close of business on February 9, 1999 has been fixed as the record date
for determination of the stockholders entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof. Only holders of
record of the Common Stock on the record date are entitled to vote at the
Special Meeting and any adjournments or postponements thereof. The proposal to
approve and adopt the Option Purchase Agreement requires the affirmative vote of
a majority of the outstanding shares of Common Stock present in person or by
proxy at the Special Meeting. The proposal to approve the consummation of the
transactions contemplated in the Option Purchase Agreement requires the
affirmative vote of a majority of the outstanding shares of Common Stock present
in person or by proxy at the Special Meeting, provided, that under the rules of
the New York Stock Exchange, Inc., if shares of Common Stock and Series A
Preferred Stock representing more than 20% of the shares of Common Stock or the
voting power of the Common Stock outstanding prior to the Acquisition would be
issued in the Acquisition, then such proposal will further require that 50% in
interest of all shares of Common Stock entitled to vote actually be voted at the
Special Meeting. The Company will issue a press release disclosing whether such
proposal has carried under the applicable required vote.
The Board of Directors of the Company has approved the Option Purchase
Agreement and the Company's exercise of the option to acquire the Life Company
and recommends that the stockholders of the Company vote FOR approval of the
Option Purchase Agreement and the consummation of the transactions contemplated
therein.
The effectiveness of the proposal relating to the consummation of the
transactions contemplated by the Option Purchase Agreement is conditioned upon
the approval of the proposal relating to the adoption of the Option Purchase
Agreement.
By Order of the Board of Directors,
/s/ Victoria M. Stanton
Victoria M. Stanton
Secretary
February 17, 1999
Glenmont, New York
YOUR VOTE IS IMPORTANT. PLEASE PROMPTLY COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY CARD AND RETURN IT IN THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER
OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.
<PAGE>
FARM FAMILY HOLDINGS, INC.
344 ROUTE 9W
GLENMONT, NEW YORK 12077
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PROXY STATEMENT
-----------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 25, 1999
-----------
This Proxy Statement is furnished to the stockholders of Farm Family
Holdings, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at a
special meeting of stockholders to be held on Thursday, March 25, 1999 at 9:00
a.m., New York time, at the corporate headquarters of the Company at 344 Route
9W, Glenmont, New York, and at any adjournments or postponements thereof (the
"Special Meeting"). This Proxy Statement and the accompanying form of proxy are
first being sent to stockholders of the Company on or about February 24, 1999.
At the Special Meeting, stockholders will be asked to consider and vote
upon (i) a proposal to approve and adopt the Amended and Restated Option
Purchase Agreement, dated as of February 26, 1998, as amended by Amendment No.
1, dated as of April 28, 1998, and Amendment No. 2, dated as of January 14, 1999
(as so amended, the "Option Purchase Agreement"), among the Company and the
stockholders (collectively, the "Selling Stockholders") of Farm Family Life
Insurance Company, a New York life insurance company (the "Life Company"), and
(ii) a proposal to approve the consummation of the transactions contemplated in
the Option Purchase Agreement, including the Company's acquisition (the
"Acquisition") of all of the outstanding capital stock of the Life Company (the
"Life Company Shares") at a purchase price of $37.5 million, less certain
expenses (currently estimated to be approximately $1.1 million) (the "Exercise
Price"). The Exercise Price would be payable in shares of common stock, par
value $.01 per share ("Common Stock"), of the Company and shares of 6 1/8%
Preferred Stock, Series A, par value $.01 per share ("Series A Preferred
Stock"), of the Company.
The Acquisition was originally approved by the Company's stockholders on
December 2, 1998, but was amended by Amendment No. 2, dated as of January 14,
1999 ("Amendment No. 2"). Under the Option Purchase Agreement, as amended by
Amendment No. 2, the price used to determine the number of shares issued in the
Acquisition would be fixed at $35.72 (which was the price that would have been
used if the closing had occurred on December 7, 1998), unless the closing price
of the Company's Common Stock on the New York Stock Exchange, Inc. (the "NYSE")
on the last trading day prior to closing of the Acquisition (the "Closing
Price") is greater than $42.86 or equal to or less than $25.00. If the Closing
Price is greater than $42.86 or equal to or less than $25.00, the price used to
determine the number of shares of stock to be issued in the Acquisition will be
equal to $35.72 divided by a factor. The factor will be equal to 1.2 (if the
Closing Price is greater than $42.86) or 0.7 (if the Closing Price is equal to
or less than $25.00) multiplied by $35.72 divided by the Closing Price. If the
Closing Price is $25.00 or less, the Company also will have the option to
terminate the Option Purchase Agreement. Assuming the price used to determine
the number of shares issued in the Acquisition is $35.72, the Company would
issue approximately 856,021 shares of Common Stock and 163,052 shares of Series
A Preferred Stock to the Selling Stockholders, representing 14.01% of the total
number of shares of Common Stock outstanding after the Acquisition and 16.25% of
the combined voting power of the stockholders of the Company after the
Acquisition. A copy of the Option Purchase Agreement is attached as Annex A
hereto, and the description of the transactions contemplated by the Option
Purchase Agreement contained in this Proxy Statement is qualified in its
entirety by reference to Annex A.
<PAGE>
As of February 9, 1999, 5,253,813 shares of the Common Stock were
outstanding and entitled to be voted. Each share entitles the holder to one vote
on each matter to come before the Special Meeting. The record date and hour for
determining stockholders entitled to receive notice of and to vote at the
Special Meeting has been fixed at the close of business on February 9, 1999.
All information contained in this Proxy Statement with respect to the
Company has been provided by the Company. All information contained in this
Proxy Statement with respect to the Life Company has been provided by the Life
Company.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
-----------
The date of this Proxy Statement is February 17, 1999
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and may be available at the
following Regional Offices of the Commission located at: Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials can be
obtained at prescribed rates from the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company
makes filings of reports, proxy statements and other information pursuant to the
Exchange Act with the Commission electronically, and such materials may be
inspected and copied at the Commission's Web site (http://www.sec.gov). In
addition, material filed by the Company can be inspected at the offices of the
New York Stock Exchange, Inc., 11 Wall Street, New York, NY 10005, on which the
shares of the Common Stock are listed.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and, while such summaries contain all
material provisions of such documents, each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission or attached as an annex hereto.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Proxy Statement the
following documents previously filed with the Commission pursuant to the
Exchange Act under file number 001-11941:
1. The Company's 1997 Annual Report on Form 10-K/A;
2. The Company's Proxy Statement Dated March 20, 1998 for its
Annual Meeting of Shareholders held on April 28, 1998;
3. The Company's Quarterly Reports on Form 10-Q/A for the
quarters ended March 31, 1998 and June 30, 1998 and the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998;
4. The Company's Current Reports on Form 8-K dated January 27,
1998, February 26, 1998, April 6, 1998, April 28, 1998, May 5, 1998,
June 26, 1998, August 7, 1998, October 27, 1998, December 3, 1998 and
December 29, 1998; and
5. The description of the Common Stock set forth in the Company's
registration statement filed with the Commission pursuant to Section
12 of the Exchange Act, and any amendment or report filed for the
purpose of updating any such description.
In addition, all reports and other documents filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the Special Meeting shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such reports
and documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a statement
contained herein (in the case of any statement in an incorporated document filed
with the Commission prior to the date of this Proxy Statement) or in any other
subsequently filed document that also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. These documents (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
herein) are available, without charge, upon written or oral request by any
person to whom this Proxy Statement is delivered, including any beneficial
owner, in the case of documents relating to the Company, directed to Farm Family
Holdings, Inc., Attention: Corporate Secretary, P.O. Box 656, Albany, New York
12201-0656, if sent by
<PAGE>
mail, or 344 Route 9W, Glenmont, New York 12077, if by hand, express mail or
overnight courier. In order to ensure timely delivery of the documents, any
request should be made before March 11, 1999.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements that are based on
management's current knowledge, expectations, estimates, beliefs and
assumptions. These forward-looking statements are identified by their use of
such terms and phrases as, but not limited to, "intends," "intend," "intended,"
"goal," "estimate," "estimates," "expects," "expect," "expected," "project,"
"projects," "projected," "projections," "plans," "anticipates," "anticipated,"
"should," "designed to," "foreseeable future," "believe," "believes" and
"scheduled."
The forward-looking statements in this Proxy Statement include, but are not
limited to, statements with respect to the financial condition, results of
operations and business of each of the Company and the Life Company on a
stand-alone basis and of the Company and the Life Company on a pro forma
combined basis following the completion of the Acquisition, including statements
with respect to the Company's potential acquisition of the Life Company and the
impact of such acquisition on the results of operation and financial condition
of the Company, statements regarding expansion into the states of Pennsylvania
and Maryland, projections of revenue, earnings, capital structure and other
financial items, statements of the plans and objectives of the Company, the Life
Company and their managements, and statements of future economic performance and
assumptions underlying statements regarding the Company, the Life Company and
their respective businesses. 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 Proxy
Statement 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
and the Life Company's control, that could cause actual results to differ
materially. These risks and uncertainties include, but are not limited to, the
results of operations of the Company and the Life Company, fluctuations in the
market value of shares of the Common Stock, the satisfaction of the closing
conditions set forth in the Option Purchase Agreement (which conditions include,
but are not limited to, the approval of the Company's stockholders and receipt
of all required governmental approvals), the risks associated with the
legislative, regulatory and competitive environments in the states of
Pennsylvania and Maryland, which may delay, prohibit or otherwise make the
Company's expansion into these states undsirable, factors relating to the
Company's and the Life Company's ability to successfully address their Year 2000
issue, 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 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
and other risks listed from time to time in the Company's Securities and
Exchange Commission filings, including the Form 10-K/A filed for the fiscal year
ended December 31, 1997 and the Prospectus dated July 22, 1996. Additional risks
and uncertainties that may cause actual results of operations and business of
the Life Company to differ materially from those contemplated or projected,
forecasted, estimated or budgeted in such forward looking statements, include,
among others: (i) assumptions regarding future morbidity, persistency, lapse
rates, expenses, mortality and interest rates used in calculating reserve and
liability amounts; (ii) significant variations of actual experience from that
assumed by the Life Company as to the expected morbidity, lapse rates and other
factors in developing pricing and other terms of its life insurance products;
(iii) the ability of the Life Company to maintain its current rating from A.M.
Best Company, Inc.; (iv) changes in interest rates causing a reduction of
investment income, operating cash flow and other sources which affect the Life
Company's ability to pay policyholder benefits; (v) policyholder lapses
resulting from interest rate fluctuations; (vi) inability of the Life Company to
maintain appropriate levels of statutory capital and surplus, particularly in
light of continuing scrutiny by rating organizations and state insurance
regulatory authorities, and to maintain acceptable financial strength and
claims-paying ratings; (vii) a significant change in or termination of the Life
Company's relationship with the Farm Bureaus(R) in the states where the Life
Company's business is concentrated; (viii) adverse state and federal legislation
and regulation, including limitations on premium levels, increases in minimum
capital and reserves and other financial viability requirements; (ix) heightened
competition, including, specifically the intensification of price competition,
the entry of new or existing competitors and the formation of new products by
new and existing competitors which may have substantially greater technical,
financial and operating resources; (x) inability to carry out marketing and
sales plans; (xi) loss of key executives; (xii) general economic and business
conditions which are less favorable than expected; (xiii) unanticipated changes
in industry trends; and (xiv) the reserving policies and the adequacy of the
reinsurance and retrocession programs of the Life Company. Accordingly, there
can be no assurance that the actual results will conform to the forward looking
statements in this Proxy Statement.
[Intentionally Blank]
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION................................................... ii
INCORPORATION OF DOCUMENTS BY REFERENCE................................. ii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............... iii
SUMMARY................................................................. 1
The Special Meeting..................................................... 1
The Companies........................................................... 2
The Acquisition......................................................... 3
Selected Historical Consolidated Financial Data......................... 8
Unaudited Pro Forma Selected Financial Data............................. 12
Comparative Per Share Data.............................................. 13
Market Prices and Dividend Information.................................. 15
THE SPECIAL MEETING..................................................... 16
Date, Time and Place.................................................... 16
Purpose of the Special Meeting.......................................... 16
Record Date; Shares Outstanding and Entitled to Vote.................... 16
Required Vote........................................................... 17
Voting and Revocation of Proxies........................................ 17
Proxy Solicitation...................................................... 18
THE ACQUISITION......................................................... 19
General................................................................. 19
Background of the Acquisition........................................... 20
Optionee Valuation...................................................... 28
Opinion of the Company's Financial Advisor.............................. 29
Reasons for the Acquisition; Recommendation of the Negotiating
Committee and Board of Directors........................................ 34
Exercise Price.......................................................... 37
Management and Operations of the Life Company After the Acquisition..... 38
Interests of Certain Persons in the Acquisition......................... 38
Regulatory Approvals.................................................... 40
Federal Income Tax Consequences......................................... 40
Accounting Treatment.................................................... 41
THE OPTION PURCHASE AGREEMENT........................................... 42
The Option.............................................................. 42
The Closing............................................................. 42
Representations and Warranties.......................................... 42
Certain Covenants....................................................... 43
Other Agreements........................................................ 44
Conditions to Closing................................................... 44
Amendment, Waiver and Termination....................................... 45
Survival of Representations and Warranties.............................. 46
Expenses................................................................ 46
Material Change In Law.................................................. 46
Amendment No. 2 to Option Purchase Agreement............................ 47
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................. 48
BUSINESS OF THE LIFE COMPANY............................................ 56
Overview................................................................ 56
Products................................................................ 56
<PAGE>
Interest Crediting...................................................... 59
Marketing............................................................... 59
Underwriting............................................................ 60
Participating Business.................................................. 60
Related Party Transactions.............................................. 61
Relationship with Farm Bureaus.......................................... 62
Reinsurance............................................................. 62
Future Policy and Contract Benefits..................................... 62
Investments............................................................. 63
A.M. Best Rating........................................................ 66
Competition............................................................. 66
Regulation.............................................................. 67
Properties.............................................................. 67
Employees............................................................... 67
Legal Proceedings....................................................... 67
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE LIFE COMPANY....................................... 68
General................................................................. 68
Results of Operations................................................... 72
Liquidity and Capital Resources......................................... 76
DESCRIPTION OF SERIES A PREFERRED STOCK................................. 78
General................................................................. 78
Designation and Amount.................................................. 78
Rank.................................................................... 78
Dividends............................................................... 78
Redemption.............................................................. 79
Voting Rights........................................................... 79
Liquidation Rights...................................................... 79
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS............. 80
Section 16(a) Beneficial Ownership Reporting Compliance................. 84
INDEPENDENT ACCOUNTANTS................................................. 84
PROPOSALS OF STOCKHOLDERS............................................... 85
ANNEXES:
ANNEX A-Option Purchase Agreement
ANNEX B-Opinion of Salomon Smith Barney Inc.
ANNEX C-Consolidated Financial Statements of Farm Family Life Insurance Company
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. Reference is made to, and this summary is qualified in
its entirety by, the more detailed information and the financial statements,
including the notes thereto, appearing elsewhere herein or incorporated by
reference herein and in the annexes hereto. As used herein, the term "Company"
means Farm Family Holdings, Inc. and its subsidiaries, and the term "Life
Company" means Farm Family Life Insurance Company and its subsidiary, except as
the context may require. All financial information set forth herein is presented
in accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted. Certain capitalized terms used in this summary are defined
elsewhere in this Proxy Statement. You are urged to read this Proxy Statement
and the annexes hereto and the documents incorporated by reference herein
carefully and in their entirety.
THE SPECIAL MEETING
Date, Time and Place of Special Meeting
The Special Meeting will be held on Thursday, March 25, 1999 at 9:00 a.m.,
New York time, at the corporate headquarters of the Company at 344 Route 9W,
Glenmont, New York.
<PAGE>
Purpose of the Special Meeting
At the Special Meeting, the Company's stockholders will be asked to
consider and act upon (i) a proposal to approve and adopt the Option Purchase
Agreement and (ii) a proposal to approve the consummation of the transactions
contemplated therein. See "The Acquisition" and "The Option Purchase Agreement."
The Option Purchase Agreement (in effect prior to Amendment No. 2) and the
consummation of the transactions contemplated therein were originally approved
by the Company's stockholders on December 2, 1998. The closing of the
Acquisition was scheduled to occur on December 7, 1998, but was delayed when it
was determined that in order for certain Selling Stockholders to provide
unqualified opinions of counsel required by the Option Purchase Agreement as a
condition to closing, such Selling Stockholders or their respective parent
entities would need to obtain approval of the Acquisition from their members. As
a result of this delay, the Option Purchase Agreement was amended by Amendment
No. 2 to, among other things, fix the price used to determine the number of
shares of Common Stock and Series A Preferred Stock issued in the Acquisition as
if the closing had occurred on December 7, 1998, subject to a collar mechanism
described below. The Company is now asking its stockholders to approve and adopt
the Option Purchase Agreement, as so amended, and the consummation of the
transactions contemplated therein.
The Board of Directors of the Company has approved the Option Purchase
Agreement and the Company's exercise of the option to acquire the Life Company
and recommends that the stockholders of the Company vote FOR approval of the
Option Purchase Agreement and the consummation of the transactions contemplated
therein.
Record Date; Shares Entitled to Vote
Only holders of record of Common Stock at the close of business on February
9, 1999 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting. As of the close of business on the Record Date, there were 5,253,813
shares of Common Stock outstanding and entitled to vote at the Special Meeting.
Each of the shares of Common Stock outstanding at the close of business on the
Record Date is entitled to one vote at the Special Meeting. See "The Special
Meeting."
<PAGE>
Required Vote
The proposal to approve and adopt the Option Purchase Agreement requires
the affirmative vote of a majority of the outstanding shares of Common Stock
present in person or by proxy at the Special Meeting. The proposal to approve
the consummation of the transactions contemplated in the Option Purchase
Agreement requires the affirmative vote of a majority of the outstanding shares
of Common Stock present in person or by proxy at the Special Meeting, provided,
that under the rules of the NYSE, if shares of Common Stock and Series A
Preferred Stock representing more than 20% of the shares of Common Stock or the
voting power of the Common Stock outstanding prior to the Acquisition would be
issued in the Acquisition, then such proposal will further require that 50% in
interest of all shares of Common Stock entitled to vote actually be voted at the
Special Meeting. The Company will issue a press release disclosing whether such
proposal has carried under the applicable required vote. The effectiveness of
the proposal relating to the consummation of the transactions contemplated by
the Option Purchase Agreement is conditioned upon the approval of the proposal
relating to the adoption of the Option Purchase Agreement. In the event that the
Company fails to obtain the requisite stockholder approvals, the Company will
either re-solicit stockholder approval or abandon the transaction. Proxies
voting against a specific proposal will not be used by the persons named in the
proxies to vote for adjournment of the Special Meeting for the purpose of
allowing additional time to solicit votes to approve such proposal. See "The
Special Meeting-Required Vote."
THE COMPANIES
The Company
The Company is an insurance holding company, whose principal subsidiary,
Farm Family Casualty Insurance Company ("FFCIC"), is a specialized property and
casualty insurer of farms, other generally related businesses and residents of
rural and suburban communities principally in the Northeastern United States.
FFCIC was established in 1955 to meet certain insurance needs of Farm Bureau(R)
members in the Northeastern United States, and provides property and casualty
insurance coverages to members of the state Farm Bureau organizations in New
York, New Jersey, Delaware, West Virginia and all of the New England states
(collectively, the "Farm Bureaus"). Membership in a state or county Farm Bureau
organization is a prerequisite for voluntary insurance coverage with the Company
except for employees of the Company and its affiliates. FFCIC principally
provides flexible multi-line packages of insurance for those engaged in
agricultural pursuits, as well as automobile, commercial general liability,
workers' compensation, umbrella liability, businessowners, homeowners and other
insurance products to rural and suburban policyholders in ten states. The
operations of the Company are also closely related with those of its affiliates,
the Life Company and its wholly owned subsidiary, United Farm Family Insurance
Company ("United"). The Company was incorporated under the laws of the State of
Delaware in 1996. Its principal office is located at 344 Route 9W Glenmont, New
York, 12077, telephone (518) 431-5000. For additional information regarding the
Company and its business, see "Available Information," "Incorporation of
Documents by Reference," and "-Selected Historical Consolidated Financial Data."
The Life Company
The Life Company is an affiliate of the Company owned by Farm Bureau
organizations and their affiliates in New York, New Jersey, Delaware, West
Virginia and all of the New England states. These entities, which comprise all
of the Selling Stockholders, are Connecticut Farm Bureau Service Company,
Delaware Farm Bureau Service Company, Inc., Maine Farm Bureau Service Company,
Massachusetts Farm Bureau Service Company, Inc., New Hampshire Farm Bureau
Federation, New Jersey Farm Bureau Service Company, New York Farm Bureau Service
Company, Inc., Rhode Island Farm Bureau Federation, Inc., Vermont Farm Bureau,
Inc. and West Virginia Farm Bureau, Inc.
The Life Company was established in 1953 to provide life insurance products
for Farm Bureau members principally in the Northeastern United States. The Life
Company principally sells individual whole life, term and universal life
products, in addition to single and flexible premium deferred annuities, single
premium immediate annuities and disability income insurance products. The Life
Company operates in the same ten states as the Company, through a common
distribution system consisting of more than 200 agents who are located in the
rural and suburban communities the Life Company serves. In addition, the Life
Company is licensed to write insurance business in Pennsylvania and Maryland and
began marketing its products in those states in 1998. Unlike FFCIC, membership
in a state or county Farm Bureau organization is not a prerequisite for
purchasing insurance coverage from the Life Company or United.
<PAGE>
The Company and the Life Company have substantially identical directors and
officers, share the same agency force and certain employees, and utilize common
office facilities. Most administrative and operating expenses are allocated
between the two companies pursuant to an expense sharing agreement. Service as a
director or officer of both the Company and the Life Company could create or
appear to create potential conflicts of interest when the director or officer is
faced with decisions that could have different implications for the Company and
the Life Company. A conflict of interest could also exist with respect to the
allocation of time and attention of persons who are officers of both the Company
and the Life Company.
The Life Company's wholly owned subsidiary, United, is a stock property and
casualty insurance company formed in 1988. Prior to January 1, 1998, United's
principal business was reinsurance of direct business written by FFCIC. In 1998,
United commenced writing direct property and casualty business in Pennsylvania
and Maryland.
The Life Company's principal executive offices are located at 344 Route 9W,
Glenmont, New York 12077, telephone (518) 431-5000. For additional information
regarding the Life Company and its business, see "Business of the Life Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Life Company," "-Selected Historical Consolidated Financial
Data" and the financial statements of the Life Company attached as Annex C to
this Proxy Statement.
THE ACQUISITION
The Option
At the time of the reorganization and conversion of Farm Family Mutual
Insurance Company ("Farm Family Mutual") in 1996, the Company and the Selling
Stockholders entered into the Option Purchase Agreement pursuant to which the
Company was granted an option (the "Option") to acquire all of the Life Company
Shares, exercisable for a two-year period which commenced on July 26, 1996. On
February 26, 1998 (the "Exercise Date"), the Company exercised such Option.
Exercise Price
The Exercise Price to be paid by the Company for the Life Company Shares
will be $37.5 million (less certain expenses, currently estimated to be
approximately $1.1 million, to be paid by the Life Company in the transaction on
behalf of the Selling Stockholders). The Exercise Price was determined by
arm's-length negotiations between a special negotiating committee of the Board
of Directors of the Company (the "Negotiating Committee") and a committee
representing the Selling Stockholders, in consultation with their respective
financial advisors and other representatives, based upon separate valuations
prepared by such financial advisors in accordance with specified valuation
procedures set forth in the Option Purchase Agreement. Upon the closing of the
Acquisition (the "Closing"), the Company will pay the Exercise Price to the
Selling Stockholders in (i) a number of shares of Common Stock equal to $31.5
million (less certain expenses currently estimated to be approximately $0.92
million) divided by the Optionee Common Stock Price (as defined below) and (ii)
a number of shares of Series A Preferred Stock equal to $6 million (less certain
expenses currently estimated to be approximately $0.18 million) divided by the
Optionee Common Stock Price. The "Optionee Common Stock Price" will be equal to
$35.72 (which was the price that would have been used if the Closing had
occurred on December 7, 1998), unless the closing price per share of Common
Stock as reported on the NYSE on the last trading day prior to the date of the
Closing of the Acquisition (the "Closing Price") is greater than $42.86 or equal
to or less than $25.00. If the Closing Price is greater than $42.86 or equal to
or less than $25.00, the Optionee Common Stock Price will equal $35.72 divided
by a factor. The factor will be equal to 1.2 (if the Closing Price is greater
than $42.86) or 0.7 (if the Closing Price is equal to or less than $25.00)
multiplied by $35.72 divided by the Closing Price. If the Closing Price is
$25.00 or less, the Company also will have the option to terminate the Option
Purchase Agreement.
Assuming the Optionee Common Stock Price is $35.72, the Company would issue
approximately 856,021 shares of Common Stock and 163,052 shares of Series A
Preferred Stock to the Selling Stockholders, representing 14.01% of the total
number of shares of Common Stock outstanding after the Acquisition and 16.25% of
the combined voting power of the stockholders of the Company after the
Acquisition.
<PAGE>
In the event that the Closing Price is greater than $42.86 or equal to or
less than $25.00, the following table illustrates how the Closing Price will
affect the Optionee Common Stock Price and the manner in which the Optionee
Common Stock Price determines the number of shares of Common Stock and Series A
Preferred Stock that would be issued at the Closing.This information should not
be construed to be indicative of the actual number of shares of Common Stock and
Series A Preferred Stock that will be issued at the Closing.
<TABLE>
<CAPTION>
Optionee
Common Shares of
Closing Stock Shares of Series A Preferred % of Common Stock % of Combined
Price Price Common Stock Issued Stock Issued Outstanding(1)(2) Voting Power(1)(2)
<C> <C> <C> <C> <C>
$20........................... $28.57 1,070,160 203,840 16.92% 19.52%
21........................... 30.00 1,019,200 194,133 16.25 18.76
22........................... 31.43 972,873 185,309 15.62 18.06
23........................... 32.86 930,574 177,252 15.05 17.41
24........................... 34.29 891,800 169,867 14.51 16.81
-
43........................... 35.83 853,284 162,530 13.97 16.20
44........................... 36.67 833,891 158,836 13.70 15.89
45........................... 37.50 815,360 155,307 13.43 15.59
46........................... 38.33 797,635 151,930 13.18 15.31
47........................... 39.17 780,664 148,698 12.94 15.03
- -----------
</TABLE>
(1) Based on 5,253,813 shares of Common Stock outstanding as of the Record
Date plus the number of shares of Common Stock and, with respect to the
combined voting power, Series A Preferred Stock estimated to be issued
at the respective Optionee Common Stock Price set forth in the second
column of this table.
(2) Excludes shares of Common Stock currently owned by certain Selling
Stockholders, which in the aggregate constitute less than 1% of the
outstanding shares of Common Stock as of February 11, 1999. See "Stock
Ownership of Management and Certain Beneficial Owners."
The actual value of the securities that the Company issues in the
Acquisition may have a value on the date of the Closing (the "Closing Date") in
excess of (or less than) $37.5 million, prior to reduction for certain expenses
(currently estimated to be $1.1 million). In addition, the market value of the
Series A Preferred Stock may be higher or lower on the Closing Date than its
stated value of $6 million, depending on interest rates, perceived credit
quality, market conditions, valuations of comparable companies and other factors
at the time it is issued. The Company's financial advisor advised the
Negotiating Committee and the Board of Directors that, as of the date of its
February 26, 1998 fairness opinion, the Series A Preferred Stock would likely
trade at approximately its stated value of $6 million. The financial advisor did
not value the Series A Preferred Stock or the Common Stock for purposes of its
fairness opinion, however. See "-Review of Series A Preferred Stock" under "The
Acquisition-Opinion of the Company's Financial Advisor," "The
Acquisition-Background of the Acquisition," "The Acquisition-Exercise Price" and
"Stock Ownership of Management and Certain Beneficial Owners."
Recommendation of Board of Directors
The Board of Directors believes that the Acquisition is in the best
interests of the Company. The Board of Directors has approved the Option
Purchase Agreement and the exercise of the Option to acquire the Life Company
pursuant to the Option Purchase Agreement and has recommended that the
stockholders of the Company vote FOR approval of the Option Purchase Agreement
and the consummation of the transactions contemplated therein. See "The
Acquisition-Reasons for the Acquisition; Recommendation of the Negotiating
Committee and Board of Directors."
<PAGE>
Fairness Opinion
Salomon Brothers Inc, a predecessor by merger to Salomon Smith Barney Inc.
(collectively with all predecessors to Salomon Smith Barney Inc., "Salomon Smith
Barney"), was retained by the Company to act as financial advisor to the Company
in connection with the possible acquisition of the Life Company and, in
connection with such engagement, rendered an opinion as to the fairness from a
financial point of view to the Company of the consideration to be paid by the
Company to the Selling Stockholders in connection with the Acquisition. On
February 26, 1998, the date the Board of Directors approved the exercise of the
Option to purchase the Life Company, Salomon Smith Barney delivered to the Board
of Directors its written opinion to the effect that, based upon and subject to
the considerations set forth in such opinion, as of such date the consideration
to be paid by the Company in connection with the proposed Acquisition of all of
the outstanding shares of capital stock of the Life Company was fair from a
financial point of view to the Company. Salomon Smith Barney has confirmed its
opinion dated February 26, 1998 by delivery to the Board of Directors of the
Company of written opinions dated October 21, 1998 and the date of this Proxy
Statement. For purposes of its opinion, Salomon Smith Barney assumed and did not
opine that the aggregate value of the Series A Preferred Stock to be issued in
the Acquisition is equal to the aggregate stated value of $6 million and that
the aggregate value of the Common Stock to be issued in the Acquisition is equal
to $31.5 million. A copy of the opinion of Salomon Smith Barney, dated the date
of this Proxy Statement, which sets forth the assumptions made, general
procedures followed, matters considered and limits on the review undertaken, is
attached as Annex B to this Proxy Statement. Stockholders are urged to read the
opinion of Salomon Smith Barney in its entirety. Salomon Smith Barney was also
retained by the Negotiating Committee to act as its financial advisor and to
prepare the initial valuation for purposes of determining the exercise price
under the Option Purchase Agreement. See "The Acquisition-Background of the
Acquisition," "The Acquisition-Optionee Valuation," and "The Acquisition-Opinion
of the Company's Financial Advisor."
Series A Preferred Stock
Each share of the Series A Preferred Stock will be entitled to one vote per
share in the election of directors and on all matters on which holders of Common
Stock are entitled to vote, not voting separately as a class but together with
all other stockholders. Cumulative dividends will be payable quarterly in cash
on each share at a rate equal to 6 1/8% per annum. The Series A Preferred Stock
will be subject to mandatory redemption by the Company on the date following the
twentieth anniversary of the issuance date (or the next business day), and
optional redemption on and after the tenth anniversary of the issuance date.
Each share of Series A Preferred Stock may be redeemed, at the option of the
Company, in cash or in shares of Common Stock. The Company's decision whether to
redeem shares of Series A Preferred Stock in cash or in shares will depend on
its financial condition and other circumstances at that time, including its
liquidity. See "Description of Series A Preferred Stock."
Conditions to Consummation of the Acquisition
The respective obligations of the Company and the Selling Stockholders to
consummate the Acquisition are conditioned on, among other things, receipt of
governmental and regulatory consents (including termination or expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder (the "HSR
Act"), and approval of the Superintendent of Insurance of the State of New York
(the "New York Superintendent")), approval of the Acquisition by the requisite
vote of the Company's stockholders, approval of the Acquisition by the requisite
affirmative votes of the members of certain of the Selling Stockholders or of
their parent entities and/or judicial approval, the absence of injunctions or
restraints preventing consummation of such transaction and satisfaction of
certain other usual conditions. On May 27, 1998, notice of early termination of
the waiting period under the HSR Act was received. On May 28, 1998, the Life
Bureau of the New York Superintendent approved the Acquisition. See "The
Acquisition-Regulatory Approvals" and "The Option Purchase Agreement-Conditions
to Closing."
Closing Date
If the proposals to approve and adopt the Option Purchase Agreement and to
approve the transactions contemplated therein are approved at the Special
Meeting, it is expected that the Closing will be consummated on the fifth
business day after satisfaction or waiver of all of the conditions specified in
the Option Purchase Agreement, unless another date is agreed to by the parties.
<PAGE>
The Company does not intend to waive any material conditions under the Option
Purchase Agreement. If the Company does waive any such material conditions,
however, it would resolicit proxies at that time.
Interests of Certain Persons in the Acquisition
The Company is closely affiliated with the Farm Bureaus in the ten states
in which it operates, and these Farm Bureaus or their affiliates comprise all of
the Selling Stockholders. Substantially all of the directors of the Company,
including the Chairman and Vice Chairman of the Board, are directors or
executive officers of, employed by or otherwise associated with the Selling
Stockholders and their affiliates. Certain of these directors also own capital
stock of certain of the Selling Stockholders, although such capital stock will
be redeemed by or returned to such Selling Stockholders prior to the
consummation of the Acquisition. The Company also has various financial
arrangements and interrelationships with the Selling Stockholders and the Life
Company. Substantially all of the directors and executive officers of the
Company are also directors and executive officers of the Life Company and
United. As a result of these interests, the Board of Directors appointed the
Negotiating Committee, which was comprised of independent directors, to
negotiate the Exercise Price on behalf of the Company with the Selling
Stockholders. See "The Acquisition-Interests of Certain Persons in the
Acquisition" and "Stock Ownership of Management and Certain Beneficial Owners."
Material Change in Law
The Option Purchase Agreement provides that in the event a Material Change
in Law (as defined in the Option Purchase Agreement) could adversely affect
certain of the Federal income tax consequences of the transaction for certain
Selling Stockholders, the Company will negotiate in good faith with the Selling
Stockholders to amend or modify the terms of the Series A Preferred Stock, to
arrange for substitute consideration or otherwise to restructure the
transactions under the Option Purchase Agreement. If the Company and the Selling
Stockholders are not able to agree on the terms of a modification to the Option
Purchase Agreement, then, among other things, neither the Company nor the
Selling Stockholders will be required to consummate the Acquisition under the
terms described in this Proxy Statement and the option purchase agreement which
was in effect between the Company and the Selling Stockholders prior to February
26, 1998 (the "Original Option Purchase Agreement") will continue in full force
and effect as if the Option Purchase Agreement, including any subsequent
amendments, had never become effective. If the Original Option Purchase
Agreement is reinstated, the Company's exercise of the Option to purchase the
Life Company as described in this Proxy Statement will be void. In the event
that the Company and the Selling Stockholders renegotiate material terms of the
consideration to be paid or the transactions under the Option Purchase Agreement
or, in the event that the Original Option Purchase Agreement is reinstated and
the Company elects to exercise its Option thereunder, the Company would
re-solicit proxies at that time. See "The Option Purchase Agreement-Material
Change in Law."
Termination of the Option Purchase Agreement
The Option Purchase Agreement may be terminated at any time prior to the
Closing Date, whether before or after approval by the stockholders at the
Special Meeting (i) by the mutual written agreement of the Company and the
Selling Stockholders, (ii) by either the Company or the Selling Stockholders if
the Closing Date has not occurred by April 30, 1999 (provided that the right to
terminate the Option Purchase Agreement is not available to any party whose
failure (on or after the date of Amendment No. 2) to fulfill any of its
obligations under the Option Purchase Agreement results in the failure of the
Closing to occur on or prior to such date) or (iii) by the Company if the
Closing Price is $25.00 or less. See "The Option Purchase Agreement-Amendment,
Waiver and Termination."
Management and Operations of the Life Company After the Acquisition
It is not expected that the consummation of the Acquisition will result in
any changes to the Board of Directors or officers of the Life Company other than
an increase in the number of directors from 21 to 23 to coincide with the number
of directors currently serving on the Boards of Directors of each of the Company
and FFCIC. Following the Acquisition, it is intended that the Life Company will
be managed in substantially the manner and with substantially the same operating
management as it is currently.
Accounting Treatment
The Acquisition will be accounted for under the "purchase" method of
accounting. See "The Acquisition-Accounting Treatment."
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of the
Company for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and as
of December 31, 1997, 1996, 1995 and 1994 has been derived from the historical
audited consolidated financial statements of the Company and such financial
statements and notes thereto should be read in conjunction with the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1997, and Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, which are
incorporated by reference herein. See "Available Information" and "Incorporation
of Documents by Reference." The selected historical consolidated financial data
of the Company for the nine months ended September 30, 1998 and 1997 and as of
December 31, 1993 and as of September 30, 1998 and 1997 has been derived from
the unaudited consolidated financial statements of the Company. The Company
believes that such unaudited financial data fairly reflect the unaudited
consolidated financial condition of the Company as of December 31, 1993. Interim
unaudited historical data which in the opinion of management of the Company
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such data, and unaudited results of
operations for the nine months ended September 30, 1998 and 1997, are not
necessarily indicative of results which may be expected for any other interim
period or for the fiscal year as a whole.
The following selected historical consolidated financial data of the Life
Company for the years ended December 31, 1997, 1996 and 1995 and as of December
31, 1997 and 1996 has been derived from the historical consolidated audited
financial statements of the Life Company and should be read in conjunction with
such financial statements and the notes thereto, set forth in Annex C to this
Proxy Statement. The selected historical consolidated financial data of the Life
Company for the year ended December 31, 1994 and as of December 31, 1995 has
been derived from the historical consolidated audited financial statements of
the Life Company. The selected historical financial data of the Life Company for
the nine months ended September 30, 1998 and 1997 and as of December 31, 1994
and as of September 30, 1998 and 1997 has been derived from the historical
unaudited consolidated financial statements of the Life Company. The Life
Company believes that such unaudited financial data fairly reflect the
consolidated results of operations and the consolidated financial condition of
the Life Company for such periods. Interim unaudited historical data which in
the opinion of management of the Life Company reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data, and unaudited results of operations for the nine
months ended September 30, 1998 and 1997, are not necessarily indicative of
results which may be expected for any other interim period or for the fiscal
year as a whole. The consolidated financial statements for the Life Company
prepared in accordance with GAAP and the selected historical consolidated
financial data for the year ended December 31, 1993 and as of December 31, 1993
are not available because, during 1997, the Life Company's financial statements
for 1996, 1995 and 1994 were, for the first time, converted to and presented in
conformity with GAAP. Previously, the Life Company's financial statements and
those of its subsidiary were presented in accordance with statutory accounting
practices prescribed or permitted by the Insurance Department of the State of
New York. This data should be read in conjunction with the financial statements
of the Life Company set forth in Annex C to this Proxy Statement, and notes
thereto and other financial information, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Life Company"
included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data of the Company
Nine Months
Ended
September 30, Year Ended December 31,
-------------
(dollars in millions, except per share data)
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums.................... $133.4 $109.2 $149.2 $130.8 $116.9 $101.5 $96.7
Net investment income....... 14.3 13.5 18.1 15.9 14.3 13.2 13.8
Net realized investment
gains (losses), net...... 0.5 5.7 5.4 (0.6) 0.9 1.3 (0.2)
Other income(1)............. 0.8 0.7 1.0 0.9 0.9 0.7 0.7
--- --- --- --- --- --- ---
Total revenues........... 149.0 129.1 173.7 147.0 133.0 116.7 111.0
----- ----- ----- ----- ----- ----- -----
Losses, expenses and
other:
Losses and loss
adjustment expenses...... 99.1 76.4 103.3 95.0 83.2 82.7 73.2
Underwriting expenses....... 35.1 32.0 43.3 39.5 36.1 29.1 26.8
Early retirement
program expense.......... - - - 1.2 - - -
Interest and other
expense.................. 0.1 0.2 0.4 0.5 0.3 0.3 0.3
--- --- --- --- --- --- ---
Total losses and
expenses............... 134.3 108.6 147.0 136.2 119.6 112.1 100.3
----- ----- ----- ----- ----- ----- -----
Gain on partial
reduction of extended
earnings liability(8).... (6.3) - - - - - -
---- ---- ---- ---- ---- ---- ----
Total losses, expenses
and other.............. 128.0 108.6 147.0 136.2 119.6 112.1 100.3
----- ----- ----- ----- ----- ----- -----
Income before federal
income tax and
extraordinary item.......... 21.0 20.5 26.7 10.8 13.4 4.6 10.7
Federal income tax
expense..................... 6.8 6.9 9.2 3.3 4.6 1.3 3.1
--- --- --- --- --- --- ---
Income before
extraordinary item.......... 14.2 13.6 17.5 7.5 8.8 3.3 7.6
Extraordinary
item-demutualization
expense..................... - - - 1.5 - - -
--- --- --- --- --- --- ---
Net income..................... $14.2 $13.6 $17.5 $6.0 $8.8 $3.3 $7.6
===== ===== ===== ==== ==== ==== ====
Income before
extraordinary item per
share-basic................. $2.70 $2.59 $3.33 $1.90 $2.95 $1.10 $2.53
===== ===== ===== ===== ===== ===== =====
Income before
extraordinary item per
share-diluted............... $2.67 $2.58 $3.32 $1.90 $2.95 $1.10 $2.53
===== ===== ===== ===== ===== ===== =====
Net income per share-basic..... $2.70 $2.59 $3.33 $1.51 $2.95 $1.10 $2.53
===== ===== ===== ===== ===== ===== =====
Net income per
share-diluted............... $2.67 $2.58 $3.32 $1.51 $2.95 $1.10 $2.53
===== ===== ===== ===== ===== ===== =====
Diluted weighted average
shares outstanding(2)....... 5,306,257 5,264,658 5,270,947 3,979,115 3,000,000 3,000,000 3,000,000
Balance Sheet Data (at period end):
Total investments.............. $307.9 $270.0 $280.4 $244.7 $207.9 $170.6 $177.7
Total assets................... 411.0 362.1 371.2 321.8 280.3 244.7 244.1
Long term debt................. - 1.3 1.3 1.3 2.7 2.7 2.8
Total liabilities.............. 269.9 244.1 248.0 216.8 210.9 195.7 183.6
Total equity................... 141.1 118.0 123.2 105.0 69.4 49.0 60.5
Book value per share........... 26.86 22.46 23.46 20.00 23.13 16.33 20.17
GAAP Ratios:
Loss and loss adjustment
expense ratio(3)............ 74.3% 70.0% 69.2% 72.6% 71.1% 81.5% 75.7%
Underwriting expense
ratio(4).................... 26.3% 29.3% 29.0% 30.2% 30.8% 28.7% 27.7%
Combined ratio(5).............. 100.6% 99.5% 98.2% 102.8% 101.9% 110.2% 103.4%
Statutory Ratios:
Statutory combined
ratio(6).................... 99.1% 96.1% 95.6% 101.8% 101.0% 108.9% 104.2%
Statutory surplus.............. $101.0 $90.2 $94.6 $83.2 $55.9 $42.9 $39.1
Ratio of annual net written
premiums to statutory
surplus(7).................. 1.78x 1.70x 1.68x 1.61x 2.16x 2.46x 2.52x
(Footnotes begin on following page)
</TABLE>
<PAGE>
- -----------
(1) Primarily represents service fee income on the Company's property and
casualty insurance business.
(2) Gives effect to the allocation of 3,000,000 shares to eligible
policyholders on July 26, 1996 pursuant to FFCIC's conversion from a mutual
company to a stockholder owned company.
(3) Calculated by dividing losses and loss adjustment expenses by premiums.
(4) Calculated by dividing underwriting expenses by premiums.
(5) The sum of the loss and loss adjustment expense ratio and the underwriting
expense ratio.
(6) The sum of the loss and loss adjustment expense ratio and the ratio of
statutory underwriting expense divided by net written premium.
(7) Calculated by dividing statutory net written premiums for the period by
statutory surplus at the end of the period.
(8) The Company recorded a nonrecurring gain on the partial reduction of its
extended earnings liability of $6.3 million during the nine months ended
September 30, 1998, which was the result of modifications made to the
agreements with the Company's agents and agency managers.
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data of the Life Company
Nine Months
Ended
September 30, Year Ended December 31,
1998 1997 1997 1996 1995 1994
(dollars in millions, except per share data)
Statement of Income Data:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums from life and health operations(1)............. $23.0 $22.5 $30.5 $30.3 $29.4 $35.9
Policy and contract charges............................. 4.3 3.8 5.0 5.0 4.5 4.2
------ ------ ------ ------ ------ ------
Total policy revenues................................ 27.3 26.3 35.5 35.3 33.9 40.1
Premiums from property/casualty operations(2)........... - 6.7 9.0 9.5 9.3 9.8
Net investment income................................... 41.5 40.4 55.0 55.7 52.6 49.5
Realized investment gains............................... 3.2 3.4 2.9 0.3 5.6 4.4
Other income............................................ 0.7 0.9 1.1 0.9 0.9 0.9
------ ------ ------ ------ ------ ------
Total revenues....................................... 72.7 77.7 103.5 101.7 102.3 104.7
------ ------ ------ ------ ------ ------
Benefits and expenses:
Benefits to policyholders............................... 22.8 21.7 26.8 27.0 26.8 26.8
Losses and loss adjustment expenses on
property/casualty operations......................... 1.5 6.3 10.0 7.8 6.9 7.7
Operating expenses...................................... 6.7 5.4 7.7 8.8 9.0 9.2
Non-recurring charges(3)................................ 0.2 - 0.7 0.9 - -
Interest credited to policyholders...................... 16.6 18.9 24.8 24.6 26.5 24.0
Amortization of policy acquisition costs................ 5.3 5.1 6.9 6.9 7.3 7.1
Participating policyholders' interest(4)................ 16.3 15.8 21.6 21.2 19.1 22.7
------ ------ ------ ------ ------ ------
Total benefits and expenses.......................... 69.4 73.2 98.5 97.2 95.6 97.5
Income before income taxes................................. 3.3 4.5 5.0 4.5 6.7 7.2
Income tax expense......................................... 1.1 1.5 1.7 1.5 2.3 2.4
------ ------ ------ ------ ------ ------
Net income attributable to common stockholders............. $2.2 $3.0 $3.3 $3.0 $4.4 $4.8
==== ==== ==== ==== ==== ====
Net income per common share................................ $37.14 $49.37 $55.66 $49.17 $73.97 $79.54
====== ====== ====== ====== ====== ======
Weighted average shares outstanding........................ 60,011 60,011 60,011 60,011 60,011 60,011
Balance Sheet Data (at period end):
Total investments.......................................... $807.3 $764.4 $780.8 $726.5 $717.5 $599.8
Total assets............................................... 863.5 839.4 843.9 800.8 779.1 685.2
Participating policyholders' interest(4)................... 116.3 109.4 109.6 96.5 99.6 69.9
Total liabilities.......................................... 822.3 801.2 804.8 766.1 746.7 657.1
Total equity............................................... 41.2 38.2 39.1 34.7 32.4 28.1
Book value per share....................................... 686.12 636.98 651.60 577.99 540.60 468.21
</TABLE>
- -----------
(1) Premiums for life and health operations in 1994 include $10.6 million of
premium for group major medical insurance. The Life Company ceased writing
this line of business during 1994, accordingly premiums from group major
medical were zero for 1997, 1996, 1995 and for the nine months ended
September 30, 1998 and 1997.
(2) Premiums from property/casualty operations prior to 1998 were assumed from
FFCIC pursuant to reinsurance agreements between United and FFCIC which
were terminated effective December 31, 1997.
(3) The Life Company recorded a non-recurring charge for the nine months ended
September 30, 1998 and for the year ended December 31, 1997 of $203,000 and
$707,000, respectively, for costs incurred by the shareholders of the Life
Company relating to the Acquisition. In 1996, the Life Company recorded a
nonrecurring expense of $914,000 for its share of the costs relating to the
implementation of a voluntary early retirement program offered to certain
eligible employees.
(4) The majority of the Life Company's insurance policies are written on
"participating" basis, as defined in the New York Insurance Law. Profits
earned on participating business are reserved for the payment of dividends
to policyholders except for the stockholders' share of profits on
participating policies, which is limited to the greater of 10% of the
statutory profit on participating business, or 50 cents per thousand
dollars per year of the face amount of participating life insurance in
force. Participating policyholders' interest includes the accumulated net
income from participating policies reserved for payment to such
policyholders in the form of dividends (less net income allocated to
stockholders as indicated above) as well as a pro rata portion of net
unrealized investment gains (losses). Dividends to policyholders are
approved by the Board of Directors based on the net income of the
participating policies. In addition to the greater of 10% of the statutory
profit on participating business or 50 cents per thousand dollars per year
of the face amount of participating life insurance in force, earnings
attributable to common stockholders consist of earnings on
non-participating business and a pro rata share of net investment income
and realized investment gains (losses).
<PAGE>
UNAUDITED PRO FORMA SELECTED FINANCIAL DATA
The following table sets forth selected unaudited pro forma consolidated
financial information for the nine months ended September 30, 1998 and the year
ended December 31, 1997, giving effect to the Acquisition using the purchase
method of accounting. See "The Acquisition-Accounting Treatment." The Statement
of Income and Per Common Share Data give effect to the Acquisition as if the
Acquisition occurred at January 1, 1997. The balance sheet data gives effect to
the Acquisition as if the Acquisition had occurred at September 30, 1998. The
pro forma information is provided for informational purposes only and is not
necessarily indicative of actual results that would have been achieved had the
Acquisition been consummated at the beginning of the periods presented or of
future results. The selected pro forma consolidated financial information is
derived from the pro forma consolidated financial information appearing
elsewhere herein. This information should be read in conjunction with the
consolidated financial statements of the Company, including the notes thereto,
incorporated by reference herein, the consolidated financial statements of the
Life Company, including the notes thereto, attached as Annex C to this Proxy
Statement, and the unaudited pro forma consolidated financial information,
including the notes thereto, appearing elsewhere herein. See "Available
Information," "Incorporation of Documents by Reference" and "Unaudited Pro Forma
Consolidated Financial Information."
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
(dollars in millions, except per share data)
Statement of Income Data:
Revenues:
<S> <C> <C>
Premiums from property/casualty operations.................................. $133.4 $158.2
Premiums from life and health operations.................................... 23.0 30.5
Net investment income....................................................... 55.8 73.0
Realized investment gains, net.............................................. 3.7 8.3
Policy and contract charges................................................. 4.3 5.1
Other income................................................................ 0.8 1.4
--- ---
Total revenues........................................................ 221.0 276.5
----- -----
Losses, benefits, expenses and other:
Losses and loss adjustment expenses......................................... 100.5 113.3
Benefits to policyholders................................................... 22.8 26.8
Underwriting & operating expenses........................................... 41.3 50.4
Non-recurring charges....................................................... 0.2 0.7
Interest credited to policyholders.......................................... 16.6 24.8
Amortization of present value of future profits............................. 1.2 2.4
Interest and other expense.................................................. 0.1 0.4
Participating Policyholders' Interest....................................... 20.0 25.6
---- ----
Total losses, benefits and expenses................................... 202.7 244.4
----- -----
Gain on partial reduction of extended earnings liability.................... (6.3) -
---- -----
Total losses, benefits, expenses and other............................ 196.4 244.4
----- ----
Income before federal income tax expense.................................... 24.6 32.1
Federal income tax expense.................................................. 8.0 11.0
--- ----
Income before preferred stock dividends..................................... 16.6 21.1
Preferred stock dividends................................................... 0.2 0.4
--- ---
Income applicable to common shareholders.................................... $16.4 $20.7
===== =====
Net income per common share-basic........................................... $2.68 $3.39
===== =====
Net income per common share-diluted......................................... $2.65 $3.38
===== =====
Weighted average shares-basic(1)............................................ 6,109,834 6,109,834
Weighted average shares-diluted(1).......................................... 6,162,278 6,126,968
Balance Sheet Data (at period end):
Total investments........................................................... $1,115.2 -
Total assets................................................................ 1,251.4 -
Participating policyholders' interest....................................... 116.3 -
Total liabilities........................................................... 1,073.8 -
Redeemable preferred stock.................................................. 5.8 -
Total equity................................................................ 171.7 -
Book value per share(1)..................................................... 28.10 -
</TABLE>
- -----------
(1) Weighted average shares and book value per share are computed assuming an
Optionee Common Stock Price of $35.72. The actual price used to determine
the number of shares to be issued in the Acquisition and the actual number
of shares of Common Stock that will be issued to the Selling Stockholders
may vary from these amounts. See "The Acquisition-Exercise Price."
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for the Company on
a historical and pro forma consolidated basis and for the Life Company on a
historical and equivalent pro forma consolidated basis based upon the historical
financial statements of the Company and the Life Company. The Company has not
paid any cash dividends. Pro forma consolidated information is not necessarily
indicative of actual or future operating results or financial position that
would have occurred or will occur upon consummation of the Acquisition. The
information presented below should be read in conjunction with the unaudited pro
forma consolidated financial information, including the notes thereto, included
elsewhere herein, the historical consolidated financial statements of the
Company, including the notes thereto, incorporated by reference herein, and the
historical consolidated financial statements of the Life Company, including the
notes thereto, attached as Annex C to this Proxy Statement. See "Available
Information," "Incorporation of Documents by Reference," "The
Acquisition-Accounting Treatment" and "Unaudited Pro Forma Consolidated
Financial Information."
<TABLE>
<CAPTION>
Nine
Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
Company Common Stock
Historical:
<S> <C> <C>
Net income per share(1)....................................................... $2.67 $3.32
Book value per share(2).................................................. 26.86 23.46
Cash dividends declared per share(3)..................................... 0.00 0.00
Pro forma consolidated:
Net income per share(4).................................................. $2.65 $3.38
Book value per share(5).................................................. 28.10 26.27
Cash dividends declared per share........................................ 0.00 0.00
Life Company Common Stock
Historical:
Net income per share(1).................................................. $37.14 $55.66
Book value per share(2).................................................. 686.12 651.60
Cash dividends declared per share(6)..................................... 0.00 8.00
Equivalent pro forma consolidated(7):
Net income per share..................................................... $37.79 $48.20
Book value per share..................................................... 400.71 374.61
Cash dividends declared per share........................................ 0.00 0.00
</TABLE>
- -----------
(1) Historical net income per share data for the Company and the Life Company
is computed by dividing historical net income for the nine months ended
September 30, 1998 and the year ended December 31, 1997 for the Company and
the Life Company, as the case may be, by the diluted weighted average
common shares outstanding for the Company and the Life Company, as the case
may be, for the nine months ended September 30, 1998 and the year ended
December 31, 1997.
(2) Historical book value per share data for the Company and the Life Company
is computed by dividing historical stockholders' equity as of September 30,
1998 and December 31, 1997 for the Company and the Life Company, as the
case may be, by the number of shares of Common Stock outstanding of the
Company (5,253,813 shares) and the number of common shares outstanding of
the Life Company (60,011 shares), as the case may be, at September 30, 1998
and December 31, 1997.
(3) The Company has never paid cash dividends on shares of Common Stock. See
"-Market Prices and Dividend Information."
Footnotes continued on following page
<PAGE>
Footnotes continued from previous page
(4) Pro forma consolidated net income per share for the Company is computed by
dividing pro forma net income for the nine months ended September 30, 1998
and the year ended December 31, 1997 by pro forma consolidated diluted
weighted average shares of Common Stock outstanding. Pro forma net income
gives effect to the Acquisition by consolidating the statements of income
of the Company and the Life Company for the nine months ended September 30,
1998 and the year ended December 31, 1997 under the purchase method of
accounting as if the Acquisition had occurred on January 1, 1997.
(5) Pro forma consolidated book value per share for the Company is computed by
dividing pro forma stockholders' equity by the sum of the number of shares
of Common Stock outstanding as of September 30, 1998 and December 31, 1997,
as the case may be, and an estimated 856,021 shares of Common Stock to be
issued in the Acquisition assuming an Optionee Common Stock Price of
$35.72. The actual price used to determine the number of shares issued in
the Acquisition and the actual number of shares of Common Stock that will
be issued to the Selling Stockholders may vary from these amounts. See "The
Acquisition-Exercise Price." The Company has never paid cash dividends on
shares of Common Stock. See "-Market Prices and Dividend Information."
(6) Historical cash dividends declared per share for the Life Company is
computed by dividing historical cash dividends declared as of September 30,
1998 and December 31, 1997 for the Life Company, as the case may be, by the
number of shares of common stock outstanding of the Life Company (60,011
shares), as the case may be, at September 30, 1998 and December 31, 1997.
See "-Market Prices and Dividend Information."
(7) Equivalent pro forma consolidated net income, cash dividends declared and
book value per share for the Life Company represent pro forma net income,
cash dividends declared and book value per share, as the case may be,
multiplied by an assumed exchange ratio of 14.26, which represents the
ratio of the number of shares of Common Stock issued in exchange for one
share of Life Company common stock assuming an Optionee Common Stock Price
of $35.72. The Company has never paid cash dividends on shares of Common
Stock. See "-Market Prices and Dividend Information."
<PAGE>
MARKET PRICES AND DIVIDEND INFORMATION
The Company
The Common Stock is traded on the NYSE under the symbol "FFH." The
following table sets forth the high and low sales price per share of Common
Stock on the consolidated transaction reporting system, as reported on the NYSE
Composite Tape, with respect to each quarterly period since July 26, 1996, the
date of the Company's initial public offering.
<TABLE>
<CAPTION>
High Low
1996
<S> <C> <C> <C> <C>
Third Quarter...................................................................... $19 1/8 $16 1/2
Fourth Quarter..................................................................... 20 1/2 18 1/8
1997
First Quarter...................................................................... $23 1/2 $19 1/2
Second Quarter..................................................................... 27 7/8 22 1/8
Third Quarter...................................................................... 32 1/8 27 7/8
Fourth Quarter..................................................................... 32 9/16 29 1/4
1998
First Quarter...................................................................... $38 3/4 $31 5/8
Fourth Quarter..................................................................... 38 3/16 28
1999
First Quarter (through February 16, 1999).......................................... $34 3/16 $32
</TABLE>
On February 26, 1998, the last full trading day prior to the public
announcement of the Company's exercise of the Option pursuant to the Option
Purchase Agreement, the closing price per share of Common Stock on the NYSE
Composite Tape was $34 1/8 per share. On February 16, 1999, the most recent
available date prior to printing this Proxy Statement, the reported closing
price of Common Stock on the NYSE Composite Tape was $32 7/16 per share. There
were approximately 28,063 registered holders of the Common Stock at February 16,
1999. Stockholders should obtain current market quotations for the Common Stock.
The Company has never paid cash dividends on shares of Common Stock. The
Company currently intends to retain any earnings in order to develop its
business and support its operations, and, as such, does not anticipate that it
will pay any dividends to stockholders in the foreseeable future. The
declaration and payment of dividends in the future are at the discretion of the
Board of Directors of the Company, are subject to certain regulatory constraints
and will depend upon, among other things, the Company's results of operations,
financial condition, cash requirements, future prospects and other factors.
The Life Company
The Life Company's common stock is privately held and therefore is not
registered or traded on a securities exchange and there is no established public
trading market for the Life Company's common stock. As of February 16, 1999,
there were ten holders of record of the Life Company's common stock.
For each of the years ended December 31, 1995, 1996, and 1997, the Life
Company paid an annual dividend of $8.00 per share of common stock. The
declaration and payment of dividends in the future are at the discretion of the
Board of Directors of the Life Company, are subject to certain regulatory
constraints and will depend upon, among other things, the Life Company's results
of operations, financial condition, cash requirements, future prospects and
other factors.
<PAGE>
THE SPECIAL MEETING
Date, Time and Place
The Special Meeting will be held on Thursday, March 25, 1999 at 9:00 a.m.,
New York time, at the corporate headquarters of the Company at 344 Route 9W,
Glenmont, New York.
Purpose of the Special Meeting
At the Special Meeting, the Company's stockholders will be asked to
consider and vote upon (i) a proposal to approve and adopt the Option Purchase
Agreement and (ii) a proposal to approve the consummation of the transactions
contemplated by the Option Purchase Agreement. See "The Acquisition" and "The
Option Purchase Agreement."
The Option Purchase Agreement (in effect prior to Amendment No. 2) and the
consummation of the transactions contemplated therein were originally approved
by the Company's stockholders on December 2, 1998. The Closing of the
Acquisition was scheduled to occur on December 7, 1998, but was delayed when it
was determined that in order for certain Selling Stockholders to provide
unqualified opinions of counsel required by the Option Purchase Agreement as a
condition to Closing, such Selling Stockholders or their respective parent
entities would need to obtain approval of the Acquisition from their members. As
a result of this delay, the Option Purchase Agreement was amended by Amendment
No. 2 to, among other things, fix the price used to determine the number of
shares of Common Stock and Series A Preferred Stock issued in the Acquisition as
if the Closing had occurred on December 7, 1998, subject to a collar mechanism
described below in "The Acquisition-Exercise Price." The Company is now asking
its stockholders to approve and adopt the Option Purchase Agreement, as so
amended, and the consummation of the transactions contemplated therein.
The consummation of the transactions under the Option Purchase Agreement is
subject to stockholder approval pursuant to the terms of the Option Purchase
Agreement. The Board of Directors knows of no matters that are to be brought
before the Special Meeting other than as set forth in the Notice of Special
Meeting. If any other matters properly come before the Special Meeting,
including, without limitation, a motion to adjourn the Special Meeting to
another time or place for the purpose of soliciting additional proxies, the
persons named in the enclosed form of proxy or their substitutes will vote in
accordance with their best judgment on such matters. Notwithstanding the
foregoing, proxies voting against a specific proposal will not be used by the
persons named in the proxies to vote for adjournment of the Special Meeting for
the purpose of allowing additional time to solicit votes to approve such
proposal.
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn), notwithstanding that they may have been effectively
voted on the same or any other matter at a previous meeting.
The Board of Directors of the Company has approved the Option Purchase
Agreement and the Company's exercise of the Option and recommends that the
stockholders of the Company vote FOR approval of the Option Purchase Agreement
and consummation of the transactions contemplated therein.
Record Date; Shares Outstanding and Entitled to Vote
The Record Date and hour for determining stockholders entitled to receive
notice of and to vote at the Special Meeting has been fixed at the close of
business on February 9, 1999. Only holders of record of the Common Stock as of
the Record Date are entitled to notice of and to vote at the Special Meeting. As
of the Record Date, there were 5,253,813 shares of Common Stock outstanding and
entitled to vote, with each share entitled to one vote.
<PAGE>
Required Vote
The proposal to approve and adopt the Option Purchase Agreement requires
the affirmative vote of a majority of the outstanding shares of Common Stock
present in person or by proxy at the Special Meeting. The proposal to approve
the consummation of the transactions contemplated in the Option Purchase
Agreement requires the affirmative vote of a majority of the outstanding shares
of Common Stock present in person or by proxy at the Special Meeting, provided,
that under the rules of the NYSE, if shares of Common Stock and Series A
Preferred Stock representing more than 20% of the shares of Common Stock or the
voting power of the Common Stock outstanding prior to the Acquisition would be
issued in the Acquisition, then such proposal will further require that 50% in
interest of all shares of Common Stock entitled to vote actually be voted at the
Special Meeting. The Company will issue a press release disclosing whether such
proposal has carried under the applicable required vote. The presence, in person
or by properly executed proxy, of the holders of one-third of the outstanding
shares of Common Stock entitled to vote at the Special Meeting is necessary to
constitute a quorum of the holders of Common Stock at the Special Meeting.
The effectiveness of the proposal relating to the consummation of the
transactions contemplated by the Option Purchase Agreement is conditioned upon
the approval of the proposal relating to the adoption of the Option Purchase
Agreement.
As of the Record Date, the Company's directors and other stockholders of
the Company whose shares may be deemed beneficially owned by such directors held
less than 1.0% of the outstanding shares of Common Stock entitled to vote at the
Special Meeting. Such directors of the Company have indicated to the Company
that they intend to vote for approval of the proposals to approve and adopt the
Option Purchase Agreement and to approve the consummation of the transactions
contemplated therein.
In the event that the Company fails to obtain the requisite stockholder
approvals, the Company will either re-solicit stockholder approval or abandon
the transaction.
Voting and Revocation of Proxies
Stockholders are requested to complete, date, sign and promptly return the
accompanying form of proxy in the enclosed envelope. Shares of Common Stock
represented by properly executed proxies received by the Company and not revoked
will be voted at the Special Meeting in accordance with the instructions
contained therein. If instructions are not given, proxies will be voted FOR
approval and adoption of the Option Purchase Agreement and approval of the
consummation of transactions contemplated therein. In accordance with Delaware
law, abstentions will, while broker nonvotes will not, be treated as present for
purposes of determining whether a proposal has received sufficient votes for
adoption. A broker nonvote is a proxy submitted by a broker for which
instructions have not been received from the beneficial owners or persons
entitled to vote and with respect to which the broker does not have
discretionary authority to vote on a particular matter.
Any proxy signed and returned by a stockholder may be revoked at any time
before it is voted by filing with the Secretary of the Company, at 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, written notice of such revocation or a duly executed proxy bearing a
later date or by attending the Special Meeting and voting in person. Attendance
at the Special Meeting will not in and of itself constitute revocation of a
proxy.
Proxy Solicitation
The Company will bear the cost of soliciting proxies from its stockholders
and will enlist the help of banks and brokerage houses in soliciting proxies
from their customers. In addition to the use of the mails, proxies may be
solicited personally or by telephone by the directors, officers, agents and
employees of the Company or its subsidiaries. Such directors and officers will
not receive additional compensation, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Such agents and employees may
receive additional compensation, in an aggregate amount not expected to exceed
$5,000, and may be reimbursed for out-of-pocket expenses in connection with such
solicitation. The Company has engaged Georgeson & Company Inc. to assist in
soliciting proxies for a fee of approximately $6,000, plus reasonable
out-of-pocket expenses.
<PAGE>
THE ACQUISITION
The following description contains certain information pertaining to the
Company's proposed acquisition of the Life Company. Reference is made to, and
this description is qualified in its entirety by, the more detailed information
contained in the annexes hereto, including the Option Purchase Agreement, a copy
of which is attached as Annex A to this Proxy Statement, and the fairness
opinion, a copy of which is attached as Annex B to the Proxy Statement. All
stockholders are urged to read the annexes in their entirety.
General
The Company and the Selling Stockholders entered into the Original Option
Purchase Agreement on February 14, 1996 in connection with the reorganization
and conversion of Farm Family Mutual from a mutual to a stock insurance company
(the "Reorganization"). Pursuant to the Original Option Purchase Agreement, the
Company was granted an option to acquire the Life Company in exchange for shares
of the Company's capital stock for a two-year period commencing on July 26,
1996, the effective date of the Reorganization, and ending on July 26, 1998 (the
"Expiration Date"), unless extended for an additional year by agreement between
the parties. On February 26, 1998, the Company and the Selling Stockholders
entered into the Option Purchase Agreement, which amended and restated the
Original Option Purchase Agreement. On April 28, 1998, the Company and the
Selling Stockholders further amended the Option Purchase Agreement. On December
2, 1998, the Company's stockholders approved the Option Purchase Agreement,
including the changes to the Original Option Purchase Agreement made thereby.
The closing of the Acquisition was scheduled to occur on December 7, 1998,
but was delayed when it was determined that in order for certain Selling
Stockholders to provide unqualified opinions of counsel required by the Option
Purchase Agreement as a condition to Closing, such Selling Stockholders or their
respective parent entities would need to obtain approval of the Acquisition from
their members. As a result of this delay, the Option Purchase Agreement was
amended by Amendment No. 2 to, among other things, fix the price used to
determine the number of shares of Common Stock and Series A Preferred Stock
issued in the Acquisition as if the Closing had occurred on December 7, 1998,
subject to a collar mechanism described below under "-Exercise Price." For a
description of the material changes to the Option Purchase Agreement made by
Amendment No. 2, see "The Option Purchase Agreement-Amendment No. 2 to Option
Purchase Agreement."
Under the Option Purchase Agreement, the exercise price of the Option is
the fair market value of the Life Company Shares as of the date the Company
first provided notice to the Selling Stockholders that it proposed to exercise
the Option (the "Fair Market Value"), determined in accordance with specified
valuation procedures and assumptions set forth in the Option Purchase Agreement
(the "Valuation Procedures"), less certain expenses. The Option Purchase
Agreement requires the Company and, if necessary, the Selling Stockholders to
obtain separate valuations of the Fair Market Value, determined in accordance
with the Valuation Procedures, by investment banking firms of national
reputation. The Valuation Procedures generally provide that the Fair Market
Value is based on the fully distributed, independent, public market value of the
Life Company Shares, without giving effect to the percentage ownership
represented by the Life Company Shares being valued (individually or in the
aggregate), the aggregate amount of the valuation of the Life Company or the
relationship between the Life Company and FFCIC, including the Life Company's
lack of stand-alone management, infrastructure or distribution system. In
determining such value, the Valuation Procedures also provide that consideration
may be given to the trading value of the publicly traded common stock of
comparable companies as well as any other valuation methods or criteria that are
deemed relevant. As discussed more fully below under "-Background of the
Acquisition," the Negotiating Committee and the Selling Stockholders negotiated
the Fair Market Value of $37.5 million at arm's-length, in consultation with
their financial advisors and other representatives, based upon separate
valuations prepared by such financial advisors determined in accordance with the
Valuation Procedures.
<PAGE>
Background of the Acquisition
Farm Family Mutual and the Life Company considered the possibility, as part
of the Reorganization, of bringing these two affiliated companies under a common
ownership structure. The achievement of such common ownership prior to the
effective date of the Reorganization was not practical due, in part, to the
difficulty of valuing the Life Company at that time. The Life Company's
financial statements were, at that time, prepared only in accordance with
statutory accounting principles prescribed or permitted by the New York
Insurance Department (the "New York Insurance Department"). The Company believed
that such financial statements did not provide an adequate basis to determine an
appropriate valuation for the Life Company. Financial statements prepared
according to GAAP for the Life Company were not expected to be available until
after the effective date of the Reorganization. The Company and the Selling
Stockholders did, however, enter into the Original Option Purchase Agreement.
Salomon Smith Barney was retained by the Company on February 1, 1996 to
provide investment banking advice, including a valuation of the Life Company, in
connection with the Original Option Purchase Agreement and to render to the
Company, at its request, an opinion as to the fairness, from a financial point
of view, to the Company of the exercise price for each Life Company Share. See
"-Opinion of the Company's Financial Advisor." On December 13, 1996,
representatives of Salomon Smith Barney presented a preliminary valuation of the
Life Company, based on statutory financial information, to the Board of
Directors of the Life Company and to the Board of Directors of FFCIC.
At a meeting of the Board of Directors of the Company on April 22, 1997,
Philip P. Weber, President and Chief Executive Officer of the Company, reviewed
the reasons for the acquisition of the Life Company with the Board of Directors.
After discussion, the Company's Board of Directors authorized the Company to
give notice to the Selling Stockholders of the Life Company that it proposed to
exercise the Option and instructed Salomon Smith Barney to determine the Fair
Market Value of the Life Company Shares, as of April 30, 1997, in accordance
with the Valuation Procedures. The Company did not consider alternatives to the
proposed Acquisition, in view of the Company's close affiliation and
interrelationship with the Life Company and the Company's belief that the
acquisition of the Life Company and resulting common ownership structure of
FFCIC and the Life Company could be beneficial to the Company by perpetuating
the operating efficiencies which the two companies currently enjoy. By letter
dated April 30, 1997, the Company gave notice of its proposed exercise of the
Option (the "Election Notice") to each of the Selling Stockholders.
During May 1997, Salomon Smith Barney conducted due diligence with respect
to the Life Company. In addition to reviewing certain public and nonpublic
information concerning the Life Company, representatives of Salomon Smith Barney
met with members of senior management of the Life Company and the Company to
discuss the Life Company's business, financial condition and prospects and the
Company's plan for the Life Company.
At Salomon Smith Barney's request, the Company engaged Coopers & Lybrand,
L.L.P., now known as PricewaterhouseCoopers LLP ("PWC") to perform a limited
actuarial analysis of the Life Company. On June 24, 1997, PWC provided the
Company with its written actuarial analysis of the Life Company, as of March 31,
1997. Thereafter, the Company provided such analysis to Salomon Smith Barney.
Although Salomon Smith Barney reviewed PWC's actuarial analysis, it did not rely
on or otherwise use the analysis for purposes of its determination of the Fair
Market Value of the Life Company or its fairness opinion.
Salomon Smith Barney's determination of the Fair Market Value included the
reallocation of approximately $21.2 million from the Life Company's unassigned
surplus to shareholders' surplus. In 1979, the shareholders of the Life Company
adopted a resolution limiting the Life Company's unassigned surplus allocated to
shareholders to $4.0 million. In 1995, the Life Company's shareholders voted to
remove the $4.0 million limit on unassigned surplus allocated to shareholders.
The amount of unassigned surplus allocated to shareholders as of December 31,
1995 was $7.4 million. By letter dated September 22, 1995 and subsequent
correspondence, the Life Company requested that the New York Insurance
Department approve the reallocation of a portion of its unassigned surplus to
shareholders' surplus. On September 16, 1996, the New York Insurance Department
approved the Life Company's proposal for fund transfer from policyholders'
surplus to shareholders' surplus. As a result, on February 13, 1997, the Life
Company shareholders approved the reallocation of approximately $21.2 million of
the Life Company's unassigned surplus to shareholders' surplus.
<PAGE>
On May 15, 1997, representatives of the Company and its counsel, LeBoeuf,
Lamb, Greene & MacRae, L.L.P. ("LeBoeuf"), met with representatives of the Life
Insurance Bureau of the New York Insurance Department in order to inform the New
York Insurance Department of the Company's proposed exercise of the Option and
the proposed structure of the transaction.
At the time the Company gave the Election Notice to the Selling
Stockholders, 21 of the Company's 23 directors, including the Chairman and Vice
Chairman of the Board, were officers, directors or both of the Selling
Stockholders or their affiliates. In order to address any potential conflicts of
interest that might arise as a result of such relationships, at a meeting on
June 6, 1997, the Board of Directors of the Company appointed two independent
directors, Messrs. John P. Moskos and Howard T. Sprow, as the Negotiating
Committee. The purpose of the Negotiating Committee was to negotiate the
Exercise Price on behalf of the Company with the Selling Stockholders.
On June 18, 1997, the Negotiating Committee met for the first time. The
Negotiating Committee met with a representative of LeBoeuf. The Negotiating
Committee discussed with LeBoeuf the qualifications of LeBoeuf and Salomon Smith
Barney to act as legal advisor and financial advisor, respectively, for the
Negotiating Committee. Following discussion, the Negotiating Committee retained
LeBoeuf and Salomon Smith Barney based on their experience in similar
transactions, their knowledge of the Company and the Life Company and their
representations that they could function as independent advisors for the
Negotiating Committee. Thereafter, LeBoeuf provided preliminary legal advice to
the Negotiating Committee.
On June 26, 1997, the Negotiating Committee met with representatives of
LeBoeuf and Salomon Smith Barney. The Negotiating Committee, LeBoeuf and Salomon
Smith Barney discussed the procedures for the determination of the Fair Market
Value of the Life Company Shares. Thereafter, the Negotiating Committee, LeBoeuf
and Salomon Smith Barney met with Mr. Weber, James J. Bettini, Executive Vice
President-Operations of the Company, Timothy A. Walsh, Executive Vice
President-Finance and Treasurer of the Company, and Victoria M. Stanton,
Executive Vice President, General Counsel and Secretary of the Company, to
discuss historical and projected financial information with respect to the Life
Company. The Negotiating Committee discussed with Mr. Weber his views about the
exercise of the Option and the future prospects of the Life Company. After
Messrs. Weber, Bettini and Walsh and Ms. Stanton left the meeting,
representatives of Salomon Smith Barney made a presentation to the Negotiating
Committee of their calculation of the Fair Market Value of $36 million as of the
date of the Election Notice (the "Optionee Valuation"). For a summary of the
Optionee Valuation and the Salomon Smith Barney presentation to the Negotiating
Committee of the Optionee Valuation, see "-Optionee Valuation" below.
The Negotiating Committee discussed with the Salomon Smith Barney
representatives the various methodologies Salomon Smith Barney used to calculate
the Optionee Valuation. Salomon Smith Barney then provided the Negotiating
Committee with a letter setting forth its calculation of the Optionee Valuation.
After discussion, the Negotiating Committee determined to proceed with the
proposal to exercise the Option on the basis of the Optionee Valuation, and
directed LeBoeuf to provide a copy of Salomon Smith Barney's letter to the
Selling Stockholders. By letter dated June 27, 1997, LeBoeuf provided a copy of
the Optionee Valuation to each Selling Stockholder and notified the Selling
Stockholders that, on the basis of the Optionee Valuation, the Company continued
to propose to exercise the Option.
In January 1996, a committee of shareholders of the Life Company was
established to review and address the proposed Original Option Purchase
Agreement and the acquisition of the Life Company by Farm Family Mutual or its
designee. On May 27, 1997, the committee of shareholders retained Dewey
Ballantine LLP ("Dewey Ballantine") to act as special counsel to the committee
of shareholders in connection with the Original Option Purchase Agreement and
the possible sale of the Life Company. On July 29, 1997, the Board of Directors
of the Life Company determined that it was in the best interests of the Life
Company and its shareholders to formally constitute the committee of
shareholders (the "Shareholders' Committee") as a committee of the Board of
Directors of the Life Company chaired by John W. Lincoln, President of the New
York Farm Bureau, Inc. and the New York Farm Bureau Service Company, Inc.
(collectively, the "New York Farm Bureau").
<PAGE>
Under the Option Purchase Agreement, if the Selling Stockholders did not
agree with the Optionee Valuation and the Company and the Selling Stockholders
were unable to resolve the disagreement, the Selling Stockholders were required
to select an investment banking firm of national standing and reasonably
acceptable to the Company for purposes of determining the Fair Market Value in
accordance with the Valuation Procedures (the "Shareholder Valuation"). The
Option Purchase Agreement provides that if the Shareholder Valuation was within
5% (plus or minus) of the Optionee Valuation (the "Target Range"), then the Fair
Market Value for purposes of the Option Purchase Agreement would equal the
average of the Optionee Valuation and the Shareholder Valuation. If the
Shareholder Valuation was not within the Target Range, then the Company and the
Selling Stockholders would use their reasonable efforts to resolve such
disagreement. If the Company and the Selling Stockholders were able to agree on
a Shareholder Valuation within the Target Range (the "Revised Shareholder
Valuation"), then the Fair Market Value for purposes of the Option Purchase
Agreement would equal the average of the Optionee Valuation and the Revised
Shareholder Valuation. If the Company and the Selling Shareholders were not able
to reach an agreement, a third independent appraiser would determine the Fair
Market Value.
On June 26, 1997, the Shareholders' Committee retained Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") to provide the Shareholder Valuation
pursuant to the Original Option Purchase Agreement. In July 1997, DLJ conducted
due diligence with respect to the Life Company. In performing such due
diligence, representatives of DLJ met with members of senior management of the
Life Company and the Company and reviewed certain public and non-public
information concerning the Life Company, including projections.
On July 25, 1997, Dewey Ballantine provided notice to the Company of the
Selling Stockholders' disagreement with the Optionee Valuation.
On July 29, 1997, the Negotiating Committee met with representatives of
LeBoeuf and Salomon Smith Barney to discuss strategies for negotiating the
exercise price of the Option. The Negotiating Committee determined to arrange a
meeting with the Shareholders' Committee to negotiate the exercise price.
On August 20, 1997, the Negotiating Committee and representatives of
LeBoeuf and Salomon Smith Barney met with the Shareholders' Committee,
representatives of Dewey Ballantine and DLJ, and representatives of the New York
Farm Bureau and the Massachusetts Farm Bureau Service Company, Inc. (the
"Massachusetts Farm Bureau") for the purpose of negotiating the exercise price
of the Option. At the meeting, Mr. Lincoln informed the Negotiating Committee
that DLJ had concluded its valuation work and that the Shareholders' Committee
proposed that the Fair Market Value be $40 million. Mr. Moskos, for the
Negotiating Committee, informed the Shareholders' Committee that the Negotiating
Committee proposed a Fair Market Value of $37 million. Upon further discussion,
Mr. Lincoln informed the Negotiating Committee that the Shareholders' Committee
could not accept a Fair Market Value below $39 million. The parties discussed
this proposal as well as certain structural issues relating to the transaction
for certain Selling Stockholders and the possible inclusion of cash as an
element of the consideration to be paid upon exercise of the Option. The meeting
concluded without resolution of these issues.
On September 8, 1997, Dewey Ballantine provided a copy of the Shareholder
Valuation to the Negotiating Committee. The Shareholder Valuation estimated the
Fair Market Value to be approximately $36 million to $39 million. Thereafter,
the Negotiating Committee, through a LeBoeuf representative, proposed a Fair
Market Value of $37.35 million to the Shareholders' Committee.
During September, October and November, 1997, Dewey Ballantine evaluated
the structure of the acquisition on behalf of the Selling Stockholders. As a
result of this review and analysis, Dewey Ballantine recommended to the
Shareholders' Committee that, in seeking to secure the intended United States
Federal income tax consequences with respect to certain Selling Stockholders
that are service companies, the Company and each such Selling Stockholder
execute an Agreement and Plan of Reorganization. See "-Federal Income Tax
Consequences" and "The Option Purchase Agreement-Other Agreements."
On December 12, 1997 the Negotiating Committee and representatives of
LeBoeuf and Salomon Smith Barney met with the Shareholders' Committee,
representatives of Dewey Ballantine and DLJ, and representatives of the
Massachusetts Farm Bureau and the New York Farm Bureau. Mr. Moskos reviewed the
Negotiating Committee's offer of $37.35 million made in September 1997 and asked
for DLJ's point valuation of the Fair Market Value on behalf of the Selling
Stockholders. Dewey Ballantine informed the Negotiating Committee that DLJ had
calculated such Fair Market Value to be $38 million. DLJ provided a copy of a
letter confirming such value to the Negotiating Committee, LeBoeuf and Salomon
Smith Barney. Thereafter, the Salomon Smith Barney representative proposed that
the Fair Market Value be set at $37.5 million, and that the consideration
include $5 million of each of mandatory cash and preferred stock. After a brief
recess, Mr. Lincoln, for the Shareholders' Committee, proposed a Fair Market
Value of $37.5 million, and that the consideration include $5 million of
mandatory cash and no preferred stock. After discussion, the Negotiating
Committee, through Salomon Smith Barney, offered a Fair Market Value of $37.5
million, and that the consideration include $5.5 million of mandatory cash and
$6 million of optional preferred stock. The Shareholders' Committee, through
Dewey Ballantine, suggested that the preferred stock be deleted because, in
their view, none of the Selling Stockholders would elect to take it. The parties
then agreed on a proposed Fair Market Value of $37.5 million, and that the
consideration include $5.5 million of mandatory cash.
<PAGE>
On December 16, 1997, the Company issued a press release announcing the
proposed terms. Representatives of LeBoeuf and Dewey Ballantine prepared an
amendment of the Original Option Purchase Agreement and Dewey Ballantine
forwarded it to the Selling Stockholders on December 19, 1997.
In late December, 1997, a representative of Dewey Ballantine informed a
representative of LeBoeuf that Dewey Ballantine had concluded that the cash
component of the purchase price could be problematic for certain Selling
Stockholders. Thereafter, LeBoeuf conveyed the information to the Negotiating
Committee, Salomon Smith Barney and Ms. Stanton.
On December 31, 1997, Mr. Sprow, for the Negotiating Committee, had a
telephone conversation with representatives of LeBoeuf and Salomon Smith Barney,
Messrs. Weber and Walsh and Ms. Stanton. After discussion, Mr. Sprow, on behalf
of the Negotiating Committee, authorized the Salomon Smith Barney representative
to propose to the Shareholders' Committee through DLJ, that (i) the Fair Market
Value be reduced to $37.35 million, (ii) the cash component of the consideration
be eliminated and (iii) the consideration include $6 million of preferred stock
paying a 6% annual dividend. Salomon Smith Barney conveyed the revised proposal
to DLJ. On January 8, 1998, a representative of Dewey Ballantine gave the
Shareholders' Committee's response to a LeBoeuf representative. The
Shareholders' Committee proposed that the Fair Market Value be $37.5 million,
including up to $6.0 million stated value of optional preferred stock paying an
8% annual dividend. In addition, the Shareholders' Committee asked for certain
registration rights with respect to the Common Stock.
On January 9, 1998, the Negotiating Committee convened a conference call
with representatives of LeBoeuf and Salomon Smith Barney and Messrs. Weber and
Walsh and Ms. Stanton. After discussions of the Shareholders' Committee's
proposal, the Negotiating Committee instructed LeBoeuf to convey to Dewey
Ballantine a proposal consisting of (i) a $37.5 million Fair Market Value, (ii)
$6.0 million stated value of mandatory preferred stock paying a 6% annual
dividend and (iii) a registration rights agreement.
On January 20, 1998, a representative of DLJ informed a representative of
Salomon Smith Barney that the Shareholder Committee had accepted the terms
proposed by the Negotiating Committee, except that the Shareholders' Committee
believed that the preferred stock should pay a 6 1/4% annual dividend. After
discussion, the DLJ representative and the Salomon Smith Barney representative
agreed that they would recommend a dividend rate of 6 1/8% to their respective
clients.
On January 20, 1998, the Negotiating Committee convened a conference call
with a representative of Salomon Smith Barney. The Salomon Smith Barney
representative recommended that the Negotiating Committee accept the proposed 6
1/8% dividend rate on the preferred stock. After discussion, the Negotiating
Committee accepted the proposal. Thereafter, the Salomon Smith Barney
representative called the DLJ representative to communicate the Negotiating
Committee's acceptance of the proposal. The DLJ representative indicated that
the Shareholders' Committee had also accepted the proposal.
On January 27, 1998, the Company issued a press release describing the
revised terms of the transaction.
LeBoeuf proceeded to prepare the Amended and Restated Option Purchase
Agreement and a form of Registration Rights Agreement to reflect the revised
terms of the transaction. Dewey Ballantine proceeded to prepare the form of
Agreement and Plan of Reorganization to reflect the revised terms of the
transaction. Such documents were received by Dewey Ballantine and disseminated
to the Selling Stockholders on February 23, 1998.
<PAGE>
At a meeting of the Board of Directors of the Company on February 26, 1998,
the Board of Directors approved the Option Purchase Agreement, dated as of
February 26, 1998, and the transactions contemplated thereby, authorized the
execution, delivery and performance of the Option Purchase Agreement and
approved the exercise of the Option at a Fair Market Value of $37.5 million. On
February 26, 1998, the Option Purchase Agreement was executed by each Selling
Stockholder. Pursuant to the terms of the Option Purchase Agreement, by letter
dated February 26, 1998, the Company gave notice (the "Exercise Notice") to each
of the Selling Stockholders that it was exercising the Option. On February 26,
1998, the Company issued a press release describing the Company's exercise of
the Option and the revised terms of the Option Purchase Agreement.
By letter dated March 13, 1998, the Company notified the New York Insurance
Department of its exercise of the Option and its plan to submit regulatory
filings with the New York Insurance Department in connection with the proposed
Acquisition.
In March 1998, a representative of the Company instructed LeBoeuf to
prepare Amendment No. 1 to the Option Purchase Agreement, in order to (i)
provide that the Closing of the Acquisition could take place at a date, time or
place other than as provided for in the Option Purchase Agreement if agreed to
by the parties and (ii) change the required vote by the Company's stockholders
to approve the consummation of the transactions thereunder from the affirmative
vote of the holders of at least a majority of the outstanding shares of Common
Stock to the affirmative vote of a majority of the outstanding shares of Common
Stock present in person or by proxy at the Special Meeting or such other vote as
may be required by applicable law, the Certificate of Incorporation and By-laws
of the Company and the rules of the NYSE.
On April 27, 1998, the Negotiating Committee had a conference call with
representatives of LeBoeuf and Ms. Stanton. A representative of LeBoeuf reviewed
a draft of Amendment No. 1 to the Option Purchase Agreement with the Negotiating
Committee. Ms. Stanton reviewed reasons for recommending a change in the
required vote of the Company's stockholders under the Option Purchase Agreement.
Ms. Stanton noted that the Original Option Purchase Agreement contained a higher
vote requirement to approve the Acquisition than is required under Delaware
corporate law, the Company's Certificate of Incorporation and By-laws and the
rules of the NYSE. Ms. Stanton further noted that, because of the relatively
large number of stockholders of the Company which resulted from Farm Family
Mutual's demutualization in 1996 in which most of Farm Family Mutual's
policyholders received Common Stock, the Company may have difficulty obtaining a
higher vote. The Negotiating Committee discussed the risks of having an
insufficient number of the Company's stockholders actually vote on the
Acquisition. The Negotiating Committee unanimously resolved to recommend to the
Board of Directors of the Company that it adopt Amendment No. 1 to the Option
Purchase Agreement.
A meeting of the Board of Directors was held on April 28, 1998, at which
the Negotiating Committee recommended to the Board of Directors that it adopt
Amendment No. 1 to the Option Purchase Agreement. After determining that
Amendment No. 1 was in the best interests of the Company, the Board of
Directors, including all members of the Negotiating Committee, then approved and
adopted Amendment No. 1 to the Option Purchase Agreement. In finding that
Amendment No. 1 to the Option Purchase Agreement was in the best interests of
the Company, the Board of Directors relied on the factors considered by the
Negotiating Committee and on the recommendation of the Negotiating Committee.
The Company filed preliminary proxy materials with the Commission on April
24, 1998. In the course of its review of the Company's preliminary proxy
materials, the Commission commented on, among other things, the Company's
accounting policy for its agents' extended earnings program. During July, August
and September 1998, the Company had various discussions with, and submitted
correspondence to, the Commission regarding this issue. In response to the
Commission's comments, the Company restated certain of its financial statements
and on October 20, 1998, the Company filed with the Commission an annual report
on Form 10-K/A for the year ended December 31, 1997 and quarterly reports on
Form 10-Q/A for the periods ended March 31, 1998 and June 30, 1998.
On May 20, 1998, the Company's Common Stock reached a new high of 42 5/8
per share. Thereafter, the stock price fluctuated and began to decline more
significantly in August 1998. On September 3, 1998, the stock closed at $30 7/8.
<PAGE>
At a special meeting of the Board of Directors of the Company on September
3, 1998, Mr. Weber discussed with the Board of Directors his views regarding the
possible dilutive effect of the Acquisition on the Company's estimated 1999
earnings as a result of the recent decline in the Company's stock price. The
Board of Directors asked the Negotiating Committee to contact the Shareholders'
Committee to discuss this issue.
On September 9, September 21, and September 25, 1998, the Negotiating
Committee had conference calls with representatives of LeBoeuf and Salomon Smith
Barney to discuss the effect of the decline in the Company's stock price on the
Acquisition, as well as the results of discussions regarding this issue with
advisors to the Shareholders' Committee. At the September 9 and September 25
meetings, Mr. Weber presented his view to the Negotiating Committee that it
should seek to negotiate a price "collar" to protect against further declines in
the price of the Company's stock. Between September 9 and September 21,
discussions occurred between representatives of LeBoeuf, Salomon Smith Barney,
Dewey Ballantine and DLJ during which the advisors to the Shareholders'
Committee indicated they were not inclined to implement a price collar.
On October 8, 1998, the Negotiating Committee and representatives of
LeBoeuf and Salomon Smith Barney met with the Shareholders' Committee and
representatives of Dewey Ballantine and DLJ. Mr. Weber was asked by the
Negotiating Committee to present his views about the effect of the Acquisition
on the Company's estimated 1999 earnings. Mr. Weber then left the meeting. The
Negotiating Committee and the Shareholders' Committee discussed fixing the
number of shares to be issued in the Acquisition. The committees were unable to
come to an agreement. The Shareholders' Committee then requested that the
Company take the steps necessary to close the Acquisition as soon as possible.
The Negotiating Committee expressed concern about the effect of a further
decline in the Company' stock price from October 8 levels on its recommendation
that stockholders vote for the Option Purchase Agreement and the transactions
contemplated therein. The two committees concluded their meeting by agreeing to
discuss the issue again if the Company's stock price experienced a further
material decline from October 8 levels.
At a Board of Directors meeting on October 13, 1998, the Negotiating
Committee reported to the Board of Directors that it had determined not to
change its original recommendation with respect to the Acquisition. Based on
this report, the Board resolved not to change its recommendation to the
Company's stockholders.
The Option Purchase Agreement (in effect prior to Amendment No. 2) and the
consummation of the transactions contemplated therein were approved by the
Company's stockholders at a Special Meeting held on December 2, 1998, and the
Closing was scheduled to occur on December 7, 1998.
Prior to the December 2, 1998 Special Meeting, certain Selling Stockholders
notified the Company and LeBoeuf that they would not be able to provide
unqualified opinions of counsel required as a condition to Closing under the
Option Purchase Agreement. On December 1, 1998, the Negotiating Committee
determined that it was unlikely it could proceed with a Closing without the
required unqualified opinions. Further, the Negotiating Committee determined
that the price used to determine the number of shares to be issued in the
Acquisition would have to be fixed as if the Closing had occurred as originally
scheduled on December 7, 1998, so that the Company would not bear the risk of
reductions in the market price of the Common Stock after such date.
On December 2, 1998, a representative of LeBoeuf met with representatives
of the Shareholders' Committee and by telephone, a representative of Dewey
Ballantine, to convey to the Shareholders' Committee the Negotiating Committee's
position as set forth in the preceding paragraph. Thereafter, a representative
of Dewey Ballantine informed a representative of LeBoeuf that Dewey Ballantine
had concluded that if the price used to determine the number of shares to be
issued in the Acquisition was fixed as though the Closing had occurred on
December 7, 1998, without a "floor" on the actual value of the Common Stock to
be received, the fixing of such price could affect its tax opinion regarding the
transaction.
On December 9, 1998 and December 10, 1998, the Negotiating Committee
convened conference calls with representatives of LeBoeuf. The Negotiating
Committee authorized LeBoeuf to propose to the Shareholders' Committee through
Dewey Ballantine that, in order to resolve the issues resulting from the delay
in the Closing, the Option Purchase Agreement be amended in order to, among
other things, (i) fix the price used to determine the number of shares issued in
the Acquisition at $35.72 (as if the Closing had occurred on December 7, 1998)
subject to a price collar which would take effect if the price of the Company's
Common Stock, at Closing, were more than 30% below or more than 10% above
$35.72, and permit the Company to terminate the Option Purchase Agreement if the
bottom collar were triggered, (ii) provide that the cost of resoliciting
stockholder approval for the Acquisition would be paid by the Selling
Stockholders, (iii) extend the termination date under the Option Purchase
Agreement, (iv) require certain Selling Stockholders to use their best efforts
to obtain required member approvals and (v) retain independent legal counsel in
New Jersey and Delaware to determine if member approval would be required by
such Selling Stockholders. On December 10, 1998, LeBoeuf conveyed the terms of
this proposal to a representative of Dewey Ballantine.
<PAGE>
On December 11, 1998, the Negotiating Committee met with the Shareholders'
Committee to discuss the Negotiating Committee's proposal. Representatives of
LeBoeuf and Dewey Ballantine were present by telephone. After discussions, the
Shareholders' Committee informed the Negotiating Committee that it would respond
to the proposal in a few days. On December 14, 1998, a representative of Dewey
Ballantine gave the Shareholders' Committee's response to a LeBoeuf
representative. The Shareholders' Committee proposed that the Negotiating
Committee's proposal be revised so that the top collar be set to take effect at
20% above $35.72 and that the costs of resoliciting stockholder approval be
split between the Company and the Selling Stockholders, with a cap of $100,000
for the Selling Stockholders.
On December 14, 1998, representatives of LeBoeuf informed the Commission of
the status of the Acquisition and the likelihood of a proxy resolicitation in
light of the proposed amendment to the Option Purchase Agreement.
On December 15, 1998, the Negotiating Committee convened a conference call
with representatives of LeBoeuf. After discussion of the Shareholders' Committee
proposal, the Negotiating Committee determined that Mr. Sprow, for the
Negotiating Committee, would convey to Mr. Lincoln, for the Shareholders'
Committee, a proposal consisting of all of the terms set forth in the original
proposal of the Negotiating Committee of December 10, 1998, but revised to
provide for (i) a top collar to take effect if, at the Closing, the price of the
Company's Common Stock were more than 15% above $35.72 and (ii) a split between
the Company and the Selling Stockholders of the costs of resoliciting
Stockholder approval, but without any cap of the Selling Stockholders'
liability. On December 15, 1998, Mr. Sprow conveyed the Negotiating Committee's
proposal to Mr. Lincoln.
On December 17, 1998, a representative of Dewey Ballantine informed a
representative of LeBoeuf that the Shareholders' Committee would not accept a
top collar below 20%, but would agree to an increased cap for the Selling
Stockholders' portion of the costs of resoliciting the Company's stockholders.
On December 18, 1998, the Negotiating Committee authorized LeBoeuf to
propose to the Shareholders' Committee through Dewey Ballantine a revised
proposal consisting of all of the terms of the Negotiating Committee's original
December 10, 1998 proposal revised to provide for (i) a top collar to take
effect if, at Closing, the price of the Company's Common Stock were more than
20% above $35.72, (ii) a cap of $200,000 for the Selling Stockholders on the
costs of resolicitation and (iii) an extension of the termination date of the
Option Purchase Agreement to April 30, 1999. On December 18, 1998, LeBoeuf
conveyed the terms of this revised proposal to a representative of Dewey
Ballantine.
On December 22, 1998, a representative of Dewey Ballantine informed a
representative of LeBoeuf that the Shareholders' Committee accepted the
proposal. On December 23, 1998, the Company issued a press release describing
the revised terms of the transaction.
LeBoeuf prepared Amendment No. 2 to the Option Purchase Agreement to
reflect the revised terms of the transaction and Dewey Ballantine forwarded it
to the Selling Stockholders on January 15, 1999.
On January 21, 1999, the Negotiating Committee had a conference call with
representatives of LeBoeuf. A representative of LeBoeuf reviewed a draft of
Amendment No. 2 to the Option Purchase Agreement with the Negotiating Committee.
The Negotiating Committee discussed the provisions of Amendment No. 2, the risks
associated with failing to fix the price used to determine the number of shares
to be issued in the Acquisition and the implementation of the price collar,
including the size of the collar and the likelihood of it taking effect. After
discussion of Amendment No. 2, the Negotiating Committee unanimously resolved to
recommend to the Board of Directors of the Company that it adopt Amendment No. 2
to the Option Purchase Agreement.
A meeting of the Board of Directors was held on January 22, 1999, at which
the Negotiating Committee recommended to the Board of Directors that it adopt
Amendment No. 2 to the Option Purchase Agreement. After determining that
Amendment No. 2 was in the best interests of the Company, the Board of
Directors, including all members of the Negotiating Committee, then approved and
adopted Amendment No. 2 to the Option Purchase Agreement. In finding that
Amendment No. 2 to the Option Purchase Agreement was in the best interests of
the Company, the Board of Directors relied on the factors considered by the
Negotiating Committee and on the recommendation of the Negotiating Committee.
<PAGE>
Optionee Valuation
The following is a summary of the Optionee Valuation and the Salomon Smith
Barney presentation to the Negotiating Committee of the Optionee Valuation on
June 26, 1997. The following quantitative information, to the extent it is based
on market data, is based on market data as it existed at April 30, 1997 and is
not necessarily indicative of current market conditions.
As noted above under "-General," the Valuation Procedures generally provide
that Fair Market Value is the fully distributed, independent, public market
value of the Life Company Shares. In order to arrive at such a Fair Market
Value, Salomon Smith Barney performed two valuation analyses: a discounted cash
flow analysis and a comparable company analysis.The two valuation analyses
described below constitute all material analyses performed by Salomon Smith
Barney in arriving at the Optionee Valuation.
Discounted Cash Flow Analysis. Salomon Smith Barney performed two
discounted cash flow analyses, based on financial projections provided by
management of the Life Company, pursuant to which the implied value of the Life
Company was estimated at April 30, 1997. For purposes of these analyses, Salomon
Smith Barney assumed that stockholders would continue to receive annual
dividends, payable on January 1 of each year 1998-2001, equal to their historic
level of $480,000, and that all other earnings would be reinvested in the Life
Company's business. Salomon Smith Barney utilized discount rates of 12%, 14%,
16% and 18% to estimate the present value of such dividends and of the terminal
value of the Life Company in 2001 calculated based upon terminal multiples of
0.9x, 1.0x, 1.1x, 1.2x, 1.3x and 1.4x year 2001 book value, and terminal
multiples of 9.0x, 10.0x, 11.0x, 12.0x and 13.0x projected 2001 earnings. From
the analysis based on a terminal multiple of projected 2001 book value of the
Life Company, Salomon Smith Barney derived a range for the aggregate implied
value of the Life Company of approximately $22 million to $43 million. From the
analysis based on a terminal multiple of projected 2001 earnings of the Life
Company, Salomon Smith Barney derived a range for the aggregate implied value of
the Life Company of approximately $18 million to $33 million. Salomon Smith
Barney used these ranges of values in arriving at its valuation of $36 million
for the Life Company.
Comparable Company Analysis. Salomon Smith Barney reviewed certain publicly
available financial, operating and stock market information for six insurance
companies (Lincoln National, Reliastar Financial, Protective Life, FBL Financial
Group, AmerUs Life Holdings and Kansas City Life (each of which is a "Valuation
Comparable Company" and collectively referred to as "Valuation Comparable
Companies")). Salomon Smith Barney considered the Valuation Comparable Companies
to be reasonably similar to the Life Company insofar as they participate in
business segments similar to the Life Company's business segments, but none of
these companies has the same management, makeup, size and combination of
businesses as the Life Company. Accordingly, the analysis described below is not
purely mathematical. Rather it involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the Life Company and the Valuation Comparable Companies and
other factors that could affect public trading value.
For each of the Valuation Comparable Companies, Salomon Smith Barney
reviewed, among other things, its April 30, 1997 market capitalization, April
30, 1997 closing price and estimated 1997 and 1998 earnings per share ("EPS")
(based upon Institutional Brokers Estimate Systems ("IBES") reports as of April
17, 1997), and calculated multiples of price to book value (ranging from 0.82x
to 2.22x, with a median of 1.23x and a mean of 1.35x), estimated 1997 EPS
(ranging from 9.1x to 12.8x, with a median of 11.4x and a mean of 11.3x) and
estimated 1998 EPS (ranging from 8.7x to 11.3x, with a mean and a median of
10.2x). Salomon Smith Barney considered these multiples and applied subjective
and qualitative judgments in utilizing a narrow range of such multiples to
derive a value for the Life Company of $36 million, which more accurately
reflected Salomon Smith Barney's judgment of the value of the Life Company, as
implied by this analysis.
<PAGE>
Opinion of the Company's Financial Advisor
Salomon Smith Barney was retained by the Company pursuant to a letter
agreement dated February 1, 1996 (the "Engagement Letter") to act as financial
advisor to the Company in connection with the possible acquisition by the
Company of the Life Company. Pursuant to the Engagement Letter, Salomon Smith
Barney rendered an opinion to the Board of Directors on February 26, 1998 to the
effect that, based upon and subject to the considerations set forth in such
opinion, as of such date, the consideration to be paid by the Company in
connection with the proposed Acquisition of all of the outstanding shares of
capital stock of the Life Company was fair from a financial point of view to the
Company. Salomon Smith Barney subsequently confirmed its February 26, 1998
opinion by delivery to the Board of Directors of the Company of written opinions
dated October 21, 1998 and the date of this Proxy Statement. Such written
opinion will not be further updated prior to consummation of the Acquisition.
For purposes of its opinion, Salomon Smith Barney assumed, without independent
verification, that the shares of Common Stock that are being issued as a portion
of the consideration have an aggregate value of $31.5 million and that the
shares of Series A Preferred Stock that are being issued as a portion of the
consideration have an aggregate value equal to the aggregate stated value of $6
million. Salomon Smith Barney did not opine that this was the actual valuation
of the Series A Preferred Stock or of the Common Stock to be issued in the
Acquisition.
The full text of Salomon Smith Barney's fairness opinion dated the date of
this Proxy Statement, which sets forth the assumptions made, general procedures
followed, matters considered and limits on the review undertaken, is attached as
Annex B to this Proxy Statement. The summary of Salomon Smith Barney's opinion
set forth below is qualified in its entirety by reference to the full text of
such opinion. Stockholders are urged to read the opinion in its entirety.
In connection with rendering its opinion, Salomon Smith Barney received,
reviewed, analyzed and relied upon certain internal information furnished or
prepared by the management of the Life Company concerning the Life Company's
businesses and operations, including historical and current statements of
financial position and results of operations of the Life Company and financial
forecasts of the Life Company. In conducting its analysis and arriving at its
opinion, Salomon Smith Barney considered such financial and other factors as it
deemed appropriate under the circumstances, including, among others, the
following: (i) the Option Purchase Agreement; (ii) the historical and current
financial position and results of operations of the Life Company; (iii) the
business prospects of the Life Company; (iv) the historical and current market
for the equity securities of companies that Salomon Smith Barney believed to be
comparable in certain respects to the Life Company; (v) the terms of the Series
A Preferred Stock and the terms of publicly traded preferred securities issued
by other financial institutions; (vi) certain other internal information,
including financial and operating projections relating to the Life Company,
prepared by the management of the Life Company, provided to Salomon Smith Barney
for purposes of its analysis; (vii) the fact that the Company and the Life
Company have common management and share facilities, employees and agents;
(viii) certain other publicly available financial and other information
regarding the Company; and (ix) the nature and terms of certain other
transactions which Salomon Smith Barney believed to be relevant to its inquiry.
Salomon Smith Barney also met with certain officers and representatives of the
Company and the Life Company to discuss the foregoing as well as other matters
relevant to its inquiry. Salomon Smith Barney also took into account its
assessment of general economic, market and financial conditions and its
experience in securities valuation.
In its review and analysis and in arriving at its opinion, Salomon Smith
Barney assumed and relied, without independent verification, upon the accuracy
and completeness of the information provided to it or publicly available, and
did not assume any responsibility for independent verification of such
information. With respect to the financial forecasts of the Life Company,
Salomon Smith Barney assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of the Life Company as to the future financial performance of the
Life Company, and Salomon Smith Barney expressed no opinion with respect to such
forecasts or the assumptions on which they are based. In addition, Salomon Smith
Barney did not conduct a physical inspection of any of the properties or
facilities of the Life Company nor did it make or obtain or assume any
responsibility for making or obtaining any independent evaluations or appraisals
of any of the assets (including properties and facilities) or liabilities of the
Life Company.
Salomon Smith Barney's opinion was necessarily based upon conditions as
they existed and could be evaluated on the date thereof, and Salomon Smith
Barney assumed no responsibility to update or revise its opinion based upon
circumstances or events occurring after the date thereof. Salomon Smith Barney's
opinion was limited to the fairness, from a financial point of view, to the
Company of the consideration to be paid in connection with the proposed
Acquisition of all of the outstanding shares of capital stock of the Life
Company and did not address the Company's underlying decision to exercise the
Option or to effect the proposed Acquisition and did not constitute a
recommendation as to how any Boardmember should vote with respect to the
exercise of the Option. Salomon Smith Barney's opinion also does not constitute
a recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the proposed Acquisition.
<PAGE>
Salomon Smith Barney's opinion expressed therein was for the benefit and
use of the Board of Directors of the Company in considering the proposed
Acquisition and may not be used by the Company for any other purpose or be
reproduced, disseminated, quoted or referred to by the Company at any time, in
any manner or for any purpose, without the prior written consent of Salomon
Smith Barney, except that Salomon Smith Barney has consented to the release of
its opinion to the New York Insurance Department and the inclusion of its
opinion and this description in this Proxy Statement.
In connection with rendering its opinion dated February 26, 1998, Salomon
Smith Barney made a presentation to the Board of Directors on February 26, 1998,
with respect to certain analyses performed by Salomon Smith Barney in evaluating
the consideration to be paid by the Company in connection with the proposed
Acquisition. The following is a summary of such Salomon Smith Barney
presentation. The following quantitative information, to the extent it is based
on market data, is based on market data as it existed at February 25, 1998 (or
otherwise noted) and is not necessarily indicative of current market conditions.
Discounted Cash Flow Analysis-the Life Company. Salomon Smith Barney
performed two discounted cash flow analyses, based on financial projections
provided by management of the Life Company, pursuant to which the implied value
of the Life Company was estimated at February 25, 1998. For purposes of these
analyses, Salomon Smith Barney assumed that stockholders would continue to
receive annual dividends, payable on January 1 of each year 1998-2002, equal to
their historic level of $480,000, and that all other earnings would be
reinvested in the Life Company's business. Salomon Smith Barney utilized
discount rates of 12%, 14%, 16% and 18% to estimate the present value of such
dividends and of the terminal value of the Life Company in 2002 calculated based
upon terminal multiples of 0.9x, 1.0x, 1.1x, 1.2x, 1.3x, 1.4x and 1.5x year 2002
book value, and terminal multiples of 9.0x, 10.0x, 11.0x, 12.0x, 13.0x and 14.0x
projected 2002 earnings. From the analysis based on a terminal multiple of
projected 2002 book value of the Life Company, Salomon Smith Barney derived a
reference range for the aggregate implied value of the Life Company of $33
million to $45 million. From the analysis based on a terminal multiple of
projected 2002 earnings of the Life Company, Salomon Smith Barney derived a
reference range for the aggregate implied value of the Life Company of $28
million to $39 million.
Comparable Company Analysis. Salomon Smith Barney reviewed certain publicly
available financial, operating and stock market information for nine insurance
companies (Lincoln National, Reliastar Financial, Protective Life, FBL Financial
Group, AmerUs Life Holdings, Kansas City Life, Allied Life Financial,
Intercontinental Life and Standard Management (each of which is a "Comparable
Company" and collectively referred to as "Comparable Companies")). Salomon Smith
Barney considered the Comparable Companies to be reasonably similar to the Life
Company insofar as they participate in business segments similar to the Life
Company's business segments, but none of these companies has the same
management, makeup, size and combination of businesses as the Life Company.
Accordingly, the analysis described below is not purely mathematical. Rather it
involves complex considerations and judgments concerning differences in
historical and projected financial and operating characteristics of the Life
Company and the Comparable Companies and other factors that could affect public
trading value.
For each of the Comparable Companies, Salomon Smith Barney reviewed, among
other things, its market capitalization, February 24, 1998 closing price and
estimated 1997 and 1998 EPS (based upon IBES reports as of January 14, 1998),
and calculated multiples of price to book value (ranging from 0.7x to 3.0x, with
a median of 1.1x and a mean of 1.5x), 1997 EPS (ranging from 8.5x to 19.7x, with
a median of 16.4x and a mean of 15.2x) and estimated 1998 EPS (ranging from 7.8x
to 17.3x, with a median of 15.6x and a mean of 13.6x). Salomon Smith Barney
derived reference ranges of multiples from the foregoing analysis of the
Comparable Companies. These reference ranges (0.7x to 1.1x book value; 9.7x to
12.0x 1997 EPS; and 8.7x to 11.8x estimated 1998 EPS) were narrower than the
ranges based solely on the calculations from the public data based on subjective
and qualitative judgments applied by Salomon Smith Barney to such calculations
to more accurately reflect Salomon Smith Barney's judgment of the value of the
Life Company, as implied by this analysis. Using the reference ranges of the
multiples of price to book value, 1997 EPS and estimated 1998 EPS of the
Comparable Companies, Salomon Smith Barney derived a reference range for the
implied value of the Life Company of $28 million to $44 million, $36 million to
$45 million and $34 million to $46 million, respectively.
<PAGE>
Analysis of Selected Insurance Company Acquisitions. Salomon Smith Barney
also analyzed certain publicly available financial, operating and stock market
information for eighteen selected merger or acquisition transactions in the life
insurance industry since April 1995 (the "Insurance Transactions") and for six
selected small merger or acquisition transactions in the life insurance industry
since January 15, 1993 (the "Small Life Transactions"). The Insurance
Transactions reviewed included the following: Conseco, Inc./Washington National
Corp., AmerUs Life Holdings, Inc./AmVestors Financial Corp., American General
Corp./Western National Corp., ING Group/Equitable of Iowa, Unitrin/Reliable
Life, Conseco, Inc./Colonial Penn Life Insurance Co., Jefferson-Pilot
Corp./Chubb Life Insurance Co., American General Corp./USLife Corp., Aegon
NV/Providian Corporation, American General Corp./Home Beneficial Corporation,
Conseco, Inc./Pioneer Financial Services, Conseco, Inc./Transport Holdings,
Inc., Conseco, Inc./Capitol American Financial, Conseco, Inc./American
Travellers Corp., G.E. Capital Corp./First Colony Corp., Conseco, Inc./Life
Partners Group, Inc., American Annuity Group, Inc./Laurentian Capital Corp. and
Zurich Insurance Group/Kemper Corporation. The Small Life Transactions reviewed
included the following: Life Partners Group, Inc./Lamar Financial Group Inc.,
Life Re Corp./First Delaware Life Insurance Co., AmVestors Financial
Corp./Financial Benefit Group Inc., Torchmark Corp./ICH Corp., Stephens Holding
Co./ICH Corp. and United Insurance Cos./Southern Educators Life Insurance Co.
Salomon Smith Barney considered the precedent mergers and acquisition
transactions to be reasonably similar to the proposed Acquisition, but none of
these precedents is identical to such transaction. For each Insurance
Transaction, Salomon Smith Barney calculated the transaction value, price per
share, the premium offered over the market price one month prior to the
announcement of the offer, and the multiples of price to latest twelve months
("LTM") operating earnings (ranging from 10.0x to 27.5x, with a median of 16.4x
and a mean of 16.9x), price to book value (ranging from 1.0x to 2.9x, with a
median of 1.5x and a mean of 1.7x) and price to the estimated earnings for the
year following the announcement date (based on IBES reports) ("Forward
Earnings") (ranging from 10.7x to 18.0x, with a median of 13.9x and a mean of
13.5x). For eac Small Life Transaction, Salomon Smith Barney calculated the
transaction value and the multiples of price to book value (ranging from
0.25x to 1.63x, with a median of 0.88x and a mean of 0.85x) and price to LTM
earnings (ranging from 0.4x to 20.4x, with a median of 7.9x and a mean of 9.0x).
Based on the foregoing analyses, Salomon Smith Barney derived reference ranges
of multiples. These reference ranges (1.0x to 1.5x book value, 10.0x to 13.0x
LTM EPS and 9.0x to 12.0x Forward Earnings for the Insurance Transactions; 0.88x
to 1.38x book value and 9.0x to 12.0x LTM earnings for the Small Life
Transactions) were narrower than the ranges based solely on the calculations
from the public data based on subjective and qualitative judgments applied by
Salomon Smith Barney to such calculations to more accurately reflect Salomon
Smith Barney's judgment of the value of the Life Company, as implied by this
analysis. Applying the reference ranges of the multiples of price to book value,
LTM EPS and Forward Earnings in the Insurance Transactions to book value, 1997
EPS and estimated 1998 EPS of the Life Company, respectively, Salomon Smith
Barney derived a reference range for the aggregate implied value of the Life
Company of $40 million to $60 million, $37 million to $48 million and $35
million to $47 million, respectively. Applying the reference ranges of the
multiples of price to book value and price to LTM earnings in the Small Life
Transactions to book value and estimated 1997 EPS of the Life Company,
respectively, Salomon Smith Barney derived a reference range for the aggregate
implied value of the Life Company of $35 million to $55 million and $33 million
to $44 million, respectively.
Accretion/Dilution Analysis. Salomon Smith Barney also analyzed the
financial impact of the proposed Acquisition on estimated 1998 EPS. Utilizing
the number of shares of Common Stock to be issued, assuming the price used to
determine the number of shares to be issued in the Acquisition is $34.00, which
was the closing price of the Common Stock on the NYSE on February 20, 1998,
Salomon Smith Barney estimated that 1998 EPS would accrete 5.1% to $2.97.
Salomon Smith Barney then performed a sensitivity analysis calculating the
impact on estimated 1998 EPS of the issuance of a greater or lesser number of
shares in the proposed Acquisition resulting from an assumed price per share of
Common Stock ranging from $28.00 to $40.00. Based on this analysis, Salomon
Smith Barney estimated that 1998 EPS would accrete within a range of 1.8% to
7.5%, which would result in estimated 1998 EPS of $2.88 to $3.04.
Review of Series A Preferred Stock. Salomon Smith Barney reviewed the terms
of the Series A Preferred Stock and the terms of publicly traded preferred
securities issued by other financial institutions. Salomon Smith Barney
estimated, based on this review, that a preferred security like the Series A
Preferred Stock would trade in line with the then current 30-Year Treasury,
which as of February 24, 1998, had a yield of 5.96%. Salomon Smith Barney added
that the Series A Preferred Stock might demand a slight premium to such Treasury
yield as a result of (i) the private nature of the transaction, (ii) the
Company's 10-year call option and (iii) the size of the issue, which premium
would be partially offset by voting rights. Based on the foregoing, Salomon
Smith Barney advised the Board of Directors that the Series A Preferred Stock
would likely trade at approximately stated value. Salomon Smith Barney noted,
however, that, for purposes of its opinion, it had assumed that the aggregate
value of the Series A Preferred Stock to be issued in the Acquisition is equal
to the aggregate stated value of $6 million, without so opining as to an exact
valuation.
<PAGE>
In connection with the opinion dated October 21, 1998 and the opinion dated
the date of this Proxy Statement, Salomon Smith Barney performed procedures to
update, as necessary, certain of the analyses described above and reviewed the
assumptions on which such analyses were based and the factors considered in
connection therewith. Salomon Smith Barney did not perform any analyses in
addition to those described above in updating its opinion. Based on the
foregoing analyses, Salomon Smith Barney reconfirmed its opinion as to the
fairness of the consideration to be paid by the Company in connection with the
proposed Acquisition of all of the outstanding shares of capital stock of the
Life Company.
The foregoing is a summary of the material analyses furnished by Salomon
Smith Barney to the Board of Directors on February 26, 1998 and used by Salomon
Smith Barney in arriving at its opinion. The preparation of financial analyses
and fairness opinions is a complex process involving subjective judgments and is
not necessarily susceptible to partial analysis or summary description. Salomon
Smith Barney made no attempt to assign specific weights to particular analyses
or factors considered, but rather made qualitative judgments as to the
significance and relevance of the analyses and factors considered. Accordingly,
Salomon Smith Barney believes that its analyses (and the summary set forth
above) must be considered as a whole, and that selecting portions of such
analyses and of the factors considered by Salomon Smith Barney, without
considering all of such analyses and factors, could create a misleading or
incomplete view of the processes underlying the analyses conducted by Salomon
Smith Barney and its opinion. With regard to the comparable public company
analysis and the comparable transaction analysis summarized above, Salomon Smith
Barney selected comparable public companies and comparable transactions,
respectively, on the basis of various factors, including the size of the public
company or transaction and similarity of the line of business; however, no
public company or transaction utilized as a comparison is identical to the Life
Company, any business segment of the Life Company or the proposed Acquisition.
As a result, the foregoing analyses are not purely mathematical, but also
take into account differences in financial and operating characteristics of the
Comparable Companies and other factors that could affect the transaction or
public trading value of the Comparable Companies and transactions to which the
Life Company, the business segments of the Life Company and the proposed
Acquisition are being compared. In its analyses, Salomon Smith Barney made
numerous assumptions with respect to the Life Company, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are byond the control of the Life Company. Any estimates contained
in Salomon Smith Barney's analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than those suggested by such analyses. Estimates of
values of companies do not purport to be appraisals or necessarily to reflect
the prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, none of the Life Company, the Board of
Directors, Salomon Smith Barney or any other person assumes responsibility if
future results or actual values differ materially from the estimates. Salomon
Smith Barney's analyses were prepared solely as part of Salomon Smith Barney's
analysis of the fairness of the consideration to be paid by the Company in
connection with the proposed Acquisition of all of the outstanding shares of
capital stock of the Life Company and were provided to the Board of Directors in
that connection. The opinion of Salomon Smith Barney was one of the factors
taken into consideration by the Board of Directors in making its determination
to approve the proposed Acquisition.
Salomon Smith Barney is an internationally recognized investment banking
firm engaged, among other things, in the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Salomon Smith Barney acted
as financial advisor and lead underwriter to the Company in connection with the
demutualization and initial public offering of Farm Family Mutual and received a
fee for its services. Also, Salomon Smith Barney or its affiliates previously
rendered certain investment banking and financial advisory services to the
Company and affiliates of the Company for which it received customary
compensation. In addition, in the ordinary course of its business, Salomon Smith
Barney actively trades the equity securities of the Company for its own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities. Salomon Smith Barney and its affiliates
(including Citigroup Inc.) may have other business relationships with the
Company or the Life Company.
Pursuant to the Engagement Letter, as amended, the Company will pay Salomon
Smith Barney a fee equal to $300,000 of which $100,000 was paid in June 1997 and
the balance will be paid upon consummation of the proposed Acquisition. In
addition, the Company will pay Salomon Smith Barney an additional $35,000 for
updating its opinion to October 21, 1998 and an additional $35,000 for updating
its opinion to the date of this Proxy Statement. The Company has also agreed to
reimburse Salomon Smith Barney for its reasonable travel and other out-of-pocket
expenses incurred in connection with its engagement (including the reasonable
fees and disbursements of its counsel) and to indemnify Salomon Smith Barney
against certain liabilities and expenses relating to or arising out of its
engagement, including certain liabilities under the federal securities laws.
Salomon Smith Barney has consented to the inclusion in this Proxy Statement
of the foregoing description of its fairness opinion and the analyses underlying
its fairness opinion. Salmon Smith Barney's opinion does not constitute a
recommendation, and by giving such consent Salomon Smith Barney does not make a
recommendation, to any stockholder of the Company as to how such stockholder
should vote with respect to the proposed Acquisition.
As noted under the caption "-Reasons for the Acquisition; Recommendation of
the Negotiating Committee and Board of Directors," the fairness opinion of
Salomon Smith Barney was only one of several factors considered by the Board of
Directors in determining to approve the proposed Acquisition. The amount of
consideration payable in the proposed Acquisition was determined by arms'-length
negotiations between the Shareholders' Committee and the Negotiating Committee,
in consultation with their respective financial advisors and other
representatives, and was not established by such financial advisors.
<PAGE>
Reasons for the Acquisition; Recommendation of the Negotiating Committee
and Board of Directors
On February 25, 1998, the Negotiating Committee had a conference call with
representatives of LeBoeuf and Salomon Smith Barney. LeBoeuf reviewed a draft of
the Option Purchase Agreement with the Negotiating Committee. Salomon Smith
Barney informed the Negotiating Committee that it was prepared to deliver a
written opinion to the effect that the consideration proposed to be paid by the
Company in connection with the Acquisition would be fair from a financial view
to the Company. LeBoeuf reviewed the fiduciary duties of the Negotiating
Committee. After a full discussion and on a motion duly made, seconded and
carried, the Negotiating Committee unanimously resolved to recommend to the
Board of Directors that it adopt the Option Purchase Agreement and approve the
exercise of the Option at a Fair Market Value of $37.5 million.
A meeting of the Board of Directors was held on February 26, 1998, and was
attended by the members of the Negotiating Committee, members of the Company's
management and representatives of LeBoeuf and Salomon Smith Barney. Salomon
Smith Barney presented its research, analyses and conclusions to the Board of
Directors, including its opinion that the consideration to be paid by the
Company in connection with the Acquisition was fair from a financial point of
view to the Company. The Negotiating Committee then recommended to the Board of
Directors that it adopt the Option Purchase Agreement and approve the exercise
of the Option at a Fair Market Value of $37.5 million.
The Board of Directors, including all members of the Negotiating Committee,
then determined that the Option Purchase Agreement and the Company's exercise of
the Option at a Fair Market Value of $37.5 million were in the best interests of
the Company. The Board of Directors, including all members of the Negotiating
Committee, then approved and adopted the Option Purchase Agreement and the
transactions contemplated thereby, authorized the execution, delivery and
performance of the Option Purchase Agreement and approved the exercise of the
Option at a Fair Market Value of $37.5 million. In finding that the Option
Purchase Agreement and the Company's exercise of the Option at a Fair Market
Value of $37.5 million were in the best interests of the Company, the Board of
Directors relied on the factors (enumerated below) relied on by the Negotiating
Committee and on the recommendation by the Negotiating Committee.
In determining to recommend to the Board of Directors that it adopt the
Option Purchase Agreement and approve the exercise of the Option at a Fair
Market Value of $37.5 million, the Negotiating Committee considered a number of
factors. The material factors considered by the Negotiating Committee were:
(a) the Negotiating Committee's belief that the Exercise Price,
which was determined by arm's-length negotiations between the
Negotiating Committee and the Shareholders' Committee, in consultation
with their respective financial advisors and other representatives,
based upon separate valuations prepared by such financial advisors in
accordance with the Valuation Procedures, provides the Company with an
opportunity to acquire the Life Company at a fair price;
<PAGE>
(b) the fact that the Fair Market Value of $37.5 million
represented a discount to the Life Company's GAAP book value of $39.1
million at December 31, 1997, and that such discount is attributable
to the nature of the Life Company's operating results, business
production and size, and not the Life Company's financial condition;
(c) Salomon Smith Barney's estimate that the Acquisition could
result in an accretion to the Company's estimated 1998 earnings of
approximately 5.1%, assuming a per share price of $34 is used to
determine the number of shares to be issued in the Acquisition, which
was the closing price of the Common Stock on the NYSE on February 20,
1998;
(d) the form of the consideration to be issued in payment of the
Exercise Price, which was negotiated as part of the Exercise Price and
represents an allocation between the Common Stock and the Series A
Preferred Stock that is consistent with the terms of the Original
Option Purchase Agreement and the Option Purchase Agreement;
(e) the terms and conditions of the Option Purchase Agreement,
including the formula for determining the payment of the Exercise
Price set forth therein, which provided, prior to Amendment No. 2,
that the number of shares of Common Stock and Series A Preferred Stock
to be issued in the Acquisition would be based upon the average
closing price per share on the NYSE during the 20 trading days prior
to the third business day preceding the Closing, causing the Company
and its stockholders to benefit from increases in, but be adversely
affected by decreases in, the price of the Common Stock prior to the
date on which such average closing price would have been determined;
(f) the compatibility of the operations of the Company and the
Life Company and the potential for long-term strategic value to the
Company and the Life Company which could result from common ownership
of the two companies by (i) perpetuating current operating
efficiencies, including shared management and facilities, the loss of
which could negatively affect the operating results of the Company,
(ii) the creation of additional critical mass, (iii) potential
diversification of earnings and (iv) increased product capabilities by
providing agents the opportunity to offer additional products to
clients;
(g) the fact that certain directors and officers of the Company
may be deemed to have interests in the Acquisition as a result of
their affiliation with certain of the Selling Stockholders;
(h) the fact that the previously affiliated "Farm Family Group"
will remain together as a result of the Acquisition and the interests
of the Farm Bureaus and their affiliates, who will receive stock in
the Acquisition, will be better aligned with the interests of the
Company's stockholders;
(i) Salomon Smith Barney's presentation to the Negotiating
Committee on February 25, 1998 and its statement that it would be
prepared to deliver a written opinion that the consideration to be
paid by the Company in connection with the Acquisition is fair from a
financial point of view to the Company, which written opinion dated
February 26, 1998, was in fact delivered; and
(j) the fact that the Closing is conditioned on obtaining
stockholder approval of the transactions under the Option Purchase
Agreement.
In reaching its conclusions, the Negotiating Committee viewed all of the
above factors as favorable, except the potential adverse effects and conflicts
of interest discussed in (e) and (g) above, respectively. Although the
Negotiating Committee did not generally consider business risks associated with
the Acquisition, the Negotiating Committee did consider but did not give great
weight to the risk that alternative uses of capital could generate higher
returns for stockholders and, in view of the estimated percentage of stock and
voting power to be issued in the Acquisition, that existing Company
stockholders' voting power would be diluted.
The Negotiating Committee and the Board of Directors were aware that the
actual value of the Common Stock and Series A Preferred Stock issued on the
Closing Date may exceed (or be less than) $37.5 million, prior to reduction for
certain expenses (currently estimated to be $1.1 million). In considering the
value of the Series A Preferred Stock to be issued in the Acquisition, the
Negotiating Committee and the Board of Directors relied principally on Salomon
Smith Barney's advice that, as of the date of its February 26, 1998 fairness
opinion, the Series A Preferred Stock would likely trade at approximately its
stated value of $6 million. Salomon Smith Barney did not value the Series A
Preferred Stock or the Common Stock for purposes of its fairness opinion,
however. See "-Review of Series A Preferred stock" under "-Opinion of the
Company's Financial Advisor" above.
<PAGE>
The Board of Directors was aware of the potential conflicts of interests
referred to in (g) above and, as a result, appointed the Negotiating Committee,
which was composed of independent directors, to negotiate the Exercise Price on
behalf of the Company with the Selling Stockholders. See "-Interests of Certain
Persons in the Acquisition."
In determining to recommend for approval Amendment No. 1 to the Option
Purchase Agreement, the Negotiating Committee considered, in view of the
reduction to the vote required by the Company's stockholders, the risk of having
an insufficient number of the Company's stockholders actually vote on the
Acquisition due, in part, to the Company's relatively large number of
stockholders resulting from Farm Family Mutual's demutualization in 1996 and the
fact that the higher vote was not required.
As a result of the fact that the Acquisition did not close on December 7,
1998, the Company and the Selling Stockholders entered into Amendment No. 2 to
the Option Purchase Agreement. In view of this delay, the Negotiating Committee
and the Board of Directors considered that the Company was exposed to a risk in
the event that the price of the Company's Common Stock declined from $35.72, the
price that would have determined the number of shares of stock to be issued in
the Acquisition if the Closing had occurred on December 7, 1998. That risk
resulted from the fact that the Option Purchase Agreement (as in effect prior to
Amendment No. 2) provided that the price to be used to determine the number of
shares to be issued in the Acquisition would be based on the average closing
price per share of Common Stock on the NYSE for the 20 trading days prior to the
third business day preceding the Closing. If the price of the Company's Common
Stock declined from $35.72, the Company would be required to issue more shares
to the Selling Stockholders than it would have at a December 7 Closing. The
Negotiating Committee and the Board of Directors determined that Amendment No. 2
addressed this risk by fixing the price at $35.72, subject to the collar. While
the collar provides the Selling Stockholders with certain "downside" protection
if the Closing Price falls to $25.00 or less per share, it provides the Company
with "upside" protection if the Closing Price exceeds $42.86. In recommending
Amendment No. 2 to the Option Purchase Agreement for approval, the Negotiating
Commi ttee considered the risks of failing to fix the price used to determine
the number of shares to be issued in the Acquisition, the implementation of the
price collar, including the size of the collar and the likelihood of it taking
effect, that the Selling Stockholders would pay 50% of the costs of resoliciting
the Company's stockholders and that the amendment assisted in the resolution of
the controversy surrounding the opinions of counsel required as a condition to
Closing under the Option Purchase Agreement.
The foregoing discussion of the information and factors considered by the
Negotiating Committee is not intended to be exhaustive but is believed to
include all material factors considered by the Negotiating Committee. In view of
the variety of factors considered in connection with its evaluation of the
proposed Acquisition, the Negotiating Committee did not find it practicable to
and did not quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. In addition, individual
members of the Negotiating Committee may have given different weights to
different factors.
Exercise Price
The Exercise Price to be paid by the Company for the Life Company Shares
will be $37.5 million (less certain expenses, currently estimated to be
approximately $1.1 million, to be paid by the Life Company in the transaction on
behalf of the Selling Stockholders). Upon the Closing, the Company will pay the
Exercise Price to the Selling Stockholders in (i) a number of shares of Common
Stock equal to $31.5 million (less certain expenses currently estimated to be
approximately $0.92 million) divided by the Optionee Common Stock Price and (ii)
a number of shares of Series A Preferred Stock equal to $6 million (less certain
expenses currently estimated to be approximately $0.18 million) divided by the
Optionee Common Stock Price. The "Optionee Common Stock Price" will be equal to
$35.72 (which was the price that would have been used if the Closing had
occurred on December 7, 1998), unless the Closing Price is greater than $42.86
or equal to or less than $25.00. If the Closing Price is greater than $42.86 or
equal to or less than $25.00, the Optionee Common Stock Price will equal $35.72
divided by a factor. The factor will be equal to 1.2 (if the Closing Price is
greater than $42.86) or 0.7 (if the Closing Price is equal to or less than
$25.00) multiplied by $35.72 divided by the Closing Price. If the Closing Price
is $25.00 or less, the Company also will have the option to terminate the Option
Purchase Agreement.
<PAGE>
Assuming the Optionee Common Stock Price is $35.72, the Company would issue
approximately 856,021 shares of Common Stock and 163,052 shares of Series A
Preferred Stock to the Selling Stockholders, representing 14.01% of the total
number of shares of Common Stock outstanding after the Acquisition and 16.25% of
the combined voting power of the stockholders of the Company after the
Acquisition.
In the event that the Closing Price is greater than $42.86 or equal to or
less than $25.00, the following table illustrates how the Closing Price will
affect the Optionee Common Stock Price and the manner in which the Optionee
Common Stock Price determines the number of shares of Common Stock and Series A
Preferred Stock that would be issued at the Closing. This information should not
be construed to be indicative of the actual number of shares of Common Stock and
Series A Preferred Stock that will be issued at the Closing.
<TABLE>
<CAPTION>
Optionee
Common Shares of
Closing Stock Shares of Series A Preferred % of Common Stock % of Combined
Price Price Common Stock Issued Stock Issued Outstanding(1)(2) Voting Power(1)(2)
----- ----- ------------------- ------------ ----------------- ------------------
<C> <C> <C> <C> <C> <C>
$20.......................... $28.57 1,070,160 203,840 16.92% 19.52%
21.......................... 30.00 1,019,200 194,133 16.25 18.76
22.......................... 31.43 972,873 185,309 15.62 18.06
23.......................... 32.86 930,574 177,252 15.05 17.41
24.......................... 34.29 891,800 169,867 14.51 16.81
-
43.......................... 35.83 853,284 162,530 13.97 16.20
44.......................... 36.67 833,891 158,836 13.70 15.89
45.......................... 37.50 815,360 155,307 13.43 15.59
46.......................... 38.33 797,635 151,930 13.18 15.31
47.......................... 39.17 780,664 148,698 12.94 15.03
</TABLE>
- -----------
(1) Based on 5,253,813 shares of Common Stock outstanding as of the Record Date
plus the number of shares of Common Stock and, with respect to the combined
voting power, Series A Preferred Stock estimated to be issued at the
respective Optionee Common Stock Price set forth in the second column of
this table.
(2) Excludes shares of Common Stock currently owned by certain Selling
Stockholders, which in the aggregate constitute less than 1% of the
outstanding shares of Common Stock as of February 11, 1999. See "Stock
Ownership of Management and Certain Beneficial Owners."
The actual value of the securities that the Company issues in the
Acquisition may have a value on the Closing Date in excess of (or less than)
$37.5 million, prior to reduction for certain expenses (currently estimated to
be $1.1 million). In addition, the market value of the Series A Preferred Stock
may be higher or lower on the Closing Date than its stated value of $6 million,
depending on interest rates, perceived credit quality, market conditions,
valuations of comparable companies and other factors at the time it is issued.
Salomon Smith Barney advised the Negotiating Committee and the Board of
Directors that, as of the date of its February 26, 1998 fairness opinion, the
Series A Preferred Stock would likely trade at approximately its stated value of
$6 million. Salomon Smith Barney did not value the Series A Preferred Stock or
the Common Stock for purposes of its fairness opinion, however. See "-Review of
Series A Preferred Stock" under "-Opinion of the Company's Financial Advisor," "
- -Background of the Acquisition" and "Stock Ownership of Management and Certain
Beneficial Owners."
<PAGE>
Each share of the Series A Preferred Stock will be entitled to one vote per
share in the election of directors and on all matters on which holders of Common
Stock are entitled to vote, not voting separately as a class but together with
all other stockholders. Cumulative dividends will be payable quarterly in
cash on each share at a rate equal to 6 1/8% per annum. The Series A Preferred
Stock will be subject to mandatory redemption by the Company on the date
following the twentieth anniversary of the issuance date (or the next business
day), and optional redemption on and after the tenth anniversary of the issuance
date. Each share of Series A Preferred Stock may be redeemed, at the option of
the Company, in cash or in shares of Common Stock. The Company's decision
whether to redeem shares of Series A Preferred Stock in cash or in shares will
depend on its financial condition and other circumstances at that time,
including its liquidity. See "Description of Series A Preferred Stock."
Management and Operations of the Life Company After the Acquisition
It is not expected that the consummation of the Acquisition will result in
any changes to the Board of Directors or officers of the Life Company other than
an increase in the number of directors from 21 to 23 to coincide with the number
of directors currently serving on the Boards of Directors of each of the Company
and FFCIC. Following the Acquisition, it is intended that the Life Company will
be managed in substantially the manner and with substantially the same operating
management as it is currently.
Interests of Certain Persons in the Acquisition
Stockholders of the Company should be aware that certain directors and
officers of the Company may be deemed to have interests in the Acquisition in
addition to their interests as Company stockholders. The Negotiating Committee
and the Board of Directors were aware of these interests and considered them,
among other matters, in approving the exercise of the Option to acquire the Life
Company pursuant to the Option Purchase Agreement and recommending the same for
stockholder approval.
Relationship of Company Directors and Officers with Selling Stockholders
and Life Company. Substantially all of the directors of the Company, including
the Chairman and Vice Chairman of the Board, are directors or executive officers
of, employed by or otherwise associated with the Selling Stockholders and their
affiliates. Certain of these directors also own capital stock of certain of the
Selling Stockholders, although such capital stock will be redeemed by or
returned to such Selling Stockholders prior to the consummation of the
Acquisition. No officer or director of the Company will receive any shares of
Common Stock or Series A Preferred Stock in the Acquisition.
Substantially all of the directors and executive officers of the Company
are also directors and executive officers of the Life Company and United. The
Company and the Life Company also share the same agency force and certain
employees, and utilize common office facilities. Most administrative and
operating expenses are allocated between the two companies pursuant to an
expense sharing agreement. Service as a director or officer of both the Company
and the Life Company could create or appear to create potential conflicts of
interest when the director or officer is faced with decisions that could have
different implications for the Company and the Life Company. A conflict of
interest could also exist with respect to the allocation of time and attention
of persons who are officers of both the Company and the Life Company. Under
Delaware and New York law, a person who is a director of both the Company and
the Life Company owes fiduciary duties to both corporations and their respective
shareholders. As a result, persons who are directors of the Company and the Life
Company are required to exercise their fiduciary duties in light of what they
believe to be best for each of the companies and its shareholders.
Relationships of the Company and Life Company with Farm Bureaus. FFCIC and
the Life Company were organized through the efforts of certain Farm Bureaus
which comprise certain of the Selling Stockholders, and both the Company's and
the Life Company's relationship with the Farm Bureaus in states where they
operate continues to be a fundamental aspect of their businesses. These Farm
Bureaus are affiliated with the American Farm Bureau Federation, the nation's
largest general farm organization with over four million members, which has
traditionally sought to advance the interests of the agricultural community.
It historically has been the practice of the Farm Bureau organizations to
establish or sponsor farm-oriented and member-oriented insurance companies to
provide insurance for their members. FFCIC was established in 1955 and the Life
Company was established in 1953 through the efforts of certain Farm Bureaus to
provide property and casualty insurance and life insurance products,
respectively, for Farm Bureau members in the Northeast. Substantially all of the
directors of the Company, FFCIC and the Life Company are associated with Farm
Bureau organizations in the Northeast. FFCIC has the exclusive endorsement of
the Farm Bureaus to market property and casualty insurance in the ten states in
which it operates. The Life Company also has the exclusive endorsement of the
Farm Bureaus to market life insurance products in the same ten states in which
FFCIC operates. In addition, the Life Company is licensed to write insurance
business in Maryland and Pennsylvania and began marketing its products in those
states in 1998. The Life Company does not have the endorsement of the state Farm
Bureaus in Maryland or Pennsylvania.
<PAGE>
The endorsement of the Farm Bureaus generally means the Farm Bureaus
provide the Company and the Life Company with the right to utilize their
membership lists and authorize the use of their name and service marks in
connection with the marketing of FFCIC's and the Life Company's products. In
exchange for these rights, the Company and the Life Company pay to each of the
Farm Bureaus an annual fee of $7.50 per Farm Bureau member, pursuant to
agreements with each Farm Bureau (the "Membership List Purchase Agreements").
For each of the years ended December 31, 1998, 1997 and 1996, FFCIC paid
approximately $660,000, $600,000 and $571,000, respectively, in the aggregate
under the Membership List Purchase Agreements and the Life Company paid
approximately $660,000, $600,000 and $571,000, respectively. The current term of
each Membership List Purchase Agreement is six years, which commenced on January
1, 1996. Pursuant to the Membership List Purchase Agreements, the Farm Bureaus
may not endorse the products of other property and casualty insurers with
respect to the Company and other life insurers, with respect to the Life
Company, within the ten-state region covered by such Membership List Purchase
Agreements.
FFCIC advertises its products in state and local Farm Bureau publications,
for which it pays advertising fees to the Farm Bureaus, and participates in
meetings and shows sponsored by Farm Bureau organizations. Such participation
typically consists of purchasing booth space at such meetings and shows to
market FFCIC's products. In general, FFCIC will not issue a policy in the
voluntary market to anyone (other than an employee) who is not a member of a
county or state Farm Bureau organization. Policyholders are also required to
maintain such membership to renew a policy. Annual Farm Bureau membership fees
generally range from $50 to $500, depending upon the county and state in which
the member resides and the type of membership. Annual associate members fees for
members not engaged in agricultural pursuits generally range from $38 to $100.
Regulatory Approvals
Insurance. Consummation of the Acquisition is conditioned upon receipt of
the approval of the New York Superintendent. The Company and the Life Company
are subject to the insurance holding company laws of the State of New York
(where FFCIC, the Life Company and United are domiciled). Under such laws, no
person may acquire control (generally defined to include the acquisition of 10%
or more of the voting securities of any other person), directly or indirectly,
of FFCIC, the Life Company or United without first obtaining the approval of the
insurance regulatory authority in such jurisdiction pursuant to specified
procedures or rebutting the presumption of control with respect to such voting
securities. By letters dated April 28, 1998, the Company filed applications with
the New York Superintendent, for the acquisition of control of the Life Company
and United. On May 28, 1998, the Life Bureau of the New York Superintendent
approved the Acquisition. See "The Option Purchase Agreement-Conditions to
Closing" and "The Option Purchase Agreement-Amendment, Waiver and Termination."
In addition, the Life Company is a licensed, foreign insurer in Connecticut
and New Hampshire and will be required to requalify for its license in
Connecticut and to reapply for its license in New Hampshire, in accordance with
the applicable insurance laws of such states. The Life Company will make the
required filings with the Connecticut Insurance Department and New Hampshire
Insurance Department to requalify for and reapply for its licenses in such
states.
HSR Act. Under the HSR Act and the rules that have been promulgated
thereunder by the Federal Trade Commission (the "FTC"), the Acquisition may not
be consummated until notifications have been given and certain information has
been furnished to the FTC and the Antitrust Division of the United States
Department of Justice (the "Antitrust Division") and specified waiting period
requirements have been satisfied. Pursuant to the requirements of the HSR Act,
the Company and the Life Company each filed a Notification and Report Form with
the Antitrust Division and the FTC on May 8, 1998 and May 11, 1998,
respectively, requesting early termination of the waiting period under the HSR
Act. Such request for early termination of the waiting period under the HSR Act
was granted and such termination became effective on May 27, 1998. The
requirements of the HSR Act will be satisfied if the Acquisition is consummated
within one year from the termination of the waiting period.
<PAGE>
Other than the approvals discussed above, the Company is not aware of any
federal, state or foreign regulatory requirements that must be complied with or
approval that must be obtained in connection with the Acquisition other than the
filing with the Commission of this Proxy Statement and compliance with
applicable state securities laws and regulations. Should any such approval be
required, it is currently contemplated that such approval will be sought.
Federal Income Tax Consequences
The following discussion summarizes the material United States Federal
income tax considerations relevant to the Acquisition. This discussion is based
on currently existing provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to the Company, the Life Company or the stockholders of such
corporations. This discussion does not deal with all Federal income tax
considerations that may be relevant to particular stockholders in light of their
particular circumstances.
The authorization and issuance by the Company of the shares of the Common
Stock and Series A Preferred Stock to the Selling Stockholders in exchange for
all of the outstanding capital stock of the Life Company will be treated as the
issuance by the Company of its stock in exchange for property, within the
meaning of Section 1032 of the Code, and, accordingly, no gain or loss will be
recognized by the Company with respect to such exchange for United States
Federal income tax purposes. Stockholders of the Company, who are not also
stockholders of the Life Company, will not be affected by the Acquisition
because they are not selling or exchanging any of their shares in the Company.
Pursuant to the Option Purchase Agreement, the Company entered into an
Agreement and Plan of Reorganization dated as of February 26, 1998 (each, an
"Agreement and Plan of Reorganization"), with the following Selling
Stockholders: Connecticut Farm Bureau Service Company, Delaware Farm Bureau
Service Company, Inc., Maine Farm Bureau Service Company, Massachusetts Farm
Bureau Service Company, Inc., New Jersey Farm Bureau Service Company and New
York Farm Bureau Service Company, Inc. (each, a "Service Company"). With respect
to each Selling Stockholder which constitutes a Service Company, the Acquisition
is intended to qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Code. Regardless of whether the Acquisition qualifies as a
tax-free reorganization within the meaning of Section 368(a) of the Code, the
Acquisition will not result in the recognition of any gain or loss by the
Company pursuant to Section 1032 of the Code.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE ACQUISITION, INCLUDING THE APPLICABILITY OF THE LAWS
OF ANY STATE OR OTHER JURISDICTION.
Accounting Treatment
The Company and the Life Company will account for the Acquisition under the
purchase method of accounting pursuant to which the Company will include the
assets and liabilities of the Life Company in its consolidated financial
statements at their estimated fair market value at the Closing Date. See
"Summary" and "Unaudited Pro Forma Consolidated Financial Information."
<PAGE>
THE OPTION PURCHASE AGREEMENT
The following summary description of the Option Purchase Agreement does not
purport to be complete and is qualified in its entirety by reference to the
Option Purchase Agreement, which is attached as Annex A to this Proxy Statement
and is incorporated herein by reference. Terms which are not otherwise defined
in this summary have the meaning set forth in the Option Purchase Agreement.
The Option
Under the Option Purchase Agreement, the Company was granted an option to
acquire all of the Life Company Shares, exercisable for a two-year period
commencing on July 26, 1996, unless extended for an additional year by agreement
between the parties. The exercise price of the Option is the Fair Market Value,
less certain expenses. The Option Purchase Agreement (as amended by Amendment
No. 2) provides that the exercise price will be payable in $6 million stated
value of Series A Preferred Stock (less certain expenses described below) and
the balance (less certain expenses described below) will be paid in shares of
Common Stock based on an Optionee Common Stock Price equal to $35.72, subject to
a collar mechanism described above under "The Acquisition-Exercise Price." As
discussed more fully above under "The Acquisition-Background of the
Acquisition," the Negotiating Committee and the Selling Stockholders negotiated
the Fair Market Value of $37.5 million at arm's-length, in consultation with
their financial advisors and other representatives, based upon separate
valuations prepared by such financial advisors determined in accordance with the
Valuation Procedures specified in the Option Purchase Agreement.
The Closing
If the proposals to approve and adopt the Option Purchase Agreement and to
approve the transactions contemplated therein are approved at the Special
Meeting, it is expected that the Closing will be consummated on the fifth
business day after satisfaction or waiver of all of the conditions specified in
the Option Purchase Agreement, unless another date is agreed to by the parties.
See "-Conditions to Closing."
Representations and Warranties
The Option Purchase Agreement contains various representations and
warranties made by each Selling Stockholder in favor of the Company, in respect
of such Selling Stockholder (as to certain matters only), the Life Company and
United and made by the Company in respect of the Company and FFCIC, in favor of
each Selling Stockholder. The representations and warranties of each Selling
Stockholder include those relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (a) organization, standing, qualification and similar
corporate matters; (b) authorization, execution, delivery, performance and
enforceability of the Option Purchase Agreement and related matters; (c)
capitalization of the Life Company and title to the Life Company Shares; (d)
subsidiaries of the Life Company; (e) the absence of violation of or breach of
provisions of charter documents, bylaws, material agreements, orders or laws
from the execution, delivery and performance of the Option Purchase Agreement;
(f) the absence of consents for the execution of the Option Purchase Agreement;
(g) compliance with laws by the Life Company and United; (h) licenses of the
Life Company; (i) the absence of pending litigation or known threatened
litigation against the Life Company; (j) an affirmation of financial statements
of the Life Company and United filed or to be filed (for the period ending after
December 31, 1995) with various insurance regulators and an affirmation of
financial statements provided; (k) material contracts of the Life Company and
United; (l) payment of taxes and certain other tax matters of the Life Company
and United; (m) title to and use of certain real and personal of the Life
Company and United; (n) environmental matters of the Life Company and United;
(o) benefit plans of the Life Company; and (p) investment intent of such Selling
Stockholder.
The Company's representations and warranties include those relating to,
among other things, the following matters (which representations and warranties
are subject in certain cases, to specified exceptions): (a) organization,
standing, qualification and similar corporate matters; (b) authorization,
execution, delivery, performance and enforceability of the Option Purchase
Agreement and related matters; (c) issuance of the Common Stock and the Series A
Preferred Stock to the Selling Stockholders; (d) subsidiaries of the Company and
FFCIC; (e) the absence of violation of or breach of provisions of charter
documents, bylaws, material agreements, orders or laws from the execution,
delivery and performance of the Option Purchase Agreement; (f) the absence of
consents for the execution of the Option Purchase Agreement; (g) compliance with
laws by the Company and FFCIC; (h) licenses of the Company and FFCIC; (i) the
absence of pending litigation or known threatened litigation of the Company or
FFCIC; (j) an affirmation of financial statements of the Company filed or to be
filed (for the period ending after December 31, 1995) with various insurance
regulators and an affirmation of financial statements provided; (k) material
contracts of the Company and FFCIC; (l) payment of taxes and certain other tax
matters of the Company and FFCIC; (m) title to and use of certain real and
personal of the Company and FFCIC; (n) environmental matters of the Company and
FFCIC; (o) benefit plans of the Company and FFCIC; and (p) investment intent of
the Company.
<PAGE>
Certain Covenants
The Option Purchase Agreement provides that, from the date of the Option
Purchase Agreement through the later of the Expiration Date and the Closing
Date, each of the Selling Stockholders will do or use its reasonable efforts to
cause to be done all things necessary to preserve, renew and keep in full force
and effect the corporate existence of the Life Company and, without the prior
written consent of the Company, each Selling Stockholder shall use its
reasonable efforts to, among other things, cause the Life Company and United to
(i) operate its business in the usual, regular and ordinary manner, and to the
extent consistent with such operation, use its best efforts to preserve intact
the present business organization, keep available the services of the present
officers, employees and agency personnel of the Life Company and United and
preserve their present relationships with persons having business dealings with
the Life Company and United, (ii) maintain the books, accounts and records
relating to the business of the Life Company and United in the usual, regular
and ordinary manner, on a basis consistent with past practice, and (iii) use all
reasonable efforts not to permit any event to occur that would result in any of
the representations and warranties contained in the Option Purchase Agreement
not being, except as specifically contemplated by the Option Purchase Agreement,
materially true and correct. Each Selling Stockholder also agrees that it will
do or cause to be done all things necessary as promptly as practicable after the
date of the Option Purchase Agreement to amend the By-laws of the Life Company
to permit the Company to acquire the Life Company Shares pursuant to the Option
Purchase Agreement.
In addition, without the prior written consent of the Company, each Selling
Stockholder will not, and will use its reasonable efforts to cause the Life
Company and Untied not to, among other things, (i) enter into an agreement or
incur any obligation, the terms of which would violate the Option Purchase
Agreement or be violated by the consummation of the transactions contemplated by
the Option Purchase Agreement, (ii) issue, pledge, sell, transfer, distribute,
dispose of or otherwise encumber the capital stock of the Life Company or United
including any Life Company Shares, or (in one or a series of transactions) any
material portion of the assets or properties of the Life Company and United
taken as a whole, (iii) redeem or otherwise acquire any shares of the Life
Company common stock or issue capital stock or any option, warrant or right or
any similar security, (iv) declare or pay dividend or make any other
distribution in respect of the capital stock of the Life Company or United,
except for dividends on the Life Company common stock not to exceed $480,088 per
annum in the aggregate, (v) provide for the consolidation with or merger of the
Life Company or United or the liquidation or dissolution of the Life Company or
United, (vi) amend the Life Company's Certificate of Incorporation or By-laws,
or adopt any stockholders' or directors' resolution or take any action which
would restrict the alienation, voting, dividend or other rights of the Life
Company Shares, or (vii) take any other action or enter into any agreement
similar to the foregoing which could have the effect of frustrating the purpose
of the Option Purchase Agreement.
Other Agreements
Agreement and Plan of Reorganization. In connection with the Option
Purchase Agreement, the Company entered into an Agreement and Plan of
Reorganization with each of the Selling Stockholders which constitute a Service
Company. The Agreement and Plan of Reorganization is required for the
transactions under the Option Purchase Agreement to qualify as tax-free
reorganizations within the meaning of Section 368(a) of the Code. See "The
Acquisition-Federal Income Tax Consequences."
Registration Rights. The Common Stock and Series A Preferred Stock issued to
the Selling Stockholders in connection with the Acquisition will not be
registered under the Securities Act of 1993, as amended (the "Securities Act")
and, accordingly, will constitute "restricted securities" within the meaning of
Rule 144 under the Securities Act which may not be sold except pursuant to an
effective registration statement under the Securities Act covering such shares,
or in
<PAGE>
compliance with Rule 144 promulgated under the Securities Act or another
applicable exemption from the registration requirements of the Securities Act.
Under the Option Purchase Agreement, on the Closing Date, the Company and the
Selling Stockholders will enter into a registration rights agreement (the
"Registration Rights Agreement") pursuant to which the Selling Stockholders will
be entitled to certain limited demand registration rights from the Company with
respect to the shares of Common Stock received by the Selling Stockholders in
the Acquisition. The holders of a majority of the shares of Common Stock issued
to the Selling Stockholders pursuant to the Option Purchase Agreement may
request, up to one time in the two year period following the Closing Date, that
the Company file a registration statement covering such shares. The Company will
be obligated to use its best efforts to effect such registration, subject to
certain conditions and limitations. These rights will be subject to certain
"blackout" provisions. The number of shares registered in connection with such
demand registration must represent more than thirty-five percent of shares of
Common Stock issued to the Selling Stockholders in the Acquisition, and must
have an aggregate expected offering price of at least $10 million. Such
registration rights will be transferrable by the Selling Stockholders. The
Company will agree to pay fifty-percent (the Selling Stockholders or their
transferees to pay the other fifty percent) of all costs and expenses in
connection with such registration, except underwriting discounts and commissions
applicable to the shares of Common Stock sold by the Selling Stockholders. The
Registration Rights Agreement will contain customary terms and provisions with
respect to, among other things, registration procedures and certain rights to
indemnification granted by the parties thereunder in connection with the
registration of Common Stock on behalf of the Selling Stockholders.
Conditions to Closing
The respective obligations of the parties to consummate the Acquisition are
subject to the following conditions, among others: (i) all consents, approvals,
orders or authorizations of, or registrations, declarations or filings with, any
Governmental Authority required in connection with the transactions contemplated
by the Option Purchase Agreement shall have been obtained or made; (ii) the
transactions contemplated by the Option Purchase Agreement shall have been
approved by (a) the affirmative vote of the outstanding shares of Common Stock
present in person or by proxy at the Special Meeting or such other vote of the
Company's stockholders as may be required by applicable law, the Certificate of
Incorporation or By-laws of the Company or the rules of the NYSE, and (b) the
requisite affirmative votes of the members of certain of the Selling
Stockholders or of their parent entities and/or by a court of competent
jurisdiction, to the extent required by Section 14 of the Option Purchase
Agreement; (iii) all waiting periods applicable to the Acquisition, including
any extension thereof, under the HSR Act shall have expired; (iv) no preliminary
or permanent injunction or other order by any court of competent jurisdiction
prohibiting or otherwise restraining the transactions contemplated by the Option
Purchase Agreement shall be in effect. On May 27, 1998, notice of early
termination of the waiting period under the HSR Act was received.
The Company's obligation to consummate the Acquisition is subject to
additional conditions, including that: (i) all of the terms, covenants and
conditions of the Option Purchase Agreement to be complied with or performed by
the Selling Stockholders at or prior to the Closing shall be complied with and
performed by them in all material respects, and the representations and
warranties made by the Selling Stockholders in the Option Purchase Agreement
shall be true and correct in all material respects at and as of the Closing;
(ii) the Company shall have received the opinion, dated the Closing Date, of
counsel to each Selling Stockholder substantially to the effect set forth in
Exhibit D to the Option Purchase Agreement; (iii) the Life Company's By-Laws
shall have been amended to permit the Company to acquire the Life Company Shares
pursuant to the Option Purchase Agreement; (iv) the Company shall have received
an opinion, in form and substance reasonably acceptable to the Company from an
investment banking firm of national standing as to the fairness, from a
financial point of view, to the Company of the transactions contemplated by the
Option Purchase Agreement; (v) each Selling Stockholder shall have reimbursed
the Company for its pro rata portion of an aggregate of 50% of the Special
Meeting Fees, as defined below under "-Expenses" (up to a maximum of $200,000 in
the aggregate); and (vi) since the Exercise Date, there shall not have occurred
any event that has had or is reasonably likely to have a Material Adverse Effect
(as defined in the Option Purchase Agreement) on the Life Company and United,
taken as a whole. The Company currently does not intend to waive any material
conditions to the Acquisition. If the Company does waive any such material
conditions, however, it would resolicit proxies at that time.
Each Selling Stockholder's obligation to consummate the Acquisition is
subject to additional conditions, including that: (i) all the terms, covenants
and conditions of the Option Purchase Agreement to be complied with or performed
by the Company at or prior to the Closing shall have been complied with and
performed by it in all material respects, and the representations and warranties
made by the Company in the Option Purchase Agreement shall be true and correct
in all material respects at and as of the Closing; (ii) such Selling Stockholder
shall have received the opinion, dated the Closing Date, of general counsel to
the Company, substantially to the effect set forth in Exhibit E to the Option
Purchase Agreement; (iii) the Company shall have executed and delivered the
Registration Rights Agreement; and (iv) the Life Company's By-Laws shall have
been amended to permit the Company to acquire the Life Company Shares pursuant
to the Option Purchase Agreement.
<PAGE>
There can be no assurance that such conditions will be satisfied or, if
such conditions are satisfied, that such conditions will be satisfied by April
30, 1999, the date specified in the Option Purchase Agreement as the date after
which the Company or the Selling Stockholders may terminate the Option Purchase
Agreement if the Closing has not yet occurred.
Amendment, Waiver and Termination
The Company and the Selling Stockholders may amend the Option Purchase
Agreement and may waive any term or condition thereof, in each case, by written
agreement at any time without the approval of the stockholders of the Company.
The Company will not, however, waive any material condition to the Option
Purchase Agreement or materially change the consideration to be paid by the
Company under the Option Purchase Agreement after the Acquisition is approved by
the Company's stockholders without obtaining the requisite approval of such
stockholders.
The Option Purchase Agreement may be terminated at any time prior to the
Closing Date, whether before or after approval by the stockholders at the
Special Meeting (i) by mutual written agreement of the Company and the Selling
Stockholders, (ii) by either the Company or the Selling Stockholders if the
Closing Date has not occurred by April 30, 1999, provided that the right to so
terminate the Option Purchase Agreement will not be available to any party whose
failure (on or after the date of Amendment No. 2) to fulfill any of its
obligations under the Option Purchase Agreement results in the failure of the
Closing to occur on or prior to such date or (iii) by the Company if the Closing
Price is $25.00 or less.
In the event of termination of the Option Purchase Agreement by either the
Company or the Selling Stockholders as provided above, the Option Purchase
Agreement will be void and there will be no liability or obligation on the part
of the Company or the Selling Stockholders, other than liability by reason of a
party's knowing misrepresentations with respect to matters under the Option
Purchase Agreement or willful failure to have performed its obligations under
the Option Purchase Agreement.
Survival of Representations and Warranties
The representations and warranties of the parties in the Option Purchase
Agreement or in any certificate or instrument delivered at Closing will survive
the Closing until the first anniversary of the Closing Date, except for the
representations and warranties of the Company and the Selling Stockholders
relating to: (i) taxes and benefit plans, which shall survive until the
expiration of applicable statutes of limitation; and (ii) the corporate
organization and standing and similar corporate matters of the Company, FFCIC,
the Life Company, United and the Selling Stockholders, capitalization of the
Life Company, issuance of the Common Stock and the Series A Preferred Stock to
the Selling Stockholders in connection with the Acquisition and title to the
Life Company Shares, which shall survive indefinitely.
Expenses
The Option Purchase Agreement provides that unless otherwise provided, the
Company and the Selling Stockholders will pay their own costs and expenses
incurred in connection with the transactions under the Option Purchase
Agreement. Any party who makes knowing misrepresentations with respect to
matters under the Option Purchase Agreement or who willfully fails to perform
its obligations under the Option Purchase Agreement may be liable for damages
occasioned by such breach. The Selling Stockholders have agreed to reimburse the
Company for 50% of the Company's reasonable out-of-pocket fees and expenses
incurred in connection with the Special Meeting, including, without limitation,
printing, proxy solicitation, mailing, investment banking, accounting and legal
fees and expenses (the "Special Meeting Fees"), up to a maximum of $200,000. The
Option Purchase Agreement further provides that the Life Company will pay the
reasonable out-of-pocket fees and expenses of the Selling Stockholders incurred
in connection with the Option Purchase Agreement for: (i) one legal counsel and
one investment banking firm, engaged by the Shareholders' Committee; (ii) travel
and per diem expenses incurred in connection with attendance at meetings of the
Shareholders' Committee; and (iii) a real estate appraisal in respect of the
Life Company's real property. The Option Purchase Agreement further provides
that the
<PAGE>
Exercise Price payable to each Selling Stockholder shall be net of such
expenses, determined on a pro rata basis, which expenses are currently estimated
to be approximately $1.1 million.
Material Change In Law
The Option Purchase Agreement provides that in the event a Material Change
in Law (as defined in the Option Purchase Agreement) could adversely affect
certain of the Federal income tax consequences of the transaction for certain
Selling Stockholders, the Company and the Selling Stockholders have agreed to
negotiate in good faith to amend or modify the terms of the Series A Preferred
Stock, to arrange for substitute consideration or otherwise to restructure the
transactions under the Option Purchase Agreement. If the Company and the Selling
Stockholders are unable to agree on the terms of any such amendment or
modification, substitute consideration or restructuring, despite their good
faith efforts to do so, the Company and the Selling Stockholders have agreed,
among other things, that (i) neither the Company nor any Selling Stockholder
will be obligated to consummate the Closing under the Option Purchase Agreement,
(ii) the amendments to the Original Option Purchase Agreement made by the Option
Purchase Agreement, including any subsequent amendments, generally will be void
ab initio and correspondingly, the Original Option Purchase Agreement (as it
existed prior to February 26, 1998) will continue in full force and effect as if
the Option Purchase Agreement had never become effective and (iii) the Company's
exercise of the Option described in this Proxy Statement pursuant to the
Exercise Notice delivered pursuant to Section 4(a) of the Option Purchase
Agreement will be void ab initio. In the event that the Company and the Selling
Stockholders renegotiate material terms of the consideration to be paid or the
transactions under the Option Purchase Agreement or, in the event that the
Original Option Purchase Agreement is reinstated and the Company elects to
exercise its Option thereunder, the Company would re-solicit proxies at that
time.
Amendment No. 2 to Option Purchase Agreement
Amendment No. 2 made certain significant changes to the terms of the Option
Purchase Agreement. Such changes include the following:
Fixed Price; Price Collar. As a result of the delay in the Closing of the
Acquisition to permit certain Selling Stockholders or their parent entities to
obtain the approval of their members, the price used to determine the number of
shares issued in the Acquisition would be fixed at $35.72 (which was the price
that would have been used if the Closing had occurred on December 7, 1998),
unless the Closing Price is greater than $42.86 or equal to or less than $25.00.
If the Closing Price is greater than $42.86 or equal to or less than $25.00, the
price used to determine the number of shares of stock to be issued in the
Acquisition will equal $35.72 divided by a factor. The factor will be equal to
1.2 (if the Closing Price is greater than $42.86) or 0.7 (if the Closing Price
is equal to or less than $25.00) multiplied by $35.72 divided by the Closing
Price.
Member Approval. Under Amendment No. 2, Rhode Island Farm Bureau Federation
and West Virginia Farm Bureau, Inc. and the parent entities of Connecticut Farm
Bureau Service Company, Inc., Massachusetts Farm Bureau Service Company, Inc.,
New Jersey Farm Bureau Service Company and New York Farm Bureau Service Company,
Inc. (each a Selling Stockholder) each agreed to (i) convene a meeting of its
members, recommend that its members vote in favor of the Acquisition, and use
its best efforts to obtain, as promptly as practicable, the consent of its
members for the Acquisition and/or (ii) seek the approval of a court of
competent jurisdiction for the Acquisition.
Special Meeting Fees. The Selling Stockholders have agreed to reimburse the
Company for 50% of the Company's reasonable out-of-pocket expenses incurred in
connection with the Special Meeting, up to a maximum of $200,000.
Extension of Termination Date. The date on which the Company or the Selling
Stockholders may terminate the Option Purchase Agreement, if the Closing has not
occurred, was extended to April 30, 1999.
Termination upon Drop in Common Stock Price. The Company may terminate the
Option Purchase Agreement if the Closing Price is equal to or less than $25.00.
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information
reflects the Acquisition by the Company of the Life Company. The pro forma
consolidated balance sheet, which combines balance sheets of the Company and the
Life Company as of September 30, 1998, gives effect to the Acquisition as if it
had occurred as of September 30, 1998. The pro forma consolidated statements of
income combines the operations of the Company and the Life Company for the year
ended December 31, 1997 and the nine months ended September 30, 1998 as if the
Acquisition had occurred on January 1, 1997. See "Available Information,"
"Incorporation of Documents by Reference" and the consolidated financial
statements, and notes thereto, of the Life Company for the nine months ended and
as of September 30, 1998 and 1997 and the years ended and as of December 31,
1997, 1996 and 1995, attached as Annex C to this Proxy Statement.
The Acquisition will be accounted for under the purchase method of
accounting. See "The Acquisition-Accounting Treatment."
The pro forma adjustments 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, incorporated by reference
herein, and the Life Company and subsidiary which are included elsewhere herein.
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.
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 1998
(dollars in thousands)
Pro Forma
The The Life Adjustments
Company Company Dr. Cr. Pro Forma
Assets
Investments
Fixed maturities:
<S> <C> <C> <C> <C> <C>
Available for sale, at fair value.............. $286,143 $719,898 $ $ $1,006,041
Held to maturity, at amortized cost............ 8,457 8,457
Equity securities................................. 4,538 36,321 40,859
Mortgage loans.................................... 710 15,164 15,874
Policy loans...................................... 30,321 30,321
Other invested assets............................. 416 639 1,055
Short-term investments............................ 7,647 4,938 12,585
----- ----- ------
Total investments............................ 307,911 807,281 1,115,192
Cash................................................. 5,711 2,985 8,696
Insurance receivables:
Reinsurance receivables........................... 22,265 1,130 23,395
Premiums receivable............................... 33,638 (d) 99 33,539
Deferred acquisition costs........................... 14,095 25,395 (b) 25,395 14,095
Present value of future profits...................... (b) 16,762 16,762
Accrued investment income............................ 5,035 12,061 17,096
Property and equipment, net.......................... 12,718 (b) 4,095 16,813
Deferred income tax asset, net....................... 1,200 1,200
Prepaid reinsurance premiums......................... 358 358
Receivable from affiliates, net...................... 17,339 (d) 17,339 0
Other assets......................................... 3,489 1,911 (e) 561 (a) 1,750 4,211
----- ----- --- ----- -----
Total assets................................. $411,041 $863,481 $21,418 $44,583 $1,251,357
======== ======== ======= ======= ==========
Liabilities and Stockholders' Equity
Liabilities
Reserves for losses and loss adjustme
expenses....................................... $176,966 $ $ $ $176,966
Future policy and contract benefits............... 221,054 221,054
Funds on deposit from policyholders............... 419,208 (b) 77 419,131
Unearned premium reserve.......................... 73,115 73,115
Accrued dividends to policyholders................ 5,585 5,585
Reinsurance premiums payable...................... 3,189 3,189
Deferred income tax liability..................... 38,426 (b) 1,551 36,875
Payable to affiliate.............................. 17,438 (d)17,438 0
Accrued expenses and other liabilities............ 16,672 4,263 (b)(e) 661 21,596
Participating policyholders' interest............. 116,332 116,332
------- ------- ------- ------- -------
Total liabilities............................ 269,942 822,306 19,066 661 1,073,843
Commitments and contingencies
Mandatory redeemable Series A Preferred
Stock............................................. (a) 5,824 5,824
Stockholders' equity:
Common stock...................................... 53 3,001 (c) 3,001 (a) 9 62
Additional paid in capital........................ 92,906 (a)30,582 123,488
Retained earnings................................. 37,074 36,256 (c) 36,256 37,074
Accumulated other comprehensive income............ 11,066 1,918 (c) 1,918 11,066
------ ----- ----- ----- ------
Total stockholders' equity................... 141,099 41,175 41,175 30,591 171,690
------- ------ ------ ------ -------
Total liabilities and stockholders' equity... $411,041 $863,481 $60,241 $37,076 $1,251,357
======== ======== ======= ======= ==========
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Balance Sheet
September 30, 1998
(dollars 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 $1,100 to be paid by the Life Company in
connection with the Acquisition on behalf of the Selling
Stockholders).
Series A Preferred Stock..................................... $(5,824)
Unregistered Common Stock issued (estimated 856,021 shares
issued, $.01 par value) in the Acquisition assuming an
Optionee Common Stock Price of $35.72. The actual price
used to determine the number of shares to be issued in
the Acquisition and the actual number of shares of
Common Stock that will be issued to the Selling
Stockholders may vary from these amounts. See "The
Acquisition-Exercise Price."........................... (9)
Additional paid in capital.................................. (30,582)
Expenses relating to acquisition............................ 1,750
(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 the
Life Company 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.................................... $4,095
Elimination of historical deferred acquisition costs........ (25,395)
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 the Life Company 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.
Notes continued on following page
<PAGE>
Notes continued from previous page
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 $1.6 million is expected to be amortized
during each of the years ended December 31, 1998, 1999,
2000, 2001 and 2002................................... $16,762
Liabilities
Adjustment to reflect the net deferred tax benefit of
purchase accounting adjustments using a statutory rate
of 34%................................................. 1,551
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........................................... 77
(c) Adjustment to eliminate the Life Company's stockholders'
equity
(d) Adjustment to eliminate intercompany balances
(e) Adjustment to accrue additional expenses relating to the
acquisition expected to be incurred......................... (561)
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Income
For the nine months ended September 30, 1998
(dollars in thousands, except per share data)
Pro Forma Adjustments
The The Life Pro
Company Company Dr. Cr. Forma
------- ------- --- --- -----
Revenues:
Premiums from
<S> <C> <C> <C>
property/casualty operations...... $133,404 $39 $ $ $133,443
Premiums from life and health
operations.............................. 23,002 23,002
Net investment income................ 14,333 41,445 55,778
Realized investment gains
(losses), net..................... 534 3,184 3,718
Policy and contract charges.......... 4,342 4,342
Other income......................... 752 703 (c) 650 805
--- --- --- ---
Total revenues.................... 149,023 72,715 650 221,088
Losses, benefits, expenses and
other:
Losses and loss adjustment
expenses.......................... 99,063 1,481 100,544
Benefits to policyholders............ 22,788 22,788
Underwriting & operating
expenses.......................... 35,129 6,710 (a) 105 (c) 650 41,294
Non-recurring charges................ 203 203
Interest credited to
policyholders..................... 16,564 16,564
Amortization of policy
acquisition costs................. 5,300 (a) 5,300 0
Amortization of present value of
future profits.................... (a) 1,240 1,240
Interest expense..................... 25 25
Dividends to policyholders........... 119 119
Participating policyholders'
interest.......................... 16,317 (a) 4,710 (a) 1,066 19,961
------ ------ ----- ----- ------
Total losses and expenses......... 134,336 69,363 6,055 7,016 202,738
Gain on partial reduction of
extended earnings liability....... (6,318) - (6,318)
------ ------
Total losses, expenses and
other........................... 128,018 69,363 6,055 7,016 196,420
------- ------ ----- ----- -------
Income before federal income tax
expense.............................. 21,005 3,352 6,705 7,016 24,668
Federal income tax expense.............. 6,814 1,123 (b) 106 8,043
----- ----- --- ----- -----
Income before preferred stock
dividends............................ 14,191 2,229 6,811 7,016 16,625
Series A preferred stock dividends...... (a) 268 268
----- ----- --- ----- -----
Income applicable to common
shareholders............................ $14,191 $2,229 $7,079 $7,016 $16,357
======= ====== ====== ====== =======
Net income per common
share-basic.......................... $2.70 $2.68
===== =====
Net income per common
share-diluted........................ $2.67 $2.65
===== =====
Weighted average shares-basic........... 5,253,813 (d) 856,021 6,109,834
Weighted average shares-diluted......... 5,306,257 (d) 856,021 6,162,278
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of income.
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Statement of Income
For the nine months ended September 30, 1998
(dollars 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............................................. $105
Adjustment to reverse amortization of deferred acquisition
costs.................................................. (5,300)
Participating policyholders' share of amortization of
deferred acquisition costs............................. 4,710
Adjustment to record amortization of present value of future
profits................................................ 1,240
Participating policyholders' share of amortization of
present value of future profits........................ (1,066)
Series A Preferred Stock dividends on estimated stated value
of $5,824 of preferred stock at a rate of 6 1/8% per
annum.................................................. 268
(b) Adjustment to reflect the federal income tax effect of item
(a) above using statutory rate of 34%....................... 106
(c) Adjustment to eliminate intercompany balances.............. 650
(d) Adjustment to reflect estimated additional shares of Common
Stock issued in the Acquisition assuming an Optionee Common
Stock Price of $35.72. The actual price used to determine
the number of shares to be issued in the Acquisition and the
actual number of shares of Common Stock that will be issued
to the Selling Stockholders may vary from these amounts. See
"The Acquisition-Exercise Price."........................... 856,021
<PAGE>
<TABLE>
<CAPTION>
Farm Family Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Income
For the year ended December 31, 1997
(dollars in thousands, except per share data)
Pro Forma
The The Life Adjustmemts Pro
Company Company Dr. Cr. Forma
------- ------- --- --- -----
Revenues:
Premiums from
<S> <C> <C> <C> <C> <C>
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 gain
(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 7,748 (a) 158 (c) 808 50,418
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) 2,370 2,370
Interest expense..................... 102 102
Dividends to policyholders........... 282 282
Participating policyholders'
interest.......................... 21,617 (a) 5,994 (a) 2,048 25,563
------ ------ ----- ----- ------
Total losses and expenses......... 147,005 98,555 8,522 9,708 244,374
Income before federal income tax
expense.............................. 26,718 5,042 9,330 9,708 32,138
Federal income tax expense.............. 9,218 1,702 (b) 129 11,049
----- ----- --- ----- ------
Income before preferred stock
dividends............................ 17,500 3,340 9,459 9,708 21,089
Series A preferred stock dividends...... (a) 357 357
----- ----- --- ----- ------
Income applicable to common
shareholders......................... $17,500 $3,340 $9,816 $9,708 $20,732
======= ====== ====== ====== =======
Net income per common
share-basic.......................... $3.33 $3.39
===== =====
Net income per common
share-diluted........................ $3.32 $3.38
===== =====
Weighted average shares-basic........... 5,253,813 (d) 856,021 6,109,834
Weighted average shares-diluted......... 5,270,947 (d) 856,021 6,126,968
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of income.
<PAGE>
Farm Family Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Statement of Income
For the year ended December 31, 1997
(dollars 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................................................ 2,370
Participating policyholders' share of amortization of
present value of future profits........................ (2,048)
Series A Preferred Stock dividends on estimated stated value
of $5,824 of preferred stock at a rate of 6 1/8% per
annum.................................................. 357
(b) Adjustment to reflect the federal income tax effect of item
(a) above using statutory rate of 34%....................... 129
(c) Adjustment to eliminate intercompany balances............... 808
Adjustment to reflect estimated additional shares of Common
Stock issued in the Acquisition assuming an Optionee
Common Stock Price of $35.72. The actual price used to
determine the number of shares to be issued in the
Acquisition and the actual number of shares of Common
Stock that will be issued to the Selling Stockholders
may vary from these amounts. See "The (d)
Acquisition-Exercise Price."........................... 856,021
<PAGE>
BUSINESS OF THE LIFE COMPANY
Overview
The following discussion includes the operations of the Life Company and
its wholly owned subsidiary, United. The operations of the Life Company are also
closely related with those of its affiliates, the Company and its wholly owned
subsidiary, FFCIC. See "-Related Party Transactions."
The Life Company is a stock life insurance company owned by Farm Bureau
organizations and their affiliates in New York, New Jersey, Delaware, West
Virginia and all of the New England States. These entities comprise all of the
Selling Stockholders. The Life Company was established in 1953 to provide life
insurance products for Farm Bureau members principally in the Northeastern
United States. The Life Company principally sells individual whole life, term
and universal life products, in addition to single and flexible premium deferred
annuities, single premium immediate annuities and disability income insurance
products. The Life Company operates in the same ten states as the Company,
through a common distribution system consisting of more than 200 agents who are
located in the rural and suburban communities the Life Company serves. In
addition, the Life Company is licensed to write insurance business in
Pennsylvania and Maryland and began to conduct business in those states in 1998.
Membership in a state or county Farm Bureau organization is not a prerequisite
for purchasing insurance coverage from the Life Company or United. The Life
Company's wholly owned subsidiary, United, is a stock property and casualty
insurance company formed in 1988. Prior to January 1, 1998, United's principal
business was reinsurance of direct business written by FFCIC. In 1998, United
commenced writing direct property and casualty business in Pennsylvania and
Maryland. The Life Company's principal executive offices are located at 344
Route 9W, Glenmont, New York 12077; its telephone number is (518) 431-5000.
As of September 30, 1998, the Life Company's shareholders' equity was $41.2
million and its total assets were $863.5 million. Premiums from life and health
operations for the nine months ended September 30, 1998 were $23.0 million and
for each of the years ended December 31, 1997, 1996 and 1995 were $30.5 million,
$30.3 million and $29.4 million, respectively. Policy and contract charge
revenues were $4.3 million for the nine months ended September 30, 1998, $5.0
million for each of the years ended December 31, 1997 and 1996 and $4.5 million
for the year ended December 31, 1995. Net income attributable to common
shareholders was $2.2 million for the nine months ended September 30, 1998 and
was $3.3 million, $3.0 million and $4.4 million for each of the years ended
December 31, 1997, 1996 and 1995, respectively. The Life Company had
approximately $3.7 billion of life insurance in force at September 30, 1998.
Products
The Life Company offers a variety of insurance products to its clients in
the rural and suburban communities in which it does business. The Life Company's
primary product lines are individual life insurance, annuities and disability
income. Individual life insurance, annuities and disability income products
accounted for 98% of the Company's direct collected premiums for the nine months
ended September 30, 1998 and for the year ended December 31, 1997. Group sales
of life insurance, annuities and accident and health insurance comprise the
remaining direct collected premiums for the Life Company.
<PAGE>
Life Insurance Products
Whole Life Insurance Products. The Life Company markets a participating
whole life product. Participating whole life insurance is designed to provide
benefits for the life of the insured. It is generally designed to provide level
premiums and a level death benefit and requires payments in excess of mortality
charges in early years to offset increasing mortality costs in later years.
Under the terms of the contract, policyholders have a right to participate in
the surplus of the Life Company to the extent determined by the Life Company's
Board of Directors, through annual participating policyholder dividends. For the
nine months ended September 30, 1998 and for the year ended December 31, 1997,
sales of traditional life insurance represented 60% and 58%, respectively, of
first year direct life premiums collected.
Term Life Products. The Life Company's term insurance policy provides life
insurance protection for a specified time period. Term insurance is mortality
based and generally has no accumulation values. The Life Company can choose to
change the premium scales at any time; however, the scales can not exceed the
guaranteed rates. For the nine months ended September 30, 1998 and for the year
ended December 31, 1997, sales of term life insurance represented 5% and 6%
respectively, of first year direct life premiums collected.
Universal Life Products. Universal life provides benefits for the life of
the insured. Interest is credited to the cash value of the policy at rates
periodically set by the Life Company. The Life Company also markets a last
survivor universal life product designed especially for the estate planning
market. There is no set premium scale for the Life Company's flexible universal
life policies except premium contributions cannot exceed Internal Revenue Code
limitations. The Life Company's Single Premium Life policy states a one time
premium payable at issue. For the nine months ended September 30, 1998 and for
the year ended December 31, 1997, sales of universal life insurance represented
35% and 36%, respectively, of first year direct life premiums collected.
Annuity Products
The Life Company markets single premium fixed annuities and flexible
premium annuities. Fixed annuities accumulate tax-deferred interest and provide
for periodic fixed payments to the annuitant in the future. Flexible premium
annuities allow for flexibility, within certain parameters established by the
Life Company, in the payment of periodic annuity premiums. The Life Company
periodically determines the interest rate credited to single premium fixed
annuities and flexible premium annuities.
Disability Income Insurance Products
The Life Company's disability income policy provides payment of benefits in
the event of a disabling accident or illness. Disability benefits reimburse the
insured for a specified dollar amount payable over a specific time period or for
the duration of the disability. Disability is generally defined as the inability
for the policyholder to perform one's occupation for the first two years after
disability, and inability to pursue any occupation thereafter. Since the
policies are guaranteed renewable rather than noncancelable, the Life Company
may change the premium scale at any time based on claim costs incurred, subject
to regulatory approval.
<PAGE>
The following table sets forth the first year collected premiums on a
statutory basis for the Life Company's products for the periods indicated:
<TABLE>
<CAPTION>
Collected Premiums by Product-Statutory Basis
Nine months
ended September 30, Year ended December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
Direct life premiums collected:
Universal life
<S> <C> <C> <C> <C> <C>
First year....................................................... $2,892 $2,873 $3,551 $2,423 $2,976
Renewal.......................................................... 4,790 4,687 6,524 6,634 6,804
----- ----- ----- ----- -----
Total.......................................................... 7,682 7,560 10,075 9,057 9,780
----- ----- ------ ----- -----
Whole life and term
First year....................................................... 5,416 5,276 7,082 8,235 6,347
Renewal.......................................................... 16,582 16,089 21,663 20,726 19,782
------ ------ ------ ------ ------
Total.......................................................... 21,998 21,365 28,745 28,961 26,129
------ ------ ------ ------ ------
Total direct life........................................... 29,680 28,925 38,820 38,018 35,909
Reinsurance ceded...................................................... (726) (567) (730) (609) (513)
---- ---- ---- ---- ----
Total life, net of reinsurance......................................... 28,954 28,358 38,090 37,409 35,396
------ ------ ------ ------ ------
Direct annuity premiums collected:
First year....................................................... 5,229 6,798 10,024 11,232 23,402
Renewal.......................................................... 4,408 4,352 5,268 7,427 16,550
----- ----- ----- ----- ------
Total annuities................................................ 9,637 11,150 15,292 18,659 39,952
----- ------ ------ ------ ------
Reinsurance ceded...................................................... - - - - -
Total annuities, net of reinsurance.................................... 9,637 11,150 15,292 18,659 39,952
Direct accident and health premiums collected
Accident and health-individual
First year....................................................... 273 283 382 428 479
Renewal.......................................................... 1,854 1,755 2,355 2,220 1,997
----- ----- ----- ----- -----
Total.......................................................... 2,127 2,038 2,737 2,648 2,476
----- ----- ----- ----- -----
Accident and health-group
First year....................................................... - 89 46 10 16
Renewal.......................................................... 36 69 45 (180) (43)
-- -- -- ---- ---
Total.......................................................... 36 158 91 (170) (27)
-- --- -- ---- ---
Total accident and health...................................... 2,163 2,196 2,828 2,478 2,449
Reinsurance ceded...................................................... (202) (184) (243) (220) (196)
---- ---- ---- ---- ----
Total accident and health, net of reinsurance.......................... 1,961 2,012 2,585 2,258 2,253
----- ----- ----- ----- -----
Total collected premiums, net of reinsurance........................... $40,552 $41,520 $55,967 $58,326 $77,601
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth information regarding life insurance and
annuities in force at the end of each period presented:
Life Insurance and Annuities in Force
As of or for the
nine month period As of or for the year ended
ended September 30, December 31,
------------------- ------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except face amounts in millions)
Life insurance:
Universal
<S> <C> <C> <C> <C> <C>
Number of policies........................................ 8,913 9,103 9,053 9,164 9,250
Direct statutory premiums................................. $7,820 $7,561 $10,078 $9,054 $9,779
GAAP policyholder account balances........................ $109,628 $101,774 $103,970 $97,231 $90,233
Direct face amounts....................................... $1,059 $1,068 $1,067 $1,056 $1,063
Whole life and term
Number of policies........................................ 66,889 67,396 67,262 67,268 66,564
Direct statutory premiums................................. $22,313 $21,437 $28,799 $29,365 $27,964
GAAP future policy benefits............................... $211,024 $198,345 $200,526 $186,408 $174,922
Direct face amounts....................................... $2,639 $2,732 $2,629 $2,526 $2,334
Total life
Number of policies........................................ 75,082 76,499 76,315 76,432 75,814
Direct statutory premiums................................. $30,133 $28,998 $38,877 $38,419 $37,743
Direct face amounts....................................... $3,698 $3,800 $3,696 $3,582 $3,397
Annuities:
Number of policies........................................... 10,664 11,636 11,490 12,033 12,263
Direct statutory premiums.................................... $9,637 $11,150 $15,292 $18,660 $39,952
GAAP policyholder account balances........................... $268,287 $282,435 $279,130 $284,783 $285,008
</TABLE>
Interest Crediting
Interest crediting rates for universal life type contracts and investment
contracts are set annually by the Life Company's Board of Directors and are
based on each product's target interest rate spread and competitive market
conditions. For the Life Company's flexible annuity products the interest
crediting rate is set by the Life Company's Board of Directors and is generally
a formula that varies monthly based on an established market rate subject to an
approved minimum and maximum rate. Interest rates credited on the Life Company's
universal life contracts for the nine months ended September 30, 1998 and 1997
and the years ended December 31, 1997, 1996 and 1995 range from 6% to 7 1/2%.
Interest rates credited on the Life Company's annuity contracts range from 5% to
8% for the nine months ended September 30, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995.
Marketing
As of September 30, 1998, the Life Company marketed its life insurance
products through approximately 215 agents, 34 independent agents and 10 field
managers. Many of the Life Company's agents are established residents of the
rural and suburban communities in which they operate and often have specific
prior experience in agricultural-related businesses. Almost all of the Life
Company's agents market and write the full range of its products. In addition to
marketing the Life Company's life insurance products, the agency force also
markets property and casualty insurance products for FFCIC. For the nine months
ended September 30, 1998 and each of the years ended December 31, 1997, 1996 and
1995, approximately 58%, 55%, 54% and 58%, respectively, of the Life Company's
direct business was written in the states of New York and New Jersey.
<PAGE>
Agent compensation is comprised primarily of commissions, office expense
allowance and an annual persistency bonus. In addition, in order to assist in
the development of a book of business, most new agents receive a salary during
their first two years of licensing provided they meet certain minimum production
requirements.
The Life Company emphasizes personal contact between its agents and the
policyholders. The Life Company believes that its name recognition, policyholder
loyalty and policyholder satisfaction with agent and claims relationships are
the principal sources of new customer referrals, cross-selling of additional
insurance products and policyholder retention. In addition, the Life Company
believes that its relationship with the Farm Bureaus in its target markets
promotes the Life Company's name recognition and new customer referrals among
Farm Bureau members. See "-Relationship with Farm Bureaus."
Underwriting
The Life Company has adopted and follows detailed, uniform underwriting
practices and procedures designed to assess risks before issuing coverage to
qualified applicants. The Life Company's underwriters review each applicant's
written application, which is prepared under the supervision of the Life
Company's agents, and any required medical records. The Life Company employs
blood and urine testing to provide additional information on applications over
$100,000 face amount. Based on the results of these tests, the Life Company may
adjust the mortality charge or decline coverage completely. Any nicotine use by
a life insurance applicant within the preceding year results in a substantially
higher mortality charge.
Participating Business
The majority of the Life Company's insurance policies are written on a
"participating" basis, as defined in the New York Insurance Law. A participating
policy is a policy under which there is a right to participate in the divisible
surplus of an insurance company. Typically, there is an expectation that a
participating policy will pay a dividend to the policyholder based on the actual
experience of the insurer. Favorable operating results are more likely to result
in the payment of such dividends. Annual policyholder dividends are often paid
in a manner that identifies divisible surplus and distributes that surplus in
approximately the same proportion as the contracts are considered to have
contributed to divisible surplus. Participating business as a percentage of the
Life Company's total life insurance in force was 90.1% as of September 30, 1998,
and 92.4%, 94.5% and 96.9% for each of the years ended December 31, 1997, 1996
and 1995, respectively. Profits earned on participating business are reserved
for the payment of dividends to policyholders except for the stockholders' share
of profits on participating policies, which is limited each year to the greater
of 10% of the statutory profits on participating business, or fifty cents per
year per thousand dollars of the face amount of participating life insurance in
force other than group term insurance. In addition to the greater of 10% of the
statutory profit on participating business or fifty cents per year per thousand
dollars of the face amount of participating life insurance in force, earnings
available to stockholders consist of earnings on non-participating business and
a pro rata share of net investment income and realized investment gains
(losses). The accumulated profit held by the Life Company for the benefit of
participating policyholders is shown as a liability on the Life Company's
balance sheet, under the caption, "Participating policyholders' interest."
Policyholder dividends are paid to participating policyholders, principally
holders of whole life products, based on the profitability of the products.
Policyholder dividends are declared annually by the Board of Directors, and are
effective on the anniversary date of the policy. At the option of the
policyholder, policyholder dividends can be paid in cash, credited to renewal
premiums due, left to accumulate at interest with the Life Company, or used to
purchase additional life insurance. Policyholder dividend expense is charged
against Participating policyholders' interest. Policyholder dividends incurred
for the nine months ended September 30, 1998 were $8.0 million and for each of
the years ended December 31, 1997, 1996 and 1995 were $10.1 million, $9.8
million and $9.4 million, respectively.
<PAGE>
Related Party Transactions
The operations of the Life Company are closely related with those of its
affiliates, the Company and FFCIC and with the Life Company's wholly owned
subsidiary, United. The companies operate under substantially identical Boards
of Directors and have substantially identical senior management. In addition,
the companies share home office facilities, data processing equipment, an agency
force and certain personnel and other operational expenses.
Expense Sharing Agreement. The Life Company, the Company and FFCIC are
parties to an Amended and Restated Expense Sharing Agreement, effective as of
February 14, 1996 (the "Expense Sharing Agreement"), pursuant to which shared
expenses for goods, services and facilities are allocated in accordance with
applicable provisions of the New York Insurance Law and regulations promulgated
thereunder. Direct expenses are charged as incurred to the Life Company, the
Company and FFCIC, as applicable, at cost. In 1995 the parties shared expenses
under a similar expense sharing agreement. For each of the years ended December
31, 1997 and 1996, 33% and 35%, respectively, of aggregate operating expenses
totaling $29.4 million and $30.7 million, respectively, were allocated to the
Life Company under the Expense Sharing Agreement and 67% and 65%, respectively,
were allocated to the Company and FFCIC. For the year ended December 31, 1995,
39% of aggregate operating expenses totaling $26.7 million was allocated to the
Life Company and 61% was allocated to the Company and FFCIC under a similar
expense sharing agreement.
Lease Agreement. The Life Company and FFCIC are parties to a Lease
Agreement dated July 1, 1988, as amended by Amendment to Lease Agreement,
effective January 1, 1994 (the "Lease Agreement"), pursuant to which the Life
Company leases home office space in Glenmont, New York to FFCIC. Annual rent
under the Lease Agreement was $760,000, $712,000 and $687,000 for each of the
years ended December 31, 1997, 1996 and 1995, respectively.
Service Agreement. United and FFCIC are parties to a Service Agreement,
dated July 25, 1988 (the "Service Agreement"), pursuant to which FFCIC provides
United with certain administrative and special services necessary for its
operations, including, but not limited to, claims management, underwriting,
accounting, tax and auditing, investment management, and functional support
services. In addition, FFCIC provides United with certain personnel, property,
equipment and facilities for its operations. For each of the years ended
December 31, 1997, 1996, and 1995, United incurred approximately $0.5 million,
$0.7 million, and $0.8 million, respectively, in direct and allocated expenses
and overhead under the Service Agreement.
Per Risk Reinsurance Contract. FFCIC and United were parties to an
Underlying Multi-Line Per Risk Reinsurance Contract, effective January 1, 1995,
as amended by Addendum No. 1, effective January 1, 1996, Addendum No. 2,
effective January 1, 1996, Addendum No. 3, effective July 26, 1996, and Addendum
No. 4, effective January 1, 1997 (as so amended, the "Per Risk Reinsurance
Contract"). For the year ended December 31, 1997, net earned premiums ceded by
FFCIC to United under the Per Risk Reinsurance Contract were $8.7 million. The
Per Risk Reinsurance Contract was terminated effective December 31, 1997.
Umbrella Reinsurance Contract. United had assumed 5% of FFCIC's net
liability retained under an Umbrella Quota Share Reinsurance Contract, effective
January 1, 1995, as amended by Addendum No. 1, effective January 1, 1995,
Addendum No. 2, effective July 25, 1996 and Addendum No. 3, effective
retroactively to January 1, 1995 as to Article IV and effective January 1, 1997
as to all other changes (as so amended, the "Umbrella Reinsurance Contract").
For the year ended December 31, 1997, net written premiums ceded by FFCIC to
United under the Umbrella Reinsurance Contract were $0.2 million. The Umbrella
Reinsurance Contract was terminated effective December 31, 1997.
Catastrophe Reinsurance Contract. United had assumed 16.67% of the 1st
layer and 2% of the 3rd and 4th layers of FFCIC's per occurrence losses under an
Excess Catastrophe Reinsurance Contract, effective January 1, 1997 (the
"Catastrophe Reinsurance Contract"). For the year ended December 31, 1997, net
earned premiums ceded by FFCIC to United under the Catastrophe Reinsurance
Contract were $0.1 million. The Catastrophe Reinsurance Contract expired on
December 31, 1997.
Although the Company terminated all reinsurance agreements with United
effective December 31, 1997, United retains liability for covered losses arising
from occurrences prior to the termination date. Effective January 1, 1998, all
reinsurance agreements for FFCIC will be provided solely by non-affiliated
reinsurers.
Relationship with Farm Bureaus
The Life Company was organized through the efforts of certain Farm Bureaus,
and its relationship with the Farm Bureaus continues to be a fundamental aspect
of its business. See "The Acquisition-Interests of Certain Persons in the
Acquisition" for a more detailed description of the Life Company's relationship
with the Farm Bureaus.
Reinsurance
In accordance with industry practices, the Life Company reinsures portions
of its life insurance and disability income exposure with unaffiliated insurance
companies under traditional indemnity reinsurance agreements. Reinsurance
contracts do not relieve the Life Company from its obligations to policyholders
as the primary insurer. The Life Company as the ceding insurer remains
responsible for policy claims to the extent the reinsurer fails to pay such
claims. The Life Company regularly evaluates the financial condition of its
reinsurers to minimize the Life Company's credit risk from its reinsurers. As of
December 31, 1997, the Life Company's reinsurance program was provided by
reinsurers which were rated "A" (Excellent) or above by A.M. Best Company, Inc.
("A.M. Best"). The Life Company does not carry an allowance for uncollectible
reinsurance. The Life Company's retained exposure is generally $400,000 for any
one life, with lesser amounts for persons considered to have a higher than
average mortality risk. The Life Company reinsures its level term life insurance
product on a 50% quota share basis. Disability income products are reinsured for
claim payments in excess of $1,500 per month. The Life Company's total premium
ceded to reinsurers was $974,000, $829,000 and $694,000 in 1997, 1996 and 1995,
respectively, and the Life Company received commission on premium ceded of
$233,000 and $134,000 in 1997 and 1996, respectively. The Life Company did not
receive any commission on premium ceded in 1995.
<PAGE>
Future Policy and Contract Benefits
Liabilities for future policy benefits for term life contracts are
calculated using the net level premium method and assumptions as to investment
yields, mortality and withdrawals. These assumptions are based on projections
and past experience and include provisions for possible unfavorable deviation.
These assumptions are made at the time the contract is issued.
Liabilities for future policy benefits for whole life contracts are
calculated using the net level premium method and statutory assumptions as to
interest and mortality. Whole life is written on a participating basis with a
provision for dividends to policyholders. See "-Participating Business."
Liabilities for future policy and contract benefits on universal life-type
and investment-type contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for long-term
disability income contracts are based upon interest rate assumptions and
morbidity and termination rates from published tables. In 1995, the Company
completed its withdrawal from the group accident and health line of business.
The Company continues to write individual accident and health coverages,
primarily disability income policies.
Investments
An important component of the operating results of the Life Company has
been the return on invested assets. The Life Company's investment objective is
to maximize current yield while maintaining safety of capital together with
adequate liquidity for its insurance operations. Since 1995, the Life Company
has significantly reduced its holdings of non-investment grade fixed maturity
securities and improved the overall credit quality of its invested assets.
Although all of its assets support all of its liabilities, the Life Company
has an asset-liability management program which includes designing and
developing products which encourage persistency and, as a result, creates a
stable liability structure; and structuring the investment portfolio with
duration and cash flow characteristics similar to the Life Company's insurance
liabilities.
At September 30, 1998, the Life Company had cash and invested assets with
an aggregate carrying value of $810.3 million. The Life Company primarily
invests in high quality fixed maturity securities and to a lesser extent, equity
securities. At September 30, 1998, 88.8% of the Life Company's total carrying
value of cash and invested assets consisted of fixed maturities, 4.5% consisted
of equity securities, 3.7% consisted of policy loans, 1.9% consisted of mortgage
loans, and the remainder consisted of short-term investments, cash and other
invested assets.
Prior to September 1, 1997, the Life Company managed its invested assets.
During 1997, the Life Company retained the services of a professional asset
management firm, specializing in the management of investments for insurance
companies, to supplement its internal capabilities and improve upon the
management of its invested assets. Investment activities are subject to
oversight by management of the Life Company, as well as the Investment Committee
of the Board of Directors of the Life Company.
The Life Company actively manages and monitors its exposure to credit risk.
Invested assets are reviewed regularly for credit quality. Investments which
have experienced payment delinquencies, adverse changes in credit ratings or
deterioration in the financial condition of the borrower, or which have
otherwise been identified as having potential adverse credit implications are
placed on a credit watch report. Securities placed on the credit watch list are
reviewed by management and the investment committee on a regular basis. At
September 30, 1998, the Life Company had identified 10 securities, with an
aggregate carrying value of $9.6 million, on the credit watch report. None of
these securities were considered non-performing or in default. In addition, the
Life Company's holdings of NAIC Class 3 through 6 bonds, generally considered
non-investment grade, were $13.0 million or 1.8% of its fixed maturity portfolio
at September 30, 1998. Due to uncertainties in the economic environment,
however, it is possible that the quality of investments currently held in the
Life Company's investment portfolio may change.
<PAGE>
The average duration and average effective maturity of the Life Company's
fixed maturity investments as of September 30, 1998 were approximately 5.0 and
7.8 years, respectively. As a result, the market value of the Life Company's
investments may fluctuate significantly in response to changes in interest
rates. In addition, the Life Company may also be likely to experience investment
losses to the extent its liquidity needs require the disposition of fixed
maturity securities in unfavorable interest rate environments.
For the nine month period ended September 30, 1998 and the year ended
December 31, 1997, compared with the prior period, the amortized cost of the
Life Company's cash and invested assets increased 2.9% to $727.3 million and
3.6% to $713.7 million, respectively, primarily as a result of the cash flow
from the Life Company's operations. For the nine months ended September 30, 1998
and 1997 and each of the years ended December 31, 1997, 1996 and 1995, the Life
Company's net investment income, average cash and invested assets and return on
average cash and invested assets were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Net investment income......................................................... $41.5 $40.4 $55.0 $55.7 $52.6
Average cash and invested assets at amortized cost............................ $720.5 $706.7 $701.3 $675.0 $608.7
Return on average cash and invested assets.................................... 7.7% 7.6% 7.8% 8.3% 8.6%
</TABLE>
The reduction in the return on average cash and invested assets for the
year ended December 31, 1997 and for the nine months ended September 30, 1998
was primarily attributable to an overall reduction in the prevailing interest
rate environment during 1996, 1997, and during the nine months ended September
30, 1998 compared to earlier periods and to the redemption of certain fixed
maturities. During 1997, and during the nine months ended September 30, 1998,
issuers paid $34.4 million and $38.8 million, respectively, to redeem fixed
maturities. The effect of the redemptions of these fixed maturities is to lower
the rate of return on the Life Company's fixed income portfolio.
<PAGE>
The following table sets forth certain information concerning the Life
Company's investments:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 December 31, 1996
------------------ ----------------- -----------------
Amortized Market Amortized Market Amortized Market
Type of Investment Cost Value(2) Cost Value(2) Cost Value(2)
- ------------------ ---- -------- ---- -------- ---- --------
(dollars in thousands)
Available for sale portfolio:
Fixed maturities(1):
United States government and
government agencies and
<S> <C> <C> <C> <C> <C> <C>
authorities....................... $16,537 $18,484 $15,009 $16,173 $30,511 $30,748
States, municipalities and
political subdivisions............ 90,260 100,401 91,897 99,687 88,928 93,793
Public utilities.................... 135,011 145,426 149,406 156,189 158,872 160,534
All other corporate bonds........... 307,384 340,564 309,912 336,383 286,593 298,862
Mortgaged-backed securities......... 102,208 106,228 70,640 72,741 40,981 42,905
Redeemable preferred stock.......... 7,524 8,795 10,343 12,260 13,456 14,382
----- ----- ------ ------ ------ ------
Total fixed maturities......... 658,924 719,898 647,207 693,433 619,341 641,224
Equity securities......................... 14,360 36,321 14,360 37,636 13,419 30,722
------ ------ ------ ------ ----- ------
Total available for sale....... 673,284 756,219 661,567 731,069 632,760 671,946
------- ------- ------- ------- ------- -------
Mortgage loans(1)......................... 15,164 15,164 15,151 15,151 13,919 13,919
Policy loans(1)........................... 30,321 30,321 28,937 28,937 28,841 28,841
Short-term investments(1)................. 4,938 4,938 4,864 4,864 10,542 10,542
Other invested assets(1).................. 639 639 741 741 1,250 1,250
--- --- --- --- ----- -----
Total investments.............. $724,346 $807,281 $711,260 $780,762 $687,312 $726,498
======== ======== ======== ======== ======== =======
</TABLE>
- -----------
(1) Fixed maturities (bonds, redeemable preferred stocks and mortgage-backed
securities) and equity securities in the available for sale portfolio are
carried at market value in the consolidated financial statements of the
Life Company. Mortgage loans, cash and short-term investments and other
invested assets are carried at cost, which approximates market value.
Policy loans are carried at the outstanding principal balance which
approximates market value.
(2) The Life Company primarily obtains market value information through the
pricing service offered by Interactive Data Corporation. Market values are
also obtained, to a lesser extent, from various brokers who provide price
quotes.
<PAGE>
The Life Company's investments in fixed maturity securities are composed
primarily of intermediate-term, investment grade securities. The table below
contains additional information concerning the investment ratings of the Life
Company's fixed maturity investments at September 30, 1998:
<TABLE>
<CAPTION>
Amortized Market
Type/Ratings of Investment(1) Cost Value Percentage(2)
(dollars in thousands)
Available for sale portfolio:(3)
<S> <C> <C> <C>
U.S. Government and Agencies...................................................... $30,787 $33,707 4.7%
AAA............................................................................... 107,078 112,434 15.6
AA ............................................................................... 103,011 111,486 15.5
A ............................................................................... 212,614 235,415 32.7
BBB............................................................................... 192,861 213,917 29.7
------- ------- ----
Total BBB or Better......................................................... 646,351 706,959 98.2
------- ------- ----
BB ............................................................................... 9,666 10,243 1.4
B and Below....................................................................... 2,907 2,696 0.4
----- ----- ---
Total available for sale.................................................... $658,924 $719,898 100.0%
======== ======== =====
</TABLE>
- -----------
(1) The ratings set forth in this table are based on the ratings, if any,
assigned by Standard & Poor's Corporation ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by Moody's Investors Services,
Inc., Fitch Investors Service, Inc. or the NAIC were used where available.
The percentage of securities that were not assigned a rating by S&P at
September 30, 1998 was 2.1%.
(2) Represents percent of market value for classification as a percent of total
for each portfolio.
(3) Fixed maturities in the available for sale portfolio are carried at market
value in the consolidated financial statements of the Life Company.
<PAGE>
The table below sets forth the maturity profile of the Life Company's fixed
maturity investments as of September 30, 1998:
<TABLE>
<CAPTION>
Amortized Market
Maturity Cost(1) Value(2) Percentage
(dollars in thousands)
<C> <C> <C> <C>
1 year or less........................................................................ $6,018 $6,109 0.8%
More than 1 year through 3 years...................................................... 14,343 15,462 2.2
More than 3 years through 5 years..................................................... 35,153 37,508 5.2
More than 5 years through 10 years.................................................... 78,140 83,434 11.6
More than 10 years through 15 years................................................... 72,127 81,663 11.3
More than 15 years through 20 years................................................... 79,151 88,076 12.2
More than 20 years.................................................................... 271,784 301,417 41.9
Mortgage backed securities............................................................ 102,208 106,229 14.8
------- ------- ----
Total........................................................................... $658,924 $719,898 100.0%
======== ======== =====
</TABLE>
- -----------
(1) Fixed maturities in the available for sale portfolio are carried at market
value in the consolidated financial statements of the Life Company.
(2) The Life Company obtains market value information primarily through the
pricing service offered by Interactive Data Corporation. Market values are
also obtained, to a lesser extent, from various brokers who provide price
quotes.
As of September 30, 1998, mortgage backed securities accounted for 14.1%
(or $102.2 million in amortized value) of the total investment portfolio. Of
this amount, 35% (or $36.4 million) was invested in collateralized mortgage
obligations, 18% (or $18.0 million) was invested in United States government
agency mortgage pools and the remaining 47% (or $47.8 million) was invested in
asset backed securities. 99% of the combined mortgage backed and asset backed
portfolio carries an S&P rating of AA or higher.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, currently assigns a Best's Rating of "A" (Excellent), its third
highest rating category to the Life Company. A.M. Best assigns "A" or "A-"
ratings to companies which, in its opinion, have demonstrated excellent overall
performance when compared to the standards established by A.M. Best. Companies
rated "A" or "A-" have a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's financial
and operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity, as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its benefit reserves, the adequacy of its surplus, its
capital structure, the experience and competency of its management and its
market presence. No assurance can be given that A.M. Best will not downgrade the
Life Company's current rating in the future.
Ratings assigned by A.M. Best are an important factor influencing the
competitive position of insurance companies. In reaffirming the Life Company's
rating in April 1998, A.M. Best placed a "negative outlook" on the rating of the
Life Company. A.M. Best cited the Life Company's continued lack of new business
growth, referring to the Life Company's first year direct ordinary life premium
production which has declined annually since 1994, and individual annuity sales
which have also declined in recent years as the primary reason for the negative
outlook on the Life Company's rating. A.M. Best further indicated that meeting
1998 marketing goals (calling for modest new premium growth in the ordinary life
segment as well as an increase in annuity sales), "within reason," would be
necessary to maintain the current rating. The Life Company believes that it has
met certain 1998 marketing goals but that it has not met others. There can be no
assurance that the Life Company will be able to maintain its current rating. If
the Life Company were to experience a rating downgrade, the Life Company's
business and results of operations could be materially adversely affected.
<PAGE>
Competition
The Life Company operates in a highly competitive environment and industry.
Numerous life insurance companies, banks and other financial institutions
compete with the Life Company. Many of the Life Company's competitors have
greater financial and other resources than those of the Life Company. The Life
Company believes that the principal competitive factors in the sale of insurance
and annuity products by the Life Company are product features, price, perceived
stability of the insurer, claims-paying ratings from rating agencies such as
A.M. Best, the ability of the Life Company's agent to provide service to the
client after the sale, and the endorsement of the Life Company by the state Farm
Bureaus to their members.
In addition to competing for sales, the Life Company competes for qualified
agents to distribute its products. Strong competition exists among insurance
companies for agents with demonstrated ability to sell life insurance and
annuity products. The Life Company maintains strong relationships with its
agents through a competitive commission structure, support services, a range of
competitive products, and continuing communication with the Life Company's
management.
Regulation
The Life Company is subject to regulation and supervision by each of the
states in which the Life Company does business. State insurance laws generally
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses, transacting business, establishing
guaranty fund associations, licensing agents, approving policy forms, regulating
premium rates, setting limits on the amount of new business that the Life
Company may write, establishing reserve requirements, requiring cash flow
testing, prescribing the form and content of required financial statements and
reports, determining the adequacy of statutory capital and surplus, regulating
the amount and types of investments permitted, limiting the amount of dividends
that may be paid without prior regulatory approval and regulating advertising
and sales illustrations. In addition, the Life Company is licensed as a New York
domestic company, and the Life Company must conform to the New York laws and
regulations in all of the states in which it does business. New York laws and
regulations governing insurance companies are generally regarded as more
restrictive than the laws and regulations of most other states. State laws and
regulations are intended to protect the interests of policyholders, and not the
interests of stockholders.
The New York Insurance Department conducts an examination of the Life
Company approximately once every three years as part of their routine regulatory
oversight. The examination is conducted in the Life Company's office by a team
of examiners assigned by the New York Insurance Department. The examination for
the years 1994 through 1996 has recently been completed. The examination
included a review of the Life Company's statutory financial statements,
investments, reserves, advertising, licensing, training and compensation of
agents, underwriting practices, and policyholder service. There were no material
adverse findings that arose from the examination. The Life Company incurred
examination fees of $105,000 in 1997.
<PAGE>
Properties
The Life Company owns its home office buildings located in Glenmont, New
York, consisting of three buildings containing a total of approximately 140,000
square feet of office space. The Life Company occupies approximately 44,000
square feet for its executive and administrative offices, and leases the
remaining space principally to the Company. The Lease Agreement provides for
FFCIC to pay the Life Company an annual rental of approximately $760,000. The
Lease Agreement expired on December 31, 1998. The parties are negotiating the
terms of a new lease. See "-Related Party Transactions."
Employees
The Life Company shares most of its employees with the Company. As of
December 31, 1998, there were 461 full time employees of the Life Company and
the Company, of which 324 employees were employed in the home office. Based on
annual time studies, 33% of total employee expenses, including salary expense,
is currently allocated to the Life Company, including United, and 67% is
allocated to the Company. See "-Related Party Transactions." None of these
employees are covered by a collective bargaining agreement, and the Life Company
believes that its employee relations are good.
Legal Proceedings
The Life Company is subject to litigation in the normal course of business.
Based upon information presently available to it, management believes that
resolution of these legal actions will not have a material adverse effect on the
Life Company's consolidated financial condition. However, given the
uncertainties attendant to litigation, there can be no assurance that the Life
Company's consolidated results of operations and financial condition will not be
materially adversely affected by any threatened or pending litigation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE LIFE COMPANY
General
Corporate Profile. The following discussion and analysis of financial
condition and results of operations includes the operations of the Life Company
and its wholly owned subsidiary, United. The Life Company is a stock life
insurance company owned by the state Farm Bureau organizations and their
affiliates in New York, New Jersey, Delaware, West Virginia and all of the New
England states. These entities comprise all of the Selling Stockholders. The
operations of the Life Company are closely related with those of its affiliates,
the Company and its wholly owned subsidiary, FFCIC. The Life Company and the
Company are affiliated by common management and substantially identical Boards
of Directors.
The Life Company incurred nonrecurring expenses of $203,000 for the nine
month period ended September 30, 1998 and $707,000 in 1997 at the discretion of
its shareholders related to their evaluation of the Option Purchase Agreement
and the proposed sale of the Life Company to the Company.
Nature of Business. The Life Company principally sells individual life
insurance, annuities and disability income insurance to residents of rural and
suburban communities, principally to members of the state Farm Bureau
organizations in New York, New Jersey, Delaware, West Virginia and all of the
New England states. Membership in a state Farm Bureau organization is not a
prerequisite for purchasing insurance coverage from the Life Company. The Life
Company began marketing its products in Pennsylvania and Maryland during 1998.
The Life Company is a New York corporation, and is subject to the regulatory
authority of the New York Insurance Department.
The Life Company's wholly owned subsidiary, United, is a property and
casualty insurance company. Prior to January 1, 1998, United's principal
business was reinsurance of direct business written by FFCIC. United commenced
writing direct property and casualty business in Pennsylvania during the second
quarter of 1998 and commenced writing direct property and casualty business in
Maryland during the third quarter of 1998.
As of September 30, 1998, the Life Company marketed its life insurance
products through approximately 215 agents, 34 independent agents and 10 field
managers. Many of the Life Company's agents are established residents of the
rural and suburban communities in which they operate and often have specific
prior experience in agricultural-related businesses. Almost all of the Life
Company's agents market and write the full range of its products. In addition to
marketing the Life Company's life insurance products, the agency force also
markets property and casualty insurance products for FFCIC. For the nine months
ended September 30, 1998 and for the years ended December 31, 1997, 1996 and
1995, approximately 58%, 55%, 54% and 58%, respectively, of the Life Company's
direct business was written in the States of New York and New Jersey.
Participating Business. Most of the policies issued by the Life Company are
classified as "participating," as defined by the New York Insurance Law.
Pursuant to New York Insurance Law, profits on participating business inuring to
the benefit of stockholders are limited to the greater of 10% of the statutory
profits on participating business, or fifty cents per year per thousand dollars
of participating life insurance in force other than group term insurance. The
profits on participating business represent the excess of revenues over benefits
and expenses and income taxes allocated to participating policies. The
accumulated profit held by the Life Company for the benefit of policyholders is
shown as a liability on the consolidated Life Company's balance sheet.
Participating business, as a percentage of the Life Company's total life
insurance in force, was 90.1% as of September 30, 1998 and was 92.4%, 94.5%, and
96.9% as of December 31, 1997, 1996, and 1995, respectively.
Sources of Income for Common Stockholders. Net income available to common
stockholders is provided by these sources: (i) an allocation of net investment
income and net realized investment gains (losses) and, (ii) profits on
non-participating policies, and (iii) the greater of 10% of the statutory
profits on participating policies or fifty cents per year per thousand dollars
of participating life insurance in force other than group term insurance.
<PAGE>
Expense Management. During 1997, the Life Company continued the expense
management initiatives it began during 1996. The goal of the Life Company's
expense management initiatives is to continually review its cost structure and
reduce or eliminate certain expenses. Additionally, the Life Company seeks to
tie expenses to operating results so that expenses become increasingly more
variable with the Life Company profitability and less fixed or volume sensitive.
As a result, portions of the compensation for employees and management are
influenced by the Life Company's operating results. These programs help align
the Life Company's interests more directly with those of its shareholders. As a
result of these initiatives, the Life Company's operating expenses as a percent
of premium from life and health operations were reduced during 1997 to 25.4%
compared to 28.9% for 1996. For the nine months ended September 30, 1998, the
Life Company's operating expenses as a percentage of premium from life and
health operations was 29.2%. The increase in operating expenses as a percentage
of premium from life and health operations for the nine months ended September
30, 1998 was primarily attributable to an increase in expenditures incurred for
advertising, actuarial consultants and field compensation as well as an increase
in start up expenses incurred by United to commence business in the states of
Pennsylvania and Maryland during 1998.
Agent compensation is the Life Company's principal policy acquisition cost.
Agents receive commission as a percentage of policy premium, with higher rates
for new business. Most of the agent's first year commission is deferred and
amortized over future premium collections for the policy. Agent and agency
manager compensation cost, as a percentage of total deferred acquisition cost,
was 70.6% and 79.7% for the nine months ended September 30, 1998 and 1997,
respectively, and 76.9%, 80.7%, and 83.7% for the years ended 1997, 1996, and
1995, respectively. Amortization of deferred acquisition costs as a percentage
of premium from life and health operations was 20.5%, 20.7% and 22.4% for the
years ended 1997, 1996 and 1995, respectively.
During the fourth quarter of 1996, the Life Company implemented a voluntary
early retirement program and other changes to the Life Company's benefit plans
as part of its continuous expense management program. The Life Company recorded
a nonrecurring charge of $594,000, which is net of a Federal income tax benefit
of $320,000, for the Life Company's share of the costs of this voluntary early
retirement program. Eligibility for the program was based on age and years of
service. In addition, effective January 1, 1997, the Life Company froze benefits
available through its defined benefit plan and enhanced its defined contribution
plan. As a result, the Life Company's contributions to the defined contribution
plan will vary to a greater extent based upon the Life Company's profitability
than the contributions previously required to fund its defined benefit plan.
Year 2000. The Life Company's primary policy administration system was
created using four digits to identify a year in the date field and is generally
Year 2000 compliant. However, many of the other computer programs upon which the
Life Company relies were created using only two digits to identify a year in the
date field. If not corrected, many of these computer applications could fail or
produce erroneous results. In 1996, management began considering Year 2000
issues as they affect the Life Company and began to develop a Year 2000 plan.
The Life Company's overall plan for dealing with the Year 2000 problem covers
information technology ("IT") systems, non-IT systems, and third party
providers. The Life Company has established a Year 2000 team to lead the Life
Company's activities relating to its Year 2000 issues. The Life Company's Year
2000 team works with the Life Company's senior management, legal and business
units on Year 2000 issues. The Life Company's current state of readiness with
respect to each of its IT systems, non-IT systems and third party providers is
discussed below.
The Life Company uses a process consisting of the following five phases to
approach Year 2000 compliance of its IT systems: (1) Inventory (cataloging the
systems portfolio); (2) Assessment (identifying possible Year 2000 related
failures and developing strategies to remediate them); (3) Remediation (creating
or acquiring corrections to deficiencies); (4) Testing (confirming whether
remediation is successful); and (5) Implementation (installing solutions).
Critical IT systems include product administration systems, key financial
systems and core IT infrastructure. The inventory and assessment phases have
been completed for all critical IT systems. The phases of remediation and
testing of critical IT systems have been 95% completed as of September 30, 1998.
Management of the Life Company believes that the phases of remediation, testing
and implementation for critical IT systems currently in use by the Life Company
have been completed. Noncritical IT systems include certain other business
applications which the Life Company does not believe to be critical. The
inventory phase has been completed for the Life Company's noncritical IT systems
as of September 30, 1998. The assessment, remediation, testing and
implementation phases for the Life Company's noncritical IT systems are ongoing
and are expected to be completed by the end of 1999.
The Life Company is currently testing the operation of IT systems working
together in an integrated test environment that replicates the Life Company's
live environment. This test exercises software and hardware using dates advanced
to Year 2000 and beyond. There can be no assurances that the integrated testing
will discover all potential Year 2000 problems or that it will not reveal
additional material problems that will have to be resolved.
<PAGE>
Non-IT systems typically include embedded technology such as
microcontrollers. The Life Company's non-IT systems include machinery and
equipment in its buildings, such as elevators, telephone equipment, HVAC,
security and alarm systems, and print shop/mail room equipment. The Life Company
is reviewing these systems for Year 2000 compliance with the third party
providers the Life Company uses to service and maintain this equipment.
The Life Company's Year 2000 effort also includes a systematic assessment
of the Year 2000 compliance status of third-party providers. The Life Company
believes loss of public utilities, phone, banking or mail services could have an
immediate adverse impact on the Life Company's operations which, under certain
circumstances could be material. The Life Company is contacting each of its
third-party providers, through letters, questionnaires and/or interviews
depending upon the nature of the product or service supplied, to determine if
the provider is Year 2000 compliant. As of September 30, 1998, the Life Company
had received responses from approximately 85 percent of such third parties. Many
of the responses indicate that the products or services provided are expected to
be Year 2000 compliant. However, few providers have provided written assurances
that they are currently Year 2000 compliant. The Life Company continues to track
the status of third-party providers' Year 2000 compliance progress and a
follow-up program is under way with providers that have not responded.
Management believes that the process of evaluating the Year 2000 compliance
status of the Life Company's third-party providers who provide mission critical
services and products will be completed by June 30, 1999.
The Life Company does not separately track the internal costs incurred for
the Year 2000 project which are principally the related payroll costs for its IT
staff. However, the Life Company has identified certain costs related to the
Year 2000 project including costs related to outside consultants and software
and hardware applications. The identified costs incurred through September 30,
1998 were approximately $85,000, of which $69,000 was expensed and $16,000 was
capitalized. Based on information currently available, the total identified
remaining costs expected to be incurred for the Year 2000 project are estimated
to be $130,000. These costs are being funded through operating cash flows. These
estimated costs are the costs allocated to the Life Company and do not include
the costs allocated to the Company and FFCIC in accordance with expense sharing
arrangements among the companies. See "Business of the Life Company-Related
Party Transactions." The Life Company's estimated costs of the Year 2000 project
are based on management's best estimates, which were derived from numerous
assumptions, including the extent of remaining remediation and testing
activities, availability of certain resources and other factors.
The phases of inventory, assessment, remediation, testing and
implementation of the Life Company's software for Year 2000 issues have been
done primarily by the Life Company's existing IT staff. Correction of Year 2000
issues is a high priority project and certain other less critical IT projects
have been deferred due to Year 2000 efforts; however, the Life Company does not
believe the deferral of other IT projects has had a material effect on the Life
Company's financial condition or results of operations in 1997 or during the
nine months ended September 30, 1998. The Life Company's IT staff has continued
to work on other high priority projects concurrent with the Year 2000 project.
The Life Company has not conducted a comprehensive analysis of the
operational problems and costs that would be reasonably likely to result from
the failure to achieve Year 2000 compliance on a timely basis. The Life Company
believes that its most reasonably likely worst case Year 2000 scenarios may
include these elements: (1) one or more parts of the Life Company's IT systems
will operate incorrectly, thereby resulting in a temporary shutdown or
miscalculations in a system, which may have an adverse effect on the Life
Company's operations and (2) one or more of the Life Company's third-party
providers will be unable to provide the products or services expected which may
have an adverse effect on the Life Company's operations. Because of the progress
which has been made toward achieving Year 2000 compliance with the Life
Company's IT systems, an IT system contingency plan has not been developed. The
Life 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 Life Company's software and hardware will
perform substantially as planned when Year 2000 processing begins. If testing
reveals material problems that cannot be remediated, then the Life Company
intends to develop such contingency plans as are practical based on the
alternatives available. A contingency plan has not been developed for dealing
with the scenario where one or more of the Life Company's third-party providers
will be unable to provide the services expected. If management believes that a
third-party provider is not Year 2000 compliant, or that a third-party
provider's Year 2000 compliance status is uncertain, then the Life Company
intends to seek other providers or develop such contingency plans as are
practical based on the alternatives available.
<PAGE>
Despite the Life Company's efforts to address its Year 2000 issues, there
can be no assurances that Year 2000 related failures of the Life Company's IT
systems, or that Year 2000 related failures by third parties with which the Life
Company interacts, will not have a material adverse effect on the Life Company's
results of operations, liquidity and financial condition.
Application of Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
("Statement 130"), "Comprehensive Income," which establishes standards for the
reporting and disclosure of comprehensive income and its components (revenues,
expenses, gains and losses). Statement 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Statement 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. Statement
130 is effective for the fiscal years beginning after December 15, 1997. The
Life Company and United have adopted Statement 130 for the first quarter of 1998
financial statements and restated prior years financial statements to conform to
this reporting standard.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures about
Segments of an Enterprise and Related Information" effective for fiscal 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 Life Company.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("Statement 132"), "Employers'
Disclosures about Pensions and Other Postretirement Benefits," effective for
fiscal years beginning after December 31, 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 for the Life Company but will have
no effect on the financial position, results of operations, or liquidity of the
Life Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement, which is
effective for fiscal years beginning on or after January 1, 2000, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. Statement 133 requires recognition of all derivatives as either
assets or liabilities in the statement of financial position and measurement of
those instruments at fair value. Management is evaluating the impact this
statement may have on the Life Company's financial statements.
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Premiums. Premiums from life and health operations increased to $23.0
million during the nine months ended September 30, 1998, an increase of $0.5
million from the premiums for the nine months ended September 30, 1997 of $22.5
million. The increase is the result of an increase of $0.5 million in whole life
and term life insurance premiums. Premiums for accident and health (principally
disability income) insurance were $1.0 million for both periods. Payments
received from policyholders for asset accumulation products, such as annuities,
and payments received from universal life policyholders, are recorded as
liabilities rather than as premiums. There was $39 thousand of premium from
property and casualty operations during the nine months ended September 30,
1998, compared to $6.7 million in the 1997 period. The decrease in premium from
property and casualty operations during the nine month period ended September
30, 1998 as compared to the same period in 1997 was primarily the result of the
termination of the reinsurance contracts between United and FFCIC effective
December 31, 1997. United commenced writing direct property and casualty
business in Pennsylvania during the second quarter of 1998 and commenced writing
direct property and casualty business in Maryland during the third quarter of
1998.
Net Investment Income. Net investment income was $41.5 million during the
nine months ended September 30, 1998 and $40.4 million for the same period in
1997. The increase in net investment income was primarily the result of the
additional income earned on the Company's fixed maturity investments which
increased by $26.5 million during the nine months ended September 30, 1998. This
increase was partially offset by an overall decline in the rate of return on the
invested assets. The return realized on the Life Company's cash and invested
assets was 7.7% for the nine months ended September 30, 1998 compared to 7.6%
for the same period in 1997. Many of the assets held by the Life Company in its
fixed maturities portfolio are subject to redemption on certain dates at the
option of the issuer. During the nine months ended September 30, 1998, issuers
paid $38.8 million to redeem investments in fixed maturities. Almost all of
these redeemed fixed maturities carried a higher interest rate than was
currently available in 1998. The effect of the redemption of these fixed
maturities is to lower the rate of return on the Life Company's fixed income
portfolio.
Net Realized Investment Gains. Net realized investment gains were $3.2
million for the nine months ended September 30, 1998 compared to $3.4 million
for the same period in 1997. During the nine months ended September 30, 1997,
the Life Company decided to reduce the amount of its investments in equities,
and because of the significant appreciation in market value of certain of the
Life Company's equities, a realized gain of $2.9 million in equities was
recognized as a result of the sale of these securities. During the nine months
ended September 30, 1998 a realized gain of $3.2 million was recognized
primarily due to calls of fixed maturities.
Policy and Contract Charges. Policy and contract charges are primarily fees
assessed as surrender charges on whole life and annuity policies, and mortality
and expense fees charged against policyholder accounts of universal life
policies. These fees were $4.3 million for the nine months ended September 30,
1998 and $3.8 million for the same period in 1997.
Benefits to Policyholders. Benefits to policyholders increased $1.1 million
to $22.8 million for the nine months ended September 30, 1998 compared to $21.7
million for the same period in 1997. Benefits to policyholders for the nine
months ended September 30, 1998 increased primarily as a result of an increase
in death benefits paid during the nine months ended September 30, 1998 as
compared to the same period in 1997.
Losses and Loss Adjustment Expenses on Property and Casualty Operations.
Losses and loss adjustment expenses decreased $4.8 million to $1.5 million for
the nine months ended September 30, 1998 compared to $6.3 million for the same
period in 1997. The decrease in losses and loss adjustment expenses was
attributable to the termination of the reinsurance agreements between United and
FFCIC effective December 31, 1997. Losses and loss adjustment expenses incurred
in the nine months ended September 30, 1998 are the result of the runoff of the
reinsurance agreement liabilities as of December 31, 1997 from the reinsurance
assumed by United from FFCIC.
Operating Expenses. Operating expenses increased $1.3 million, to $6.7 million
for the nine months ended September 30, 1998 from $5.4 million for the same
period in 1997. For the nine months ended September 30, 1998, operating expenses
were 29.2% of premium revenue from life and health operations compared to 24.1%
for the same period in 1997. The increase in expense is primarily attributable
to increases in expenditures incurred for advertising, actuarial consultants,
and field compensation, as well as start up expenses incurred by United to
commence business in the states of Pennsylvania and Maryland during 1998.
Interest Credited to Policyholders. Interest credited to policyholders
decreased $2.3 million, to $16.6 million for the nine month period ended
September 30, 1998 compared to $18.9 million for the same period in 1997. The
decline was the result of lower interest crediting rates on annuity business and
policyholder funds on deposit and a decline in the amount of funds held for
policyholders under annuity contracts in the nine months ended September 30,
1998 as compared to the same period in 1997.
Amortization of Deferred Policy Acquisition Costs. Amortization of deferred
policy acquisition costs was $5.3 million in the nine month period ended
September 30, 1998 and $5.1 million for the same period in 1997.
Participating Policyholders' Interest. Participating policyholders'
interest increased $0.5 million to $16.3 million for the nine months ended
September 30, 1998 compared to $15.8 million for the same period in 1997.
Federal Income Tax Expense. Federal income tax expense was $1.1 million and
33.5% of income before Federal income taxes for the nine months ended September
30, 1998 compared to $1.5 million and 33.8% of income before Federal income
taxes for the same period in 1997.
<PAGE>
Net Income Attributable to Common Stockholders. Net income attributable to
common stockholders decreased $0.8 million to $2.2 million for the nine months
ended September 30, 1998 from $3.0 million in the same period of 1997 primarily
as a result of the foregoing factors.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Premiums. Premiums from life and health operations increased slightly to
$30.5 million during the year ended December 31, 1997, an increase of $0.2
million from 1996's premium of $30.3 million. The increase is the result of a
decrease of $0.2 million in whole life and term life insurance, and an increase
of $0.4 million in accident and health (principally disability income)
insurance. Premium from property casualty operations decreased $0.4 million or
4.3% during the year ended December 31, 1997 to $9.0 million from $9.4 million
in 1996. This decrease was primarily the result of a decrease in rate for the
major reinsurance assumed contract between United and FFCIC. Payments received
from policyholders of asset accumulation products, such as annuities, and
payments received from universal life policyholders are recorded as liabilities
rather than as premiums.
Net Investment Income. Net investment income decreased $0.7 million to
$55.0 million for the year ended December 31, 1997, from $55.7 million in 1996.
The decrease in net investment income was primarily the result of a decline in
the investment yield of the portfolio as maturing investments are replaced at
lower rates. The return realized on the Life Company's cash and invested assets
was 7.8% in 1997 and 8.3% in 1996. Many of the assets held by the Life Company
in its fixed maturities portfolio are subject to redemption on certain dates at
the option of the issuer. During 1997, issuers paid $34.4 million to redeem
investments in fixed maturities. Almost all of these redeemed fixed maturities
carried a higher interest rate than was currently available in 1997. The effect
of the redemption of these fixed maturities is to lower the rate of return on
the Life Company's fixed income portfolio.
Net Realized Investment Gains. Net realized investment gains were $2.9
million for the year ended December 31, 1997, compared to $0.3 million in 1996.
During 1997, the Life Company decided to reduce the amount of its investments in
equities, and because of the significant appreciation in market value of certain
of the Life Company's equities, a realized gain of $3.5 million in equities was
recognized.
Policy and Contract Charges. Policy and contract charges are primarily fees
assessed as surrender charges on whole life and annuity policies, and mortality
and expense fees charged against policyholder accounts of universal life
policies. These fees were approximately $5.0 million for 1997 and 1996.
Benefits to Policyholders. Benefits to policyholders decreased $0.2 million
or 0.7% to $26.8 million in 1997 compared to $27.0 million in 1996.
Losses and Loss Adjustment Expenses on Property and Casualty Operations.
Losses and loss adjustment expenses increased $2.2 million, or 28.6%, to $10.0
million for the year ended December 31, 1997, from $7.8 million for the 1996
period. The ratio of losses and loss adjustment expenses to premiums earned
increased from 82.2% in 1996 to 110.6% in 1997. The increase in losses and loss
adjustment expenses was primarily attributable to an increase in losses from
excess reinsurance assumed from FFCIC.
Operating Expenses. Operating expenses decreased $1.1 million, or 11.6%, to
$7.7 million for the year ended December 31, 1997, from $8.8 million for same
period in 1996. For the year ended December 31, 1997, operating expenses were
25.4% of premium revenue from life and health operations compared to 28.9% in
1996. The reduction in the Life Company's ratio of operating expenses to premium
revenue was primarily attributable to the Life Company's continuing expense
management program which began in 1996.
Interest Credited to Policyholders. Interest credited to policyholders
increased $0.2 million, or 0.7%, to $24.8 million in 1997 compared to $24.6
million in 1996. The increase was the result of an increase in funds on deposit
from policyholders in 1997 as compared to 1996.
Amortization of Deferred Policy Acquisition Costs. Amortization of deferred
policy acquisition costs was approximately $6.9 million in 1997 and 1996.
<PAGE>
Participating Policyholders' Interest. Participating policyholders'
interest decreased $0.4 million to $21.6 million for the year ended December 31,
1997 compared to $21.2 million for the same period in 1996.
Federal Income Tax Expense. Federal income tax expense was $1.7 million in
1997 and $1.5 million in 1996. Federal income tax expense was 33.8% of income
before Federal income taxes in 1997 compared to 34.2% in 1996.
Net Income Attributable to Common Stockholders. Net income attributable to
common stockholders increased $0.3 million to $3.3 million in 1997 from $3.0
million in 1996 primarily as a result of the foregoing factors. In 1996, the
Life Company implemented a voluntary early retirement program which resulted in
a one-time charge to earnings of $0.6 million net of tax in the fourth quarter
of 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Premiums. Premiums from life and health operations increased $0.9 million
or 3.3% during the year ended 1996, to $30.3 million from $29.4 million in 1995.
The increase is the result of an increase of $1.2 million in whole life and term
life insurance, and a decrease of $0.3 million in disability income insurance.
Premium from property and casualty operations increased $0.1 million or 1.2%
during 1996 to $9.4 million from $9.3 million in 1995. This increase is the
result of growth in premiums assumed from the major reinsurance contract between
United and FFCIC. Payments received from policyholders of asset accumulation
products, such as annuities, and payments received from universal life
policyholders are recorded as liabilities rather than as premiums.
Net Investment Income. Net investment income increased $3.1 million or 6.0%
to $55.7 million for the year ended December 31, 1996, from $52.6 million in
1995. The increase in net investment income was primarily the result of an
increase in cash and invested assets (at amortized cost) of approximately $27.9
million, or 4.2%. The return realized on the Life Company's cash and invested
assets was 8.3% in 1996 and 8.6% in 1995. Many of the assets held by the Life
Company in its fixed maturities portfolio are subject to redemption on certain
dates at the option of the issuer. During 1996, issuers paid $30.9 million to
redeem investments in fixed maturities. Almost all of these redeemed fixed
maturities carried a higher interest rate than was currently available in 1996.
The effect of the redemption of these fixed maturities is to lower the rate of
return on the Life Company's fixed income portfolio.
Net Realized Investment Gains. Net realized investment gains were $0.3
million for the year ended December 31, 1996, compared to $5.7 million in 1995.
During 1995, the Life Company decided to reduce the amount of its investments in
equities, and because of the significant appreciation in market value of
equities, a realized gain of $5.2 million in equities was recognized.
Policy and Contract Charges. Policy and contract charges are primarily fees
assessed as surrender charges for whole life and annuity policies, and mortality
and expense fees charged against policyholder accounts for universal life
policies. These fees increased $0.5 million to $5.0 million in 1996 compared to
$4.5 million 1995. The increase is a result of the continuing growth of the Life
Company's universal life policies in force.
Benefits to Policyholders. Benefits to policyholders increased $0.2 million
or 1.0% to $27.0 million in 1996 compared to $26.8 million in 1995.
Losses and Loss Adjustment Expenses on Property and Casualty Business.
Losses and loss adjustment expenses increased $0.8 million, or 11.6%, to $7.8
million for the year ended December 31, 1996, from $7.0 million in 1995. The
ratio of losses and loss adjustment expenses to premiums earned increased from
74.5% in 1995 to 82.2% in 1996. The increase in losses and loss adjustment
expenses was primarily attributable to an increase in losses from excess
reinsurance assumed from FFCIC.
Operating Expenses. Operating expenses decreased $0.2 million, or 2.2%, to
$8.8 million for the year ended December 31, 1996, from $9.0 million for the
same period in 1995. For the year ended December 31, 1996, operating expenses
were 28.9% of premium revenue from life and health operations compared to 30.5%
in 1995. The reduction in the Life Company's ratio of operating expenses to
premium revenue was primarily attributable to a smaller relative increase in
overhead expenses than in premium revenue for the period.
<PAGE>
Interest Credited to Policyholders. Interest credited to policyholders
decreased $1.9 million, or 7.0%, to $24.6 million in 1996 compared to $26.5
million in 1995. The decline was the result of lower interest crediting rates on
annuity business in 1996 as compared to 1995.
Amortization of Deferred Policy Acquisition Costs. Amortization of deferred
policy acquisition costs decreased $0.4 million, or 4.9%, to $6.9 million in
1996 compared to $7.3 million in 1995.
Participating Policyholders' Interest. Participating policyholders'
interest increased $2.1 million to $21.2 million for the year ended December 31,
1996 compared to $19.1 million for the same period in 1995. The increase in
participating policyholders' interest is primarily attributable to an increase
in the participating policyholders' share of net investment income.
Federal Income Tax Expense. Federal income tax expense was $1.5 million in
1996 and $2.3 million in 1995. Federal income tax expense was 34.2% of income
before Federal income taxes in 1996 compared to 34.1% in 1995.
Net Income Attributable to Common Stockholders. Net income attributable to
common stockholders decreased $1.5 million to $2.9 million in 1996 from $4.4
million in 1995 primarily as a result of the foregoing factors. In 1996, the
Life Company implemented a voluntary early retirement program which resulted in
a one-time charge to earnings of $0.6 million net of tax in the fourth quarter
of 1996.
Liquidity and Capital Resources
Historically, the principal sources of the Life Company's cash flow have
been premiums, investment income, maturing investments, and proceeds from sales
of invested assets. In addition to the need for cash flow to meet operating
expenses, the liquidity requirements of the Life Company relate primarily to the
payment of benefits under the Life Company's life insurance, annuity, and
accident and health policies. Additional sources of cash flow include the sale
of invested assets and financing activities. The liquidity requirements of the
Life Company vary because of the uncertainties regarding the settlement dates
for liabilities for unpaid claims and because of the potential for large claims,
either individually or in the aggregate. The Life Company believes that its
future liquidity needs will be met from all of the above sources.
The Life Company has paid $480,088 in dividends to stockholders each year
for the years 1997, 1996 and 1995. Dividends are paid annually in the first
quarter of the following year. The payment of dividends to stockholders by the
Life Company is subject to the approval of the New York Insurance Department.
At September 30, 1998, the Life Company's cash and invested assets, at
amortized cost, was $727.3 million, a $13.6 million increase from the year ended
December 31, 1997, and a $38.4 million increase from the year ended December 31,
1996. The increase is primarily the result of the investment of operating cash
flows. During 1998 and 1997, the Life Company continued to invest primarily in
investment-grade fixed maturities to maintain the overall quality of its
investment portfolio. The aggregate carrying value of fixed maturity securities
rated as non-investment grade by the NAIC was $13.0 million and $14.7 million,
or 1.8% and 2.1% of its fixed maturity portfolio, at September 30, 1998 and
December 31, 1997, respectively. Approximately 13.2% and 10.1% of the Life
Company's investment portfolio at September 30, 1998 and December 31, 1997,
respectively, consisted of investments in mortgage-backed securities. The
mortgage-backed securities held by the Life Company as of December 31, 1997,
were primarily GNMA, FNMA, and Federal Home Loan Mortgage Corp. pass-through
securities. The Life Company currently has no investments in such derivative
financial instruments as futures, forward, swap, or option contracts, or other
financial instruments with similar characteristics. The market value of the Life
Company's fixed maturity investments is subject to fluctuations directly
attributable to prevailing rates of interest as well as other factors. As of
September 30, 1998 and December 31, 1997, the aggregate market value of the Life
Company's fixed maturity investments exceeded the aggregate amortized cost of
such investments by $61 million and $46.2 million, respectively. As of December
31, 1996, the aggregate market value of the Life Company's fixed maturity
investments exceeded the aggregate amortized cost of such investments by $21.9
million.
The Life Company has in place an unsecured line of credit with Key Bank, NA
under which it may borrow up to $5.0 million at an annual interest rate equal to
the bank's prime rate. At September 30, 1998 and December 31, 1997, no amounts
were outstanding on the line of credit. The Life Company had no debt outstanding
as of September 30, 1998 and December 31, 1997.
<PAGE>
Net cash provided by operating activities was $33.5 million for the nine
months ended September 30, 1998 and $47.3 million, $48.3 million and $39.6
million during the years ended December 31, 1997, 1996, and 1995, respectively.
The principal sources of cash provided by operating activities is interest
credited to policyholders, participating policyholders' interest, and increases
in reserves for future policy and contract benefits. These sources provided cash
of $42.7 million for the nine months ended September 30, 1998 and $61.9 million,
$57.9 million and $56.7 million for the years ended December 31, 1997, 1996 and
1995, respectively. Net cash used in investing activities was $11.6 million for
the nine months ended September 30, 1998 and $23.4 million, $28.7 million and
$44.5 million in 1997, 1996 and 1995, respectively. Purchases of investments in
fixed maturities, net of collections and sales, were $10.0 million for the nine
months ended September 30, 1998 and $29.4 million, $35.0 million and $52.8
million in 1997, 1996, and 1995, respectively. Net cash used in financing
activities was $21.3 million, $23.0 million and $19.1 million for the nine
months ended September 30, 1998 and for the years ended December 31, 1997 and
1996, respectively, as a result of an excess of contractholder fund withdrawals
over deposits in 1997 and 1996. Net cash provided by financing activities was
$4.9 million for the year ended December 31, 1995 as a result of an excess of
contractholder fund deposits over withdrawals in 1995. Management believes
contractholder fund withdrawals increased in 1997 and 1996 because fixed rate
contracts, such as annuities and universal life contracts, were considered less
attractive than other equity security-based investment contracts as a result of
the current bull market.
The Life Company purchases reinsurance for its life insurance and accident
and health lines of business in part to mitigate the impact of large or unusual
claims on its liquidity and operating results. The Life Company's property and
casualty business is written by its subsidiary, United, and has consisted
primarily of excess of loss reinsurance. Effective December 31, 1997, United's
reinsurance agreements with FFCIC were terminated. United will continue to be
obligated to pay claims under the canceled agreements for losses occurring in
the year 1997 and for prior years. In 1998, United commenced writing direct
property and casualty business in Pennsylvania and Maryland. United's business
in Pennsylvania and Maryland is expected to be automobile, Special Farm Package,
homeowners, and business owners, and other insurance products for agribusiness
and residents of rural and suburban communities. United's business may
experience large losses and catastrophic losses from time to time.
The Life Company's asset/liability management process attempts to mitigate
the risks associated with interest-sensitive assets and liabilities. The Life
Company prices its annuity and universal life products based on assumptions
considering prevailing and expected interest rates and other factors to achieve
a positive difference, or spread, between its expected return on investments and
the crediting rate. The Life Company attempts to achieve this spread by active
portfolio management focusing on matching the durations of invested assets and
related liabilities to minimize the exposure to fluctuations in interest rates
and by the adjustment of the crediting rate on annuity products. The results of
the asset/liability matching are analyzed periodically through cash flow
analysis under multiple interest rate scenarios. The Life Company believes that
it will continue to achieve a positive spread and that the amount of lapses and
surrender rates will remain consistent with those assumed in the pricing of the
products. During 1997, the Life Company and United retained the services of a
professional investment management firm specializing in managing insurance
company assets. Management believes this step supplements the Life Company's
internal capabilities and will enable the Life Company to further improve the
management of the invested assets.
<PAGE>
DESCRIPTION OF SERIES A PREFERRED STOCK
The following summary description of certain terms of the Series A
Preferred Stock does not purport to be complete and is qualified in its entirety
by reference to the Company's Certificate of Incorporation incorporated by
reference herein and to the provisions of the Certificate of Designations of
Series A Preferred Stock attached as an exhibit to the Option Purchase
Agreement, which is incorporated by reference herein.
General
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock, par value $.01 per share, issuable in
classes or series (the "Preferred Stock"). The Company's Board of Directors is
authorized to approve the issuance of one or more classes or series of preferred
stock without further authorization of the stockholders of the Company and to
fix the number of shares, the designations, the relative rights and limitations
of any such class or series. No shares of the Company's Preferred Stock are
outstanding, but the Company has reserved for issuance 70,000 shares of its
Junior Participating Cumulative Preferred Stock, par value $.01 per share
("Junior Preferred Stock"), issuable upon exercise of the preferred share
purchase rights (a "Right") issued under a shareholders rights plan adopted by
the Company, which are attached to and trade with the Common Stock. A
description of the terms of the Rights are set forth in the Rights Agreement,
dated as of July 29, 1997, between the Company and The Bank of New York, as
Rights Agent, which is incorporated herein by reference.
Designation and Amount
The Series A Preferred Stock will be authorized as a new series of
preferred stock of the Company to be issued to the Selling Stockholders in
connection with the Acquisition, consisting of that number of shares equal to $6
million stated value (less certain expenses described above under "The Option
Purchase Agreement-Expenses") divided by the actual price used to determine the
number of shares of Common Stock and Series A Preferred Stock issued in the
Acquisition. The number of shares of Series A Preferred Stock may be decreased
(but not below the number of shares then outstanding), as permitted by the
Delaware General Corporation Law by the Company's Board of Directors from time
to time, but may not be increased or otherwise decreased without the affirmative
vote of the holders of a majority of the outstanding shares of Series A
Preferred Stock. The Series A Preferred Stock will have a stated value per share
(the "Stated Value") equal to the actual price used to determine the number of
shares of Common Stock and Series A Preferred Stock issued in the Acquisition.
Rank
With respect to the payment of dividends and distribution of assets on
liquidation, dissolution or winding up of the Company, the Series A Preferred
Stock will rank senior to the Common Stock, the Junior Preferred Stock and all
other classes of stock of the Company except those classes of preferred or other
capital stock expressly designated as ranking senior to or on a parity with the
Series A Preferred Stock.
Dividends
Cumulative dividends on the Series A Preferred Stock will be payable
quarterly at a rate equal to 6 1/8% per annum, on each January 15, April 15,
July 15 and October 15. If dividends in full on the Series A Preferred Stock for
all prior periods and the current period have not been paid or declared and set
apart for payment, or if there is an existing default on the Company's mandatory
redemption obligation, no dividends may be declared or paid or set apart for
payment on, nor may any distribution be made to holders of, any class of stock
ranking junior to the Series A Preferred Stock (other than dividends or
distributions made in shares of stock ranking junior to the Series A Preferred
Stock), and no dividends on shares of stock ranking on a parity with the Series
A Preferred Stock may be paid or set apart for payment except ratably according
to unpaid dividends and required redemptions. If Series A Preferred Stock
dividends for all past and the current quarterly dividend periods have not been
paid in full or been declared and set apart for payment, (i) the Company may
not, and may not permit its subsidiaries to, repurchase any shares of Series A
Preferred Stock unless either all outstanding shares of such stock are
repurchased or the shares are repurchased by the Company pro rata from all
holders of outstanding shares of Series A Preferred Stock and (ii) the Company
may not, and may not permit its subsidiaries to, repurchase any shares of any
class of stock ranking junior to the Series A Preferred Stock, except
repurchases made in shares of stock ranking junior to the Series A Preferred
Stock, and may not repurchase any shares of any class of stock ranking on a
parity with the Series A Preferred Stock, except ratably according to unpaid
dividends and required redemptions.
<PAGE>
Redemption
The Series A Preferred Stock will be subject to mandatory redemption by the
Company on the date following the twentieth anniversary of the issuance date (or
the next business day), and optional redemption, in whole or in part, on and
after the tenth anniversary of the issuance date. The redemption price, equal to
the Stated Value of the Series A Preferred Stock plus accrued and unpaid
dividends to the date of redemption, may be paid in cash or, at the Company's
option, by delivery of a number of shares of Common Stock determined by dividing
the aggregate redemption price by the average of the closing market prices for
the Common Stock on the NYSE for the 30 consecutive trading days preceding the
redemption date.
Voting Rights
The holders of shares of Series A Preferred Stock will be entitled to one
vote per share in the election of directors and on all matters on which holders
of Common Stock are entitled to vote, not voting separately as a class but
together with all other stockholders. The holders of shares of Series A
Preferred Stock will not be entitled to any other voting rights except as
provided in the Company's Certificate of Incorporation or as otherwise required
by law.
Liquidation Rights
Subject to the rights of holders of any preferred or other capital stock of
the Company ranking senior to or on a parity with the Series A Preferred Stock,
upon any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary (a "Liquidation Transaction"), the holders of shares of
Series A Preferred Stock will be entitled to receive a liquidation preference in
an amount per share equal to the Stated Value, plus an amount equal to all
dividends accrued and unpaid thereon to the date of distribution, before any
distribution or payment is made to holders of Common Stock, Junior Preferred
Stock or any other class of stock of the Company ranking junior to the holders
of shares of Series A Preferred Stock.
Neither the consolidation, merger or other business combination of the
Company with or into any other person, nor the sale of all or substantially all
of the assets of the Company will be deemed to be a Liquidation Transaction.
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of February 11, 1999, and such
beneficial ownership as adjusted to reflect the issuance of an estimated 856,021
shares of Common Stock and 163,052 shares of Series A Preferred Stock (assuming
an Optionee Common Stock Price of $35.72, see "The Acquisition-Exercise Price")
to the Selling Stockholders in the Acquisition by (i) each director, (ii) the
Chief Executive Officer and each of the other four most highly compensated
executive officers, (iii) all executive officers and directors of the Company as
a group, and (iv) each person who is known by the Company to be the beneficial
owner of more than 5% of the Common Stock as of such date. The shareholdings
reported for all directors and executive officers as a group total less than 1%
of the outstanding shares of the Common Stock on February 11, 1999. Except as
noted below, each person listed in the table has sole investment and voting
power with respect to the shares held by such person. With the exception of the
information reported under the captions "Estimated Number of Shares of Common
Stock Beneficially Owned After the Acquisition" and "Estimated % of Common Stock
Outstanding After the Acquisition" and the estimated share information, which
has been provided by the Company, this information has been furnished by the
persons listed in the table.
<TABLE>
<CAPTION>
Number of Shares of
Common Stock
Name Beneficially Owned
<S> <C>
William M. Stamp, Jr............................................................ 534(1)
John W. Lincoln................................................................. 167(2)
Philip P. Weber................................................................. 1,237(3)
James J. Bettini................................................................ 563(4)
Stuart C. Henderson............................................................. 213(5)
Victoria M. Stanton............................................................. 835(6)
Timothy A. Walsh................................................................ 200(7)
Robert L. Baker................................................................. 963(8)
Wayne R. Bissonette............................................................. 0(9)
Randolph C. Blackmer, Jr........................................................ 800(10)
Fred G. Butler, Sr.............................................................. 587(11)
Joseph E. Calhoun............................................................... 73(12)
James V. Crane.................................................................. 350(13)
Stephen J. George............................................................... 100(14)
Gordon H. Gowen................................................................. 1,017(15)
Jon R. Greenwood................................................................ 1,479(16)
Clark W. Hinsdale III........................................................... 210(17)
Richard A. Jerome............................................................... 50(18)
Arthur D. Keown, Jr............................................................. 0(19)
Daniel R. LaPointe.............................................................. 62(20)
Wayne A. Mann................................................................... 67(21)
Frank W. Matheson............................................................... 372(22)
John P. Moskos.................................................................. 0
Norma R. O'Leary................................................................ 1,216(23)
John I. Rigolizzo, Jr........................................................... 27(24)
Howard T. Sprow................................................................. 0
Charles A. Wilfong.............................................................. 643(25)
Tyler P. Young.................................................................. 227(26)
All directors and executive officers as a group (31 persons).................... 12,513
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Estimated
Number of Estimated %
% of Common Shares of of Common
Number of Shares Stock Common Stock Stock
of Common Stock Outstanding Beneficially Outstanding
Holders of Greater Than 5% Beneficially Owned Prior to Owned After After
of Common Stock Prior to Acquisition Acquisition Acquisition Acquisition
- --------------- -------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FMR Corp........................................ 525,300(27) 9.99 525,300 8.60(28)
82 Devonshire Street
Boston, MA 02109
Gotham Partners, L.P. and Gotham
Partners II, L.P............................. 350,500(29) 6.67 350,500 5.74(30)
110 E. 42nd Street, 18th Floor
New York, NY 10017
W.R. Berkley Corporation........................ 325,900(31) 6.20 325,900 5.33(32)
165 Mason Street
P.O. Box 2518
Greenwich, CT 06836-2518
Fenimore Asset Management, Inc.................. 276,400(33) 5.26 276,400 4.52(34)
118 N. Grand Street, Box 310
Cobleskill, NY 12043 2,021 * 341,271(35) 5.59(36)
New York Farm Bureau, Inc.......................
Route 9W, Box 992
Glenmont, NY 12077-0992
</TABLE>
- -----------
* Less than one percent.
(1) Includes 297 shares as to which voting and investment power are shared with
Stamp Farm Enterprises, Inc. or Carol Stamp. Excludes 1,090 shares owned by
Rhode Island Farm Bureau Federation, Inc. (a Selling Stockholder) and
excludes 30,854 shares of Common Stock and 5,877 shares of Series A
Preferred Stock estimated to be received by Rhode Island Farm Bureau
Federation, Inc. in the Acquisition. Mr. Stamp is President and a Director
of Rhode Island Farm Bureau Federation, Inc. Mr. Stamp is also Chairman of
the Board and a Director of the Life Company.
(2) Includes 113 shares as to which voting and investment power are shared with
S. Anne Lincoln. Excludes 2,021 shares owned by New York Farm Bureau, Inc.
and excludes 339,250 shares of Common Stock and 64,619 shares of Series A
Preferred Stock estimated to be received by New York Farm Bureau Service
Company, Inc. (a Selling Stockholder) in the Acquisition. Mr. Lincoln is
President and a Director of New York Farm Bureau, Inc. and its affiliate,
New York Farm Bureau Service Company, Inc. Mr. Lincoln is also Vice
Chairman of the Board and a Director of the Life Company.
(3) Represents shares as to which voting and investment power are shared with
Brenda Lee Weber. Mr. Weber is President and Chief Executive Officer of the
Life Company.
(4) Represents shares as to which voting and investment power are shared with
Marie C. Bettini. Mr. Bettini is Executive Vice President-Operations of the
Life Company.
(5) Includes 113 shares as to which voting and investment power are shared with
Melanie S. Henderson.
(6) Includes 685 shares as to which voting and investment power are shared with
Randy M. Sweeney. Ms. Stanton is Executive Vice President, General Counsel
and Secretary of the Life Company.
(7) Mr. Walsh is Executive Vice President-Finance and Treasurer of the Life
Company.
<PAGE>
(8) Represents 33 shares as to which voting and investment power are shared
with Pamela M. Baker, 86 shares as to which voting and investment power are
shared with Delaware Produce Growers, Inc., 744 shares as to which voting
and investment power are shared with Baker Farms, Inc. and 100 shares held
by the Robert L. Baker Revocable Trust. Excludes 60 shares owned by
Delaware Farm Bureau, Inc. and excludes 38,542 shares of Common Stock and
7,341 shares of Series A Preferred Stock estimated to be received by
Delaware Farm Bureau Service Company, Inc. (a Selling Stockholder) in the
Acquisition. Mr. Baker is Second Vice President and a Director of Delaware
Farm Bureau, Inc. and its affiliate, Delaware Farm Bureau Service Company,
Inc. Mr. Baker is also a Director of the Life Company.
(9) Excludes 296 Shares owned by Vermont Farm Bureau, Inc. (a Selling
Stockholder) and its affiliates and excludes 157 shares of Common Stock and
30 shares of Series A Preferred Stock estimated to be received by Vermont
Farm Bureau, Inc. in the Acquisition. Mr. Bissonette is Second Vice
President and a Director of Vermont Farm Bureau, Inc. Mr. Bissonette is
also a Director of the Life Company.
(10) Represents shares as to which voting and investment power are shared with
Myrtie I. Blackmer or Ag Services, Inc. Excludes 91 shares owned by
Connecticut Farm Bureau Association, Inc. and excludes 69,382 shares of
Common Stock and 13,216 shares of Series A Preferred Stock estimated to be
received by Connecticut Farm Bureau Service Company (a Selling Stockholder)
in the Acquisition. Mr. Blackmer is First Vice President and a Director of
Connecticut Farm Bureau Association, Inc. and its affiliate, Connecticut
Farm Bureau Service Company. Mr. Blackmer is also a Director of the Life
Company.
(11) Represents shares as to which voting and investment power are shared with
Norma Gene Butler. Excludes 7,053 shares owned by West Virginia Farm
Bureau, Inc. (a Selling Stockholder) and excludes 30,854 shares of Common
Stock and 5,877 shares of Series A Preferred Stock estimated to be received
by West Virginia Farm Bureau, Inc. in the Acquisition. Mr. Butler is a
Director of West Virginia Farm Bureau, Inc. Mr. Butler is also a Director
of the Life Company.
(12) Represents shares as to which voting and investment power are shared with
Bessie J. Calhoun. Excludes 60 shares owned by Delaware Farm Bureau, Inc.
and excludes 38,542 shares of Common Stock and 7,341 shares of Series A
Preferred Stock estimated to be received by Delaware Farm Bureau Service
Company, Inc. (a Selling Stockholder) in the Acquisition. Mr. Calhoun is
President and a Director of Delaware Farm Bureau, Inc. and its affiliate,
Delaware Farm Bureau Service Company, Inc. Mr. Calhoun is also a Director
of the Life Company.
(13) Represents shares as to which voting and investment power are shared with
Crane Bros., Inc. Excludes 397 shares owned by Maine Farm Bureau
Association and its affiliates and excludes 15,434 shares of Common Stock
and 2,940 shares of Series A Preferred Stock estimated to be received by
Maine Farm Bureau Service Company (a Selling Stockholder) in the
Acquisition. Mr. Crane is a Director of Maine Farm Bureau Association and
its affiliate, Maine Farm Bureau Service Company.
(14) Represents shares as to which voting and investment power are shared with
Susan George. Excludes 996 shares owned by New Jersey Farm Bureau and
excludes 231,298 shares of Common Stock and 44,057 shares of Series A
Preferred Stock estimated to be received by New Jersey Farm Bureau Service
Company (a Selling Stockholder) in the Acquisition. Mr. George is a
Director of New Jersey Farm Bureau Service Company. Mr. George is also a
Director of the Life Company.
(15) Includes 929 shares as to which voting and investment power are shared with
Elizabeth R. Gowen. Excludes 207 shares owned by New Hampshire Farm Bureau
Federation and excludes 28 shares of Common Stock and 5 shares of Series A
Preferred Stock estimated to be received by New Hampshire Farm Bureau
Federation (a Selling Stockholder) in the Acquisition. Mr. Gowen is
President and a Director of New Hampshire Farm Bureau Federation. Mr. Gowen
is also a Director of the Life Company.
(16) Represents shares as to which voting and investment power are shared with
Linda R. Greenwood. Excludes 2,021 shares owned by New York Farm Bureau,
Inc. and excludes 339,250 shares of Common Stock and 64,619 shares of
Series A Preferred Stock estimated to be received by New York Farm Bureau
Service Company, Inc. (a Selling Stockholder) in the Acquisition. Mr.
Greenwood is Vice President and a Director of New York Farm Bureau, Inc.
and its affiliate, New York Farm Bureau Service Company, Inc. Mr. Greenwood
is also a Director of the Life Company.
<PAGE>
(17) Excludes 296 shares owned by Vermont Farm Bureau, Inc. and its affiliates
and excludes 157 shares of Common Stock and 30 shares of Series A Preferred
Stock estimated to be received by Vermont Farm Bureau, Inc. (a Selling
Stockholder) in the Acquisition. Mr. Hinsdale is President and a Director
of Vermont Farm Bureau, Inc. Mr. Hinsdale is also a Director of the Life
Company.
(18) Represents shares as to which voting and investment power are shared with
Mary Margaret Jerome. Excludes 2,021 shares owned by New York Farm Bureau,
Inc. and excludes 339,250 shares of Common Stock and 64,619 shares of
Series A Preferred Stock estimated to be received by New York Farm Bureau
Service Company, Inc. (a Selling Stockholder) in the Acquisition. Mr.
Jerome is also a Director of the Life Company.
(19) Excludes 637 shares owned by Massachusetts Farm Bureau Federation, Inc. and
its affiliates and excludes 100,222 shares of Common Stock and 19,090
shares of Series A Preferred Stock estimated to be received by
Massachusetts Farm Bureau Service Company, Inc. (a Selling Stockholder) in
the Acquisition. Mr. Keown is President and a Director of Massachusetts
Farm Bureau Federation, Inc., and its affiliate, Massachusetts Farm Bureau
Service Company, Inc. Mr. Keown is also a Director of the Life Company.
(20) Excludes 397 shares owned by Maine Farm Bureau Association and its
affiliates and excludes 15,434 shares of Common Stock and 2,940 shares of
Series A Preferred Stock estimated to be received by Maine Farm Bureau
Service Company (a Selling Stockholder) in the Acquisition. Mr. LaPointe is
a Director of Maine Farm Bureau Association and its affiliate, Maine Farm
Bureau Service Company.
(21) Represents shares as to which voting and investment power are shared with
Ruth F. Mann. Excludes 207 shares owned by New Hampshire Farm Bureau
Federation and excludes 28 shares of Common Stock and 5 shares of Series A
Preferred Stock estimated to be received by New Hampshire Farm Bureau
Federation (a Selling Stockholder) in the Acquisition. Mr. Mann is First
Vice President and a Director of New Hampshire Farm Bureau Federation. Mr.
Mann is also a Director of the Life Company.
(22) Includes 69 shares as to which voting and investment power are shared with
Eunice Matheson. Excludes 637 shares owned by Massachusetts Farm Bureau
Federation, Inc. and its affiliates and excludes 100,222 shares of Common
Stock and 19,090 shares of Series A Preferred Stock estimated to be
received by Massachusetts Farm Bureau Service Company, Inc. (a Selling
Stockholder) in the Acquisition. Mr. Matheson is Vice President and a
Director of Massachusetts Farm Bureau Federation, Inc. Massachusetts Farm
Bureau Service Company, Inc. is an affiliate of Massachusetts Farm Bureau
Federation, Inc. Mr. Matheson is also a Director of the Life Company.
(23) Includes 71 shares as to which voting and investment power are shared with
Ernest J. O'Leary. Excludes 91 shares owned by Connecticut Farm Bureau
Association, Inc. and excludes 69,382 shares of Common Stock and 13,216
shares of Series A Preferred Stock estimated to be received by Connecticut
Farm Bureau Service Company (a Selling Stockholder) in the Acquisition. Ms.
O'Leary is President and a Director of Connecticut Farm Bureau Association,
Inc. and its affiliate, Connecticut Farm Bureau Service Company. Ms.
O'Leary is also a Director of the Life Company.
(24) Represents shares as to which voting and investment power are shared with
Marita Rigolizzo. Excludes 996 shares owned by New Jersey Farm Bureau and
excludes 231,298 shares of Common Stock and 44,057 shares of Series A
Preferred Stock estimated to be received by New Jersey Farm Bureau Service
Company (a Selling Stockholder) in the Acquisition. Mr. Rigolizzo is
President and a Director of New Jersey Farm Bureau, and Vice President and
a Director of its affiliate, New Jersey Farm Bureau Service Company. Mr.
Rigolizzo is also a Director of the Life Company.
(25) Represents shares as to which voting and investment power is shared with
Linda Wilfong. Excludes 7,053 shares owned by West Virginia Farm Bureau,
Inc. and excludes 30,854 shares of Common Stock and 5,877 shares of Series
A Preferred Stock estimated to be received by West Virginia Farm Bureau,
Inc. (a Selling Stockholder) in the Acquisition. Mr. Wilfong is President
and a Director of West Virginia Farm Bureau, Inc. Mr. Wilfong is also a
Director of the Life Company.
(26) Represents shares as to which voting and investment power are shared with
Karla K. Young. Excludes 1,090 shares owned by Rhode Island Farm Bureau
Federation, Inc. and excludes 30,854 shares of Common Stock and 5,877
shares of Series A Preferred Stock estimated to be received by Rhode Island
Farm Bureau Federation, Inc. (a Selling Stockholder) in the Acquisition.
Mr. Young is Vice President and a Director of Rhode Island Farm Bureau
Federation, Inc. Mr. Young is also a Director of the Life Company.
<PAGE>
(27) Based on Schedule 13G/A dated February 14, 1998 filed with the Commission
by FMR Corp. which has the sole dispositive power over 525,300 shares and
the sole voting power over 0 shares.
(28) Represents 8.37% of the estimated total combined voting power of
stockholders of the Company after the Acquisition.
(29) Based on Schedule 13D dated March 7, 1997 filed with the SEC by Gotham
Partners, L.P. and Gotham Partners II, L.P. Gotham Partners, L.P. has the
sole dispositive power over 345,505 shares and the sole voting power over
345,505 shares. Gotham Partners II, L.P. has sole dispositive power over
4,995 shares and the sole voting power over 4,995 shares.
(30) Represents 5.59% of the estimated total combined voting power of
stockholders of the Company after the Acquisition.
(31) Based on Schedule 13G/A dated February 8, 1999 filed with the Commission by
W.R. Berkley Corporation which has the sole voting and dispositive power
over 325,900 shares.
(32) Represents 5.20% of the estimated total combined voting power of
stockholders of the Company after the Acquisition.
(33) Based on Schedule 13G/A dated February 5, 1999 filed with the Commission by
Fenimore Asset Management, Inc. which has shared dispositive power and
shared voting power over 276,400 shares.
(34) Represents 4.41% of the estimated total combined voting power of
stockholders of the Company after the Acquisition.
(35) Includes 339,250 shares of Common Stock estimated to be received by New
York Farm Bureau Service Company, Inc. (a Selling Stockholder) in the
Acquisition. New York Farm Bureau Service Company, Inc. is a subsidiary of
New York Farm Bureau, Inc.
(36) Represents 6.44% of the total combined voting power of the stockholders of
the Company, after giving effect to 64,619 shares of Series A Preferred
Stock estimated to be received by the New York Farm Bureau Service Company,
Inc. in the Acquisition.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires executive officers and
directors, and persons who beneficially own more than 10% of the Common Stock,
to file initial reports of ownership and reports of change in ownership with the
Commission and the NYSE. Such persons are required by Commission regulations to
provide to the Company copies of all their Section 16(a) filings. Based solely
on a review of the forms furnished to the Company and written representations
from the Company's executive officers and directors, the Company believes that
there was full compliance with all Section 16(a) filing requirements for the
year ended December 31, 1998.
<PAGE>
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Company incorporated in this
Proxy Statement by reference to the Company's 1997 Annual Report on Form 10-K/A
have been incorporated herein by reference in reliance on the report of
PricewaterhouseCoopers LLP, independent public accountants, given on the
authority of that firm as experts in accounting and auditing.
The consolidated financial statements of the Life Company as of December
31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995,
included in this Proxy Statement have been included herein in reliance on the
reports of PricewaterhouseCoopers LLP, independent public accountants, given on
the authority of that firm as experts in accounting and auditing.
Representatives of PricewaterhouseCoopers LLP will be present at the
Special Meeting. While such representatives have stated that they do not plan to
make a statement at such meeting, they will be available to respond to
appropriate questions from stockholders in attendance.
PROPOSALS OF STOCKHOLDERS
The date by which proposals to be submitted by stockholders of the Company
in order to have been considered for inclusion in the proxy materials relating
to the Company's 1999 Annual Meeting of Stockholders has passed.
In addition to any other applicable requirements, if a stockholder desires
to bring business before an annual meeting which is not the subject of a
proposal timely submitted for consideration for inclusion in the proxy materials
relating to the annual meeting, the stockholder must follow the advance notice
procedures outlined in the Company's By-Laws. 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. If
the date of the annual meeting has been advanced or delayed by more than 30 days
from the prior anniversary date, notice must be received not later than the
close of business on the 10th day following the day on which such notice of the
annual meeting was mailed or such public disclosure of the date of such annual
meeting was made, whichever first occurs. For the Company's 1999 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 requirements of the By-Laws 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.
Victoria M. Stanton
Secretary
February 17, 1999
Glenmont, New York
<PAGE>
ANNEX A
CONFORMED COPY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AMENDED AND RESTATED
OPTION PURCHASE AGREEMENT
among
FARM FAMILY HOLDINGS, INC.
and
THE SHAREHOLDERS OF
FARM FAMILY LIFE INSURANCE COMPANY
Dated as of February 26, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-1
<PAGE>
TABLE OF CONTENTS
Section 1. Definitions; Interpretation......................................A-5
(a) Definitions................................................A-5
(b) Interpretation............................................A-10
Section 2. Grant of Options................................................A-10
Section 3. Fair Market Value per Share.....................................A-10
Section 4. Exercise of Option..............................................A-11
Section 5. Expense Allocation..............................................A-12
Section 6. Closing; Payment of Exercise Price..............................A-12
Section 7. Conditions of Closing...........................................A-13
Section 8. Representations and Warranties of Each Shareholder..............A-14
(a) Corporate Existence.......................................A-14
(b) Authorization; Enforcement................................A-14
(c) Capital Stock of the Company; Ownership of Shares.........A-14
(d) Subsidiaries..............................................A-14
(e) No Conflict...............................................A-14
(f) Consents..................................................A-15
(g) Compliance with Law.......................................A-15
(h) Insurance Licenses........................................A-15
(i) Litigation................................................A-15
(j) Financial Statements......................................A-16
(k) Contracts.................................................A-16
(l) Taxes.....................................................A-16
(m) Assets....................................................A-17
(n) Environmental Matters.....................................A-17
(o) Employee Benefits.........................................A-17
(p) Investment Purpose........................................A-18
Section 9. Representations and Warranties of the Optionee..................A-18
(a) Corporate Existence.......................................A-18
(b) Authorization; Enforcement................................A-18
(c) Capital Stock of Optionee.................................A-18
(d) Subsidiaries..............................................A-18
(e) No Conflict...............................................A-18
(f) Consents..................................................A-19
(g) Compliance with Law.......................................A-19
(h) Insurance Licenses........................................A-19
(i) Litigation................................................A-19
(j) Financial Statements......................................A-19
(k) Contracts.................................................A-20
A-2
<PAGE>
(l) Taxes.....................................................A-20
(m) Assets....................................................A-20
(n) Environmental Matters.....................................A-21
(o) Employee Benefits.........................................A-21
(p) Investment Purpose........................................A-21
Section 10. Covenants of each Shareholder; Restrictions on Certain Actions.A-22
(a) Covenants.................................................A-22
(b) Restrictions..............................................A-22
Section 11. Adjustment Upon Changes in Capitalization......................A-23
Section 12. Access and Information.........................................A-23
Section 13. Approvals of Governmental Authorities..........................A-23
Section 14. Stockholder Approval...........................................A-23
Section 15. Restrictive Legends............................................A-23
Section 16. Termination; Survival of Representations and Warranties........A-24
Section 17. Binding Effect; No Assignment..................................A-24
Section 18. Specific Performance...........................................A-24
Section 19. Entire Agreement...............................................A-25
Section 20. Effectiveness of Agreement.....................................A-25
Section 21. Further Assurances.............................................A-25
Section 22. Validity.......................................................A-25
Section 23. Material Change in Law.........................................A-25
Section 24. Notices........................................................A-26
Section 25. Governing Law..................................................A-27
Section 26. Descriptive Headings...........................................A-27
Section 27. Counterparts...................................................A-27
Section 28. Expenses.......................................................A-27
Section 29. Amendments; Waiver.............................................A-27
Section 30. Action by the Shareholders.....................................A-27
A-3
<PAGE>
EXHIBITS
Exhibit A -- Shareholders
Exhibit B -- Valuation Procedures
Exhibit C -- Form of Certificate of Designations for Voting Preferred Stock
Exhibit D -- Form of Opinion of Counsel to Shareholder
Exhibit E -- Form of Opinion of the General Counsel to Optionee and
Insurance Subsidiary
Exhibit F -- Form of Registration Rights Agreement
Exhibit G -- Form of Agreement and Plan of Reorganization
SCHEDULES
Schedule 8(i) -- Litigation
Schedule 8(l) -- Taxes
Schedule 8(n) -- Environmental Matters
Schedule 9(d) -- Subsidiaries
Schedule 9(i) -- Litigation
Schedule 9(l) -- Taxes
Schedule 9(n) -- Environmental Matters
A-4
<PAGE>
AMENDED AND RESTATED
OPTION PURCHASE AGREEMENT
THIS AMENDED AND RESTATED OPTION PURCHASE AGREEMENT (this "Agreement"),
dated as of February 26, 1998, by and among FARM FAMILY HOLDINGS, INC., a
Delaware corporation (the "Optionee"), and THE SHAREHOLDERS OF FARM FAMILY LIFE
INSURANCE COMPANY set forth on the signature pages hereof (each of such
shareholders, a "Shareholder" and collectively, the "Shareholders").
WHEREAS, the Optionee and the Shareholders have previously entered into the
Option Purchase Agreement, dated as of February 14, 1996, as amended by
Amendment No. 1 ("Amendment No. 1") to Option Purchase Agreement, dated as of
April 22, 1997 (as so amended, the "Option Purchase Agreement");
WHEREAS, the Optionee and the Shareholders desire to amend and restate the
Option Purchase Agreement as set forth herein;
WHEREAS, the Plan of Conversion, as defined herein, contemplates that the
Optionee and the Shareholders will enter into this Agreement and that the
Optionee will reserve shares of the Optionee Common Stock (as defined herein)
and the Voting Preferred Stock (as defined herein) for issuance to the
Shareholders in the event the Option granted hereunder is exercised;
WHEREAS, Farm Family Life Insurance Company, a New York domiciled stock
life insurance company (the "Company") has outstanding 60,011 shares of common
stock, par value $50.00 per share (the "Common Stock"), which constitute all of
the issued and outstanding shares of capital stock of the Company;
WHEREAS, each of the Shareholders owns the number of shares of Common Stock
set forth opposite its name on Exhibit A (each, a "Share" and, collectively, the
"Shares"); and
WHEREAS, each of the Shareholders desires to grant to the Optionee an
option to purchase the Shares owned by it, upon the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
Section 1. Definitions; Interpretation.
(a) Definitions. The terms defined in this Section 1, whenever used in this
Agreement, shall have the following meanings for all purposes of this Agreement:
"Affiliate" of a specified Person means a Person that (at the time when the
determination is to be made) directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with, the
specified Person. As used in the foregoing sentence, the term "control"
(including, with correlative meaning, the terms "controlling", "controlled by"
and "under common control with") means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" has the meaning set forth in the first paragraph hereof.
A-5
<PAGE>
"Agreement and Plan of Reorganization" means, with respect to any Service
Company, an agreement substantially in the form of Exhibit G hereto between that
Service Company and the Optionee.
"Amendment No. 1" has the meaning set forth in the first recital hereof.
"Benefit Plan" has the meaning set forth in Section 8(o).
"Business Day" means any day that is not a Saturday or Sunday or a day on
which banks in the State of New York are authorized or required by law to close.
"Certificate of Designations" means the Certificate of Designations for the
Voting Preferred Stock, substantially in the form attached as Exhibit C hereto.
"Change in Law" has the meaning set forth in Section 23.
"Closing" has the meaning set forth in Section 4(a).
"Closing Date" has the meaning set forth in Section 4(a).
"Closing Price" means, with respect to any security on any Trading Day, the
last reported sale price, regular way, or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices,
regular way, in either case as reported on the principal securities exchange on
which such security is then listed or admitted to trading or, if such security
is not then listed or admitted to trading on any national securities exchange,
as quoted through the National Association of Securities Dealers Automated
Quotations National Market System or, if such security is not then listed or
admitted to trading on any securities exchange, or quoted through such National
Market System, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that makes a market in such security selected by the Optionee and reasonably
acceptable to the Shareholders.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" has the meaning set forth in the fourth recital hereof.
"Company" has the meaning set forth in the fourth recital hereof.
"Company Benefit Plan" means any plan, fund, program or arrangement
(including any employee benefit plans as defined in ERISA Section 3(3))
established, maintained or to which contributions are made by the Company or for
which the Company has any obligation or liability.
"Company Contract" means every Contract to which the Company or United is a
party or by which it is bound that materially affects the business or operations
of the Company and United taken as a whole (other than insurance or reinsurance
policies written by the Company or United in the ordinary course of business).
"Company Control Group" means the Company and any Person that is considered
a single employer with the Company within the meaning of ERISA Section
4001(b)(1) or Code Sections 414(b), (c), (m) or (o).
A-6
<PAGE>
"Contract" means any written or oral contract, agreement, instrument,
commitment or other arrangement.
"Effective Date" has the meaning set forth in Section 5.2 of the Plan of
Conversion.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and regulations issued thereunder.
"Exercise Date" means the date as of which the Fair Market Value per Share
is determined pursuant to Section 3.
"Exercise Notice" has the meaning set forth in Section 4(a).
"Exercise Price" has the meaning set forth in Section 2.
"Expense Allocation" has the meaning set forth in Section 5.
"Expiration Date" means the second anniversary of the Effective Date;
provided, however, that the Expiration Date may be extended to the third
anniversary of the Effective Date upon the mutual agreement in writing of the
Company and the Shareholders.
"Fair Market Value per Share" has the meaning set forth in Section 3(a).
"Farm Bureau" means each of (i) New Hampshire Farm Bureau Federation, (ii)
Rhode Island Farm Bureau Federation, Inc., (iii) Vermont Farm Bureau, Inc. and
(iv) West Virginia Farm Bureau, Inc.
"GAAP" means generally accepted accounting principles.
"Governmental Authority" means any foreign, federal, state, local or other
court, arbitration, administrative agency or commission, insurance or securities
regulatory or self-regulatory body or securities or commodities exchange.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended.
"Insurance Subsidiary" means Farm Family Casualty Insurance Company, a New
York domiciled stock insurance company.
"knowledge" means, with respect to any representation or warranty in which
such term is contained to the best knowledge of any officer or director or
management employee of the Optionee, on the one hand, or such Shareholder, on
the other hand, after a due and diligent inquiry.
"Laws" has the meaning set forth in Section 8(g).
"Lien" means any lien, encumbrance, pledge, mortgage, security interest,
claim, charge, lease, option, right of first refusal, easement, servitude,
equity, claim or other third party right (including a right of pre-emption),
restriction or other limitation, in each case of any nature whatsoever.
A-7
<PAGE>
"Material Adverse Effect" means a material adverse effect on the assets,
results of operations, business, prospects or condition (financial or otherwise)
of the Company and United, taken as a whole, or the Optionee and the Insurance
Subsidiary, taken as a whole, as the case may be.
"Material Change in Law" has the meaning set forth in Section 23.
"Option" has the meaning set forth in Section 2.
"Option Purchase Agreement" has the meaning set forth in the first recital
hereof.
"Optionee" has the meaning set forth in the first paragraph hereof.
"Optionee Appraiser" has the meaning set forth in Section 3(a).
"Optionee Benefit Plan" means any plan, fund, program or arrangement
(including any employee benefit plans as defined in ERISA Section 3(3))
established, maintained or to which contributions are made by the Optionee or
the Insurance Subsidiary or for which the Optionee or the Insurance Subsidiary
has any obligation or liability.
"Optionee Common Stock" means the common stock, par value $.01 per share,
of the Optionee.
"Optionee Common Stock Price" means the average Closing Price per share of
Optionee Common Stock during the twenty Trading Days prior to the third Business
Day preceding the Closing Date.
"Optionee Contract" means every Contract to which the Optionee or the
Insurance Subsidiary is a party or by which it is bound that materially affects
the business or operations of the Optionee and the Insurance Subsidiary, taken
as a whole (other than insurance or reinsurance policies written by the
Insurance Subsidiary in the ordinary course of business).
"Optionee Control Group" means the Optionee and any Person that is
considered a single employer with the Optionee within the meaning of ERISA
Section 4001(b)(1) or Code Sections 414(b), (c), (m) or (o).
"Optionee Valuation" has the meaning set forth in Section 3(a).
"Permits" has the meaning set forth in Section 8(h) and 9(h).
"Person" means any individual, corporation, limited liability company,
partnership, firm, joint venture, association, trust, unincorporated
organization, Governmental Authority or other entity.
"Plan of Conversion" means the Plan of Reorganization and Conversion of
Farm Family Mutual Insurance Company dated February 14, 1996, as amended from
time to time in accordance with its terms.
"Policies" means all insurance policies, annuity contracts and guaranteed
interest contracts (including riders to any such policies or contracts,
certificates issued with respect to group life insurance or annuity contracts
and any contracts issued in connection with retirement plans or
A-8
<PAGE>
arrangements) and assumption certificates issued (or filed pending current
review by applicable Governmental Authorities) by the Company, United or the
Insurance Subsidiary, as the case may be.
"property" means real, personal or mixed property, tangible or intangible.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated the Closing Date, among the Optionee and the Shareholders, substantially
in the form attached as Exhibit F hereto.
"Revised Shareholder Valuation" has the meaning set forth in Section 3(b).
"SAP" has the meaning set forth in Section 8(j).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Service Company" means each of (i) Connecticut Farm Bureau Service
Company, (ii) Delaware Farm Bureau Service Company, Inc., (iii) Maine Farm
Bureau Service Company, (iv) Massachusetts Farm Bureau Service Company, Inc.,
(v) New Jersey Farm Bureau Service Company and (vi) New York Farm Bureau Service
Company, Inc.
"Shareholders" or "Shareholder" has the meaning set forth in the first
paragraph hereof.
"Shareholder Appraiser" has the meaning set forth in Section 3(b).
"Shareholder Valuation" has the meaning set forth in Section 3(b).
"Shares" or "Share" has the meaning set forth in the fifth recital hereof.
"Stated Value" means the stated value per share of Voting Preferred Stock,
which shall equal the Optionee Common Stock Price.
"Subsidiary" means, with respect to any person, any corporation, limited
liability company, limited or general partnership, joint venture, association,
joint stock company, trust, unincorporated organization, or other entity
analogous to any of the foregoing of which a majority of the equity ownership
(whether voting stock or comparable interest) is, at the time, owned, directly
or indirectly by such person.
"Target Range" has the meaning set forth in Section 3(b).
"Tax" or "Taxes" means all federal, state, county, local, foreign and other
taxes (including, without limitation, income taxes, premium taxes, excise taxes,
sales taxes, use taxes, gross receipts taxes, franchise taxes, ad valorem taxes,
severance taxes, capital levy taxes, transfer taxes, employment and
payroll-related taxes, property taxes, import duties and other governmental
charges and assessments), and includes interest, additions to tax and penalties
with respect thereto.
"Third Appraiser" has the meaning set forth in Section 3(c).
"Third Valuation" has the meaning set forth in Section 3(c).
"Trading Day" means any day the New York Stock Exchange is open for regular
trading.
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"United" means United Farm Family Insurance Company, a New York domiciled
property/casualty insurance and reinsurance company.
"Valuation Procedures" means the procedures for determining the Fair Market
Value per Share set forth in Exhibit B.
"Voting Preferred Stock" means the Voting Preferred Stock, par value $.01
per share, of the Optionee, the terms of which are set forth in the Certificate
of Designations substantially in the form attached as Exhibit C hereto.
"Voting Preferred Stock Allocation" means, with respect to any Shareholder,
the number of shares of Voting Preferred Stock to be allocated to such
Shareholder as calculated pursuant to the following formula:
A/B x C/D
where: "A" equals $6,000,000; "B" equals the Stated Value of a share of Voting
Preferred Stock; "C" equals the number of Shares owned by such Shareholder; and
"D" equals the total number of Shares owned by all Shareholders.
(b) Interpretation. When a reference is made in this Agreement to a
Section, Schedule or Exhibit, such reference shall be to a Section, Schedule or
Exhibit of this Agreement unless otherwise indicated or unless the context shall
otherwise require. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not effect in any way the
meaning or interpretation of this Agreement. The definitions of terms in this
Agreement shall be applicable to both the plural and the singular forms of the
terms defined when either such form is used in this Agreement. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". The words
"hereof", "herein" and "hereunder", and other words of similar import, refer to
this Agreement as a whole and not to any particular Section, subsection,
paragraph or clause.
Section 2. Grant of Options. Each Shareholder hereby grants to the
Optionee, for the period beginning on the Effective Date and ending at midnight
(New York time) on the Expiration Date, the exclusive and irrevocable right and
option (the "Option") to purchase from such Shareholder all of the Shares owned
by such Shareholder at a price (subject, however, to Sections 5 and 6 hereof)
equal to the product of (i) the Fair Market Value per Share and (ii) the number
of Shares sold by such Shareholder hereunder (as adjusted in accordance with
Section 5 hereof, the "Exercise Price"), payable in shares of Optionee Common
Stock and Voting Preferred Stock, as provided in Section 6.
Section 3. Fair Market Value per Share. (a) If the Optionee proposes to
exercise the Options, the Optionee shall so notify the Shareholders in writing
and instruct an investment banking firm of national reputation, selected by the
Optionee and reasonably acceptable to the Shareholders (the "Optionee
Appraiser"), to determine the fair market value of each Share as of the date of
such notice (the "Fair Market Value per Share") in accordance with the Valuation
Procedures (the "Optionee Valuation"). If, following receipt of the Optionee
Valuation, the Optionee continues to propose to exercise the Options, the
Optionee shall so notify the Shareholders in writing and supply the Shareholders
with the Optionee Valuation. The Shareholders and their authorized
representatives shall review the Optionee Valuation and, within 30 days after
the date of such receipt, the Shareholders shall notify the Optionee in writing
of their agreement or disagreement with the Optionee Valuation. In the event the
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Shareholders agree with the Optionee Valuation, the Optionee Valuation shall be
the Fair Market Value per Share for purposes of this Agreement. In the event the
Shareholders disagree with the Optionee Valuation, the Shareholders and the
Optionee shall use their reasonable efforts to resolve such disagreement within
15 days after the date the Optionee has received notice of such disagreement. If
the Shareholders and the Optionee are able to resolve such disagreement within
such 15-day period, the valuation so agreed shall be the Fair Market Value per
Share for purposes of this Agreement.
(b) In the event the Shareholders and the Optionee are unable to resolve
such disagreement within such 15-day period and the Optionee continues to
propose to exercise the Options, the Shareholders shall promptly thereafter
select an investment banking firm of national standing and reasonably acceptable
to the Optionee (the "Shareholder Appraiser") for purposes of determining the
Fair Market Value per Share in accordance with the Valuation Procedures (the
"Shareholder Valuation"). The Shareholders shall deliver the Shareholder
Valuation to the Optionee within the 30-day period next following such 15-day
period. If the Shareholder Valuation is within 5% (plus or minus) of the
Optionee Valuation (the "Target Range"), then the Fair Market Value per Share
for purposes of this Agreement shall equal the average of the Optionee Valuation
and the Shareholder Valuation. If the Shareholder Valuation is not within the
Target Range, then the Optionee and the Shareholders shall use their reasonable
efforts to resolve such disagreement within 15 days after the Optionee's receipt
of the Shareholder Valuation. If the Shareholders and the Optionee are able to
agree on a Shareholder Valuation within the Target Range (the "Revised
Shareholder Valuation"), then the Fair Market Value per Share for purposes of
this Agreement shall equal the average of the Optionee Valuation and the Revised
Shareholder Valuation.
(c) In the event the Shareholders and the Optionee are unable to resolve
such disagreement within such 15-day period and the Optionee continues to
propose to exercise the Options, the Optionee and the Shareholders shall
promptly thereafter jointly select an investment banking firm of national
standing and the firm so selected (the "Third Appraiser") shall be directed by
the Optionee and the Shareholders to determine the Fair Market Value per Share
in accordance with the Valuation Procedures (the "Third Valuation"). The Third
Appraiser shall deliver the Third Valuation to the Optionee and the Shareholders
within the 30-day period following its selection. The Fair Market Value per
Share for purposes of this Agreement shall be the middle valuation of the Third
Valuation, the Optionee Valuation and the Shareholder Valuation.
(d) The fees and expenses of the Optionee Appraiser shall be paid by the
Optionee. The fees and expenses of the Shareholder Appraiser shall be paid by
the Shareholders on a pro rata basis based on the number of Shares owned by each
of them. The fees and expenses of the Third Appraiser shall be paid 50% by the
Optionee and 50% by the Shareholders on a pro rata basis based on the number of
shares owned by each of them.
Section 4. Exercise of Option. (a) Within 45 days after any determination
of the Fair Market Value per Share pursuant to Section 3, the Optionee may
exercise the Options in whole but not in part by sending a written notice (the
"Exercise Notice") to the Shareholders specifying its election to exercise the
Options on the basis of such Fair Market Price per Share. The closing (the
"Closing") of the transactions contemplated hereby shall take place on the date
that is five Business Days after the satisfaction or waiver of the conditions
set forth in Section 7 at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P.,
at 10:00 A.M., New York time. The "Closing Date" shall be the date the Closing
occurs.
(b) The Optionee shall acquire the Shares pursuant to the exercise of the
Option in exchange for Optionee Common Stock and Voting Preferred Stock as set
forth in Section 6 hereof and, in the case of a Service Company Shareholder, in
accordance with the Agreement and Plan of Reorganization between the Optionee
and such Shareholder.
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Section 5. Expense Allocation. The Company shall pay the reasonable
out-of-pocket fees and expenses of the Shareholders incurred in connection with
the Agreement for (i) one legal counsel and one investment banking firm, in each
case engaged by the Shareholders' Committee appointed by the Shareholders in
connection with this Agreement, (ii) travel and per diem expenses incurred in
connection with attendance at meetings of the Shareholders' Committee, and (iii)
a real estate appraisal in respect of the Company's real property (the amount
paid on behalf of each Shareholder, being referred to as such Shareholder's
"Expense Allocation," shall equal the total amount paid by the Company pursuant
to this Section 5 multiplied by the number of Shares owned by such Shareholder
divided by the total number of Shares owned by all of the Shareholders). The
Expense Allocation paid on behalf of the Shareholders shall be taken into
account in determining the Exercise Price payable to the Shareholders hereunder,
as provided in Section 6.
Section 6. Closing; Payment of Exercise Price. (a) At the Closing: (i) each
Shareholder shall deliver to the Optionee (A) a certificate or certificates
representing all of the Shares owned by such Shareholder, duly endorsed in blank
or accompanied by duly executed instruments of transfer acceptable to the
Optionee and accompanied by all requisite stock transfer stamps and taxes
attached or provided for, and (B) all instruments and documents required to be
delivered by such Shareholder to the Optionee pursuant to this Agreement; and
(ii) the Optionee shall deliver to each Shareholder (A) a certificate or
certificates representing the number of shares of the Optionee Common Stock and
Voting Preferred Stock to be received by such Shareholder pursuant to subsection
(b) of this Section 6, such certificate or certificates to be registered in the
name of such Shareholder and to bear the legend set forth in Section 15; and (B)
all instruments and documents required to be delivered by the Optionee to such
Shareholder pursuant to this Agreement.
(b) In payment of the Exercise Price in respect of its Shares, each
Shareholder shall receive:
(i) the number of shares of Voting Preferred Stock (rounded to the
nearest whole share) calculated using the following formula:
A-(A/B x C)
-------------
D
where: (A) "A" equals the product of the Stated Value and such
Shareholder's Voting Preferred Stock Allocation; (B) "B" equals the amount that
would constitute the Exercise Price hereunder in respect of such Shareholder's
Shares if Section 5 hereof were not given effect; (C) "C" equals the amount of
such Shareholder's Expense Allocation; and (D) "D" equals the Stated Value; plus
(ii) the number of shares of Optionee Common Stock (rounded to the
nearest whole share) calculated using the following formula:
A-B-(C/A x D)
---------------
E
where: (A) "A" equals the amount that would constitute the Exercise Price
hereunder in respect of such Shareholder's Shares if Section 5 hereof were not
given effect; (B) "B" equals the product of the Stated Value
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and such Shareholder's Voting Preferred Stock Allocation; (C) "C" equals "A"
minus "B"; (D) "D" equals the amount of such Shareholder's Expense Allocation;
and (E) "E" equals the Optionee Common Stock Price.
(c) All instruments and documents executed and delivered to the Optionee
pursuant hereto shall be in form and substance, and shall be executed in a
manner, reasonably satisfactory to the Optionee. All instruments and documents
executed and delivered to each Shareholder pursuant hereto shall be in form and
substance, and shall be executed in a manner, reasonably satisfactory to such
Shareholder.
Section 7. Conditions of Closing. (a) The obligation of the Optionee to
consummate the Closing is subject to satisfaction of the following conditions at
or prior to the Closing (unless expressly waived in writing by the Optionee at
or prior to the Closing): (i) all of the terms, covenants and conditions of this
Agreement to be complied with or performed by the Shareholders at or prior to
the Closing shall have been complied with and performed by it in all material
respects, and the representations and warranties made by the Shareholders in
this Agreement shall be true and correct in all material respects at and as of
the Closing, with the same force and effect as though such representations and
warranties had been made at and as of the Closing, and the Optionee shall have
received a certificate executed on behalf of each of the Shareholders to the
effect that the foregoing conditions have been satisfied; (ii) all consents,
approvals, orders or authorizations of, or registrations, declarations or
filings with, any Governmental Authority required in connection with the
transactions contemplated hereby shall have been obtained or made, as the case
may be; (iii) the transactions contemplated hereby shall have been approved by
the affirmative vote of the holders of at least a majority of the outstanding
shares of the Optionee Common Stock; (iv) all waiting periods, if any, including
any extension thereof, under the HSR Act shall have expired; (v) no preliminary
or permanent injunction or other order by any court of competent jurisdiction
prohibiting or otherwise restraining the transactions contemplated hereby shall
be in effect; (vi) the Optionee shall have received the opinion, dated the
Closing Date, of counsel to each Shareholder substantially to the effect set
forth in Exhibit D; (vii) the Company's By-Laws shall have been amended to
permit the Optionee to acquire the Shares pursuant to this Agreement; (viii) the
Optionee shall have received an opinion, in form and substance reasonably
acceptable to the Optionee, from an investment banking firm of national standing
as to the fairness, from a financial point of view, to the Optionee of the
transactions contemplated by this Agreement; and (ix) since the Exercise Date,
there shall not have occurred any event that has had or is reasonably likely to
have a Material Adverse Effect on the Company and United, taken as a whole.
(b) The obligation of each Shareholder to consummate the Closing is subject
to the satisfaction of the following conditions at or prior to the Closing
(unless expressly waived in writing by such Shareholder at or prior to the
Closing): (i) all of the terms, covenants and conditions of this Agreement to be
complied with or performed by the Optionee at or prior to the Closing shall have
been complied with and performed by it in all material respects, and the
representations and warranties made by the Optionee in this Agreement shall be
true and correct in all material respects at and as of the Closing with the same
force and effect as though such representations and warranties had been made at
and as of the Closing, and the Shareholder shall have received a certificate
executed on behalf of the Optionee to the effect that the foregoing conditions
have been satisfied; (ii) all consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any Governmental Authority
required in connection with the transactions contemplated hereby shall have been
obtained or made, as the case may be; (iii) the transactions contemplated hereby
shall have been approved by the affirmative vote of the holders of at least a
majority of the outstanding shares of the Optionee Common Stock; (iv) all
waiting periods, including any extensions thereof, under the HSR Act shall have
expired; (v) no preliminary or permanent injunction or other order by any court
of competent jurisdiction prohibiting or otherwise restraining the transactions
contemplated hereby shall be in effect; (vi) such Shareholder shall have
received the opinion, dated the Closing Date, of general counsel to the Optionee
and the Insurance Subsidiary, substantially to the effect set forth in Exhibit
E; (vii) the Optionee shall have executed and delivered the Registration Rights
Agreement; and (viii) the Company's By-Laws shall have been amended to permit
the Optionee to acquire the Shares pursuant to this Agreement.
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<PAGE>
Section 8. Representations and Warranties of Each Shareholder. Each
Shareholder represents to the Optionee as follows:
(a) Corporate Existence. (i) Each of the Company and United is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York. Each of the Company and United has all necessary power
and authority and possesses all rights, licenses, authorizations and approvals,
governmental or otherwise to own, lease and operate its properties and to
conduct its business as now being conducted. Each of the Company and United is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which the conduct of its business requires such
qualification, except when the failure to be so qualified would not have a
Material Adverse Effect.
(ii) Such Shareholder is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction in which
it is organized. Such Shareholder has all necessary power and authority and
possesses all rights, licenses, authorizations and approvals, governmental
or otherwise to own, lease and operate its properties and to conduct its
business as now being conducted and to own the Shares.
(b) Authorization; Enforcement. Such Shareholder has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. Such Shareholder has taken all necessary
corporate action to duly and validly authorize its execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by such Shareholder and is
the legal, valid and binding obligation of such Shareholder, enforceable against
Shareholder, in accordance with its terms.
(c) Capital Stock of the Company; Ownership of Shares. (i) The authorized
capital stock of the Company consists of 61,000 shares of Common Stock of which
60,011 are issued and outstanding. All of the issued and outstanding shares of
Common Stock have been duly authorized and validly issued and are fully paid and
nonassessable. The Shares have not been issued in violation of, and none of the
Shares or such shares of capital stock is subject to, any preemptive or
subscription rights. There are no outstanding warrants, options, contracts,
convertible or exchangeable securities or other commitments (other than this
Agreement) pursuant to which such Shareholder or the Company is or may be
obligated to issue, sell, purchase, return or redeem any shares of capital stock
or other securities of the Company, and there are not any equity securities of
the Company reserved for issuance for any purpose.
(ii) Such Shareholder is the record and beneficial owner of the number
of Shares set forth opposite its name on Exhibit A, free and clear of any
Liens. Upon consummation of the transactions contemplated by this
Agreement, the Optionee will acquire record and beneficial ownership of the
Shares, free and clear of any Liens. Other than this Agreement and Article
II, Section 1 of the Company's By-laws, the Shares are not subject to any
voting trust agreement or other contract, agreement, arrangement,
commitment or understanding, including any such agreement, arrangement,
commitment or understanding restricting or otherwise relating to the
voting, dividend rights or disposition of the Shares.
(d) Subsidiaries. Except for United, the Company does not have any
Subsidiaries.
e) No Conflict. Neither the execution, delivery and performance of this
Agreement by such Shareholder nor the consummation of the transactions
contemplated hereby will: (i) violate any provision of the certificate of
incorporation, by-laws or other charter or organizational document of such
Shareholder or, to the knowledge of such Shareholder, the Company or United,
other than Article II, Section 1 of the Company's By-laws; (ii) violate,
conflict with or result in the breach of any of the terms of, result in any
modification of the effect of, otherwise give any other contracting party the
right to terminate, or constitute (or with notice or lapse
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<PAGE>
of time or both constitute) a default under, any Contract to which such
Shareholder or, to the knowledge of such Shareholder, the Company or United is a
party or by or to which any of them or their assets or properties may be bound
or subject, except for such of the foregoing as would not have a Material
Adverse Effect or interfere in any material way with the ability of such
Shareholder to consummate the transactions contemplated hereby; (iii) violate
any order, judgment, injunction, award or decree of any Governmental Authority
against, or binding upon, any Contract with, or condition imposed by, any
Governmental Authority binding upon such Shareholder or, to the knowledge of
such Shareholder, the Company or United or upon the business, properties or
assets of such Shareholder or, to the knowledge of such Shareholder, the Company
or United, except for such violations as would not have a Material Adverse
Effect or interfere in any material way with the ability of such Shareholder to
consummate the transactions contemplated hereby; (iv) violate any statute, law
or regulation of any jurisdiction as such statute, law or regulation relates to
such Shareholder or, to the knowledge of such Shareholder, the Company or
United, or to the business, properties or assets of such Shareholder or, to the
knowledge of such Shareholder, the Company or United, except for such violations
as would not have a Material Adverse Effect or interfere in any material way
with the ability of such Shareholder to consummate the transactions contemplated
hereby; or (v) result in the creation or imposition of any material Lien on any
of the properties or assets of such Shareholder or, to the knowledge of such
Shareholder, the Company or United (including any of the Shares).
(f) Consents. No consent, license, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
to be obtained, made or given by or with respect to such Shareholder or, to the
knowledge of such Shareholder, the Company, in connection with the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby other than under: (i) the insurance laws of the
State of New York; (ii) the HSR Act; and (iii) any other consents and approvals
as shall have been obtained on or prior to the Closing Date.
(g) Compliance with Law. To the knowledge of such Shareholder, the Company
and United have complied with, and are now complying, with all foreign, federal,
state and local statutes, laws, regulations, ordinances, judgments, injunctions,
orders, licenses, approvals, permits and other requirements (collectively,
"Laws") applicable to the Company, United or their respective businesses,
properties or assets, except where the failure to comply would not have a
Material Adverse Effect.
(h) Insurance Licenses. To the knowledge of such Shareholder, each of the
Company and United holds such licenses, certificates and permits from
governmental authorities (including, without limitation, insurance licenses from
the insurance regulatory authorities of the jurisdictions in which they conduct
an insurance business) (collectively, "Permits") that are necessary to the
conduct of their business as presently conducted; to the knowledge of such
Shareholder, the Company and United have fulfilled and performed all obligations
necessary to maintain such Permits; to the knowledge of such Shareholder, there
is no pending or threatened action, suit, proceeding or investigation (and, to
the best of such Shareholder's knowledge, no reasonable basis for any such
action, suit, proceeding or investigation exists) that may reasonably be
expected to lead to the revocation, termination or suspension of any such
Permits.
(i) Litigation. Except as set forth in Schedule 8(i), to the knowledge of
such Shareholder, there is no judicial, administrative or regulatory action,
proceeding, investigation or inquiry or administrative charge or complaint
pending or threatened against the Company or United the respective assets,
properties or businesses of the Company or United, which, either singly or in
the aggregate, could reasonably be expected to have a Material Adverse Effect or
which questions the validity of this Agreement or any action taken or to be
taken by the Company or such Shareholder pursuant to this Agreement or in
connection with the transactions contemplated hereby.
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<PAGE>
(j) Financial Statements. (i) The Company has made available to the
Optionee complete and correct copies of the Annual Statement of the Company and
United filed with the New York Insurance Department for the years ended December
31, 1993, 1994 and 1995, together with the exhibits and schedules thereto and
the Statement of Actuarial Opinion and any affirmations and certifications filed
therewith. To the knowledge of such Shareholder, the financial statements of the
Company and United contained in such Annual Statements and in all Quarterly
Statements and Annual Statements filed with the New York Insurance Department
for the periods ending after December 31, 1995: (A) have been prepared in
accordance with statutory accounting practices prescribed or permitted by the
New York Insurance Department applied on a consistent basis (except as set forth
in the notes, exhibits or schedules thereto) ("SAP"); (B) present fairly in all
material respects, to the extent required and in conformity with SAP, the
financial condition of the Company or United, as the case may be, at their
respective dates, and its results of operations, changes in capital and surplus,
and cash flows for each of the periods then ended; (C) were correct in all
material respects when filed; and (D) there were no material omissions therefrom
when filed.
(ii) The Company will make available to the Optionee, as soon as the
same are available, complete and correct copies of the audited consolidated
financial statements and the audited statutory financial statements and, in
each case, the notes thereto of the Company and United for the years ended
December 31, 1993, 1994 and 1995. To the knowledge of such Shareholder,
such financial statements and the related notes thereto will have been
prepared in accordance with GAAP and SAP, as the case may be, consistently
applied throughout the periods involved and will fairly present the
consolidated financial condition, results of operations, cash flows and
changes in stockholders' equity of the Company and United at the dates and
for the periods presented.
(k) Contracts. With respect to the Company's or United's performance of its
respective obligations under the Company Contracts, to the knowledge of such
Shareholder, no event of default or non-compliance, or event which with the
passage of time, giving of notice or both, would constitute such an event of
default or non-compliance, has occurred or is continuing under any such Company
Contract. With respect to the performance by any other party of its obligations
under the Company Contracts, to the knowledge of such Shareholder, no event of
default or non-compliance, or event which with the passage of time, giving of
notice or both, would constitute such an event of default or non-compliance, has
occurred or is continuing under any such Company Contract.
(l) Taxes. Except as set forth in Schedule 8(l), to the knowledge of such
Shareholder, (A) the Company (the term "Company" as used in this Section 8(l)
includes United except where the context otherwise requires), has duly and
timely filed all federal and state Tax returns of the Company or which include
the Company (including information returns relating to Policies) required to be
filed as of the date hereof and prior to the Closing Date and, to the knowledge
of such Shareholder, filed reports with all other Governmental Authorities
having jurisdiction, with respect to Taxes withheld by or imposed upon the
Company except such returns and reports where the failure to file would not,
singly or in the aggregate, have a Material Adverse Effect; (B) all Taxes shown
on such Tax returns and all assessments received by such Shareholder or the
Company with respect to Taxes for which the Company has any liability for
payment have been paid or fully reserved for to the extent that such Taxes are
required to be reserved for in accordance with statutory accounting practices
prescribed or permitted by the New York Insurance Department; (C) neither such
Shareholder nor the Company has requested any extension of time within which to
file any Tax return of the Company or Tax return which includes the Company,
which return or returns have not since been filed, nor are there any Tax liens
upon any property or assets of the Company, except for Taxes not yet due and
payable; (D) there are no outstanding deficiencies assessed against such
Shareholder or the Company for any Taxes for which the Company has any liability
for payment, and there are no proceedings or actions pending, concerning either
(x) the liability of such Shareholder or the Company with respect to Taxes for
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which the Company has any liability for payment, or (y) the collection or
assessment of Tax for any period for which Tax returns of the Company, or Tax
returns which include the Company, have been filed or were due; and (E) there is
no pending audit of any of the Tax returns of the Company or which include the
Company, and neither such Shareholder nor the Company has been notified in
writing that any taxing authority proposes to commence an audit of such Tax
returns.
(m) Assets. (i) To the knowledge of such Shareholder, each of the Company
and United has good and marketable title to, or valid leasehold or license
interests in, all the property and assets that they purport to own, lease or
license, including without limitation, property and assets reflected on the 1995
Annual Statements of the Company and United (except assets disposed of in the
ordinary course of business between December 31, 1995 and the Closing Date), and
property and assets acquired since December 31, 1995, in each case free and
clear of all Liens, except (A) the Lien of current Taxes not yet due and payable
or of Taxes the validity of which is being contested in good faith by
appropriate proceedings, (B) Liens (if any) reflected in the 1995 Annual
Statement, (C) Liens related to required deposits with insurance departments,
(D) Liens the validity of which are being contested or litigated in good faith
by appropriate proceedings and for which the Company have provided adequate
reserves, and (E) such other Liens which as on the Closing Date will not,
individually or in the aggregate, materially detract from the values of such
property and assets or materially interfere with the present uses thereof.
(ii) With respect to any property leased by the Company or United or
that is material to the business, operations or financial condition of the
Company and United, taken as a whole, to the knowledge of such Shareholder,
there exists no default by the Company or United, or by any third party,
that materially and adversely affects any such lease. To the knowledge of
such Shareholder, the Company or United, as the case may be, enjoys
peaceful and undisturbed possession under each such lease to which it is a
party.
(n) Environmental Matters. Except as set forth on Schedule 8(n) and, with
respect to properties owned, operated or leased by the Company or United prior
to, but not on or after January 1, 1994, to such Shareholder's knowledge:
(i) No portion of the property is being used or has been used at any
previous time, for the disposal, storage, treatment, processing or other
handling of waste contamination, polychlorinated biphenyl or asbestos-containing
material, or other toxic or hazardous substances; the property violates no
applicable federal, state, county or other municipal law, ordinance, order,
regulation or requirement, and neither the Company nor United have received
notice to that effect.
(ii) The Company and United have complied with all requirements
of any applicable department of environmental resources or similar
governmental agency, and there are no ongoing requirements ordered by
said agency or any other governmental body for environmental cleanup
with respect to the property.
(o) Employee Benefits. Except for ongoing contribution requirements, all
unpaid material liabilities with respect to employee benefit plans, as that term
is defined in ERISA Section 3(3) ("Benefit Plan"), of the Company are included
in the Company's financial statement. With respect to each Company Benefit Plan,
the Company has made available to the Optionee, true and correct copies of all
the plan, trust, insurance contracts and related documents, financial,
actuarial, employee communications and, where applicable, Internal Revenue
Service determination letters. Each Company Benefit Plan is maintained and
administered at all times in material compliance with its terms, ERISA and
applicable laws and regulations. There are no action, suits or claims (other
than routine claims for benefits), pending, or to the knowledge of the
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Company, threatened with respect to any Company Benefit Plan or against the
assets of any Benefit Plan. Each Company Benefit Plan subject to ERISA Section
601 is in compliance therewith.
(p) Investment Purpose. Such Shareholder is acquiring the Optionee Common
Stock and the Voting Preferred Stock for investment only and not with a view to
resale in connection with any distribution thereof except in compliance with the
Securities Act and all other applicable securities laws. Such Shareholder
understands that the Optionee Common Stock and the Voting Preferred Stock have
not been registered under the Securities Act or under the securities laws of any
state and that such shares may not be sold, transferred, offered for sale,
pledged, hypothecated or otherwise disposed of in the absence of an effective
registration under the Securities Act except pursuant to a valid exemption from
such registration.
Section 9. Representations and Warranties of the Optionee. The Optionee
hereby represents and warrants to each Shareholder as follows:
(a) Corporate Existence. Each of the Optionee and the Insurance Subsidiary
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is organized. Each of the Optionee and the
Insurance Subsidiary has all necessary power and authority and possesses all
rights, licenses, authorizations and approvals, governmental or otherwise to
own, lease and operate its properties and to conduct its business as now being
conducted. Each of the Optionee and the Insurance Subsidiary is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which the conduct of its business requires such qualification,
except when the failure to be so qualified would not have a Material Adverse
Effect.
(b) Authorization; Enforcement. The Optionee has all necessary corporate
power and authority to execute and deliver this Agreement and, subject to
approval of the transactions contemplated hereby by the stockholders of the
Optionee, to perform its obligations hereunder. The Optionee has taken all
necessary corporate action to duly and validly authorize its execution and
delivery of this Agreement and, subject to approval of the transactions
contemplated hereby by the stockholders of the Optionee, the consummation of the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Optionee and is the legal, valid and binding obligation of the
Optionee, subject to approval of the transactions contemplated hereby by the
stockholders of the Optionee, enforceable against the Optionee in accordance
with its terms.
(c) Capital Stock of Optionee. The shares of Optionee Common Stock and
Voting Preferred Stock to be issued to the Shareholders pursuant to this
Agreement will be duly authorized prior to the Closing Date and, when issued and
delivered as provided in this Agreement, will be validly issued, fully paid and
nonassessable. Upon delivery of the shares of Optionee Common Stock and Voting
Preferred Stock to the Shareholders as provided in this Agreement, the
Shareholders will acquire such shares free and clear of any Liens.
(d) Subsidiaries. Schedule 9(d) sets forth a true, correct and complete
list of all Subsidiaries of the Optionee and the Insurance Subsidiary.
(e) No Conflict. Neither the execution, delivery and performance of this
Agreement nor the consummation of the transactions contemplated hereby will: (i)
violate any provision of the certificate of incorporation, by-laws or other
charter or organizational document of the Optionee or the Insurance Subsidiary;
(ii) violate, conflict with or result in the breach of any of the terms of,
result in any modification of the effect of, otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default under, any Contract to which the Optionee
or the Insurance Subsidiary is a party or by or
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to which any of them or their assets or properties may be bound or subject,
except for such of the foregoing as would not have a Material Adverse Effect or
interfere in any material way with the ability of the Optionee to consummate the
transactions contemplated hereby; (iii) violate any order, judgment, injunction,
award or decree of any Governmental Authority against, or binding upon, or any
Contract with, or condition imposed by, any Governmental Authority binding upon
the Optionee or the Insurance Subsidiary, or upon the business, properties or
assets of the Optionee or the Insurance Subsidiary, except for such violations
as would not have a Material Adverse Effect or interfere in any material way
with the ability of the Optionee to consummate the transactions contemplated
hereby; (iv) violate any statute, law or regulation of any jurisdiction as such
statute, law or regulation relates to the Optionee or the Insurance Subsidiary,
or to the business, properties or assets of the Optionee or the Insurance
Subsidiary, except for such violations as would not have a Material Adverse
Effect or interfere in any material way with the ability of the Optionee to
consummate the transactions contemplated hereby; or (v) result in the creation
or imposition of any material Lien on any of the properties or assets of the
Optionee or the Insurance Subsidiary.
(f) Consents. No consent, license, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
to be obtained, made or given by or with respect to the Optionee or the
Insurance Subsidiary in connection with the execution, delivery and performance
of this Agreement or the consummation of the transactions contemplated hereby
other than: (i) under the insurance laws of the State of New York; (ii) under
the HSR Act; (iii) under federal securities laws in connection with the approval
required by the stockholders of the Optionee; and (iv) any other consents and
approvals as shall have been obtained on or prior to the Closing Date.
(g) Compliance with Law. The Optionee and the Insurance Subsidiary have
complied with, and are now complying, with all Laws applicable to the Optionee,
the Insurance Subsidiary, or their respective business, properties or assets,
except when the failure to comply would not have a Material Adverse Effect.
(h) Insurance Licenses. Each of the Optionee and the Insurance Subsidiary
holds such licenses, certificates and permits from governmental authorities
(including, without limitation, insurance licenses from the insurance regulatory
authorities of the jurisdictions in which they conduct an insurance business)
(collectively, "Permits") that are necessary to the conduct of their business as
presently conducted; the Optionee and the Insurance Subsidiary have fulfilled
and performed all obligations necessary to maintain such Permits; there is no
pending or, to the best of the Optionee's knowledge, threatened action, suit,
proceeding or investigation (and, to the best of the Optionee's knowledge, no
reasonable basis for any such action, suit, proceeding or investigation exists)
that may reasonably be expected to lead to the revocation, termination or
suspension of any such Permits.
(i) Litigation. Except as set forth on Schedule 9(i), there is no judicial,
administrative or regulatory action, proceeding, investigation or inquiry or
administrative charge or complaint pending or, to the knowledge of the Optionee,
threatened against the Optionee or the Insurance Subsidiary, the respective
assets,properties or businesses of the Optionee or the Insurance Subsidiary,
which, either singly or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or which questions the validity of this Agreement or any
action taken or to be taken by the Optionee pursuant to this Agreement or in
connection with the transactions contemplated hereby.
(j) Financial Statements. (i) The Optionee has made available to the
Shareholders complete and correct copies of the Annual Statement of the
Insurance Subsidiary filed with the New York Insurance Department for the years
ended December 31, 1993, 1994 and 1995, together with the exhibits and schedules
thereto and the Statement of Actuarial Opinion and any affirmations and
certifications filed therewith. The financial statements of the Insurance
Subsidiary contained in such Annual Statements and in all Quarterly Statements
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and Annual Statements filed with the New York Insurance Department for the
periods ending after December 31, 1995: (A) have been prepared in accordance
with SAP; (B) present fairly in all material respects, to the extent required
and in conformity with SAP, the financial condition of the Optionee at their
respective dates, and its results of operations, changes in capital and surplus,
and cash flows for each of the periods then ended; (C) were correct in all
material respects when filed; and (D) there were no material omissions therefrom
when filed.
(ii) The Optionee has made available to the Shareholders complete
and correct copies of the audited consolidated financial statements
and audited statutory financial statements and, in each case, the
notes thereto of the Insurance Subsidiary for the years ended December
31, 1993, 1994 and 1995. Such financial statements and the related
notes thereto were prepared in accordance with GAAP and SAP, as the
case may be, consistently applied throughout the periods involved and
fairly present the financial condition, results of operations, cash
flows and changes in stockholders' equity of the Insurance Subsidiary
at the dates and for the periods presented.
(k) Contracts. With respect to the Optionee's or the Insurance Subsidiary's
performance of its respective obligations under the Optionee Scheduled
Contracts, no event of default or non-compliance, or event which with the
passage of time, giving of notice or both, would constitute such an event of
default or non-compliance, has occurred or is continuing under any such Optionee
Scheduled Contract. With respect to the performance by any other party of its
obligations under the Optionee Scheduled Contracts, to the knowledge of the
Optionee, no event of default or non-compliance, or event which with the passage
of time, giving of notice or both, would constitute such an event of default or
non-compliance, has occurred or is continuing under any such Optionee Scheduled
Contract.
(l) Taxes. Except as set forth in Schedule 9(l), (A) the Optionee or the
Insurance Subsidiary (as appropriate) (the term "Optionee" as used in this
Section 9(l) includes the Insurance Subsidiary except where the context
otherwise requires) has duly and timely filed all federal and state Tax returns
of the Optionee (including information returns relating to Policies) required to
be filed as of the date hereof and prior to the Closing Date and, to the
knowledge of the Optionee, filed reports with all other Governmental Authorities
having jurisdiction, with respect to Taxes withheld by or imposed upon the
Optionee except such returns and reports where the failure to file would not,
singly or in the aggregate, have a Material Adverse Effect; (B) all Taxes shown
on such Tax returns and all assessments received by the Optionee with respect to
Taxes for which the Optionee has any liability for payment have been paid or
fully reserved for to the extent that such Taxes are required to be reserved for
in accordance with statutory accounting practices prescribed or permitted by the
New York Insurance Department; (C) the Optionee has not requested any extension
of time within which to file any Tax return of the Optionee which return or
returns have not since been filed, nor are there any Tax liens upon any property
or assets of the Optionee, except for Taxes not yet due and payable; (D) there
are no outstanding deficiencies assessed against the Optionee for any Taxes for
which the Optionee has any liabilityfor payment, and there are no proceedings or
actions pending, concerning either (x) the liability of the Optionee with
respect to Taxes for which the Optionee has any liability for payment, or (y)
the collection or assessment of Tax for any period for which Tax returns of the
Optionee, have been filed or were due; and (E) there is no pending audit of any
of the Tax returns of the Optionee, and the Optionee has not been notified in
writing that any taxing authority proposes to commence an audit of such Tax
returns.
(m) Assets. (i) The Optionee and the Insurance Subsidiary have good and
marketable title to, or valid leasehold or license interests in, all the
property and assets that it purports to own, lease or license, including without
limitation, property and assets reflected on the Insurance Subsidiary's 1995
Annual Statement (except assets disposed of in the ordinary course of business
between December 31, 1995 and the Closing Date), and property and assets
acquired since December 31, 1995, in each case free and clear of all
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Liens, except (A) the Lien of current Taxes not yet due and payable or of Taxes
the validity of which is being contested in good faith by appropriate
proceedings, (B) Liens (if any) reflected in the 1995 Annual Statement, (C)
Liens related to required deposits with insurance departments, (D) Liens the
validity of which are being contested or litigated in good faith by appropriate
proceedings and for which the Insurance Subsidiary has provided adequate
reserves, and (E) such other Liens which as on the Closing Date will not,
individually or in the aggregate, materially detract from the values of such
property and assets or materially interfere with the present uses thereof.
(ii) With respect to any property leased by the Optionee and the
Insurance Subsidiary or that is material to the business, operations
or financial condition of the Optionee and the Insurance Subsidiary,
there exists no default by the Optionee or the Insurance Subsidiary,
or to the knowledge of the Optionee, by any third party, that
materially and adversely affects any such lease. The Optionee and the
Insurance Subsidiary, as the case may be, enjoy peaceful and
undisturbed possession under each such lease to which it is a party.
(n) Environmental Matters. Except as set forth on Schedule 9(n) and, with
respect to properties owned, operated or leased by the Optionee or the Insurance
Subsidiary prior to, but not on or after January 1, 1994, to the Optionee's
knowledge:
(i) No portion of the property is being used or has been used at
any previous time, for the disposal, storage, treatment, processing or
other handling of waste contamination, PCBs, or other toxic or
hazardous substances; the property violates no applicable federal,
state, county or other municipal law, ordinance, order, regulation or
requirement, and the Optionee has received no notice to that effect.
(ii) The Optionee and the Insurance Subsidiary have complied with
all requirements of any applicable department of environmental
resources or similar governmental agency, and there are no ongoing
requirements ordered by said agency or any other governmental body for
environmental cleanup with respect to the property.
(o) Employee Benefits. Except for ongoing contribution requirements, all
unpaid material liabilities with respect to the Optionee Benefit Plans are
included in Optionee's financial statements. With respect to each Optionee
Benefit Plan, the Optionee has made available to the Shareholders true and
correct copies of all the plan, trust, insurance contracts and related
documents, financial, actuarial, employee communications and, where applicable,
Internal Revenue Service determination letters. Each Optionee Benefit Plan is
maintained and administered at all time in material compliance with its terms,
ERISA and applicable laws and regulations. There are no action, suits or claims
(other than routine claims for benefits), pending, or to the knowledge of the
Optionee, threatened with respect to any Optionee Benefit Plan or against the
assets of any Optionee Benefit Plan. Each Optionee Benefit Plan subject to ERISA
Section 601 is in compliance therewith.
(p) Investment Purpose. The Optionee is acquiring the Shares for investment
only and not with a view to resale in connection with any distribution of any of
the Shares except in compliance with the Securities Act and all other applicable
securities laws. The Optionee understands that the Shares have not been
registered under the Securities Act or under the securities laws of any state
and that the Shares may not be sold, transferred, offered for sale, pledged,
hypothecated or otherwise disposed of in the absence of an effective
registration under the Securities Act except pursuant to a valid exemption from
such registration.
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Section 10. Covenants of each Shareholder; Restrictions on Certain Actions.
(a) Covenants. (i) From the date hereof through the later of the Expiration
Date and any extension thereof or the Closing Date, each Shareholder hereby
covenants and agrees that it will do or use its reasonable efforts to cause to
be done all things necessary to preserve, renew and keep in full force and
effect the corporate existence of the Company and that, without the prior
written consent of the Optionee (which consent shall not be unreasonably
withheld), it shall, and shall use its reasonable efforts to cause the Company
and United to:
(A) operate the business of the Company and United in the usual, regular
and ordinary manner and, to the extent consistent with such operation, use its
best efforts to preserve intact the present business organization, keep
available the services of the present officers, employees and agency personnel
of the Company and United and preserve their present relationships with persons
having business dealings with the Company and United;
(B) maintain the books, accounts and records relating to the business of
the Company and United in the usual, regular and ordinary manner, on a basis
consistent with past practice;
(C) use all reasonable efforts not to permit any event to occur that would
result in any of the representations and warranties contained in this Agreement
not being, except as specifically contemplated by this Agreement, materially
true and correct; and
(D) amend Article II, Section 1 of the Company's By-laws so as to permit
the transactions contemplated by this Agreement.
(ii) Each Shareholder hereby covenants and agrees that it will do or cause
to be done all things necessary as promptly as practicable after the date hereof
to amend the By-laws of the Company to permit the Optionee to acquire the Shares
pursuant to this Agreement.
(b) Restrictions. Except as otherwise contemplated by this Agreement, from
the date hereof through the later of the Expiration Date and any extension
thereof or the Closing Date, without the prior written consent of the Optionee,
each Shareholder shall not, and shall use its reasonable efforts to cause the
Company and United not to:
(i) enter into an agreement or incur any obligation the terms of which
would violate this Agreement or be violated by the consummation of the
transactions contemplated by this Agreement;
(ii) issue, pledge, sell, transfer, distribute, dispose of or otherwise
encumber all or any part of the capital stock of the Company including any
Shares owned by such Shareholder, or the outstanding shares of capital stock of
United, or (in one or a series of transactions) any material portion of the
assets or properties of the Company and United taken as a whole;
(iii) redeem or otherwise acquire any shares of the Company's Common Stock
or issue any capital stock or any option, warrant or right relating thereto or
any securities convertible into or exchangeable for any shares of capital stock;
(iv) declare or pay any dividend or make any other distribution, in cash,
securities or otherwise, on the outstanding shares of Common Stock or any
capital stock of the Company or United, except for dividends on the Common Stock
not to exceed $480,088 per annum in the aggregate;
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(v) provide for the consolidation with or merger of the Company or United
into another corporation or other entity or the liquidation or dissolution of
the Company or United;
(vi) amend the Company's Certificate of Incorporation or By-laws, or adopt
any shareholders' or directors' resolution or take any other action which would
restrict the alienation, voting, dividend or other rights of the Shares; or
(vii) take any other action or enter into any agreement similar to the
foregoing which could have the effect of frustrating the purpose of this
Agreement.
Section 11. Adjustment Upon Changes in Capitalization. In the event of any
change in the Common Stock by reason of stock dividend, splitups, mergers,
recapitalizations, combinations, exchange of shares or the like, the type and
number of shares subject to the Options and the Fair Market Value per Share
shall be adjusted appropriately.
Section 12. Access and Information. Prior to the later to occur of the
Expiration Date and any extension thereof or the Closing Date, the Shareholders
shall cause the Company and United to afford to the Optionee and the Optionee's
authorized representatives reasonable access during normal business hours to all
of their properties, books, contracts, commitments and records and, during such
period, the Shareholders shall furnish promptly to the Optionee all information
concerning the business, properties and personnel of the Company and United as
the Optionee may reasonably request.
Section 13. Approvals of Governmental Authorities. (a) Upon the Optionee's
election to exercise the Options, the Optionee and the Shareholders shall take,
and the Shareholders shall cause the Company and United to take, all reasonable
steps necessary or appropriate, and shall use, and shall cause the Company to
use, all commercially reasonable efforts, to obtain as promptly as practicable
all consents, approvals, authorizations, licenses and orders of Governmental
Authorities required to be obtained by the Optionee or the Shareholders, the
Company or United, as the case may be, in connection with the consummation of
the transactions contemplated by this Agreement.
(b) The Optionee and the Shareholders shall cooperate with each other and
each other's respective Affiliates in seeking to obtain all such consents,
approvals, authorizations, licenses and orders, and shall provide, and shall
cause their respective Affiliates to provide, such information and
communications to Governmental Authorities as such Governmental Authorities may
reasonably request in connection therewith.
Section 14. Stockholder Approval. In the event the Optionee notifies the
Shareholders of its election to exercise the Options, the Optionee shall call a
meeting of its stockholders for purposes of approving the exercise of the
Options pursuant to this Agreement.
Section 15. Restrictive Legends. Each certificate representing shares of
Optionee Common Stock and Voting Preferred Stock delivered to the Shareholders
at the Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
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Whenever any such shares cease to be restricted securities, the holder
thereof shall be entitled to receive from the Optionee, without expense, upon
surrender to the Optionee of the certificate representing such shares, a new
certificate for such shares, of like form but without a legend of the character
set forth above.
Section 16. Termination; Survival of Representations and Warranties. (a)
(i) This Agreement shall terminate automatically if the Optionee has not
notified the Shareholders in writing of its election to exercise the Options
prior to midnight (New York time) on the Expiration Date.
(ii) This Agreement may be terminated at any time prior to the Closing
Date:
(A) by mutual agreement in writing of the Optionee and the
Shareholders;
(B) by either the Optionee or the Shareholders upon written
notice to the other if (1) the Effective Date has not occurred by
December 31, 1997 or (2) the Closing has not occurred by the first
anniversary of the Exercise Date, provided, that the right to
terminate this Agreement pursuant to this clause (B) shall not be
available to any party whose failure to fulfill any of its obligations
under this Agreement resulted in the Closing not occurring by such
date.
(iii) In the event of the termination of this Agreement pursuant to this
Section 16, this Agreement shall thereafter become void and have no effect and
no party shall have a liability hereunder; provided, however, that no party
shall be released from liability if this Agreement is terminated by reason of
(A) willful failure of such party to have performed its obligations hereunder,
or (B) any knowing misrepresentation made by such party of any matter set forth
herein.
(b) Notwithstanding any right of the Optionee and the Shareholders fully to
investigate the affairs of the Company and the Shareholders, as the case may be,
and notwithstanding any knowledge of facts determined or determinable by the
Optionee and the Shareholders pursuant to such investigation or right of
investigation, the Optionee, and each of the Shareholders have the right to rely
fully upon the representations and warranties of the Optionee and each of the
Shareholders contained in this Agreement. All of the representations,
warranties, covenants and agreements contained in this Agreement or in any
certificate or other instrument delivered at Closing shall survive the execution
and delivery of this Agreement and the Closing until the first anniversary of
the Closing Date, except for the representations, warranties, covenants and
agreements of the Optionee and each Shareholder, as the case may be (i)
contained in Sections 8(a), 8(c), 9(a) and 9(c), which shall survive the Closing
Date indefinitely, and (ii) contained in Sections 8(l), 8(o), 9(l) and 9(o),
which shall survive the Closing Date until the applicable statute of limitations
has expired.
Section 17. Binding Effect; No Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, and permitted assigns. Except as expressly provided for in this
Agreement, neither this Agreement nor the rights or the obligations of any party
hereto are assignable, except by operation of law, or with the written consent
of the other parties. Nothing contained in this Agreement, express or implied,
is intended to confer upon any person other than the parties hereto and their
respective permitted assigns any rights or remedies of any nature whatsoever by
reason of this Agreement.
Section 18. Specific Performance. The parties recognize and agree that if
for any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party agrees that, in addition to other
remedies, the other parties shall be entitled to an injunction restraining any
violation or threatened violation of the provisions of this Agreement. In the
event that any action should be brought in equity to enforce the provisions of
this Agreement, no party will allege, and each party hereby waives the defense,
that there is adequate remedy at law.
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Section 19. Entire Agreement. This Agreement (including the exhibits and
schedules thereto) constitutes the entire agreement among the parties with
respect to the subject matter hereof.
Section 20. Effectiveness of Agreement. Notwithstanding anything herein to
the contrary, this Agreement shall not become effective unless and until it
shall be executed by the Optionee and Shareholders owning in the aggregate at
least 80% of the issued and outstanding shares of the Common Stock.
Section 21. Further Assurances. Each party will execute and deliver all
such further documents and instruments and take all such further action as may
be necessary in order to consummate the transactions contemplated hereby.
Section 22. Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect. In
the event any court or other competent authority holds any provisions of this
Agreement to be null, void or unenforceable, the parties hereto shall negotiate
in good faith the execution and delivery of an amendment to this Agreement in
order, as nearly as possible, to effectuate, to the extent permitted by law, the
intent of the parties hereto with respect to such provision. Each party agrees
that, should any court or other competent authority hold any provision of this
Agreement or part hereof to be null, void or unenforceable, or order any party
to take any action inconsistent herewith, or not take any action required
herein, the other party shall not be entitled to specific performances of such
provision or part hereof or to any other remedy, including but not limited to
money damages, for breach hereof or of any other provision of this Agreement or
part hereof as the result of such holding or order.
Section 23. Material Change in Law. In the event of a Material Change in
Law (as defined below), the parties hereto agree to negotiate in good faith to
amend or modify the terms of the Voting Preferred Stock, to arrange for
substitute consideration or otherwise to restructure the transactions
contemplated hereby (x) so as to eliminate the effect of such Material Change in
Law on the eligibility of the transactions contemplated hereby to qualify (i) in
respect of each Service Company (other than a Service Company described in
clause (ii) immediately following), as a reorganization under section
368(a)(1)(C) of the Code (without reliance on section 368(a)(2)(B) of the Code)
or (ii) as to any Service Company described in clause (t) of the definition of
"Material Change in Law" below, as a reorganization under section 368(a)(1)(B)
of the Code, in either such case, having the same tax effects applicable to such
form of reorganization as under current law, (y) in a manner that substantially
preserves the anticipated respective economic positions of the parties hereto;
provided, however, that if the parties shall not be able to agree on the terms
of any such amendment or modification, substitute consideration or
restructuring, despite their good faith efforts to do so, the Optionee and the
Shareholders hereby agree that (i) neither the Optionee nor any Shareholder
shall be obligated to consummate the Closing under this Agreement, (ii) the
amendments to the Option Purchase Agreement made by this Agreement shall be void
ab initio (other than clauses (i) through (v) of this proviso) and
correspondingly, the terms of the Option Purchase Agreement (as amended by
Amendment No. 1) shall continue in full force and effect as if this Agreement
had never become effective, (iii) any Exercise Notice delivered pursuant to
Section 4(a) of this Agreement shall be void ab initio, (iv) the Optionee
Valuation, dated as of June 26, 1997, prepared by the Optionee Appraiser
pursuant to the Option Purchase Agreement and the Shareholder Valuation, dated
as of September 5, 1997, prepared by the Shareholder Appraiser pursuant to the
Option Purchase Agreement shall remain in effect and shall be deemed to be
delivered under the reinstated Option Purchase Agreement as of the date of such
reinstatement of the Option Purchase Agreement pursuant to the immediately
foregoing clause (ii), and (v) the Expiration Date under the Option Purchase
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Agreement shall be extended until the date which is "X" plus 120 days following
the date of reinstatement of the Option Purchase Agreement pursuant to the
immediately foregoing clause (ii), where "X" equals the sum of (A) that number
of days from (and including) the date of delivery of the Exercise Notice under
this Agreement to (and including) the date on which there is determined to be a
Material Change in Law for purposes of Section 23 of this Agreement and (B) that
number of days, if any, remaining until the original Expiration Date under the
Option Purchase Agreement.
For purposes of this Section 23:
(I) "Material Change in Law" shall mean a Change in Law
occurring on or before the Closing Date that, in the opinion of
tax counsel to the Shareholders, poses a significant risk to any
Service Company that the inclusion in the transaction of the
Voting Preferred Stock contemplated hereby (employing the
assumption in making such determination that the Voting Preferred
Stock constitutes nonqualified preferred stock within the meaning
of section 351(g) of the Code) would preclude the transactions
contemplated hereby from qualifying as a reorganization within
the meaning of (s) section 368(a)(1)(C) of the Code (without
reliance on section 368(a)(2)(B) of the Code) or (t) as to any
Service Company that resolves not to liquidate as contemplated by
the Agreement and Plan of Reorganization, section 368(a)(1)(B) of
the Code, in either such case, having the same tax effects
applicable to such form of reorganization as under current law;
and
(II) "Change in Law" shall mean (a) the promulgation of temporary or final
Treasury regulations (or proposed regulations having a proposed effective date
on or before the Closing Date), (b) the issuance of any Internal Revenue Service
notice, ruling or other administrative pronouncement or any other issuance of
official interpretative guidance, (c) the enactment of any law (including any
technical corrections to the Taxpayer Relief Act of 1997) or (d) the proposal of
any law having a proposed effective date on or before the Closing Date.
Section 24. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if (i) delivered personally, or (ii)
sent by reputable overnight courier service, or (iii) telecopied (which is
confirmed), or (iv) five days after being mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to the Optionee, to:
Farm Family Holdings, Inc.
P.O. Box 656
Albany, New York 12201-0656
Attention: General Counsel
Telephone: (518) 431-5409
Telecopy: (518) 431-5999
(b) If to the Shareholders, to:
The addresses of each Shareholder listed on Exhibit A
hereto.
A-26
<PAGE>
Section 25. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed entirely within such State and without
regard to its choice of law principles.
Section 26. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 27. Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed to be an original, but both of
which, taken together, shall constitute one and the same instrument.
Section 28. Expenses. Except as otherwise expressly provided herein, all
costs and expenses incurred in connection with the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses.
Section 29. Amendments; Waiver. This Agreement may be amended by the
parties hereto and the terms and conditions hereof may be waived only by an
instrument in writing signed on behalf of each of the parties hereto, or, in the
case of a waiver, by an instrument signed on behalf of the party waiving
compliance.
Section 30. Action by the Shareholders. Notwithstanding any provision of
this Agreement to the contrary, any action or decision required to be taken or
made by the Shareholders pursuant to this Agreement may be taken or made by the
written consent of the holders of a majority of the Shares held by the
Shareholders; provided, however, that no such action or decision shall, without
the written consent of all the Shareholders, reduce the percentage of
Shareholders required to approve any such action or decision pursuant to this
Section 30. Any action or decision taken or made by the written consent of the
holders of a majority of the Shares pursuant to this Section 30 shall apply
equally to all Shareholders and shall be binding upon all of them.
A-27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
FARM FAMILY HOLDINGS, INC.
By /s/ Philip P. Weber
-------------------
Name: Philip P. Weber
Title: President & C.E.O.
CONNECTICUT FARM BUREAU SERVICE
COMPANY
By /s/ Norma R. O' Leary
---------------------
Name: Norma R. O'Leary
Title: President
DELAWARE FARM BUREAU SERVICE COMPANY,
INC.
By /s/ Joseph E. Calhoun
---------------------
Name: Joseph E. Calhoun
Title: President
MAINE FARM BUREAU SERVICE COMPANY
By /s/ Sandra A. George
--------------------
Name: Sandra A. George
Title: President
A-28
<PAGE>
MASSACHUSETTS FARM BUREAU SERVICE
COMPANY, INC.
By /s/ Arthur D. Keown, Jr.
------------------------
Name: Arthur D. Keown, Jr.
Title: President
By /s/ James F. Slattery
---------------------
Name: James F. Slattery
Title: Clerk
NEW HAMPSHIRE FARM BUREAU FEDERATION
By /s/ Gordon H. Gowen
-------------------
Name: Gordon H. Gowen
Title: President
NEW JERSEY FARM BUREAU SERVICE
COMPANY
By /s/ John I. Rigolizzo, Jr.
--------------------------
Name: John I. Rigolizzo, Jr.
Title: President
NEW YORK FARM BUREAU SERVICE COMPANY,
INC.
By /s/ John W. Lincoln
-------------------
Name: John W. Lincoln
Title: President
RHODE ISLAND FARM BUREAU FEDERATION,
INC.
By /s/ William M. Stamp, Jr.
-------------------------
Name: William M. Stamp, Jr.
Title: President
A-29
<PAGE>
VERMONT FARM BUREAU, INC.
By /s/ Clark W. Hinsdale III
-------------------------
Name: Clark W. Hinsdale III
Title: President
WEST VIRGINIA FARM BUREAU, INC.
By /s/ Charles A. Wilfong
----------------------
Name: Charles A. Wilfong
Title: President
A-30
<PAGE>
AMENDMENT NO. 1 TO AMENDED AND RESTATED OPTION PURCHASE AGREEMENT
This AMENDMENT NO. 1 TO AMENDED AND RESTATED OPTION PURCHASE AGREEMENT,
dated as of April 28, 1998 (this "Amendment"), by and among FARM FAMILY
HOLDINGS, INC., a Delaware Corporation (the "Optionee"), and THE SHAREHOLDERS OF
FARM FAMILY LIFE INSURANCE COMPANY set forth on the signature pages hereof
(individually, a "Shareholder" and collectively, the "Shareholders").
WHEREAS, the Optionee and the Shareholders have previously entered into the
Amended and Restated Option Purchase Agreement, dated as of February 26, 1998,
(the "Option Purchase Agreement"); and
WHEREAS, the Optionee and the Shareholders desire to further amend the
Option Purchase Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Optionee and the Shareholders
hereby agree that the Option Purchase Agreement shall be, and hereby is, amended
and modified as follows:
1. Section 4(a) of the Option Purchase Agreement is amended by adding the
following phrase at the end of the second sentence of Section 4(a):
", unless another date, time or place is agreed to by the parties hereto."
2. Sections 7(a)(iii) and 7(b)(iii) of the Option Purchase Agreement are
amended by deleting the existing Sections 7(a)(iii) and 7(b)(iii) and inserting
in their place a new Section 7(a)(iii) and 7(b)(iii), which read as follows:
"the transactions contemplated hereby shall have been approved by the
affirmative vote of a majority of the outstanding shares of the
Optionee Common Stock present in person or by proxy at a meeting of
stockholders of the Optionee or such other vote of the stockholders of
the Optionee as may be required by applicable Law, the Certificate of
Incorporation and By-laws of the Optionee and the rules of the New York
Stock Exchange, Inc.;"
This Amendment may be executed in two or more counterparts, each of which
shall be considered one in the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
FARM FAMILY HOLDINGS, INC.
By /s/ Philip P. Weber
-------------------
Name: Philip P. Weber
Title: President & C.E.O.
A-31
<PAGE>
CONNECTICUT FARM BUREAU SERVICE
COMPANY
By /s/ Norma R. O'Leary
--------------------
Name: Norma R. O'Leary
Title: President
DELAWARE FARM BUREAU SERVICE COMPANY,
INC.
By /s/ Joseph E. Calhoun
---------------------
Name: Joseph E. Calhoun
Title: President
MAINE FARM BUREAU SERVICE COMPANY
By /s/ Sandra A. George
--------------------
Name: Sandra A. George
Title: President
MASSACHUSETTS FARM BUREAU SERVICE
COMPANY, INC.
By /s/ Arthur D. Keown, Jr.
------------------------
Name: Arthur D. Keown, Jr.
Title: President
NEW HAMPSHIRE FARM BUREAU FEDERATION
By /s/ Gordon H. Gowen
-------------------
Name: Gordon H. Gowen
Title: President
A-32
<PAGE>
NEW JERSEY FARM BUREAU SERVICE
COMPANY
By /s/ John I. Rigolizzo, Jr.
--------------------------
Name: John I. Rigolizzo, Jr.
Title: Vice President
NEW YORK FARM BUREAU SERVICE COMPANY,
INC.
By /s/ John W. Lincoln
-------------------
Name: John W. Lincoln
Title: President
RHODE ISLAND FARM BUREAU FEDERATION,
INC.
By /s/ William M. Stamp, Jr.
-------------------------
Name: William M. Stamp, Jr.
Title: President
VERMONT FARM BUREAU, INC.
By /s/ Clark W. Hinsdale III
-------------------------
Name: Clark W. Hinsdale III
Title: President
WEST VIRGINIA FARM BUREAU, INC.
By /s/ Charles A. Wilfong
----------------------
Name: Charles A. Wilfong
Title: President
A-33
<PAGE>
AMENDMENT NO. 2 TO AMENDED AND RESTATED OPTION PURCHASE AGREEMENT
This AMENDMENT NO. 2 TO AMENDED AND RESTATED OPTION PURCHASE AGREEMENT,
dated as of January 14, 1999 (this "Amendment"), by and among FARM FAMILY
HOLDINGS, INC., a Delaware Corporation (the "Optionee"), and THE SHAREHOLDERS OF
FARM FAMILY LIFE INSURANCE COMPANY set forth on the signature pages hereof
(individually, a "Shareholder" and collectively, the "Shareholders").
WHEREAS, the Optionee and the Shareholders have previously entered into the
Amended and Restated Option Purchase Agreement, dated as of February 26, 1998,
as amended by Amendment No. 1, dated as of April 28, 1998 (as so amended, the
"Option Purchase Agreement" or "Agreement"); and
WHEREAS, the Optionee and the Shareholders desire to further amend the
Option Purchase Agreement as set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Optionee and the Shareholders
hereby agree that the Option Purchase Agreement shall be, and hereby is, amended
and modified as follows:
1. Section 1(a) of the Option Purchase Agreement is amended by deleting the
existing definition of "Optionee Common Stock Price", and inserting in its place
a new definition of "Optionee Common Stock Price", which reads as follows:
"'Optionee Common Stock Price'" means $35.71875; provided,
however, that if the Closing Price on the last Trading Day
preceding the Closing Date (the "Testing Day Price") is less than
the product of 0.7 times the Optionee Common Stock Price, then
the Optionee Common Stock Price shall be equal to $35.71875
divided by a factor equal to (0.7 times the Optionee Common Stock
Price divided by the Testing Day Price) and; provided, further,
that if the Testing Day Price is greater than the product of 1.2
times the Optionee Common Stock Price, then the Optionee Common
Stock Price shall be equal to $35.71875 divided by a factor equal
to (1.2 times the Optionee Common Stock Price divided by the
Testing Day Price)."
2. Section 1(a) of the Option Purchase Agreement is amended by adding the
following definitions in alphabetical order to Section 1(a):
"'Farm Bureau'" has the meaning set forth in Section 14(c).
"'Members'" has the meaning set forth in Section 14(c).
"'Testing Day Price'" has the meaning set forth in the definition of
Optionee Common Stock Price.
3. Section 7 of the Option Purchase Agreement is amended by deleting the
existing Section 7 and inserting in its place a new Section 7, which reads as
follows:
"Section 7. Conditions of Closing. (a) The obligation of the Optionee to
consummate the Closing is subject to satisfaction of the following conditions at
or prior to the Closing (unless expressly
A-34
<PAGE>
waived in writing by the Optionee at or prior to the Closing): (i) all of the
terms, covenants and conditions of this Agreement to be complied with or
performed by the Shareholders at or prior to the Closing shall have been
complied with and performed by it in all material respects, and the
representations and warranties made by the Shareholders in this Agreement shall
be true and correct in all material respects at and as of the Closing, with the
same force and effect as though such representations and warranties had been
made at and as of the Closing, and the Optionee shall have received a
certificate executed on behalf of each of the Shareholders to the effect that
the foregoing conditions have been satisfied; (ii) all consents, approvals,
orders or authorizations of, or registrations, declarations or filings with, any
Governmental Authority required in connection with the transactions contemplated
hereby shall have been obtained or made, as the case may be; (iii) the
transactions contemplated hereby shall have been approved by (1) the affirmative
vote of the holders of at least a majority of the outstanding shares of the
Optionee Common Stock present in person or by proxy at a meeting of the
stockholders of the Optionee or such other vote of the stockholders of the
Optionee as may be required by applicable Law, the Certificate of Incorporation
and By-Laws of the Optionee and the rules of the New York Stock Exchange, Inc.,
and (2) the requisite affirmative votes of the Members of the Farm Bureaus
and/or by a court of competent jurisdiction, to the extent required by Section
14; (iv) all waiting periods, if any, including any extension thereof, under the
HSR Act shall have expired; (v) no preliminary or permanent injunction or other
order by any court of competent jurisdiction prohibiting or otherwise
restraining the transactions contemplated hereby shall be in effect; (vi) the
Optionee shall have received the opinion, dated the Closing Date, of counsel to
each Shareholder substantially to the effect set forth in Exhibit D; (vii) the
Company's By-Laws shall have been amended to permit the Optionee to acquire the
Shares pursuant to this Agreement; (viii) the Optionee shall have received an
opinion, in form and substance reasonably acceptable to the Optionee, from an
investment banking firm of national standing as to the fairness, from a
financial point of view, to the Optionee of the transactions contemplated by
this Agreement; (ix) each Shareholder shall have paid in cash its reimbursement
obligation to Optionee pursuant to Section 14(b) hereof; and (x) since the
Exercise Date, there shall not have occurred any event that has had or is
reasonably likely to have a Material Adverse Effect on the Company and United,
taken as a whole.
(b) The obligation of each Shareholder to consummate the Closing is subject
to the satisfaction of the following conditions at or prior to the Closing
(unless expressly waived in writing by such Shareholder at or prior to the
Closing): (i) all of the terms, covenants and conditions of this Agreement to be
complied with or performed by the Optionee at or prior to the Closing shall have
been complied with and performed by it in all material respects, and the
representations and warranties made by the Optionee in this Agreement shall be
true and correct in all material respects at and as of the Closing with the same
force and effect as though such representations and warranties had been made at
and as of the Closing, and the Shareholder shall have received a certificate
executed on behalf of the Optionee to the effect that the foregoing conditions
have been satisfied; (ii) all consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any Governmental Authority
required in connection with the transactions contemplated hereby shall have been
obtained or made, as the case may be; (iii) the transactions contemplated hereby
shall have been approved by (1) the affirmative vote of the holders of at least
a majority of the outstanding shares of the Optionee Common Stock present in
person or by proxy at a meeting of the stockholders of the Optionee or such
other vote of the stockholders of the Optionee as may be required by applicable
Law, the Certificate of Incorporation and By-Laws of the Optionee and the rules
of the New York Stock Exchange, Inc., and (2) the requisite affirmative vote of
such Shareholder's Members or the Members of such
A-35
<PAGE>
Shareholder's parent entity and/or by a court of competent jurisdiction, to the
extent required by Section 14; (iv) all waiting periods, including any
extensions thereof, under the HSR Act shall have expired; (v) no preliminary or
permanent injunction or other order by any court of competent jurisdiction
prohibiting or otherwise restraining the transactions contemplated hereby shall
be in effect; (vi) such Shareholder shall have received the opinion, dated the
Closing Date, of general counsel to the Optionee and the Insurance Subsidiary,
substantially to the effect set forth in Exhibit E; (vii) the Optionee shall
have executed and delivered the Registration Rights Agreement; and (viii) the
Company's By-Laws shall have been amended to permit the Optionee to acquire the
Shares pursuant to this Agreement."
4. Section 9(j)(ii) of the Option Purchase Agreement is amended by deleting
the existing Section 9(j)(ii) and inserting in its place a new Section 9(j)(ii),
which reads as follows:
"(ii) Subject to the information set forth on Schedule 9(j), the Optionee
has made available to the Shareholders complete and correct copies of the
audited consolidated financial statements and audited statutory financial
statements and, in each case, the notes thereto of the Insurance Subsidiary for
the years ended December 31, 1993, 1994 and 1995. Such financial statements and
the related notes thereto were prepared in accordance with GAAP and SAP, as the
case may be, consistently applied throughout the periods involved and fairly
present the financial condition, results of operations, cash flows and changes
in stockholders' equity of the Insurance Subsidiary at the dates and for the
periods presented."
5. Section 14 of the Option Purchase Agreement is amended by deleting the
existing Section 14 and inserting in its place a new Section 14, which reads as
follows:
"Section 14. Stockholder Approval; Member Approval. (a) In the event the
Optionee notifies the Shareholders of its election to exercise the Options, the
Optionee shall call a meeting of its stockholders for purposes of approving the
exercise of the Options pursuant to this Agreement.
(b) At or prior to the Closing, the Shareholders shall reimburse the
Optionee for an aggregate of 50% of the Optionee's reasonable out-of-pocket fees
and expenses incurred in connection with the meeting of the stockholders to be
called for the purpose of approving this Agreement as amended by Amendment No. 2
hereto, including printing, proxy solicitation, mailing, investment banking,
accounting and legal fees and expenses; provided, however, that the aggregate
fees and expenses to be reimbursed by the Shareholders pursuant to this
subsection (b) shall not exceed $200,000. Each Shareholder shall satisfy its
reimbursement obligation pursuant to this Section 14(b) by paying its pro rata
portion (based on the number of Shares owned by each of them) of such
reimbursement obligation to the Optionee in cash.
(c) Each of Rhode Island Farm Bureau Federation and West Virginia Farm
Bureau, Inc. (each such Shareholder, a "Farm Bureau") shall, and each of
Connecticut Farm Bureau Service Company, Massachusetts Farm Bureau Service
Company, Inc., New Jersey Farm Bureau Service Company and New York Farm Bureau
Service Company, Inc., shall use its best efforts to cause its parent entity
(each such parent entity also a "Farm Bureau") to, (A) (i) duly convene, as
promptly as practicable, a meeting of its members or voting delegates, as the
case may be ("Members"), to consider and vote on a proposal to approve the
transfer to the Optionee of the Shares owned by such Shareholder pursuant to
this Agreement, and (ii) include in the proxy materials to be sent to the
Members of such Farm Bureau the recommendation of the Board of
A-36
<PAGE>
Directors of such Farm Bureau that the Members of such Farm Bureau vote in
favor of the approval of such proposal, and/or (B) seek the approval of the
transfer to the Optionee of the Shares by such Shareholder pursuant to this
Agreement by a court of competent jurisdiction, as applicable.
(d) Each of the Shareholders referred to in subsection (c) above shall use
its best efforts to take, or cause to be taken, all actions, and to do, or cause
to be done, all things necessary, proper or advisable to obtain, as promptly as
practicable, the consent of its Members, or the Members of its parent entity,
and/or court approval, as the case may be, for the transfer to the Optionee of
the Shares pursuant to this Agreement."
6. Section 16(a)(ii) of the Option Purchase Agreement is amended by
deleting the existing Section 16(a)(ii)(B) and inserting in its place new
Sections 16(a)(ii)(B) and (C), which read as follows:
"(B) by either the Optionee or the Shareholders upon written notice to the
other if the Closing has not occurred by April 30, 1999, provided, that the
right to terminate this Agreement pursuant to this clause (B) shall not be
available to any party whose failure (on or after the date of Amendment No. 2
hereto) to fulfill any of its obligations under this Agreement resulted in the
Closing not occurring by such date; or
(C) by the Optionee if the Testing Day Price is less than $25.003125."
7. Section 23 of the Option Purchase Agreement is amended by deleting the
second existing clause (ii) of Section 23 and inserting in its place a new
clause (ii), which reads as follows:
"(ii) the amendments to the Option Purchase Agreement (as it existed prior
to February 26, 1998) made by this Agreement dated February 26, 1998 and any
subsequent amendments hereto shall be void ab initio (other than clauses (i)
through (v) of this proviso) and correspondingly, the terms of the Option
Purchase Agreement (as it existed prior to February 26, 1998) shall continue in
full force and effect as if this Agreement and any subsequent amendments thereto
had never become effective,"
8. Schedule 9(j) attached hereto is hereby added to the Option Purchase
Agreement and Schedules 8(l) and Schedule 9(l) are hereby amended by deleting
the existing Schedules 8(l) and Schedule 9(l) and inserting in their place
Schedule 8(l) and Schedule 9(l), respectively, attached hereto.
9. Except as modified by this Amendment, the terms of the Option Purchase
Agreement shall remain in full force and effect.
This Amendment may be executed in two or more counterparts, each of which
shall be considered one in the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties and delivered
to the other parties, it being understood that all parties need not sign the
same counterpart.
A-37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
FARM FAMILY HOLDINGS, INC.
By /s/ Philip P. Weber
-------------------
Name: Philip P. Weber
Title: President & C.E.O.
CONNECTICUT FARM BUREAU SERVICE
COMPANY
By /s/ Randolph C. Blackmer, Jr.
-----------------------------
Name: Randolph C. Blackmer, Jr.
Title: President
DELAWARE FARM BUREAU SERVICE COMPANY,
INC.
By /s/ Robert L. Baker
-------------------
Name: Robert L. Baker
Title: President
MAINE FARM BUREAU SERVICE COMPANY
By /s/ Sandra A. George
--------------------
Name: Sandra A. George
Title: President
A-38
<PAGE>
MASSACHUSETTS FARM BUREAU SERVICE
COMPANY, INC.
By /s/ Arthur D. Keown, Jr.
------------------------
Name: Arthur D. Keown, Jr.
Title: President
By /s/ James F. Slattery
----------------------
Name: James F. Slattery
Title: Treasurer
NEW HAMPSHIRE FARM BUREAU FEDERATION
By /s/ Frank W. Reinhold, Jr.
--------------------------
Name: Frank W. Reinhold, Jr.
Title: Second Vice-President
NEW JERSEY FARM BUREAU SERVICE
COMPANY
By /s/ Walter Ellis, Jr.
---------------------
Name: Walter Ellis, Jr.
Title: President
NEW YORK FARM BUREAU SERVICE COMPANY,
INC.
By /s/ John W. Lincoln
-------------------
Name: John W. Lincoln
Title: President
RHODE ISLAND FARM BUREAU FEDERATION,
INC.
By /s/ William M. Stamp, Jr.
-------------------------
Name: William M. Stamp, Jr.
Title: President
A-39
<PAGE>
VERMONT FARM BUREAU, INC.
By /s/ Clark W. Hinsdale III
-------------------------
Name: Clark W. Hinsdale III
Title: President
WEST VIRGINIA FARM BUREAU, INC.
By /s/ Charles A. Wilfong
-------------------------
Name: Charles A. Wilfong
Title: President
A-40
<PAGE>
ANNEX B
February 17, 1999
Board of Directors
Farm Family Holdings, Inc.
344 Route 9W
Glenmont, NY 12201
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to Farm Family Holdings, Inc. (the
"Company") of the Consideration (as defined below) to be paid by the Company in
connection with the proposed acquisition (the "Proposed Acquisition") of all of
the outstanding shares of capital stock of Farm Family Life Insurance Company
(the "Life Company") pursuant to the Option Purchase Agreement dated as of
February 14, 1996, as amended by Amendment No. 1 dated as of April 22, 1997, and
the Amended and Restated Option Purchase Agreement dated as of February 26,
1998, as amended by Amendment No. 1 dated as of April 28, 1998 and Amendment No.
2 dated as of January 14, 1999 (as so amended, the "Option Purchase Agreement"),
by and between the Company and the shareholders of the Life Company (the
"Shareholders").
As more specifically set forth in the Option Purchase Agreement, and
subject to the terms and conditions thereof, the Company has delivered notice,
pursuant to Section 3 of the Option Purchase Agreement, of the proposed exercise
of its option (the "Option") to purchase all of the outstanding shares of
capital stock of the Life Company. You have advised us that the aggregate
Exercise Price (as defined in the Option Purchase Agreement) payable to the
Shareholders pursuant to Section 6(b) of the Option Purchase Agreement is $37.5
million and such aggregate Exercise Price will be payable in the form of $31.5
million aggregate value of common stock of the Company (the "Company Common
Stock") and $6 million aggregate stated value of 6 1/8% voting preferred stock
of the Company (the "Company Preferred Stock" and, together with the Company
Common Stock, the "Consideration"). Pursuant to the Option Purchase Agreement,
the number of shares of Company Common Stock and Company Preferred Stock issued
as the Consideration shall be determined using a per share price of $35.71875
(the "Fixed Price"); provided, however, that if the closing price of the Company
Common Stock on the last trading day prior to the closing of the Proposed
Acquisition (the "Testing Day Price") is less than $25.003125, then such number
of shares shall be determined using a per share price equal to $35.71875 divided
by a factor equal to 0.7 times the Fixed Price divided by the Testing Day Price;
and provided, further, that if the Testing Day Price is greater than $42.8625,
then such number of shares shall be determined using a per share price equal to
$35.71875 divided by a factor equal to 1.2 times the Fixed Price divided by the
Testing Day Price.
B-1
<PAGE>
As you are aware, Salomon Smith Barney Inc. (collectively with all
predecessors to Salomon Smith Barney Inc., "Salomon Smith Barney"), is acting as
financial advisor to the Company in connection with the Proposed Acquisition and
will receive a fee for such services, a substantial portion of which is
contingent upon consummation of the Proposed Acquisition. Additionally, Salomon
Smith Barney or its affiliates have previously rendered certain investment
banking and financial advisory services to the Company and affiliates of the
Company, including acting as financial advisor and lead underwriter to the
Company in connection with the demutualization and initial public offering of
Farm Family Mutual Insurance Company, for which we or such affiliates received
customary compensation. In addition, in the ordinary course of our business, we
actively trade the equity securities of the Company for our own account and for
the accounts of customers and, accordingly, may at any time hold a long or short
position in such securities. Salomon Smith Barney and its affiliates (including
Citigroup Inc. and its affiliates) may have other business relationships with
the Company or the Life Company.
In connection with rendering our opinion, we have received, reviewed,
analyzed, and relied upon certain internal information furnished or prepared by
the management of the Life Company concerning its businesses and operations,
including historical and current statements of financial position and results of
operations of the Life Company and financial forecasts of the Life Company. In
conducting our analysis and arriving at our opinion as expressed herein, we have
considered such financial and other factors as we have deemed appropriate under
the circumstances, including, among others, the following: (i) the Option
Purchase Agreement, (ii) the historical and current financial position and
results of operations of the Life Company, (iii) the business prospects of the
Life Company, (iv) the historical and current market for the equity securities
of companies that we believe to be comparable in certain respects to the Life
Company, (v) the terms of the Company Preferred Stock and the terms of publicly
traded preferred securities issued by other financial institutions, (vi) certain
other internal information, including financial and operating projections
relating to the Life Company, prepared by the management of the Life Company,
provided to us for purposes of our analysis, (vii) the fact that the Company and
the Life Company have common management and share facilities, employees and
agents, (viii) certain other publicly available financial and other information
regarding the Company and (ix) the nature and terms of certain other
transactions which we believe to be relevant to our inquiry. We have also met
with certain officers and representatives of the Company and the Life Company to
discuss the foregoing as well as other matters relevant to our inquiry. We have
also taken into account our assessment of general economic, market and financial
conditions and our experience in securities valuation.
In our review and analysis and in arriving at our opinion, we have
assumed and relied, without independent verification, upon the accuracy and
completeness of the information provided to us or publicly available, and we
have not assumed any responsibility for independent verification of such
information. With respect to the financial forecasts of the Life Company, we
have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of the Life
B-2
<PAGE>
Company as to the future financial performance of the Life Company, and we
express no opinion with respect to such forecasts or the assumptions on which
they are based. In addition, we have not conducted a physical inspection of any
of the properties or facilities of the Life Company nor have we made or obtained
or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any of the assets (including properties and
facilities) or liabilities of the Life Company. We have assumed, without
independent verification, that the shares of Company Common Stock that are being
issued as a portion of the Consideration have an aggregate value of $31.5
million and that the shares of Company Preferred Stock that are being issued as
a portion of the Consideration have an aggregate value equal to the aggregate
stated value of $6 million.
Our opinion is necessarily based upon conditions as they exist and can
be evaluated on the date hereof, and we assume no responsibility to update or
revise our opinion based upon circumstances or events occurring after the date
hereof. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the Company of the Consideration to be paid in
connection with the Proposed Acquisition of all of the outstanding shares of
capital stock of the Life Company and does not address the Company's underlying
decision to exercise the Option or to effect the Proposed Acquisition and does
not constitute a recommendation as to how any Board member should vote with
respect to the exercise of the Option. This opinion also does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Proposed Acquisition.
It is understood that our opinion expressed herein is for the benefit
and use of the Board of Directors of the Company in considering the transaction
to which it relates and may not be used by the Company for any other purpose or
be reproduced, disseminated, quoted or referred to by the Company at any time,
in any manner or for any purpose, without the prior written consent of Salomon
Smith Barney, except that it may be referred to or included in, to the extent
required by applicable federal securities law, statements filed with the
Securities and Exchange Commission, including the Proxy Statement mailed to the
Company's stockholders in connection with the Option Purchase Agreement.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Consideration to be paid by the Company in connection
with the Proposed Acquisition of all of the outstanding shares of capital stock
of the Life Company is fair from a financial point of view to the Company.
Very truly yours,
/s/ Salomon Smith Barney
B-3
<PAGE>
ANNEX C
INDEX TO HISTORICAL FINANCIAL STATEMENTS
FARM FAMILY LIFE INSURANCE COMPANY AND SUBSIDIARY
Page
Report of Independent Accountants............................... C-2
Consolidated Balance Sheets at September 30, 1998 (unaudited) and
at December 31, 1997 and 1996............................... C-3
Consolidated Statements of Income and Comprehensive Income for
the Nine Months Ended September 30, 1998 and 1997
(unaudited) and for the Years Ended December 31, 1997, 1996,
and 1995.................................................... C-4
Consolidated Statements of Stockholders' Equity for the Nine
Months Ended September 30, 1998 (unaudited) and for the
Years Ended December 31, 1997, 1996,
and 1995.................................................. C-5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 (unaudited) and for the Years
Ended December 31, 1997, 1996, and 1995..................... C-6
Notes to Consolidated Financial Statements.......................... C-7
C-1
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
Farm Family Life Insurance Company and Subsidiary
We have audited the accompanying consolidated balance sheets of Farm Family Life
Insurance Company and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Farm Family Life
Insurance Company and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Albany, New York \s\ Coopers & Lybrand LLP
March 6, 1998
C-2
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
------------- ------------
($ in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Assets
Investments:
Fixed Maturities
Available for sale, at fair value
<S> <C> <C> <C>
(Amortized cost: $658,924 in 1998, $647,207 in 1997 and $619,341 in 1996) $719,898 $693,433 $641,224
Equity securities
Available for sale, at fair value
(Cost: $14,360 in 1998 and 1997, and $13,419 in 1996) 36,321 37,636 30,722
Mortgage loans on real estate 15,164 15,151 13,919
Policy loans 30,321 28,937 28,841
Other invested assets 639 741 1,250
Short-term investments 4,938 4,864 10,542
- ---------------------------------------------------------------------------------------------------------------
Total investments 807,281 780,762 726,498
- ---------------------------------------------------------------------------------------------------------------
Cash 2,985 2,481 1,600
Reinsurance receivables 1,130 1,159 1,192
Deferred acquisition costs 25,395 31,046 42,602
Property and equipment, net 12,061 12,715 13,914
Accrued investment income 12,718 13,954 13,837
Other assets 1,911 1,782 1,139
- ---------------------------------------------------------------------------------------------------------------
Total Assets $863,481 $843,899 $800,782
===============================================================================================================
Liabilities:
Future policy and contract benefits $221,054 $211,212 $197,050
Funds on deposit from policyholders 419,208 423,495 421,227
Accrued dividends to policyholders 5,585 5,268 5,024
Deferred income tax liability 38,426 33,824 25,085
Payable to affiliate (see Note 9) 17,438 17,888 16,133
Other liabilities 4,263 3,552 5,047
Participating policyholders' interest 116,332 109,557 96,530
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 822,306 804,796 766,096
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencie
Stockholders' equity:
Common Stock, $50 par value, 61,000 shares authorized
and 60,011 shares issued and outstanding 3,001 3,001 3,001
Accumulated other comprehensive income 1,918 1,595 38
Retained earnings 36,256 34,507 31,647
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,175 39,103 34,686
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $863,481 $843,899 $800,782
===============================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
C-3
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the Nine Months For the Year
Ended Ended
September 30, December 31,
($ in thousands) 1998 1997 1997 1996 1995
- --------------------------------------------------------------------------------- --------------------------
Revenues:
<S> <C> <C> <C> <C> <C>
Premiums from life and health operations $23,002 $22,498 $30,505 $30,322 $29,358
Premiums from property/casualty operations 39 6,651 9,020 9,440 9,328
Net investment income 41,445 40,415 54,964 55,728 52,572
Realized investment gains, net 3,184 3,427 2,914 284 5,652
Policy and contract charges 4,342 3,803 5,041 4,960 4,482
Other income (see Note 9) 703 938 1,153 920 928
- ------------------------------------------------------------------------------------------------------------
Total revenues 72,715 77,732 103,597 101,654 102,320
- ------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Benefits to policyholders 22,788 21,737 26,843 27,031 26,775
Losses and loss adjustment expenses
on property/casualty operations (see Note 9) 1,481 6,287 9,975 7,756 6,947
Operating expenses (see Note 9) 6,710 5,420 7,748 8,768 8,964
Non-recurring expenses 203 - 707 914 --
Interest credited to policyholders 16,564 18,886 24,813 24,629 26,495
Amortization of deferred acquisition costs 5,300 5,133 6,852 6,910 7,269
Participating policyholders' interest 16,317 15,796 21,617 21,159 19,130
- ------------------------------------------------------------------------------------------------------------
Total 69,363 73,259 98,555 97,167 95,580
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 3,352 4,473 5,042 4,487 6,740
Income tax expense 1,123 1,510 1,702 1,536 2,301
- ------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $2,229 $2,963 $3,340 $2,951 $4,439
============================================================================================================
Other comprehensive income, net of tax
Unrealized holding gain arising during the period
(net of deferred tax of ($145), ($403), ($866), $122 and 269 748 1,608 (166) 415
($239), respectively)
Reclassification adjustment for gains included in net income
(net of tax expense of $16, $49, $28, $33 and $16, (30) (91) (51) (61) (30)
respectively)
- -----------------------------------------------------------------------------------------------------------
239 657 1,557 (227) 385
- -----------------------------------------------------------------------------------------------------------
Other Comprehensive Income $2,468 $3,620 $4,897 $2,724 $4,824
===========================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
C-4
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
------------- ------------
($ in thousands) 1998 1997 1996 1995
- ------------------------------------------------------------------------------ ------------------------------
Common Stock
<S> <C> <C> <C> <C>
Beginning of period $3,001 $3,001 $3,001 $3,001
- ------------------------------------------------------------------------------ ------------------------------
End of period 3,001 3,001 3,001 3,001
- ------------------------------------------------------------------------------ ------------------------------
Accumulated other comprehensive income
Beginning of period 1,595 38 265 (120)
Change in unrealized investment gains (losses), net of effect
of deferred income taxes and amortization of deferred acquisiton costs 323 1,557 (227) 385
- ------------------------------------------------------------------------------ ------------------------------
End of period 1,918 1,595 38 265
- ------------------------------------------------------------------------------ ------------------------------
Retained earnings
Beginning of period 34,507 31,647 29,176 25,217
Dividends to stockholders (480) (480) (480) (480)
Net income 2,229 3,340 2,951 4,439
- ------------------------------------------------------------------------------ -----------------------------
End of period 36,256 34,507 31,647 29,176
- ------------------------------------------------------------------------------ -----------------------------
Total Stockholders' Equity $41,175 $39,103 $34,686 $32,442
============================================================================== =============================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
C-5
<PAGE>
<TABLE>
<CAPTION>
FARM FAMILY LIFE INSURANCE COMPANY & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months For the Year
Ended Ended
September 30, December 31,
------------- ------------
($ in thousands) 1998 1997 1997 1996 1995
- --------------------------------------------------------------------------- ------------------------------
Operating Activities
<S> <C> <C> <C> <C> <C>
Net income $2,229 $2,963 $3,340 $2,951 $4,439
Amortization of bond discount 421 742 906 (181) (520)
(premium)
Amortization of mortgage discount - - - (53) (53)
Interest credited to policyholders 16,564 18,886 24,813 24,629 26,495
Deferred income taxes (3,044) (3,964) (5,432) (2,831) (4,283)
Participating policyholders interest 16,317 15,796 21,617 21,159 19,130
Dividends to policyholders (7,980) (7,362) (10,066) (9,787) (9,380)
Realized investment gains, net (3,184) (3,427) (2,914) (284) (5,652)
Amortization of deferred acquisition costs 5,300 5,133 6,852 6,910 7,269
Capitalization of deferred acquisition costs (6,674) (7,239) (9,731) (9,682) (10,491)
Depreciation expense 2,008 2,038 2,686 2,556 2,505
Gain on sale of property and equipment (38) (23) (23) (15) (36)
Changes in:
Accrued investment income 1,236 324 (117) (861) (1,317)
Reinsurance receivable 29 (316) 33 (733) (117)
Other assets (129) (554) (662) (783) 285
Future policy and contract benefits 9,842 12,172 15,504 12,081 11,113
Payable to affiliate (see Note 9) (450) 499 1,755 2,275 1,410
Other liabilities 1,028 (922) (1,251) 899 (1,155)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,475 34,746 47,310 48,250 39,642
- ----------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from sales:
Fixed maturities available for sale 9,383 12,988 48,913 18,184 43,560
Equity securities 1,093 4,624 5,074 1,678 11,082
Investment collections:
Fixed maturities available for sale 56,911 39,242 49,028 51,004 54,065
Mortgage loans on real estate - 928 1,154 7,454 5,037
Equity securities - 14 254 - 452
Investment purchases:
Fixed maturities available for sale (76,341) (74,120) (127,320) (104,167) (150,456)
Mortgage loans on real estate (13) (2,373) (2,386) - (3,500)
Equity securities - (2,748) (2,748) (4,152) (438)
Policy loans issued, net (1,384) (114) (96) 1,725 (660)
Sales of other invested assets, net 102 651 509 1,050 449
Sales of short-term investments, net (74) 3,296 5,678 271 (1,767)
Purchases of property and equipment (1,384) (1,008) (1,511) (1,944) (2,387)
Proceeds from sale of property and equipment 67 32 47 163 77
- ----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (11,640) (18,588) (23,404) (28,734) (44,486)
- ----------------------------------------------------------------------------------------------------------
Financing Activities
Contractholder fund deposits 25,520 24,680 32,951 36,638 58,789
Contractholder fund withdrawals (46,371) (39,852) (55,496) (55,242) (50,544)
Payments on mortgage payable - - - - (2,884)
Dividends on common stock (480) (480) (480) (480) (480)
- ----------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by
financing activities (21,331) (15,652) (23,025) (19,084) 4,881
- ----------------------------------------------------------------------------------------------------------
Increase in cash 504 506 881 432 37
Cash at beginning of period 2,481 1,600 1,600 1,168 1,131
- ----------------------------------------------------------------------------------------------------------
Cash at end of period $2,985 $2,106 $2,481 $1,600 $1,168
==========================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
C-6
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of Farm Family Life Insurance Company ("Farm Family Life") and its
wholly owned subsidiary, United Farm Family Insurance Company ("United Farm
Family") (collectively referred to as the "Company"). All significant
intercompany balances and transactions have been eliminated. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues, benefits and expenses during the
reporting period. Actual results could differ from those estimates.
Farm Family Life provides life, annuity, and accident & health insurance
coverages principally to members of the state Farm Bureau organizations in
New York, New Jersey, Delaware, West Virginia and all of the New England
states. Membership in a state Farm Bureau organization is not a
prerequisite for insurance coverage. Farm Family Life is a stock life
insurance company owned by the state Farm Bureau organizations of the ten
states in which the Company operates.
The operations of Farm Family Life are closely related with those of its
subsidiary, United Farm Family, and its affiliate, Farm Family Casualty
Insurance Company. ("Farm Family Casualty") (see Note 9). United Farm
Family is a property and casualty insurance company whose business prior to
1998 consisted primarily of reinsurance assumed from Farm Family Casualty.
In 1998, United Farm Family began to write direct business in Pennsylvania
and Maryland. United Farm Family terminated its reinsurance assumed
business from Farm Family Casualty effective December 31, 1997. Farm Family
Casualty is a wholly owned subsidiary of Farm Family Holdings, Inc. ("Farm
Family Holdings"), a publicly traded company. The Company and Farm Family
Casualty are affiliated by common management, shared agents and employees
and similar Boards of Directors.
The accompanying unaudited consolidated financial statements, reflect, in
the opinion of management, all adjustments, consisting of only normal and
recurring adjustments, necessary for a fair presentation of the
consolidated financial position at September 30, 1998, and the consolidated
results of operations for the nine month periods ended September 30, 1997
and 1998. The results of operations for the nine month period ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
C-7
<PAGE>
Investments
Fixed maturities include bonds, redeemable preferred stocks and
mortgage-backed securities. Fixed maturities may be sold prior to their
contractual maturity and are classified as available for sale and carried
at fair value. The difference between amortized cost and fair value of
fixed maturities classified as available for sale, net of deferred income
taxes and amortization of deferred acquisition costs, is reflected as a
component of stockholders' equity.
Equity securities include common and non-redeemable preferred stocks which
are carried at fair value. The difference between cost and fair value of
equity securities, less deferred income taxes and amortization of deferred
acquisition costs, is reflected as a component of stockholders' equity.
Mortgage loans on real estate are carried at amortized cost less an
allowance for estimated uncollectible amounts. At December 31, 1997 and
1996, no mortgage loans were considered uncollectible. Other invested
assets, which consist primarily of investments in limited partnerships, are
carried at cost which approximates fair value.
Policy Loans are carried at the unpaid principal balance.
Cash and short-term investments consist of demand deposits, repurchase
agreements and money market investments whose maturities are three months
or less from the date of purchase. Short-term investments are carried at
cost which approximates fair value.
The carrying values of all investments are reviewed on an ongoing basis. If
this review indicates a decline in fair value below cost is other than
temporary, the Company's carrying value in the investment is reduced to its
estimated realizable value and a specific writedown is taken. Such
writedowns are included in realized investment gains and losses.
Investment income consists primarily of interest and dividends. Interest is
recognized on an accrual basis and dividends are recorded on the
ex-dividend date. Interest income on mortgage-backed securities is
determined on the effective yield method based on estimated principal
repayments. Realized investment gains and losses are determined on a
specific identification basis.
Impairments
Effective January 1, 1996, the Company adopted the provisions prescribed by
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". This statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires a write down to fair value when long-lived assets
to be held and used are impaired. The statement also requires that
long-lived assets to be disposed of (e.g. real estate held for sale) be
C-8
<PAGE>
carried at the lower of cost or fair value less costs to sell and does not
allow such assets to be depreciated. The Company periodically reviews
long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The impact of
this standard did not have a material impact on the Company's 1997 and 1996
results of operations, financial condition or liquidity.
Premium Revenue and Benefits to Policyholders
RECOGNITION OF TRADITIONAL LIFE, GROUP AND ANNUITY PREMIUM REVENUE AND
BENEFITS TO POLICYHOLDERS Traditional life insurance products include those
products with fixed and guaranteed premiums and benefits, and consist
principally of whole life insurance policies and certain annuities with
life contingencies (immediate annuities). Life insurance premiums and
immediate annuity premiums are recognized as premium revenue when due.
Group insurance premiums are recognized as premium revenue over the time
period to which the premiums relate. Benefits and expenses are associated
with earned premiums so as to result in recognition of profits over the
life of the contracts. This association is accomplished by means of the
provision for liabilities for future policy benefits and the amortization
of deferred acquisition costs.
RECOGNITION OF UNIVERSAL LIFE-TYPE CONTRACTS REVENUE AND BENEFITS TO
POLICYHOLDERS Universal life-type policies are insurance contracts with
terms that are not fixed and guaranteed. The terms that may be changed
could include one or more of the amounts assessed to the policyholder,
premiums paid by the policyholder or interest accrued to policyholder
balances. Amounts received as payments for such contracts are not reported
as premium revenues. Payments received are considered deposits and are
classified as funds on deposit from policyholders. Account balances are
increased by interest credited and reduced by withdrawals, mortality
charges and administrative expenses charged to policyholders. For the years
ended December 31, 1997, 1996 and 1995, interest rates credited to
policyholder funds ranged from 6% to 7 1/2%.
C-9
<PAGE>
Revenues for universal life-type policies consist of charges assessed
against policy account values for the cost of insurance and policy
administration. Policy benefits and claims that are charged to expense
include interest credited to contracts and benefit claims incurred in the
period in excess of related policy account balances.
RECOGNITION OF INVESTMENT CONTRACT REVENUE AND BENEFITS TO POLICYHOLDERS
Contracts that do not subject the Company to risks arising from
policyholder mortality or morbidity are referred to as investment
contracts. Certain annuity contracts are considered investment contracts.
Amounts received as payments for such contracts are not reported as premium
revenues. Payments received are considered deposits and are classified as
funds on deposit from policyholders. Account balances are increased by
interest credited and reduced by withdrawals. For the years ended December
31, 1997, 1996 and 1995, interest rates credited to policyholder funds
ranged from 5% to 8%.
Revenues for investment contracts consist of investment income and policy
administration charges. Contract benefits that are charged to expense
include benefit claims incurred in the period in excess of related contract
balances, and interest credited to contract balances.
Interest crediting rates for universal life type contracts and investment
contracts are set annually by the board of directors and are based on
current market conditions.
Deferred Acquisition Costs
Those costs of acquiring new business, which vary with and are primarily
related to the production of new business, have been deferred to the extent
that such costs are deemed recoverable from future premiums. Such costs
include commissions, certain costs of policy issuance and underwriting, and
certain variable agency expenses.
For traditional insurance products, these costs are amortized, with
interest, in proportion to the ratio of estimated annual revenues to the
estimated total revenues over the contract period. For most life insurance,
a 15-year to 40-year amortization period is used, and a 20-year period is
used for annuities.
Deferred acquisition costs for universal life contracts and certain annuity
contracts are amortized at a constant rate based upon the present value of
estimated gross profit expected to be realized over the life of the
contracts, which is reevaluated annually.
Future Policy and Contract Benefits
Liabilities for future policy benefits for term life contracts are
calculated using the net level premium method and assumptions as to
investment yields, mortality and withdrawals. These assumptions are based
on projections and past experience and include provisions for possible
unfavorable deviation. These assumptions are made at the time the contract
is issued.
Liabilities for future policy benefits for traditional whole life contracts
are calculated using the net level premium method and statutory assumptions
as to interest and mortality. Traditional whole life is written on a
participating basis with a provision for dividends to policyholders (see
Participating Policyholders' interest).
Liabilities for future policy and contract benefits on universal life-type
and investment-type contracts are based on the policy account balance.
The liabilities for future policy and contract benefits for long-term
disability income contracts are based upon interest rate assumptions and
morbidity and termination rates from published tables. In 1995, the Company
completed its withdrawal from the group accident and health line of
business. The Company continues to write individual accident and health
coverages, primarily disability income policies.
C-10
<PAGE>
Income Taxes:
The income tax provision is calculated under the liability method. Deferred
income tax assets and liabilities are recorded based on the difference
between the financial statement and tax bases of assets and liabilities and
the enacted tax rates. The principal assets and liabilities giving rise to
such differences are future policy and contract benefits and funds on
deposit from policyholders and deferred acquisition costs. Deferred income
taxes also arise from unrealized investment gains or losses on equity
securities and fixed maturities classified as available for sale.
Property-Casualty Insurance Accounting:
Premiums are deferred and earned on a pro rata basis over the terms of the
respective policies. Amounts paid for ceded reinsurance premiums are
reported as prepaid reinsurance premiums and amortized over the remaining
contract period in proportion to premium. Premiums receivable are recorded
at cost less an allowance for doubtful accounts.
Policy acquisition costs that vary with and are primarily related to the
production of business have been deferred. Deferred acquisition costs
primarily consist of agents' compensation, premium taxes, and certain other
underwriting expenses. Such deferred acquisition costs are amortized as
premium revenue is recognized. Deferred acquisition costs are limited to
their estimated realizable value, which gives effect to the premium to be
earned, related investment income, and losses and loss adjustment expenses
expected to be incurred as the premium is earned.
Reserves for losses and loss adjustment expenses represent estimates of the
ultimate amounts necessary to settle reported losses and a provision for
incurred but not reported claims of insured losses. The reserve estimates
are based on known facts and circumstances, including the Company's
experience with similar cases and historical trends involving reserving
patterns, loss payments, pending levels of unpaid claims and product mix,
as well as other factors including court decisions, economic conditions and
public attitudes. The reserves for losses and loss adjustment expenses
include case basis estimates of reported losses, estimates of incurred but
not reported losses based upon prior experience adjusted for current
trends, and estimates of losses to be paid under assumed reinsurance
contracts. Estimated amounts of recoverable salvage and subrogation are
deducted from the reserves for losses and loss adjustment expenses. The
establishment of appropriate reserves, as well as related amounts
recoverable under reinsurance contracts is an inherently uncertain process.
Reserve estimates are regularly reviewed and updated, using the most
current information available. Any resulting adjustments, which may be
material, are reflected in current operations. Reserves for losses and loss
adjustment expenses are included in other liabilities on the accompanying
consolidated balance sheets
C-11
<PAGE>
Participating Policyholders' Interest:
The majority of Farm Family Life's insurance policies are written on a
"participating" basis, as defined in the New York State insurance law.
Profits earned on participating business are reserved for the payment of
dividends to policyholders except for the stockholders' share of profits on
participating policies, which is limited to the greater of 10% of the
statutory profit on participating business, or 50 cents per thousand
dollars of the face amount of participating life insurance in force.
Participating policyholders' interest includes the accumulated net income
from participating policies reserved for payment to such policyholders in
the form of dividends (less net income allocated to stockholders as
indicated above) as well as a pro rata portion of net unrealized investment
gains (losses). Dividends to policyholders are approved by the Board of
Directors based on the net income of the participating policies.
In addition to the greater of 10% of the statutory profit on participating
business or 50 cents per thousand dollars of the face amount of
participating life insurance in force, earnings available to common
stockholders consists of earnings on non-participating business and a pro
rata share of net investment income and realized investment gains (losses).
The change in participating policyholders' interest for the years ended
December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Participating policyholders' interest, beginning of year $ 96,530 $ 99,561 $ 69,887
Net income attributable to participating
policyholders interest 14,318 13,914 12,599
Change in unrealized gains (losses), net of effect of
deferred income taxes and amortization of deferred
acquisition costs attributable to participating
policyholders interest 8,773 (7,097) 26,401
Dividends to policyholders and other (10,064) (9,848) (9,326)
-------------------------------------
Participating policyholders' interest, end of year $ 109,557 $ 96,530 $ 99,561
=====================================
</TABLE>
2. Option to Purchase Farm Family Life
Farm Family Life entered into an Option Purchase Agreement with the
shareholders of Farm Family Holdings pursuant to which Farm Family Holdings
has, for a two-year period commencing on July 26, 1996, the option to
acquire Farm Family Life subject to certain conditions. On February 26,
1998, the Board of Directors of Farm Family Holdings approved the exercise
of the option to acquire Farm Family Life and its wholly owned subsidiary
United Farm Family. Under the terms, 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 $6 million
stated value of 6-1/8% voting preferred stock of Farm Family Holdings, less
certain expenses to be paid by Farm Family Life in connection with the
acquisition on behalf of the shareholders of Farm Family Life. The proposed
acquisition of Farm Family Life is subject to the approval of the
shareholders of Farm Family Holdings and receipt of all required
governmental approvals. Management expects that the acquisition of Farm
Family Life will be brought to the shareholders of Farm Family Holdings for
their approval in 1998.
C-12
<PAGE>
3. Investments
The cost/amortized cost, gross unrealized gains and losses and fair value
of available for sale securities at December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
Cost/ Gross
Amortized Unrealized Fair
($ thousands) Cost Gains (Losses) Value
---- -----
1997
Fixed maturities:
<S> <C> <C> <C> <C>
U.S.Governent & Agencies $ 15,009 $ 1,164 $ --- $ 16,173
States, Municipalities & 91,897 7,830 (40) 99,687
Political Subdivisions
Corporate 459,318 33,510 (256) 492,572
Mortgage-backed Securities 70,640 2,101 --- 72,741
Redeemable Preferred Stock 10,343 1,923 (6) 12,260
-----------------------------------------------
Total fixed maturities 647,207 46,528 (302) 693,433
Equity Securities 14,360 23,368 (92) 37,636
-----------------------------------------------
Total Available for Sale $ 661,567 $ 69,896 $ (394) $ 731,069
===============================================
</TABLE>
<TABLE>
<CAPTION>
Cost/ Gross
Amortized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1996
Fixed maturities:
<S> <C> <C> <C> <C>
U.S. Government & Agencies $ 30,511 $ 704 $ (467) $ 30,748
States, Municipalities & 88,928 5,141 (276) 93,793
Political Subdivisions
Corporate 445,465 18,356 (4,425) 459,396
Mortgage-backed Securities 40,981 2,043 (119) 42,905
Redeemable Preferred Stock 13,456 1,002 (76) 14,382
-----------------------------------------------
Total fixed maturities 619,341 27,246 (5,363) 641,224
Equity securities 13,419 17,311 (8) 30,722
-----------------------------------------------
Total Available for Sale $ 632,760 $ 44,557 $ (5,371) $ 671,946
===============================================
</TABLE>
C-13
<PAGE>
The table below presents the amortized cost and fair value of fixed
maturities at December 31, 1997, by contractual maturity. Actual maturities
may differ from contractual maturities as a result of prepayments.
<TABLE>
<CAPTION>
($ in thousands)
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 5,592 $ 5,923
Due after one year through five years 49,152 51,980
Due after five years through ten years 47,676 49,445
Due after ten years 474,147 513,344
--------------- ------------
576,567 620,692
Mortgage-backed securities 70,640 72,741
--------------- ------------
Total $ 647,207 $ 693,433
=============== ============
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. Mortgage-backed securities are included based
on their final maturity.
Unrealized investment gains and losses on fixed maturities classified as
available for sale and equity securities included in stockholders' equity
and participating policyholders' interest at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
($ in thousands) Cost/ Gross Net
Amortized Fair Unrealized Unrealized
Cost Value Gains (Losses) Gains
---- ----- ----- -------- -----
Fixed maturities available
<S> <C> <C> <C> <C> <C>
for sale $ 647,207 $ 693,433 $ 46,528 $ (302) $ 46,226
Equity securities 14,360 37,636 23,368 (92) 23,276
---------------------------------------------------------
Total $ 661,567 $ 731,069 $ 69,896 $ (394) $ 69,502
---------------------------------------------------------
Adjustment for assumed changes
in amortization of deferred aquitsion costs (30,958)
Provision for deferred income taxes (13,479)
--------------
Total net unrealized gain 25,065
Net unrealized gain attributabble to
participating policyholders' interest (23,470)
--------------
Net unrealized gain attributable to common
common stockholders $ 1,595
===============
</TABLE>
C-14
<PAGE>
The change in unrealized appreciation (depreciation) of investments
included in stockholders' equity and participating policyholders'
interest for the years ended December 31, 1997, 1996 and 1995 was as
follows:
<TABLE>
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities available for sale $ 24,342 $ (23,784) $ 67,005
Equity securities 5,972 5,361 2,229
------------------------------------
30,314 (18,423) 69,234
Adjustment for assumed changes in amortization
of deferred acquisition costs (14,430) 7,138 (28,034)
Provision for deferred income taxes (5,554) 3,961 (14,414)
------------------------------------
Total change in unrealized appreciation (depreciation) 10,330 (7,324) 26,786
Change in unrealized appreciation (depreciation) of
investments attributable to participating
policyholders' interest (8,773) 7,097 (26,401)
------------------------------------
Change in unrealized appreciation (depreciation) of
investments attributable to common stockholders $ 1,557 $ (227) $ 385
====================================
</TABLE>
The components of net investment income are as follows:
<TABLE>
($ in thousands) 1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Interest on fixed maturities $ 52,130 $ 51,262 $ 48,516
Dividends from equity securities 937 860 837
Interest on mortgage loans 1,232 1,865 2,579
Interest on short-term investments 432 393 625
Interest on policy loans 1,664 1,638 1,698
Real estate 23 23 23
Other, net 333 1,065 305
----------------------------------------
Total investment income 56,751 57,106 54,583
Investment expense (1,787) (1,378) (2,011)
----------------------------------------
Net investment income $ 54,964 $ 55,728 $ 52,572
========================================
</TABLE>
C-15
<PAGE>
A summary of realized investment gains (losses), net as follows:
<TABLE>
<CAPTION>
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $ (606) $ 593 $ 462
Equity securities 3,520 (309) 5,190
----------------------------------------
Total $ 2,914 $ 284 $ 5,652
========================================
</TABLE>
4. Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined using
available market information and appropriate value methodologies. The
estimated fair value of financial instruments are not necessarily
indicative of the amounts the Company might pay or receive in actual market
transactions. Potential taxes and other transaction costs have not been
considered in estimating fair value. As a number of the Company's
significant assets and liabilities (including deferred acquisition costs,
and deferred income taxes) are not considered financial instruments, the
disclosures that follow do not reflect the fair value of the Company as a
whole.
The following table presents the carrying value and fair value of the
Company's financial instruments at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
($ in thousands) December 31, 1997 December 31, 1996
----------------- ----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Assets
------
<S> <C> <C> <C> <C>
Fixed maturities available for sale: $ 693,433 $ 693,433 $ 641,224 $ 641,224
Equity securities 37,636 37,636 30,722 30,722
Mortgage loans on real estate 15,151 15,151 13,919 13,919
Policy loans 28,937 28,937 28,841 28,841
Other invested assets 741 741 1,250 1,250
Cash and short-term investments 7,345 7,345 12,142 12,142
Accrued investment income 13,954 13,954 13,837 13,837
Other assets 1,782 1,782 1,139 1,139
Liabilities
-----------
Other liabilites 3,552 3,552 5,047 5,047
Accrued dividends to policyholders 5,268 5,268 5,024 5,024
Funds on deposit from policyholders 423,495 420,918 421,227 421,004
Payable to affiliate 17,888 17,888 16,133 16,133
</TABLE>
C-16
<PAGE>
The following methods and assumptions were used in estimating the fair
value disclosures for the financial instruments:
Fixed maturities, equity securities and other invested assets -- The
fair value is based upon quoted market prices where available or
from independent pricing services.
Mortgage loans on real estate -- The fair value is based on discounted
cash flows using discount rates at which similar loans would be
made to borrowers with similar characteristics.
Cash and short-term investments, accrued dividends to policyholders,
accrued investment income, other assets, payable to affiliate and
other liabilities -- Due to their short-term highly liquid
nature, their carrying value approximates the fair value.
Policy Loans -- Future cash flows of policy loans are uncertain and
difficult to predict. As a result, management deems it
impractical to calculate the fair value of policy loans.
Funds on deposit from policyholders -- Deposit funds include
investment contracts that earn interest at either fixed or
variable rates. Interest rates are adjusted monthly to market
rates for those investment contracts with a variable rate. The
carrying value is the fair value for these liabilities. Other
investment contracts earn interest at a fixed rate for one, three
or five-year terms. Fair value for these liabilities is set by
discounting future cash flows to present value at current market
rates.
5. Property and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. The Company depreciates property using the straight line
method over the estimated useful lives ranging from 18 to 30 years. The
Company depreciates equipment using the straight line method over the
estimated useful lives ranging from 3 to 7 years. Depreciation expense was
$2,686,000 $2,556,000, and $2,505,000 for 1997, 1996, and 1995,
respectively. Affiliates of the Company rent a portion of the Company's
property and equipment (see Note 9). The Company received depreciation
expense recoveries of $2,242,000 $2,134,000 and $1,972,000 in 1997, 1996,
and 1995 from affiliates for the rental of property and equipment.
C-17
<PAGE>
The carrying value of the Company's property and equipment at December 31
is as follows:
<TABLE>
($ in thousands) 1997 1996
---------------- ---- ----
<S> <C> <C>
Home office building $9,914 $9,790
Furniture and equipment 15,550 14,555
Automobiles 832 775
------------------------
26,296 25,120
Accumulated depreciation (13,581) (11,206)
------------------------
Property and equipment, net $12,715 $13,914
========================
</TABLE>
6. Reinsurance
Life and Accident & Health Insurance:
The Company cedes life insurance and disability income business to several
unaffiliated reinsurers. Reinsurance contracts do not relieve the Company
from its obligations to policyholders as the primary insurer. The Company
evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar geographic regions,
activities and economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. Reinsurance
receivables consist principally of amounts due from four unaffiliated
reinsurers, each of which were rated "A" (Excellent) or above by the A.M.
Best Company, Inc. Amounts recoverable are regularly evaluated by the
Company and an allowance for uncollectible reinsurance is provided when
collection is in doubt. At December 31, 1997 and 1996, the Company
determined it was not necessary to provide an allowance for uncollectible
reinsurance.
The Company's retention limit is $400,000 per life for individual coverage,
with lower retentions applicable to group and substandard risks. Level term
life insurance is written on a 50% quota share basis. As of December 31,
1997, $335,846,000 of life insurance inforce was ceded to other companies.
The effect of reinsurance on life and accident & health premiums and
recoveries is as follows:
<TABLE>
($ in thousands) Year Ended December 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Direct Premiums $31,479 $31,151 $30,052
Reinsurance Ceded (974) (829) (694)
-----------------------------------------
Net Premiums $30,505 $30,322 $29,358
-----------------------------------------
Reinsurance Recoveries $ 785 $ 416 $ 224
=========================================
</TABLE>
C-18
<PAGE>
Property and Casualty:
United Farm Family assumes all of its property and casualty business from
its affiliate, Farm Family Casualty, (See Note 9). The effects of
reinsurance on property and casualty premiums written and earned, and
losses and loss adjustment expenses, for the years indicated were as
follows:
<TABLE>
Year Ended December 31,
($ in thousands) 1997 1996 1995
---- ---- ----
Premiums written
<S> <C> <C> <C>
Direct $ 39 $ 115 $ 105
Assumed from Farm Family Casualty 8,959 9,336 9,237
Ceded to Farm Family Casualty (3) (6) (5)
Ceded to non-affiliates (1) (4) (4)
-------------------------------------
Premiums written, net of reinsurance $ 8,994 $ 9,441 $ 9,333
=====================================
Premiums earned
Direct $ 64 $ 116 $ 99
Assumed from Farm Family Casualty 8,960 9,334 9,238
Ceded to Farm Family Casualty (3) (6) (5)
Ceded to non-affiliates (1) (4) (4)
-------------------------------------
Premiums earned, net of reinsurance $ 9,020 $ 9,440 $ 9,328
=====================================
Losses and loss adjusement expenses
Direct $ 270 $ 479 $ 343
Assumed from Farm Family Casualty 9,705 7,277 6,604
-------------------------------------
Losses and loss adjustment expenses,
net of reinsurance $ 9,975 $ 7,756 $ 6,947
=====================================
</TABLE>
Effective December 31, 1997, the reinsurance agreement between United
Farm Family and its affiliate, Farm Family Casualty, was terminated.
C-19
<PAGE>
7. Income Taxes
The components of the deferred income tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
($ in thousands)
Deferred Income Tax Assets 1997 1996
---- ----
Future policy and contract benefits and funds
<S> <C> <C>
on deposit from policyholders $ 11,742 $ 10,752
Reserves for losses and loss adjustment expenses 1,305 1,018
Unearned premium reserve 6 8
Investments 729 469
Other 2,321 2,071
------------- ------------
Total deferred income tax assets 16,103 14,318
------------- ------------
Deferred Income Tax Liabilities
Deferred acquisition costs 18,972 17,966
Unrealized investment gains, net 13,479 7,924
Other 17,476 13,513
------------- ------------
Total deferred income tax liabilities 49,927 39,403
------------- ------------
Net deferred income tax liability $ (33,824) $ (25,085)
============= ============
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 6,059 4,367 $ 6,585
Deferred (4,357) (2,831) (4,284)
-------------- ------------- --------------
Total income tax expense $ 1,702 1,536 $ 2,301
============== ============= ==============
</TABLE>
The Company paid income taxes of $6,398,000, $4,484,000 and $6,371,000 in
1997, 1996 and 1995, respectively.
C-20
<PAGE>
A reconciliation of the differences between the Company's effective rates
of tax and the United States federal income tax rates follows:
<TABLE>
<CAPTION>
% of % of % of
($ in thousands) Pretax Pretax Pretax
1997 Income 1996 Income 1995 Income
---- ------ ---- ------ ---- ------
Income tax provision at
<S> <C> <C> <C> <C> <C> <C>
prevailing rates $ 1,745 34.61% $ 1,553 34.61% $ 2,333 34.61%
Tax effect of:
Tax exempt interest income (24) (0.47) (87) (1.94) (79) (1.17)
Dividends received deduction (86) (1.71) (24) (0.52) (54) (0.80)
Other, net 67 1.33 94 2.09 101 1.50
-- ---- -- ---- --- - ----
Federal income tax expense $ 1,702 33.76% $ 1,536 34.24% $ 2,301 34.14%
======= ====== ====== ====== ====== ======
</TABLE>
8. Benefits Plans
Pension Plan:
The Company and Farm Family Casualty sponsor a qualified multi-employer
noncontributory defined benefit pension plan covering substantially all of
the Company's and Farm Family Casualty's full-time employees who meet the
eligibility requirements. Benefits under the pension plan are primarily
based upon the employee's length of service and the employee's average
compensation for certain periods during the last years of employment. The
Company's funding policy for its defined benefit pension plan is to make
annual contributions in accordance with accepted actuarial cost methods
subject to regulatory funding limitations. Effective January 1, 1997, the
Company and Farm Family Casualty froze benefits available through the
defined benefit plan. In addition, the Company implemented a voluntary
early retirement program in the fourth quarter of 1996 (see Note 12).
The net pension expense for the plan is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
($ in thousands) 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Service cost $ $ ---- $ 869 $ 708
Interest cost on projected benefit 1,429 1,411 1,384
obligation
Actual return on plan assets (1,502) (854) (1,844)
Net amortization (deferral) 73 (447) 632
Voluntary early retirement program ---- 2,069 ---
---------------------------------------------
Total net periodic pension expense $ ---- $ 3,048 $ 880
=============================================
</TABLE>
The Company incurred no net periodic pension expense in 1997 due to the
freezing of the plan. The Company's portion of net periodic pension
expense, excluding the expense of the voluntary early retirement program,
for the years ended December 31, 1996 and 1995 was $461,000 and $323,000,
respectively. In addition, the Company's portion of the expense related to
the voluntary early retirement program was $914,000 for 1996.
C-21
<PAGE>
Assumptions used in the determination of pension obligations and assets
were:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.00% 7.00% 6.40%
Rate of increase in compensation levels 0.00% 4.00% 3.40%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
</TABLE>
Since benefits under the plan were frozen as of January 1, 1997, the rate
of increase in compensation levels assumption for 1997 is 0.00%.
The following table summarizes the funded status of the pension plan:
<TABLE>
<CAPTION>
($ in thousands) Year Ended December 31,
1997 1996
--------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested $ 20,785 $ 21,075
Nonvested --- ---
--------------------------------
Accumulated benefit obligation 20,785 21,075
Effect of projected future salary increases on past services --- ---
--------------------------------
Projected benefit obligation 20,785 21,075
Plan assets at fair value 19,026 18,881
--------------------------------
Projected benefit obligation in excess of plan assets $ (1,759) $ (2,194)
================================
</TABLE>
Plan assets primarily consist of cash, U.S. government securities,
municipal and corporate debt instruments, common stock mutual funds, and an
insurance group annuity contract.
The accrued pension liability of the plan is as follows:
<TABLE>
<CAPTION>
($ in thousand) Year Ended December 31,
1997 1996
--------------------------------
<S> <C> <C>
Projected benefit obligation in excess of plan assets $ (1,759) $ (2,194)
Unrecognized prior service asset --- ---
Unrecognized net gain from past experience different
from that assumed --- ---
Unrecognized net asset at transition --- ---
Minimum liability adjusment --- ---
--------------------------------
Accrued pension liability $ (1,759) $ (2,194)
================================
</TABLE>
C-22
<PAGE>
The Company's portion of the accrued pension liability is $766,000 and
$914,000 for the years ended December 31, 1997 and 1996, respectively and
is included in payable to affiliate on the accompanying consolidated
balance sheets.
Incentive Savings Plan:
The Company and Farm Family Casualty sponsor employee incentive savings
plans which are qualified under Section 401 of the Internal Revenue Code.
Under the provisions of these plans, employees may contribute up to 15% of
their eligible compensation, with up to 6% being eligible for matching
contributions from the Company. In 1997, the Company contributed to the
plans a matching contribution of 50% of the first 6% of eligible
compensation deferred by each eligible employee and, as a percentage of
each employee's eligible compensation, a regular contribution of 3%, a
profit sharing contribution of 3% and a money purchase contribution of 3%.
The profit sharing contribution and a portion of the matching contributions
made by the Company in 1997 were discretionary. In 1997, the Company
established a non qualified unfunded supplemental plan for those employees
whose compensation exceeds the Internal Revenue Code compensation limits
for qualified plans. The Company's expense associated with the plans was
$575,000, $112,000 and $86,000 in 1997, 1996 and 1995, respectively. In
1995 and 1996, the Company contributed 1% of eligible compensation (up to
$240 per employee) to the plan for all eligible employees.
Postretirement Benefits Other Than Pensions:
The Company and Farm Family Casualty provide life insurance benefits for
retired employees meeting certain age and length of service requirements.
The Company's postretirement benefit plan is currently unfunded and
noncontributory. Benefits under the postretirement benefit plan are
provided by a group term life insurance policy.
Net periodic postretirement benefit expense for the years ended December
31, 1997, 1996, and 1995 included the following:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Service cost $ 26 $ 27 $ 37
Interest cost 66 63 73
Return on assets ---- ---- ----
Amortization of transition obligation 47 47 47
Amortization of unrecognized net gain (1) ---- ----
Voluntary early retirement program ---- 41 ----
-------------------------------------
Total: $ 138 $ 178 $ 157
=====================================
</TABLE>
C-23
<PAGE>
The Company's portion of net periodic postretirement benefit expense for
the years ended December 31, 1997, 1996 and 1995 was $58,000, $40,000 and
$67,000. The Company's portion of the voluntary early retirement program
expense in 1996 was $18,000.
The plan's postretirement benefit obligation reconciled with the plan's
funded status and the amount recognized on the Farm Family Holdings, Inc.
consolidated balance sheets was as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996
------------------------------
Accumulated postretirement benefit obligation:
<S> <C> <C>
Retirees $ (492) $ (487)
Other fully eligible plan participants (221) (182)
Other active plan participants (276) (293)
------------------------------
Obligation at year-end (989) (962)
Plan assets --- ---
------------------------------
Funded status (989) (962)
Unrecognized transition obligation 759 805
Unrecognized net loss (105) (95)
------------------------------
Accrued postretirement benefit liability $ (335) $ (252)
==============================
</TABLE>
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.0% at December 31, 1997 and 1996.
9. Related Party Transactions
The operations of the Company are closely related with those of its
affiliates, Farm Family Holdings, Farm Family Casualty and with the
Company's subsidiary, United Farm Family. The affiliated Companies operate
under similar Boards of Directors and have similar senior management. The
Company and its affiliates are parties to an Expense Sharing Agreement
which provides for the sharing of certain expenses among the parties and
defines the methods to be used for allocating such expenses. The Companies
share home office premises, branch office facilities, data processing
equipment, certain personnel and other operational expenses. Shared
expenses are allocated to each Company based on allocation methods defined
in the Expense Sharing Agreement. The primary allocation method that is
utilized for shared expenses is the Weighted Time Method. The Weighted Time
Method allocates the actual cost of shared expenses based on a series of
ratios derived from weighted time studies conducted from time to time for
the purpose of allocating shared expenses on a basis to reflect actual
usage. All expenses incurred on the Company's behalf by its affiliates have
been reflected in the accompanying financial statements. Management
believes the costs incurred by its affiliates and allocated to the Company
are reasonable. During the normal course of business the aforementioned
transactions result in intercompany balances that are settled on a monthly
basis.
C-24
<PAGE>
The gross shared expenses and the Company's share of such expenses is summarized
below:
<TABLE>
<CAPTION>
($ in thousands)
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross Shared Expenses $29,364 $30,689 $26,650
Company's Share:
Amount $9,685 $10,777 $10,468
Percentage 33% 35% 39%
</TABLE>
The Company held $813,000 of debentures issued by Farm Family Casualty in
1995. In July 1996, Farm Family Casualty repurchased the debentures owned
by the Company for the principal amount of $813,000 plus accrued interest
of $37,000. The Company received interest income of $37,000 in 1996 and
$65,000 in 1995 on the debentures issued by Farm Family Casualty.
Farm Family Casualty's reinsurance program includes reinsurance agreements
with United Farm Family. In accordance with the provisions of these
reinsurance agreements, the Company recognized commission expenses of
approximately $63,000, $191,000 and $2,000 during the years ended December
31, 1997, 1996 and 1995 respectively. Effective December 31, 1997, United
Farm Family terminated all reinsurance agreements with Farm Family
Casualty. A summary of the effect of the reinsurance agreements with Farm
Family Casualty on premiums written and earned is described in Note 6.
Amounts payable to affiliate represent amounts due to Farm Family Casualty
pursuant to a reinsurance agreement and amounts due to Farm Family Casualty
for shared expenses as well as the Company's portion of the accrued pension
liability (see Note 8).
Rental income received from affiliates for leased home office space is
recorded as other income on the accompanying consolidated statements of
income and comprehensive income. Rental income received from affiliates for
use of other property and equipment is recorded as a reduction to operating
expenses on the accompanying consolidated statements of income and
comprehensive income.
Reserves for Losses and Loss Adjustment Expenses
As described in Note 1, the Company establishes reserves for losses and
loss adjustment expenses on reported and incurred but not reported claims
of insured losses. The establishment of appropriate reserves for losses and
loss adjustment expenses is an inherently uncertain process and the
ultimate cost may vary materially from the recorded amounts. Reserve
estimates are regularly reviewed and updated, using the most current
information. Any resulting adjustments, which may be material, are
reflected in current operations.
C-25
<PAGE>
Reserves for losses and loss adjustment expenses are included in payable to
affiliate on the accompanying consolidated balance sheets pursuant to a
reinsurance agreement between United Farm Family and the Company's
affiliate, Farm Family Casualty.
The following table provides a reconciliation of beginning and ending
liability balances for reserves for losses and loss adjustment expenses for
the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
($ in thousands)
Reserves for losses and loss adjustment
<S> <C> <C> <C>
expenses at beginning of year 16,785 15,363 14,006
Less reinsurance recoverables and receivables - - -
-------------------------------------
Net reserves for losses and loss adjustment
expenses at beginning of year 16,785 15,363 14,006
-------------------------------------
Incurred losses and loss adjustment expenses:
Provision for insured events of current year 9,785 8,157 8,177
Increase (decrease) in provision for
insured events of prior years 190 (401) (1,230)
-------------------------------------
Total incurred losses and loss adjustment expenses 9,975 7,756 6,947
-------------------------------------
Payments:
Losses and loss adjustment expenses
attributable to insured events of current year 1,839 1,579 1,749
Losses and loss adjustment expenses
attributable to insured events of prior years 4,755
7,498 3,841
-------------------------------------
Total payments 9,337 6,334 5,590
-------------------------------------
Net reserves for losses and loss
adjustment expenses at end of year 17,423 16,785 15,363
Plus reinsurance recoverables and receivables - - -
-------------------------------------
Reserves for losses and loss adjustment
expenses at end of year $17,423 $16,785 $15,363
======================================
</TABLE>
C-26
<PAGE>
10. Dividends and Statutory Financial Information
The Company's payment of dividends to stockholders is regulated by New York
state insurance law and is subject to certain limitations based on
statutory stockholder surplus. Farm Family Life paid stockholder dividends
of $480,000 in 1997, 1996 and 1995.
Farm Family Life's net income and capital and surplus as determined in
accordance with statutory accounting practices are as follows:
<TABLE>
<CAPTION>
($ in thousands)
1997 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $10,106 $8,111 $9,255
Capital and surplus attributable
to participating policyholders and stockholders 92,237 74,081 61,801
----------------------------------------------------------------------------------------------
</TABLE>
The National Association of Insurance Commissioners ("NAIC") requires
insurance companies to calculate and report risk based capital information
under a set of formulas which measure statutory capital and surplus needs
based on a regulatory definition of the risks in a company's mix of
products and its balance sheet. As of December 31, 1997, Farm Family Life's
total capital and United Farm Family's total capital exceeds the threshold
level of regulatory action, as defined by the NAIC.
11. Commitments, Contingencies and Uncertainties
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.
The Company is a party to Membership List Purchase Agreements with each of
the state Farm Bureaus in the ten states in which it conducts business. The
Membership List Purchase Agreements are for six years commencing on January
1, 1996. For the years ended December 31, 1997 and 1996, the Company paid a
total of approximately $600,000 and $571,000, respectively, to the Farm
Bureaus, pursuant to the Membership List Purchase Agreements. For the year
ended December 31, 1995, $547,000 was paid to the Farm Bureaus under
substantially similar Membership List Purchase Agreements in effect for the
period.
During 1996, the Company entered into a capital lease for certain
electronic data processing equipment that expires on September 1, 1999. At
December 31, 1997, the gross amount of property and equipment and related
accumulated depreciation recorded under the capital lease was $698,000 and
$140,000, respectively. The future minimum capital lease payments as of
December 31, 1997 were $255,000 for 1998 and $170,000 for 1999. The present
value of net minimum capital lease payments as of December 31, 1997 was
$403,000.
C-27
<PAGE>
At December 31, 1997, the Company had an available line of credit with a
bank for $5,000,000. There were no amounts outstanding on this line of
credit at December 31, 1997.
The Company's liability for funds on deposit from policyholders includes
amounts subject to discretionary withdrawal from annuity investment
contracts. Withdrawal characteristics of annuity deposit liabilities as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
($ in thousands) Amount % of Total
Subject to discretionary withdrawal at book value less
<S> <C> <C> <C>
surrender charge of 5% or more $ 7,733 2.4%
Subject to discretionary withdrawl at book value
withdrawal at book value less no minimal
surrender charge 301,621 94.5%
Not subject to discretionary withdrawal 9,826 3.1%
--------------- ----------------
Total annuities and deposit liabilities 319,180 100.0%
=============== ================
</TABLE>
Although Farm Family Life's primary policy administration system is Year
2000 compliant, many of Farm Family Life's other existing computer programs
use only two digits to identify a year in the date field. These programs
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many of these computer
applications could fail or create erroneous results by or at the Year 2000.
The Year 2000 issue affects virtually all companies and organizations.
Therefore, Farm Family Life must also coordinate with other entities with
which it interacts to ensure these entities are also addressing the Year
2000 issue. If not successfully addressed, the Year 2000 issue could have
material adverse consequences on Farm Family Life. Farm Family Life has an
on-going, enterprise-wide project to address its Year 2000 issue. During
1998, Farm Family Life will perform system-wide testing to support its plan
of becoming Year 2000 compliant. Year 2000 work will continue through 1999.
In addition, Farm Family Life has contacted other entities on which it
relies to process and support its business. Farm Family Life will react to
their plans to achieve Year 2000 compliance and will adjust operations as
required. Farm Family Life believes it will successfully address its Year
2000 issue without material adverse consequences to Farm Family Life.
However, there can be no assurance that other entities with which Farm
Family Life interacts will achieve Year 2000 compliance or that the failure
by such entities to achieve Year 2000 compliance would not have a material
adverse effect on Farm Family Life.
<PAGE>
12. Non-Recurring Expenses
Pursuant to the Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions," the Company recorded a nonrecurring
expense, net of an income tax benefit of $320,000, of $594,000 for the
Company's share of the costs of a voluntary early retirement program
offered to certain eligible employees in 1996. Eligibility for the program
was based on age and years of service.
The Company recorded a nonrecurring expense, net of an income tax benefit
of $237,000, of $470,000 for costs incurred by the shareholders of the
Company relating to its acquisition by Farm Family Holdings.
13. Future Application of Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 "Comprehensive Income", ("Statement 130") which establishes standards
for the reporting and disclosure of comprehensive income and its components
(revenues, expenses, gains and losses). Statement 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Statement 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. Statement 130 is effective for the
fiscal years beginning after December 15, 1997. The Company has adopted
Statement 130 in 1998 and restated prior years financial statements to
conform to this reporting standard.
<PAGE>
PROXY CARD
FARM FAMILY HOLDINGS, INC.
344 Route 9W
Glenmont, New York 12077
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FARM FAMILY
HOLDINGS, INC.
PROXY CARD
The person(s) signing the front of this Proxy Card hereby appoint(s)
William M. Stamp, Jr., John W. Lincoln and Victoria M. Stanton, or any of them,
lawful attorneys-in-fact and proxies with full power of substitution in each of
them and hereby authorize(s) them to represent and vote, as designated on the
reverse side hereof, all shares of Common Stock of Farm Family Holdings, Inc.
(the "Company") standing in the name of said person(s) with all powers said
person(s) would possess if present at the Special Meeting of Stockholders of
Farm Family Holdings, Inc. to be held on Thursday, March 25, 1999 at 9:00 a.m.,
New York time, at the corporate headquarters of the Company at 344 Route 9W,
Glenmont, New York, or any adjournment(s) or postponement(s) thereof. In their
discretion, the proxies are authorized to vote upon such other business
(including any business of which the Board of Directors was not aware within a
reasonable time before the solicitation) as may properly come before the Special
Meeting or any adjournment(s) or postponement(s) thereof.
This proxy, properly executed and returned, will be voted as directed on
this card by the persons designated as proxies above. If no specific directions
are given, this proxy will be voted "FOR" Proposal I and Proposal II.
(Continued, and to be dated and signed on reverse side.)
FARM FAMILY HOLDINGS, INC.
P.O. BOX 11098
NEW YORK, N.Y. 10203-0098
<PAGE>
The Board of Directors recommends a vote FOR proposals I and II
Proposal I: Approval and adoption of the Amended and Restated Option
Purchase Agreement, dated as of February 26, 1998, as
amended by Amendment No. 1, dated as of April 28, 1998, and
Amendment No. 2, dated as of January 14, 1999 (as so
amended, the "Option Purchase Agreement"), among the Company
and the stockholders of Farm Family Life Insurance Company
(the "Life Company").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Proposal II: Approval of the consummation of the transactions
contemplated in the Option Purchase Agreement, including the
Company's acquisition of all of the outstanding capital
stock of the Life Company at a purchase price of $37.5
million, less certain expenses, payable in shares of the
Company's common stock, par value $.01 per share, and 6 1/8%
Preferred Stock, Series A, par value $.01 per share.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Special Meeting or any adjournment(s) or
postponement(s) thereof.
I plan to attend [ ]
the Special Meeting
Change of Address and [ ]
or Comments Mark Here
Please sign exactly as your name(s) appear(s) to the left.
(Joint owners should each sign.) When signing as an
attorney, executor, administrator, trustee, guardian
or corporate officer, please give your full title as such.
Dated: , 1999
Signature
(Additional signature(s)
if held jointly)
Votes MUST be indicated (X)
in Black or Blue ink.
Please mark, sign and date on this side of this Proxy Card and return it in the
postage-paid envelope provided.
