Registration No. 333-24739
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
AMENDMENT NUMBER FOUR TO FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
------------------------------
STONEVILLE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Mississippi 6331 72-1341156
(State or other jurisdiction (Primary Standard Industrial (IRS Employer Identi-
of incorporation or Classification Code Number) fication Number)
organization)
Harry E. Vickery Harry E. Vickery
Stoneville Insurance Company Delta Agricultural and Industrial Trust
633 North State Street, Suite 200 633 North State Street, Suite 200
Jackson, Mississippi 39202-7817 Jackson, Mississippi 39202-7817
(601) 352-7817 (601) 352-7817
(Address, including zip code, (Name, address, including zip
and telephone number, including code, and telephone number,
area code of registrant's including area code, of agent
principal executive offices) for service)
Copies to:
David L. Martin, Esq.
L. Keith Parsons, Esq.
Watkins Ludlam & Stennis, P.A.
633 North State Street
P. O. Box 427
Jackson, Mississippi 39205-0427
Telephone Number: (601)949-4701
Approximate date of commencement of proposed sale of securities to the public:
As soon as practicable after the effective date of this Registration Statement
and the liquidation of Delta Agricultural and Industrial Trust and
capitalization of Stoneville Insurance Company have been consummated pursuant to
the Plan and Agreement of Reorganization and Conversion described in this
Prospectus.
If the securities being registered on this form are being offered in conjunction
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. /__/
CALCULATION OF REGISTRATION FEE
================================================================================
Proposed Maximum
Title of Each Class of Securities to Amount Offering Price
be Registered to be Registered(1) Per Unit
- --------------------------------------------------------------------------------
Common Stock, par value $1.00 650,000 N/A
=================================== ==================== ======================
(1) Represents the maximum number of shares of Stoneville Insurance Company
common stock to be issued in accordance with the Plan and Agreement of
Reorganization and Conversion included as Exhibit A to the attached Prospectus.
(2) Estimated in accordance with Rule 457(f)(2) solely for the purpose of
calculating the registration fee on the basis of the book value of the trust
equity of Delta Agricultural and Industrial Trust as of December 31, 1996.
==================== ======================
==================================================================
Proposed Maximum Aggregate Amount of
Offering Price(2) Registration Fee
- ------------------------------------------------------------------
$2,600,000 $787.88
== =============================== ==============================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
<PAGE>
STONEVILLE INSURANCE COMPANY
CROSS REFERENCE SHEET
Caption or Location
Items in Form S-4 in Prospectus
A. Information About the Transaction
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus....................... Cover Page of
Registration Statement;
Cross Reference Sheet;
Cover Page of the Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus........ Available Information;
Incorporation of
Certain Documents by
Reference; Table of Contents
3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information...................... Summary; Risk Factors; Selected
Financial Data of the Trust; Pro
Forma Condensed Balance Sheets
and Statements of Income
(Unaudited) of the Company
4. Terms of the Transaction......... Summary; The Conversion; The
Plan; Description of Company
Stock; Comparison of Rights of
Former Members of the Trust and
Shareholders of the Company
5. Pro Forma Financial Information. Pro Forma Condensed Balance
Sheets and Statements of Income
(Unaudited) of the Company
/
6. Material Contacts with the
Company Being Acquired........... Not Applicable
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be Under-
writers.......................... Not Applicable
8. Interest of Named Experts and
Counsel.......................... Legal Opinion; Experts
9. Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities... Comparison of Rights of Former
Members of the Trust and
Shareholders of the Company
B. Information About the Registrant
10. Information with Respect to
S-3 Registrants.................. Not Applicable
11 Incorporation of Certain Infor-
mation by Reference.............. Not Applicable
12. Information with Respect to S-2
or S-3 Registrants............... Not Applicable
13. Incorporation of Certain Infor-
mation by Reference.............. Not Applicable
14. Information with Respect to
Registrants Other Than S-3 or
S-2 Registrants.................. Summary; The Conversion; Business
of the Company; Financial
Statements; Pro Forma Condensed
Balance Sheets and Statements of
Income (Unaudited) of the Company
C. Information About the Company Being Acquired
<PAGE>
15. Information with Respect to S-3
Companies...................... Not Applicable
16. Information with Respect to S-2
or S-3 Companies............... Not Applicable
17. Information with Respect to
Companies Other Than S-3 or
S-2 Companies.................. Summary; The Conversion; Business
of the Trust; Financial Statements;
Selected Financial Data of the Trust;
Trust Management's Discussion and
Analysis of Financial Conditions and
Results of Operations
D. Voting and Management Information
18. Information if Proxies, Consents
or Authorizations Are to be
Solicited........................ Not Applicable
19. Information if Proxies, Consents
or Authorizations Are Not to be
Solicited or in an Exchange
Offer............................ Cover Page of Prospectus;
Summary; The Special Meeting; The
Plan; Business of the Company;
Certain Transactions of
Relationships
iii
<PAGE>
[Delta Agricultural and Industrial Trust Letterhead]
, 1997
To Our Former Members:
As you are aware, since the Delta Agricultural and Industrial Trust
(the "Trust") was started by the Delta Council in 1991, the purpose of the Trust
has been to provide reasonably priced insurance for its insureds. Due to
fundamental changes in the workers' compensation market, a key part of the
Trust's strategy has been to move gradually toward the formation of a stock
insurance company while providing continuity of coverage to its insureds. In
December, 1996, Stoneville Insurance Company (the "Company") was formed to
become the successor of the Trust. The Board of Trustees believes that the
creation of the Company will allow the continuation of the Trust's original
mission as well as allow the flexibility in the future to provide services the
Trust could not offer.
The Board of Trustees of the Trust recently took the next step to make
the Company an operating entity by voting to approve and adopt a Plan and
Agreement of Reorganization and Conversion of the Trust (the "Plan").
Pursuant to the Plan, the Trust will transfer substantially all of its
assets and liabilities (other than insurance liabilities) to the Company in
exchange for common stock ("Stock") of the Company, the Trust will be dissolved,
and Former Members (as defined in the Plan) of the Trust will receive Stock of
the Company on the terms and subject to the conditions set forth in the Plan,
all as more fully described in the attached Prospectus (the "Conversion"). Upon
completion of the actions set forth in the Plan, the Company will have succeeded
to substantially all of the assets and liabilities of the Trust (other than
insurance liabilities) and the Company will apply for, and anticipates
receiving, a license as a Mississippi stock insurance company eligible to write
workers' compensation insurance. Simultaneously with implementation of the Plan,
Continental Casualty Company (a member of the CNA Insurance Group) will assume
direct responsibility for the insurance liabilities of the Trust, which will
relieve the Former Members of the Trust from their joint and several liability
with respect to the insurance liabilities of the Trust. The terms of the
Conversion and the anticipated business of the Company are described in detail
in the enclosed Prospectus.
The Board of Trustees of the Trust has unanimously approved the Plan
and believes the Conversion is in the best interests of the Trust and its Former
Members. No approval by Former Members is necessary for the consummation of the
Conversion; however, all Former Members should carefully read the enclosed
Prospectus including the section entitled "Risk Factors" to fully understand the
Conversion and the plans and prospects of the Company.
The Board of Trustees believes that the creation of the Company will
best continue the Trust's original mission while providing Former Members the
opportunity to participate in the Company's growth potential.
By Order of the Board of Trustees
William L. Kennedy
Chairman of the Board of Trustees
<PAGE>
PROSPECTUS
STONEVILLE INSURANCE COMPANY
[insert logo here]
DELTA AGRICULTURAL AND STONEVILLE INSURANCE COMPANY
INDUSTRIAL TRUST Maximum of 650,000 Shares of Common Stock,
$1.00 par value
-----------------
This Prospectus is being furnished to former members of Delta
Agricultural and Industrial Trust, a Mississippi workers' compensation self
insurance trust (the "Trust") in connection with the Plan and Agreement of
Reorganization and Conversion of the Trust (the "Plan") and the transactions
contemplated thereby, which was adopted and approved by the Trust's Board of
Trustees on March 20, 1997 as amended September 11, 1997. A conformed copy of
the Plan, as amended, is attached as Exhibit A. Pursuant to the Plan: (i) the
Trust will transfer substantially all its assets and liabilities (other than
insurance liabilities) to Stoneville Insurance Company (the "Company"); (ii) in
exchange for the contribution of such assets and liabilities by the Trust to the
Company, the Company will issue shares of its common stock, $1.00 par value (the
"Stock") to the Trust; and (iii) the Trust will dissolve and distribute its
assets (Stock of the Company) in a liquidating distribution to former members of
the Trust ("Former Members"). Former Members of the Trust are those employers
who at any time had workers' compensation insurance coverage provided by the
Trust for one or more of the following complete accounting years of the Trust:
August 1, 1992-July 31, 1993; August 1, 1993-December 31, 1994; January 1,
1995-December 31, 1995; and January 1, 1996-December 31, 1996 (collectively,
"Positive Income Fund Years" or individually interchangeably, a "Positive Income
Fund Year"). The foregoing transaction is referred to as the "Conversion."
As a result of the Conversion, each Former Member shall receive one
share of Company Stock for each $4.00 of Trust equity (a "Trust Unit") allocable
to such Former Member, except dissenters, who shall receive $4.00 in cash for
each Trust Unit allocable to such dissenter. If dissenters' rights are perfected
by holders of more than 20% of the Trust Units, then the Conversion will not
proceed with the result that no cash or stock will be distributed to any Former
Members and this offering will terminate. As of June 30, 1997, there were a
total of approximately 595,997 Trust Units allocable to Former Members as a
group which at $4.00 per Trust Unit represents the approximately $2,383,989
value, as of June 30, 1997, of the net assets anticipated to be transferred from
the Trust to the Company. The actual amount transferred and the number of Trust
Units will depend on the results of operations of the Trust between June 30,
1997 and the effective date of the Plan.. Trust Units will be allocated to each
Former Member based on a ratio (the "Proportionate Earned Premium") which takes
into account the proportion such Former Member's net premiums paid to the Trust
for full years bears to the net premiums paid to the Trust for full years by all
Former Members. The Proportionate Earned Premium is calculated by dividing (a)
the net earned premium derived by the Trust from a Former Member for each
Positive Income Fund Year during which the Trust derived a net earned premium
for the full Positive Income Fund Year from such Former Member by (b) the total
of all such net earned premiums of the Trust. The total of Trust Units allocable
to Former Members as a group will be multiplied by each Former Member's
Proportionate Earned Premium in order to determine the number of Trust Units
(and thereby the Stock or, in the case of dissenters, the amount of cash) to be
received by such Former Member as a result of the Conversion.
No vote of Former Members is required for the approval or consummation
of the Conversion. However, all Former Members should carefully read this
Prospectus to understand the Conversion and their rights under the Plan.
Consummation of the Conversion is subject to various conditions as set forth in
the Plan and described in the Prospectus.
------------------
THIS PROSPECTUS, WHICH IS BEING FURNISHED TO FORMER MEMBERS OF THE
TRUST TO ADVISE THEM OF THE TERMS OF THE CONVERSION, ALSO CONSTITUTES THE
PROSPECTUS OF THE COMPANY WITH RESPECT TO A MAXIMUM OF 650,000 SHARES OF COMPANY
STOCK TO BE ISSUED IN CONNECTION WITH THE CONVERSION.
-----------------
No person is authorized to give any information or to make any
representation concerning the Conversion not contained in this Prospectus and,
if given or made, such information or representation should not be relied upon
as having been authorized by the Company or the Trust. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Prospectus in any jurisdiction, to or from any person
to whom it is unlawful to make such offer or solicitation of an offer in such
jurisdiction. Neither the delivery of this Prospectus nor any distribution of
the securities made under this Prospectus shall, under any circumstances, create
any implication that there has been no change in the information set forth
herein since the date of this Prospectus.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED CAREFULLY BY FORMER MEMBERS OF THE TRUST IN CONSIDERING THEIR RIGHTS
REGARDING THE CONVERSION. THIS STOCK IS PURELY SPECULATIVE.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE WORKERS' COMPENSATION COMMISSION, THE MISSISSIPPI
DEPARTMENT OF INSURANCE OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, THE WORKERS' COMPENSATION COMMISSION, THE
MISSISSIPPI DEPARTMENT OF INSURANCE OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------
This Prospectus is being first mailed to
Former Members of the Trust on or about ,
1997. The date of this Prospectus is ,
1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4 (together
with any amendments thereto, the "Registration Statement") with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Act of
1933, as amended (the "Securities Act") of which this Prospectus is a part with
respect to the shares of Stock to be issued in connection with the Conversion.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted pursuant to
the Rules and Regulations of the Commission. Such additional information may be
obtained from the Commission's principal office in Washington, D.C. Statements
contained in this Prospectus or in any document incorporated by reference
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or attached as an annex hereto or such
other document, each such statement being qualified in all respects by such
reference.
Prior to the issuance of the shares of Stock of the Company and
registration thereof pursuant to the Registration Statement, neither the Company
nor the Trust have been subject to any informational requirements of the
Securities Exchange Act of 1934. Subsequent to the registration of the Company's
Stock, the Company will be subject to certain informational requirements of the
Securities Exchange Act of 1934.
------------------
This Prospectus incorporates documents by reference which are not
presented herein or delivered herewith. Copies of any such documents, other than
exhibits to such documents which are not specifically incorporated by reference
herein, are available without charge, upon the written or oral request of any
Former Member of the Trust or prospective Purchaser to whom this Prospectus is
delivered. In order to ensure timely delivery of such documents, any request
should be made by , 1997 [date at least 10 days after mailing date], and such
requests should be directed to the Company's offices at 633 North State Street,
Suite 200, Jackson, Mississippi 39202; telephone (601) 352-7817, Attention:
Harry E. Vickery, President.
-----------------
<PAGE>
TABLE OF CONTENTS
SUMMARY....................................................1
The Company................................................1
The Trust..................................................1
Definition of Former Members of the Trust..................1
Description of Plan........................................2
Adoption of Plan...........................................3
Reasons for Conversion.....................................3
Dissenters' Rights.........................................3
Effective Date.............................................4
Conditions and Termination.................................4
Assumption Reinsurance Agreement...........................4
Termination of Self Insurer Status.........................5
Business of the Company....................................5
Management of the Company..................................5
Regulation of the Company..................................5
Dividend Policy............................................6
Certain Federal Income Tax Consequences....................6
Accounting Treatment.......................................6
Required Regulatory Approvals..............................6
Comparison of Rights of Former Members of the Trust
and Shareholders of the Company ...6
RISK FACTORS...............................................7
Lack of History of Operations..............................7
Limited Operations.........................................7
Capitalization.............................................7
Reliance on Certain Persons................................8
Variability of Operating Results...........................8
Adequacy of Loss Reserves..................................8
Regulation.................................................9
Competition................................................9
Lack of Ratings............................................9
Licensure..................................................9
THE CONVERSION............................................10
Background................................................10
Reasons for Conversion....................................11
Assumption Reinsurance Agreement..........................12
Regulatory Approvals......................................14
Resales of Company Stock..................................14
Certain Federal Income Tax Consequences...................14
Consequences to Former Members ..14
i
Consequences to the Trust and the Company ........15
Anticipated Accounting Treatment............................15
THE PLAN....................................................16
General.....................................................16
Effective Date..............................................16
Terms of the Plan ..........................................16
Dissemination of Liquidating Distribution...................18
Conditions..................................................18
Termination.................................................19
PRO FORMA CONDENSED BALANCE SHEETS AND STATEMENTS
OF INCOME (UNAUDITED) OF THE COMPANY........................20
THE WORKERS' COMPENSATION INSURANCE SYSTEM..................45
BUSINESS OF THE TRUST.......................................46
History of the Trust........................................46
Operations of the Trust.....................................46
The Commercial Program......................................46
Regulation..................................................47
Employees...................................................47
Trustees....................................................48
Legal Proceedings...........................................48
SELECTED FINANCIAL DATA OF THE TRUST........................49
TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS..............51
Overview....................................................51
Results of Operations.......................................53
Earned Premium ........53
Losses ........53
Other Expenses ........57
Income Taxes ........57
Investment Income ........58
Liquidity and Capital Resources.............................59
General ........59
Liquidity Requirements ........59
Admitted Assets ........60
Commitments ........61
BUSINESS OF THE COMPANY.....................................61
Organization and Purpose....................................61
Company Management's Plan of Operation......................61
Continuation of Commercial Program ........61
ii
Provision of Reinsurance ........62
Creation of Other Workers' Compensation
Insurance Program ........62
General Operations ........62
Investments ........63
Government Regulation.......................................63
Assumption of Trust Contracts...............................64
Employees...................................................65
Management of the Company...................................65
Executive Compensation......................................66
Legal Proceedings...........................................66
DESCRIPTION OF COMPANY STOCK................................67
COMPARISON OF RIGHTS OF FORMER MEMBERS OF
THE TRUST AND SHAREHOLDERS OF THE COMPANY ..................67
Governance..................................................67
Liability...................................................67
Assessment..................................................67
Voting......................................................67
Resale......................................................68
Indemnification of Officers and Directors of the Company....68
Indemnification of Trustees of the Trust.................. .69
Preemptive Rights....................................... .70
Dividends................................................ .70
CERTAIN TRANSACTIONS AND RELATIONSHIPS................. ..71
LEGAL MATTERS........................................... ..71
EXPERTS............................................... ....72
INDEX TO FINANCIAL STATEMENTS........................ ...F-1
iii
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Prospectus and the documents incorporated herein by reference.
This summary does not contain a complete statement of all material information
relating to the Conversion and is subject to and qualified in its entirety by
reference to the more detailed information and financial statements contained
elsewhere in this Prospectus, including any Exhibits and the documents
incorporated in this Prospectus by reference. Certain capitalized terms used in
this summary are defined elsewhere in this Prospectus.
The Company
The Company is a Mississippi corporation, with its principal office
located 633 North State Street, Suite 200, Jackson, Mississippi 39202, telephone
number (601) 352-7817. The Company was incorporated on December 13, 1996.
Subsequent to the Conversion, the Company will apply for, and anticipates
receiving, a license as a Mississippi stock insurance company eligible to
provide workers' compensation insurance within the State of Mississippi. See
"Business of the Company -- Organization and Purpose."
The Trust
The Trust is a Mississippi workers' compensation self insurance trust
with its principal office located at 633 North State Street, Suite 200, Jackson,
Mississippi, 39202-7817, telephone number (601) 352-7817. The Trust was formed
under a Trust Agreement dated August 1, 1991 (the "Trust Agreement"), to provide
workers' compensation insurance to its participants. See "Business of the Trust
- -- History of the Trust; Operations of the Trust."
Definition of Former Members of the Trust
Former Members of the Trust are those employers who at any time had
workers' compensation insurance coverage provided by the Trust for one or more
full Positive Income Fund Years. The Positive Income Fund Years were August 1,
1992-July 31, 1993; August 1, 1993- December 31, 1994; January 1, 1995-December
31, 1995; and January 1, 1996-December 31, 1996.
Since July 1, 1996, which is the date of the inception of the Trust's
program of workers' compensation insurance coverage provided through TIG
Insurance Company (the "Commercial Program"), no employer has paid a premium to
the Trust for workers' compensation insurance nor has the Trust issued such
insurance. Because the Trust Agreement governing operations of the Trust defines
members as those who purchase insurance through the Trust, as a result of the
creation of the Commercial Program the Trust ceased having members as
contemplated by the provisions of the Trust Agreement.
To clarify the rights of Former Members regarding the terms of the
Conversion, on March 20, 1997, the Board of Trustees of the Trust unanimously
adopted a resolution to clarify and define
1
<PAGE>
those who are Former Members of the Trust as those employers who had workers'
compensation insurance coverage provided by the Trust for one or more full
Positive Income Fund Years. The Trustees included the Positive Income Fund Year
as a condition to be a Former Member based on the position of the Mississippi
Workers' Compensation Commission that the Conversion should be treated similar
to a Trust refund, which would only be payable to employers who had workers'
compensation insurance provided by the Trust during years in which the Trust
made a profit, i.e. a Positive Income Fund Year.
Description of Plan
General Description. The Company has been formed to become the
successor of the Trust. Pursuant to the Plan: (i) the Trust will transfer
substantially all its assets and liabilities (other than insurance liabilities)
to the Company; (ii) in exchange for the contribution of the such assets and
liabilities by the Trust to the Company, the Company will issue Stock to the
Trust; and (iii) the Trust will be liquidated and will distribute to Former
Members of the Trust one (1) share of Company Stock for each Trust Unit ($4.00
of value of Trust equity) allocable to such Former Member, except for those
Trust Units with respect to which rights of dissent have been exercised
(collectively, the "Liquidating Distribution"). As of June 30, 1997, a total of
approximately 595,997 Trust Units are available for distribution to Former
Members, which represents the approximately $2,383,989 value, as of June 30,
1997, of the net assets anticipated to be transferred to the Company. The actual
number of Trust Units will be computed based upon the value of the equity of the
Trust as of June 30, 1997, increased by the income of the Trust between such
date and the effective date of the Plan minus all expenses incurred between such
date and the effective date of the Plan, including amounts reserved to pay
estimated expenses of the Trust, but excluding amounts reserved to pay
dissenters.
The number of Trust Units and the actual amount transferred from the Trust to
the Company will depend on the number of dissenters and the expenses of the
Conversion and the income of the Trust between June 30, 1997 and the effective
date of the Plan.
Computation of Number of Shares Each Former Member Will Receive. For
purposes of computing the number of shares of Stock (or in the case of
dissenters, cash) distributable to each Former Member, each Former Member will
have allocated to it a number of Trust Units determined by multiplying the total
number of Trust Units by the Proportionate Earned Premium of each Former Member.
The Proportionate Earned Premium is calculated by dividing (a) the net earned
premium derived by the Trust from a Former Member for each Positive Income Fund
Year during which the Trust derived a net earned premium for the full Positive
Income Fund Year from such Former Member by (b) $16,166,610, which is the total
of all such net earned premiums of the Trust. From time to time, at the request
of a Former Member, the Trust will conduct an audit to determine if the amount
of premium paid by the Former Member during a particular year was correct. Any
such audits conducted between the date hereof and the Effective Date could
result in some adjustment to the amount of the total net earned premium of the
Trust derived from Former Members for full Positive Income Fund Years; however,
it is not expected that such adjustment would be material. See "The Plan --
General; Terms of the Plan; Dissemination of Liquidating Distribution" and
"Description of Company of Stock."
2
<PAGE>
Computation Assistance. To determine the approximate number of shares a
Former Member will receive, the Former Member can divide the premiums paid to
the Trust for coverage for a full year in the years August 1, 1992-July 31,
1993; August 1, 1993-December 31, 1994; January 1, 1995-December 31, 1995; and
January 1, 1996-December 31, 1996 by $16,166,610 and multiply the result by
595,997. For assistance with this calculation a Former Member can call the Trust
collect at (601) 352-7817.
Adoption of Plan
The Trust's Board of Trustees unanimously approved and adopted the Plan
on March 20, 1997. The Plan was amended on September 11, 1997. No vote of Former
Members is required to approve or adopt the Plan or consummate the Conversion,
because a vote of the members is not required under either state law or under
the Trust Agreement.
The Trust Agreement provides that the Trust's Board of Trustees may
terminate the Trust at any time with the approval of the members of the Trust.
However, when the Trust ceased directly providing workers' compensation
insurance, the Trust ceased having members as defined by the Trust Agreement.
Because there are no members as contemplated by the Trust Agreement, no vote
other than the Trust's Board of Trustees is required to approve and adopt the
Plan or consummate the Conversion. See "Summary -- Definition of Former Members
of the Trust."
Reasons for Conversion
Formation of the Company is intended to provide a locally controlled,
long term source of dependable and reasonably priced insurance without the joint
and several liability associated with workers' compensation self-insured pools
such as the Trust. As a Mississippi stock insurance company, the Company is
permitted by law to expand into a broader range of insurance activities and to
have more flexibility in financing activities and other matters than is
currently permitted to the Trust as a Mississippi workers' compensation
self-insured pool. Formation of the Company also is intended to facilitate the
development of an active market in the Company's Stock. See "The Conversion --
Reasons for Conversion; Resales of Company Stock" and "Business of the Company
- -- Company Management's Plan of Operation."
Dissenters' Rights
Former Members of the Trust have the right to dissent from the Plan and
receive $4.00 in cash for each of their Trust Units. In order to perfect
dissenters' rights, a Former Member wishing to dissent must deliver to the
Trust's office written notice of such Former Member's intent to demand payment
on or before ______________, 1997 [compute 30 days after the effective date of
the Registration Statement]. See "The Plan -- General; Terms of the Plan."
If dissenters' rights are perfected by holders of more than 20% of the
Trust Units, then the Conversion will not proceed with the result that no cash
or stock will be distributed to any Former Members.
3
<PAGE>
Effective Date
The effective date of the Plan at which time the Company will be
capitalized and the Trust liquidated and dissolved (the "Effective Date") will
be the close of business on the last day of the month in which all of the
conditions to the Plan have been satisfied. See "The Plan -- Effective Date;
Conditions; Termination."
Conditions and Termination
The Plan may be terminated and abandoned at any time prior to the
Effective Date by vote of the Trust's Board of Trustees. In addition, the Plan
is subject to certain conditions, which, if not met, also constitute grounds for
termination. Such conditions include: (i) an opinion from Watkins Ludlam &
Stennis, P.A. shall have been received, to the effect that the Conversion will
be treated, for federal income tax purposes, as a tax-free transaction as to the
Trust, the Company, and to those Former Members who receive Stock of the
Company; (ii) the Assumption Reinsurance Agreement described elsewhere herein
shall have become effective; and (iii) dissenters' rights shall not be perfected
by holders of more than twenty percent (20%) of the Trust Units. See "The Plan
- -- Conditions; Termination."
Assumption Reinsurance Agreement
The Trust and the Company have entered into an Assumption Reinsurance
Agreement (the "Assumption Reinsurance Agreement") with Continental Casualty
Company ("Continental"), a member of the CNA Insurance Group.
In a self insured pool such as the Trust, all persons who have ever
purchased insurance from the pool are jointly and severally liable for the loss
obligations of one another which were incurred during the time period such
person was an insured. The Assumption Reinsurance Agreement provides that
Continental will assume the Trust's insurance liabilities and the joint and
several liability of any employers to whom the Trust provided insurance and that
such employers will be able to look directly to Continental for coverage and
claims payments without the necessity of making a claim against the Trust.
Each Former Member of the Trust which accepts a Liquidating
Distribution will be deemed to have agreed to look solely to Continental for
coverage, to release the Trust from further insurance obligations, and to
release the Former Members of the Trust from joint and several liability. In
addition, all Former Members will be required to sign and return an Assumption
Certificate evidencing their agreement to the assumption by Continental as a
condition to receiving the Liquidating Distribution applicable to such Former
Member and participating in the offering of stock described in this Prospectus.
The purpose of this requirement is to ensure that the objective of releasing
Former Members from joint and several liability and effectively transferring
this liability to Continental is accomplished.
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Under the terms of the Assumption Reinsurance Agreement, the Company
has the option to reinsure Continental for the Trust's former insurance which
Continental directly assumed. See "The Conversion -- Assumption Reinsurance
Agreement" and "Business of the Company -- Company
Management's Plan of Operation."
Termination of Self Insurer Status
Upon consummation of the Assumption Reinsurance Agreement, the Trust
will surrender its Certificate of Authority to the Workers' Compensation
Commission. See "The Conversion -- Regulatory Approvals."
Business of the Company
Upon completion of the Conversion, the Company anticipates being
licensed by the Mississippi Department of Insurance (the "Department of
Insurance") to write workers' compensation insurance in the State of
Mississippi. The Company anticipates that it will continue the Commercial
Program as well as create workers' compensation programs through other insurers.
The Company may obtain income through the provision of reinsurance to
Continental and to TIG Insurance Company and TIG Reinsurance Company through the
Commercial Program, through investment income and through the creation and
management of workers' compensation programs similar to the Commercial Program.
See "Business of the Company -- Company Management's Plan of Operation."
The Company does not anticipate directly writing insurance until it is
eligible to receive a rating from an insurance rating organization, which is
anticipated to be at least five years after the date of licensure. Having a
favorable rating is important to a company writing insurance on a direct basis
because the absence of a rating, or a low rating, will make the company's
products less attractive to insureds. See "Business of the Company -- Company
Management's Plan of Operation."
Management of the Company
The officers and directors of the Company are William L. Kennedy
(Director and Chairman of the Board), Harry E. Vickery (Director and President)
and David R. White (Director, Secretary, Treasurer and Vice President). See
"Business of the Company -- Management of the Company;
Executive Compensation."
Regulation of the Company
The Company will be subject to the regulation of the Department of
Insurance although control over the delivery of benefits is generally under the
purview of the Workers' Compensation Commission. The regulatory policies of both
the Workers' Compensation Commission (applicable to the Trust) and the
Department of Insurance (applicable to the Company) are designed to encourage
responsible operation and solvency. The principal difference in regulatory
requirements
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between the two regulatory entities is that the Department of Insurance's
reporting requirements are more detailed and its regulatory powers are more
extensive than those of the Workers' Compensation Commission. In addition,
commercial insurance companies are allowed to set their rates at any level,
subject only to Department of Insurance disapproval, thus allowing commercial
insurers to quickly respond to market changes. This is in contrast with premium
setting by pools such as the Trust, the rates of which must be analyzed and
approved by the Workers' Compensation Commission. See "The Conversion --
Regulatory Approvals"; "The Workers' Compensation Insurance System"; and
"Business of the Company -- Government Regulation."
Dividend Policy
The payment of dividends by the Company is subject to regulatory
restrictions. See "Comparison of the Rights of Former Members of the Trust and
Shareholders of the Company -- Dividends."
Certain Federal Income Tax Consequences
Where a Former Member exercises the right to dissent and receives cash
in exchange for Trust Units, such cash will be treated as having been received
by the Former Member as a distribution in redemption of the Trust Units subject
to the provisions and limitations of Section 302 of the Internal Revenue Code of
1986, as amended (the "Code"). Where a Former Member receives shares of Company
Stock in exchange for Trust Units, no gain or loss will be recognized by the
Former Member on the Company Stock received. No gain or loss will be recognized
by the Trust or the Company with respect to the Conversion. See "The Conversion
- -- Certain Federal Income Tax Consequences."
Accounting Treatment
The Conversion is a reorganization of entities under common control,
the accounting for which is similar to a pooling of interests. See "The
Conversion -- Anticipated Accounting
Treatment."
Required Regulatory Approvals
The Conversion does not require regulatory approval from either the
Workers' Compensation Commission or the Department of Insurance. See "The
Conversion -- Regulatory Approvals."
Comparison of Rights of Former Members of the Trust and Shareholders of the
Company
There are material differences between the rights of Former Members of
the Trust and rights of shareholders of the Company. These differences include
the following: Former Members are jointly and severally liable for loss
obligations of the Trust during the period such Former Members were insureds of
the Trust, while stockholders of the Company will not be liable for the
obligations
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of the Company and the Company Stock will be nonassessable; Former Members have
no voting rights while holders of Company Stock are entitled to one vote per
share held on each matter submitted to a vote of the shareholders; and Former
Members may not sell or transfer their interest in the Trust, while holders of
Company Stock may freely transfer their shares, subject to applicable securities
laws. See "Comparison of Rights of Former Members of the Trust and Rights of
Shareholders of the Company."
RISK FACTORS
The following risk factors should be considered carefully by Former
Members and Purchasers in evaluating whether to become holders of Company Stock.
These factors should be considered in conjunction with other information
included and incorporated by reference in this Prospectus.
Lack of History of Operations
The Company is a newly formed Mississippi corporation and has no
history of operations. Although the Company will be the successor in interest to
the Trust and plans to capitalize on relationships between the Trust and its
present and former insureds, there can be no assurance that the Company will
succeed or meet its objectives. See "Business of the Company -- Organization and
Purpose; Company Management's Plan of Operation."
Limited Operations
The Company anticipates that initially its sole potential sources of
revenue are investment income, premiums generated from the provision of
reinsurance under the Assumption Reinsurance Agreement if the Company elects to
provide such reinsurance, premiums generated from the provision of reinsurance
under the Commercial Program if the Company elects to provide such reinsurance,
and the creation and management of any program similar to the Commercial
Program. See "The Conversion -- Assumption Reinsurance Agreement" and "Business
of the Company -- Company Management's Plan of Operations." The Company does not
plan to write insurance directly until it receives a favorable rating of at
least an A-, which the Company anticipates will be at least five years from the
date of licensure. See "Risk Factors -- Lack of Ratings."
Capitalization
The Company anticipates it will exceed the statutory minimum capital
and surplus requirements of the Department of Insurance for writing workers'
compensation insurance in Mississippi. However, the Company initially will be
thinly capitalized. In the early years, the Company may incur losses. Losses in
excess of those anticipated by management during the initial years of the
Company's operations or otherwise could result in the Company failing to meet
the statutory minimum capital and surplus requirements. In that event, the
Company could be placed under certain operating and other restrictions by the
Department of Insurance, the Company could be placed under supervision by the
Department of Insurance, or the Department of Insurance could
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<PAGE>
seek to appoint a receiver or liquidator for the Company. See "Business of the
Company -- Company Management's Plan of Operations; Government Regulation."
Reliance on Certain Persons
The success of the Company will be substantially dependent on the
services of Harry E. Vickery (Director, President of the Company) and David R.
White (Director, Secretary, Treasurer, and Vice President). The loss of the
services of one or both persons could have an adverse impact on the Company's
ability to reach its objectives. See "Business of the Company -- Management of
the Company" and "Certain Transactions and Relationships."
Variability of Operating Results
Historically, the workers' compensation industry has been cyclical,
generally characterized by periods of overcapacity which result in lower premium
rates followed by periods of scarcity resulting in higher rates. Premium rates,
and thus profitability, can be affected significantly by many factors including
competition, the severity and frequency of claims, interest rates, regulations,
court decisions, the judicial climate, and general economic conditions and
trends, all of which are outside of the Company's control. These factors could
contribute to significant variation of results of operations from year to year.
Changes in economic conditions can lead to reduced premium levels due to lower
payrolls as well as increased claims due to the tendency of workers who are laid
off to submit worker's compensation claims. Legislative and regulatory changes
can also contribute to variable operating results for worker's compensation
insurance businesses. See "The Conversion -- Reasons for Conversion" and "The
Workers' Compensation Insurance System."
Adequacy of Loss Reserves
The Company will be required to maintain reserves to cover its
estimated ultimate liability for losses with respect to reported and unreported
claims incurred as of the end of each accounting period. These reserves do not
represent an exact calculation of liabilities but rather are estimates involving
actuarial projections at a given time of what the Company expects the ultimate
settlement and administration of claims will cost based on facts and
circumstances then known, predictions of future events, estimates of future
trends in claims frequency and severity. See "Business of the Company --
Government Regulation."
In light of present facts and current legal interpretations, management
of the Company believes that adequate provisions will have been made for loss
reserves upon the Conversion. In making this determination, management has
considered the claims experience of the Trust, loss development history for
prior accident years for the Trust, estimates of future trends of claims
frequency and severity and the proposed underwriting activities of the Company.
However, establishment of appropriate reserves is an inherently uncertain
process, and there can be no certainty that currently established reserves will
prove adequate in light of subsequent actual experience. Subsequent actual
experience could result in loss reserves being too high or too low.
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Future loss development could require reserves for prior periods to be
increased, which would adversely impact earnings in future periods.
Regulation
The Company's worker's compensation insurance operations will initially
be conducted only in Mississippi and will be subject to supervision and
regulation by the Department of Insurance. Such supervision and regulation
relate to numerous aspects of an insurance company's business and financial
condition. The primary purpose of such supervision and regulation is the
protection of policyholders rather than investors or stockholders of an issuer.
In the event an insurance company does not comply with the rules and regulations
promulgated by the Department of Insurance, the Department of Insurance may
utilize a number of enforcement mechanisms against the noncomplying company,
including supervision, receivership, or liquidation. See "Business of the
Company -- Government Regulation."
Competition
The insurance industry is characterized by competition primarily on the
basis of price. However, availability and quality of products, quality and speed
of service (including claims service), financial strength, distribution systems
and technical expertise are also important elements of competition. Many of the
Company's competitors are larger and have greater resources than the Company.
See "Business of the Company -- Company Management's Plan of Operations."
Lack of Ratings
Rating organizations review the financial performance and condition of
insurers. The Company will initially not be rated as a result of having less
than five consecutive years of operating experience. The absence of a rating
could make the Company's reinsurance product less attractive to potential ceding
companies (the companies which would transfer the insurance risk to the Company)
because the ceding insurer will not have an independent third party evaluation
of the Company's financial status. As a result, the ceding companies may require
pledged collateral or a letter of credit as a condition for ceding insurance to
the Company.
Licensure
Upon completion of the Conversion, the Company expects to be licensed
by the Department of Insurance as a provider of workers' compensation insurance.
Although the Company believes it will meet all requirements for licensure and
has undertaken discussions with the Department of Insurance to that effect, the
Department of Insurance is not required to grant such licensure.
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THE CONVERSION
Background and Recommendation of the Trust's Board of Trustees.
During late 1995, management of the Trust began discussing the best
method of continuing to fulfill the Trust's mission of ensuring long term
availability of reasonably priced workers' compensation insurance to its core
agricultural and industrial clients. Due to fundamental changes in the workers'
compensation insurance market, management of the Trust determined that the
conversion of the Trust into a commercial stock company would best suit the
needs of the Trust's insureds. See "The Workers' Compensation Insurance System."
In reaching its recommendation to pursue the Conversion, the Trust's
Board of Trustees examined a number of options. Because of the current low
premiums being charged by workers' compensation insurers, the Trust could not
offer competitively priced workers' compensation insurance. The Board considered
simply dissolving the Trust and returning the remaining assets to Former Members
or leaving the Trust dormant while continuing with the Commercial Program (both
with and without terminating the joint and several liability of the insureds)
but these strategies conflicted with the Trust's original mission to ensure long
term availability of reasonably priced workers' compensation insurance to its
core agricultural and industrial clients.
Although the Commercial Program has produced more competitive rates
than the Trust, the Trustees do not wish to rely upon the Commercial Program as
a long term solution because there is no assurance that TIG will continue
writing insurance under the Commercial Program. In addition, TIG's rates may
become uncompetitive. The Trustees believe that the workers' compensation market
will experience another period of scarcity and higher premium rates as a result
of excessive price competition (as the market experienced in the late 1980's and
early 1990's). The Trustees also believe that in such event a commercial
insurance company structure will provide more flexibility for assuring coverage
of the Trust's target market through reinsurance or other arrangements. In
addition, dissolution or dormancy of the Trust would not allow Former Members an
opportunity to participate in the long term growth potential of a company that
they owned. Further, in the event of dissolution of the Trust, the cash
liquidation proceeds would be taxable to the recipients, while receipt of
Company Stock is not.
On March 20, 1997, the Trustees of the Trust (William L. Kennedy, Aven
Whittington, Merlin Richardson, and S. Hall Barrett, Jr.) unanimously voted to
approve and adopt the Plan. The Trustees amended the Plan effective September
11, 1997. The Company approved and adopted the Plan and the sale of its stock
to the Trust and related transactions on the same date. For additional
explanation of the Trustees' reasons for approving the Plan, see "The
Conversion -- Reasons for Conversion."
THE BOARD OF TRUSTEES OF THE TRUST HAS UNANIMOUSLY VOTED FOR APPROVAL AND
ADOPTION OF THE PLAN AND BELIEVES THAT THE CONVERSION IS IN THE BEST INTERESTS
OF THE TRUST AND THE FORMER MEMBERS.
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Reasons for Conversion
The Changing Workers Compensation Market
At the time the Trust was organized, workers' compensation insurance
written by commercial insurers in Mississippi was becoming difficult and
expensive to obtain as a result of losses experienced by commercial insurers.
Mississippi's experience paralleled a national trend of limited availability of
workers' compensation insurance which prompted the formation of self insured
pools across the United States. See "The Workers' Compensation Insurance
System."
However, as a result of structural changes in the workers' compensation
market, such as tort reform and better loss analysis, premiums charged by
commercial workers' compensation carriers have lessened while availability of
insurance has increased. As a result, self insured pools such as the Trust have
found it difficult to compete with commercial insurance companies on a cost of
premium basis because commercial insurers generally have greater financial
resources and, due to different regulatory requirements, can change their
pricing strategy much more rapidly than can the self insured pools. See
"Business of the Trust -- Regulation" and "Trust Management's Discussion and
Analysis of Financial Conditions and Operation." Although availability of
workers' compensation insurance has increased, the industry remains highly
cyclical, which could result in periods of scarcity and high premiums in the
future.
As a result of the changing nature of the workers' compensation market,
effective July 1, 1996 the Trust ceased writing workers' compensation insurance
and created the Commercial Program with TIG Insurance Company ("TIG") and TIG
Reinsurance Company. Under the Commercial Program, TIG (an "A" (excellent) rated
commercial insurance company according to A. M. Best Company), provides workers'
compensation to Former Members and other persons through the Trust's network of
agents.
The Trust created the Commercial Program in order to maintain coverage
of its insureds at reasonable rates as the Trust planned for the Conversion. The
Trust continues to operate primarily to service and "run off" business written
prior to July 1, 1996.
Joint and Several Liability
In a self insurance pool such as the Trust, all insureds are jointly
and severally liable for the loss obligations of one another during the periods
such persons were insured by the pool. Upon the effectiveness of the Assumption
Reinsurance Agreement which is a condition precedent of the Plan becoming
effective, Continental will insure the joint and several liability obligations
of all the insureds of the Trust. In the future, the shareholders of the Company
will not be jointly and severally liable for any obligations arising out of
policies written by the Company. See "Comparison of the Rights of Former Members
of the Trust and Shareholders of the Company -- Liability; Assessment."
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Ability to Write Other Lines of Business
Mississippi law prohibits self insured workers' compensation trusts
from writing any type of insurance other than workers' compensation insurance.
As a commercial stock company, assuming appropriate licensure, the Company could
write and/or participate in insurance programs to provide lines of insurance
business in addition to workers' compensation. In the event the Company desired
to participate in other lines of business, the Department of Insurance would
require the Company to maintain higher levels of capital and surplus ($600,000
and $900,000, respectively) than is required for a single line company which,
like the Company, will write only workers' compensation ($400,000 and $600,000,
respectively). Though the Company does not anticipate becoming licensed to write
other lines of business in the near future, management of the Trust and the
Company believe the ability to do so will allow the Company to be more
responsive to the future needs of its target market than a self insured workers'
compensation trust.
Ability to Write Insurance in Other States
Self insurers such as the Trust cannot write workers' compensation
insurance outside of Mississippi. As a commercial insurer, assuming appropriate
licensure and financial strength, the Company could write insurance in other
states.
The Company does not plan to directly write insurance for at least five
years after the Conversion (in order to allow time to be rated). However, under
certain circumstances it can participate in workers' compensation programs
similar to the Commercial Program in other states without seeking licensing or
any additional statutory capital or surplus requirements in those states,
provided that another company that is licensed in the state is directly writing
the business. There are currently no such arrangements in place with respect to
other states. to See "Business of the Company -- Company Management's Plan of
Operation -- Creation of Other Workers' Compensation Insurance Programs."
Ability to Raise Additional Capital
If self insured workers' compensation trusts require additional
capital, their principal options would be to either increase premiums or assess
their members jointly and severally. As a commercial insuror, the Company's
shareholders are not liable to assessment and capital needs may be met through
the sale of stock. At present, the Company has no plans to issue additional
stock after the Conversion. See "Comparison of the Rights of Members of the
Trust and Shareholders of the Company -- Liability; Assessment" and "Business of
the Company -- Government Regulation."
Assumption Reinsurance Agreement
The Trust and the Company have entered into the Assumption Reinsurance
Agreement dated as of March 20, 1997, with Continental, a member of the CNA
Insurance Group. The Assumption Reinsurance Agreement was subsequently amended
effective September 5, 1997. The CNA
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Insurance Group has a rating by the A. M. Best Company of "A" (Excellent).
This rating applies to the group's nine-member intercompany pool which includes
Continental.
The Assumption Reinsurance Agreement provides that Continental will
assume the Trust's insurance liabilities and the joint and several liability of
any employers to whom the Trust provided insurance from the inception of the
Trust and that such employers will be able to look directly to Continental for
coverage and claims payments without the necessity of making a claim against the
Trust. Each Former Member of the Trust which accepts a Liquidating Distribution
will be deemed to have agreed to look solely to Continental for coverage, to
release the Trust from further insurance obligations, and to release the Former
Members of the Trust from joint and several liability. In addition, all Former
Members will be required to sign and return an Assumption Certificate evidencing
their agreement to the assumption by Continental and to release the Former
Members from joint and several liability as a condition to receiving the
Liquidating Distribution applicable to such Former Member.
The Assumption Reinsurance Agreement will become effective when the
Trust pays to Continental a total premium not to exceed $1,875,000 composed of
$1,625,000 in reserves to be transferred to Continental for use in paying claims
made against the Trust (which amount may be adjusted downward depending on
claims settled), and $250,000 as a fee to Continental for the provision of
coverage. David R. White, who is an officer and director of the Company, or an
affiliate of Mr. White, will be paid a commission of $25,000 by Continental in
connection with the transaction. See "Risk Factors -- Capitalization;" "Business
of the Company -- Government Regulation;" and "Trust Management's Discussion and
Analysis of Financial Conditions and Results of Operations."
Under the terms of the Assumption Reinsurance Agreement, the Company
has the option to reinsure Continental with respect to the insurance which
Continental directly assumed ("Stoneville Reinsurance"). No consideration shall
be paid or due to or from either the Company or Continental for Stoneville
Reinsurance. Under the terms of the Assumption Reinsurance Agreement, Stoneville
may exercise Stoneville Reinsurance on March 1, 1998, by providing written
notice to Continental on or prior to such exercise date. If Stoneville exercises
Stoneville Reinsurance, Continental and Stoneville shall enter into a
Reinsurance Agreement in a form acceptable to Continental with such
acceptability criteria to be based on customary industry practice and with such
acceptance by Continental not to be unreasonably withheld. If Stoneville
Reinsurance is provided, reserves allocable to such risk reinsured by the
Company will be transferred to the Company, thus allowing the Company to invest
those funds and generate income. The Company will be required to fund a trust
account with a financial institution acceptable to Continental and the Company
with the amount of funds necessary for Continental to receive full financial
statement credit for such reinsurance and with the terms and conditions of such
trust to comply with the law of Continental's state of domicile such that
Continental shall receive full financial statement credit for such reinsurance.
The Assumption Reinsurance Agreement is unrelated to and will have no
effect on the ongoing operations of the Trust's Commercial Program.
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Regulatory Approvals
No formal regulatory approvals from either the Workers' Compensation
Commission or the Department of Insurance are required in order for the Trust to
consummate the Conversion. The Company must be licensed as an insurance company
by the Department of Insurance prior to commencing operations as a workers'
compensation insurer. The Company believes such licensure will be granted upon
the consummation of the Conversion. See "Business of the Company -- Government
Regulations." The Trust has provided copies of the Plan, as amended, a copy of
this Prospectus, and other information to the Workers' Compensation Commission.
Immediately prior to the consummation of the Conversion, the Trust will
surrender its Certificate of Authority to the Workers' Compensation Commission.
Resales of Company Stock
All shares of Company Stock received by Former Members of the Trust in
the Conversion will be freely transferable, except that shares of Company Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of the Trust before the Conversion may be resold by
them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 in the case of such persons
who become affiliates of the Company), or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of the Trust or the
Company generally include individuals or entities that control, are controlled
by, or are under common control with, such party and may include certain
officers and directors of such party as well as principal shareholders of such
party in the case of the Company, or certain Trustees or Former Members in the
case of the Trust. See "Comparison of the Rights of Former Members of the Trust
and Shareholders of the Company -- Resale."
Certain Federal Income Tax Consequences
The following discussion of certain federal income tax consequences of
the Conversion is based on provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations thereunder, judicial authority, and
administrative rulings and practice as of the date hereof. Watkins Ludlam &
Stennis, P.A. has furnished an opinion of counsel to the effect that the
Conversion will be treated as a tax free transaction as to the Trust, the
Company, and to those Former Members who receive Stock of the Company.
Consequences to Former Members
Former Members receiving cash as a result of the Conversion will be
treated as having received cash as a distribution in redemption of the Trust
Units. Such distribution will be taxable, subject to the provisions and
limitations of Code Section 302. No gain or loss will be recognized by the
Former Members upon their receipt of Company Stock solely in exchange for their
Trust
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Units by virtue of Code Section 354(a)(1). The basis of the Company Stock to be
received by the Former Members will be the same as the Former Members' basis in
the Trust Units allocable to such Former Members, under Code Section 358(a)(1).
The holding period of the Company Stock received by the Former Members
will include, in each instance, the period during which the Former Members had
an interest in the equity of the Trust as determined under the Plan, provided
that such Trust equity constituted a capital asset on the date of the exchange,
pursuant to Code Section 1223(1).
Consequences to the Trust and the Company
No gain or loss will be recognized by the Trust or the Company as a
result of the Conversion under Code Sections 361(a) and 1032(a), respectively.
The basis of the assets of the Trust in the hands of the Company will be the
same as the basis of those assets in the hands of the Trust immediately prior to
the transfer under Code Section 362(b). The holding period of the assets of the
Trust in the hands of the Company will include the period during which such
assets were held by the Trust under Code Section 1223(2).
EACH FORMER MEMBER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH FORMER MEMBER OF THE
CONVERSION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, FOREIGN AND OTHER
TAX LAWS. THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION WITHOUT REGARD TO THE
PARTICULAR FACTS AND CIRCUMSTANCES OF EACH FORMER MEMBER OF THE TRUST.
Anticipated Accounting Treatment
The Conversion is a reorganization of entities under common control,
the accounting for which is similar to a pooling of interests. Under this method
of accounting, the recorded assets of the Trust will be carried forward to the
Company at their recorded amounts, income of the Company will include income of
the Trust for the entire fiscal year in which the Conversion occurs and the
reported income of the Trust for prior periods will be combined with and
included as income of the Company.
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THE PLAN
General
The terms of the Conversion are contained in the Plan, a copy of which
is attached to the Prospectus as Exhibit A. The statements in this Prospectus
are qualified entirely by reference to the Plan.
Upon the satisfaction of the conditions to the effectiveness of the
Plan: (i) the Trust will transfer substantially all its assets and liabilities
(other than insurance liabilities) to the Company; (ii) in exchange for the
contribution of such assets and liabilities by the Trust to the Company, the
Company will issue shares of its $1.00 par value Stock to the Trust with each
share of such Stock to be valued for purposes of the exchange at $4.00 per
share; and (iii) the Trust will dissolve and distribute its assets (stock of the
Company) to Former Members of the Trust, with the exception of Former Members
who elect to dissent from the transaction, who will receive $4.00 for each share
of Stock to which they would have been entitled to under the Plan.
The Plan fixes the value of the Stock based on a per share measurement
of $4.00 of Trust equity (one Trust Unit) per share of Stock. The per share
valuation is designed to result in the Company issuing an appropriate number of
shares so that it will have the minimum levels of statutory capital and surplus
as required by law. In Mississippi, the par value of stock issued by an
insurance company cannot be less than $1.00. The Company will be considered a
single line commercial insurance company by the Department of Insurance so long
as it writes only workers' compensation insurance. Single line commercial
insurance companies such as the Company must at all times meet and maintain a
minimum capital (the par value of the issued and outstanding stock) and surplus
(generally the difference between the issuance price of the stock and its par
value) levels of $400,000 and $600,000, respectively. The Company anticipates
that it will exceed the minimum levels of capital and surplus. See "Trust
Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Results of Operations -- Liquidity Requirements."
Effective Date
The Plan is dated as of March 20, 1997, and was subsequently amended
effective , 1997. The Plan will become effective as of the Effective Date, which
is the close of business on the last day of the month during which all
conditions to the Plan have been satisfied. The capitalization of the Company
and the liquidation and dissolution of the Trust shall be deemed to have
occurred simultaneously and completely as of the Effective Date.
Terms of the Plan
As of the Effective Date, the Trust will transfer to the Company
substantially all of the assets and liabilities (other than insurance
liabilities) of the Trust in return for the number of shares of Stock of the
Company equal to the assets and liabilities of the Trust transferred by the
Trust to the Company measured by $4.00 of Trust equity (one Trust Unit) per
share of Company Stock. The
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value of the assets and liabilities to be transferred to the Company is
anticipated to be $2,383,989, which is the value of the equity of the Trust as
of June 30, 1997, increased by the estimated income of the Trust between such
date and the Effective Date of the Plan minus all expenses incurred between such
date and the effective date of the Plan, including amounts reserved to pay
estimated expenses of the Trust, but excluding amounts reserved to pay
dissenters. At that point, the Trust will own all the issued and outstanding
shares of Stock of the Company. Immediately thereafter, the Trust will be
liquidated.
Upon liquidation of the Trust, each Former Member shall receive its
Liquidating Distribution of one share of Company Stock for each Trust Unit
allocable to such Former member, except dissenters, who shall receive $4.00 in
cash for each Trust Unit allocable to such dissenter. As of June 30, 1997, there
were a total of approximately 595,997 Trust Units allocable to Former Members
which represents the approximately $2,383,989 value, as of June 30, 1997, of the
net assets which will be transferred to the Company. The actual amount
transferred from the Trust to the Company will depend the results of operations
of the Trust between June 30, 1997 and the Effective Date of the Plan. In the
event that the expenses set aside for the Conversion are less than anticipated
and/or few Former Members exercise dissenters' rights and/or the Trust income is
greater than projected, then the remaining amounts shall be transferred from the
Trust to the Company as a contribution to capital of the Company. For purposes
of computing the number of shares of Stock (or in the case of dissenters, cash)
distributable to each Former Member, each Former Member of the Trust will have
allocated to it a number of Trust Units determined by multiplying the total
number of Trust Units by the Proportionate Earned Premium of each Former Member.
Proportionate Earned Premium is computed by dividing (a) the net earned
premium derived by the Trust from a Former Member for each Positive Income Fund
Year during which the Trust derived a net earned premium for the full Positive
Income Fund Year from such Former Member by (b) the total of all such net earned
premiums of the Trust. The Proportionate Earned Premium is designed to allocate
to each Former Member an amount of Trust Units in proportion to that Former
Member's economic contribution to the Trust. This computation, including the use
of only Positive Income Fund Years, is similar to the one used for determining a
member refund in a self insured pool, is similar to the method that would be
used if the Trust were liquidating and distributing cash, and was chosen based
on discussions with the Workers' Compensation Commission.
Mississippi law does not provide for dissenters' rights in transactions
involving trusts. However, based on discussions with the Workers' Compensation
Commission, the Plan includes a version of dissenters' rights which is designed
to allow dissenters to dissent from the Plan and receive $4.00 in cash for each
Trust Unit allocable to such persons upon perfection of dissenters' rights.
Payments to dissenters shall be paid by the Trust in an amount (to be determined
as of the Effective Date) which will satisfy certain published Internal Revenue
Service Guidelines so as not to cause the Conversion to lose its
characterization as a tax free transaction as to the Trust, the Company, and
those Former Members who receive Stock of the Company. Any excess over such
amount shall be paid to dissenters by the Company (contemporaneously with the
payments made
17
<PAGE>
to dissenters from funds of the Trust) out of operating funds or from the
proceeds of a loan that the Company will obtain for that purpose and not out of
assets transferred to the Company from the Trust pursuant to the Plan. The
Company's intent is to pay debt service on any loan obtained to pay dissenters
out of future earnings of the Company and not out of funds transferred from the
Trust.
In order to perfect dissenters' rights, a Former Member wishing to
dissent must deliver to the Trust's office at 633 North State Street, Suite 200,
Jackson, Mississippi 39202-7817, before ___________, 1997 [compute 30 days after
the Effective Date of the Registration Statement], written notice of such Former
Member's intent to demand payment. Payment to dissenters who have perfected
their dissenters' rights shall be made within 60 days after the Effective Date.
If dissenters' rights are perfected by holders of more than 20% of the
Trust Units, then the Conversion will not proceed with the result that no cash
or stock will be distributed to any Former Members.
As of the Effective Date, following the Liquidating Distribution, the
Trust shall be dissolved. Subsequent to the dissolution of the Trust, any
amounts remaining not needed to pay expenses or dissenters, if any, shall be
transferred to the Company.
Dissemination of Liquidating Distribution
Promptly after the Effective Date, each Former Member will receive an
Assumption Certificate which will evidence Continental's assumption of the
insurance liabilities of the Trust, including the joint and several liability
obligations of each of the Trust's insureds to the other. Each Former Member
must sign and return the Assumption Certificate to the Trust at which time the
Trust will tender to the Former Member such Former Member's Stock in the Company
or such amount as may be due if such Former Member has complied with the
dissenters' procedures as set forth in the Plan. The purpose of this requirement
is to ensure that the objective of releasing Former Members from joint and
several liability and effectively transferring this liability to Continental is
accomplished.
Conditions
The obligation of the Trust to consummate the Plan is subject to the
following conditions: (i) the Assumption Reinsurance Agreement being in effect;
(ii) receipt of an opinion from Watkins Ludlam & Stennis, P.A. to the effect
that the Conversion will be treated as a tax-free transaction as to the Trust,
the Company, and to those Former Members who receive Stock of the Company; and
(iii) dissenter's rights shall not be perfected by holders of more than twenty
percent (20%) of the Trust Units.
18
<PAGE>
Termination
The Plan may be terminated at any time by vote of the Trustees of the
Trust or if all conditions to the Plan have not been satisfied by December 31,
1997. In the event the Plan is terminated, the Conversion will not proceed. The
Trustees of the Trust will at that point determine whether to allow the Trust to
become dormant, liquidate the Trust, and/or cause the Assumption Reinsurance
Agreement to become effective.
19
<PAGE>
PRO FORMA CONDENSED BALANCE SHEETS AND STATEMENTS
OF INCOME (UNAUDITED) OF THE COMPANY
Pro Forma Condensed Balance Sheets
The following proforma condensed balance sheets are presented as of December 31,
1996 and June 30, 1997. The December 31, 1996 proforma balance sheets give
effect to the conversion as if the conversion was in place effective December
31, 1996. They also assume that the Assumption Reinsurance Agreement with CNA
was in place effective December 31, 1996. The June 30, 1997 proforma balance
sheets give effect to the conversion as if the conversion was in place effective
June 30, 1997. They also assume that the Assumption Reinsurance Agreement with
CNA was in place effective December 31, 1996.
The pro forma condensed balance sheets with the notation "20% Dissent" assume
that Former Members representing at least 20% of the equity of the Trust will
perfect dissenters' rights under the Plan.
The pro forma condensed balance sheets with the notation "No Dissenters" assume
that no Former Members will perfect dissenters' rights under the Plan.
Pro Forma Condensed Statements of Income
Two pro forma condensed statements of income are presented for the year ended
December 31, 1996 and two for the six month period ending June 30, 1997.
The 1996 pro forma condensed statements of income give effect to the Conversion
as if the Conversion had been in place January 1, 1996. They also assume that
the TIG Commercial Insurance Program, which began July 1, 1996, was in effect as
of January 1, 1996.
The pro forma condensed statements of income for the six months ended June 30,
1997 give effect to the conversion as if the conversion had taken place December
31, 1996, the CNA Assumption Reinsurance Agreement was in place effective
December 31, 1996, and the TIG Commercial Insurance Program became effective
July 1, 1996.
The pro forma condensed statements of income with the notation "20% Dissent"
assume that Former Members representing at least 20% of the equity of the Trust
at December 31, 1996 will perfect dissenters rights under the Plan.
The pro forma condensed statements of income with the notation "No Dissenters"
assume that no Former members of the Trust will perfect dissenters' rights under
the Plan.
The pro forma information is based upon historical financial statements of the
Trust giving effect to the transactions as a reorganization of entities under
common control, and the assumptions and adjustments described in the
accompanying notes to the unaudited pro forma financial statements.
20
<PAGE>
The unaudited pro forma condensed balance sheets and statements of income have
been prepared by management of the Company based upon financial statements of
the Trust and the Company which are included elsewhere herein. The pro forma
balance sheets and statements of income may not be indicative of the financial
condition that would have existed if the conversion had become effective on
December 31, 1996 or January 1, 1996 or if the TIG Commercial Program had been
in effect on January 1, 1996. In particular, the pro forma financial statements
contain no adjustments for the exercise of rights of the company to provide
reinsurance under the TIG Commercial Program and the Assumption Reinsurance
Agreement with Continental. The pro forma condensed balance sheets and
statements of income should be read in conjunction with financial statements and
related notes of the Company and the Trust contained elsewhere herein.
21
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Balance Sheet (No Dissenters)
December 31, 1996 Trust Trust Stoneville Stoneville Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance Pro Forma Pro Forma Adj
Trust # Adjustments Balance Company Adjustments Balance #
----------- ----- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $1,359,965 $1,359,965 $19,970 $19,970
Invested assets 3,361,332 1 (3,014,234) 347,098
Notes receivable 20,000 20,000 7
Accrued interest receivable 52,410 52,410 6
Reinsurance receivables, net 660,986 2 (660,986) 0
of uncollectible amounts
Excess insurance premium 89,860 89,860
overpayment
Capital equipment leases at
cost less
accumulated depreciation 13,517 13,517
Prepaid expenses 21,798 21,798
Income tax refund receivable 152,862 3 327,990 480,852
Other assets 575 575
----------- ----- ----------------------------------------- -------------------------------
Total Assets $5,733,305 ($3,347,230) $2,386,075 $19,970 $0 $19,970
=========== ===== ========================================= ===============================
Liabilities and Stockholders'
Equity
Liabilities
Reserve for losses and loss 2,834,220 4 (2,834,220) 0
adjustment expenses
Reserve for premium 384,863 384,863
adjustment
Notes payable 0 0 20,000 20,000 9
Accounts payable and 56,290 56,290 407 407 8
accrued liabilities
<PAGE>
Capital lease obligations 4,038 4,038
----------- ----- ----------------------------------------- -------------------------------
Total Liabilities 3,279,411 (2,834,220) 445,191 20,407 0 20,407
=========== ===== ========================================= ===============================
Stockholders' Equity
Common Stock 500,000
shares issued and outstanding
$1 par value 0 0 10
Retained Earnings 2,463,130 5 (513,010) 1,950,120 (437) (437) 11
Unrealized decline in market
value of equity securities
less applicable future tax
benefit (9,236) (9,236)
----------- ----- ----------------------------------------- -------------------------------
Total Stockholders' Equity 2,453,894 (513,010) 1,940,884 (437) 0 (437)
----------- ----- ----------------------------------------- -------------------------------
Total Liabilities and $5,733,305 ($3,347,230) $2,386,075 $19,970 $0 $19,970
Stockholders' Equity
=========== ===== ========================================= ===============================
</TABLE>
<TABLE>
Inter-Co. Combined
Elimination Pro Forma
Adjustments Balance
Assets ------------------ --------
<S> <C> <C>
Cash and Cash Equivalents $1,379,935
Invested assets 347,098
Notes receivable (20,000) 0
Accrued interest receivable (407) 52,003
Reinsurance receivables, net 0
of uncollectible amounts
Excess insurance premium 89,860
overpayment
Capital equipment leases at 0
cost less
accumulated depreciation 13,517
Prepaid expenses 21,798
Income tax refund receivable 480,852
Other assets 575
--------- ----------------
Total Assets ($20,407) $2,385,638
========= ================
Liabilities and Stockholders'
Equity
Liabilities
Reserve for losses and loss $0
adjustment expenses
Reserve for premium 384,863
adjustment
Notes payable (20,000) 0
Accounts payable and (407) 56,290
accrued liabilities
<PAGE>
Capital lease obligations 4,038
--------- ----------------
Total Liabilities (20,407) 445,191
========= ================
Stockholders' Equity
Common Stock 500,000
shares issued and outstanding
$1 par value 500,000 500,000
Retained Earnings (500,000) 1,449,683
Unrealized decline in market 0
value of equity securities
less applicable future tax
benefit (9,236)
--------- ----------------
Total Stockholders' Equity 0 1,940,447
--------- ----------------
Total Liabilities and ($20,407) $2,385,638
Stockholders' Equity
========= ================
</TABLE>
<PAGE>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
December 31, 1996 (No Dissenters)
Trust Adjustments
Adjustment
Number Description Amount
1 Adjustment for the payment of the CNA Premium of
$2,764,234 plus a fee of $250,000 out of the investments
of the Trust. $(3,014,234)
2 Adjustment to remove the reinsurance receivable from the
Books of the Trust. This receivable will be transferred to
CNA along with outstanding insurance claims. $ (660,986)
==========
3 Adjustment to the income tax refund receivable due to the
change in taxable income as a result of the CNA Assumption
Reinsurance Agreement as shown following:
Loss from liability transfer $591,000
CNA fee 250,000
---------
Decrease in taxable income 841,000
Tax Decrease (34% Federal and 5% State) $ 327,990
===========
* Loss from the CNA transfer is calculated as follows:
Liability transfered $2,834,220
Premium Paid Excluding Fee (2,764,234)
Reinsurance Receivable
Transferred ( 660,986)
------------
Loss $ 591,000
=========
4 Adjustment to reserve for losses to remove claims liability
transferred to CNA $(2,834,220)
5 Adjustments to Retained Earnings
a Loss from CNA Assumption Reinsurance Agreement (See
Adjustment # 3 above.) $ (591,000)
22
<PAGE>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
December 31, 1996 (No Dissenters)
b Fee expense to CNA for Assumption Agreement ( 250,000)
c Tax adjustment as a result of the CNA transaction. (See
Adjustment # 3 above.) 327,990
-------
Total Adjustment # 5 $(513,010)
==========
Inter-Company Eliminating Entries
Adjustment
Number Description Amount
6 Eliminate accrued interest receivable from $( 407)
Stoneville to the Trust ============
7 Eliminate note receivable from Stoneville $( 20,000)
to Trust =============
8 Eliminate accrued interest payable to Trust $( 407)
from Stoneville =============
9 Eliminate notes payable from Stoneville to $( 20,000)
the Trust =============
10 Record issuance of 500,000 shares of common
stock, $1.00 par value $ 500,000
=============
11 Record use of $500,000 of Trust to issue
500,000 shares of common stock, $1.00 par $ ( 500,000)
value of Stoneville Insurance Co. =============
23
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Balance Sheet (20% Dissent)
December 31, 1996 Trust Trust Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance
Trust # Adjustments Balance Company
---------------------------------- -----------------------------
Assets
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $1,359,965 $1,359,965 $19,970
Invested assets 3,361,332 1 (3,114,234) 247,098
Notes receivable 20,000 20,000
Accrued interest receivable 52,410 52,410
Reinsurance receivables, net of uncollectible 660,986 2 (660,986) 0
amounts
Excess insurance premium overpayment 89,860 89,860
Capital equipment leases at cost less
accumulated depreciation
13,517 13,517
Prepaid expenses 21,798 21,798
Income tax refund receivable 152,862 3 327,990 480,852
Other assets 575 575
---------------------------------- -----------------------------
Total Assets $5,733,305 ($3,447,230) $2,286,075 $19,970
================================== =============================
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss adjustment 2,834,220 4 (2,834,220) 0
expenses
Reserve for premium adjustment 384,863 384,863
Notes payable 0 0 20,000
Accounts payable and accrued liabilities 56,290 56,290 407
Capital lease obligations 4,038 4,038
---------------------------------- -----------------------------
Total Liabilities 3,279,411 (2,834,220) 445,191 20,407
---------------------------------- -----------------------------
Stockholders' Equity
Common Stock 400,000 issued and
outstanding $1 par value
0
Retained Earnings 2,463,130 5 (613,010) 1,850,120 (437)
Unrealized decline in market value of equity
securities less applicable future tax benefit
(9,236) (9,236)
---------------------------------- -----------------------------
Total Stockholders' Equity 2,453,894 (613,010) 1,840,884 (437)
---------------------------------- -----------------------------
Total Liabilities and Stockholders' Equity $5,733,305 ($3,447,230) $2,286,075 $19,970
================================== =============================
</TABLE>
<TABLE>
Stoneville Stoneville Inter-Co. Combined
Adj Pro Forma Pro Forma Adj Elimination Pro Forma
# Adjustments Balance # Adjustments Balance
-------------------- ----------------------------------- --------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $19,970 $1,379,935
Invested assets 247,098
Notes receivable 9 (20,000) 0
Accrued interest receivable 8 (407) 52,003
Reinsurance receivables, net of uncollectible 0
amounts
Excess insurance premium overpayment 89,860
Capital equipment leases at cost less 0
accumulated depreciation
13,517
Prepaid expenses 21,798
Income tax refund receivable 480,852
Other assets 575
-------------------- ----------------------------------- --------------
Total Assets $0 $19,970 ($20,407) $2,285,638
==================== =================================== ==============
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss adjustment $0
expenses
Reserve for premium adjustment 384,863
Notes payable 6 288,089 308,089 11 (20,000) 288,089
Accounts payable and accrued liabilities 407 10 (407) 56,290
Capital lease obligations 4,038
-------------------- ----------------------------------- --------------
Total Liabilities 288,089 308,496 (20,407) 733,280
-------------------- ----------------------------------- --------------
Stockholders' Equity
Common Stock 400,000 issued and
outstanding $1 par value
0 12 400,000 400,000
Retained Earnings 7 (288,089) (288,526) 13 (400,000) 1,161,594
Unrealized decline in market value of equity 0
securities less applicable future tax benefit
(9,236)
-------------------- ----------------------------------- --------------
Total Stockholders' Equity (288,089) (288,526) 0 1,552,358
-------------------- ----------------------------------- --------------
Total Liabilities and Stockholders' Equity $0 $19,970 ($20,407) $2,285,638
==================== =================================== ==============
</TABLE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
December 31, 1996 (20% Dissent)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C> <C>
1 Adjustments to Investments
a Payment of the CNA Premium of $2,764,234 plus a fee
of $250,000 out of the investments of the Trust. $(3,014,234)
b Payment of $100,000 to Dissenters who have perfected
their rights. The balance of disbursement to dissenters
will be made from Stoneville with borrowed funds. (100,000)
------------
Total of Adjustment # 1 $(3,114,234)
===========
2 Adjustment to remove the reinsurance receivable from the
Books of the Trust. This receivable will be transferred to
CNA along with outstanding insurance claims. $ (660,986)
===========
3 Adjustment to the income tax refund receivable due to the
change in taxable income as a result of the CNA Assumption
Reinsurance Agreement as shown following:
Loss from liability transfer $591,000*
CNA fee 250,000
---------
Decrease in taxable income 841,000
Tax Decrease (34% Federal and 5% State) $ 327,990
===========
* Loss from the CNA transfer is calculated as follows:
Liability transfered $2,834,220
Premium Paid Excluding Fee (2,764,234)
Reinsurance Receivable
Transferred ( 660,986)
------------
Loss $ (591,000)
===========
4 Adjustment to reserve for losses to remove claims liability
transferred to CNA $(2,834,220)
5 Adjustments to Retained Earnings
a Loss from CNA Assumption Reinsurance Agreement (See
Adjustment # 3 above.) $(591,000)
b Fee expense to CNA for Assumption Agreement ( 250,000)
c Payment of $100,000 to Dissenters who have perfected
their rights. The balance to be paid by Stoneville. ( 100,000)
d Tax adjustment as a result of the CNA transaction. (See
Adjustment # 3 above.) 327,990
-----------
24
Total Adjustment # 5 $( 613,010)
===========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
December 31, 1996 (20% Dissent)
Stoneville Adjustments
Adjustment
Number Description Amount
<S> <C>
6 Adjustment to notes payable to record a loan obtained
for the purpose of paying dissenters rights on balance of
20% dissenters. Loan is assumed obtained 12/31/96. No
Interest is assumed accrued. $ 288,089
===========
7 Adjustment to retained earnings to pay balance of Dissenters
rights with funds borrowed at 12/31/96 for such purpose. The
Trust is assumed to have made a $100,000 for the same purpose. $ (288,089)
============
Inter-Company Eliminating Entries
8 Eliminate accrued interest receivable from Stoneville to the Trust $( 407)
===========
9 Eliminate note receivable from Stoneville toTrust $( 20,000)
============
10 Eliminate accrued interest payable to Trust from Stoneville $( 407)
===========
11 Eliminate notes payable from Stoneville to the Trust $( 20,000)
===========
12 Record issuance of 400,000 shares of common stock, $1.00
par value $ 400,000
===========
13 Record use of $400,000 of Trust to issue 400,000 shares of
common stock, $1.00 par value of Stoneville Insurance Co. $( 400,000)
===========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Statement of Income
Year Ended December 31, 1996
(No Dissenters) Trust Trust Stoneville Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance Adj Pro Forma
Trust # Adjustments Amount Company # Adjustments
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Premiums earned $2,077,351 1 (2,077,351) $0
Premiums ceded (89,860) 2 $89,860 0
----------------------------------------------------------------------------------------------
Net premiums earned 1,987,491 0
Investment income 297,076 3 (45,888) 251,188
Net realized gains and losses on
securities
available-for-sale (37,286) (37,286)
Other (422,850) (422,850)
----------------------------------------------------------------------------------------------
Total Revenue 1,824,431 (2,033,379) (208,948) 0 0
----------------------------------------------------------------------------------------------
Expenses
Loss and loss adjustment 916,592 4 (959,032) (42,440)
expenses
Service company fees 299,322 5 (299,322) 0
Regulatory fees 28,548 6 (28,548) 0
General expenses 450,959 7 (201,089) 249,870 437
----------------------------------------------------------------------------------------------
0
Total Expenses 1,695,421 (1,487,991) 207,430 437 0
----------------------------------------------------------------------------------------------
Net Income Before Income Tax Prov. 129,010 (545,388) (416,378) (437) 0
Provision for income tax 98,768 8 (103,284) (4,516)
-----------------------------------------------------------------------------------------------
Net Income $30,242 ($442,104) ($411,862) ($437) $0
===============================================================================================
</TABLE>
<TABLE>
Stoneville Inter-Co. Combined
Pro Forma Adj Elimination Pro Forma
Amount # Adjustments Amount
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Premiums earned $0
Premiums ceded
-------------------------------------------------------
Net premiums earned 0
Investment income 9 (407) 250,781
Net realized gains and losses on
securities
available-for-sale (37,286)
Other (422,850)
-------------------------------------------------------
Total Revenue 0 (407) (209,355)
-------------------------------------------------------
Expenses
Loss and loss adjustment
expenses (42,440)
Service company fees 0
Regulatory fees 0
General expenses 437 10 (407) 249,900
------------------------------------------------------
Total Expenses 437 (407) 207,460
------------------------------------------------------
Net Income Before Income Tax Prov. (437) 0 (416,815)
Provision for income tax (4,516)
------------------------------------------------------
Net Income ($437) $0 ($412,299)
======================================================
</TABLE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Statement of Income
Year Ended December 31, 1996 (No Dissenters)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C>
1 Remove premiums earned as a result of assuming the TIG
Commercial Program began on January 1, 1996, and $ (2,077,351)
that as a result no premium was written in 1996.
2 Remove premium ceded as a result of assuming the TIG
Commercial Program began on January 1, 1996, and that
as a result no premium was written or ceded in 1996. $ 89,860
=============
3 Adjustment to investment income as a result of having less
cash available to invest in 1996. Average cash available for
investment was reduced from $5,339,216 to $4,517,770
due to the elimination of premium income netted against a
reduction in claims related expenses as a result of assuming
the TIG Commercial Program began on January 1, 1996.
Cash available for investment was increased by a reduction in
income taxes paid.
The Trust experienced a 5.58% return on its average cash and
investments in 1996. This adjustment calculates the
difference in investment income based on the reduced amount
available for investment. $( 45,888)
==============
4 Loss and loss adjustment expenses are reduced by the claims
expenses attributable to 1996 business. The claims expense
category reflects a negative balance of $42,440 after this
adjustment due to reduction in prior years estimated loss
reserves which the Trust continued to run-off in 1996. $( 959,032)
=============
5 Service company fees are eliminated due to an assumption
of current claims processing by TIG. Prior year claims
processing is covered as a part of reserves for losses and
loss adjustment expenses. $( 299,322)
=============
6 Regulatory fees are eliminated as a part of the TIG Commercial
Program arrangement. $( 28,548)
==============
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Statement of Income
Year Ended December 31, 1996 (No Dissenters)
Adjustment
Number Description Amount
<S> <C>
7 Adjustment is made for the legal and accounting expenses
directly attributable to the costs of conversion of the Trust
Incurred by the Trust in 1996. $( 201,089)
=============
8 Adjustment is made to reduce income tax expense (current
and deferred) as a result of decreased taxable income due to
assuming the TIG Commercial Program began on January 1,
1996. Federal taxable income is reduced to $(19,679),
creating a deferred tax benefit of $6,690. State income
taxes are $2,166 for a total tax benefit of $4,524. Federal
tax rate is 34% and the Mississippi rate is 5%. $( 103,284)
=============
Inter-Company Eliminating Entries
9 Eliminate interest income from Stoneville $( 407)
==============
10 Eliminate interest expense to the Trust $( 407)
==============
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Statement of Income
Year Ended December 31, 1996
(20% Dissent) Trust Trust Stoneville Stoneville Stoneville Inter-Co. Combined
Delta A&I Adj Pro Forma Pro Forma Insurance Adj Pro Forma Pro Forma Adj Elimination Pro Forma
Trust # Adjustments Amount Company # Adjustments Amount # Adjustments Amount
--------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Premiums earned $2,077,351 1 ($2,077,351) $0 $0
Premiums ceded (89,860) 2 $89,860 0 0
------------------------------------------------ --------------------- ------ ---------------------------
Net premiums earned 1,987,491 0 0
Investment income 297,076 3 (48,668) 248,408 10 (407) 248,001
Net realized gains and
losses on securities
available-for-sale (37,286) (37,286) (37,286)
Other (422,850) (422,850) (422,850)
------------------------------------------------ --------------------- ------ -------------------------
Total Revenue 1,824,431 (2,036,159) (211,728) 0 0 0 (407) (212,135)
------------------------------------------------ --------------------- ------ -------------------------
Expenses
Loss and loss adjustment
expenses 916,592 4 (959,032) (42,440) (42,440)
Service company fees 299,322 5 (299,322) 0 0
Regulatory fees 28,548 6 (28,548) 0 0
General expenses 450,959 7 (201,089) 249,870 437 9 34,319 34,756 11 (407) 284,219
------------------------------------------------ --------------------- ------ -------------------------
0
Total Expenses 1,695,421 (1,487,991) 207,430 437 34,319 34,756 (407) 241,779
------------------------------------------------ --------------------- ------ -------------------------
Net Income Before Income
Tax Provision 129,010 (548,168) (419,158) (437) (34,319) (34,756) 0 (453,914)
Provision for income tax 98,768 8 (118,372) (19,604) (19,604)
------------------------------------------------- --------------------- ------ -------------------------
Net Income $30,242 ($429,796) ($399,554) ($437) ($34,319) ($34,756) $0 ($434,310)
================================================= ===================== ====== =========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Statement of Income
Year Ended December 31, 1996 (20% Dissent)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C>
1 Remove premiums earned as a result of assuming the
TIGCommercial Program began on January 1, 1996, $ (2,077,351)
and that as a result no premium was written in 1995. ===============
2 Remove premium ceded as a result of assuming the TIG
Commercial Program began on January 1, 1996 and that
as a result, no premium was written or ceded in 1996. $ 89,860
=============
3 Adjustment to investment income as a result of having less
cash available to invest in 1996. Average cash available for
investment was reduced from $5,339,216 to $4,467,770
due to the elimination of premium income netted against a
reduction in claims related expenses as a result of assuming
the TIG Commercial Program began on January 1, 1996. Cash
was also decreased by the payment to Dissenters and was
increased by a reduction in income taxes paid.
The Trust experienced a 5.58% return on its average cash and
investments in 1996. This adjustment calculates the
difference in investment income based on the reduced amount
available for investment. $( 48,668)
==============
4 Loss and loss adjustment expenses are reduced by the claims
expenses attributable to 1996 business. The claims expense
category reflects a negative balance of $42,440 after this
adjustment due to reduction in prior years estimated loss
reserves which the Trust continued to run-off in 1996. $( 959,032)
=============
5 Service company fees are eliminated due to an assumption
of current claims processing by TIG. Prior year claims
processing is covered as a part of reserves for losses and
loss adjustment expenses. $( 299,322)
=============
6 Regulatory fees are eliminated as a part of the TIG Commercial
Program arrangement. $( 28,548)
==============
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Statement of Income
Year Ended December 31, 1996 (20% Dissent)
Adjustment
Number Description Amount
<S> <C>
7 Adjustment is made for the legal and accounting expenses
directly attributable to the costs of conversion of the Trust
Incurred by the Trust in 1996. $( 201,089)
=============
8 Adjustment is made to reduce income tax expense (current
and deferred) as a result of decreased taxable income due to
assuming the TIG Commercial Program began on January 1,
1996. Taxable income is reduced to $(56,778), creating a
deferred tax benefit of $19,304 federal and $300 state for a
total of $19,604. Federal tax rate is 34% and the Mississippi
rate is 5%. $( 118,372)
=============
Stoneville Adjustments
9 Adjust for interest expense incurred as a result of Stoneville
borrowing $381,326 at 9% interest to pay Dissenters. $ 34,319
=============
Inter-Company Eliminating Entries
10 Eliminate interest income from Stoneville $( 407)
==============
11 Eliminate interest expense to the Trust $( 407)
==============
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Balance Sheet
June 30, 1997
(No Dissenters) Trust Trust Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance
Trust # Adjustments Balance Company
------------------------------ -----------------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $1,878,940 1 ($389,292) $1,489,648 $19,970
Invested assets 1,745,063 1 (1,745,063) 0
Notes receivable 20,000 20,000
Accrued interest receivable 41,356 41,356
Reinsurance receivables, net of
uncollectible amounts 660,986 2 (660,986) 0
Excess insurance premium overpayment 89,860 89,860
Capital equipment leases at cost less
accumulated depreciation 11,107 11,107
Prepaid expenses 24,665 24,665
Income tax refund receivable 190,279 3 327,990 518,269
Deferred tax asset 40,489 40,489
Other assets 10,533 10,533
--------------------------- --------------------------
Total Assets $4,713,278 ($2,467,351) $2,245,927 $19,970
=========================== ==========================
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss
adjustment expenses 1,954,341 4 (1,954,341) 0
Reserve for premium adjustment 324,672 324,672
Notes payable 0 0 20,000
Accounts payable and accrued
liabilities 46,408 46,408 995
Capital lease obligations 3,868 3,868
--------------------------- --------------------------
Total Liabilities 2,329,289 (1,954,341) 374,948 20,995
--------------------------- --------------------------
Stockholders' Equity
Common Stock 500,000 issued and
outstanding
$1 par value 0
Retained Earnings 2,390,686 5 (513,010) 1,877,676 (1,025)
Unrealized decline in market value of
equity securities
less applicable future tax benefit (6,697) (6,697)
--------------------------- --------------------------
Total Stockholders' Equity 2,383,989 (513,010) 1,870,979 (1,025)
--------------------------- --------------------------
Total Liabilities and Stockholders' $4,713,278 ($2,467,351) $2,245,927 $19,970
Equity =========================== ==========================
</TABLE>
<PAGE>
<TABLE>
Stoneville Stoneville Inter-Co. Combined
Adj Pro Forma Pro Forma Adj Elimination Pro Forma
# Adjustments Balance # Adjustments Balance
------------------------------------ ----- --------------------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $19,970 $1,509,618
Invested assets 0
Notes receivable 7 (20,000) 0
Accrued interest receivable 6 (995) 40,361
Reinsurance receivables, net of
uncollectible amounts 0
Excess insurance premium overpayment 89,860
Capital equipment leases at cost less 0
accumulated depreciation 11,107
Prepaid expenses 24,665
Income tax refund receivable 518,269
Deferred tax asset 40,489
Other assets 10,533
-------------------------------------------------------------------
Total Assets $0 $19,970 ($20,995) $2,244,902
===================================================================
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss
adjustment expenses $0
Reserve for premium adjustment 324,672
Notes payable 20,000 9 (20,000) 0
Accounts payable and accrued
liabilities 995 8 (995) 46,408
Capital lease obligations 3,868
----------------------------------------------------------------
Total Liabilities 0 20,995 (20,995) 374,948
----------------------- ----------------------------------------
Stockholders' Equity
Common Stock 500,000 issued and
outstanding
$1 par value 0 10 500,000 500,000
Retained Earnings (1,025) 11 (500,000) 1,376,651
Unrealized decline in market value of
equity securities 0
less applicable future tax benefit (6,697)
---------------------------------------------------------------
Total Stockholders' Equity 0 (1,025) 0 1,869,954
---------------------------------------------------------------
Total Liabilities and Stockholders' $0 $19,970 ($20,995) $2,244,902
Equity ===============================================================
</TABLE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
June 30, 1997 (No Dissenters)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C> <C>
1 Adjustment for the payment of the CNA Premium of
$1,884,355 plus a fee of $250,000. $1,745,063 comes from
invested assets and $389,292 from cash. The premium payment
to CNA is less than the premium payment shown on the
December, 1996 proforma as a result of claims paid and
adjustments made to reserves from 1/1/97-6/30/97. $(2,134,355)
===========
2 Adjustment to remove the reinsurance receivable from the
Books of the Trust. This receivable will be transferred to
CNA along with outstanding insurance claims. $ (660,986)
===========
3 Adjustment to the income tax refund receivable due to the
change in taxable income as a result of the CNA Assumption
Reinsurance Agreement as shown following:
Loss from liability transfer $591,000
CNA fee 250,000
---------
Decrease in taxable income 841,000
Tax Decrease (34% Federal and 5% State) $ 327,990
===========
* Loss from the CNA transfer is calculated as follows:
Liability transfered $1,954,341
Premium Paid Excluding Fee (1,884,335)
Reinsurance Receivable
Transferred ( 660,986)
Loss ( $591,000)
4 Adjustment to reserve for losses to remove claims liability
transferred to CNA $(1,954,341)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
June 30, 1997 (No Dissenters)
<S> <C>
5 Adjustments to Retained Earnings
a Loss from CNA Assumption Reinsurance Agreement (See
Adjustment # 3 above.) $ (591,000)
b Fee expense to CNA for Assumption Agreement ( 250,000)
c Tax adjustment as a result of the CNA transaction. (See
Adjustment # 3 above.) 327,990
--------------
Total Adjustment # 5 $ (513,010)
=============
Inter-Company Eliminating Entries
Adjustment
Number Description Amount
6 Eliminate accrued interest receivable from Stoneville to the Trust $( 995)
=============
7 Eliminate note receivable from Stoneville toTrust $( 20,000)
=============
8 Eliminate accrued interest payable to Trust from Stoneville $( 995)
=============
9 Eliminate notes payable from Stoneville to the Trust $( 20,000)
=============
10 Record issuance of 500,000 shares of common stock, $1.00
par value $ 500,000
===========
11 Record use of $500,000 of Trust to issue 500,000 shares of
common stock, $1.00 par value of Stoneville Insurance Co. $( 500,000)
===========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Balance Sheet (20% Dissent)
June 30, 1997
Trust Trust Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance
Trust # Adjustments Balance Company
----------------------------------------------- -------------
<S> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $1,878,940 1 ($489,292) $1,389,648 $19,970
Invested assets 1,745,063 1 (1,745,063) 0
Notes receivable 20,000 20,000
Accrued interest receivable 41,356 41,356
Reinsurance receivables, net of uncollectible 660,986 2 (660,986) 0
amounts
Excess insurance premium overpayment 89,860 89,860
Capital equipment leases at cost less
accumulated depreciation 11,107 11,107
Prepaid expenses 24,665 24,665
Income tax refund receivable 190,279 3 327,990 518,269
Deferred tax asset 40,489 40,489
Other assets 10,533 10,533
----------------------------------------------- -------------
Total Assets $4,713,278 ($2,567,351) $2,145,927 $19,970
=============================================== =============
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss adjustment 1,954,341 4 (1,954,341) 0
expenses
Reserve for premium adjustment 324,672 324,672
Notes payable 0 0 20,000
Accounts payable and accrued liabilities 46,408 46,408 995
Capital lease obligations 3,868 3,868
----------------------------------------------- -------------
Total Liabilities 2,329,289 (1,954,341) 374,948 20,995
----------------------------------------------- -------------
Stockholders' Equity
Common Stock 400,000 issued and
outstanding $1 par value
0
Retained Earnings 2,390,686 5 (613,010) 1,777,676 (1,025)
Unrealized decline in market value of equity
securities less applicable future tax benefit (6,697) (6,697)
----------------------------------------------- -------------
Total Stockholders' Equity 2,383,989 (613,010) 1,770,979 (1,025)
----------------------------------------------- -------------
Total Liabilities and Stockholders' Equity $4,713,278 ($2,567,351) $2,145,927 $19,970
=============================================== =============
</TABLE>
<TABLE>
Stoneville Stonveville Inter-Co. Combined
Adj Pro Forma Pro Forma Adj Elimination Pro Forma
# Adjustments Balance # Adjustments Balance
-------------------- ---------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $19,970 $1,409,618
Invested assets 0
Notes receivable 9 (20,000) 0
Accrued interest receivable 8 (995) 40,361
Reinsurance receivables, net of uncollectible 0
amounts
Excess insurance premium overpayment 89,860
Capital equipment leases at cost less 0
accumulated depreciation 11,107
Prepaid expenses 24,665
Income tax refund receivable 518,269
Deferred tax asset 40,489
Other assets 10,533
-------------------- ---------------------------------- --------------
Total Assets $0 $19,970 ($20,995) $2,144,902
==================== ================================== ==============
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss adjustment $0
expenses
Reserve for premium adjustment 324,672
Notes payable 6 273,991 293,991 11 (20,000) 273,991
Accounts payable and accrued liabilities 995 10 (995) 46,408
Capital lease obligations 3,868
-------------------- ---------------------------------- --------------
Total Liabilities 273,991 294,986 (20,995) 648,939
-------------------- ---------------------------------- --------------
Stockholders' Equity
Common Stock 400,000 issued and
outstanding $1 par value
0 12 400,000 400,000
Retained Earnings 7 (273,991) (275,016) 13 (400,000) 1,102,660
Unrealized decline in market value of equity 0
securities less applicable future tax benefit (6,697)
-------------------- ---------------------------------- --------------
Total Stockholders' Equity (273,991) (275,016) 0 1,495,963
-------------------- ---------------------------------- --------------
Total Liabilities and Stockholders' Equity $0 $19,970 ($20,995) $2,144,902
==================== ================================== ==============
</TABLE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
June 30, 1997 (20% Dissent)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C>
1 Adjustments to Investments
a Payment of the CNA Premium of $1,884,355 plus a fee
of $250,000 out of the investments of the Trust. The premium
payment to CNA is less than the premium payment shown
on the December, 1996 proforma as a result of claims paid
and adjustments made to reserves from 1/1/97-6/30/97. $(2,134,355)
b Payment of $100,000 to Dissenters who have perfected
their rights. The balance of disbursement to dissenters
will be made from Stoneville with borrowed funds. (100,000)
------------
Total of Adjustment # 1 *($1,745,063 paid from invested
funds and $489,292 from cash) $(2,234,355)*
============
2 Adjustment to remove the reinsurance receivable from the
Books of the Trust. This receivable will be transferred to
CNA along with outstanding insurance claims. $ (660,986)
============
3 Adjustment to the income tax refund receivable due to the
change in taxable income as a result of the CNA Assumption
Reinsurance Agreement as shown following:
Loss from liability transfer $591,000
CNA fee 250,000
--------
Decrease in Taxable Income 841,000
Tax Decrease (34% Federal and
5% State) $ 327,990
===========
* Loss from the CNA transfer is calculated as follows:
Liability transferred $1,954,341
Premium Paid Excluding Fee (1,884,355)
Reinsurance Receivable Transferred (660,986)
-----------
Loss ($ 591,000)
4 Adjustment to reserve for losses to remove
claim liability transferred to CNA $(1,954,341)
============
5 Adjustments to Retained Earnings
a Loss from CNA Assumption Reinsurance Agreement (See
Adjustment # 3 above.) ($591,000)
b Fee expense to CNA for Assumption Agreement ( 250,000)
c Payment of $100,000 to Dissenters who have perfected
their rights. The balance to be paid by Stoneville. ( 100,000)
d Tax adjustment as a result of the CNA transaction. (See #3) 327,990
------------
Total Adjustment # 5 $( 613,010)
===========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Balance Sheet
June 30, 1997 (20% Dissent)
Stoneville Adjustments
Adjustment
Number Description Amount
<S> <C>
6 Adjustment to notes payable to record a loan obtained
for the purpose of paying dissenters rights on balance of
20% dissenters. Loan is assumed obtained 6/30/97. $ 273,991
===========
7 Adjustment to retained earnings to pay balance of Dissenters
rights with funds borrowed at 6/30/97 for such purpose. The
Trust is assumed to have made a $100,000 for the same purpose $( 273,991)
===========
Inter-Company Eliminating Entries
8 Eliminate accrued interest receivable from Stoneville to the
Trust $( 995)
===========
9 Eliminate note receivable from Stoneville to Trust $( 20,000)
===========
10 Eliminate accrued interest payable to Trust from Stoneville $( 995)
===========
11 Eliminate notes payable from Stoneville to the Trust $( 20,000)
==========
12 Record issuance of 400,000 shares of common stock, $1.00
par value. $ 400,000
===========
13 Record use of $400,000 of Trust to issue 400,000 shares of
common stock, $1.00 par value of Stoneville Insurance Co. $( 400,000)
===========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Statement of Income
Six Months Ended June 30, 1997 (No Dissenters)
Trust Trust Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance
Trust # Adjustments Amount Company
----------------------------------- -------------------------- -
<S> <C> <C> <C> <C> <C>
Revenue
Premiums earned $0 $0 $0
Premiums ceded 0 $0 0
----------------------------------- -------------------------- -
Net premiums earned 0 0
Investment income 91,444 1 (59,335) 32,109
Net realized gains and losses on securities
available-for-sale 0 0
Other (9,115) (9,115)
----------------------------------- -------------------------- -
Total Revenue 82,329 (59,335) 22,994 0
----------------------------------- -------------------------- -
Expenses
Loss and loss adjustment expenses 0 0 0
Service company fees 0 0 0
Regulatory fees 11,502 2 (11,502) 0
General expenses 183,760 3 (160,000) 23,760 588
----------------------------------- -------------------------- -
0
Total Expenses 195,262 (171,502) 23,760 588
----------------------------------- -------------------------- -
Net Income Before Income Tax Provision (112,933) 112,167 (766) (588)
Provision for income tax (40,489) 4 43,516 3,027
----------------------------------- -------------------------- -
Net Income ($72,444) $68,651 ($3,793) ($588)
=================================== ========================== =
</TABLE>
<PAGE>
<TABLE>
Stoneville Stoneville Inter-Co. Combined
Adj Pro Forma Pro Forma Adj Elimination Pro Forma
# Adjustments Amount # Adjustments Amount
----- -------------------------- ------ -----------------------------
<S> <C> <C> <C> <C>
Revenue
Premiums earned $0
Premiums ceded 0
----- -------------------------- ------ -----------------------------
Net premiums earned 0
Investment income 5 (588) 31,521
Net realized gains and losses on securities
available-for-sale 0
Other (9,115)
----- -------------------------- ------ -----------------------------
Total Revenue 0 0 (588) 22,406
----- -------------------------- ------ -----------------------------
Expenses
Loss and loss adjustment expenses 0
Service company fees 0
Regulatory fees 0
General expenses 588 6 (588) 23,760
----- -------------------------- ------ -----------------------------
Total Expenses 0 588 (588) 23,760
----- -------------------------- ------ -----------------------------
Net Income Before Income Tax Provision 0 (588) 0 (1,354)
Provision for income tax 3,027
----- -------------------------- ------ -----------------------------
Net Income $0 ($588) $0 ($4,381)
===== ========================== ====== ============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Statement of Income
Six Months Ended June 30, 1997 (No Dissenters)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C>
1 Adjustment to investment income as a result of having less
cash available to invest. Cash available for
investment was reduced by $2,134,355 due to the payment
to CNA for the Assumption Reinsurance Agreement. A 5.56%
rate of return was used to calculate the difference in
investment income. $( 59,335)
==============
2 Regulatory fees are eliminated as a part of the TIG Commercial
Program arrangement. $( 11,502)
==============
3 Adjustment is made for the legal and accounting expenses
directly attributable to the costs of conversion of the Trust
Incurred by the Trust in 1996. $( 160,000)
=============
4 Adjustment is made to increase income tax expense as a result
of increased taxable income due to decreased operating
expense. Taxable income increased to $7,761, eliminating the
tax benefit and creating current tax of $3,027. Federal tax
rate is 34% and the Mississippi rate is 5%. $ 43,516
=============
Inter-Company Eliminating Entries
5 Eliminate interest income from Stoneville $( 588)
==============
6 Eliminate interest expense to the Trust $( 588)
==============
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Statement of Income
Six Months Ended June 30, 1997 (20% Dissent)
Trust Trust Stoneville Stoneville Stoneville
Delta A&I Adj Pro Forma Pro Forma Insurance Adj Pro Forma Pro Forma
Trust # Adjustments Amount Company # Adjustments Amount
------------ ------ ------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Premiums earned $0 $0 $0
Premiums ceded 0 $0 0
------------ ------ ------------------------- -----------------------------------------------
Net premiums earned 0 0
Investment income 91,444 1 (62,115) 29,329
Net realized gains and losses on
securities available-for-sale 0 0
Other (9,115) (9,115)
------------ ------ ------------------------- -----------------------------------------------
Total Revenue 82,329 (62,115) 20,214 0 0 0
------------ ------ ------------------------- -----------------------------------------------
Expenses
Loss and loss adjustment expenses 0 0 0
Service company fees 0 0 0
Regulatory fees 11,502 2 (11,502) 0
General expenses 183,760 3 (160,000) 23,760 588 5 9,647 10,235
------------ ------ ------------------------- -----------------------------------------------
0
Total Expenses 195,262 (171,502) 23,760 588 9,647 10,235
------------ ------ ------------------------- -----------------------------------------------
Net Income Before Income Tax (112,933) 109,387 (3,546) (588) (9,647) (10,235)
Provision
Provision for income tax (40,489) 4 38,669 (1,820)
------------ ------ ------------------------- -----------------------------------------------
Net Income ($72,444) $70,718 $1,726 ($588) ($9,647) ($10,235)
============ ====== ========================= ===============================================
</TABLE>
<PAGE>
Inter-Co. Combined
Adj Elimination Pro Forma
# Adjustments Amount
--------------------------------------
Revenue
Premiums earned $0
Premiums ceded 0
--------------------------------------
Net premiums earned 0
Investment income 6 (588) 28,741
Net realized gains and losses on
securities available-for-sale 0
Other (9,115)
--------------------------------------
Total Revenue (588) 19,626
--------------------------------------
Expenses
Loss and loss adjustment expenses 0
Service company fees 0
Regulatory fees 0
General expenses 7 (588) 33,407
--------------------------------------
Total Expenses (588) 33,407
--------------------------------------
Net Income Before Income Tax 0 (13,781)
Provision
Provision for income tax (1,820)
--------------------------------------
Net Income $0 ($11,961)
======================================
<TABLE>
<CAPTION>
Stoneville Insurance Company
Adjustments to Pro Forma Statement of Income
Six Months Ended June 30, 1997 (20% Dissent)
Trust Adjustments
Adjustment
Number Description Amount
<S> <C>
1 Adjustment to investment income as a result of having less
cash available to invest. Cash available for
investment was reduced by $2,234,355 due to the payment
to CNA for the Assumption Reinsurance Agreement and the
payment to Dissenters. A 5.56% rate of return was used to
calculate the difference in investment income. $( 62,115)
==============
2 Regulatory fees are eliminated as a part of the TIG Commercial
Program arrangement. $( 11,502)
==============
3 Adjustment is made for the legal and accounting expenses
directly attributable to the costs of conversion of the Trust
Incurred by the Trust in 1996. $( 160,000)
=============
4 Adjustment is made to increase income tax expense as a result
of increased taxable income due to decreased operating expense.
Taxable income increased to ($4,666), creating a current
tax benefit of $1,820. Federal tax rate is 34% and the
Mississippi rate is 5%. $ 38,669
=============
Stoneville Adjustments
5 Adjust for interest expense incurred as a result of Stoneville
borrowing $214,381 at 9% interest for six months to pay
dissenters. $ 9,647
=============
Inter-Company Eliminating Entries
6 Eliminate interest income from Stoneville $( 588)
==============
7 Eliminate interest expense to the Trust $( 588)
==============
</TABLE>
36
<PAGE>
THE WORKERS' COMPENSATION INSURANCE SYSTEM
Workers' compensation is a legal system designed to provide financial
protection to employees in the event they are injured while working. Each state
has its own workers' compensation law which governs the benefit structure and
the administration of the system. The intent of workers' compensation is to
provide financial security for employees, normally for a limited time period
but, in certain cases, for the remainder of an employee's natural life. In
Mississippi, employers which employ five or more employees must obtain workers'
compensation insurance coverage.
Oversight with regard to commercial insurors is generally under the
purview of the Department of Insurance, although control over the delivery of
benefits is handled by the Workers' Compensation Commission.
Throughout the years, the determination of base rates for workers'
compensation premiums for commercial insurors has been in most cases handled by
the National Council on Compensation Insurance ("NCCI"), which recommends base
premium rate changes to the insurance departments for over thirty states. Based
on the NCCI recommendations, the insurance departments typically adopt the base
rates with any revisions they deem necessary.
In addition to commercial insurers, self insured workers' compensation
pools (such as the Trust) also exist. The pools, usually formed as trusts, allow
employers to pay premiums into the pool and claims are deducted from the amount
of funds available. The participants in pools are typically jointly and
severally liable for any funding shortfall.
The workers' compensation market is cyclical. In the late 1980's and
early 1990's, commercial workers' compensation carriers were losing money across
the United States due to an imbalance between claims costs and premium revenues.
The result was a scarcity of competitively priced workers' compensation
insurance coverage in a number of states, including Mississippi. As a response,
self insured pools such as the Trust were formed in order to ensure that
employers could obtain workers' compensation insurance.
Due to structural changes in the workers' compensation market such as
tort reform and better loss analysis, commercial workers' compensation carriers
have become active in Mississippi once again. The result has been increased
competition by carriers to write workers' compensation insurance for employers
with low loss histories. Premium rates have also begun to decrease. With a view
to increasing competition, a recent trend has been for a number of states to
legislate open rating for commercial insurance companies, which means premium
rates are subject to the open market. The Department of Insurance has moved to
the open rating concept by adopting the "loss costs" system which became
effective as of March 1, 1996.
The "loss costs" methodology reflects a change in philosophy; the
Department of Insurance previously set a blanket premium rate from which
commercial insurers could deviate or otherwise lower their rates. As a result,
many insurers clustered around the set rate. Under the "loss costs"
37
<PAGE>
system, insurers are free to set their rates at any level, subject only to
Department of Insurance disapproval. This is in contrast with premium setting by
pools, the rates of which must be analyzed and approved by the Workers'
Compensation Commission. See "Reasons for Conversion -- The Changing Workers'
Compensation Market."
BUSINESS OF THE TRUST
History of the Trust
The Trust was formed under a Trust Agreement dated August 1, 1991, by
members of the Delta Council of Stoneville, Mississippi, as a response to the
unavailability of workers' compensation insurance at reasonable prices. The
Trust was originally organized to provide workers' compensation insurance to
cotton gin owners, but has since expanded its workers' compensation insurance
activities. See " Summary -- The Trust."
Operations of the Trust
From the beginning of the Trust through June 30, 1996, the Trust sold
its workers' compensation insurance through a nonexclusive network of agents.
With the inception of the Commercial Program (described below), the Trust ceased
providing direct insurance coverage and arranged for the Trust's agent network
to place its insureds with a commercial insurer in accordance with a program
jointly designed by the Trust and the commercial insurer.
The Commercial Program
Effective July 1, 1996, pursuant to an Insurance Placement Agreement by
and between the Trust, TIG and TIG Reinsurance Company (the "Insurance Placement
Agreement") the Trust ceased writing workers' compensation insurance directly
and moved the persons who wished to maintain their affiliation with the Trust to
the Trust's Commercial Program. Under the Commercial Program, TIG (an "A"
(Excellent) rated commercial insurance company according to the A.M. Best
Company), provides workers' compensation insurance primarily to Former Members
of the Trust and other persons through the Trust's network of agents.
The Trust created the Commercial Program in order to allow its insureds
to take advantage of the lower rates being offered by commercial insurers while
preparing the Trust for conversion to a Mississippi domestic stock insurance
company, which the Board of Trustees believes will best assure long term
availability of reasonably priced workers' compensation insurance. The Insurance
Placement Agreement provides that the Trust (or the Company as the Trust's
successor) may provide reinsurance with respect to policies issued by TIG under
the Commercial Program.
As part of the creation of the Commercial Program, the Trust also
entered into a Representative Agreement (the "Representative Agreement") with
MRM Underwriters, Inc. ("MRM") by which MRM acts as the Trust's representative
for marketing the Commercial Program and allocates to Delta Administration, Inc.
certain amounts for oversight and administration of the
38
<PAGE>
Commercial Program and the Trust's operations. MRM is responsible for marketing
the program as a general agent of TIG and for overall administration of the
program. Delta Administration, Inc. is responsible for sending bills,
collections, liaison, program oversight, and obtaining association endorsements.
Pursuant to the Representative Agreement, MRM receives 7.8% of the collected
premiums generated by the Commercial Program and Delta Administration, Inc. is
paid 3.5% of such amounts. The Representative Agreement was entered into on July
1, 1996 and will continue until terminated. The Representative Agreement shall
automatically terminate with no notice required upon (i) the bankruptcy,
receivership, assignment for the benefit of creditors or similar action of MRM
or the commencement of any such proceedings by or against MRM; (ii) the
termination of the general agency relationship between TIG and MRM; or (iii) the
termination of the Placement Agreement between TIG and the Trust for any reason.
The obligations of the Trust under the Representative Agreement will
be assumed by the Company subsequent to the Conversion for the duration of the
Commercial Program. MRM is controlled by David R. White, who is an officer and
director of the Company. Delta Administration, Inc. is controlled by Harry E.
Vickery, who is the Administrator of the Trust and is an officer and director
of the Company. See "Business of the Trust -- Employees; and Assumption of
Trust Contracts" and "Certain Transactions and Relationships."
Regulation
The operations of the Trust are regulated by the Workers' Compensation
Commission. Any changes in premium rates must be approved by the Workers'
Compensation Commission, and operations of the Trust are subject to the
oversight of the Workers' Compensation Commission.
Employees
The Trust has no employees. From its inception, the activities of the
Trust have been managed by third parties. The Administrator of the Trust, Harry
E. Vickery, has managed the activities of the Trust since October 1, 1993,
through Delta Administration, a sole proprietorship, which was incorporated as
Delta Administration, Inc. in 1996 (collectively, "Delta Administration"). Delta
Administration has two employees. From the inception of the Trust until October
1, 1993, Harry E. Vickery served as Chairman of the Board of Trustees of the
Trust. When Mr. Vickery assumed his current duties as Administrator of the Trust
effective October 1, 1993, he resigned from the Board of Trustees of the Trust.
Under the Commercial Program, pursuant to the Representative Agreement,
Delta Administration is paid 3.5% of the collected premiums generated by the
Commercial Program to manage the activities of the Trust. Delta Administration
also receives $3,800 a month from the Trust in exchange for administrative
services. From these funds, Delta Administration pays the office expenses of the
Trust including rent, salaries of its employees who administer the Trust, and
sponsor fees. See "Certain Transactions and Relationships."
39
<PAGE>
Trustees
The Trustees of the Trust are William L. Kennedy, Aven Whittington,
Merlin Richardson, and S. Hall Barrett, Jr. If the Conversion takes place,
employers and/or businesses with which the Trustees are affiliated will be
allocated approximately the following amounts of Trust Units:
employer/affiliate of William L. Kennedy - 8,600 Trust Units;
employer/affiliate of Aven Whittington - 2,362 Trust Units; employer/affiliate
of Merlin Richardson - 0 Trust Units; employer/affiliate of S. Hall Barrett,
Jr. - 6,200 Trust Units.
Legal Proceedings
On April 21, 1997, the Trust initiated an arbitration proceeding with
the National Association of Securities Dealers, Inc. ("NASD") Office of Dispute
Resolution against Bear Stearns Securities Corp., Bear Stearns & Co; Axiom
Capital Management, Inc.; Kevin Connors; and Michael Guttenberg (the "Securities
Arbitration"). In the Securities Arbitration Statement of Claims, the Trust asks
for $2,062,185 in actual and punitive damages as a result of improper trading on
its account by the persons listed above. The Securities Arbitration is in its
initial phase and arbitrators have not yet been appointed. See "Trust
Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Results of Operations -- Losses." Other than the Securities
Arbitration, there are no material legal proceedings pending, nor are any
material legal proceedings known by the Trust to be contemplated by governmental
authorities or other parties to which the Trust is or might become a party. The
Trust continually engages in defending workers' compensation insurance claims,
which is an ordinary part of its business. Management does not believe that any
such claims will materially impact the Trust's liquidity or results of
operations.
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<PAGE>
SELECTED FINANCIAL DATA OF THE TRUST
The following selected financial data reflect the operations of the
Trust since January 1, 1995. The data for full fiscal years has been derived
from financial statements examined by Richard L. Eaton, independent certified
public accountant whose report with respect thereto appears elsewhere in this
Prospectus. See "Trust Management's Discussion and Analysis of Financial
Condition and Results of Operations."
41
<PAGE>
Selected Financial Data of the Trust
For the Six Months Ended June 30, 1997 and 1996, and
the Years Ended December 31, 1996 and 1995
June 30, December 31,
1997 1996 1996 1995
--------------------------------------------------------
Earned Premium $0 $2,127,334 $2,077,351 $5,659,925
Premium Ceded 0 (89,860) (89,860) (335,973)
Net Investment Income 91,444 147,583 297,076 328,027
Realized Investment
Gains (Losses) 0 983 (37,286) (159,557)
Other (9,115) (286,085) (422,850) 0
--------------------------------------------------------
Total Revenue $82,329 $1,899,955 $1,824,431 $5,492,422
========================================================
Excess Revenue over
Expense Before Income
Tax Provision $(112,933) $96,570 $129,010 $1,948,286
========================================================
Excess Revenue over
Expense (72,444) $(25,946) $30,242 $1,304,626
========================================================
Total Assets $4,713,278 $6,744,379 $5,733,305 $8,156,720
========================================================
Total Liabilities $2,329,289 $4,368,358 $3,279,411 $5,790,992
========================================================
42
<PAGE>
TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Overview
The Trust was created by Delta Council, a Mississippi non-profit
corporation August 1, 1991. Although the sponsoring organization is tax-exempt,
the Trust is taxable for both Federal and State income tax purposes. While the
trust was established to provide workers compensation coverage to its members on
a consistent basis at a reasonable price rather than to generate profits, the
trustees and members of the Trust recognize the importance of operating in such
a manner that will yield positive operating results, since positive operating
results produce an entity that will consistently be able to provide the
insurance protection needed at reasonable rates to its members.
The Trust operates under a Certificate of Authority granted by the
Workers' Compensation Commission. The Workers' Compensation Commission regulates
the establishment of rates charged by self-insured groups, the payment of
claims, the payment of refunds to members, investments and other areas that may
fall within their purview. See "Business of the Trust -- Regulation."
Effective March 1, 1996, the Department of Insurance moved to an open
rating concept by adopting the "loss costs" system. This has resulted in a major
change in the method of calculating premium rates a commercial insurance carrier
charges employers for worker's compensation insurance. This change resulted in
Mississippi worker's compensation commercial insurance rates dropping
significantly in 1996. However, since the rates charged by self-funded worker's
compensation trusts in Mississippi are regulated by the Workers' Compensation
Commission, neither the Trust nor any of the other self-funded groups in
Mississippi were able to reduce rates in a timely manner to the level of the
commercial carriers. As a result of this disparity in rates, management of the
Trust sought an alternative arrangement that would allow its members to benefit
from lower market rates and still retain its base of insureds. See "The Workers'
Compensation Insurance System."
In conjunction with TIG and TIG Reinsurance Company, the Trust created
the Commercial Program, under which effective as of July 1, 1996, the Trust
ceased writing workers' compensation insurance directly and moved the persons
who wished to maintain their affiliation with the Trust to the Trust's
Commercial Program. Consequently, the Trust had no underwriting income or
expense from July 1, 1996 through December 31, 1996. See "Business of the Trust
- -- The Commercial Program."
While the Trust receives no current income from the Commercial Program,
the Company may participate in this block of business on a reinsurance basis
after the conversion of the Trust is completed. The Insurance Placement
Agreement permits the Company to determine the amount of reinsurance it may
provide at any point in time. The initial level of reinsurance is expected to be
no more than 25% of the volume of business currently written within the
Commercial Program.
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<PAGE>
Any profit to the Company from the provision of reinsurance to the
Commercial Program in 1998 is anticipated to be substantially less than the
profit realized by the Trust during each of the two years immediately preceding
the establishment of the Commercial Program when the Trust provided workers'
compensation insurance on a direct basis. This is due to the overall reduction
of commercial rates in Mississippi in the workers compensation market during
1996. Consequently, the Company may elect not to participate in the reinsurance
of the Commercial Program when rates are low and to participate to a greater
degree when rates are higher. Since the Company's percentage participation is
expected to be no more than 25%, the net contribution to the profits of the
Company from this block of business will be limited.
The Trust and the Company have entered into the Assumption Reinsurance
Agreement whereby Continental will assume all of the claims liabilities of the
Trust for business written prior to July 1, 1996. The Trust will pay Continental
an amount not to exceed $1,875,000 consisting of $1,625,000 in reserves required
to pay claims liabilities (which amount may be adjusted downward depending on
claims settled) plus a non-refundable fee of $250,000 for handling claims. Under
the Assumption Reinsurance Agreement, the Company has the right on March 1, 1998
to provide reinsurance to Continental pertaining to the claims liabilities
assumed by Continental pursuant to the Assumption Reinsurance Agreement. If such
reinsurance is put in place, a portion of the assets the Trust transferred to
Continental will be transferred back to the Company along with any associated
liability. The Company will be required to fund a trust account with a financial
institution acceptable to Continental and the Company with the amount of funds
necessary for Continental to receive full financial statement credit for such
reinsurance and with the terms and conditions of such trust to comply with the
law of Continental's state of domicile such that Continental shall receive full
financial statement credit for such reinsurance. No decision has been made as to
whether the Company will exercise its right to provide reinsurance.
Without taking into account the Company's reinsurance rights, the
impact of the Assumption Reinsurance Agreement on the financial condition of the
Company, as successor to the Trust, will be to eliminate liabilities to
policyholders and to make a corresponding substantial reduction in the assets of
the Company. Without taking into account the Company's reinsurance rights, the
impact of the Assumption Reinsurance Agreement on the results of operations of
the Company, as successor to the Trust, will be to eliminate claims expenses and
also to eliminate the revenue realized when claims are settled for less than the
amount reserved for such claims or when the amount of such reserves is
determined to be too high.
If the Company exercises its reinsurance rights to the extent of such
reinsurance the Company's liabilities to policyholders would increase and there
would be a corresponding increase in the assets of the Company. Likewise, if the
Company exercises its reinsurance rights to the extent of such reinsurance, the
Company would have claims expenses and would realize revenue when claims are
settled for less than the amount reserved for such claims or when the amount of
such reserves is determined to be too high. Although in the past the business
insured by the Trust has been profitable, it is impossible to predict whether
the obligations ceded to Continental will be profitable. Whether the Company
will exercise reinsurance rights is also unknown at this time. For
44
<PAGE>
these reasons, it is impossible to predict with accuracy what financial impact
these reinsurance rights will have on the Company.
Results of Operations
Earned Premium
Net earned premium for the year ended December 31, 1996 was $1,987,491
compared to $5,323,952 for the year ended December 31, 1995, a decrease of
$3,336,461. This decrease was due to the fact that, pursuant to the Commercial
Program, the insureds of the Trust who wished to maintain their affiliation with
the Trust were transferred to TIG effective July 1, 1996 and the Trust
consequently had no earned premium during the last six months of 1996.
Historically, the Trust has earned a larger portion of its premium during the
last six months of each calendar year.
For the six month period ended June 30, 1997, the Trust had no earned
premium as a result of the TIG Commercial Program arrangement. This compares to
earned premium of $2,037,474 for the six months ended June 30, 1996.
Losses
Losses and loss adjustment expenses are generally a function of the
amount of payroll expended by Trust members. Consequently, as a result of having
only six months of payroll used in calculating earned premium in 1996, loss and
loss adjustment expenses decreased to $916,592 in 1996 from $2,448,722 in 1995.
Loss and loss adjustment expenses are determined actuarially each year and
adjustments to previous years' estimates included in current year loss expenses.
After such adjustments, loss and loss adjustment expense as a percentage of
earned premium amounted to forty-six percent (46%) in both 1996 and 1995.
Losses and loss adjustment expenses determined without regard to
adjustments for previous years' estimates were 49% and 54% for the years ended
December 31, 1996 and 1995 respectively.
As a result of having no premium income during the six months ended
June 30, 1997, there were no losses or loss adjustment expenses for this period.
For the six months ended June 30, 1996, loss and loss adjustment expenses
totaled $1,248,334.
The Trust has maintained a significantly faster payout pattern than is
generally the case within the workers' compensation insurance industry. This
rapid payout pattern reduces the discount that is applied to the reserves for
the value of investment income that is assumed to be earned on invested funds.
The Trust assumes a 5.5% interest rate in discounting the required reserves.
Open claims at December 31, 1996 were 96 compared to 240 at December
31, 1995. Open claims at June 30, 1997 were 61 compared to 259 at June 30, 1996.
45
<PAGE>
There have been no recent significant changes in the mix of business
written by the Trust. At the inception of the Trust, the insureds consisted
primarily of agricultural operations in the Mississippi Delta region. In 1993,
in addition to agricultural risks, the Trust began covering risks that included
restaurants, trucking companies and a variety of retail and service industry
employers. The mix of insureds has remained relatively constant since that
point.
The following schedules detail (i) the changes in unpaid claims and
claim adjustment expenses from 1994-1996; and (ii) an analysis of loss reserve
development from the inception of the Trust.
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<PAGE>
<TABLE>
<CAPTION>
Reconciliation of Beginning and Ending
Loss and Loss Adjustment Expense Reserves
1996 1995 1994*
-------- ---- -----
<S> <C> <C> <C>
Reserves for unpaid losses and loss adjustment
expenses - beginning of year 3,713,923 3,849,169 2,818,567
Incurred losses and loss adjustment expenses:
Provision for current year 959,032 2,558,087 2,986,083
Increase (decrease) in estimates for losses
occurring in prior years (42,440) (109,365) (432,568)
----------- ----------- -----------
Total incurred claims and claim adjustment
expenses 916,592 2,448,722 2,553,515
Payments for losses and loss adjustment expenses incurred in:
Current year (369,070) (1,197,368) (706,834)
Prior years (1,384,325) (1,388,900) (850,479)
Other:
Increase (decrease) in service company fee
reserve (42,900) 2,300 34,400
----------- ----------- -----------
Reserve for unpaid losses and loss adjustment
expenses - end of year $ 2,834,220 $ 3,713,923 $ 3,849,169
=========== =========== ===========
<FN>
*The fiscal year end of the Trust changed from July 31 to December 31 in 1994.
Opening balance is as of January 1, 1993.
</FN>
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Analysis of Loss Reserve Development
Year Ended
12/31/96 12/31/95 12/31/94* 07/31/94 07/31/93 07/31/92
<S> <C> <C> <C> <C> <C> <C>
Gross reserve for losses and loss adjustment
expenses $ 2,834,220 $ 3,713,923 $ 3,849,169 $ 2,613,482 $ 2,241,465 $ 935,500
Reinsurance receivable 660,986 708,509 836,427 774,371 774,371 0
----------------------------------------------------------------------------------
Net reserve for losses and loss adjustment
expenses 2,173,234 3,005,414 3,012,742 1,839,111 1,467,094 935,500
Cumulative paid through:
One year later 1,380,545 1,256,360 293,850 982,835 396,232
Two years later 1,789,225 806,375 1,276,685 452,024
Three years later 972,189 1,046,477 458,668
Four years later 1,233,020 493,276
Five years later 481,434
Retroactively re-estimated net liability for
unpaid loss and LAE as of:
End of year 2,173,234 3,005,414 3,012,742 1,839,111 1,467,094 935,500
One year later 2,910,717 2,805,055 933,643 1,432,178 507,143
Two years later 2,526,407 1,686,618 1,046,377 459,507
Three years later 1,472,901 1,623,695 450,102
Four years later 1,485,586 557,787
Five years later 540,239
---------------------------------------------------------------------------------
Net cumulative (deficiency) redundancy -- $ 94,697 $ 486,335 $ 366,210 ($ 18,492) $ 395,261
===========
<FN>
*The Trust changed its fiscal year to a calendar year in 1994.
</FN>
</TABLE>
48
<PAGE>
Other Expenses
Other expenses that are directly related to members' payroll expense
levels and consequently premium income are service company fees and excess
insurance premiums. Service company fees, the fees paid to an outside claims
administrator, decreased from $626,332 in 1995 to $299,322 in 1996 as a result
of a decrease in premium income together with a rate decrease negotiated with
the servicing company. There were no service company fees for the period ended
June 30, 1997 due to the claims being handled through the TIG Commercial Program
arrangement. For the same period in 1996, service company fees totaled $299,322.
Regulatory fees were virtually unchanged, decreasing from $30,858 in
1995 to $28,548 in 1996. For the period ending June 30, 1997 and 1996,
regulatory fees amounted to $11,502 and $14,274 respectively. These fees are
levied by the Workers' Compensation Commission and are based on the medical and
indemnity payments paid to claimants during the previous calendar year.
Consequently, the level of premium income does not have a direct effect on these
expenses.
General expenses increased from $438,224 in 1995 to $450,959 in 1996.
The increase was due primarily to the expense involved in the structuring and
implementation of the Commercial Program and in the analysis and planning of the
dissolution of the Trust in conjunction with the formation of the Company. The
Trust incurred general expenses primarily relating to the formation of the
Company totaling $183,760 in the first quarter of 1997 compared to general
expenses for the first six months in 1996 of $241,455.
Income Taxes
The current tax provision of the Trust decreased to $98,768 in 1996
from $643,660 in 1995 as a result of decreased taxable income. In 1996, the tax
provision represents a large percentage of the net income before tax because for
tax purposes the Trust can only deduct capital losses up to the amount of its
gains. Since the Trust could not deduct the net loss from the sale of its
securities in 1996, its taxable income was significantly higher than financial
statement net income, thus creating a large tax provision in comparison to net
income before tax.
Because of a change in the investment philosophy of the Trust to invest
in primarily fixed income securities, it appears unlikely that the Trust will
experience future capital gains which would allow it to benefit from the capital
loss carryforwards generated on the sale of securities in 1996 and 1995.
Consequently, Trust management does not believe that such loss carryforwards
will be utilized.
For temporary differences between the tax basis of assets and
liabilities, a deferred tax liability or asset account is established. At
December 31, 1995 a deferred tax asset existed as a result of the future tax
benefit the Trust would receive from the sale of securities in which the Trust
had current unrealized losses. During 1996, it became apparent that the Trust
may not be able to fully realize a tax benefit from the eventual sale of such
securities at a loss unless the Trust was likely to have future capital gains to
offset such losses. Since only minimal capital gains were likely due to
49
<PAGE>
a change in the investment portfolio of the Trust, the deferred tax asset was
eliminated in 1996 to reflect the net expected tax benefit from the sale of
securities at a loss.
The Trust made 1996 estimated income tax payments during the first half
of 1996 based on the income tax paid in 1995. However, since the Trust
discontinued writing business July 1, 1996, the taxable income of the Trust was
significantly less than in 1995, creating an income tax overpayment. At December
31, 1996, the Trust had overpaid Federal income taxes by $134,488 and
Mississippi income taxes by $18,374, resulting in a total income tax refund due
of $152,862, at that date.
Due to an absence of premium income for the quarter ended June 30, 1997
and with continuing costs involved in its conversion, the Trust experienced a
net loss of $112,933 creating a current income tax benefit of $40,489 compared
to a provision for income tax of $122,516 for the same quarter of 1996.
Investment Income
Investment income decreased from $328,027 in 1995 to $297,076 in 1996.
This decrease was a result of having less cash available for investment in 1996.
Cash and investments at December 31, 1996 and 1995 were $4,721,297 and
$5,957,135 respectively. This decrease was a result of the discontinuance of
premium income effective July 1, 1996 coupled with the Trust's continuing
obligation to pay existing claims. Numerous claims were settled during the last
six months of 1996, further reducing cash available for investment.
Investment income decreased from $147,583 for the six months ended June
30, 1996 to $91,444 for the same period in 1997. The decline was due to a
further decrease in cash available for investment as a result of the Trust
continuing to pay existing claims without current premium income.
The Statements of Revenue and Expenses for the years ended December 31,
1996 and 1995 reflect net realized losses from the sale of securities
available-for-sale $37,286 and 159,557 respectively. Additionally, a 1996 loss
on the sale of "trading securities" in the amount of $422,850 is presented as
"Other"on the statement in accordance with generally accepted accounting
principles. The losses in 1995 were primarily the result of a decline in the
value of certain foreign currency based securities. The investment policy of the
Trust no longer permits investment in foreign securities. With respect to the
1996 losses, the Trust has initiated arbitration proceedings against the
brokerage firm to recover its losses. As of December 31, 1996, the Trust had
liquidated virtually all of its equity security holdings with this firm.
For the period ending June 30, 1997 the Trust sustained an additional
loss on the sale of "trading securities" in the amount of $9,115. The Trust
experienced a loss on the sale of "trading securities" in the same period of the
preceding year in the amount of $286,085.
50
<PAGE>
Effective April 1, 1997, the Trust engaged the services of Investek
Capital Management, Inc. ("Investek") to assist in the management of the Trust's
investment portfolio. Investek has substantial experience in the management of
insurance company investment portfolios.
Liquidity and Capital Resources
General
The liquidity and capital requirements for a workers' compensation
carrier is significantly different from other property and casualty carriers.
Workers' Compensation carriers generally have use of premium dollars for
investment purposes for longer periods of time because claims may be paid over a
fifteen year or longer period. Because of this long payment period, investment
income becomes a major source of revenue for most carriers. Consequently,
discounting the liability for future claims payments for the present value of
investment income that will be earned on the funds available for future expected
payments becomes a significant factor in estimating a carrier's claims
liability.
Liquidity Requirements
Historically, the Trust has needed liquidity primarily to meet claims
obligations. The Trust and the Company have entered into the Assumption
Reinsurance Agreement whereby Continental will assume all of the claims
liabilities of the Trust as of September 5, 1997. The Trust will pay Continental
an amount not to exceed $1,875,000 consisting of $1,625,000 in reserves required
to pay claims liabilities (which amount may be adjusted downward depending on
claims settled) plus a non-refundable fee of $250,000 for handling claims. As a
result of this arrangement, the Trust and the Company's need for liquidity has
been substantially eliminated, unless the Company exercises its reinsurance
rights.
Under the Assumption Reinsurance Agreement, the Company has the right
on March 1, 1998 to provide reinsurance to Continental pertaining to the claims
liabilities assumed by Continental pursuant to the Assumption Reinsurance
Agreement. If such reinsurance is put in place, a portion of the assets the
Trust transferred to Continental will be transferred back to the Company along
with any associated liability. The Company will be required to fund a trust
account with a financial institution acceptable to Continental and the Company
with the amount of funds necessary for Continental to receive full financial
statement credit for such reinsurance and with the terms and conditions of such
trust to comply with the law of Continental's state of domicile such that
Continental shall receive full financial statement credit for such reinsurance.
No decision has been made as to whether the Company will exercise its right to
provide reinsurance. Although in the past the business insured by the Trust has
been profitable, it is impossible to predict whether the obligations ceded to
Continental will be settled for less than the reserves transferred to
Continental. For these reasons, it is impossible to predict with accuracy what
financial impact these reinsurance rights will have on the Company.
51
<PAGE>
The Company may participate in business written through the Commercial
Program on a reinsurance basis after the conversion of the Trust is completed.
The Insurance Placement Agreement permits the Company to determine the amount of
reinsurance it may provide at any point in time. If the Company elects to
provide such reinsurance liabilities and corresponding assets would be
transferred to the Company. The effect of such transfer would depend on the
amount and timing of the reinsurance and the profitability of the business
transferred all of which are unknown at this time. For these reasons, it is
impossible to predict with accuracy what financial impact these reinsurance
rights will have on the Company.
The Trust will also need liquidity to pay amounts owed to dissenters.
The Trust will pay an amount (to be determined as of the Effective Date) which
will satisfy certain published Internal Revenue Service Guidelines so as not to
cause the Conversion to lose its characterization as a tax free transaction as
to the Trust, the Company, and those Former Members who receive Stock of the
Company. Any excess over such amount shall be paid to dissenters by the Company
(contemporaneously with the payments made to dissenters from funds of the Trust)
out of operating funds or from the proceeds of a loan that the Company will
obtain for that purpose and not out of assets transferred to the Company from
the Trust pursuant to the Plan. The Company's intent is to pay debt service on
any loan obtained to pay dissenters out of future earnings of the Company and
not out of funds transferred from the Trust. The actual amount payable by the
Trust will be determined on the Effective Date so that any changes in the
Trust'`s financial position may be taken into account in determining the amount
the Trust may pay to dissenters without jeopardizing their tax free status of
the transaction as noted above.
After payments have been made pursuant to the Assumption Reinsurance
Agreement and all existing liabilities of the Trust have been paid (assuming no
dissenters), it is anticipated that the Trust will have approximately $1.5
million in cash, investments and other liquid assets with which to capitalize
the Company. In order to be licensed by the Department of Insurance, the Company
must maintain $400,000 in capital and $600,000 in surplus on a statutory basis.
It is anticipated that the Company will have in excess of the minimum required
capital and surplus.
Admitted Assets
The Company will be required to maintain its books on the statutory
basis of accounting. Currently the Trust maintains its books on a GAAP
(generally accepted accounting principals) basis. As far as the Company is
concerned, initially the major difference in the statutory and GAAP basis of
accounting lies in the classification of assets as admitted or non-admitted.
Under the statutory basis, only admitted assets will be permitted to be included
as assets on the Company's balance sheet. At December 31, 1996 the Trust owned
certain investments that are not considered admitted assets for statutory
accounting purposes. In January, 1997, the Trust sold the major portion of these
non-admitted investment assets for cash in order to qualify them as admitted
assets upon transfer to the Company. Other non-admitted assets totaling $125,750
are fixed assets of $13,517, prepaid expenses of $21,798 and receivables and
other assets totaling $90,435. Non-admitted assets at June 30, 1997 totaled
$176,654.
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<PAGE>
Commitments
Both the Trust and the Company, as successor to the Trust, have ongoing
commitments for administrative services to Delta Administration in the
approximate amount of $3,800 per month as well as other normal operating
expenses. Under the Commercial Program, pursuant to the Representative
Agreement, Delta Administration is also paid 3.5% of the collected premiums
generated by the Commercial Program to manage the activities of the Trust. See
"Certain Transactions and Relationships."
BUSINESS OF THE COMPANY
Organization and Purpose
The Company was organized on December 13, 1996, as a Mississippi
business corporation with the purpose of succeeding to the assets of the Trust
pursuant to the Conversion and thereafter functioning as a commercial stock
insurance company licensed to write workers' compensation insurance in the State
of Mississippi. The Company must at all times meet and maintain a minimum
capital and surplus level of $400,000 and $600,000, respectively. As of the
Effective Date of the Conversion, the Company anticipates that it will exceed
the minimum levels of capital and surplus.
In order for the Department of Insurance to issue the Company a license
as a workers' compensation insurer, immediately following the Conversion the
Company must place one-half of its statutory capital ($200,000) on deposit with
the Treasurer of the State of Mississippi and submit evidence of such deposit
and the required levels of capital and surplus to the Department of Insurance,
and pay a $200 license fee.
Until the Effective Date of the Plan, the Company will have no material
assets or liabilities. Because the Company has no material assets as of the date
hereof, selected financial data of the Company is not included in this
Prospectus; for financial statements of the Company, see "Index to Financial
Statements." Upon the completion of the Conversion, the Company expects to be
licensed as a workers' compensation insurer by the Department of Insurance.
Company Management's Plan of Operation
Continuation of Commercial Program
The Company plans to continue with the Commercial Program begun by the
Trust. Until the Company has received a rating from a recognized insurance
rating organization (which requires five years of continuous operations), it
plans to continue the Commercial Program and/or initiate similar programs with
other insurers.
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<PAGE>
There is currently substantial price competition in the workers'
compensation market. The Company plans to continually examine the Commercial
Program and any other similar programs it may provide in order to ensure such
programs are competitive.
Provision of Reinsurance
The Company may provide reinsurance to Continental in accordance with
the Assumption Reinsurance Agreement and it may provide reinsurance to TIG in
accordance with the Insurance Placement Agreement. See "Trust Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources -- Liquidity Requirements."
When an insurance company provides reinsurance, the amount of the
insurance obligation which the company providing the reinsurance assumes is
specifically defined. Further, the insurance obligation assumed is to the ceding
insurer (the company which is transferring the insurance risk to the company
providing reinsurance) and not an individual insured. In the event that the
Company provides reinsurance to Continental or TIG, the Company expects to have
excess coverage which will limit its exposure.
Under the Assumption Reinsurance Agreement, the Company has the right
on March 1, 1998 to provide reinsurance to Continental pertaining to the claims
liabilities assumed by Continental pursuant to the Assumption Reinsurance
Agreement. If such reinsurance is put in place, the assets remaining of the
assets the Trust transferred to Continental will be transferred back to the
Company along with any associated liability.
Creation of Other Workers' Compensation Insurance Programs
In addition to the Commercial Program, the Company may develop workers'
compensation insurance programs with other large carriers. It is anticipated
that these programs will be structured in a manner similar to the current
Commercial Program. The Company would participate as a reinsurer of the business
written by the commercial carriers. It is anticipated that the Company's level
of risk participation in these programs would vary. Due to the integration of
stop loss policies into the program at relatively low levels, the potential loss
to the Company on this program would be greatly minimized.
General Operations
The Company plans to concentrate its business activities on providing
workers' compensation for businesses in the agricultural and industrial sectors
in Mississippi and, in the future if desirable opportunities arise, in nearby
states. Company management believes that it has a base of experience in
agricultural workers' compensation risk (such as cotton gins) which is
transferable to other states. In addition, so long as the Company is licensed as
a workers' compensation insurer in Mississippi, it may participate under certain
circumstances in workers' compensation programs similar to the Commercial
Program without licensure by such other states.
54
<PAGE>
Company management also has identified a potential client population in
the insureds and former insureds of self insurance pools such as the Trust. The
factors that rendered the Trust noncompetitive have affected other pools, in
some instances causing insolvencies. The Company believes that it is well
positioned to identify the insureds of such pools and place them in programs
such as the Commercial Program as well as to arrange for the placement of
coverage with other insurers to terminate the joint and several liability of
insureds in such pools.
Assuming operation as set forth above, management of the Company
believes that the Company's business activities should allow the Company to
satisfy its cash needs without seeking additional financing for the next twelve
months. However, in the event that operations do not meet projected targets, the
Company will be required to obtain financing for shortfall amounts through debt
financing or the issuance of additional equity securities.
Investments
Management of the Company's portfolio of investments will be a
significant part of the Company's business. The Company's investments are
limited by statutes and other regulations which restrict a large portion of such
investments to specific categories. The Company is expected to invest in
securities and other investments authorized by applicable state laws and
regulations and receive income from such investments in the form of interest,
dividends and capital gains. The Company expects to follow an investment policy
designed to maximize yield to the extent consistent with liquidity requirements
and preservation of assets. The Company has retained Investek Capital
Management, Inc. as its investment advisor. Investek currently manages over $1.1
billion and has substantial experience in investing funds of insurance
companies.
Government Regulation
The Company will be subject to regulation by the Department of
Insurance although control over the delivery of benefits is generally under the
purview of the Workers' Compensation Commission. The primary purpose of
regulation by the Department of Insurance is to provide safeguards for
policyholders rather than to protect the interests of shareholders. The
Department of Insurance has broad administrative powers relating to the
licensing of insurers and their agents, the regulation of trade practices,
transactions with affiliates, investments, deposits of securities, the form and
content of financial statements, accounting practices, reporting requirements,
sales literature, insurance policy forms and the maintenance of specified
reserves and capital and surplus.
Workers' compensation insurers such as the Company must maintain
reasonable ratios between net written premiums and statutory surplus in order to
be consistent with sound underwriting practices and requirements of insurance
regulators and rating agencies. Accordingly, an insurance company's volume of
net written premiums is limited by the amount of its statutory surplus. As the
premium volume of the Company grows, its statutory surplus must also increase so
that the ratio of net written premiums to statutory surplus does not become too
high. The Company's objective will be to maintain the ratio of net written
premiums to statutory surplus within the maximum guidelines of the NAIC.
55
<PAGE>
Insurance companies are required by law to maintain reserves for
claims. These reserves are intended to cover the probable ultimate cost of
settling all claims incurred and unpaid, including those not yet reported.
Reserves will be determined by the Company in accordance with applicable law.
Reserves will be monitored by the Company using a variety of techniques for
analyzing claim cost and frequency data and other economic factors. Among other
techniques, the Company expects to periodically compare estimated and actual
expenses for settled claims and adjust its reserve estimates, if necessary, on
the basis of such comparisons. Claim reserves are estimates only, and it is
possible that ultimate liability may exceed or be less than such estimates.
Under Mississippi law, workers' compensation insurers must maintain a
reserve for losses as well as a reserve for unearned premiums. The assets
constituting the unearned premium reserve must be withdrawn from use by the
Company for its general purposes and are gradually released over the life of the
policy.
Upon being licensed by the Department of Insurance, the Company will
automatically become a member of the Mississippi Insurance Guaranty Association
(the "Guaranty Association"). The purpose of the Guaranty Association is to
provide a mechanism for the payment of claims made by insureds against an
insolvent insurer. The Association may assess insurers to pay the obligations of
the Association in accordance with a statutory formula based on net direct
premiums written.
Upon being authorized by the Department of Insurance to write workers'
compensation insurance in Mississippi, the Company will be required to be a
member of the Mississippi Workers' Compensation Assigned Risk Pool ("the "Pool")
and to participate in the Mississippi Workers' Compensation Assigned Risk Plan
(the "Plan"). The purpose of the Pool is to be a reinsurance mechanism for the
Plan. The Pool may assess insurers to pay the obligations of the Pool in
proportion to the insurers' direct net workers' compensation premium writings in
Mississippi. So long as the Company does not directly write workers'
compensation insurance, it will not be subject to assessment by the Pool.
In a stock insurance company structure such as the Company's, there is
no personal liability of the shareholders in the event the insurer becomes
insolvent and is not able to pay claims. The claims are assumed by the Guaranty
Association. This is in contrast to the joint and several liability of members
of group self insurers such as the Trust.
Assumption of Trust Contracts
The Company and the Trust have entered into an Assignment and
Assumption Agreement dated as of March 20, 1997, which provides that upon the
Conversion, the Trust will assign, and the Company will assume, the Trust's
rights under the Insurance Placement Agreement, the Representative Agreement,
agreements relating to claims administration, and certain other agreements and
rights of the Trust.
56
<PAGE>
Employees
The Company will initially have no employees. The Company will be
administered by Delta Administration on the same financial and operational basis
as the Trust. See "The Trust -- Employees" and "Certain Transactions and
Relationships." The Company anticipates that it will continue to utilize the
services of Mr. Vickery through Delta Administration to manage the day to day
operations of the Company.
Management of the Company
The names of the executive officers and directors of the Company and
their respective ages and positions with the Company are set forth as follows:
Name Age Position
William L. Kennedy 46 Chairman of the Board
of Directors, Chief
Executive Officer
Harry E. Vickery 62 President, Director
David R. White 47 Secretary, Treasurer,
Vice President, Director
William L. Kennedy resides in Inverness, Mississippi. He holds a BS
degree in Entomology from Mississippi State University. He has worked with
Duncan Gin, Inc. since 1972 and currently serves as President and Chief
Operating Officer of Duncan Gin, Inc. Duncan Gin, Inc. is a multiline
agricultural marketing entity and is the largest cotton ginning operation in
Mississippi. He has served from inception on the Board of Trustees of the
Delta Agricultural & Industrial Trust and is presently Chairman of the Trust.
Harry Vickery resides in Jackson, Mississippi. From 1962-1993, Mr.
Vickery was involved in the automobile business in Greenville, Mississippi.
Mr. Vickery was one of the original members of the Board of Trustees of the
Trust from inception until 1993 when he became Administrator. Mr. Vickery was
President and a director of Vickery Chevrolet Oldsmobile Co., Inc. which filed
a Chapter 11 bankruptcy petition in 1993. All assets of Vickery Chevrolet
Oldsmobile Co., Inc. were sold and the bankruptcy case was subsequently
dismissed.
David R. White resides in Jackson, Mississippi. He holds a BS degree
from the University of Mississippi in Accounting and Business Administration. He
has been involved in the insurance business since 1987 and has served as
President and Chief Operating Officer of MRM Underwriters, Inc. since that date.
He holds a number of awards in the insurance field and has served as president
of insurance associations both on the local and state level.
All directors hold office until the next annual meeting of shareholders
of the Company or until their successors have been elected and qualified. Unless
changed by the action of the Board
57
<PAGE>
of Directors, the number of directors shall be no fewer than three (3) nor more
than seven (7). Officers serve at the discretion of the Board of Directors.
There are no family relationships between the directors and officers.
Executive Compensation
There are no current plans to pay compensation to officers or directors
other than for (i) attendance at meetings; and (ii) activities undertaken on
behalf of the Company with approval by the board of directors. MRM and Delta
Administration, entities controlled by David R. White and Harry E. Vickery,
respectively, received funds as a result of providing services to the Trust. MRM
received commission income as a result of providing insurance and services to
the Trust and Delta Administration provided management services to the Trust.
See "The Trust -- Employees"; "The Company -- Employees"; and "Certain
Transactions and Relationships."
Legal Proceedings
Following the Conversion, the company will succeed to the Trust's claim
in the Securities Arbitration. See "Business of the Trust -- Legal Proceedings"
and "Trust Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Results of Operations -- Losses." Other than the
pending involvement of the Company in the Securities Arbitration as successor to
the Trust, the Company is not involved in any pending legal proceeding nor are
any material legal proceedings known by the Company to be contemplated by
governmental authorities other parties, to which the Company is or might become
a party.
58
<PAGE>
DESCRIPTION OF COMPANY STOCK
The Company is authorized to issue 100,000,000 shares of common stock,
$1.00 par value, of which up to 650,000 will be issued and outstanding upon the
Effective Date of the Plan. When issued, the Stock will be fully paid and
nonassessable. The Company's Stock does not have preemptive rights. Holders of
shares of the Company's Stock are entitled to one vote per share in all matters
to be voted on by shareholders, except that holders are entitled to cumulate
their votes in the election of directors. See "Comparison of Rights of Former
Members of the Trust and Shareholders of the Company."
COMPARISON OF RIGHTS OF FORMER MEMBERS OF THE TRUST AND
SHAREHOLDERS OF THE COMPANY
There are important differences between the rights of shareholders of
the Company ("Shareholders") and Former Members of the Trust.
Governance
The Company will be subject to the Mississippi Business Corporation Act
("MBCA") and not to general trust law. Shareholders of the Company will elect a
Board of Directors who will oversee governance of the Company. Former Members of
the Trust have no voting or governance rights.
Liability
Former Members of the Trust are jointly and severally liable for the
obligations of the Trust which were incurred during such Former Member's period
of membership. Shareholders of the Company will not be liable for the
obligations of the Company or their fellow shareholders except to the extent of
their investment in the Stock.
Assessment
Former Members of the Trust are assessable in the event the Trust is
unable to adequately discharge its financial obligations which were incurred
during such Former Member's period of membership. The Stock of the Company is
nonassessable.
Voting
Former Members of the Trust have no voting rights. Shareholders of the
Company will be entitled to one vote for each share held on each matter
submitted to a vote at a meeting of the Shareholders, with the exception that
Shareholders may cumulate their votes for directors.
59
<PAGE>
Resale
Former Members of the Trust may not sell or transfer their interest in
the Trust. Shareholders in the Company may freely sell or transfer their shares,
subject to applicable securities laws. See "The Conversion -- Resales of Company
Stock."
Indemnification of Officers and Directors of the Company
Subject to the terms and conditions of the Bylaws of the Company, the
Company is required to indemnify any person who was or is a party or is
threatened to be made a party to a threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative because
he is or was serving as an officer or director of the Company, or while serving
as a director of the Company, is or was serving at the request of the Company as
a director, officer, partner, trustee, employee or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise. Indemnification is available for an obligation to pay a
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) or reasonable expenses (including counsel
fees) incurred with respect to such proceeding. Indemnification permitted in
connection with a proceeding by or in the right of the Company shall be limited
to reasonable expenses incurred in connection with the proceeding.
Under the Bylaws, the Company may not indemnify a director unless the
person indemnified shall have conducted himself in good faith and reasonably
believed, in the case of conduct in his official capacity with the Company, that
his conduct was in its best interests, and in all other cases, that his conduct
was at least not opposed to its best interests, and in the case of any criminal
proceeding, that he had no reasonable cause to believe his conduct was unlawful.
Such a determination shall be made by the Board of Directors by majority vote of
a quorum consisting of disinterested directors, or if a quorum cannot be
obtained, by majority vote of a committee duly designated by the Board of
Directors, by special legal counsel, by the shareholders of the Company, or by a
court of competent jurisdiction. The termination of a proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the director did not meet the
standard of conduct. The Company may not indemnify a director in connection with
a proceeding by or in the right of the Company in which the director was
adjudged liable to the Company or in connection with any other proceeding
charging improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
The Company must pay for or reimburse the reasonable expenses incurred
by a director who is a party to a proceeding in advance of final disposition of
the proceeding if the director furnishes the Company a written affirmation of
his good faith belief that he has met the applicable standard of conduct if the
director furnishes the Company a written undertaking, executed personally or on
his behalf, to repay the advance if it shall be ultimately determined that he
did not meet the standard of conduct and a determination is made that the facts
then known to those making the determination would not preclude indemnification.
The undertaking to repay must be an unlimited general
60
<PAGE>
obligation of the director but need not be secured and may be accepted without
reference to financial ability to make repayment.
The Bylaws authorize the Company to purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee or agent of
the Company or who, while a director, officer, employee or agent of the Company,
is or was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against liability asserted against or incurred by him in that capacity or
arising from his status as a director, officer, employee or agent, whether or
not the Company would have power to indemnify him against such liability.
The Bylaws authorize the Board of Directors of the Company to make any
further indemnity, including advance of expenses, to and to enter contracts of
indemnity with any director, officer, employee or agent, except an indemnity
against his gross negligence or willful misconduct.
The Company must pay or reimburse expenses incurred by a director in
connection with his appearance as a witness in a proceeding at a time when he
has not been made a named defendant or respondent to the proceeding when his
appearance as a witness is in connection with his serving as a director of the
Company.
The Company's Articles of Association include a provision limiting the
personal liability of a director to the Company or its shareholders for monetary
damages with the exception of liability arising out of (i) the amount of a
financial benefit received by a director to which he is not entitled, (ii) an
intentional infliction of harm on the corporation or the shareholders, (iii)
violation of certain provisions of the MBCA, or (iv) an intentional violation of
criminal law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 or under the securities laws of various states may be permitted to
directors, officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission and certain state securities commissioners such
indemnification is against public policy and is therefore unenforceable.
Indemnification of Trustees of the Trust
The Trust Agreement of the Trust (the "Trust Agreement") provides for
mandatory indemnification of the Trustees against all costs and expenses
(including attorneys' fees) incurred in connection with any claim in which a
Trustee may be involved by virtue of his position in the Trust. The
indemnification is not operative with respect to: (i) a person gaining any
personal profit or advantage; (ii) the dishonesty of a person; (iii) a person's
conflict of interest; (iv) willful violation of a statute or ordinance committed
by a person or with the person's knowledge or consent; or (v) any matter as to
which a person shall have been finally adjudged in such action, suit or
proceeding to be liable for misconduct in the performance of his duties. The
Trust Agreement further provides that the rights of indemnification set forth
therein shall not be deemed exclusive of any rights to
61
<PAGE>
which those indemnified may be entitled and the Board of Trustees, by vote of
disinterested Trustees, may provide any further indemnification it feels
justified.
Preemptive Rights
Under the MBCA, a shareholder does not have preemptive rights unless
such rights are specifically granted. The Company's Articles of Association do
not provide for preemptive rights. Because the Trust is an unincorporated entity
and issues no shares, preemptive rights are not applicable.
Dividends
Under Mississippi law, the Company may pay cash dividends only from
actual net surplus determined on a statutory basis. In addition, "extraordinary
dividends" or "extraordinary distributions" may not be paid until thirty (30)
days after the Commissioner of Insurance has received notice of the declaration
thereof and has not within such period disapproved such payment, or the
Commissioner has approved such payment within such thirty (30) day period.
Extraordinary dividends or distributions are defined as any dividend or
distribution of cash or other property whose fair market value together with
that of other dividends or distributions made within the preceding twelve months
exceeds the lesser of (i) ten percent (10%) of the Company's surplus as regards
policyholders as of the December 31 next preceding, or (ii) the net income of
such insurer, not including realized capital gains, for the twelve month period
ending the December 31 next preceding, but shall not include pro-rata
distributions of any class of the insurer's own securities. In determining
whether a dividend or distribution is extraordinary, an insurer may carry
forward net income from the previous two (2) calendar years that has not already
been paid out as dividends.
Payment of dividends (also called refunds) by the Trust are restricted
to any monies for a full accounting year of the Trust (a "Fund Year") in excess
of the amount necessary to fund all obligations for that Fund Year which have
been declared to be refundable by the Board of Trustees with the approval of the
Workers' Compensation Commission and which shall be payable not less than twelve
(12) months after the end of the Fund Year. The Workers' Compensation Commission
will not consider refunds for a particular Fund Year for approval until
financial statements are available reflecting fund equity for that Fund Year at
the period ending 24 months after the end of that Fund Year.
After approval of a refund for a particular Fund Year: (i) up to 33% of
the equity for that Fund Year could be approved for distribution as a refund
during the period beginning 24 months after the closing of that Fund Year; (ii)
up to 50% of the remaining equity for that Fund Year could be approved for
distribution as a refund during the period beginning 36 months after the closing
of that Fund Year; (iii) up to 50% of the remaining equity for that Fund Year
could be approved for distribution as a refund during the period beginning 48
months after the closing of that Fund Year; and (iv) up to 100% of the remaining
equity for that Fund Year could be approved for distribution as a refund during
the period beginning 60 months after the closing of that Fund Year. Each refund
distribution requires a separate application and approval after financial
results are available reflecting the Fund Year equity balance at the relevant
time (i.e., 24 months after the close of the Fund Year; 36 months after the
close of the Fund Year, etc.).
62
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
David R. White is an officer and director of the Company and controls
MRM. Through the Representative Agreement and MRM's General Agent Agreement with
TIG, MRM receives a percentage of the premiums written through the Commercial
Program. It is anticipated that the Company will become the assignee of the
Trust's rights under the Representative Agreement and that MRM will continue
providing such services to the Company. MRM brokers directors and officers
coverage and excess workers' compensation coverage for the Trust. In 1995, 1996,
and for the period from January 1, 1997 - June 30, 1997, MRM received direct and
indirect compensation from the Trust and the Company in the aggregate amounts of
$131,290; $137,716; and $121,400, respectively, for such years.
Mr. White, or an affiliate of Mr. White, will be paid a commission of
$25,000 by Continentalin connection with the Assumption Reinsurance Agreement.
Harry E. Vickery is an officer and director of the Company and serves
as Administrator of the Trust and owns all the issued and outstanding stock of
Delta Administration. Under the Commercial Program, pursuant to the
Representative Agreement, Delta Administration, which is a licensed insurnace
agency, is paid 3.5% of the collected premiums generated by the Commercial
Program to manage the activities of the Trust. Delta Administration also
receives $3,800 a month from the Trust in exchange for administrative services.
From these funds, Delta Administration pays the office expenses of the Trust
including rent, salaries of its employees who administer the Trust, and sponsor
fees. Mr. Vickery, through Delta Administration, acts as an agent for the
Commercial Program through MRM. Mr. Vickery will continue to sell coverage
through the Commercial Program in addition to his management role in the
Company. In the event that the Company creates other insurance programs, it is
anticipated that Delta Administration will provide services similar to those
provided under the Commercial Program.
In 1995, 1996, and for the period from January 1, 1997 - June 30, 1997,
Delta Administration received direct and indirect compensation from the Trust
and the Company in the aggregate amounts of $111,991; $114,207; and $74,907,
respectively, for such years. After payment by Delta Administration of office
expenses of the Trust, Mr. Vickery's gross compensation in 1995 was $87,092 and
$104,451 in 1996. Prior to the commencement of the Commercial Program, Delta
Administration was paid directly by the Trust for its services. As a part of the
Conversion, the Trust's obligations regarding Delta Administration will be
assumed by the Company.
LEGAL MATTERS
The validity of the shares of Stock to be issued in connection with the
Conversion will be passed upon for the Company and the Trust by Watkins Ludlam &
Stennis, P.A., Jackson,
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<PAGE>
Mississippi. Certain of the tax consequences of the Conversion will be passed
upon by Watkins Ludlam & Stennis, P.A.
EXPERTS
The audited financial statements and financial statement schedules of
the Trust included in this Prospectus and elsewhere in the Registration
Statement have been examined by Richard L. Eaton, independent certified public
accountant, Jackson, Mississippi, for the periods and to the extent set forth in
his reports and are included herein in reliance upon the reports of such firm,
given upon his authority as an expert in accounting and auditing.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Delta Agricultural and Industrial Trust Financial Statements for the Years ended
December 31, 1996 and 1995
Report of Independent Auditor F-3
Balance Sheets as of December 31, 1996 and 1995 F-4
Statements of Revenues and Expenses for Years Ended
December 31, 1996 and 1995 F-5
Statements of Changes in Trust Equity for Years Ended
December 31, 1996 and 1995 F-6
Statements of Cash Flows for Years Ended December 31,
1996 and 1995 F-7
Notes to Financial Statements F-9
Schedules to Financial Statements F-21
Delta Agricultural and Industrial Trust Compiled Financial Statements
for the Six Months Ended June 30, 1997 and 1996
Balance Sheets as of June 30, 1997 and 1996 F-27
Statements of Revenues and Expenses for Six Months Ended
June 30, 1997 and 1996 F-28
Statements of Changes in Trust Equity for Six Months Ended
June 30, 1997 and 1996 F-29
Statements of Cash Flows for Six Months Ended June 30,
1997 and 1996 F-30
Notes to Financial Statements F-32
Stoneville Insurance Company Financial Statements for the
Years Ended December 31, 1996 and 1995
Report of Independent Auditor F-44
Balance Sheet as of December 31,
1996 F-45
Statement of Income for Year Ending December 31, 1996 F-46
Statement of Changes in Stockholders' Equity for Year Ended
December 31, 1996 F-47
Statement of Cash Flows for Year Ended December 31, 1996 F-48
Notes to Financial Statements F-49
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
(cont.)
Stoneville Insurance Company Compiled Financial Statements for the Six
Months Ended June 30, 1997 and 1996
Balance Sheet as of June 30, 1997 F-52
Statement of Income for the Six
Months Ending June 30, 1997 F-53
Statement of Changes in Stockholders'
Equity for the Six Months Ended
June 30, 1997 F-54
Statement of Cash Flows for the Six Months Ended June 30, 1997 F-55
Notes to Financial Statements F-56
</TABLE>
F-2
<PAGE>
RICHARD L. EATON
CERTIFIED PUBLIC ACCOUNTANT
(A PROFESSIONAL CORPORATION)
POST OFFICE BOX 16603
JACKSON, MISSISSIPPI 39236
____________
TELEPHONE: (601) 956-9751
FAX: (601) 956-7415
MEMBER OF:
AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
MISSISSIPPI SOCIETY OF
CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees
Delta Agricultural and Industrial Trust
Jackson, Mississippi
I have audited the accompanying balance sheets of Delta Agricultural and
Industrial Trust as of December 31, 1996 and 1995 and the related statements of
revenue and expenses, changes in trust equity and cash flows for the years then
ended. These financial statements are the responsibility of management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements present fairly, in all material
respects, the financial position of Delta Agricultural and Industrial Trust as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/Richard L. Eaton
Richard L. Eaton
Jackson, Mississippi
January 29, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Balance Sheets
December 31, 1996 and 1995
1996 1995
----------- ------------
Assets
Investments:
<S> <C> <C>
Trading securities (at fair value)
Equity securities $ 1,696,944 $ 0
Securities available-for-sale (at fair value)
Fixed maturities (amortized cost - $1,150,740 and $0) 1,141,504 0
Equity securities (amortized cost - $0 and $2,580,133) 0 2,469,692
Securities held-to-maturity (at amortized cost)
Fixed maturities (fair value $521,940 and $2,246,853) 522,884 2,247,145
----------- -----------
Total Investments 3,361,332 4,716,837
Cash and Cash Equivalents 1,359,965 1,240,298
Premiums receivable net of uncollectible amount 0 1,337,030
Notes receivable 20,000 0
Accrued interest receivable 52,410 90,736
Reinsurance receivables, net of uncollectible amounts 660,986 708,509
Excess insurance premium overpayment 89,860 0
Capital equipment leases at cost less
accumulated depreciation of $9,775 and $5,759 13,517 16,782
Prepaid expenses 21,798 2,622
Income tax refund receivable 152,862 0
Deferred tax asset 0 43,331
Other assets 575 575
----------- ------------
Total Assets $ 5,733,305 $ 8,156,720
=========== ===========
Liabilities and Trust Equity
Liabilities
Reserve for losses and loss adjustment expenses $ 2,834,220 $ 3,713,923
Unearned premiums 0 1,466,279
Reserve for premium adjustment 384,863 0
Accounts payable and accrued liabilities 56,290 207,762
Income taxes payable 0 394,048
Capital lease obligations 4,038 8,980
----------- -----------
Total Liabilities 3,279,411 5,790,992
----------- -----------
Trust Equity
Retained earnings 2,463,130 2,432,888
Net unrealized loss on securities
available for sale, net of deferred taxes (9,236) (67,160)
------------ -----------
Total Trust Equity 2,453,894 2,365,728
------------ -----------
Total Liabilities and Trust Equity $ 5,733,305 $ 8,156,720
============ ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL & INDUSTRIAL TRUST
Statements of Revenue and Expenses For the
Years Ended December 31, 1996 and 1995
1996 1995
----------- ------------
<S> <C> <C>
Revenue
Premiums earned $ 2,077,351 $ 5,659,925
Premiums ceded (89,860) (335,973)
------------ ------------
Net premiums earned 1,987,491 5,323,952
Investment income 297,076 328,027
Net realized gains and losses on securities available-for-sale (37,286) (159,557)
Other (422,850) 0
------------ -----------
Total Revenue 1,824,431 5,492,422
============ ==========
Expenses
Loss and loss adjustment expenses 916,592 2,448,722
Service company fees 299,322 626,332
Regulatory fees 28,548 30,858
General expenses 450,959 438,224
----------- ----------
Total Expenses 1,695,421 3,544,136
----------- ----------
Excess Revenue over Expenses
Before Income Tax Provision 129,010 1,948,286
Provision for income tax 98,768 643,660
----------- ----------
Excess Revenue over Expenses $ 30,242 $ 1,304,626
=========== ============
</TABLE>
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Statements of Changes in Trust Equity For the Years Ended
December 31, 1996 and 1995
1996 1995
---------- ----------
Trust Equity - Beginning of Year $2,365,728 $1,023,330
Excess Revenue over Expenses 30,242 1,304,626
Change in net unrealized loss on
securities available for sale
net of change in deferred taxes 57,924 37,772
----------- ----------
Trust Equity - End of Year $2,453,894 $2,365,728
========== ==========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Statements of Cash Flows For the Years
Ended December 31, 1996 and 1995
1996 1995
----------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities
Premiums collected $ 2,688,450 $ 7,034,172
Losses and loss adjustment expenses paid (1,748,772) (2,456,050)
Refunds and premium adjustments paid (449,415) (297,576)
Administrative expenses paid (1,056,948) (1,463,647)
Income taxes paid (625,678) (1,012,930)
Investment income received 335,402 225,407
Net (increase) decrease in trading securities 429,528 0
Interest paid (855) (43,037)
----------- -----------
Net Cash Provided by Operating Activities (428,288) 1,986,339
----------- -----------
Cash Flows From Investing Activities
Proceeds from sales of available-for-sale securities 3,185,627 1,139,184
Purchase of available-for-sale securities (2,631,979) (1,434,328)
Proceeds from maturities of held-to-maturity securities 0 2,882,300
Purchases of held-to-maturity securities 0 (5,540,465)
Capital expenditures (751) (2,991)
----------- -----------
Net Cash Provided by Investing Activities 552,897 (2,956,300)
----------- -----------
Cash Flows From Financing Activities
Principal payments under capital lease obligations (4,942) (6,235)
----------- -----------
Net Cash Used in Financing Activities (4,942) (6,235)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 119,667 (976,196)
Cash and Cash Equivalents at Beginning of Year 1,240,298 2,216,494
----------- -----------
Cash and Cash Equivalents at End of Year $ 1,359,965 $ 1,240,298
=========== ===========
Continued
<FN>
See accompany notes and accountant's report.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Statements of Cash Flows (Continued) For
the Years Ended December 31, 1996 and 1995
Reconciliation of net income to net cash provided 1996 1995
----------------- -----------------
by Operating Activities
<S> <C> <C>
Net Income $ 30,242 $ 1,304,626
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,818 3,424
(Gain) or loss on sale of investments 460,136 159,557
Decrease in trading securities 429,528 0
Decrease in premiums receivable 1,337,030 1,070,626
Decrease (increase) in prepaid expenses (19,176) 158,981
Decrease (increase) in accrued interest receivable 38,326 (90,736)
Increase in notes and other receivables (109,860) 0
Amortization of bond premium (discount) 12,646 (11,884)
Decrease in unpaid losses and loss adjustment expenses (832,180) (7,328)
Increase (decrease) in unearned premiums (1,466,279) 134,256
Decrease in accounts payable and accrued expenses (151,472) (365,914)
Increase in premium adjustment reserve 384,863 0
Decrease in income tax liability (546,910) (369,269)
----------- -----------
Net cash provided by operating activities ($ 428,288) $ 1,986,339
=========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 1: Description and Operation of the Trust
The Delta Agricultural and Industrial Trust was formed under a Trust Agreement,
dated August 1, 1991, between the Delta Council, a Mississippi nonprofit
corporation and the Board of Trustees of Delta Agricultural and Industrial
Trust.
The Trust, which is an entity subject to Federal and Mississippi Income Tax, was
created to take advantage of Section 71-3-75 (3) of the Mississippi Code of
1972, as amended, which allows employers to form a pool for the purpose of
self-insuring their liabilities under the Mississippi Workers' Compensation Law,
versus purchasing insurance coverage from a commercial insurance company. The
primary purpose of the Trust has been to provide its members with a source of
consistent Workers Compensation insurance coverage at reasonable rates,
regardless of the cyclical swings of the commercial insurance market. As a
result of forming the Trust, members have the benefit of self-insurance while at
the same time spreading the risk of self insurance among a group of employers.
While the primary purpose of the Trust is to provide workers compensation
coverage to its members on a consistent basis at a reasonable price rather than
the generation of profits, the Trustees of the Trust recognize the importance of
operating in such a manner that will yield positive operating results. The
Trustees believe that as long as the Trust operates in a profitable manner, its
ability to service the members of the Trust remains strong.
Each member's contribution of funds to the Trust is computed similarly to the
method employed by commercial insurance companies in determining premium rates.
However, should the Trust be unable to sufficiently discharge all of its
obligations, it would assess the members amounts needed to make up the
deficiency. While the Trust has never assessed any of its members as a result of
a deficiency, the members of the Trust are jointly and severally liable for the
obligations of the trust.
Due to changes in the Mississippi workers compensation market in early 1996, the
Trust determined that the interests of its members would best be served by
entering into an arrangement with a commercial insurance company whereby the
Trust would discontinue writing coverage for its members effective July 1, 1996
and would encourage its members to move their workers' compensation insurance to
the commercial carrier. Consequently the Trust had no premium revenue for the
period July 1 through December 31, 1996. The Trust, or any successor to the
Trust may, at its discretion, begin writing workers compensation for its members
again at anytime.
In conjunction with the transfer of the Trust's insurance operation to a
commercial carrier, management of the Trust began the process of forming a stock
insurance company with the
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
objective of allowing members of the Trust to become shareholders in the stock
company. Under the plan, electing members would receive stock in the new company
with a book value equivalent to the book value in the Trust at the date of
conversion. The Plan also provides for the elimination of the joint and several
liability of its members. As of the balance sheet date, this process was not
complete.
Note 2: Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The Significant accounting policies
used to prepare the financial statements are summarized below:
Trading Securities
Bonds, notes, common stocks and mutual fund shares held principally for resale
in the near term are classified as trading account securities and recorded at
their fair values. Realized and unrealized gains and losses on trading account
securities are included in other income.
Securities Held-to-Maturity
Bonds, notes and certificates of deposit (with maturities of more than three
months) for which the Trust has the intent and ability to hold to maturity are
reported at amortized cost, adjusted for amortization of premiums or discounts
and other than temporary declines in fair value.
Securities Available-for-Sale
Bonds, notes, common stock and certificates of deposit (with maturities of more
than three months) not classified as either trading or held-to-maturity are
reported at fair value, adjusted for other than temporary declines in fair
value, with unrealized gains and losses excluded from losses and reported as a
separate component of trust equity. Realized gains and losses are determined on
the specific identification method.
Cash Equivalents
For the purpose of presentation in the Trust's statements of cash flows, cash
equivalents are short-term, highly liquid investments that are both (a) readily
convertible to known amounts of cash and (b) so near to maturity that they
present insignificant risk of changes in value due to changing interest rates.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 2: Summary of Significant Accounting Policies (continued)
Premium Revenue Recognition
Insurance premiums are recognized as revenue on a pro rata basis over the policy
term. The portion of premiums that will be earned in the future are deferred and
reported as unearned premiums. In determining premium rates, the Trust begins
with rates established by NCCI (National Council of Commissioners of Insurance),
determined by a prescribed worker classification code. The Trust then applies an
experience modifier that may either increase, decrease or make no change to the
NCCI rate based on an individual employer's claims history. To this modified
rate, the Trust then applies a self-insured discount rate of fifteen percent
(15%). After calculating the self-insured modified premium, a Premium Volume
discount, as specified by NCCI, is applied based on the premium level of the
insured to arrive at the total discounted premium amount.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the reinsured policy. Amounts due from
reinsurers are shown as reinsurance receivables, net of uncollectible amounts on
the balance sheets. Liabilities for losses and loss adjustment expenses are not
reduced by the amounts receivable from reinsurers. Amounts ceded to reinsurer's
are shown as a reduction of earned premium on the statements of revenue.
Capital Equipment Leases
Certain assets of the Trust were acquired under capital lease arrangements. Such
assets are recorded at their original cost and depreciated under the
straight-line method over the estimated useful lives of the respective assets.
Depreciation expense is included in "General Expenses".
Policy Acquisition Costs
All Trust member contracts renew annually on a calendar year basis.
Consequently, there are ordinarily no unamortized policy acquisition costs at
December 31 to be presented on the balance sheet.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 2: Summary of Significant Accounting Policies (continued)
Insurance Liabilities
The liability for losses and loss-adjustment expenses includes an amount
determined from loss reports and individual cases and an amount, based on past
experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates and, while management believes that the amount is
adequate, the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing the
resulting liability are continually reviewed and any adjustments are reflected
in earnings currently.
Income Taxes
Income tax provisions are based on the asset and liability method. A deferred
tax asset or liability is provided for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Such differences are related principally to the unrealized loss in
the market value of available-for-sale securities.
Note 3: Investments
Major categories of net investment income are summarized as follows:
1996 1995
------------ --------
Fixed Maturities $169,037 $180,645
Equity Securities 105,291 128,638
Short-term Investments 22,748 18,744
----------- ----------
Total $297,076 $328,027
======== ========
The aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses, and amortized cost for available-for-sale and held-to-maturity
securities by major security type at December 31, 1996 and 1995 are as follows:
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 3: Investments (continued)
<TABLE>
<CAPTION>
Available-for-Sale Securities as of December 31, 1996 and 1995
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Bank certificates of
deposit $ 524,166 $ 889 $ 2,915 $ 522,140
Obligations of states and
political subdivisions 626,574 13 7,223 619,364
---------- ---------- ---------- ----------
Total $1,150,740 $ 902 $ 10,138 $1,141,504
========== ========== ========== ==========
</TABLE>
<TABLE>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Equity securities $ 2,580,183 $ 1,026 $ 111,517 $ 2,469,692
----------- ------------ ---------- -----------
Total $ 2,580,183 $ 1,026 $ 111,517 $ 2,469,692
=========== ============ ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities as of December 31, 1996 and 1995
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of the
U.S. Government $ 98,966 $ 0 $ 944 $ 98,022
Bank certificates of
deposit 423,918 0 0 423,918
------------ ---------------------------------- ------------
Total $ 522,884 $ 0 $ 944 $ 521,940
=========== ================= ============= ==========
</TABLE>
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 3: Investments (continued)
<TABLE>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of the
U.S. Government $ 94,829 $ 0 $ 1,758 $93,071
Bank certificates of
deposit 1,973,896 1,210 0 1,975,106
Obligations of states
and political subdivisions 178,420 256 0 178,676
---------- ---------- ---------- ----------
Total $2,247,145 $ 1,466 $ 1,758 $2,246,853
========== ========== ========== ==========
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities were:
1996 1995
--------- -------
Gross realized gains:
Fixed maturities $ 2,407 $ 7,481
Equity securities 30,502 14,192
-------- ----------
Total $ 32,909 $ 21,673
======== ==========
Gross realized losses:
Bank certificates of deposit $ 6,039 0
Equity securities 64,155 181,231
-------- ---------
Total $70,194 $181,231
======= ========
The Trust also realized net losses in trading securities in the amount of
$415,929 in 1996. Trading security gains and losses are included in "Other
Income". Additionally, as a result of transferring certain securities from the
available-for-sale category to the trading category at December 31, 1996, $6,921
in realized losses were included in "Other Income".
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 3: Investments (continued)
The scheduled maturities of available-for-sale and held-to-maturity securities
at December 31, 1996 were as follows:
Held-to-Maturity Securities Amortized
Cost Fair Value
Due in one year or less $522,884 $522,010
-------- --------
Total $522,884 $522,010
======== ========
Available-for-Sale Securities: Amortized
Cost Fair Value
Due in one year or less $181,350 $181,533
Due after one year through five years 448,884 446,497
Due after five years through ten years 520,505 513,474
------- -------
Total $ 1,150,739 $1,141,504
============= ==========
Because their likelihood of sale increased, securities with an amortized cost of
$948,293 previously classified as held-to-maturity were transferred to the
available-for-sale category. The fair value of such securities at the time of
transfer was $948,099, creating an unrealized loss of $194. This
reclassification was made as a result of the arrangement with the commercial
insurance carrier (described in Note 1) to begin writing coverage for Trust
members effective July 1, 1996. As a result of this arrangement, the Trust would
not receive any premium income for an unknown period of time, creating less cash
available for the payment of claims and other Trust expenses. In order to have
sufficient cash to pay Trust expenses, it is possible that certain securities
the trust planned to hold until maturity may have to be sold prior to their
maturity. Consequently, these investments have been reclassified to the
available-for-sale category. Only investments with a maturity of less than one
year remain in the held-to-maturity category. This reclassification has been
made as a result of an event that could not be anticipated in the previous year
and that was isolated, non-recurring and unusual for the Trust in accordance
with paragraph 8 of SFAS 115.
There were no securities that were non-income producing for the year ended
December 31, 1996.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 4: Reserve for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses at December 31, 1996 and 1995
consisted of the following:
1996 1995
---------- ---------
Case-basis reserves $2,053,357 $2,383,549
Incurred but unreported claims 727,763 1,234,374
Service company fees 53,100 96,000
---------- ----------
Total Reserves $2,834,220 $3,713,923
========== ==========
Included in case-basis reserves are amounts that are to be paid by a reinsurer.
The amounts due from the reinsurer are $660,986 and $708,509 in 1996 and 1995
respectively.
While the excess carrier has made all required payments through December 31,
1996, the Trust retains the ultimate liability for the payment of claims.
Additionally, the reserves have been discounted using an average interest rate
of 5.5% per annum and using the Trust's historical payout pattern combined with
national payment trends.
Note 5: Reserve for Premium Adjustment
The premium amounts paid by members of the Trust are determined initially each
policy year from member provided estimates of their annual payroll by worker
classification code. The member is then subject to an audit of their payroll
data to determine the accuracy of their estimate. Any necessary premium
adjustments are made based on audited payroll information. For the period ended
June 30, 1996, management elected to audit less than 100% of the Trust
membership. Due to the limited number of audits performed, a reserve was
established for premium adjustments that management estimates could be due in
the event members who were not audited request such an audit.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 6: Minimum Lease Payments
The Trust leases certain business equipment that are treated as capital leases
in accordance with SFAS-13. Following are the present values of the minimum
lease payments under these leases as of December 31, 1996 and 1995.
1996 1995
-------- ------
1996 $6,095
1997 3,172 2,450
1998 1,208 1,174
------ ------
$4,380 $9,719
====== ======
Note 7: Excess Insurance
The Trust acquired excess coverage insurance for accidents occurring during the
period January 1, 1996 through June 30, 1996. The specific coverage limits the
Trust's liability to $350,000 per claim incurred during this period. For claims
incurred prior to January 31, 1992, the claim retention level was $200,000 with
a maximum benefit of $10,000,000. Claims incurred from February 1, 1992 through
July 31, 1992 have a retention level of $250,000 and a maximum benefit of
$10,000,000. No claims are expected to exceed the maximum benefit. Although the
excess carrier has made all required payments through December 31, 1996, the
Trust retains the ultimate liability for the payment of claims.
The premium paid by the Trust for excess insurance is based on the manual
premium of the Trust. Such manual premium is estimated at the beginning of the
year and a premium payment made based on a full year's estimated manual premium.
However, since the Trust discontinued writing coverage effective July 1, 1996
the Trust was entitled to a refund of a portion of the annual premium it paid
for excess insurance for 1996. Based on the 1996 manual premium of the Trust, an
overpayment of $89,860 exists as of December 31, 1996.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 8: Income Taxes
The Trust is a taxable entity subject to Internal Revenue Code Section 831 and
related provisions. The provision for income tax for 1996 and 1995 from
continuing operations consists of the following:
1996 1995
---- ----
Current Income Tax
Federal $ 81,142 $549,712
State 17,626 93,948
Deferred 0 0
-------- --------
TOTAL $ 98,768 $643,660
======== ========
The effective income tax rates varied from the U.S. federal statutory rate for
the years ended December 31 as follows:
1996 1995
------- -----
Federal statutory income tax rate 34.0% 34.0%
Unused net capital loss 65.6 3.6
Dividends received deduction (12.1) (2.0)
Tax exempt interest (6.1) (1.9)
State income taxes, net of federal
benefit and other (18.5) (5.5)
Effective income tax rate 62.9% 28.2%
==== ====
The Trust had capital loss carryforwards at December 31, 1996 and 1995 of
$1,037,257 and $577,121 respectively. These loss carryforwards can only be
utilized if the Trust experiences future capital gains from the sale of
investments. The trust made changes to its investment policy in 1996,
discontinuing the practice of acquiring financial instruments in anticipation of
realizing capital gains on the sale of such investments. As a result of this
change, it is unlikely that these loss carryforwards will be utilized.
Consequently, no deferred tax benefit or related deferred tax asset has been
recognized in the financial statements for the eventual use of such loss
carryforwards. If not used against future capital gains, these capital loss
carryforwards will expire beginning in 1999 and extending through 2001.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
Note 8: Income Taxes (continued)
The components of the net deferred tax (asset) liability at December 31 were as
follows:
1996 1995
----------- --------
Deferred tax assets:
Unrealized Loss on available-for-sale
Securities $ 0 $ 43,331
Valuation allowance 0 0
-------- --------
Total deferred tax asset 0 $ 43,331
-------- --------
Deferred tax liabilities 0 0
-------- --------
Net deferred tax (asset) liability $ 0 $(43,331)
======== ========
The 1995 balance sheet of the Trust presents a deferred tax asset in the amount
of $43,331. This amount reflects what management believed was a temporary
unrealized decline in the market value of its securities available for sale. The
amount reflects the future tax benefit the Trust would have received if such
securities were sold at the market value at that date. This amount was also
applied to the gross decline in market value of investments to arrive at the net
unrealized depreciation of securities available-for-sale, net of deferred taxes.
It was determined in 1996 that the possibility of the Trust being able to
utilize the losses resulting from such a sale would be remote and therefore no
deferred tax benefit was recorded at December 31, 1996.
As described in Note 1, the Trust discontinued writing business effective July
1, 1996, reducing taxable income for 1996 significantly below 1995 levels.
Estimated income tax payments for the first half of 1996 were based on Income
Tax paid in 1995, consequently an overpayment was created. At December 31, 1996,
the Trust was due a refund of $134,488 from the Internal Revenue Service and
$18,374 from the State of Mississippi.
Note 9: Notes Receivable
At December 31, 1996 the balance sheet of the Trust reflects a note receivable
of $20,000. Additionally, $407 of accrued interest due on this note is included
in accrued interest receivable. This note is due on demand from Stoneville
Insurance Company. Under the plan described in Note 1, Stoneville would be the
successor of the Trust in its conversion to a stock insurance company.
Note 9: Related Party Transactions (continued)
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Years Ended December 31, 1996 and 1995
The Trust maintained an arrangement with Delta Administration, Inc. (Formerly
Delta Administration) whereby Delta Administration provides administration
services to the Trust. Harry Vickery is the President of Delta Administration,
Inc. and will also be the president of Stoneville Insurance Company, the planned
successor to the Trust in its conversion to a stock insurance company. Delta
Administration, Inc.'s fee for providing such services was based upon 1.5% of
the manual premium of the Trust through June 30, 1996. Effective July 1, 1996,
the fee was changed to $3,800 per month. The fee earned by Delta Administration,
Inc. was $74,207 and $111,991 in 1996 and 1995, respectively. Delta
Administration, Inc. is also compensated for their services by the commercial
insurance carrier participating in the Commercial Program described in Note 1.
The Trust engaged the services of Sedgwick of Mississippi to administer claims
for the Trust. Sedgwick's fee was based upon 7.2% of the manual premium of the
Trust through June 30, 1996. A portion of this fee was used to compensate the
marketing agency of the Trust's insurance program, Mississippi Risk Management,
Inc. The President of Mississippi Risk Management, Inc. will become an officer
of Stoneville Insurance Company, the successor to the Trust under the Plan of
Conversion described in Note 1.
Note 10: Concentration of Credit Risk
At December 31, 1996 the Trust had cash account balances in excess of the
federally insured limit at its primary depository institution.
At December 31, 1995 premiums receivable were due from various members of the
Trust. Because only locations in Mississippi are eligible for coverage, the
majority of the members conduct business exclusively in the state of
Mississippi. Additionally, reinsurance receivables of $660,986 and $708,509 in
1996 and 1995 respectively, are due from one reinsurer.
Note 11: Contingencies
In the normal course of operations, the Trust is involved in litigation related
to certain claims. In the opinion of management, the reserve for losses and loss
adjustment expenses is sufficient to cover these claims. Therefore, it believes
the disposition of these matters will not have a material adverse effect on the
Trust's financial position.
<PAGE>
<TABLE>
<CAPTION>
Delta Agricultural and Industrial Trust
Schedule I - Summary of Investments
Other than Investments in Related Parties
December 31, 1996 and 1995
Balance
1996 Sheet
Type of Investment Cost Value Amount
---------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $98,966 $98,022 $98,966
States, municipalities and
political subdivisions 626,574 619,364 619,364
Certificates of deposit 948,084 946,058 946,058
-------------------------------------------------------------
Total fixed maturities 1,673,624 1,663,444 1,664,388
-------------------------------------------------------------
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other 1,696,944 1,696,944 1,696,944
-------------------------------------------------------------
Total investments $3,370,568 $3,360,388 $3,361,332
=============================================================
1995
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $94,829 $93,071 $94,829
States, municipalities and
political subdivisions 178,420 178,676 178,420
Certificates of deposit 1,973,896 1,975,106 1,973,896
-------------------------------------------------------------
Total fixed maturities 2,247,145 2,246,853 2,247,145
=============================================================
Equity securities
Common stocks:
Industrial, miscellaneous
and all other 2,580,183 2,469,692 2,469,692
-------------------------------------------------------------
Total investments $4,827,328 $4,716,545 $4,716,837
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Delta Agricultural and Industrial Trust
Schedule III - Supplementary Insurance Information
December 31, 1996 and 1995
Deferred Future Policy Other Policy Benefits, Amortization
Policy Benefits, Claims and Net Claims, loss of Deferred Other
Acquistion Claims and Unearned Benefits Premium Investment and Settlem. Policy Operating Premiums
Segment Costs Loss Exp. Premiums Payable Revenue Income Expenses Acq. Costs Expenses Written
------------------ ---------------------------------- ----------------------- ------------- ------------------------
1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
See Note $0 $2,834,220 $0 $0 $1,987,491 $297,076 $1,215,914 $0 $479,507 $2,077,351
------------------ ---------------------------------- ----------------------- ------------- ------------------------
1995
See Note $0 $3,713,923 $1,466,279 $0 $5,323,952 $328,027 $3,075,054 $0 $469,082 $5,659,925
------------------ ---------------------------------- ----------------------- ------------- ----------------------
<FN>
Note: Delta Agricultural and Industrial Trust wrote only Workers' Compensation
Insurance during 1995 and 1996. Therefore, there were no segments to report.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Delta Agricultural and Industrial Trust
Schedule IV - Reinsurance
December 31, 1996 and 1995
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed to
Amount Companies Companies Amount Net
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums
Property and Liability
Insurance*
1996 $2,077,351 $89,860 $0 $1,987,491 0.00%
=====================================================================================
1995 $5,659,925 $335,973 $0 $5,323,952 0.00%
=====================================================================================
<FN>
* Workers' Compensation
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Delta Agricultural and Industrial Trust
Schedule V - Valuation and Qualifying Accounts
December 31, 1996 and 1995
Additions
---------------------------------------------
Balance Charged Charged Balance
Beginning of to Costs to Other End of
Description Period & Expense Accounts Deductions Period
----------------------- ------------------------------ -------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Allowance deducted from asset to which it applies:
Allowance for doubtful
accounts:
Year ended December
31, 1995 (Note A) $97,332 - - $80,555 $16,777
Year ended December
31, 1996 (Note A) 16,777 - - 16,777 0
Allowance for Unrealized
losses on securities
available-for-sale
Year ended December
31, 1995 (Note C) 158,987 - - 48,496 110,491
Year ended December
31, 1996 (Note B) 110,491 - - 101,255 9,236
<FN>
Note A - Uncollected receivables written off net of recoveries.
Note B - Loss recognized on securities sold or reclassified as "Trading
Securities".
Note C - Loss recognized on securities sold and write-up of marketable
securities previously written down.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Delta Agricultural and Industrial Trust
Schedule VI - Supplemental Information
Concerning Property-Casualty Insurance Operations
December 31, 1996 and 1995
Claims and Claim
Deferred Reserve for Adjustment Expenses Amortization Paid Claims
Affiliation Policy Unpaid Claims Net Incurred Related to of Deferred and Claim
------------------
with Acquistion and Claim Unearned Earned Investment Current Prior Policy Acq. Adjustment Premiums
Registrant Costs Adj. Expense Discount Premium Premiums Income Year Years Costs Expenses Written
- ----------------------------------------------------------- ----------------------------------------------- -----------------------
1996
<S> <C> <C> <C> <C><C> <C> <C> <C> <C> <C> <C>
Registrant $0 $2,834,220 $237,894 $0 $1,987,491 $297,076 $959,032 ($42,440) $0 $1,796,295 $2,077,351
-- ----------------------------------------- -------------------------------------------------------------- --------
1995
Registrant $0 $3,713,923 $251,104 $1,466,279 $5,323,952 $328,027$2,558,087($109,365) $0 $2,583,968 $5,659,925
<FN>
Note: Delta Agricultural and Industrial Trust has no subsidiaries.
</FN>
</TABLE>
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Balance Sheets
June 30, 1997
1997 1996
--------------- ----------------
<S> <C> <C>
Assets
Investments:
Trading securities (at fair value)
Equity securities $247 $2,405,721
Securities available-for-sale (at fair value)
Fixed maturities (amortized cost - $1,163,781 and $2,324,472) 1,157,084 2,293,551
Securities held-to-maturity (at amortized cost)
Fixed Maturities (fair value - $586,816 and $195,053) 587,732 196,898
--------------- ----------------
Total Investments 1,745,063 4,896,170
Cash and Cash Equivalents 1,878,940 881,582
Premiums receivable net of uncollectible amount 0 41,445
Notes receivable 20,000 0
Accrued interest receivable 41,356 63,085
Reinsurance receivables, net of uncollectible amounts 660,986 660,986
Excess insurance premium overpayment 89,860 89,860
Other receivables 9,958 0
Capital equipment leases at cost less
accumulated depreciation of $12,087 and $8,168 11,107 15,926
Prepaid expenses 24,665 21,636
Income taxes receivable 190,279 73,114
Deferred Tax Asset 40,489 0
Other assets 575 575
--------------- ----------------
Total Assets $4,713,278 $6,744,379
=============== ================
Liabilities and Trust Equity
Liabilities
Reserve for losses and loss adjustment expenses $1,954,341 $3,990,583
Unearned premiums 0 0
Reserve for premium adjustment 324,672 366,936
Accounts payable and accrued liabilities 46,408 4,883
Income taxes payable 0 0
Capital lease obligations 3,868 5,956
--------------- ----------------
Total Liabilities 2,329,289 4,368,358
--------------- ----------------
Trust Equity
Retained earnings 2,390,686 2,406,942
Net unrealized loss on securities
available for sale, net of deferred taxes (6,697) (30,921)
--------------- ----------------
Total Trust Equity 2,383,989 2,376,021
--------------- ----------------
Total Liabilities and Trust Equity $4,713,278 $6,744,379
=============== ================
</TABLE>
See accompanying notes and accountant's report.
<TABLE>
<CAPTION>
DELTA AGRICULTURAL & INDUSTRIAL TRUST
Statements of Revenue and Expenses For the
Six Months Ended June 30, 1997
1997 1996
----------------- -----------------
<S> <C> <C>
Revenue
Premiums earned $0 $2,127,334
Premiums ceded 0 (89,860)
----------------- -----------------
Net premiums earned 0 2,037,474
Investment income 91,444 147,583
Net realized gains and losses on securities available-for-sale 0 983
Other (9,115) (286,085)
----------------- -----------------
Total Revenue 82,329 1,899,955
----------------- -----------------
Expenses
Loss and loss adjustment expenses 0 1,248,334
Service company fees 0 299,322
Regulatory fees 11,502 14,274
General expenses 183,760 241,455
----------------- -----------------
Total Expenses 195,262 1,803,385
----------------- -----------------
Excess Revenue over Expenses
Before Income Tax Provision (112,933) 96,570
Provision (benefit) for income taxes (all current) (40,489) 122,516
----------------- -----------------
Excess Revenue over Expenses ($72,444) ($25,946)
================= =================
</TABLE>
See accompanying notes and accountant's report
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Statements of Changes in Trust Equity
For the Six Months Ended June 30, 1997
1997 1996
----------------- -----------------
<S> <C> <C>
Trust Equity - Beginning of Year $2,453,894 $2,365,728
Excess Revenue over Expenses (72,444) (25,946)
Change in net unrealized loss on
securities available for sale
net of change in deferred taxes 2,539 36,239
----------------- -----------------
Trust Equity - End of Period $2,383,989 $2,376,021
================= =================
</TABLE>
<PAGE>
See accompanying notes and accountant's report.
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Statements of Cash Flows For the Six
Months Ended June 30, 1997
1997 1996
------------------ -------------------
<S> <C> <C>
Cash Flows From Operating Activities
Premiums collected $0 $1,956,640
Losses and loss adjustment expenses paid (879,879) (971,674)
Refunds and premium adjustments paid (60,241) 0
Administrative expenses paid (208,011) (847,156)
Income taxes paid (37,417) (589,678)
Investment income received 105,953 167,011
Net (increase) decrease in trading securities 1,680,339 (49,168)
Interest paid 0 (634)
------------------ -------------------
Net Cash Provided by Operating Activities 600,744 (334,659)
------------------ -------------------
Cash Flows From Investing Activities
Proceeds from sales of available-for-sale securities 0 619,545
Purchase of available-for-sale securities 0 (1,054,025)
Purchases of held-to-maturity securities (589,285) (100,000)
Transfer of held-to-maturity security to cash equivalent 507,686 515,000
Capital expenditures 0 (1,553)
------------------ -------------------
Net Cash Provided by Investing Activities (81,599) (21,033)
------------------ -------------------
Cash Flows From Financing Activities
Principal payments under capital lease obligations (170) (3,024)
------------------ -------------------
Net Cash Used in Financing Activities (170) (3,024)
------------------ -------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 518,975 (358,716)
Cash and Cash Equivalents at Beginning of Year 1,359,965 1,240,298
------------------ -------------------
Cash and Cash Equivalents at End of Period $1,878,940 $881,582
================== ===================
Continued
</TABLE>
<PAGE>
See accompanying notes and accountant's report
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Statements of Cash Flows (Continued) For
the Six Months Ended June 30, 1997
1997 1996
-----------------------------------------------
Reconciliation of net income to net cash provided
by Operating Activities
<S> <C> <C>
Net Income ($72,444) ($25,946)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,919 2,409
(Gain) or loss on sale of investments 0 (983)
Decrease (increase) in trading securities 1,696,697 (49,168)
Unrealized loss on trading securities 0 286,085
Decrease in premiums receivable 0 1,295,585
Decrease (increase) in prepaid expenses (2,867) (19,014)
Decrease (increase) in accrued interest receivable 11,054 27,651
Increase in notes and other receivables (9,958) 0
Amortization of bond premium (discount) 2,201 8,382
Decrease (increase) in reserve for in unpaid loss (gain) and loss (879,879) 276,660
adjustment expenses
Increase (decrease) in unearned premiums 0 (1,466,279)
Decrease in accounts payable and accrued expenses (9,882) (202,879)
Increase (decrease) in premium adjustment reserve (60,191) 0
Decrease in income tax liability (77,906) (467,162)
-----------------------------------------------
Net cash provided by operating activities $600,744 ($334,659)
===============================================
</TABLE>
<PAGE>
See accompanying notes and accountant's report.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 1: Description and Operation of the Trust
The Delta Agricultural and Industrial Trust was formed under a Trust Agreement,
dated August 1, 1991, between the Delta Council, a Mississippi nonprofit
corporation and the Board of Trustees of Delta Agricultural and Industrial
Trust.
The Trust, which is an entity subject to Federal and Mississippi Income Tax, was
created to take advantage of Section 71-3-75 (3) of the Mississippi Code of
1972, as amended, which allows employers to form a pool for the purpose of
self-insuring their liabilities under the Mississippi Workers' Compensation Law,
versus purchasing insurance coverage from a commercial insurance company. The
primary purpose of the Trust has been to provide its members with a source of
consistent Workers Compensation insurance coverage at reasonable rates,
regardless of the cyclical swings of the commercial insurance market. As a
result of forming the Trust, members have the benefit of self-insurance while at
the same time spreading the risk of self insurance among a group of employers.
While the purpose of the Trust is to provide workers compensation coverage to
its members on a consistent basis at a reasonable price rather than the
generation of profits, the Trustees of the Trust recognize the importance of
operating in such a manner that will yield positive operating results. The
Trustees believe that as long as the trust operates in a profitable manner, its
ability to service the members of the Trust remains strong.
Each member's contribution of funds to the Trust is computed similarly to the
method employed by commercial insurance companies in determining premium rates.
However, should the Trust be unable to sufficiently discharge all of its
obligations, it would assess the members amounts needed to make up the
deficiency. While the Trust has never assessed any of its members as a result of
a deficiency, the members of the Trust are jointly and severally liable for the
obligations of the Trust.
Due to changes in the Mississippi workers compensation market in early 1996, the
Trust determined that the interests of its members would best be served by
entering into an arrangement with a commercial insurance company whereby the
Trust would discontinue writing coverage for its members effective July 1, 1996
and would encourage its members to move their workers' compensation insurance to
the commercial carrier. Consequently the Trust has had no premium revenue since
June 30, 1996. The Trust, or any successor to the Trust may, at its discretion,
begin writing workers compensation for its members again at anytime.
In conjunction with the transfer of the Trust's insurance operation to a
commercial carrier, management of the Trust began the process of forming a stock
insurance company with the objective of allowing members of the Trust to become
shareholders in the stock company.
Under the plan, electing members would receive stock in the new
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 1: Description and Operation of the Trust (continued)
company with a book value equivalent to the book value in the Trust at the date
of conversion. The Plan also provides for the elimination of the joint and
several liability of its members. As of the balance sheet date, this process was
not complete.
The financial statements include all adjustments which in the opinion of
management are necessary to make the financial statements not misleading.
Note 2: Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The Significant accounting policies
used to prepare the financial statements are summarized below:
Trading Securities
Bonds, notes, common stocks and mutual fund shares held principally for resale
in the near term are classified as trading account securities and recorded at
their fair values. Realized and unrealized gains and losses on trading account
securities are included in other income.
Securities Held-to-Maturity
Bonds, notes and certificates of deposit (with maturities of more than three
months) for which the Trust has the intent and ability to hold to maturity are
reported at amortized cost, adjusted for amortization of premiums or discounts
and other than temporary declines in fair value.
Securities Available-for-Sale
Bonds, notes, common stock and certificates of deposit (with maturities of more
than three months) not classified as either trading or held-to-maturity are
reported at fair value, adjusted for other than temporary declines in fair
value, with unrealized gains and losses excluded from losses and reported as a
separate component of trust equity. Realized gains and losses are determined on
the specific identification method.
Cash Equivalents
For the purpose of presentation in the Trust's statements of cash flows, cash
equivalents are short-term, highly liquid investments that are both (a) readily
convertible to known amounts of cash and (b) so near to maturity that they
present
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 2: Summary of Significant Accounting Policies (continued)
insignificant risk of changes in value due to changing interest rates.
Premium Revenue Recognition
Insurance premiums are recognized as revenue on a pro rata basis over the policy
term. The portion of premiums that will be earned in the future are deferred and
reported as unearned premiums. In determining premium rates, the Trust begins
with rates established by NCCI (National Council of Commissioners of Insurance),
determined by a prescribed worker classification code. The Trust then applies an
experience modifier that may either increase, decrease or make no change to the
NCCI rate based on an individual employer's claims history. To this modified
rate, the Trust then applies a self-insured discount rate of fifteen percent
(15%). After calculating the self-insured modified premium, a Premium volume
discount, as specified by NCCI, is applied based on the premium level of the
insured to arrive at the total discounted premium amount.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the reinsured policy. Amounts due from
reinsurers are shown as reinsurance receivables, net of uncollectible amounts on
the balance sheets. Liabilities for losses and loss adjustment expenses are not
reduced by the amounts receivable from reinsurers. Amounts ceded to reinsurers
are shown as a reduction of earned premium on the statements of revenue.
Capital Equipment Leases
Certain assets of the Trust were acquired under capital lease arrangements. Such
assets are recorded at their original cost and depreciated under the
straight-line method over the estimated useful lives of the respective assets.
Depreciation expense is included in "General Expenses".
Policy Acquisition Costs
Since the Trust has not had any insurance contracts in force since June 30,
1996, as a result of the commercial program described in Note 1, no unamortized
policy acquisition costs existed at June 30, 1997. Additionally, during 1996,
insured's were billed quarterly for premiums. Consequently, there were also no
unamortized policy acquisition costs as
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 2: Summary of Significant Accounting Policies (continued)
of June 30, 1996.
Insurance Liabilities
The liability for losses and loss-adjustment expenses includes an amount
determined from loss reports and individual cases and an amount, based on past
experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates and, while management believes that the amount is
adequate, the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing the
resulting liability are continually reviewed and any adjustments are reflected
in earnings currently.
Income Taxes
Income tax provisions are based on the asset and liability method. A deferred
tax asset or liability is provided for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
Note 3: Investments
Major categories of net investment income are summarized as follows:
1997 1996
------------ --------
Fixed Maturities $ 81,980 $ 97,279
Equity Securities 0 40,036
Short-term Investments 9,464 10,268
-------- --------
Total $ 91,444 $147,583
======== ========
The aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses, and amortized cost for available-for-sale and held-to-maturity
securities by major security type at June 30, 1997 and 1996 are as follows:
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 3: Investments (continued)
<TABLE>
<CAPTION>
Available-for-Sale Securities as of June 30, 1997 and 1996
June 30, 1997
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Bank certificates of
deposit $ 538,019 $ 606 $ 2,663 $ 535,962
Obligations of states and
political subdivisions 625,762 558 5,198 621,122
---------- ---------- ---------- ----------
Total $1,163,781 $ 1,164 $ 7,861 $1,157,084
========== ========== ========== ==========
</TABLE>
<TABLE>
June 30, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Bank certificates of
deposit $ 1,697,086 $ 10,910 $ 13,028 $ 1,685,148
Obligations of states and
political subdivisions 627,386 0 18,983 608,403
------------ --------------- ------------- -------------
Total $ 2,324,472 $ 1,090 $ 32,011 $ 2,293,551
=========== ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities as of June 30, 1997 and 1996
June 30, 1997
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Obligations of the
U.S. Government
Corporations and
Agencies $ 587,732 $ 0 $ 916 $ 586,816
----------- ----------------- --------------- -----------
Total $ 587,732 $ 0 $ 916 $ 586,816
=========== ================= =============== ===========
</TABLE>
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 3: Investments (continued)
<TABLE>
June 30, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of the
U.S. Government $ 96,898 $ 0 $ 1,845 $ 95,053
Bank certificates of
deposit 100,000 0 0 100,000
-------- -------- -------- --------
Total $196,898 $ 0 $ 1,845 $195,053
======== ======== ======== ========
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities were:
1997 1996
--------- -------
Gross realized gains:
Fixed maturities $ 0 $ 2,253
---------- ---------
Total $ 0 $ 2,253
========== =========
Gross realized losses:
Fixed maturities $ 0 $ 1,270
---------- ---------
Total $ 0 $ 1,270
========== =========
The Trust also realized net losses in trading securities in 1996 and 1995 in the
amounts of $9,114 and $43,019 respectively. Trading security gains and losses
are included in "Other Income". Additionally, $243,067 of unrealized losses on
trading securities were included in "Other Income" for period ending June 30,
1996.
The scheduled maturities of available-for-sale and held-to-maturity securities
at June 30, 1997 were as follows:
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 3: Investments (continued)
Held-to-Maturity Securities Amortized
Cost Fair Value
Due in one to five years $201,967 $ 201,540
Due after ten years 385,765 $ 385,276
--------- ---------
Total $ 587,732 $ 586,816
========= =========
Available-for-Sale Securities: Amortized
Cost Fair Value
Due in one year or less $ 448,446 $ 448,695
Due after one year through five years 195,325 193,511
Due after five years through ten years 520,010 514,878
---------- ----------
Total $1,163,781 $1,157,084
========== ==========
There were no securities that were non-income producing for the twelve months
prior to June 30, 1997.
Note 4: Reserve for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses at June 30, 1997 and 1996
consisted of the following:
1997 1996
---------- ---------
Case-basis reserves $1,805,603 $2,660,209
Incurred but unreported claims 95,639 1,234,374
Service company fees 53,100 96,000
---------- ----------
Total Reserves $1,954,341 $3,990,583
========== ==========
Included in case-basis reserves are amounts that are to be paid by a reinsurer.
The amounts due from the reinsurer are $660,986 in 1997 and 1996.
While the excess carrier has made all required payments through June 30, 1997,
the Trust retains the ultimate liability for the payment of claims.
Additionally, the reserves have been discounted using an average interest rate
of 5.5% per annum and using the Trust's historical payout pattern combined with
national payment trends.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 5: Reserve for Premium Adjustment
The premium amounts paid by members of the Trust are determined initially each
policy year from member provided estimates of their annual payroll by worker
classification code. The member is then subject to an audit of their payroll
data to determine the accuracy of their estimate. Any necessary premium
adjustments are made based on audited payroll information. For the period ended
June 30, 1996, management elected to audit less than 100% of the Trust
membership. Due to the limited number of audits performed, a reserve was
established for premium adjustments that management estimates could be due in
the event members who were not audited request such an audit.
Note 6: Minimum Lease Payments
The Trust leases certain business equipment that are treated as capital leases
in accordance with SFAS-13. Following are the present values of the minimum
lease payments under these leases as of June 30, 1997 and 1996.
1997 1996
-------- ------
1996 $2,332
1997 $2,660 2,450
1998 1,208 1,174
-------- -------
$ 3,868 $5,956
======== ======
Note 7: Excess Insurance
The Trust acquired excess coverage insurance for accidents occurring during the
period January 1, 1996 through June 30, 1996. The specific coverage limits the
Trust's liability to $350,000 per claim incurred during this period. The reserve
for losses and loss adjustment expenses is shown net of expected recoveries on
this coverage. For claims incurred prior to January 31, 1992, the claim
retention level was $200,000 with a maximum benefit of $10,000,000. Claims
incurred from February 1, 1992 through July 31, 1992 have a retention level of
$250,000 and a maximum benefit of $10,000,000.
No claims are expected to exceed the maximum benefit. Although the excess
carrier has made all required payments through June 30, 1997, the Trust retains
the ultimate liability for the payment of claims.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 7: Excess Insurance (continued)
The premium paid by the Trust for excess insurance is based on the manual
premium of the Trust. Such manual premium is estimated at the beginning of the
year and a premium payment made based on a full year's estimated manual premium.
However, since the Trust discontinued writing coverage effective July 1, 1996
the Trust was entitled to a refund of a portion of the annual premium it paid
for excess insurance for 1996. Based on the 1996 manual premium of the Trust, an
overpayment of $89,860 exists as of June 30, 1997 and June 30, 1996.
Note 8: Income Taxes
The Trust is a taxable entity subject to Internal Revenue Code Section 831 and
related provisions. The provision for income tax for 1997 and 1996 from
continuing operations consists of the following:
1997 1996
---- ----
Current Income Tax Provision (Benefit)
Federal $(34,896) $107,000
State (5,593) 15,513
-------- --------
TOTAL $(40,489) $122,516
======== ========
The effective income tax rates varied from the U.S. Federal Statutory Rate for
the years ended December 31 as follows:
1997 1996
-------- ------
Federal Statutory Income Tax Rate 34.0% 34.0%
Unused net capital loss 2.7 100.3
Dividends received deduction,
Tax exempt interest, and other (5.8) (23.5)
----- ----
Effective income tax rate 30.90% 110.8%
====== =======
The Trust had capital loss carryforwards at December 31, 1996 and 1995 of
$1,037,257 and $577,121 respectively. These loss carryforwards can only be
utilized if the Trust experiences future capital gains from the sale of
investments. The Trust made changes to its investment policy in 1996,
discontinuing the practice of acquiring financial instruments in anticipation of
realizing capital gains on the sale of such investments. As a result of this
change, it is unlikely that these loss
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 8: Income Taxes (continued)
carryforwards will be utilized. Consequently, no deferred tax benefit or related
deferred tax asset has been recognized in the financial statements for the
eventual use of such loss carryforwards. If not used against future capital
gains, these capital loss carryforwards will expire beginning in 1999 and
extending through 2001.
The components of the net deferred tax (asset) liability at June 30 were as
follows:
1997 1996
-------- -------
Deferred tax assets: $40,489 $ 0
Net Operating loss carryback 0 0
------- -------
Total deferred tax asset 40,489 0
------- -------
Deferred tax liabilities 0 0
------- -------
Net deferred tax (asset) liability $40,489 $ 0
======= =======
The Trust had certain unrealized losses on securities available-for-sale which
ordinarily would create a deferred tax asset, the benefit from which would be
realized upon the sale of such securities. It was determined in 1996; however,
that the possibility of the Trust being able to utilize the losses resulting
from such a sale would be remote and therefore no deferred tax benefit was
recorded as of the balance sheet dates.
Note 9: Related Party Transactions
At June 30, 1997 the balance sheet of the Trust reflects a note receivable of
$20,000. Additionally, $995 of accrued interest due on this note is included in
accrued interest receivable. This note is due on demand from Stoneville
Insurance Company. Under the plan described in Note 1, Stoneville would be the
successor of the Trust in its conversion to a stock insurance company.
The Trust maintained a arrangement with Delta Administration, Inc. (Formerly
Delta Administration) whereby Delta Administration provides administration
services to the Trust. Harry Vickery is the President of Delta Administration,
Inc., and will also be the President of Stoneville Insurance Company, the
planned successor to the Trust in its conversion to a stock insurance company.
Delta Administration, Inc.'s fee for providing such services was based upon 1.5%
of the manual premium of the Trust through June 30, 1996. Effective July 1,
1996, the fee was changed to $3,800 per month. The fee earned by Delta
Administration, Inc. through June 30 was $51,407
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 9: Related Party Transactions (continued)
and $22,800 in 1997 and 1996 respectively. Delta Administration, Inc., is also
compensated for their services by the commercial insurance carrier participating
in the Commercial Program described in Note 1.
The Trust engaged the services of Sedgwick of Mississippi to administer claims
for the Trust. Sedgwick's fee was based upon 7.2% of the manual premium of the
Trust through June 30, 1996. A portion of this fee was used to compensate the
marketing agency of the Trust's insurance program, Mississippi Risk Management,
Inc. The President of Mississippi Risk Management, Inc. Will become an officer
of Stoneville Insurance Company, the successor to the Trust under the Plan of
Conversion described in Note 1.
Note 10: Concentration of Credit Risk
At June 30, 1996 premiums receivable were due from various members of the Trust.
Because only locations in Mississippi are eligible for coverage, the majority of
the members conduct business exclusively in the state of Mississippi.
Additionally, reinsurance receivables of $660,986 in 1997 and 1996 respectively,
are due from one reinsurer.
Note 11: Contingencies
In the normal course of operations, the Trust is involved in litigation related
to certain claims. In the opinion of management, the reserve for losses and loss
adjustment expenses is sufficient to cover these claims. Therefore, it believes
the disposition of these matters will not have a material adverse effect on the
Trust's financial position.
<PAGE>
STONEVILLE INSURANCE COMPANY
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
<PAGE>
RICHARD L. EATON
CERTIFIED PUBLIC ACCOUNTANT
(A PROFESSIONAL CORPORATION)
POST OFFICE BOX 16603
JACKSON, MISSISSIPPI 39236
____________
TELEPHONE: (601) 956-9751
FAX: (601) 956-7415
MEMBER OF:
AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
MISSISSIPPI SOCIETY OF
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Stoneville Insurance Company
Jackson, Mississippi
I have audited the accompanying balance sheet of Stoneville Insurance Company as
of December 31, 1996 and the related statements of income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements present fairly, in all material
respects, the financial position of Stoneville Insurance Company as of December
31, 1996 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Richard L. Eaton
Richard L. Eaton
Jackson, Mississippi
March 6, 1997
<PAGE>
STONEVILLE INSURANCE COMPANY
Balance Sheet
December 31, 1996
Assets
Cash in Bank $ 19,970
--------
Total Assets $ 19,970
========
Liabilities
Notes Payable $ 20,000
Accrued Interest Payable 407
--------
Total Liabilities 20,407
========
Stockholders' Equity
Common Stock 0
Retained Earnings (437)
--------
Total Stockholders' Equity (437)
--------
Total Liabilities and Stockholders' Equity $ 19,970
========
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statement of Income
For the Year Ending December 31, 1996
Revenue $ 0
-----
Expenses
Bank Charges 30
Interest Expense 407
-----
Total Expenses 437
-----
Net Income ($437)
=====
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statement of Changes in Stockholders' Equity For
the Year Ended December 31, 1996
Total
Common Retained Stockholders'
Stock Earnings Equity
-------------------------------------
Balance at Beginning of Year $ 0 $ 0 $ 0
Net Income (Loss) 0 437 $437
-------------------------------------
Balance at End of Year $ 0 $437 $437
=====================================
See accompanying notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statement of Cash Flows For the Year Ended December
31, 1996
Cash Flows From Operating Activities
Bank charges paid ($30)
--------------------
Net Cash Provided by Operating Activities (30)
--------------------
Cash Flows From Financing Activities
Loan proceeds 20,000
--------------------
Net Cash Provided by Financing Activities 20,000
--------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 19,970
Cash and Cash Equivalents at Beginning of Year 0
--------------------
Cash and Cash Equivalents at End of Year $19,970
====================
Reconciliation of Net Income to Cash Flows Provided
by Operating Activities
Net income ($437)
Increase in accrued interest payable 407
--------------------
Net Cash Provided by Operating Activities ($30)
====================
See accompanying notes to financial statements.
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Year Ended December 31, 1996
Note 1: Description and Operation of the Company
Stoneville Insurance Company (The Company) is a developmental stage insurance
company formed in August, 1996 to become the successor to the Delta Agricultural
and Industrial Trust, (The Trust), a Mississippi self-funded workers
compensation insurance trust.
The Trust has been in operation since August, 1991 providing workers
compensation insurance coverage initially to agricultural and industrial
concerns in the Mississippi Delta region, and later to numerous industries
throughout Mississippi. The Trust was an alternative to the high cost of
insurance acquired through the Mississippi assigned risk pool or through
commercial carriers. Each member's contribution of funds to the Trust was
computed similarly to the method employed by commercial insurance companies in
determining premium rates. However, if the Trust was unable to sufficiently
discharge all of its obligations, it would assess members the amount needed to
make up any deficiency. The insureds of the Trust are jointly and severally
liable for the obligations of the Trust.
Due to changes in the Mississippi workers compensation market in early 1996, the
Trust determined that the interests of its members would best be served by
converting into a Mississippi domestic insurance company in which the members of
the Trust could become shareholders. The Trust entered into an arrangement with
a commercial insurance company whereby the Trust discontinued writing coverage
for its members effective July 1, 1996 and encouraged its members to move their
workers' compensation insurance to the recommended commercial carrier. The Trust
or any successor to the Trust has the right to reinsure as much of the business
transferred to the commercial carrier as they deem appropriate.
The Trust began the process of forming a stock insurance company (Stoneville
Insurance Company) with the objective of allowing the members of the Trust to
become shareholders in the stock company. Under the plan, qualifying insureds of
the Trust would receive stock in the new company with a book value equivalent to
the book value in the Trust at the date of conversion and all remaining assets
and liabilities of Trust would be transferred to Stoneville Insurance Company.
The plan also provides for the elimination of the joint and several liability of
the Trust's insureds. Although Stoneville has been formed, the conversion
process had not been completed. Upon completion of the conversion process, the
Company is expected to be licensed by the Mississippi Department of Insurance.
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Year Ended December 31, 1996
Other than the opening of a checking account with funds borrowed from the Trust,
the Company had no activity during 1996.
Note 2: Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. No significant accounting policies are
described due to the absence of activity.
Note 3: Notes Payable
At December 31, 1996 the balance sheet of the Company reflects a note payable of
$20,000. This is a demand note due to the Trust that provides for interest at
the applicable federal rate. Accrued and unpaid interest at December 31, 1996
amount to $407. This note would be eliminated upon the completion of the plan of
conversion described in Note 1.
<PAGE>
STONEVILLE INSURANCE COMPANY
FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<PAGE>
STONEVILLE INSURANCE COMPANY
Balance Sheet
June 30, 1997
Assets
Cash in Bank $19,970
-----------------
Total Assets $19,970
=================
Liabilities
Notes Payable $20,000
Accrued Interest Payable 995
-----------------
Total Liabilities 20,995
-----------------
Stockholders' Equity
Common Stock 0
Retained Earnings (1,025)
-----------------
Total Stockholders' Equity (1,025)
-----------------
Total Liabilities and Stockholders' Equity $19,970
=================
See accompanying notes and accountant's report.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statement of Income
For the Six Months Ended June 30, 1997
Revenue $0
-----------------
Expenses
Interest Expense 588
-----------------
Total Expenses 588
-----------------
Net Income ($588)
=================
See accompanying notes and accountant's report.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statement of Changes in Stockholders' Equity
For the Six Months Ended June 30, 1997
Total
Common Retained Stockholders'
Stock Earnings Equity
------------- --------------------------------
Balance at Beginning of Year $0 ($437) ($437)
Net Income (Loss) 0 (588) ($588)
------------- -----------------------------
Balance at End of Period $0 ($1,025) ($1,025)
============= =============================
See accompanying notes and accountant's report.
<PAGE>
STONEVILLE INSURANCE COMPANY
Statement of Cash Flows
For the Six Months Ended June 30, 1997
Cash Flows From Operating Activities
$0
-----------------
Net Cash Provided by Operating Activities 0
-----------------
Cash Flows From Financing Activities
0
-----------------
Net Cash Provided by Financing Activities 0
-----------------
Net Increase (Decrease) in Cash and
Cash Equivalents 0
Cash and Cash Equivalents at Beginning of Year 19,970
-----------------
Cash and Cash Equivalents at End of Year $19,970
=================
Reconciliation of Net Income to Cash Flows Provided
by Operating Activities
Net income ($588)
Increase in accrued interest payable 588
-----------------
Net Cash Provided by Operating Activities $0
=================
See accompanying notes and accountant's report.
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 1: Description and Operation of the Company
Stoneville Insurance Company (The Company) is a developmental stage insurance
company formed in August, 1996 to become the successor to the Delta Agricultural
and Industrial Trust, (The Trust), a Mississippi self-funded workers
compensation insurance trust.
The Trust has been in operation since August, 1991 providing workers
compensation insurance coverage initially to agricultural and industrial
concerns in the Mississippi Delta region, and later to numerous industries
throughout Mississippi. The Trust was an alternative to the high cost of
insurance acquired through the Mississippi assigned risk pool or through
commercial carriers. Each member's contribution of funds to the Trust was
computed similarly to the method employed by commercial insurance companies in
determining premium rates. However, if the Trust was unable to sufficiently
discharge all of its obligations, it would assess members the amount needed to
make up any deficiency. The members of the Trust are jointly and severally
liable for the obligations of the Trust.
Due to changes in the Mississippi workers compensation market in early 1996, the
Trust determined that the interests of its members would best be served by
entering into an arrangement with a commercial insurance company whereby the
Trust discontinued writing coverage for its members effective July 1, 1996 and
encouraged its members to move their workers' compensation insurance to the
recommended commercial carrier. The Trust or any successor to the Trust has the
right to reinsure as much of the business transferred to the commercial carrier
as they deem appropriate.
In conjunction with the transfer of the Trust's insurance operation to a
commercial carrier, management of the trust began the process of forming a stock
insurance company (Stoneville Insurance Company) with the objective of allowing
the members of the Trust to become shareholders in the stock company. Under the
plan, electing members would receive stock in the new company with a book value
equivalent to the book value in the Trust at the date of conversion and all
remaining assets and liabilities of Trust would be transferred to Stoneville
Insurance Company. The Plan also provides for the elimination of the joint and
several liability of its members. Although Stoneville has been formed, the
conversion process had not been completed. Upon completion of the conversion
process, the Company is expected to be licensed by the Mississippi Department of
Insurance.
The Company was inactive during the first six months of 1997.
30
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Six Months Ended June 30, 1997
Note 1: Description and Operation of the Company (continued)
The interim statements include all adjustments which in the opinion of
management are necessary in order to make the financial statements not
misleading.
Note 2: Summary of Significant Accounting Policies
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. No significant accounting policies are
described due to the absence of activity.
Note 3: Notes Payable
At June 30, 1997 the balance sheet of the Company reflects a note payable of
$20,000. This is a demand note due to the Trust described in Note 1 that
provides for interest at the applicable federal rate. Accrued and unpaid
interest at June 30, 1997 amounts to $995. This note would be eliminated upon
the completion of the plan of conversion described in Note 1.
31
<PAGE>
EXHIBIT A
PLAN AND AGREEMENT OF REORGANIZATION AND CONVERSION
OF DELTA AGRICULTURAL AND INDUSTRIAL TRUST
As Amended Effective September 11, 1997
This Plan and Agreement of Reorganization and Conversion (the
"Conversion Agreement") is made and entered into as of this 11th day of
September, 1997, by and between Delta Agricultural and Industrial Trust, a
Mississippi workers' compensation self insured trust (the "Trust") and
Stoneville Insurance Company ("Stoneville").
1. Definitions
a. "Board" means the board of directors of Stoneville.
b. "Commercial Program" means the Trust's program of commercial
insurance written through TIG Insurance Company which commenced on
July 1, 1996.
c. "Continental" means Continental Casualty Company, an Illinois stock
insurance company.
d. "Dissenters" means those Former Members who dissent from the Plan and
who have perfected their dissenters' rights as set forth herein.
e. "Former Members" means those Persons who at any time have had workers'
compensation insurance provided by the Trust for one or more full
Positive Income Fund Years.
f. "Person" means any individual, corporation, partnership, joint
venture, association or other form of organization.
g. "Plan" means this Plan and Agreement of Reorganization and Conversion
of the Trust.
h. "Positive Income Fund Year" means a complete accounting year of the
Trust which resulted in positive net income for the Trust. A list
of Positive Income Fund Years is set forth on Schedule A attached
hereto.
i. "Proportionate Earned Premium" means the percentage derived by
dividing (a) the net earned premium derived by the Trust from
a Former Member for each Positive Income Fund Year during
which the Trust derived a net earned premium for the full
Positive Income Fund Year from such Former Member by (b) the
total of all such net earned premiums of the Trust.
<PAGE>
j. "Registration Statement" means the registration statement for
certain shares of Stoneville stock to be filed with the
Securities and Exchange Commission on Form S-4.
k. "Reinsurance Agreement" means that certain Assumption
Reinsurance Agreement by and among the Trust, Stoneville,
and Continental.
l. "Stoneville" means Stoneville Insurance Company, a
Mississippi stock insurance company.
m. "Trust" means Delta Agricultural and Industrial Trust, a
Mississippi workers' compensation self insured trust.
n. "Trustees" shall mean the board of Trustees of the Trust.
o. "Trust Unit" means each Four Dollars ($4.00) of equity of the
Trust.
2. Effective Date. The Trust shall begin taking the actions as set forth herein
as of the date hereof. The effective date of the Plan shall be, and the
capitalization of Stoneville and the liquidation and dissolution of the Trust
(Sections 5, 7 and 8) shall be deemed to have occurred simultaneously and
completely as of the close of business on the last day of the month during which
the conditions precedent as set forth in Section 11 hereof have been satisfied
(the "Effective Date").
3. Certificate of Authority. On or prior to the Effective Date, the
Trust will surrender its Certificate of Authority to serve as a workers'
compensation self insurance trust to the Mississippi Workers' Compensation
Commission.
4. Reserve for Expenses. On or prior to the Effective Date, all known or
ascertainable liabilities of the Trust shall be promptly paid or provided for.
There shall also be set aside, in cash, securities, or other assets, a reserve
fund in an amount up to One Hundred Fifty Thousand Dollars ($150,000) for the
payment of estimated expenses, taxes and payment of Dissenters.
5. Capitalization of Stoneville. As of the Effective Date, the Trust will
transfer to Stoneville all of the assets of the Trust other than amounts
required to consummate the Reinsurance Agreement and the reserve for expenses as
set forth in Section 4 hereof in return for that number of shares of capital
stock of Stoneville equal to the Trust equity transferred by the Trust to
Stoneville measured by Four Dollars ($4.00) of Trust equity (one Trust Unit) per
share of Stoneville common stock less the amount Stoneville is required to pay
dissenters, which shall be all the issued and outstanding shares of stock of
Stoneville.
6. Dissenter's Rights. Members and Former Members may dissent from the Plan and
receive Four Dollars ($4.00) in cash for each Trust Unit allocable to such
Persons upon perfection of dissenters' rights pertaining to such Trust Units
allocable to such Persons. Payments to Dissenters shall be paid by the Trust in
an amount (to be determined as of the Effective Date) which will satisfy certain
published Internal Revenue Service Guidelines so as not to cause the transaction
described in the Plan to lose its characterization as a tax free transaction as
to the Trust, the Company and
<PAGE>
those Former Members who receive Stock of the Company. Any excess over such
amount shall be paid to Dissenters by Stoneville (contemporaneously with the
payments made to Dissenters from funds of the Trust) out of operating funds or
from the proceeds of a loan that Stoneville will obtain for that purpose and not
out of assets transferred to Stoneville from the Trust pursuant to the Plan. In
order to perfect dissenters' rights, a Former Member wishing to dissent must
deliver to the Trust's office at 633 North State Street, Suite 200, Jackson,
Mississippi 39202-7817 written notice of such Former Member's intent to demand
payment within thirty (30) days after the effective date of Stoneville's
Registration Statement.
7. Computation and Payment of Liquidating Distribution. For purposes of
computing the number of shares of Stoneville common stock (or in the case of
Dissenters, cash) distributable from the Trust to each Former Member, each
Former Member of the Trust will have allocated to it a number of Trust Units
determined by multiplying the total number of Trust Units by the Proportionate
Earned Premium of each Former Member. Upon liquidation of the Trust, each Former
Member shall thereupon receive one share of Stoneville common stock for each
Trust Unit allocable to such Former Member, except Dissenters, who shall receive
Four Dollars ($4.00) in cash for each Trust Unit allocable to such Dissenter in
accordance with Section 6 above (collectively, the "Liquidating Distribution").
The Liquidating Distribution shall be disbursed to Former Members as of the
Effective Date.
8. Dissolution. As of the Effective Date, following the Liquidating Distribution
as set forth in Section 7, the Trust shall be dissolved and shall furnish notice
of such dissolution to the Mississippi Workers' Compensation Commission and take
any other such action as the Trustees shall deem necessary or appropriate
including the completion of distribution of any remaining funds subsequent to
dissolution.
9. Distribution of Remaining Funds. At such time as the Trustees of the Trust
(as dissolved) may determine that all liabilities of the Trust have been paid or
provided for and there is no need for the reserve fund established pursuant to
Section 4 above, the Trustees of the Trust (as dissolved) shall transfer any
amounts remaining in such fund to Stoneville as an additional contribution to
capital.
10. Termination. This Plan may be terminated and abandoned (i) at any
time by vote of the Trustees or the Board; or (ii) if all conditions precedent
as set forth in Section 11 have not been satisfied or waived by December 31,
1997.
11. Conditions Precedent. The Plan shall not become effective until all the
following conditions have been satisfied: (i) the Reinsurance Agreement is in
effect; (ii) receipt of a favorable opinion from Watkins Ludlam & Stennis, P.A.
to the effect that the consummation of the Plan will be treated, for federal
income tax purposes, as a tax free transaction as to the Trust, the Company, and
to those Former Members who receive Stock of the Company; and (iii) dissenters'
rights shall not have been perfected by holders of more than twenty percent
(20%) of Trust Units.
12. Dissemination of Share Certificates and Payment of Dissenters. Each
Person who was insured by the Trust at any time will be sent an assumption
certificate (the "Assumption Certificate") pursuant to the Reinsurance
Agreement. Each Former Member must sign and return the Assumption Certificate
to the Trust at which time the Former Member shall receive such Person's
liquidating
<PAGE>
Distribution.
13. Governing Law. This Plan shall be governed and construed in
accordance with the laws of Mississippi.
IN WITNESS WHEREOF, the parties have executed this Plan as of the day
and year set forth above.
TRUST: STONEVILLE:
DELTA AGRICULTURAL AND STONEVILLE INSURANCE COMPANY
INDUSTRIAL TRUST
By:/s/ Harry E. Vickery By:/s/ Harry E. Vickery
Name/Title: Harry E. Vickery, Name/Title: Harry E. Vickery,
Administrator President
<PAGE>
SCHEDULE A
LIST OF POSITIVE INCOME FUND YEARS
The following years resulted in positive net income for the Trust:
August 1, 1992- July 31, 1993
August 1, 1993- December 31, 1994
January 1, 1995- December 31, 1995
January 1, 1996- December 31, 1996
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits and financial statement schedules are
furnished as a part of this Registration Statement:
Exhibit Number Description
2.1 Plan and Agreement of Reorganization and Conversion of the Trust
as amended September 11, 1997, included as part of Exhibit A to the
Prospectus contained herein
8 Opinion of Watkins Ludlam & Stennis, P.A. regarding tax matters
10.5 Amendment Number One dated September 5, 1997 to Assumption
Reinsurance Agreeement between the Trust, Continental, and the
Company
23.1 Revised consent of Richard L. Eaton, CPA, independent accountant,
with respect to the consolidated financial statements of of the Trust
and the Company
27.1 Revised Financial Data Schedule of Stoneville Insurance Company
27.2 Revised Financial Data Schedule of Delta Agricultural and Industrial
Trust
The following financial statements and financial statement schedules
are included in the Prospectus:
Financial Statements:
Delta Agricultural and Industrial Trust Financial Statements for the Years ended
December 31, 1996 and 1995
Report of Independent Auditor
Balance Sheets as of December 31, 1996 and 1995
Statements of Revenues and Expenses for Years Ended December 31, 1996
and 1995 Statements of Changes in Trust Equity for Years Ended December
31, 1996 and 1995 Statements of Cash Flows for Years Ended December 31,
1996 and 1995 Notes to Financial Statements
Delta Agricultural and Industrial Trust Compiled Financial Statements
for the Six Months Ended June 30, 1997 and 1996
Report of Independent Auditor
Balance Sheets as of June 30, 1997 and 1996
Statements of Revenues and Expenses for Six Months Ended June 30, 1997
and 1996 Statements of Changes in Trust Equity for Six Months Ended
June 30, 1997 and 1996 Statements of Cash Flows for Six Months Ended
June 30, 1997 and 1996 Notes to Financial Statements
<PAGE>
Stoneville Insurance Company Financial Statements for the
Years Ended December 31, 1996 and 1995
Report of Independent Auditor
Balance Sheet as of December 31, 1996
Statement of Income for Year Ending December 31, 1996
Statement of Changes in Stockholders' Equity for Year Ended December
31, 1996
Statement of Cash Flows for Year Ended December 31, 1996
Notes to Financial Statements
Stoneville Insurance Company Compiled Financial Statements for the
Six Months Ended June 30, 1997 and 1996
Report of Independent Auditor
Balance Sheet as of June 30, 1997
Statement of Income for the Six Months Ending June 30, 1997
Statement of Changes in Stockholders' Equity for the Six Months Ended
June 30, 1997
Statement of Cash Flows for the Six Months Ended June 30, 1997
Notes to Financial Statements
Financial Statement Schedules:
Trust Schedules
Schedule I - Summary of Investments - Other than Investments in Related Parties
Schedule III - Supplementary Insurance Information Scehdule IV - Reinsurance
Schedule V - Valuation and Qualifying Accounts Schedule VI - Supplemental
Information Concerning Property-Casualty Insurance Operations
All other schedules are omitted because they are not applicable to the
Trust under Regulation S-X or because the required information is included in
the Financial Statements or the notes thereto.
Company Schedules
All schedules are omitted because they are not applicable to the
Company under Regulation S-X.
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3, Form S-8 or Form F-3 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of Regulation S-X at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided that the registrant includes in the prospectus, by means of
a post-effective amendment, financial statements required pursuant to this
paragraph (a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of Regulation S-X if such financial statements
and information are
<PAGE>
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Form F-3.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Amendment Number 4 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Jackson, State of Mississippi on this the 12th day of September, 1997.
STONEVILLE INSURANCE COMPANY
BY: /s/ Harry E. Vickery
Harry E. Vickery
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment Number 4 to the Registration Statement has been signed by the
following persons in the capacities and on the date indicated.
NAME TITLE DATE
/s/ William L. Kennedy * Chairman of the Board September 12, 1997
- ---------------------------
William L. Kennedy and Director (Chief
Executive Officer)
/s/ Harry E. Vickery President and Director, September 12, 1997
Harry E. Vickery Principal Financial Officer,
Principal Accounting Officer
/s/ David R. White * Secretary, Treasurer, September 12, 1997
- ---------------------------
David R. White Vice President, Director
*By: /s/ Harry E. Vickery
Harry E. Vickery, Attorney in Fact,
pursuant to the power of attorney issued
on April 1, 1997
September 12, 1997
Board of Directors Board of Trustees
Stoneville Insurance Company Delta Agricultural and Industial Trust
633 North State Street, Suite 200 833 Washington Avenue
Jackson, Mississippi 39202 Greenville, Mississippi 38704-5037
Re: The Federal Income Tax Consequences of Certain Matters
Arising Under the Corporate Reorganization Provisions of
the Internal Revenue Code of 1986, as amended.
Gentlemen:
We have acted as special counsel to Delta Agricultural and Industrial
Trust, a Mississippi workers' compensation self insurance trust (the "Trust"),
and Stoneville Insurance Company, a Mississippi corporation (the "Company"), in
connection with certain federal income tax matters relating to the transactions
described in the Plan and Agreement of Reorganization and Conversion of Delta
Agricultural and Industrial Trust (the "Plan"), dated as of March 20, 1997, and
as subsequently amended on September 11, 1997. This opinion is furnished to you
pursuant to Section 11(ii) of the Plan. Except as otherwise defined herein, all
capitalized terms herein have the meanings set forth in the Plan.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Form S-4 Registration Statement filed by the Company with the Securities and
Exchange Commission relating to the Company stock to be issued in connection
with the Conversion as hereinafter defined (the "Registration Statement"), the
Plan and such other documents as we have deemed necessary or appropriate in
order to enable us to render the opinion below. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of all natural
persons, the
<PAGE>
Board of Directors
Stoneville Insurance Company
Board of Trustees
Delta Agricultural and Industrial Trust
September12, 1997
Page 2
authenticity of all documents submitted to us as originals, the conformity to
original documents submitted to us as certified, conformed or photostatic copies
and the authenticity of the originals of such copies. In rendering the opinion
set forth below, we have relied upon certain written representations and
covenants of the parties to the Plan set forth in the Certificates which are
attached hereto as Exhibits "A" and "B." In rendering our opinion, we have
considered the applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, pertinent judicial authorities,
interpretive rulings of the Internal Revenue Service (the "Service") and such
other authorities as we have considered relevant.
I. DESCRIPTION OF PROPOSED PLAN OF REORGANIZATION
AND CONVERSION
The proposed Conversion (as hereinafter defined) will be structured in
accordance with the Plan, the laws of the State of Mississippi, the statements
and representations of the parties to the transaction, and the following
descriptions:
1. On the Effective Date, the following events shall be deemed to have
occurred simultaneously.
(a) The Trust will transfer substantially all of its assets, less an
amount sufficient to pay the Trust's remaining costs and expenses,
including amounts required to consummate the Reinsurance Agreement and
amounts due to dissenters, to the Company in exchange for Company
Stock. After this exchange, the Trust will own all the issued and
outstanding shares of stock of the Company.
(b) The Trust will distribute to Former Members perfecting dissenters'
rights, if any, four dollars ($4.00) in cash in redemption of each
Trust Unit held by such Former Members up to an aggregate amount
payable to all Former Members perfecting dissenters' rights not to
exceed an amount to be determined which will satisfy certain published
Service safe harbor guidelines for meeting the requirements for
tax-free reorganization treatment (the "Safe Harbor Amount").
(c) The Trust will be liquidated and will distribute to Former Members
all the Company Stock on an even exchange basis of one (1) full or
fractional share of Company Stock for each full or fractional Trust
Unit allocable to such Former Member at December 31, 1996, except for
those Trust Units with respect to which rights of dissent
<PAGE>
Board of Directors
Stoneville Insurance Company
Board of Trustees
Delta Agricultural and Industrial Trust
September12, 1997
Page 3
have been exercised. (The steps described in (a) through (c) of this
subsection 1. are hereinafter collectively referred to as the
"Conversion.")
(d) In the event that Former Members as a group perfect dissenters'
rights (see 2. below) resulting in an obligation to redeem Trust Units
with a value in excess of the Safe Harbor Amount, the excess amount due
will be paid to such Former Members by the Company. Such payments, if
any, paid by the Company to such Former Members perfecting dissenters
rights shall be paid from operating funds of the Company or from a loan
obtained by the Company for such purpose and not out of assets
transferred to the Company from the Trust pursuant to the Plan.
2. Former Members of the Trust may dissent from the Plan upon perfection
of dissenters' rights. If Former Members holding more than twenty
percent (20%) of the Trust Units perfect dissenters' rights, the Plan
will not become effective and the Conversion will not occur.
3. Subsequent to the liquidation of the Trust, any amounts remaining with
the Trust which were not needed to pay expenses or dissenters, if any,
shall be contributed to the Company as an additional contribution to
capital.
4. After the Conversion, the Former Members of the Trust, with the
exception of those perfecting dissenters' rights, will be the
shareholders (and own all of the issued and outstanding stock) of the
Company.
5. After the Conversion, the Company will continue the historical business
of the Trust in a substantially unchanged manner, or use a significant
portion of the Trust's historic assets in a business.
II. DISCUSSION OF APPLICABLE REORGANIZATION PROVISIONS
The parties intend that the Conversion will satisfy the requirements
for nonrecognition (i.e., treatment as a tax free reorganization) under section
368(a)(1)(D) of the Code. This Code section describes a non-divisive or
acquisitive Type "D" reorganization under which the transferor corporation (the
Trust here, which is treated as a corporation for federal income tax purposes)
transfers substantially all of its assets to a controlled corporation (the
Company here), the stock of which the transferor corporation distributes to its
shareholders in pursuance to the
<PAGE>
Board of Directors
Stoneville Insurance Company
Board of Trustees
Delta Agricultural and Industrial Trust
September12, 1997
Page 4
plan of reorganization. The Code describes a Type "D" reoganization involving
the transfer of assets to a controlled corporation as follows:
1. A transfer by a corporation, of all or part of its assets to another
corporation if immediately after the transfer the transferor, or one
or more of its shareholders (including persons who were shareholders
immediately before the transfer) or any combination thereof, is in
control of the corporation to which the assets are transferred /1; but
only if, in pursuance of the plan, stock or securities of the
corporation to which the assets are transferred are distributed in a
transaction which qualifies under section 354/2 ... or 356,
and
2. In effect, a complete liquidation of the transferor corporation occurs.
(Although Code section 354(b) does not explicitly require a complete
liquidation of the transferor, the requisite distribution of all of the
transferor's properties will have the effect of a complete
liquidation.)
In addition to the requirements under the Code which have been
generally described above, nonrecognition for the Conversion is subject to
several other nonstatutory rules that have been established through case law and
Treasury Regulations. These requirements involve continuity of proprietary
interest, continuity of business enterprise, and the existence of a valid
business purpose for the transaction. The judicially developed step transaction
doctrine, wherein a series of formally separate steps are considered together as
component parts of an overall plan, must also be considered when evaluating
whether a transaction, in substance, qualifies as a valid reorganization under
Code section 368(a)(1)(D).
- --------
1/The determination of whether a corporation is "controlled"
for this purpose is made using the 50% ownership test (by value or
voting) of section 304(c) as the "control" threshold, as mandated by
Code section 368(a)(2)(H).
2/Code section 354 shall not apply to an exchange in pursuance
to a Type "D" reorganization unless (1) the corporation to which the
assets are transferred acquires substantially all of the assets of the
transferor of such assets; and (2) the stock or other property received
by the transferor corporation, as well as the other properties of such
transferor, are distributed under the plan of reorganization, as
mandated by Code section 354(b)(1).
<PAGE>
Board of Directors
Stoneville Insurance Company
Board of Trustees
Delta Agricultural and Industrial Trust
September12, 1997
Page 5
III. OPINION
In reliance upon the foregoing facts and representations of the parties
to the Conversion transactions, and based upon our review of such documents and
consideration of such legal matters as we have deemed relevant and sufficient to
enable us to render an informed opinion, we are of the opinion that the federal
income tax consequences of the proposed Conversion will be as follows:
1. The acquisition by the Company of substantially all of the assets of
the Trust in exchange for Company Stock and the liquidation of the
Trust and distribution of the Company Stock to the Former Members will
constitute a reorganization within the meaning of Code section
368(a)(1)(D).
For purposes of this opinion, "substantially all" means at least 90
percent of the fair market value of the net assets and at least 70
percent of the fair maket value of the gross assets of the Trust held
immediately prior to the reorganization and Conversion (Rev. Proc.
77-37, 1977-2 C.B. 568, 569 section 3.01). The Trust and the Company
will each be "a party to a reorganization" within the meaning of
section 368(b) of the Code.
2. No gain or loss will be recognized by the Trust upon the transfer of
substantially all of its assets to the Company in exchange for the
Company Stock (all of which will be distributed to the Former Members)
(Code section 361(a)).
3. No gain or loss will be recognized by the Company on the receipt by the
Company of substantially all of the assets of the Trust in exchange for
the Company Stock (Code section 1032(a)).
4. No gain or loss will be recognized by the Former Members on the receipt
of Company Stock solely in exchange for their Trust Units (Code section
354(a)(1)).
5. Where a dissenting Former Member receives solely cash in exchange for
all of his or her Trust Units, such cash will be treated as having been
received by the Former Member as a distribution in redemption of his or
her Trust Units subject to the provisions and limitations of Code
section 302.
6. The basis of the Company Stock to be received by a Former Member will
be the same as the Former Member's basis in the Trust Units allocable
to such Former Member (Code section 358(a)(1)).
<PAGE>
Board of Directors
Stoneville Insurance Company
Board of Trustees
Delta Agricultural and Industrial Trust
September12, 1997
Page 6
7. The holding period of the Company Stock received by the Former Members
will include, in each instance, the period during which the Former
Members held an interest in the equity of the Trust as determined under
the Plan, provided such Trust equity constituted a capital asset on the
date of the exchange (Code section 1223(1)).
8. The basis of the assets of the Trust in the hands of the Company will
be the same as the basis of those assets in the hands of the Trust
immediately prior to the transfer (Code section 362(b)).
9. The holding period of the assets of the Trust in the hands of the
Company will include the period during which such assets were held by
the Trust (Code section 1223(2)).
We have qualified our opinions by reference to the Code, the Treasury
Regulations promulgated thereunder, and existing judicial and administrative
interpretations thereof. In so opining, we have relied upon the foregoing facts
and representations and have reviewed such documents and have considered such
legal matters as we have deemed relevant and sufficient to enable us to render
an informed opinion. While we have not been requested nor have we undertaken to
make independent investigations to verify the representations and statements
described above or set forth in the Certificates attached as Exhibits "A" and
"B," based upon our discussions with representatives of the parties and our
limited review of certain background material, we believe that it is reasonable
for us to rely on such representations and statements.
Our opinion is limited to the specific opinions expressed above, and no
other opinions are intended nor should they be inferred. An opinion of counsel
has no binding effect upon the Service and no assurances can be given that the
conclusions reached in any opinion will not be contested by the Service, or if
contested, will be sustained by a court.
The opinions we have expressed above are based on the facts and
representations outlined herein being correct in all material respects as of the
dates indicated or at the time of the proposed transactions as the case may be.
In the event that one or more of the facts or representations are incorrect for
any such time, our opinion would likely be substantially different than that
expressed above.
The opinion expressed herein is for the sole benefit of the Trust and
the Company, together with the Former Members for their use in connection with
the proposed Plan of Reorganization and Conversion, and is not to be used,
delivered to or relied upon by any other party for any other purpose, and may
not be circulated, quoted, or otherwise referred to for any other purpose
without our prior written consent.
<PAGE>
Board of Directors
Stoneville Insurance Company
Board of Trustees
Delta Agricultural and Industrial Trust
September12, 1997
Page 7
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" and other such locations as it may appear in the Prospectus comprising
Part I of the Registration Statement.
Very truly yours,
/s/ Watkins Ludlam & Stennis, P.A.
WATKINS LUDLAM & STENNIS, P.A.
<PAGE>
EXHIBIT A
CERTIFICATE OF DELTA AGRICULTURAL AND INDUSTRIAL TRUST
RELATING TO SECTION 368 OPINION ON THE PLAN OF
REORGANIZATION AND CONVERSION
This Certificate has been requested by the law firm of Watkins Ludlam &
Stennis, P.A. in connection with the rendering of its opinion as to certain
federal income tax consequences relating to the conversion (the "Conversion") of
Delta Agricultural and Industrial Trust (the "Trust") into Stoneville Insurance
Company (the "Company") as such transaction is described in that certain Plan
and Agreement of Reorganization and Conversion of Delta Agricultural and
Industrial Trust dated as of March 20, 1997, and as subsequently amended on
September 11, 1997 (the "Plan"). Watkins Ludlam & Stennis, P. A. will rely on
the representations stated hereinafter, as well as on other facts, assumptions,
and representations described in its opinion letter dated September 12, 1997
(the "WL&S Tax Opinion") in opining on the federal income tax issues stated
therein. Accordingly, this Certificate is an integral part of the WL&S Tax
Opinion. Unless otherwise noted, all defined or capitalized terms used in this
Certificate have the same meaning ascribed to such terms in the Plan or in the
WL&S Tax Opinion.
The following representations are being made in connection with the
Conversion:
1. The Trust is classified and treated as a corporation for federal
income tax purposes.
2. The Trust will distribute the Company Stock it receives in the
Conversion in pursuance of the Plan.
3. The fair market value of the Company Stock and other consideration
received by each Former Member will be approximately equal to the fair
market value of the Trust Units surrendered in the exchange.
4. There is no plan or intention by the Former Members who own one
percent (1%) or more of the Trust Units, and to the best of the
knowledge of the management of the Trust, there is no plan or
intention on the part of the remaining Former Members to sell,
exchange, or otherwise dispose of a number of shares of Company Stock
received in the Conversion that would reduce the Former Members'
ownership of Company Stock to a number of shares having a value, as of
the date of the Conversion, of less than fifty percent (50%) of the
value of all of the formerly outstanding Trust Units of the Trust as
of the same date. For purposes of this representation, the Trust Units
exchanged for cash or other property or surrendered by dissenters will
be treated as outstanding Trust Units on the date of the Conversion.
Moreover, Trust Units and Company Stock held by Former Members and
otherwise sold, redeemed, or disposed of prior or subsequent to the
Conversion will be considered in making this representation.
5. The Company will acquire at least ninety percent (90%) of the fair
market value of the net assets and at least seventy percent (70%) of
the fair market value of the gross assets held by the Trust immediately
prior to the Conversion. For purposes of this representation, amounts
paid by the Trust to dissenters, amounts paid by the Trust to Former
Members who receive cash or other property, amounts used by the Trust
to pay its reorganization expenses, and all redemptions and
distributions (except for regular,
Exhibit "A" to Tax Opinion
<PAGE>
normal dividends) made by the Trust immediately preceding the transfer
will be included as assets of the Trust held immediately prior to the
Conversion.
6. After the transaction, the Former Members of the Trust will own at
least eighty percent (80%) of the total combined voting power of all
classes of stock of the Company entitled to vote, or at least eighty
percent (80%) of the total value of shares of all classes of stock of
the Company.
7. The liabilities of the Trust assumed by the Company, if any, plus the
liabilities, if any, to which the transferred assets are subject were
incurred by the Trust in the ordinary course of its business and are
associated with the assets transferred.
8. The Trust, the Company and the Former Members will pay their respective
expenses, if any, incurred in connection with the Conversion.
9. There is no intercorporate indebtedness existing between the Trust and
the Company that was issued, acquired, or will be settled at a
discount.
10. The Trust is not an investment company as defined in Code section 368
(a)(2)(F)(iii) and (iv).
11. The fair market value of the assets of the Trust transferred to the
Company will equal or exceed the sum of the liabilities assumed by the
Company, if any, plus the amount of liabilities, if any, to which the
transferred assets are subject.
12. The total adjusted basis of the assets of the Trust transferred to the
Company will equal or exceed the sum of the liabilities to be assumed
by the Company, if any, plus the amount of liabilities, if any, to
which the transferred assets are subject.
13. The Trust is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Code section 368(a)(3)(A).
The Trust hereby certifies that the officer of the Trust executing this
Certificate has knowledge of the pertinent information set forth herein and that
he has examined the foregoing representations and, to the best of such officer's
knowledge and belief, the representations made are true, complete and correct as
of the date, September 12, 1997, of this Certificate, and he further certifies
that he is duly authorized and empowered to execute and deliver this
Certificate.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
By: ____________________________________________
Title:___________________________________________
9
<PAGE>
CERTIFICATE OF STONEVILLE INSURANCE COMPANY
RELATING TO SECTION 368 OPINION ON THE PLAN OF
REORGANIZATION AND CONVERSION
This Certificate has been requested by the law firm of Watkins Ludlam &
Stennis, P.A. in connection with the rendering of its opinion as to certain
federal income tax consequences relating to the conversion (the "Conversion") of
Delta Agricultural and Industrial Trust (the "Trust") into Stoneville Insurance
Company (the "Company") as such transaction is described in that certain Plan
and Agreement of Reorganization and Conversion of Delta Agricultural and
Industrial Trust dated as of March 20, 1997, and as subsequently amended on
September 11, 1997 (the "Plan"). Watkins Ludlam & Stennis, P.A. will rely on the
representations stated hereinafter, as well as on other facts, assumptions, and
representations described in its opinion letter dated September 12, 1997 (the
"WL&S Tax Opinion") in opining on the federal income tax issues stated therein.
Accordingly, this Certificate is an integral part of the WL&S Tax Opinion.
Unless otherwise noted, all defined or capitalized terms used in this
Certificate have the same meaning ascribed to such terms in the Plan or in the
WL&S Tax Opinion.
The following representations are being made in connection with the
Conversion:
1. The Company does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any equity of the
Trust.
2. The fair market value of the Company Stock and other consideration
received by each Former Member will be approximately equal to the fair
market value of the Trust Units surrendered in the exchange.
3. There is no plan or intention by the Former Members who own one
percent (1%) or more of the Trust Units, and to the best of the
knowledge of the management of the Company, there is no plan or
intention on the part of the remaining Former Members to sell,
exchange, or otherwise dispose of a number of shares of Company Stock
received in the transaction that would reduce the Former Members'
ownership of Company Stock to a number of shares having a value, as of
the date of the Conversion, of less than fifty percent (50%) of the
value of all of the formerly outstanding Trust Units of the Trust as
of the same date. For purposes of this representation, the Trust Units
exchanged for cash or other property, or surrendered by dissenters
will be treated as outstanding Trust Units on the date of the
Conversion. Moreover, Trust Units and Company Stock held by Former
Members and otherwise sold, redeemed, or disposed of prior or
subsequent to the Conversion will be considered in making this
representation.
4. The Company will acquire at least ninety percent (90%) of the fair
market value of the net assets and at least seventy percent (70%) of
the fair market value of the gross assets held by the Trust immediately
prior to the Conversion. For purposes of this representation, amounts
paid by the Trust to dissenters, amounts paid by the Trust to Former
Members who receive cash or other property, amounts used by the Trust
to pay its reorganization expenses, and all redemptions and
distributions (except for regular,
Exhibit "B" to Tax Opinion
<PAGE>
normal dividends) made by the Trust immediately preceding the transfer
will be included as assets of the Trust held immediately prior to the
Conversion.
5. After the transaction, the Former Members of the Trust will own at
least eighty percent (80%) of the total combined voting power of all
classes of stock of the Company entitled to vote, or at least eighty
percent (80%) of the total value of shares of all classes of stock of
the Company.
6. The Company has no plan or intention to reacquire any of its stock
issued in the Conversion.
7. The Company has no plan or intention to sell or otherwise dispose of
any of the assets of the Trust acquired in the Conversion, except for
dispositions made in the ordinary course of business.
8. The liabilities of the Trust assumed by the Company, if any, plus the
liabilities, if any, to which the transferred assets are subject were
incurred by the Trust in the ordinary course of its business and are
associated with the assets transferred.
9. Following the Conversion, the Company will continue the historic
business of the Trust or use a significant portion of the Trust's
historic business assets in a business.
10. At the time of the Conversion, the Company will not have outstanding
any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire Company Stock that, if
exercised or converted, would affect the Former Members' acquisition or
retention of at least eighty percent (80%) of the total combined voting
power of all classes of stock of the Company entitled to vote, or at
least eighty percent (80%) of the total value of shares of all classes
of stock of the Company.
11. The Company, the Trust, and the Former Members will pay their
respective expenses, if any, incurred in connection with the
Conversion.
12. There is no intercorporate indebtedness existing between the Trust and
the Company that was issued, acquired, or will be settled at a
discount.
13. The Company is not an investment company as defined in Code section
368(a)(2)(F)(iii)and (iv).
14. The fair market value of the assets of the Trust transferred to the
Company will equal or exceed the sum of the liabilities assumed by the
Company, if any, plus the amount of liabilities, if any, to which the
transferred assets are subject.
15. The Company is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Code section 368(a)(3)(A).
16. There will be no cash paid by the Company to Former Members in lieu of
fractional
11
<PAGE>
interests of Trust Units exchanged in the Conversion.
17. Any cash payments (in excess of the Safe Harbor Amount) to Former
Members who dissent to the Conversion shall be paid (a) from future
operating funds or earnings of the Company, or (b) from a loan to be
obtained by the Company for the purpose of making such payments to
dissenters, and not out of assets transferred to the Company from the
Trust pursuant to the Plan. In addition, in the event a loan is
obtained for this purpose, the Company intends to pay the debt service
from its future operating funds or earnings and not out of assets
transferred from the Trust.
The Company hereby certifies that the officer of the Company executing
this Certificate has knowledge of the pertinent information set forth herein and
that he has examined the foregoing representations and, to the best of such
officer's knowledge and belief, the representations made are true, complete and
correct as of the date, September 12, 1997, of this Certificate, and he further
certifies that he is duly authorized and empowered to execute and deliver this
Certificate.
STONEVILLE INSURANCE COMPANY
By:_____________________________________
Title:___________________________________
AMENDMENT NUMBER ONE TO
ASSUMPTION REINSURANCE AGREEMENT
This Amendment Number One to Assumption Reinsurance Agreement (the
"Amendment") is made and entered into as of the 5th day of September, 1997 by
and between Delta Agricultural and Industrial Trust, a Mississippi workers'
compensation self insured trust (the "Trust"); Stoneville Insurance Company, a
Mississippi stock insurance company ("Stoneville"); and Continental Casualty
Company, an Illinois stock insurance company ("Continental").
WHEREAS, the Trust, Stoneville and Continental entered into that
certain Assumption Reinsurance Agreement (the "Agreement") as of March 20, 1997,
for the purposes as set forth therein, and
WHEREAS, the parties have determined that it is in their mutual best
interest to amend the Agreement to remove the requirement for Stoneville to
provide Additional Collateral (as defined in the Agreement) to Continental as
well as to amend the Agreement as further set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants, provisions and agreements set forth herein, the parties agree as
follows:
1. Section 1.3 is amended in its entirety to provide as follows:
"Continental Expense" means the sum of Two Hundred Fifty
Thousand Dollars ($250,000) which the Trust shall pay the Continental as a part
of the Premium.
2. Section 1.5 is amended in its entirety to provide as follows:
"Effective Date" means 12:01 a.m., Central Standard Time,
September 5, 1997. This Agreement shall become effective only upon the
satisfaction of the conditions precedent as set forth in Article 9 hereof.
3. Section 1.13 is amended in its entirety to provide as follows:
"Reserves" means as of the date hereof the sum of One Million
Six Hundred Twenty-Five Thousand ($1,625,000), less Claims amounts paid between
the Effective Date and the date of the relevant transfer of Reserves from the
Trust to Continental or from Continental to the Trust or Stoneville as required
or permitted by this Agreement, and subject to any other adjustments provided
for in this Agreement. The Reserves shall consist of funds allocated
specifically to Reported Claims as well as funds allocated to Unreported Claims.
<PAGE>
4. Section 3.1 is amended in its entirety to provide as follows:
Certificate. Within thirty (30) days after satisfaction of the
conditions precedent as set forth in Article 9 hereof, the Trust shall issue and
send by first-class mail an Assumption Certificate in the form as set forth on
Exhibit D to each of the Trust's insureds as shown on the books and records of
the Trust.
5. Section 4.1 of the Agreement is deleted in its entirety.
6. The parties agree that Stoneville shall not provide to Continental
the Additional Collateral and all references to such Additional Collateral are
hereby deleted from the Agreement including but not limited to Sections 4.2,
7.3, 8.3, and 9.1 as if such references had not been included in the Agreement.
7. Article 7 is amended in its entirety to provide as follows:
7.1. Reinsurance. Stoneville shall have the right to
cause Continental to cede to Stoneville all of the Covered Obligations for the
purpose of providing reinsurance to Continental pursuant to Stoneville
Reinsurance. No consideration shall be paid or due to or from either
Stoneville or Continental for Stoneville Reinsurance.
7.2. Notice of Reinsurance. Stoneville may exercise Stoneville
Reinsurance on March 1, 1998, by providing written notice to Continental on or
prior to such exercise date. If Stoneville exercises Stoneville Reinsurance,
Continental and Stoneville shall enter into a Reinsurance Agreement in a form
acceptable to Continental with such acceptability criteria to be based on
customary industry practice and with such acceptance by Continental not to be
unreasonably withheld.
7.3. Effect of Stoneville Reinsurance on Reserves.
(a) Upon Stoneville Reinsurance Continental shall transfer to
Stoneville the amounts of Reserves entered in the Experience Account.
(b) Upon Stoneville Reinsurance, Stoneville agrees to fund a
trust account with a financial institution acceptable to Continental and
Stoneville with the amount of funds necessary for Continental to receive full
financial statement credit for such reinsurance and with the terms and
conditions of such trust to comply with the law of Continental's state of
domicile such that Continental shall receive full financial statement credit for
such reinsurance.
8. Article 8 is deleted in its entirety.
<PAGE>
9. Unless specifically amended herein, all other terms and conditions
of the Agreement remain in full force and in effect. Unless otherwise
specifically stated herein, capitalized terms shall have the meanings assigned
to them in the Agreement.
The parties have duly executed this Amendment as of the day and year
first above written.
CONTINENTAL: TRUST:
CONTINENTAL CASUALTY COMPANY DELTA AGRICULTURAL AND
INDUSTRIAL TRUST
By: By:
Name/Title: Name/Title:
STONEVILLE:
STONEVILLE INSURANCE
COMPANY
By:
Name/Title:
EXHIBIT 23.1
CONSENT OF RICHARD L. EATON, CPA, INDEPENDENT ACCOUNTANT
Independent Auditors' Consent
The Board of Directors
Stoneville Insurance Company
We consent to the use of (i) our audit report dated January 29, 1997 on the
financial statements of Delta Agricultural and Industrial Trust as of December
31, 1996 and 1995; and (ii) our audit report dated March 6, 1997 on the audited
financial statements of Stoneville Insurance Company for the year ending
December 31, 1996 in the Prospectus comprising Part I of the S-4 Registration
Statement of Stoneville Insurance Company.
We consent to the use of our name under the heading "Experts" and other such
locations as it may appear in the Prospectus comprising Part I of the
Registration Statement.
RICHARD L. EATON, CPA
/s/Richard L. Eaton, CPA
Jackson, Mississippi
September 12, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<DEBT-HELD-FOR-SALE> 0 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 0 0
<CASH> 19,970 19,970
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 19,970 19,970
<POLICY-LOSSES> 0 0
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 20,407 20,690
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (437) (1,025)
<TOTAL-LIABILITY-AND-EQUITY> 19,970 19,970
0 0
<INVESTMENT-INCOME> 0 0
<INVESTMENT-GAINS> 0 0
<OTHER-INCOME> 0 0
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<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> (437) (588)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (437) (588)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (437) (588)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 JUN-30-1997 JUN-30-1996
<DEBT-HELD-FOR-SALE> 1,141,504 0 1,157,084 2,293,551
<DEBT-CARRYING-VALUE> 522,884 2,247,145 587,732 196,898
<DEBT-MARKET-VALUE> 521,940 2,246,853 586,816 195,053
<EQUITIES> 1,696,944 2,469,692 247 2,405,721
<MORTGAGE> 0 0 0 0
<REAL-ESTATE> 0 0 0 0
<TOTAL-INVEST> 3,361,332 4,716,837 1,745,063 4,896,170
<CASH> 1,359,965 1,240,298 1,878,940 881,582
<RECOVER-REINSURE> 0 0 0 0
<DEFERRED-ACQUISITION> 0 0 0 0
<TOTAL-ASSETS> 5,733,305 8,156,720 4,713,278 6,744,379
<POLICY-LOSSES> 2,834,220 3,713,923 1,954,341 3,990,583
<UNEARNED-PREMIUMS> 0 1,466,279 0 0
<POLICY-OTHER> 0 0 0 0
<POLICY-HOLDER-FUNDS> 384,863 0 324,672 0
<NOTES-PAYABLE> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 2,453,894 2,365,728 2,383,989 2,376,021
<TOTAL-LIABILITY-AND-EQUITY> 5,733,305 8,156,720 4,713,278 6,744,379
1,987,491 5,323,952 0 2,037,474
<INVESTMENT-INCOME> 297,076 328,027 91,444 147,583
<INVESTMENT-GAINS> (37,286) (159,557) 0 983
<OTHER-INCOME> (422,850) 0 (9,115) (286,085)
<BENEFITS> 1,215,914 3,075,054 0 1,547,656
<UNDERWRITING-AMORTIZATION> 0 0 0 0
<UNDERWRITING-OTHER> 28,548 30,858 11,502 14,274
<INCOME-PRETAX> 129,010 1,948,286 (112,933) 96,570
<INCOME-TAX> 98,768 643,660 (40,489) 122,516
<INCOME-CONTINUING> 30,242 1,304,626 (72,444) (25,946)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 30,242 1,304,626 (72,444) (25,946)
<EPS-PRIMARY> 0 0 0 0
<EPS-DILUTED> 0 0 0 0
<RESERVE-OPEN> 3,713,923 3,849,169 2,834,220 3,713,923
<PROVISION-CURRENT> 959,032 2,558,087 0 746,795
<PROVISION-PRIOR> (42,440) (109,365) 0 573,289
<PAYMENTS-CURRENT> 369,070 1,197,368 0 161,383
<PAYMENTS-PRIOR> 1,427,225 1,386,600 879,879 882,041
<RESERVE-CLOSE> 0 3,713,923 0 3,990,583
<CUMULATIVE-DEFICIENCY> 0 94,697 0 0
</TABLE>
