Filed with the SEC on April 8, 1997 Registration No. 333-24739
This document dated August 7, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
AMENDMENT NUMBER TWO 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.
Stephen M. Roberts, Esq.
Watkins Ludlam & Stennis, P.A.
633 North State Street
P. O. Box 427
Jackson, Mississippi 39205-0427
Telephone Number: (601)949-4900
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 Amount to Offering Price Proposed Maximum Aggregate
Securities to be be Registered Per Unit Offering Price(2)
Registered 650,000 N/A $2,600,000
Common Stock
par value $1.00
======================== ============== ================ =====================
Amount of Registration Fee
$787.88
---------------------------------
---------------------------------
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(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.
============== ================ ===================== =====================
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; Plan
of Distribution of Excess Stock
5. Pro Forma Financial Information. Pro Forma Condensed Balance
Sheets and Statements of Income
(Unaudited) of the Company
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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
ii
<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 being
licensed 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. A conformed copy of the Plan 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. There are a total of approximately
507,224 Trust Units allocable to Former Members as a group which at $4.00 per
Trust Unit represents the approximately $2,028,894 value 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 number of
dissenters and the expenses of the Conversion. 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 bears to the net premiums paid to the Trust by all Former Members. The
Proportionate Earned Premium is calculated by dividing (i) the net earned
premium derived by the Trust from each Former Member for all Positive Income
Fund Years by (ii) the total net earned premium of the Trust derived from Former
Members for all Positive Income Fund Years. 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.
------------------
IN THE EVENT THAT THE MAXIMUM NUMBER OF SHARES OF STOCK REGISTERED
HEREUNDER ARE NOT DISTRIBUTED PURSUANT TO THE PLAN, THE COMPANY MAY SELL THE
BALANCE OF SUCH STOCK TO PERSONS OTHER THAN FORMER MEMBERS AT $4.00 PER SHARE
("PURCHASERS"). SUCH SALES SHALL BE MADE ONLY THROUGH OFFICERS AND DIRECTORS OF
THE COMPANY AND NO COMMISSIONS WILL BE CHARGED.
-----------------
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 AND BY PURCHASERS.
THIS STOCK IS PURELY SPECULATIVE.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE MISSISSIPPI DEPARTMENT OF INSURANCE OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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
Page
SUMMARY......................................................................1
The Company..................................................................1
The Trust....................................................................1
Definition of Former Members of the Trust....................................1
Description of Plan..........................................................2
Adoption of Plan.............................................................2
Reasons for Conversion.......................................................3
Dissenters' Rights...........................................................3
Effective Date...............................................................3
Conditions and Termination...................................................3
Assumption Reinsurance Agreement.............................................4
Termination of Self Insurer Status...........................................4
Business of the Company......................................................4
Management of the Company....................................................5
Regulation of the Company....................................................5
Dividend Policy..............................................................5
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
Sale of Excess Stock ........................................................6
RISK FACTORS.................................................................7
Lack of History of Operations................................................7
Limited Operations...........................................................7
Capitalization...............................................................7
Reliance on Certain Persons..................................................7
Variability of Operating Results.............................................8
Adequacy of Loss Reserves....................................................8
Regulation...................................................................8
Competition..................................................................9
Lack of Ratings..............................................................9
Licensure....................................................................9
THE CONVERSION..............................................................10
Background..................................................................10
Reasons for Conversion......................................................10
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<PAGE>
Recommendation of the Trust's Board of Trustees.............................12
Assumption Reinsurance Agreement............................................12
Regulatory Approvals........................................................14
Resales of Company Stock....................................................14
Certain Federal Income Tax Consequences.....................................14
Consequences to Former Members..............................................14
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.................................................................18
PRO FORMA CONDENSED BALANCE SHEETS AND STATEMENTS
OF INCOME (UNAUDITED) OF THE COMPANY..................................19
THE WORKERS' COMPENSATION INSURANCE SYSTEM..................................30
BUSINESS OF THE TRUST.......................................................31
History of the Trust........................................................31
Operations of the Trust.....................................................31
The Commercial Program......................................................31
Regulation..................................................................32
Employees...................................................................32
Trustees....................................................................32
Legal Proceedings...........................................................33
SELECTED FINANCIAL DATA OF THE TRUST........................................34
TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS..................................36
Overview....................................................................36
Results of Operations.......................................................37
Earned Premium..............................................................37
Losses......................................................................37
Other Expenses..............................................................41
Income Taxes................................................................41
Investment Income...........................................................42
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<PAGE>
Liquidity and Capital Resources.............................................42
General.....................................................................42
Liquidity Requirements......................................................42
Admitted Assets.............................................................44
Commitments.................................................................44
BUSINESS OF THE COMPANY.....................................................45
Organization and Purpose....................................................45
Company Management's Plan of Operation......................................45
Continuation of Commercial Program..........................................45
Recapture of Reserves.......................................................45
Provision of Reinsurance....................................................46
Creation of Other Workers' Compensation Insurance Programs..................46
General Operations..........................................................47
Investments.................................................................47
Government Regulation.......................................................48
Assumption of Trust Contracts...............................................49
Employees...................................................................49
Management of the Company...................................................49
Executive Compensation......................................................50
Legal Proceedings...........................................................50
DESCRIPTION OF COMPANY STOCK................................................51
COMPARISON OF RIGHTS OF FORMER MEMBERS OF THE TRUST AND
SHAREHOLDERS OF THE COMPANY ..........................................51
Governance..................................................................51
Liability...................................................................51
Assessment..................................................................51
Voting......................................................................51
Resale......................................................................52
Indemnification of Officers and Directors of the Company....................52
Indemnification of Trustees of the Trust....................................53
Preemptive Rights...........................................................54
Dividends...................................................................54
PLAN OF DISTRIBUTION OF EXCESS STOCK .......................................55
CERTAIN TRANSACTIONS AND RELATIONSHIPS......................................55
LEGAL MATTERS...............................................................56
EXPERTS.....................................................................56
INDEX TO FINANCIAL STATEMENTS..............................................F-1
INDEX TO FINANCIAL STATEMENTS..............................................F-2
iii
<PAGE>
EXHIBIT A -- PLAN AND AGREEMENT OF REORGANIZATION AND CONVERSION
OF DELTA AGRICULTURAL AND INDUSTRIAL TRUST...........................A-1
iv
<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
completing licensure 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.
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 those who are Former Members of the
Trust as those employers who had workers' compensation
1
<PAGE>
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
dividend, 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
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"). A
total of approximately 507,224 Trust Units are available for distribution to
Former Members, which represents the approximately $2,028,894, the estimated
value of the net assets anticipated to be transferred to the Company. The number
of Trust Units has been computed based upon the value of the equity of the Trust
as of December 31, 1996, increased by 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. 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 December 31, 1996 and the
effective date of the Plan. 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. See "The Plan -- General; Terms of the Plan;
Dissemination of Liquidating Distribution" and "Description of Company of
Stock."
Adoption of Plan
The Trust's Board of Trustees unanimously approved and adopted the Plan on
March 20, 1997. No vote of Former Members is required to approve or adopt the
Plan or consummate the Conversion.
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."
2
<PAGE>
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. 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") is
expected to be the close of business on the last day of the month after 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) receipt of an opinion from Watkins
Ludlam & Stennis, P.A., 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)
effectiveness of the Assumption Reinsurance Agreement described elsewhere
herein; 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."
3
<PAGE>
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.
Under the terms of the Assumption Reinsurance Agreement, the Company has
the option to reinsure Continental for part or all of the Trust's former
insurance which Continental directly assumed and in connection therewith to
recapture related reserves transferred to Continental. The Assumption
Reinsurance Agreement is expected to provide significant net income to the
Company through the recapture of part of the reserves transferred to
Continental. Though the adequacy of such reserves was actuarially computed, the
Company, based on its claims experience, believes such reserves are in excess of
the amounts actually needed to provide for claims assumed by Continental under
the Assumption Reinsurance Agreement. 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
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Company expects to obtain income through the recapture of certain loss reserves
which will be held by Continental, 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 will be important in the event the Company elects to write
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 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 to the Rights of Members of the Trust and
Shareholders of the Company -- Dividends."
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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 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." Sale of Excess Stock
In the event that the maximum number of shares of Stock registered
hereunder are not distributed pursuant to the Plan, the Company may sell the
balance of such stock to persons other than Former Members. The sale price of
such Stock shall be $4.00 per share. Such sales shall be made only through
officers and directors of the Company and no commissions will be charged. See
"Plan of Distribution of Excess Stock."
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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 its sole sources of revenue will consist
initially of investment income, premiums generated from the provision of
reinsurance and recapture of reserves under the Assumption Reinsurance
Agreement, premiums generated from the provision of reinsurance under the
Commercial Program, 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 or supervision by the Department of Insurance or the
Department of Insurance could seek to appoint a receiver or liquidator for the
Company. See "Business of the Company -- Company Management's Plan of
Operations; Government Regulation."
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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 if 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. Future loss
development could require reserves for prior periods to be increased, which
would adversely impact earnings in future periods.
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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
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 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 Company approved and adopted the Plan and the
sale of its stock to the Trust and related transactions on the same date.
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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, 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" its existing
claims.
No 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 assume 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."
Ability to Write Other Lines of Business
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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 programs similar to the Commercial Program to write
lines of 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 model. 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.
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 other than the amount registered by this Prospectus.
See "Comparison of the Rights of Members of the Trust and Shareholders of the
Company -- Liability; Assessment" and "Business of the Company -- Government
Regulation." Recommendation of the Trust's Board of Trustees.
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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Assumption Reinsurance Agreement
The Trust and the Company have entered into the Assumption Reinsurance
Agreement to be effective as of January 1, 1997, with Continental, a member of
the CNA Insurance Group. The Assumption Reinsurance Agreement was subsequently
amended effective , 1997. The CNA 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 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 $2,250,000 composed of
$2,000,000 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. 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 part or all of the Trust's former insurance which
Continental directly assumed ("Stoneville Reinsurance"). The Company plans to
reinsure risks that are three years old or greater at the first available
opportunity. The Company has chosen the three year point because loss reserves
required to be held by the Company against such risks are lower, thus allowing
the Company to write more reinsurance. As 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.
In addition, the Assumption Reinsurance Agreement will allow the Company
to recapture portions of the reserves held by Continental as described above
which may not be actuarially required due to settlement of claims ("Stoneville
Recapture"). On each January 1 and July 1, pursuant to Stoneville Recapture, the
Company has the right to cause Continental to transfer to the Company any
unspent reserves held by Continental over the amount actually needed either as a
result of (i) claims being settled for less than the amount reserved for such
claims; or (ii) an actuarial determination that such reserve amounts are not
required for the payment of reported and unreported claims. As the
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Company recaptures such unneeded reserves, these reserves and any investment
earnings they generate will provide income to the Company. See "Business of the
Company -- Company Management's Plan of Operations."
The Assumption Reinsurance Agreement will have no effect on the ongoing
operations of the Trust's Commercial Program.
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Regulatory Approvals
No 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."
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. will furnish 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 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).
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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). 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 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 having at least the minimum
levels of statutory capital and surplus as required by the Department of
Insurance. 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 value of the
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assets and liabilities to be transferred to the Company is anticipated to be
$2,028,894, which is the value of the equity of the Trust as of December 31,
1996, 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. See "Trust
Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Results of Operations -- Liquidity Requirements."
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. There are a total of
approximately 507,224 Trust Units allocable to Former Members which represents
the approximately $2,028,894 anticipated value of the net assets which will be
transferred to the Company. 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 December 31, 1996 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 (i) the net earned
premium derived by the Trust from each Former Member for all Positive Income
Fund Years by (ii) the total net earned premium of the Trust derived from Former
Members for all Positive Income Fund Years. 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 dividend in a self insured pool 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 not 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
18
<PAGE>
the Company will obtain for that purpose and not out of assets transferred to
the Company 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, 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.
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
(iv) dissenter's rights shall not be perfected by holders of more than twenty
percent (20%) of the Trust Units.
19
<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.
20
<PAGE>
PRO FORMA CONDENSED BALANCE SHEETS AND STATEMENTS
OF INCOME (UNAUDITED) OF THE COMPANY
The following unaudited pro forma condensed balance sheets and statements
of income as of December 31, 1996, give effect to the Conversion as if the
Conversion had been in place effective December 31, 1996.
The first pro forma condensed balance sheet assumes 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 information is based on historical financial statements of
the Trust giving effect to the transactions under the pooling of interests
method of accounting and the assumptions and adjustments described in the
accompanying notes to the unaudited pro forma financial statements.
The unaudited pro forma condensed balance sheets and statements of income
have been prepared by the management of the Company based upon financial
statements of the Trust and the Company which are included elsewhere herein.
These 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. The pro forma condensed balance sheets and
statements of income should be read in conjunction with the financial statements
and related notes of the Company and the Trust contained elsewhere herein.
21
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Balance Sheet (20% Dissent)
December 31, 1996 Trust Trust Stoneville Stoneville Stoneville Combined
Delta A&I Pro Forma Pro Forma Insurance Pro Forma Pro Forma Pro Forma
Trust Adjustments Balance Company Adjustments Balance Balance
--------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $1,359,965 $1,359,965 $19,970 $400,000 $419,970 $1,779,935
Invested assets 3,361,332(2,750,000) 611,332 611,332
Notes receivable 20,000 (20,000) 0 0
Accrued interest receivable 52,410 (407) 52,003 52,003
Reinsurance receivables, net of 660,986 (660,986) 0 0
uncollectible amounts
Excess insurance premium overpayment 89,860 89,860 89,860
Capital equipment leases at cost less
accumulated depreciation 13,517 13,517 13,517
Prepaid expenses 21,798 21,798 21,798
Income tax refund receivable 152,862 29,939 182,801 182,801
Other assets 575 575 575
--------------------------------------------- ------------------------------------
Total Assets $5,733,305($3,401,454) $2,331,851 $19,970 $400,000 $419,970 $2,751,821
============================================= ====================================
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss 2,834,220 (2,834,220) 0 $0
adjustment expenses
Reserve for premium adjustment 384,863 384,863 384,863
Notes payable 0 0 20,000 360,000 380,000 380,000
Accounts payable and accrued liabilities 56,290 56,290 407 (407) 0 56,290
Capital lease obligations 4,038 4,038 4,038
--------------------------------------------- ------------------------------------
Total Liabilities 3,279,411 (2,834,220) 445,191 20,407 359,593 380,000 825,191
============================================= ====================================
Stockholders' Equity
Common Stock 400,000 issued and outstanding
$1 par value 0 400,000 400,000 400,000
Retained Earnings 2,463,130 (576,470) 1,886,660 (437) (359,593) (360,030) 1,526,630
Unrealized decline in market value
of equity securities
less applicable future tax benefit (9,236) 9,236 0 0
--------------------------------------------- ------------------------------------
Total Stockholders' Equity 2,453,894 (567,234) 1,886,660 (437) 40,407 39,970 1,926,630
--------------------------------------------- ------------------------------------
Total Liabilities and Stockholders $5,733,305($3,401,454) $2,331,851 $19,970 $400,000 $419,970 $2,751,821
Equity ============================================= ====================================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Statement of Income
Year Ended December 31, 1996 Trust Trust Stoneville Stoneville Stoneville Combined
Delta A&I Pro Forma Pro Forma Insurance Pro Forma Pro Forma Pro Forma
Trust Adjustments Amount Company Adjustments Amount Amount
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue
Premiums earned $2,077,351 $2,077,351 $2,077,351
Premiums ceded (89,860) (89,860) (89,860)
---------------------------------------------------------------------------------
Net premiums earned 1,987,491 1,987,491 1,987,491
Investment income 297,076 (407) 296,669 296,669
Net realized gains and losses on
securities available-for-sale (37,286) (9,236) (46,522) (46,522)
Other (422,850) (422,850) (422,850)
---------------------------------------------------------------------------------
0
Total Revenue 1,824,431 (9,643) 3,802,279 0 0 0 3,802,279
---------------------------------------------------------------------------------
Expenses
Loss and loss adjustment expenses 916,592 916,592 916,592
Service company fees 299,322 200,000 499,322 499,322
Regulatory fees 28,548 28,548 28,548
General expenses 450,959 450,959 437 (407) 30 $450,989
---------------------------------------------------------------------------------
0
Total Expenses 1,695,421 200,000 1,895,421 437 (407) 30 1,895,451
---------------------------------------------------------------------------------
Net Income Before Income Tax Provision 129,010 (209,643) (80,633) (437) 407 (30) (80,663)
Provision for income tax 98,768 (88,155) 10,613 10,613
---------------------------------------------------------------------------------
Net Income $30,242 ($121,488) ($91,246) ($437) $407 ($30) ($91,276)
=================================================================================
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Adjustments to Pro Forma Financial Statements 20% Dissent
Trust Adjustments Stoneville Adjustments
<S> <C> <S> <C>
Adjustment to Investments Adjustments to Cash
CNA Fee Paid from Investments ($2,250,000) Stock Proceeds from Trust $400,000
===============
Transfer to Stoneville for Stock (400,000)
Payment to Dissenters (100,000) Adjustments to Notes Payable
------------
($2,750,000) Eliminate Note to Trust ($20,000)
============
Loan for Payment to Dissenters 380,000
---------------
Adjustments to Notes Receivable $360,000
===============
Eliminate Note from Stoneville ($20,000)
============
Adjustments to Accrued Liabilities
Adjustments to Acc. Int. Receivable Eliminate Acc. Interest to Trust ($407)
===============
Eliminate Stoneville Accrued Interest ($407)
============
Adjustments to Accrued Liabilities
Adjustment to Reinsurance Receivable Eliminate Acc. Interest to Trust ($407)
===============
Assignment of Receivable to CNA ($660,986)
============
Adjustments to Retained Earnings
Adjustment for Reserve for Losses Eliminate Note to Trust $20,000
Assumption of Claims Liability by CNA ($2,834,220) Eliminate Acc. Interest to Trust 407
============
Payment to Dissenters (380,000)
---------------
Adjustments to Retained Earnings ($359,593)
===============
Fee to CNA ($250,000)
Transfer Stock price to Stoneville (400,000)
Gain on Claims Assumption by CNA 173,234
Realized Loss on Security Sale (9,236) Trust Adjustments (Continued)
Eliminate Stoneville Note/Acc. Int. (20,407)
Income Tax Reduction 29,939 Adjustment to Net Investment Income
Payment to Dissenters (100,000) Eliminate Interest Income ($407)
------------ from Stoneville ===============
($576,470)
============
Adjustment to Loss and
Adjustment to Service Company Fees Loss Adjustment Expenses
Fee to CNA ($250,000) Reduction in Claims - CNA Assumption ($173,234)
============ ===============
Adjustment to Net Realized Gain (Loss) Adjustment to Income Tax Provision
Loss on Securities Sold ($9,236) Tax decrease Due to Increased Expense ($29,939)
============ ===============
</TABLE>
Pro Forma Financial Statements (20% Dissent)
Summary of Significant Assumptions
December 31, 1996
General Assumptions
The accompanying pro forma balance sheet and statement of income of the Company
is presented as though the Plan became effective as of December 31, 1996.
The pro forma financial statements have been prepared in accordance with
generally accepted accounting principles and combine the audited financial
statements of the Trust and the Company at December 31, 1996 as though the
Conversion had taken place as of that date.
Assumption Reinsurance Agreement Consummated
Invested assets were reduced by $2,250,000 to reflect the payment of a premium
to Continental for the assumption of all claims liabilities of the Trust as of
December 31, 1996. The payment of this premium eliminates the outstanding claims
liability of the Trust as of December 31, 1996 in the amount of $2,834,220 and
the reinsurance receivable in the amount of $660,986. Additionally, this
transaction creates a gain of $173,234 as a result of Continental assuming all
claims for less than the reserve established by the Trust . The payment also
includes a $250,000 non-refundable fee to Continental.
Payment to Dissenters
It is estimated that Former Members representing approximately twenty
percent (20%) of the equity of the Trust at December 31, 1996 ($480,000) will
perfect dissenters rights under the Plan. The Trust will pay an amount to be
determined as of the Effective Date which will not 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 second pro forma condensed balance sheet assumes no dissenter payments
by the Trust or the Company. For the purpose of this pro forma only, it has been
assumed that the Trust may pay up to $100,000 of its funds to dissenters with
the balance ($380,000) being paid by the Company out of operating funds or
proceeds of a loan that the Company will obtained for such purpose. 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.
Notes Payable - Trust
The note payable from the Company to the Trust in the amount of $20,000 along
with accrued interest in the amount of $407 would be eliminated as a result of
the conversion.
24
<PAGE>
Pro Forma Financial Statements (20% Dissent)
Summary of Significant Assumptions
December 31, 1996
Stock Issuance
It is assumed that 400,000 shares of common stock in the Company with a par
value of $1.00 per share was issued to members of the Trust by the pro forma
balance sheet date.
Sale of Securities
It is assumed that certain securities available-for-sale would be sold for
purposes of payment to dissenters resulting in a loss realized that was
previously unrealized.
Provision for Income Taxes
The provision for Income tax is reduced by $29,939 as a result of a reduction in
taxable income due primarily to the additional expense incurred as a result of
the Assumption Reinsurance Agreement.
25
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Balance Sheet (No Dissenters)
December 31, 1996 Trust Trust Stoneville Stoneville Stoneville Combined
Delta A&I Pro Forma Pro Forma Insurance Pro Forma Pro Forma Pro Forma
Trust Adjustments Balance Company Adjustments Balance Balance
----------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and Cash Equivalents $1,359,965 $1,359,965 $19,970 $500,000 $519,970 $1,879,935
Invested assets 3,361,332 (2,750,000) 611,332 611,332
Notes receivable 20,000 (20,000) 0 0
Accrued interest receivable 52,410 (407) 52,003 52,003
Reinsurance receivables, net of uncollectible 660,986 (660,986) 0 0
amounts
Excess insurance premium overpayment 89,860 89,860 89,860
Capital equipment leases at cost less
accumulated depreciation 13,517 13,517 13,517
Prepaid expenses 21,798 21,798 21,798
Income tax refund receivable 152,862 29,939 182,801 182,801
Other assets 575 575 575
----------- ----------------------------------------------------------------------
Total Assets $5,733,305 ($3,401,454) $2,331,851 $19,970 $500,000 $519,970 $2,851,821
=========== ======================================================================
Liabilities and Stockholders' Equity
Liabilities
Reserve for losses and loss adjustment expenses 2,834,220 (2,834,220) 0 $0
Reserve for premium adjustment 384,863 384,863 384,863
Notes Payable 0 0 20,000 (20,000) 0 0
Accounts payable and accrued liabilities 56,290 56,290 407 (407) 0 56,290
Capital lease obligations 4,038 4,038 4,038
----------- ----------------------------------------------------------------------
Total Liabilities 3,279,411 (2,834,220) 445,191 20,407 (20,407) 0 445,191
----------- ----------------------------------------------------------------------
Stockholders' Equity
Common Stock 500,000 issued and outstanding
$1 par value 0 400,000 400,000 400,000
Retained Earnings 2,463,130 (576,470) 1,886,660 (437) 20,407 19,970 1,906,630
Unrealized decline in market value of equity
securities less applicable future tax benefit (9,236) 9,236 0 0
----------- ----------------------------------------------------------------------
Total Stockholders' Equity 2,453,894 (567,234) 1,886,660 (437) 520,407 519,970 2,406,630
----------- ----------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $5,733,305($3,401,454) $2,331,851 $19,970 $500,000 $519,970 $2,851,821
=========== ======================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Statement of Income
Year Ended December 31, 1996 Trust Trust Stoneville Stoneville Stoneville Combined
Delta A&I Pro Forma Pro Forma Insurance Pro Forma Pro Forma Pro Forma
Trust Adjustments Amount Company Adjustments Amount Amount
------------------------------------ -------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Premiums earned 2,077,351 $2,077,351 $2,077,351
------------------------------------ -------------------------------- -----------
Premiums ceded (89,860) (89,860) (89,860)
Net premiums earned 1,987,491 1,987,491 1,987,491
Investment income 297,076 (407) 296,669 296,669
Net realized gains and losses on
securities available-for-sale (37,286) (9,236) (46,522) (46,522)
Other (422,850) (422,850) (422,850)
------------------------------------ -------------------------------- -----------
0
Total Revenue 1,824,431 (9,643) 1,814,788 0 0 0 1,814,788
------------------------------------ -------------------------------- -----------
Expenses
Loss and loss adjustment expenses 916,592 (173,234) 743,358 743,358
Service company fees 299,322 250,000 549,322 549,322
Regulatory fees 28,548 28,548 28,548
General expenses 450,959 450,959 437 (407) 30 $450,989
------------------------------------ -------------------------------- -----------
0
Total Expenses 1,695,421 76,766 1,772,187 437 (407) 30 1,772,217
------------------------------------ -------------------------------- -----------
Net Income Before Income Tax Provision 129,010 (86,409) 42,601 (437) 407 (30) 42,571
Provision for income tax 98,768 (29,939) 68,829 68,829
------------------------------------ -------------------------------- -----------
Net Income $30,242 ($56,470) ($26,228) ($437) $407 ($30) ($26,258)
==================================== ================================ ===========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Adjustments to Pro Forma Financial Statements No Dissenters
<S> <C> <S> <C>
Trust Adjustments
Adjustment to Investments Stoneville Adjustments
CNA Fee Paid from Investments ($2,250,000) Adjustments to Cash
Transfer to Restricted Assets 0 Stock Proceeds from Trust $400,000
===========
Transfer to Stoneville for Stock (400,000)
Payment to Dissenters 0 Adjustments to Notes Payable
-----------
($2,650,000) Eliminate Note to Trust ($20,000)
=========== ===========
Adjustments to Notes Receivable Adjustments to Accrued Liabilities
Eliminate Note from Stoneville ($20,000) Eliminate Acc. Interest to Trust ($407)
=========== ===========
Adjustments to Acc. Int. Receivable Adjustments to Common Stock
Eliminate Stoneville Accrued Interest ($407) Stock Proceeds from Trust $400,000
=========== ===========
Adjustments to Reinsurance Receivables Adjustments to Retained Earnings
Receivable assigned to CNA ($660,986) Eliminate Note to Trust $20,000
===========
Eliminate Acc. Interest to Trust 407
-----------
Adjustment for Reserve for Losses $20,407
===========
Assumption of Liability by CNA ($2,834,220)
===========
Adjustment to General Expenses
Adjustments to Retained Earnings Eliminate Interest Expense to Trust ($407)
===========
Fee to CNA ($250,000)
Transfer Stock price to Stoneville (400,000)
Realized Loss on Security Sale (9,236)
Gain on Claims Assumption by CNA 173,234
Tax Decrease Due to Increased Expenses 29,939 Trust Adjustments (Continued)
Eliminate Stoneville Note/Acc. Int. (20,407)
-----------
($476,470) Adjustment to Investment Income
===========
Eliminate Interest Income from ($407)
Stoneville ===========
Adjustment to Service Company Fees
Fee to CNA $250,000 Adjustment to Loss and Loss
===========
Adjustment Expenses
Adjustment to Net Realized Gain (Loss) Reduction in Claims - CNA Assumption ($173,234)
===========
Loss on Securities Sold ($9,236)
===========
Adjustment to Income Tax Provision
Tax Decrease Due to Increased Expense ($29,939)
</TABLE>
Pro Forma Financial Statements (No Dissenters)
Summary of Significant Assumptions
December 31, 1996
General Assumptions
The accompanying pro forma balance sheet and statement of income of the Company
is presented as though the Plan became effective as of December 31, 1996.
The pro forma financial statements have been prepared in accordance with
generally accepted accounting principles and combine the audited financial
statements of the Trust and the Company at December 31, 1996 as though the
Conversion had taken place as of that date.
Assumption Reinsurance Agreement Consummated
Invested assets were reduced by $2,250,000 to reflect the payment of a premium
to Continental for the assumption of all claims liabilities of the Trust as of
December 31, 1996. The payment of this premium eliminates the outstanding claims
liability of the Trust as of December 31, 1996 in the amount of $2,834,220 and
the reinsurance receivable in the amount of $660,986. Additionally, this
transaction creates a gain of $173,234 as a result of Continental assuming all
claims for less than the reserve established by the Trust. The payment also
includes a $250,000 non-refundable fee to Continental.
Payment to Dissenters
It is assumed that either no payments are required to be made for dissenters or
that dissenters' stock is sold, resulting in no net cash outlay for dissenters.
Notes Payable - Trust
The note payable from the Company to the Trust in the amount of $20,000 along
with accrued interest in the amount of $407 would be eliminated as a result of
the conversion.
28
<PAGE>
Pro Forma Financial Statements (No Dissenters)
Summary of Significant Assumptions
December 31, 1996
Stock Issuance
It is assumed that 500,000 shares of common stock in the Company with a par
value of $1.00 per share was issued to members of the Trust by the pro forma
balance sheet date.
Sale of Securities
It is assumed that certain securities available-for-sale would be sold resulting
in a loss realized that was previously unrealized.
Provision for Income Taxes
The provision for income taxes is reduced by $29,939 as a result of a reduction
in taxable income due primarily to the additional expense incurred as a result
of the Assumption Reinsurance Agreement.
29
<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
30
<PAGE>
lower their rates. As a result, many insurers clustered around the set rate.
Under the "loss costs" 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.
31
<PAGE>
("MRM") by which MRM acts as the Trust's representative for marketing the
Commercial Program nd allocates to Delta Administration, Inc. certain amounts
for oversight and administration of the Commercial Program and the Trust's
operations. 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. 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. MRM is controlled
by David R. White, who is an officer and directorof 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. From the percentage of
collected premiums paid to Delta Administration under the Representative
Agreement, 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."
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 - 7,304 Trust Units;
employer/affiliate of Aven Whittington - 1,912 Trust Units; employer/affiliate
of Merlin Richardson - 5,224 Trust Units; employer/affiliate of S. Hall
Barrett, Jr. - 4,514 Trust Units.
32
<PAGE>
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.
33
<PAGE>
SELECTED FINANCIAL DATA OF THE TRUST
The following selected financial data reflect the operations of the Trust
since January, 1995. Such data 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."
34
<PAGE>
Selected Financial Data of the Trust
For the Years Ended December 31, 1996 and 1995
Revenue 1996 1995
-----------------------------
Earned Premium $2,077,351 $5,659,925
Premium Ceded (89,860) (335,973)
Net Investment Income 297,076 328,027
Realized Investment Gains (Losses) (37,286) (159,557)
Other (422,850) 0
-----------------------------
Total $1,824,431 $5,492,422
-----------------------------
Excess Revenue over Expense
Before Income Tax Provision $129,010 $1,948,286
Excess Revenue over Expense $30,242 $1,304,626
-----------------------------
Total Assets $5,733,305 $8,156,720
=============================
Total Liabilities $3,279,411 $5,790,992
=============================
35
<PAGE>
TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Overview
The Trust is a taxable trust and is subject to both Federal and
Mississippi income tax.
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." The Trust continues to service the claims.
While the Trust receives no current income from the Commercial Program,
the Company plans to 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 (subject to Department of Insurance approval). The
Company's initial level of reinsurance permitted by the Department of Insurance
is expected to be 25% of the volume of business currently written within the
Commercial Program.
While expected to remain profitable, the profit to the Company from the
provision of reinsurance to the Commercial Program in 1997 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.
36
<PAGE>
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 will be limited to 25%, the net contribution
to the profits of the Company from this block of business will be limited.
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. 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.
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.
There were 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.
37
<PAGE>
<TABLE>
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Reserves for Unpaid Claims and
Claim Adjustment Expenses - Beginning of Year $3,005,414 $3,012,742 $1,982,140
Incurred Claims and Claim Adjustment Expenses
Provision for insured events - current year 959,032 2,558,087 2,986,083
Increases (decreases) in provision for
insured events of prior years 1,303 (109,365) (432,568)
-------------------------------------
Total incurred Claims and Claim Adjustment Expenses 960,335 2,448,722 2,553,515
Payments
Claims and claim adjustment expenses attributable
to insured events of the current year (369,070) (1,197,368) (706,834)
Claims and claim adjustment expenses attributable
to insured events of prior years (1,380,545) (1,260,982) (850,479)
Other Increase (decrease) in Service Company Fee (42,900) 2,300 34,400
Reserve --------------------------------------
Reserves for Unpaid Claims and
Claim Adjustment Expenses - End of Year $2,173,234 $3,005,414 $3,012,742
======================================
<FN>
Note: All Amounts Net of Receivables from Excess Reinsurance.
</FN>
</TABLE>
<TABLE>
Loss Reserve Development
Claim Year Ended July 31, 1992 Measurement Date
- ------------------------------------ ------------------------------------------------------------
7/31/92 7/31/93 7/31/94 12/31/94 12/31/95 12/31/96
------------------------------------------------------------
Cumulative Paid Losses $515,993 $912,225 $968,017 $974,661$1,009,269 $997,427
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Original Reserve for Unpaid Claims and
Claim Adjustment Expenses at 7/31/92 $935,500 $935,500 $935,500 $935,500 $935,500 $935,500
Retroactively Reestimated Liability for
Claims and Claim Adjustment Expenses 935,500 701,203 459,507 458,208 562,420 545,283
at 7/31/92
Difference in Original Estimated Liability
and the Reestimated Liability $0 $234,297 $475,993 $477,292 $373,080 $390,217
============================================================
Claim Year Ended July 31, 1993 Measurement Date
- ------------------------------------ --------------------------------------------------
7/31/93 7/31/94 12/31/94 12/31/95 12/31/96
--------------------------------------------------
Cumulative Paid Losses $1,292,914 $2,219,957$2,276,955$2,428,890$2,469,424
--------------------------------------------------
Original Reserve for Unpaid Claims and
Claim Adjustment Expenses at 7/31/93 $1,277,387 $1,277,387$1,277,387$1,277,387$1,277,387
Retroactively Reestimated Liability for Claims
and Claim Adjustment Expenses at 7/31/93 1,277,387 1,194,046 1,133,291 1,487,0681,362,818
--------------------------------------------------
Difference in Original Estimated Liability
and the Reestimated Liability $0 $83,341 $144,096($209,681)($85,431)
==================================================
Claim Year Ended July 31, 1994 Measurement Date
- ------------------------------------ -------------------------------------
07/31/94 12/31/94 12/31/95 12/31/96
----------------------------------------
Cumulative Paid Losses $851,045$1,081,253$1,407,235$1,625,425
----------------------------------------
Original Reserve for Unpaid Claims and
Claim Adjustment Expenses at 7/31/94 $1,389,768$1,389,768$1,389,768$1,389,768
Retroactively Reestimated Liability for Claims and
Claim Adjustment Expenses at 7/31/94 1,389,768 680,801 1,045,253 965,174
----------------------------------------
Difference in Original Estimated Liability
and the Reestimated Liability $0 $708,967 $344,515 $424,594
========================================
38
<PAGE>
Claim Adjustment Expenses at 7/31/92 935,500 701,203 459,507 458,208 562,420 545,283
Claim Adjustment Expenses at 7/31/92 935,500 701,203 459,507 458,208 562,420 545,283
Difference in Original Estimated
Liability and the Reestimated Liability $0 $234,297 $475,993 $477,292 $373,080 $390,217
============================================================
============================================================
Claim Year Ended July 31, 1993 Measurement Date
- ------------------------------------ --------------------------------------------------
7/31/93 7/31/94 12/31/94 12/31/95 12/31/96
--------------------------------------------------
Cumulative Paid Losses $1,292,914 $2,219,957$2,276,955$2,428,890$2,469,424
--------------------------------------------------
Loss Reserve Development (Continued)
Claim Period Ended December 31, 1994 (Short Year) Measurement Date
- ------------------------------------------------ ----------------------------
12/31/94 12/31/95 12/31/96
-----------------------------
Cumulative Paid Losses $251,530 $995,365$1,281,348
-----------------------------
Original Reserve for Unpaid Claims and
Claim Adjustment Expenses at 12/31/94 $2,098,233$2,098,233$2,098,233
Retroactively Reestimated Liability for Claims and
Claim Adjustment Expenses at 12/31/94 2,098,233 1,405,0881,322,582
-----------------------------
Difference in Original Estimated Liability
and the Reestimated Liability $0 $693,145 $775,651
=============================
Claim Year Ended December 31, 1995 Measurement Date
- -------------------------------------- ------------------
12/31/95 12/31/96
-------------------
Cumulative Paid Losses $1,197,368$2,045,048
-------------------
Original Reserve for Unpaid Claims and
Claim Adjustment Expenses at 12/31/95 $1,456,719$1,456,719
Retroactively Reestimated Liability for Claims and
Claim Adjustment Expenses at 12/31/95 1,456,7191,591,625
-------------------
Difference in Original Estimated Liability
and the Reestimated Liability $0($134,906)
===================
<FN>
Note: All Amounts Net of Receivables from Excess Reinsurance
</FN>
</TABLE>
39
<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.
Regulatory fees were virtually unchanged, decreasing from $30,858 in 1995
to $28,548 in 1996. 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.
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.
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 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.
40
<PAGE>
41
<PAGE>
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 below reserved
amounts during the last six months of 1996, further reducing cash available for
investment.
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
principals. 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.
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
The Trust and its successors have entered into the Assumption Reinsurance
Agreement whereby Continental will assume all of the claims liabilities of the
Trust as of January 1, 1997. The Trust will pay Continental an amount not to
exceed $2,250,000 consisting of $2,000,000 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.
42
<PAGE>
Under the Assumption Reinsurance Agreement, the Company has the right at
certain intervals to provide reinsurance to Continental pertaining to the claims
liabilities assumed by Continental pursuant to the Assumption Reinsurance
Agreement. The Company plans to reinsure all claims that are three years old or
greater at the first available opportunity. As such reinsurance is put in place,
the assets the Trust transferred to Continental will be transferred back to the
Company along with any associated liability. The outstanding claims net of
amounts due from reinsurers under excess insurance policies (excluding claims
processing fees included in claims liability) associated with each of the
Trust's fund years as of December 31, 1996 is as follows:
Net
Claims Outstanding
Fund Year December 31, 1996 Percent
Prior to 1994 $ 419,644 19.79%
1994 317,538 14.98%
1995 792,990 37.40%
1996 589,962 27.83%
Total $ 2,120,134 100.00%
The amount of reinsurance that the Department of Insurance will allow the
Company to write will be determined largely by the amount of capital and surplus
of the Company. See "Business of the Company -- Government Regulation." The
ability to receive the reserves from settled claims should cause the Company's
surplus to grow and place the Company in a position of being able to write more
reinsurance business.
Management anticipates that the Company will realize a gain of
approximately 20% or $424,000 upon providing Continental with reinsurance on the
above claims. Assuming no transfer of reserves from settled claims, such gains
would occur over a period of three years in the following approximate amounts:
1997 $147,436
1998 158,598
1999 117,966
Total $424,000
The Company also has the right under the Assumption Reinsurance Agreement
to require Continental to transfer excess reserves held by them that are
associated with claims that have been settled. Management believes that the
ability to receive the reserves associated with settled claims will be
especially beneficial to the Company in light of the speed at which the Trust
has settled claims in the past. For example, the Company may reinsure
Continental at December 31, 1997 for any claims incurred prior to 1994 ($419,644
as shown above) and may also require Continental to release any reserves
associated with claims that have been settled in 1994, 1995 and 1996. This would
43
<PAGE>
amount to reinsuring specific claims that are not yet three years old and
receiving the associated reserves without receiving a corresponding liability.
In addition to the transfer of reserves allocable to settled claims, the Company
has the right to cause Continental to transfer to the Company any unspent
reserves held by Continental over the amount actually needed as a result of an
actuarial determination that such reserve amounts are not required for the
payment of reported and unreported claims.
Regarding payments to dissenters, the Trust will pay an amount (to be
determined as of the Effective Date) which will not 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 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 $2,028,894
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. Commitments
44
<PAGE>
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. 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.
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.
Recapture of Reserves
45
<PAGE>
The Assumption Reinsurance Agreement provides that the Trust will transfer
to Continental $2,000,000 in reserves which Continental will have available to
pay claims made with respect to insurance written by the Trust.
On each January 1 and July 1, pursuant to Stoneville Recapture, the
Company has the right to cause Continental to transfer to the Company any
unspent reserves held by Continental over the amount actually needed either as a
result of (i) claims being settled for less than the amount reserved for such
claims; or (ii) an actuarial determination that such reserve amounts are not
required for the payment of reported and unreported claims. As the Company
recaptures such unneeded reserves, these reserves will be invested by the
Company to provide income. See Trust Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources -- Liquidity Requirements."
Provision of Reinsurance
The Company anticipates providing reinsurance to Continental in accordance
with the Assumption Reinsurance Agreement as well as providing 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 will have excess
coverage which will limit claims to a maximum of $250,000 per occurrence.
Under the Assumption Reinsurance Agreement, the Company has the right at
certain intervals to provide reinsurance to Continental pertaining to the claims
liabilities assumed by Continental pursuant to the Assumption Reinsurance
Agreement. The Company plans to reinsure all claims that are three years old or
greater at the first available opportunity. As such reinsurance is put in place,
the assets the Trust transferred to Continental will be transferred back to the
Company along with any associated liability. The Company plans to reinsure
claims three years old or greater because statutory reserve requirements for
such claims are less than reserve requirements for claims that are less than
three years old.
Creation of Other Workers' Compensation Insurance Programs
In addition to the Commercial Program, the Company plans to develop
workers' compensation insurance programs with other large carriers. The programs
will be structured in a manner similar to the current Commercial Program. The
Company anticipates it will 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 will vary from 25% to 50% of the risk. Due to
the
46
<PAGE>
integration of stop loss policies into the program at relatively low levels, the
potential loss to the Company on this program will be greatly minimized.
Since these programs are in the formative stages, no projection is made in
the pro forma income statements of the Company. However, the Company anticipates
that it will realize a net profit from these programs amounting to 12.5% of the
annual premium written. The volume of business expected to be written within
these programs and the related profits for the first four years of the Company
are as follows:
1997 1998 1999 2000
Estimated Premium $1,000,000 $2,000,000 $3,000,000 $4,000,000
Estimated Net Income $ 125,000 $ 250,000 $ 375,000 $ 500,000
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, as applicable, in adjoining 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.
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.
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
47
<PAGE>
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.
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
48
<PAGE>
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.
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:
49
<PAGE>
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 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
No compensation will be paid 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
50
<PAGE>
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.
51
<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.
52
<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 obligation
53
<PAGE>
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 which
54
<PAGE>
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
55
<PAGE>
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.).
PLAN OF DISTRIBUTION OF EXCESS STOCK
In the event that the maximum number of shares of Stock registered
hereunder are not distributed pursuant to the Plan, the Company may sell the
balance of such stock to persons other than Former Members. The sale price of
such Stock shall be $4.00 per share. Such sales shall be made only through
officers and directors of the Company and no commissions will be charged.
In the event that the expenses set aside for the Conversion were less than
anticipated or revenues of the Trust are more than anticipated and the remaining
amounts are transferred to the Company as a contribution to capital, then the
sale of Company Stock to Purchasers will dilute the value of Stock held by such
Former Members, but not to a level of less than $4.00 per share.
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 - March 31, 1997, MRM received direct
and indirect compensation from the Trust and the Company in the aggregate
amounts of $131,290; $137,716; and $21,145, respectively, for such years.
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 Representative Agreement, Delta Administration
is paid 3.5% of the collected premiums generated by the Commercial Program which
is used by Delta Administration to pay the office expenses of the Trust,
including rent, the salaries of the employees of Delta Administration (including
Mr. Vickery) and sponsor fees. This arrangement was created because it is
unlawful to pay commissions to a person or entity not licensed as an insurance
agent or agency. Mr. Vickery is licensed by the Department of Insurance as an
individual property and casualty agent and Delta Administration is licensed by
the Department of Insurance as a property and casualty insurance agency. Mr.
Vickery, through Delta Administration, also 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.
56
<PAGE>
In 1995, 1996, and for the period from January 1, 1997 - March 31, 1997,
Delta Administration received direct and indirect compensation from the Trust
and the Company in the aggregate amounts of $111,991; $114,207; and $25,057,
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, 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.
57
<PAGE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Delta Agricultural and Industrial Trust Financial Statements for the Years F-3
ended December 31, 1996 and 1995 F-4
Report of Independent Auditor
Balance Sheets as of December 31, 1996 and 1995 F-5
Statements of Revenues and Expenses for Years Ended
December 31, 1996 and 1995 F-6
Statements of Changes in Trust Equity for Years Ended
December 31, 1996 and 1995 F-7
Statements of Cash Flows for Years Ended December 31, F-9
1996 and 1995
Notes to Financial Statements
Delta Agricultural and Industrial Trust Compiled Financial Statements F-20
for the Three Months Ended March 31, 1997 and 1996 F-21
Report of Independent Auditor
Balance Sheets as of March 31, 1997 and 1996 F-22
Statements of Revenues and Expenses for Three Months Ended
March 31, 1997 and 1996 F-23
Statements of Changes in Trust Equity for Three Months Ended
March 31, 1997 and 1996 F-24
Statements of Cash Flows for Three Months Ended March 31, F-26
1997 and 1996
Notes to Financial Statements
Stoneville Insurance Company Financial Statements for the
Years Ended December 31, 1996 and 1995
Report of Independent Auditor F-37 Balance Sheet as of December 31,
1996 F-38 Statement of Income for Year Ending December 31, 1996 F-39
F-40 Statement of Changes in Stockholders' Equity for Year Ended F-41
December 31, 1996 F-42
Statement of Cash Flows for Year Ended December 31, 1996
Notes to Financial Statements
<PAGE>
INDEX TO FINANCIAL STATEMENTS
(cont.)
Stoneville Insurance Company Compiled Financial Statements for the Three
Months Ended March 31, 1997 and 1996
Report of Independent Auditor F-45 Balance Sheet as of March 31, 1997
F-48 F-46 Statement of Income for the Three Months Ending March 31,
1997 F-49 F-47 Statement of Changes in Stockholders' Equity for the
Three Months F-50 Ended
March 31, 1997
Statement of Cash Flows for the Three Months Ended March 31, 1997
Notes to Financial Statements
</TABLE>
<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.
Richard L. Eaton
Jackson, Mississippi
January 29, 1997
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Balance Sheets
December 31, 1996 and 1995
1996 1995
----------- ----------
<S> <C> <C>
Assets
Investments:
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>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND 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
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Changes in Trust Equity
For the Years Ended December 31, 1996 and 1995
1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<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 securties 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
=========== ===========
Reconciliation of net income to net cash provided
by Operating Activities
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 receivable38,326 (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>
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.
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 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.
<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
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.
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
<PAGE>
classification code. The Trust then applies certain modifiers that either
increase or decrease the NCCI rate based on an individual
<PAGE>
Note 2: Summary of Significant Accounting Policies (continued)
employer's claims history. From this modified rate certain other discounts may
be applied to arrive at the individual insured's annual premium.
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. 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
------- --------
<PAGE>
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:
<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>
<PAGE>
<TABLE>
<CAPTION>
Note 3: Investments (continued)
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>
<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 $ 4,829 $ 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>
Note 3: Investments (continued)
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
-------- ----------
<PAGE>
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".
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
========== ==========
Note 3: Investments (continued)
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.
There were no securities that were non-income producing for the year ended
December 31, 1996.
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.
<PAGE>
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.
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.
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:
<PAGE>
1996 1995
------- --------
Current Income Tax
Federal $81,142 $549,712
State 17,626 93,948
------- --------
TOTAL $98,768 $643,660
======= ========
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.
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. 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 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
<PAGE>
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>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 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
To the Trustees
Delta Agricultural and Industrial Trust
Jackson, Mississippi
I have compiled the accompanying balance sheets of Delta Agricultural and
Industrial Trust as of March 31, 1997 and 1996, and the related statements of
revenues and expenses, changes in trust equity and cash flows, for the three
months then ended, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. I have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
Richard L. Eaton
Jackson, Mississippi
June 12, 1997
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Balance Sheets
March 31, 1997 and 1996
1997 1996
----------- ----------
<S> <C> <C>
Assets
Investments:
Trading securities (at fair value)
Equity securities $ 247 $ 2,438,645
Securities available-for-sale (at fair value)
Fixed maturities (amortized cost - $1,149,207 and $1,558,165) 1,132,273 1,549,448
Securities held-to-maturity (at amortized cost)
Fixed Maturities (fair value - $521,940 and $593,825) 423,918 595,863
----------- -----------
Total Investments 1,556,438 4,583,956
Cash and Cash Equivalents 2,494,299 1,495,584
Premiums receivable net of uncollectible amount 0 778,402
Notes receivable 20,000 0
Accrued interest receivable 42,064 54,220
Reinsurance receivables, net of uncollectible amounts 660,986 708,509
Excess insurance premium overpayment 89,860 0
Other receivables 9,958 0
Capital equipment leases at cost less
accumulated depreciation of $11,782 and $6,964 12,312 17,130
Prepaid expenses 19,745 184,674
Income taxes receivable 198,830 0
Other assets 575 575
----------- -----------
Total Assets $ 5,105,067 $ 7,823,050
=========== ===========
Liabilities and Trust Equity
Liabilities
Reserve for losses and loss adjustment expenses $ 2,345,052 $ 3,439,700
Unearned premiums 0 1,223,856
Reserve for premium adjustment 324,268 0
Accounts payable and accrued liabilities 29,000 152,443
Income taxes payable 0 245,516
Capital lease obligations 3,868 7,108
----------- -----------
Total Liabilities 2,702,188 5,068,623
----------- -----------
Trust Equity
Retained earnings 2,419,829 2,763,144
Net unrealized loss on securities
available for sale, net of deferred taxes (16,950) (8,717)
----------- -----------
Total Trust Equity 2,402,879 2,754,427
----------- -----------
Total Liabilities and Trust Equity $ 5,105,067 $ 7,823,050
=========== ===========
<FN>
See accompanying notes and accountant's report.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL & INDUSTRIAL TRUST
Statements of Revenue and Expenses
For the Three Months Ended March 31, 1997 and 1996
1997 1996
-------- -----------
<S> <C> <C>
Revenue
Premiums earned $ 0 $ 1,294,792
Premiums ceded 0 (44,930)
-------- -----------
Net premiums earned 0 1,249,862
Investment income 51,961 65,128
Net realized gains and losses on securities available-for-sale0 983
Other (9,959) (167,692)
-------- -----------
Total Revenue 42,002 1,148,281
-------- -----------
Expenses
Loss and loss adjustment expenses 0 326,581
Service company fees 0 139,649
Regulatory fees 9,000 12,437
General expenses 84,870 102,890
-------- -----------
Total Expenses 93,870 581,557
-------- -----------
Excess Revenue over Expenses
Before Income Tax Provision (51,868) 566,724
Provision (benefit) for income taxes (all current) (8,551) 236,468
-------- -----------
Excess Revenue over Expenses ($43,317) $ 330,256
======== ===========
<FN>
See accompanying notes and accountant's report
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Changes in Trust Equity
For the Three Months Ended March 31, 1997 and 1996
1997 1996
------------ ----------
<S> <C> <C>
Trust Equity - Beginning of Year $ 2,453,894 $2,365,728
Excess Revenue over Expenses (43,317) 330,256
Change in net unrealized loss on
securities available for sale
net of change in deferred taxes (7,698) 58,443
----------- ----------
Trust Equity - End of Period $ 2,402,879 $2,754,427
=========== ==========
<FN>
See accompanying notes and accountant's report.
</FN>
</TABLE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND
INDUSTRIAL TRUST
Statements of Cash Flows For the Three Months Ended March 31,
1997 and 1996
1997 1996
----------- ------------
<S> <C> <C>
Cash Flows From Operating Activities
Premiums collected $ 0 $ 1,610,997
Losses and loss adjustment expenses paid (489,168) (600,804)
Refunds and premium adjustments paid (60,595) 0
Administrative expenses paid (119,107) (535,646)
Income taxes paid (37,417) (385,000)
Investment income received 62,088 105,677
Net (increase) decrease in trading securities 1,678,829 (23,899)
Interest paid 0 (426)
----------- -----------
Net Cash Provided by Operating Activities 1,034,630 170,899
----------- -----------
Cash Flows From Investing Activities
Proceeds from sales of available-for-sale securities 0 559,145
Purchase of available-for-sale securities 0 (727,333)
Purchases of held-to-maturity securities 0 (100,000)
Transfer of held-to-maturity security to cash equivalent 99,874 356,000
Capital expenditures 0 (1,553)
----------- -----------
Net Cash Provided by Investing Activities 99,874 86,259
----------- -----------
Cash Flows From Financing Activities
Principal payments under capital lease obligations (170) (1,872)
----------- -----------
Net Cash Used in Financing Activities (170) (1,872)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,134,334 255,286
Cash and Cash Equivalents at Beginning of Year 1,359,965 1,240,298
----------- -----------
Cash and Cash Equivalents at End of Year $ 2,494,299 $ 1,495,584
=========== ===========
Reconciliation of net income to net cash provided
by Operating Activities
($ 43,317) $ 330,256
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities: 1,205 1,205
Depreciation 0 (983)
(Gain) or loss on sale of investments 1,696,697 (23,899)
Decrease (increase) in trading securities 0 167,692
Unrealized loss on trading securities 0 558,628
Decrease in premiums receivable 2,053 (182,052)
Decrease (increase) in prepaid expenses 10,346 36,516
Decrease (increase) in accrued interest receivable (9,958) 0
Increase in notes and other receivables 625 4,033
Amortization of bond premium (discount) (489,168) (274,223)
Decrease in unpaid loss and loss adjustment expenses 0 (242,423)
Increase (decrease) in unearned premiums (27,290) (55,319)
Decrease in accounts payable and accrued expenses (60,595) 0
Increase in premium adjustment reserve (45,968) (148,532)
----------- -----------
Decrease in income tax liability
Net cash provided by operating activities $ 1,034,630 $ 170,899
=========== ===========
<FN>
See accompanying notes and accountant's report.
</FN>
</TABLE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
Notes to Financial Statements
For the Three Months Ended March 31, 1997 and 1996
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.
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, 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 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.
<PAGE>
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.
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
Note 2: Summary of Significant Accounting Policies (continued)
<PAGE>
then applies certain modifiers that either increase or decrease the NCCI rate
based on an individual employer's claims history. From this modified rate
certain other discounts may be applied to arrive at the individual insured's
annual premium.
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
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.
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.
Note 2: Summary of Significant Accounting Policies (continued)
Income Taxes
Income tax provisions are based on the asset and liability method.
<PAGE>
Note 3: Investments
Major categories of net investment income are summarized as follows:
1997 1996
--------- ---------
Fixed Maturities $ 46,304 $ 27,167
Equity Securities 0 30,332
Short-term Investments 5,657 7,629
--------- ---------
Total $ 51,961 $ 65,128
========= =========
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:
Available-for-Sale Securities as of March 31, 1997 and 1996
March 31, 1997
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ------- ------- -------------
Bank certificates of
deposit $ 523,039 $ 585 $ 3,768 $ 519,856
Obligations of states and
political subdivisions 626,168 0 13,751 612,417
---------- ------- ------- -----------
Total $1,149,207 $ 585 $17,519 $ 1,132,273
========== ======= ======= ===========
Note 3: Investments (continued)
March 31, 1996
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- --------- ------- -----------
Bank certificates of
deposit $ 1,380,072 $ 1,522 $ 8,849 $ 1,372,745
Obligations of states and
<PAGE>
political subdivisions 178,093 0 1,390 176,703
----------- --------- -------- -----------
Total $ 1,558,165 $ 1,522 $ 10,239 $ 1,549,448
=========== ========= ======== ===========
Held-to-Maturity Securities as of March 31, 1997 and 1996
March 31, 1997
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- -------- -------- --------------
Bank certificates of
deposit $ 423,918 $ 0 $ 0 $ 423,918
----------- --- --- -----------
Total $ 423,918 $ 0 $ 0 $ 423,918
=========== === === ===========
March 31, 1996
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ----------- ---------- ----------
U.S. Treasury securities
and obligations of the
U.S. Government $ 95,863 $ 0 $ (2,038) $ 93,825
Bank certificates of
deposit 500,000 0 0 500,000
--------- ------ --------- ---------
Total $ 595,863 $ 0 $ (2,038) $ 593,825
========= ====== ========= =========
Note 3: Investments (continued)
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:
<PAGE>
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 $9,959 and $167,692 respectively. Trading security gains and losses
are included in "Other Income".
The scheduled maturities of available-for-sale and held-to-maturity securities
at March 31, 1997 were as follows:
Held-to-Maturity Securities Amortized
Cost Fair Value
----------- ------------
Due in one year or less $ 423,918 $ 423,918
--------- -----------
Total $ 423,918 $ 423,918
========= ===========
Available-for-Sale Securities: Amortized
Cost Fair Value
--------- -------------
Due in one year or less $ 433,515 $ 431,715
Due after one year through five years 195,434 193,324
Due after five years through ten years 520,258 507,234
--------- ----------
Total $1,149,207 $1,132,273
========== ==========
There were no securities that were non-income producing for the twelve months
prior to March 31, 1997.
Note 4: Reserve for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses at March 31, 1997 and 1996
consisted of the following:
1997 1996
---------- -----------
Case-basis reserves $2,015,724 $ 2,109,326
Incurred but unreported claims 276,228 1,234,374
Service company fees 53,100 96,000
---------- -----------
Total Reserves $2,345,052 $ 3,439,700
========== ===========
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 1997 and 1996
respectively.
<PAGE>
While the excess carrier has made all required payments through March 31, 1997,
the Trust retains the ultimate liability for the payment of claims.
Additionally, 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>
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 March 31, 1997 and 1996.
1997 1996
------ ------
1996 $3,484
1997 $2,660 2,450
1998 1,208 1,174
------ ------
$ 3,868 $7,108
================
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 March 31, 1997, 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 March 31, 1997.
<PAGE>
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 $ (7,439) $205,727
State (1,112) 30,741
--------- --------
TOTAL $ (8,551) $236,468
========= ========
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.
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: Notes Receivable
At March 31, 1997 the balance sheet of the Trust reflects a note receivable of
$20,000. 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.
<PAGE>
Note 10: Concentration of Credit Risk
At March 31, 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 and $708,509 as
of March 31, 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.
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.
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
=============
<PAGE>
See accompanying notes to financial statements.
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)
================
<PAGE>
See accompanying notes to financial statements.
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
============= ============= ===============
<PAGE>
See accompanying notes to financial statements.
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)
================
<PAGE>
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
<PAGE>
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 THREE MONTHS ENDED MARCH 31, 1997 AND 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
Stoneville Insurance Company
Jackson, Mississippi
I have compiled the accompanying balance sheet of Stoneville Insurance Company
as of March 31, 1997, and the related statement of revenues and expenses,
changes in trust equity and cash flows for the three months then ended, in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. I have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
Richard L. Eaton
Jackson, Mississippi
June 12, 1997
<PAGE>
STONEVILLE INSURANCE COMPANY
Balance Sheet
March 31, 1997
Assets
Cash in Bank $19,970
-------------
Total Assets $19,970
=============
Liabilities
Notes Payable $20,000
Accrued Interest Payable 690
-------------
Total Liabilities 20,690
-------------
Stockholders' Equity
Common Stock 0
Retained Earnings (720)
-------------
Total Stockholders' Equity (720)
-------------
Total Liabilities and Stockholders' Equity $19,970
=============
See accompanying notes and accountant's report.
STONEVILLE INSURANCE COMPANY
Statement of Income
For the Three Months Ended March 31, 1997
Revenue $0
-------------
Expenses
Interest Expense 283
-------------
Total Expenses 283
-------------
Net Income ($283)
=============
See accompanying notes and accountant's report.
<PAGE>
STONEVILLE INSURANCE
COMPANY
Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 1997
Total
Common Retained Stockholders'
Stock Earnings Equity
--------------- ------------------------------
Balance at Beginning of Year $0 ($437) ($437)
Net Income (Loss) 0 (283) ($283)
--------------- ------------------------------
Balance at End of Period $0 ($720) ($720)
=============== ==============================
See accompanying notes and accountant's report.
STONEVILLE INSURANCE COMPANY
Statement of Cash Flows
For the Three Months Ended March 31, 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 ($238)
Increase in accrued interest payable 238
-------------
Net Cash Provided by Operating Activities $0
=============
See accompanying notes and accountant's report.
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Three Months Ended March 31, 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.
<PAGE>
STONEVILLE INSURANCE COMPANY
Notes to Financial Statements
For the Three Months Ended March 31, 1997
The Company was inactive during the first three months of 1997.
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 March 31, 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 March 31, 1997 amounts to $690. This note would be eliminated upon
the completion of the plan of conversion described in Note 1.
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
8 Previously filed.
23.1 Previously filed.
27.1 Financial Data Schedule Stoneville
Insurance Company Period 12/31/96 and 3/31/97
27.2 Financial Data Schedule Delta Agricultural
and Industrial Trust Periods 12/31/96 and
12/31/95
27.3 Financial Date Schedule Delta Agricultural
and Industrial Trust Periods 3/31/97 and
3/31/96
99.1 Financial Statement Schedules of The Trust
99.2 Financial Statement Schedules of Stoneville
Insurance Company
1
<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 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.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment Number 2
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 30th day of July, 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 Three to the Registration Statement has been signed by the
following persons in the capacities and on the date indicated.
NAME TITLE DATE
/s/ Harry E. Vickery* Chairman of the Board August 7, 1997
- ----------------------- and Director (Chief
William L. Kennedy Executive Officer)
/s/ Harry E. Vickery President and Director, August 7, 1997
- ----------------------- Principal Financial Officer,
Harry E. Vickery Principal Accounting Officer
/s/ Harry E. Vickery* Secretary, Treasurer, August 7, 1997
- ---------------------- Vice President,
David R. White Director
*By: /s/ Harry E. Vickery
Harry E. Vickery, Attorney in Fact,
pursuant to the power of attorney issued
on April 1, 1997
3
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<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) (720)
<TOTAL-LIABILITY-AND-EQUITY> 19,970 19,970
0 0
<INVESTMENT-INCOME> 0 0
<INVESTMENT-GAINS> 0 0
<OTHER-INCOME> 0 0
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 0 0
<INCOME-PRETAX> (437) (283)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (437) (283)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (437) (283)
<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>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 1,141,504 0
<DEBT-CARRYING-VALUE> 522,884 2,247,145
<DEBT-MARKET-VALUE> 521,940 2,246,853
<EQUITIES> 1,696,944 2,469,692
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 3,361,332 4,716,837
<CASH> 1,359,965 1,240,298
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 5,072,319 8,156,720
<POLICY-LOSSES> 0 3,713,923
<UNEARNED-PREMIUMS> 0 1,466,279
<POLICY-OTHER> 2,173,234 0
<POLICY-HOLDER-FUNDS> 384,863 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 2,453,894 2,365,728
<TOTAL-LIABILITY-AND-EQUITY> 5,072,319 8,156,720
2,077,351 5,323,952
<INVESTMENT-INCOME> 297,076 328,027
<INVESTMENT-GAINS> (37,286) (159,557)
<OTHER-INCOME> (422,850) 0
<BENEFITS> 1,305,774 3,075,054
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 479,507 30,858
<INCOME-PRETAX> 129,010 1,948,286
<INCOME-TAX> 98,768 643,660
<INCOME-CONTINUING> 30,242 1,304,626
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 30,242 1,304,626
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 3,005,414 3,849,169
<PROVISION-CURRENT> 959,032 2,558,087
<PROVISION-PRIOR> (42,440) (109,365)
<PAYMENTS-CURRENT> 369,070 1,197,368
<PAYMENTS-PRIOR> 1,379,702 1,386,600
<RESERVE-CLOSE> 2,173,234 3,713,923
<CUMULATIVE-DEFICIENCY> 2,317,410 2,258,357
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<DEBT-HELD-FOR-SALE> 1,132,273 1,549,448
<DEBT-CARRYING-VALUE> 423,918 595,863
<DEBT-MARKET-VALUE> 423,918 595,863
<EQUITIES> 247 2,438,645
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 1,556,438 4,583,956
<CASH> 2,494,299 1,495,584
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 0 0
<TOTAL-ASSETS> 5,105,067 7,823,050
<POLICY-LOSSES> 2,345,052 3,439,700
<UNEARNED-PREMIUMS> 0 1,223,856
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 324,268 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 2,402,879 2,754,427
<TOTAL-LIABILITY-AND-EQUITY> 5,105,067 7,823,050
0 1,249,862
<INVESTMENT-INCOME> 51,961 65,128
<INVESTMENT-GAINS> 0 983
<OTHER-INCOME> (9,959) (167,692)
<BENEFITS> 0 466,230
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 9,000 12,437
<INCOME-PRETAX> (51,868) 566,724
<INCOME-TAX> (8,551) 236,468
<INCOME-CONTINUING> (43,317) 330,256
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (43,317) 330,256
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 2,834,220 3,713,923
<PROVISION-CURRENT> 0 185,445
<PROVISION-PRIOR> 0 141,136
<PAYMENTS-CURRENT> 0 52,361
<PAYMENTS-PRIOR> 489,168 548,443
<RESERVE-CLOSE> 2,345,052 3,439,700
<CUMULATIVE-DEFICIENCY> 2,317,410 2,258,357
</TABLE>
Exhibit 99.1
Financial Statement Schedules of the Trust
Schedule Number Description
- ---------------- ------------
I Summary of Investments - Other than
Investments in Related Parties
II Condensed Financial Information of
Registrant
III Supplementary Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts
VI Supplemental Information Concerning
Property - Casualty Insurance Operations
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996 AND 1995
MARCH 31, 1997 AND 1996
DECEMBER 31, 1996
Balance
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
========= ========= =========
DECEMBER 31, 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
========= ========= =========
MARCH 31, 1997
Fixed maturities:
Bonds:
States, municipalities
and political
subdivisions 626,168 612,417 612,417
Certificates of deposit 946,957 943,774 943,774
--------- --------- ---------
Total fixed maturities 1,573,125 1,556,191 1,556,191
--------- --------- ---------
Equity securities
Common stocks:
Industrial,
miscellaneous and
all other 247 247 247
--------- --------- ---------
Total investments $1,573,372 $1,556,438 $1,556,438
========= ========= =========
MARCH 31, 1996
Fixed maturities:
Bonds:
United States
Government and
government agencies
and authorities $95,863 $93,825 $95,863
States, municipalities
and political
subdivisions 178,093 176,703 176,703
Certificates of deposit 1,880,072 1,872,745 1,872,745
--------- --------- ---------
Total fixed maturities 2,154,028 2,143,273 2,145,311
--------- --------- ---------
Equity securities
Common stocks:
Industrial,
miscellaneous and
all other 2,438,645 2,438,645 2,438,645
--------- --------- ---------
Total investments $4,592,673 $4,581,918 $4,583,956
========= ========= =========
</TABLE>
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1996 AND 1995
MARCH 31, 1997 AND 1996
Schedule II is not applicable. The registrant has no
subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1996 AND 1995
MARCH 31, 1997 AND 1996
Future Other
Deferred Policy Policy
Policy Benefits, Claims and
Acquisition Claims and Unearned Benefits
Segment Costs Loss Exp. Claims Payable
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31
1996
See Note $0 $2,834,220 $0 $0
DECEMBER 31
1995
See Note $0 $3,713,923 $1,466,279 $0
MARCH 31
1997
See Note $0 $2,345,052 $0 $0
MARCH 31
1996
See Note $0 $3,439,700 $1,223,856 $0
</TABLE>
<TABLE>
Benefits, Amorti-
Claims, zation of
Net loss and Deferred
Invest- Settle- Policy Other
Premium ment ment Acq. Operating Premiums
Segment Revenue Income Expenses Costs Expenses Written
- ------------ --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31 $1,987,491 $297,076 $1,215,914 $0 $479,507 $2,077,351
1996
See Note
DECEMBER 31 $5,323,952 $328,027 $3,075,054 $0 $469,082 $5,659,925
1995
See Note
MARCH 31 $0 $ 51,961 $0 $0 $ 93,870 $ 0
1997
See Note
MARCH 31 $1,249,862 $ 65,128 $ 466,230 $0 $115,327 $1,294,792
1996
See Note
</TABLE>
Note: Delt Agricultural and Industrial Trust wrote only Workers' Compensation
Insurance in 1996. Therefore, there were no segments to report.
<PAGE>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
SCHEDULE IV - REINSURANCE
DECEMBER 31, 1996 and 1995
MARCH 31, 1997 AND 1996
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed to
Amount Companies Companies Amount Net
------------------------------------------------------------
Premiums
- --------
Property and
Liability Insurance*
DECEMBER 31, 1996 $2,077,351 $ 89,860 $0 $1,987,491 0.00%
======================================================
DECEMBER 31, 1995 $5,659,925 $335,973 $0 $5,323,952 0.00%
======================================================
MARCH 31, 1997 $ 0 $ 0 $0 $ 0 0.00%
======================================================
MARCH 31, 1996 $1,294,792 $ 44,930 $0 $1,249,862 0.00%
======================================================
*Workers Compensation
<PAGE>
<TABLE>
Delta Agricultural and Industrial Trust
Schedule V - Valuation and Qualifying Accounts
December 31, 1996 and 1995
March 31, 1997 and 1996
Additions
---------------------
Balance Charged Charged Balance
Beginning to Costs to Other End of
Description Period & Expense Accounts Deductions Period
- --------------------------------------------------------------------------
<C> <C> <S> <S> <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
Period ended
March
31, 1997
(Note A) $16,777 - - $16,777 $ 0
Period ended
March
31, 1996
(Note A) $ 0 - - 0 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
Period ended
March
31, 1997
67,160 - - 58,773 8,717
Period ended
March
31, 1996
9,236 - 7,714 - 16,950
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. </TABLE>
<PAGE>
<TABLE>
<CAPTION>
DELTA AGRICULTURAL AND INDUSTRIAL TRUST
SCHEDULE VI - SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
DECEMBER 31, 1996 AND 1995
MARCH 31, 1997 AND 1996
Deferred Reserve for
Affiliation Policy Unpaid Claims Net
with Acquisition and Claim Unearned Earned Investment
Registrant Costs Adj. Expense Discount Premiums Premiums Income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Registrant $0 $2,834,220 $237,894 $0 $1,987,491 $297,076
December 31, 1995
Registrant $0 $3,713,923 $251,104 $1,466,279 $5,323,952 $328,027
March 31, 1997
Registrant $0 $2,345,052 $100,000 $0 $ 0 $ 51,961
March 31, 1996
Registrant $0 $3,439,700 $251,104 $1,223,856 $1,249,862 $ 65,128
</TABLE>
<TABLE>
Claims and Claim
Adjustment Expenses
Incurred Related to Amortization Paid Claims
---------------------- of Deferred and Claim
Current Prior Policy Acq. Adjustment Premium
Year Years Costs Expenses Written
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1996
Registrant $ 959,032 ($ 42,440) $0 $1,796,295 $2,077,351
December 31, 1995
Registrant $2,558,087 ($109,365) $0 $2,583,968 $5,659,925
March 31, 1997
Registrant $ 0 $ 0 $0 $ 0 $ 0
March 31, 1996
Registrant $ 185,445 $141,136 $0 $ 0 $1,294,792
</TABLE>
Note: Delta Agricultural and Industrial Trust has no subsidiaries.
Exhibit 99.2
Financial Statement Schedules of the Company
Schedule Number Description
- ---------------- ------------
I Summary of Investments - Other than
Investments in Related Parties
II Condensed Financial Information of
Registrant
III Supplementary Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts
VI Supplemental Information Concerning
Property - Casualty Insurance Operations
<PAGE>
STONEVILLE INSURANCE COMPANY
SCHEDULE 1 - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
MARCH 31, 1997
Schedule I is not applicable. The Company had no investments at December 31,
1996 or March 31, 1997.
<PAGE>
STONEVILLE INSURANCE COMPANY
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1996
MARCH 31, 1997
Schedule II is not applicable.
<PAGE>
STONEVILLE INSURANCE COMPANY
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1996
MARCH 31, 1997
Schedule III is not applicable. The Company was inactive in 1996 and the first
quarter of 1997.
<PAGE>
STONEVILLE INSURANCE COMPANY
SCHEDULE IV - REINSURANCE
DECEMBER 31, 1996
MARCH 31, 1997
Schedule IV is not applicable.
<PAGE>
STONEVILLE INSURANCE COMPANY
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1996
MARCH 31, 1997
Schedule V is not applicable.
<PAGE>
STONEVILLE INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
DECEMBER 31, 1996
MARCH 31, 1997
Schedule VI is not applicable. The Company was inactive in 1996 and the first
quarter of 1997.
