UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-24739
---------
STONEVILLE INSURANCE COMPANY
----------------------------
(exact name of Registrant as specified in its charter)
MISSISSIPPI 72-1341156
- --------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Identification Number)
incorporation of organization)
633 North State Street, Suite 200,
Jackson, Mississippi 39202-7817
- ---------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (601-352-7817)
--------------
Securities registered pursuant to Section 12(b) of the Act: None
-------
Securities registered pursuant to Section 12(g) of the Act: None
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. Yes (X ) No ( )
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES ( X ) NO ()
Issuer's revenues for the most recent fiscal year: $2,088,336
Aggregate market value of equity held by non-affiliates: To the issuer's
knowledge there has never been a sale of its common stock or any bid or asked
prices of such stock.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at March 25, 1999
Common stock, $1.00 par value 503,384 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
<PAGE>
STONEVILLE INSURANCE COMPANY
FORM 10-KSB
PART I
In addition to historical information, this report contains statements
which constitute forward-looking statements and information which are based on
management's beliefs, plans, expectations and assumptions and on information
currently available to management. The words "may," "should," "expect,"
"anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," and
similar expressions used in this report that do not relate to historical facts
are intended to identify forward-looking statements. These statements appear in
a number of places in this report, including, but not limited to, statements
found in Item 1 "Description of Business" and in Item 6 "Management's Discussion
and Analysis." All phases of the Company's operations are subject to a number of
risks and uncertainties. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projections in the forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and uncertainties
discussed in this report, including, without limitation, the portions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports and filings and public statements, many of which are beyond the
control of the Company, and many of which, or a combination of which, could
materially affect the results of the Company's operations and whether forward-
looking statements made by the Company ultimately prove to be accurate.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Stoneville Insurance Company (the "Company") is a Mississippi domestic
property and casualty insurer formed December 13, 1996. The Company was licensed
by the Mississippi Department of Insurance on January 1, 1998 to write workers'
compensation insurance in the State of Mississippi. The Company's home office is
located in Jackson, Mississippi.
The Company was formed to become the successor of Delta Agricultural and
Industrial Trust, which was a Mississippi workers' compensation self insurance
trust (the "Trust") formed in 1991 by members of the Delta Council of
Stoneville, Mississippi, as a response to the unavailability of workers'
compensation insurance at reasonable prices. Pursuant to a Plan and Agreement of
Reorganization and Conversion of the Trust (the "Plan") which was effective at
the close of business on December 31, 1997: (i) the Trust transferred
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 issued shares of common
stock of the Company to the Trust; and (iii) the Trust liquidated and
distributed to former members of the Trust one (1) share of the Company's common
stock for each trust unit ($4.00 of value of Trust equity) allocable to such
former member.
The Company currently operates as a reinsurer for certain direct commercial
writers of workers' compensation insurance in the State of Mississippi. The
Company also writes direct workers' compensation insurance for small employers
in Mississippi. During 1999 the Company anticipates reinsuring certain direct
commercial writers of workers' compensation insurance in Arkansas. The Company
intends to enter into an agreement to acquire American Colonial Insurance
Company ("American Colonial"). American Colonial is a small Arkansas domestic
property and casualty insurer formed April 15, 1958 and is licensed to write
workers' compensation insurance in the State of Arkansas. The acquisition was
approved by the Arkansas Commissioner of Insurance on March 19, 1999. Although
the acquisition is subject to certain other conditions, the Company anticipates
completing the acquisition by March 31, 1999. Upon consummation of the
acquisition, it is anticipated that American Colonial will be re-named
Stoneville Insurance Company of Arkansas and will write direct workers'
compensation insurance for small employers in Arkansas.
<PAGE>
The Company has entered into an agreement to provide full workers'
compensation claims administration and risk control services to the commercial
insurers that it reinsures in Mississippi and Arkansas. The Company also
provides full workers' compensation claims administration and risk control
services for the Company's direct workers' compensation insurance written in
Mississippi. In January 1999, the Company formed Stoneville Service Company as a
wholly owned subsidiary of the Company to conduct claims administration and risk
control business. Stoneville Service Company is a Mississippi corporation. It
has been authorized in Arkansas to provide workers' compensation claims
administration services. Stoneville Service Company has established an office in
Little Rock, Arkansas and currently provides workers' compensation claims
administration services for self insured employer accounts in Arkansas. It is
anticipated that Stoneville Service Company also will provide workers'
compensation claims administration services in Mississippi.
COMPANY'S REINSURANCE BUSINESS
The Company currently has two reinsurance programs whereby the Company
reinsures certain direct commercial writers of workers' compensation insurance.
The main program is with Continental Casualty Company ("Continental") and is
operated pursuant to the terms of a Quota Share Reinsurance Agreement (the
"Quota Share Agreement"). The Quota Share Agreement provides for the Company to
reinsure a twenty-five percent (25%) quota share of certain workers'
compensation insurance written by Continental in Mississippi and Arkansas. The
Company's liability under the Quota Share Agreement is limited to twenty-five
percent (25%) of up to $100,000 (each occurrence, each policy) for the
Mississippi insurance business and twenty-five percent (25%) of up to $200,000
(each occurrence, each policy) for the Arkansas business. The Company is
required to collateralize the agreement with a letter of credit totaling
$100,000 per $1,000,000 of gross premium written under the program.
The second reinsurance program is a one-time reinsurance arrangement with
Continental pursuant to a March 20, 1997, Assumption Reinsurance Agreement (the
"Assumption Reinsurance Agreement"). The Assumption Reinsurance Agreement was
subsequently amended effective September 5, 1997. Under the Assumption
Reinsurance Agreement, Continental assumed the Trust's insurance liabilities for
the period through July 1, 1996, when the Trust ceased writing workers'
compensation insurance. Under the terms of the Assumption Reinsurance Agreement,
the Company had the option to reinsure Continental with respect to the insurance
which Continental directly assumed. On February 13, 1998, the Company exercised
this option by providing written notice to Continental.
In addition to the reinsurance programs discussed above, the Company may
develop workers' compensation insurance programs with other large carriers. It
is anticipated that these programs will be structured in a manner similar to the
programs described above, and the Company would participate as a reinsurer of
the business written by the commercial carriers and provide claims
administration and risk control services.
<PAGE>
COMPANY'S DIRECT INSURANCE BUSINESS
In early 1998, management of the Company identified a need in the State of
Mississippi for workers' compensation insurance for small employers. The Company
began writing direct workers' compensation insurance in the fall of 1998. This
program is known as the Small Employer Workers' Compensation Program (the "Small
Comp Program"). The target annual premium for the Small Comp Program is $750 to
$10,000 with the annual premium generally being less than $4,000. Morgan-White
Underwriters, Inc. ("Morgan-White Underwriters") handles the marketing and
sales of the direct insurance (this arrangement is discussed below) and the
Company handles all claims and administration services through its claims and
risk control group (discussed below).
In an effort to minimize its liability from the Small Comp Program, the
Company has entered into two reinsurance arrangements. The first of these
reinsurance arrangements is with Trenwick America Reinsurance Corporation
("Trenwick"). The terms of this arrangement are set forth in a Quota Share
Reinsurance Agreement with Trenwick whereby Trenwick reinsures a fifty percent
(50%) quota share of up to $200,000 (each occurrence). The second arrangement is
with Continental and the terms of this arrangement are set forth in an Agreement
of Reinsurance whereby Continental assumes liability for the Company's ultimate
net loss (each occurrence) in excess of $200,000.
CLAIMS AND RISK CONTROL GROUP
The Company has entered into an agreement to provide full workers'
compensation claims administration and risk control services to the commercial
insurers that it reinsures in Mississippi and Arkansas. The Company also
provides full workers' compensation claims administration and risk control
services for the Company's direct workers' compensation insurance written in
Mississippi.
In January 1999, the Company formed Stoneville Service Company as a wholly
owned subsidiary of the Company to conduct the claims administration and risk
control business. Stoneville Service Company is a Mississippi corporation. It
has been authorized in Arkansas to provide workers' compensation claims
administration and risk control services. Stoneville Service Company has
established an office in Little Rock, Arkansas, and currently provides workers'
compensation claims administration services for self insured employer accounts
in Arkansas.
It is anticipated that during 1999, Stoneville Service Company may begin
providing workers' compensation claims administration services in Mississippi.
It is also anticipated that during 1999, Stoneville Service Company may begin
providing claims administration services with respect to Arkansas workers'
compensation insurance business insured by the Company.
On July 1, 1998, the Company entered into a Service Agreement (the "Service
Agreement") with Continental whereby the Company provides complete claims
administration services for workers' compensation insurance written by
Continental and subject to the reinsurance arrangement between the Company and
Continental. The term of the Service Agreement is from July 1, 1998 through June
30, 1999, with one year automatic renewal terms unless terminated by either
party not later than sixty (60) days prior to the then current period.
On July 1, 1997, the Company entered into a Loss Control Agreement (the
"Loss Control Agreement") with Continental whereby the Company performs certain
risk control services for Continental in connection with workers' compensation
insurance written by Continental and subject to the reinsurance arrangement
between the Company and Continental. These services include: (i) providing
conferences to certain agricultural clients of Continental to assist them in
preventing industry specific injuries; (ii) conducting annual safety surveys and
providing Continental with loss prevention recommendations; and (iii) conducting
hazardous employment surveys for clients selected by Continental. The term of
the Loss Control Agreement is continuous until terminated upon the sixty (60)
days written notice of either party.
<PAGE>
COMPANY MANAGEMENT'S PLAN OF OPERATION
The Company intends to concentrate its business activities of providing
workers' compensation for businesses in the agricultural and industrial sectors
in Mississippi, Arkansas, and, in the future if desirable opportunities arise,
in nearby states. Management of the Company believes that it has a base of
experience in agricultural workers' compensation risk (such as cotton gins)
which is transferable to other states.
The Company plans to focus its direct workers' compensation insurance
business on "small premium" policies with premiums in the $750 to $10,000 range
with the annual premium generally being less than $4,000.
The Company plans to continue its reinsurance business with Continental and
will continue to pursue options to enter into reinsurance agreements with other
direct writers of workers' compensation insurance. In addition to expanding its
reinsurance business, the Company plans to expand its claims administration and
risk control services in the State of Mississippi and Arkansas and will continue
to consider options to expand these services into other states.
DATA PROCESSING SYSTEM
The Company has recently leased, and is currently installing, a new
computer accounting system. This accounting system will be fully integrated with
Morgan-White Underwriters so that no duplicate data entry will be required. Once
Morgan-White Underwriters enters the data into the system, the Company will be
able to use the data to handle billing and customer service. In addition to this
accounting system, the Company has recently purchased a new computer system
which will assist the Company and Stoneville Service Company in offering
complete claims administration services.
COMPANY STRUCTURE
The Company currently has one wholly owned subsidiary, Stoneville Service
Company. Upon the completion of the acquisition of American Colonial, it also
will be a wholly owned subsidiary of the Company. It is anticipated that the
Company and American Colonial will ultimately be combined into a single
insurance entity.
At the 1999 annual meeting of the Company, it is anticipated that the
shareholders will vote on an Agreement and Plan of Exchange whereby, each share
of the Company will be exchanged for one share of Stoneville, Inc., a
Mississippi corporation (the "Holding Company") created for the sole purpose of
entering into the proposed exchange. After the proposed exchange, all of the
shares of stock of Stoneville Service Company and American Colonial may be
distributed to the Holding Company as a dividend so that the Company, Stoneville
Service Company and American Colonial would become wholly owned subsidiaries of
the Holding Company.
The proposed exchange is subject to certain approvals, including the
approval of the Mississippi Department of Insurance. It is anticipated that the
exchange will be consummated in the second quarter of 1999.
<PAGE>
PROGRAM MANAGEMENT
On September 1, 1998, the Company entered into a Program Management
Agreement (the "Program Management Agreement") with Morgan-White Underwriters.
Under the terms of the Program Management Agreement, Morgan-White Underwriters
has the exclusive right to receive and accept proposals for insurance for the
Company for the Approved Programs as defined in the Program Management
Agreement. The Approved Programs include one hundred sixty eight (168) workers'
compensation risk categories and are limited by various underwriting guidelines
set forth in the Program Management Agreement. Pursuant to the Program
Management Agreement, the Company and Morgan-White Underwriters are jointly
responsible for promotional activities for the Approved Programs and the Company
is responsible for the issuance of quotations, binders and policies and claims
administration. The term of the Program Management Agreement is ten (10) years,
with automatic one year renewals unless one hundred eighty (180) days prior
written notice is given by either party.
INVESTMENTS
Management of the Company's portfolio of investments is a significant part
of the Company's business. The Company's investments are limited by statutes and
other regulations which restrict a large portion of such investments to specific
categories. The Company is expected to invest in securities and other
investments authorized by applicable state laws and regulations and receive
income from such investments in the form of interest, dividends and capital
gains. The Company expects to follow an investment policy designed to maximize
yield to the extent consistent with liquidity requirements and preservation of
assets. The Company has retained Investek Capital Management, Inc. ("Investek")
as its investment advisor. Investek currently manages over $1 billion and has
substantial experience in investing funds of insurance companies.
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.
EMPLOYEES
The Company and its subsidiaries currently have a total of thirteen (13)
employees, all of whom are full-time employees. Eight (8) of the employees are
employed in Mississippi and the remaining five (5) employees are employed in
Arkansas.
SUPERVISION AND REGULATION
The Company is subject to regulation by the Mississippi Department of
Insurance (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.
<PAGE>
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 is to maintain the ratio of net written premiums
to statutory surplus within the maximum guidelines of the National Association
of Insurance Commissions.
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 are
determined by the Company in accordance with applicable law. Reserves are
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 periodically compares estimated and actual expenses for settled claims
and adjusts 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
automatically became a member of the Mississippi Insurance Guaranty Association
(the "Guaranty Association"). The purpose of the Guaranty Association is to
provide a mechanism for the payment of claims made by insureds against an
insolvent insurer. The Guaranty Association may assess insurers to pay the
obligations of the Guaranty 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 was 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
"Assigned Risk Plan"). The purpose of the Pool is to be a reinsurance mechanism
for the Assigned Risk 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.
YEAR 2000
The year 2000 computer issue is caused by computer programs being written
using two digits rather than four to identify the applicable year. Since most
older application software only contains the two digits, many computer systems
will identify January 1, 2000 as January 1, 1900 which has the potential to
cause many computer systems and software programs to generate incorrect results,
or worse, not function at all. The magnitude of the problem extends beyond the
computer environment as many business machines and other office equipment also
have date sensitive functions.
<PAGE>
The Company purchased all of its computer software and hardware in 1997 and
1998. The purchasing process included an assessment of the product's Year 2000
compliance and all software acquired by the Company has been represented to be
Year 2000 compliant.
The Company has identified two companies whose failure to be Year 2000
compliant could have a material impact on the Company. Continental acts as a
fronting company under several reinsurance arrangements where the Company acts
as a reinsurer. The failure of Continental to be Year 2000 compliant could delay
the issuance of policies and the payment of claims. The Company uses Trustmark
National Bank for routine banking services. The public disclosures of these
companies, including their SEC filings, indicate that both have made substantial
progress towards Year 2000 compliance and expect to be fully compliant by
January 1, 2000. The Company intends to continue to monitor the public
disclosures made by these companies and to develop contingency plans if these
disclosures indicate problems.
The Company expects to spend only a nominal amount of money on Year 2000
issues. Because the Company does not anticipate any significant Year 2000
problems it has not developed any contingency plans.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases it's principal executive offices located at 633 North
State Street, Suite 200, Jackson, Mississippi. The Company also leases its
Arkansas office which is located at 124 West Capital Avenue, Little Rock,
Arkansas. Management believes the offices are in good condition and adequate for
the Company's foreseeable needs.
ITEM 3. 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 Mitchel Guttenberg (the "Securities
Arbitration"). In the Securities Arbitration Statement of Claim, the Trust asked
for $2,062,185 in actual and punitive damages as a result of improper trading on
its account by the persons listed above. Following the conversion, the Company
succeeded to the Trust's claim in the Securities Arbitration. During February
1999, an arbitration panel heard the Company's claim and on March 8, 1999, a
decision was issued by the arbitration panel rejecting all of the Company's
claims and splitting the costs of the hearing between the parties. The Company
is responsible for $3,450 in costs.
The Company is, from time to time, involved in litigation arising in the
normal course of business. Management of the Company, based on the advice of
counsel, is of the opinion that the Company's ultimate liability, if any, which
may result from the litigation, will not have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's shareholders during the
fourth quarter of 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's shares.
Management of the Company is not aware of any trades of Company stock.
HOLDERS
As of March 25, 1999, there were 402 holders of record of Common Stock of
the Company.
DIVIDENDS
The Company has paid no dividends since its inception and there are no
present plans to pay 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL DATA
The following selected financial data reflect operations of the Company since
January 1, 1997 and have been derived from the financial statements examined by
Deloitte and Touche LLP, independent certified public accountants whose report
with respect thereto appears elsewhere in this report.
Selected Financial Data
For the Years Ended December 31, 1998 and 1997
1998 1997
------------ ------------
Earned Premium (net of ceded $ 1,691,374
amount of approximately $20,000)
Investment Income 93,978 $ 193,465
Administrative and Management Fees 243,477
Net Realized Losses on Trading Securities (19,057)
Other 59,507 228,871
------------ ------------
Total revenues $ 2,088,336 $ 403,279
============ ============
Loss Before Income Taxes $ (158,256) $ (759,459)
============ ============
Net Loss $ (96,536) $ (474,439)
============ ============
Total Assets $ 4,502,602 $ 2,122,588
============ ============
Total Liabilities $ 2,587,549 $ 118,482
============ ============
RESULTS OF OPERATIONS
The Company's results of operations for 1997 and 1998 differ greatly. The
Company experienced a significant growth in total revenues in 1998 (from
$403,279 in 1997 to $2,088,336 in 1998), a significant decrease in net loss
(from $474,439 in 1997 to $96,536 in 1998) and a significant increase in total
assets (from $2,122,588 in 1997 to $4,502,602 in 1998). The main reason for
these significant differences is that the Company did not have any real business
operations in 1997. In early 1998, the Company began its active reinsurance
business operations, in July of 1998 the Company began its claims administration
and risk control operations, and in the fall of 1998, the Company began its
direct insurance business operations.
For the year ended December 31, 1998 the Company had $1,691,374 in earned
premiums compared to $0 for the year ended in December 31, 1997. No business was
written from June 30, 1996 through
December 31, 1997.
The Company's losses and loss adjustment expenses increased from $707,736
in 1997 to $1,269,134 in 1998. Losses and loss adjustment expenses generally
increase as personnel costs and premiums paid by policyholders increase. These
costs also can increase or decrease as a result of adjustments made to the
reserve amounts established to pay reported and unreported claims.
<PAGE>
As a result of Continental's assumption of the Trust's insurance
liabilities (reported and unreported) pursuant to the Assumption Reinsurance
Agreement, the Company did not have any insurance liabilities in 1997. The
reason for this is that the premium the Company paid to Continental to assume
the insurance liabilities exceeded the existing claims reserve on the books of
the Trust. Consequently, the losses and loss adjustment expenses were charged in
1997 to reflect the premium paid. This adjustment amounted to $707,736, the
entire amount of loss and loss adjustment expense for 1997.
The significant increase in the Company's losses and loss adjustment
expenses in 1998 are a result of the Company beginning active operations in 1998
and not having the benefit of a charge against loss and loss adjustment expense
as in 1997. The following schedule details the changes in unpaid claims and
claim adjustment expenses from 1997 through 1998.
Reconciliation of Beginning and Ending
Loss and Loss Adjustment Expense Reserves
1998 1997
------------ ------------
Reserves for unpaid losses and $ 0 $ 2,834,220
loss adjustment expenses -
beginning of year
Incurred losses and loss 1,269,134 0
adjustment expenses:
Provision for the current year
Increase (decrease) in estimates 0 707,736
for losses occurring in prior years ------------ ------------
Total incurred claims and claim 1,269,134 707,736
adjustment expenses
Payment for loss and loss
adjustment expenses
incurred in:
Current year 511,979 0
Prior years ** 0 (2,880,970)
Other:
Increase (decrease) in 0 0
service company fee reserve
Reinsurance receivable ** 1,023,532 (660,986)
------------ -----------
Reserve for unpaid losses and
loss adjustment
expenses - end of year $ 1,780,687 $ 0
============ =============
** Payments for prior years paid in 1997 include $1,586,463 paid to Continental
as part of the Assumption Reinsurance Agreement. Receivables due from
reinsurance contracts on outstanding claims were also assigned to Continental as
part of the Assumption Reinsurance Agreement.
<PAGE>
OTHER EXPENSES
Policy acquisition fees which consist primarily of commissions paid to
independent insurance agents representing the Company were $53,502 in 1998
compared to $0 in 1997. Since no business was written in 1997, no acquisition
fees were incurred in that year.
Program administration fees of $107,377 were incurred in 1998 compared to
$0 in 1997 as a result of the insurance programs begun in 1998.
Regulatory fees are fees charged by the Mississippi Workers' Compensation
Commission and are based on medical and indemnity payments made to claimants
during the previous calendar year. Such fees increased from $23,004 in 1997 to
$63,823 in 1998.
General expenses increased from $430,592 in 1997 to $752,756 in 1998. In
1997 the activity of the Company was limited to the reorganization and
conversion of the Trust and the Company did not conduct any insurance business
operations. Consequently, the expenses incurred were limited primarily to costs
related to such reorganization and conversion. In 1998 however, the Company
began building its insurance operation including the establishment of a claims
administration and risk control group and administrative staff. There was no fee
based income to offset expenses until July, 1998, consequently, the Company
sustained a net loss in 1998.
Total expenses increased from $1,162,738 in 1997 to $2,246,592 in 1998.
Loss before income taxes benefit decreased from ($759,459) in 1997 to ($158,256)
in 1998.
INCOME TAXES
The tax benefit of $285,020 in 1997 was decreased to $61,720 in 1998, due
to a decrease in the Company's net loss from 1997 to 1998.
In 1997, the loss sustained by the Company produced a taxable loss that the
Company opted to carry back to an earlier tax year to recoup taxes paid in that
prior year. The combined Federal and State refunds relating to such carry backs
amounted to $235,561. Tax benefits that may be realized in future periods
include a charitable contribution carry forward with a tax benefit of $9,325,
unamortized reorganization costs with a tax benefit of $56,652 and capital loss
carry forwards which management believes will be utilized in future years
providing a tax benefit of $17,113. Deferred taxes on unrealized gains on
marketable securities totaled $9,430. The deferred taxes and tax benefits
totaled $77,446 at December 31, 1997.
In 1998, the Company sustained a net operating loss of $158,256. Such loss
created a deferred tax benefit of $61,720 in 1998. The deferred tax asset at
December 31, 1998 consisted of the following: Charitable contribution carry
forward of $9,325, unamortized reorganization costs of $45,321, unearned
premiums discounted of $35,450, unrealized gain on securities of $13,882,
capital loss carry forward of $17,113, NOL carry forward of $49,466 and other of
$8,078 for a total of $134,715.
Refundable income taxes at December 31, 1998 of $68,618 represents a state
income tax refund due on a loss carry back filed in 1998.
<PAGE>
INVESTMENT INCOME
Investment income decreased from $193,465 in 1997 to $93,978 in 1998
primarily as a result of the Company having less cash available for investment.
Less cash was available for investment due to the funding of the Assumption
Reinsurance Agreement with Continental in December, 1997 which decreased cash
available for investment by more than $1.5 million.
Beginning in April, 1997 the Company engaged Investek to assist the
Company in the management of its 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
(15) year or a 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
Due to the fact that workers' compensation insurance claims are paid over a
long period of time, it is anticipated that cash flows from premiums collected
will be sufficient to pay any insurance claims that arise during 1999 and for
the foreseeable future.
Pursuant to the Quota Share Agreement entered into with Continental, the
Company is required to collateralize the agreement with letters of credit
totaling $100,000 per $1,000,000 of annual gross premium written under the
program. The Company currently has pledged $500,000 in securities to secure such
letters of credit. The Company estimates due to the anticipated increase in the
annual gross premium written under the program, the Company will be required to
pledge an additional $200,000 in securities to secure letters of credit in 1999.
Additionally, the Company will be required to provide a $250,000 letter of
credit to secure payment under a lease for computer hardware and software. The
letter of credit will be secured by securities owned by the Company.
The purchase price for the acquisition of American Colonial is expected to
be approximately $325,000. The liquid assets of American Colonial are
approximately $275,000, therefore, the net cost to the Company pursuant to this
acquisition is expected to be approximately $50,000.
The Company anticipates generating approximately $800,000 in claims
administration and program management fees in 1999. The fees generated from such
activities will provide the funds necessary to pay any general operating
expenses of the Company in 1999.
<PAGE>
CAPITAL
The Company was licensed by the Mississippi Department of Insurance
effective January 1, 1998. As a licensed Mississippi insurance company, the
Company is required to maintain minimum capital and surplus of $400,000 and
$600,000 respectively on a statutory basis.
For regulatory purposes, the Company is required to maintain its books on
the statutory basis of accounting. For financial reporting purposes, the Company
maintains its books in accordance with Generally Accepted Accounting Principles
("GAAP") basis. The primary difference in statutory and GAAP accounting as far
as the Company is concerned lies in the classification of assets as either
admitted or non-admitted. On a statutory basis, only admitted assets will be
permitted to be included as assets on the Company's balance sheet. As a result,
shareholders' equity (GAAP basis) exceeded capital and surplus (statutory basis)
by $238,927 and $380,887 at December 31, 1998 and 1997, respectively. Non-
admitted assets include deferred tax assets, property and equipment, prepaid
expenses and other assets.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Stoneville Insurance Company:
We have audited the accompanying balance sheets of Stoneville Insurance Company
as of December 31, 1998 and 1997 and the related statements of operations and
comprehensive losses, of changes in shareholders' equity and of cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Stoneville Insurance Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Jackson, Mississippi
March 12, 1999, except Note 15, the date
of which is March 19, 1999
<PAGE>
STONEVILLE INSURANCE COMPANY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
ASSETS 1998 1997
Investments:
Securities available for sale at fair
value - amortized cost of $1,139,000
(1998) and $1,206,000 (1997) $ 1,175,757 $ 1,231,102
Short-term investments, at cost which
approximates market 342,358 340,257
------------ ------------
Total investments 1,518,115 1,571,359
------------ ------------
Cash and cash equivalents 1,222,322 175,236
Premiums receivable 420,902
Accrued interest receivable 19,888 29,819
Refundable income taxes 68,618 235,561
Reinsurance recoverable 1,023,532
Equipment, net of accumulated depreciation
of $27,000 (1998) and $12,000 (1997) 84,598 7,292
Deferred tax assets 134,715 77,446
Other 9,912 25,875
------------ ------------
TOTAL ASSETS $ 4,502,602 $ 2,122,588
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserve for losses and loss adjustment expenses $ 1,780,687
Unearned premium 475,106
Accounts payable and accrued expenses 323,415 $ 117,226
Capital lease obligations 8,341 1,256
------------ ------------
Total liabilities 2,587,549 118,482
COMMITMENTS AND CONTINGENCIES (Notes 4, 6 and 12)
SHAREHOLDERS' EQUITY:
Common stock ($1 par value; 10,000,000
shares authorized; 503,384 shares
issued and outstanding) 503,384 503,384
Retained earnings 1,388,334 1,484,870
Accumulated other comprehensive income -
Unrealized gains on securities available
for sale, net of income taxes of $14,000
(1998) and $9,000 (1997) 23,335 15,852
------------ ------------
Total shareholders' equity 1,915,053 2,004,106
============ ============
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,502,602 $ 2,122,588
============ ============
See notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSES
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
REVENUES:
Net premiums earned (loss ceded amount of
approximately $20,000) $ 1,691,374
Investment Income 93,978 $ 193,465
Administrative and management fees 243,477
Net realized losses on trading securities (19,057)
Other 59,507 228,871
------------ ------------
Total revenues 2,088,336 403,279
EXPENSES:
Loss and loss adjustment expenses 1,269,134 707,736
Policy acquisition fees 53,502
Program administration fees 107,377
Regulatory fees 63,823 23,004
General expenses 752,756 430,592
Loss on disposal of equipment - 1,406
------------ ------------
Total expenses 2,246,592 1,162,738
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (158,256) (759,459)
INCOME TAX BENEFIT (61,720) (285,020)
------------ ------------
NET LOSS (96,536) (474,439)
OTHER COMPREHENSIVE INCOME, net of income tax effect -
Unrealized gain on investments in securities 7,483 21,643
------------ ------------
COMPREHENSIVE LOSS $ (89,053) $ (452,796)
============ ============
NET LOSS PER SHARE $ (0.19) $ (0.94)
============ ============
See notes to financial statements.
<PAGE>
STONEVILLE INSURANCE COMPANY
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other Total
------------------- Retained Comprehensive Shareholders'
Shares Amount Earnings Income Equity
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 $2,462,693 $(9,236) $2,453,457
Net loss (474,439) (474,439)
Issuance of stock upon conversion
from a trust to a stock company 503,384 $503,384 (503,384)
Net increase in unrealized
appreciation of securities
available for sale 25,088 25,088
------- ---------- ----------- -------- -----------
BALANCE AT DECEMBER 31, 1997 503,384 503,384 1,484,870 15,852 2,004,106
Net loss (96,536) (96,536)
Net increase in unrealized appreciation
of securities available for sale 7,483 7,483
------- ---------- ----------- -------- -----------
BALANCE AT DECEMBER 31, 1998 503,384 $ 503,384 $1,388,334 $23,335 $1,915,053
======= ========== =========== ======== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<PAGE>
STONEVILLE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
OPERATING ACTIVITIES:
Premiums collected $1,691,374
Other income 302,984
Losses and loss adjustment expenses paid (511,979) $(2,880,971)
Refunds and premium adjustments paid (61,313)
General insurance and administrative expenses paid (737,438) (396,021)
Income taxes refund received 166,943 115,444
Investment income received 103,909 220,610
Net decrease in trading securities 1,696,697
Net loss on trading securities (19,057)
Interest paid (716) (141)
----------- ------------
Net cash provided by (used in) operating
activities 1,067,024 (1,324,752)
INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities
available-for-sale 65,179 187,726
Purchase of securities available-for-sale (587,775)
Proceeds from maturities of held-to-maturity
securities 522,884
Capital expenditures (82,628)
----------- ------------
Net cash (used in) provided by investing
activities (17,449) 122,835
FINANCING ACTIVITIES -
Principal payments under capital lease obligations (2,489) (2,782)
----------- ------------
Net cash used in financing activities (2,489) (2,782)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,047,086 (1,204,699)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 175,236 1,379,935
----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $1,222,322 $175,236
=========== ============
(Continued)
<PAGE>
STONEVILLE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(96,536) $(474,439)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on disposition of equipment 1,406
Depreciation and amortization expense 14,894 9,779
Deferred income tax benefit (61,720) (86,877)
Decrease in trading securities 1,696,697
Decrease in income taxes receivable/payable 166,943 (169,576)
Decrease (increase) in prepaid expenses 16,967 (3,502)
Decrease in accrued interest receivable 9,931 22,184
(Increase) decrease in premiums and reinsurance
receivables (1,446,690) 660,986
(Increase) decrease in notes and other
receivables (1,004) 89,860
Increase (decrease) in unpaid losses and loss
adjustment expenses 1,780,687 (2,834,220)
Increase in unearned premiums 475,106
Increase in accounts liability and accrued
expenses 208,446 60,936
Increase (decrease) in premium adjustment reserve (384,863)
----------- ------------
Net cash provided by (used in)
operating activities $1,067,024 $(1,324,752)
=========== ============
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES -
Capital leases incurred $ 9,575
===========
See notes to financial statements. (Concluded)
<PAGE>
STONEVILLE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE COMPANY AND PLAN OF REORGANIZATION AND CONVERSION
Stoneville Insurance Company (the Company) was formed to become the
successor to Delta Agricultural and Industrial Trust, (the Trust), a self-
funded workers' compensation trust. Under a Plan of Reorganization and
Conversion dated March 20, 1997, amended September 11, 1997, and effective
December 31, 1997, the Trust transferred all of its existing assets and
liabilities to the Company in exchange for all of the stock of the Company
(503,384 shares). The Trust then distributed the stock to qualified former
members of the Trust and was dissolved.
The Trust was formed to provide its members with a source of consistent
workers' compensation insurance coverage at reasonable rates, regardless of
cyclical swings in the commercial insurance market. Premiums were determined
in a manner similar to the methods used by commercial insurance carriers,
but the risk of loss was spread among its members who were jointly and
severally liable for the obligations of the Trust. The formation of the
Company was intended to provide a locally controlled, long term source of
dependable and reasonably priced insurance without the joint and several
liability associated with self-insured pools such as the Trust.
In anticipation of the formation of the Company and due to significant
changes in the workers' compensation premium rate structure in the State
of Mississippi, the Trust entered into an arrangement with a commercial
insurance carrier and discontinued writing coverage for its members
effective in 1996. Coverage for members who agreed to the change was then
written by a commercial carrier. This change provided lower rates and
other benefits for the members of the Trust during the period in which the
Plan of Reorganization and Conversion was being developed.
Prior to and as a condition precedent to the conversion, the Trust entered
into an Assumption Reinsurance Agreement with another commercial carrier
whereby the commercial carrier assumed all of the insurance obligations of
the Trust. This arrangement removed the joint and several liability of the
former Trust members and created a situation in which there were no
insurance liabilities to be transferred to the Company as a part of the
conversion and reorganization. The Company exercised its right to reinsure
the commercial carrier for the claims assumed by them in 1998.
Immediately after the effective date of the conversion and reorganization,
the Company applied for a license with the Mississippi Department of
Insurance. The license was issued shortly thereafter effective January 1,
1998. The conversion and reorganization qualified as a tax-free
reorganization under Internal Revenue Code Section 368.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The conversion and reorganization described in Note 1 has been accounted for
as a business combination between entities under common control, the
accounting for which is similar to the pooling of interests method.
<PAGE>
Therefore the financial information of the two previously separate entities
have been combined for financial reporting purposes. The significant
accounting policies used to prepare the financial statements are summarized
below:
A. USE OF ESTIMATES - The financial statements are prepared in conformity
with generally accepted accounting principles which require management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
B. INVESTMENTS - Debt securities are considered available for sale and
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 other comprehensive income (loss).
Realized gains and losses are determined on the specific identification
method.
C. CASH EQUIVALENTS - For the purpose of reporting cash flows, cash
equivalents include all highly liquid investments with a maturity of
three months or less when purchased.
D. 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.
E. 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 operations and comprehensive losses.
F. CAPITAL LEASES - Certain assets of the Company 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".
G. POLICY ACQUISITION COSTS - Substantially all policy acquisition costs are
paid as the related premiums are earned. Consequently, there were
ordinarily no unamortized policy acquisition costs to be presented on the
balance sheet at December 31.
H. INSURANCE LIABILITIES - The liability for losses and loss-adjustment
expenses include an amount determined from loss reports and individual
cases and an undiscounted 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
liabilities are continually reviewed, and any adjustments are reflected
in earnings currently.
<PAGE>
I. INCOME TAXES - Deferred tax liabilities and assets are determined based
on the differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
J. COMPREHENSIVE INCOME - The Company has adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" in 1998.
This standard expands or modifies disclosures, and accordingly, has no
impact on the Company's financial position, results of operations or cash
flows.
K. NET LOSS PER SHARE - Net loss per share is based on net loss and the
weighted average number of shares outstanding during each period. The
number of shares used in computing loss per share is 503,384 in 1998 and
1997.
L. RECLASSIFICATIONS - Certain reclassifications have been made in the
1997 financial statements to conform to the method of presentation used
in 1998.
3. SECURITIES AVAILABLE FOR SALE
The aggregate fair value, gross unrealized holding gains and losses, and
amortized cost for securities available-for-sale by major security type at
December 31, 1998 and 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
1998
Obligations of U. S. Government
corporations and agencies $378,124 $19,139 $ 0 $397,263
Obligations of states and political
subdivision 610,917 11,527 622,444
Mortgage-backed securities 150,311 5,739 156,050
----------- -------- ------- -----------
Total $1,139,352 $36,405 $ 0 $1,175,757
=========== ======== ======= ===========
1997
Obligations of U. S. Government
corporations and agencies $ 187,272 $ 9,586 $ 0 $ 196,858
Obligations of states and political
subdivision 624,949 7,918 4,378 628,489
Mortgage-backed securities 393,926 11,829 0 405,755
----------- -------- ------- ----------
Total $1,206,147 $29,333 $4,378 $1,231,102
=========== ======== ======= ==========
<PAGE>
The scheduled maturities of securities available-for-sale at December 31,
1998 were as follows:
Amortized Fair
Cost Value
Due in one year or less $ 100,262 $ 100,864
Due after one year through five years 201,450 210,270
Due after five years through ten years 687,329 708,573
----------- -----------
989,041 1,019,707
Mortgage-backed securities 150,311 156,050
----------- -----------
Total $1,139,352 $1,175,757
=========== ===========
Actual maturities may differ from contractual maturities because of the
borrower's right to call or prepay obligations.
Major categories of investment income are summarized as follows:
1998 1997
Securities available for sale $ 84,280 $ 120,549
Equity securities 6,620
Short-term investments 9,698 66,296
-------- ---------
Total $ 93,978 $ 193,465
======== =========
4. ASSETS PLEDGED
Approximately $1,180,000 in cash and investments are pledged as collateral
for a letter of credit issued to an insurer that the Company reinsures. The
letter of credit secures the payment of claims being administered by the
Company.
Investments with an approximate carrying value of $252,000 in 1998 were
pledged to the State of Mississippi for the security and benefit of
policyholders. At December 31, 1998, assets on deposit met minimum statutory
requirements.
5. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company entered into an Assumption Reinsurance Agreement in December
1997 whereby all of the insurance liabilities of the Company were assumed by
a commercial insurance carrier. Consequently, there are no reserves
established for losses and loss adjustment expenses at December 31, 1997.
The reserve for losses and loss adjustment expenses at December 31, 1998
consisted of the following:
Case basis reserves $ 656,895
Incurred but unreported claims 100,260
---------
Total reserves $ 757,155
=========
<PAGE>
Activity in the reserve for losses and loss adjustment expenses is
summarized as follows:
1998 1997
Balance at January 1 $ 0 $ 2,834,220
Incurred related to -
Current year 1,269,134 0
Prior years 0 707,736
----------- ------------
1,269,134 707,736
Paid related to -
Current year 511,979 0
Prior years 0 (2,880,970)
----------- ------------
Net balance at December 31 757,155 660,986
Plus reinsurance recoverable 1,023,532 (660,986)
----------- ------------
Balance at December 31 $1,780,687 $ 0
=========== ============
6. PROPERTY UNDER CAPITAL LEASES AND LEASE COMMITMENTS
Leased equipment capitalized in the financial statements is summarized as
follows:
1998 1997
Equipment $ 15,051 $ 5,476
Less accumulated depreciation (2,212) (365)
--------- --------
$ 12,838 $ 5,111
========= ========
The future minimum rental commitments for capital leases as of December 31,
1998, were as follows:
1999 $ 2,652
2000 2,652
2001 2,652
2002 2,652
2003 663
-------
Total minimum lease commitments 11,271
Less amount representing imputed interest (2,930)
--------
Present value of minimum lease commitments $ 8,341
========
7. REINSURANCE
The Company uses specific and aggregate excess policies to limit losses.
These limits range from $25,000 to $100,000 per claim, depending on the type
of claim filed.
<PAGE>
Reinsurance contracts do not relieve the Company from its primary obligation
to policyholders. Failure of any reinsurer to honor its obligations could
result in losses to the Company.
8. INCOME TAXES
The benefit from income taxes consisted of the following:
1998 1997
Current:
Federal $(166,943)
State (31,200)
Deferred income tax $(61,720) (86,877)
--------- ----------
$(61,720) $(285,020)
========= ==========
The effective income tax benefit varied from the U. S. Federal statutory
rate of 35% as follows:
1998 1997
Federal income tax benefit at statutory rates $(55,389) $(265,811)
State income tax benefit (5,222) (25,062)
Other (1,109) 5,853
--------- ----------
Benefit from income taxes $(61,720) $(285,020)
========== ==========
The Company had capital loss carryforwards at December 31, 1998 of
approximately $1,064,000. These capital loss carryforwards will expire as
follows:
1999 $ 407,000
2000 170,000
2001 460,000
2002 27,000
-----------
$1,064,000
===========
These loss carryforwards can only be utilized if the Company experiences
future capital gains. Because the Company's investment strategy is to
emphasize ordinary income rather than capital gains, a valuation allowance
has been provided for substantially all of the capital loss carryforward.
As a result of the net operating tax loss incurred in 1998, the Company has
a net operating loss carryforward of approximately $131,000.
The components of the net deferred tax asset were as follows:
<PAGE>
1998 1997
Deferred tax assets (liabilities):
Charitable contributions $ 9,325 $ 9,325
Unamortized reorganization costs 45,321 56,652
Unearned premiums discounted 35,450
Capital loss carryforward 396,892 396,892
Unrealized gain on securities (13,882) (9,430)
NOL carryforward 49,466
Other (8,078) 3,787
---------- ----------
514,494 457,225
Valuation allowance (379,779) (379,779)
---------- ----------
Net deferred tax assets $ 134,715 $ 77,446
========== ==========
9. RELATED PARTY TRANSACTIONS
During 1997, the Company's day-to-day operations were managed by Delta
Administration, Inc. ("DAI"), a Mississippi corporation. The stock of DAI
was owned 100% by Harry E. Vickery, an officer and director of Stoneville
Insurance Company. During 1997, Mr. Vickery received no direct compensation
from the Company. For the year ended December 31, 1997, DAI was paid
$45,600, for services rendered to the Company (none in 1998).
In 1997, DAI received compensation from a commercial insurance carrier for
services provided to the commercial program in Note 1. This compensation
amounted to 3.5% of collected premium from the commercial program (none in
1998).
Mr. David R. White, an officer and director of the Company, is also an
officer and director of MRM Underwriters, Inc. ("MRM"). As the marketing
director of the Company's insurance programs, MRM received compensation
based on a percentage of collected premium from the Company's insurance
programs of $25,000 (1998) (none in 1997).
MRM also received a commission from Continental Casualty Company in 1998 for
the placement of the Assumption Reinsurance Agreement between the Company
and Continental.
10. STATUTORY FINANCIAL INFORMATION
Generally accepted accounting principles differ in certain respects from the
accounting practices prescribed or permitted by insurance regulatory
authorities (statutory basis). A reconciliation between net loss and
shareholders' equity as reported under generally accepted accounting
principles (GAAP basis) and statutory net loss and shareholders' equity of
Stoneville follows:
<PAGE>
1998 1997
------------------------- ------------------------
Net Shareholders' Net Shareholders'
Loss Equity Loss Equity
GAAP basis $ (96,536) $1,915,053 $(474,439) $2,004,106
Adjustments to:
Non-admitted assets (66,292) (278,159)
Deferred income taxes (61,720) (134,715) (86,877) (77,446)
Unrealized gain on
invested securities (37,127) (25,282)
Other (248) (793)
---------- ----------- ----------- -----------
Statutory basis $(158,504) $1,676,126 $(561,316) $1,623,219
========== =========== =========== ===========
Under Mississippi insurance regulations, the Company is required to maintain
minimum capital of $400,000 and minimum surplus of $600,000. Insurance
regulations limit the amount of dividends that may be paid without approval
of the Company's regulatory agency. At December 31, 1998, there were no
undistributed earnings and surplus of the Company available for
distributions as dividends, without the prior approval of the State of
Mississippi Insurance Department.
The NAIC measures the adequacy of a company's capital by its risk-based
capital ratio (the ratio of its total capital, as defined, to its risk-based
capital). The requirements provide a measurement of minimum capital
appropriate for an insurance company to support its overall business
operations based upon its size and risk profile which considers (i) asset
risk, (ii) insurance risk, (iii) interest rate risk, and (iv) business risk.
An insurance company's risk-based capital is calculated by applying a
defined factor to various statutory-based assets, premiums, and reserve
items, wherein the factor is higher for items with greater underlying risk.
The NAIC has provided levels of progressively increasing regulatory action
for remedies when an insurance company's risk-based capital ratio falls
below a ratio of 1:1. As of December 31, 1998, the Company was in compliance
with these minimum capital requirements as follows:
Total adjusted capital $1,796,959
Authorized control level risk-based capital 304,301
Ratio of adjusted capital to risk based capital 5.91:1
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
In accordance with FAS Statement No. 107, "Disclosures about Fair Value of
Financial Instruments", information is provided about the fair value of
certain financial instruments for which it is practicable to estimate that
value. The fair value amounts disclosed represent management's best
estimates of fair value. In accordance with FAS No. 107, this disclosure
excludes certain insurance policy-related financial instruments and all
nonfinancial instruments. The aggregate fair value amounts presented are not
intended to represent the underlying aggregate fair value of the Company.
The estimated fair values are significantly affected by assumptions used,
principally the timing of future cash flows, the discount rate, judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. Because assumptions are inherently
<PAGE>
subjective in nature, the estimated fair values cannot be substantiated by
comparison to independent quotes and, in many cases, the estimated fair
values could not necessarily be realized in an immediate sale or settlement
of the instrument. Potential tax ramifications related to the realization
of unrealized gains and losses that would be incurred in an actual sale
and/or settlement have not been taken into consideration.
The methods and assumptions used to estimate fair value are as follows:
* Fair value for securities is determined from quoted market prices,
where available. For securities not actively traded, fair value is
estimated using quoted market prices for similar securities. See fair
values disclosed in Note 3.
* Fair value for short-term investments and accrued investment income
approximates the carrying amount.
12. OPERATING SEGMENT DISCLOSURE
During 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information." The Company operates as a property and casualty
insurance company, with substantially all of its premium revenue derived
from worker's compensation insurance. Therefore, the Company has one
operating segment.
13. ACCOUNTING STANDARD TO BE ADOPTED IN THE FUTURE
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities,", effective for fiscal years beginning
after June 15, 1999. SFAS 133 requires, among other things, that
derivatives be recorded on the balance sheet at fair value. Changes in the
fair value of derivatives may, depending on circumstances, be recognized in
earnings or deferred as a component of shareholders' equity until a hedged
transaction occurs. The Company has not determined what impact, if any, the
adoption of SFAS 133 will have on its financial position or results of
operations.
14. COMMITMENTS AND CONTINGENCIES
The Company is required to participate in certain guaranty funds and
involuntary pools of insurance and is therefore exposed to undeterminable
future assessments resulting from the insolvency of other insurers.
The Company leases office space under a month-to-month lease arrangement.
Expenses incurred under this operating lease approximated $15,000 in 1998.
The Company is involved in litigation incurred in the normal course of
business. Management of the Company, based upon the advice of legal counsel,
is of the opinion that the Company's ultimate liability, if any, which may
result from the litigation, will not have a material adverse effect on the
financial condition or results of operations of the Company.
<PAGE>
15. SUBSEQUENT EVENT
In December 1998, the Company made an offer to acquire American Colonial
Insurance Company, a property-casualty insurance company in Arkansas, which
was accepted, subject to approval by the Arkansas Department of Insurance.
The Arkansas Department of Insurance approved the transaction on March 19,
1999. The transaction is expected to close in 1999 at an estimated cost of
$325,000.
* * * * * *
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Stoneville Insurance Company.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Stoneville Insurance Company included in this Form 10-K
and have issued our report thereon dated March 12, 1999 (except Note 15, the
date of which is March 19, 1999). Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedule
listed in the index to financial statement schedule is the responsibility of the
Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
DELOITTE & TOUCHE LLP
Jackson, Mississippi
March 12, 1999, except Note 15, the date
of which is March 19, 1999
<PAGE>
Article 7. Schedule V - Valuation and Qualifying Accounts
Col. A. Col. B Col. C Col. D Col. E
Description Balance at Additions Deductions -- Balance at
Beginning -------------------- End of
of Period (1) (2) Period
Charged Charged
to Costs to Other
and Accounts --
Expenses Describe
1998
Valuation
allowance for
deferred tax
assets
$ 379,779 $ 379,779
--------- ----------- ----------
$ 379,779 $ 0 $ 379,779
========= =========== ==========
1997
Valuation
allowance for
deferred tax
assets 397,088 17,309 379,779
(recovery)
--------- --------- --------- ------------ ----------
$ 397,088 $ 17,309 $ 379,779
========= ========= ========= ============ ==========
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
A current report on Form 8-K was filed on January 28, 1999 disclosing
Deloitte & Touche LLP as the Company's new auditors.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
The names of the executive officers and directors of the Company and their
respective ages and positions with the Company are set forth as follows:
Name Age Position
- ------------------ --- ----------------------------------
William L. Kennedy 47 Chairman of the Board of
Directors, Chief ExecutiveOfficer
Harry E. Vickery 63 President, Director
David R. White 49 Secretary, Treasurer, Vice
President, Director
Richard L. Eaton 41 Chief Financial Officer
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 served from inception on the Board of Trustees of the Trust
until the conversion became effective at which time Mr. Kennedy became a
Director of the Company.
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 became a Director
of the Company in 1998. 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. Mr. White became a Director
of the Company in 1998. 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
Morgan-White 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.
<PAGE>
Richard L. Eaton resides in Jackson, Mississippi. He holds a BBA degree
from Marshall University and received his Certified Public Accountancy
certification in 1982. He has been in private practice with Richard L. Eaton,
CPA, since 1988 and served as the Trust's independent auditor from 1993 through
1997.
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. Mr. White's wife and Mr. Eaton's wife are
sisters. There are no other family relationships between the directors and
officers.
Because its stock is not registered under Section 12 of the Securities
Exchange Act of 1934, the Company is not subject to Section 16 of the Securities
Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Principal Year Salary ($) Bonus Other Annual Long Term Compensation All Other
Position ($) Compensation ---------------------------------- Compensation
- -------------------------- ---- ------------ ----- ------------ ------------
Awards Payouts ($)
----------------------- ------- ---
Restricted Securities LTIP
Stock Underlying Payouts
Award(s) Options ($)
($) SARS(#) -------
--------- ----------
<S> <C> <C> <C> <C>
William L. Kennedy,CEO 1998 $ 3,000.00(1) 0 0
Harry E. Vickery,President 1998 $96,000.00 0 0
Richard L. Eaton, CFO 1998 $92,000.00(2) 0 0
<FN>
(1) Mr. Kennedy received no compensation other than $3,000 in directors fees.
(2) $13,704.39 of the $92,000.00 Mr. Eaton received as salary from the Company
was reimbursed by Mr. Eaton to the Company. Mr. Eaton reimbursed this sum
because Mr. Eaton's accounting firm, Richard L. Eaton, CPA was paid
$13,704.39 out of a trust account set up by TIG Insurance Company ("TIG")
and Morgan-White Underwriters for work Mr. Eaton performed in winding-up an
arrangement between the Trust, TIG and Morgan-White Underwriters.
</FN>
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of March 25, 1999 as to
persons beneficially owning more than five percent (5%) of the Company's Common
Stock.
Amount and
Nature Percentage of
of Beneficial Outstanding
Name Ownership Common Stock
- ------------------------ -------------- --------------
Danskin, Inc. 39,567 7.86%
305 State Street
York, PA 17403
<PAGE>
The following table sets forth information as of March 25, 1999, as to the
number of shares of Company Common Stock owned by the Company's directors and
executive officers.
Amount and
Nature Percentage of
of Beneficial Outstanding
Name Ownership Common Stock
- ------------------------------ -------------- -------------
William L. Kennedy (1) 7,123 0.65%
Harry E. Vickery 0 0.00%
David R. White (2) 49 0.00%
4 Executive Officers and 7,172 0.65%
Directors as a group
(1) Mr. Kennedy shares voting and investment power with respect to these shares.
(2) Mr. White shares voting and investment power with respect to these shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DELTA ADMINISTATION
Harry E. Vickery is an officer and director of the Company and owns all
the issued and outstanding stock of Delta Administration, Inc. ("Delta
Administration"), a Mississippi corporation. Pursuant to a program (the
"Commercial Program") created between the Trust and Morgan-White Underwriters
pursuant to a Representative Agreement, Delta Administration, which is a
licensed insurance agency, was paid 3.5% of the collected premiums generated by
the Commercial Program in 1997 to manage the activities of the Trust. In 1997,
Delta Administration also received $3,800 a month from the Trust in exchange for
administrative services. From these funds, Delta Administration paid the office
expenses of the Trust including rent, salaries of its employees who administer
the Trust, and sponsor fees. In 1997, Delta Administration received direct and
indirect compensation from the Trust in the aggregate amounts of $167,707. In
1998 these arrangements were terminated and the 3.5% of the collected premiums
generated by the Commercial Program were paid to the Company, and the Company
was responsible for office expenses, including rent and salaries of its
employees.
MORGAN-WHITE UNDERWRITERS
On September 1, 1998, the Company entered into a Program Management
Agreement with Morgan-White Underwriters. David R. White, an officer and
director of the Company, is a shareholder, officer and director of Morgan-White
Underwriters.
<PAGE>
Pursuant to the terms of the Program Management Agreement, Morgan-White
Underwriters has the exclusive right to receive and accept proposals for
insurance for the Company for the Approved Programs as defined in the Program
Management Agreement. The Approved Programs include one hundred sixty eight
(168) workers' compensation risk categories and are limited by various
underwriting guidelines set forth in the Program Management Agreement. Pursuant
to the Program Management Agreement, the Company and Morgan-White Underwriters
are jointly responsible for promotional activities for the Approved Programs and
the Company is responsible for the issuance of quotations, binders and policies
and claims administration. The term of the Program Management Agreement is ten
(10) years, with automatic one year renewals unless one hundred eighty (180)
days prior written notice is given by either party. The Company does not
currently have the capability to perform the services provided by Morgan-White
Underwriters pursuant to this arrangement. In the event that the Program
Management Agreement is terminated, the Company would either have to enter into
an agreement with another company to provide these services, or the Company
would be required to hire personnel and otherwise set up the capabilities to
internally provide these services. For the program management services rendered
by Morgan-White Underwriters pursuant to the Program Management Agreement in
1998, Morgan-White Underwriters was paid approximately $25,000 by the Company.
Morgan-White Underwriters received no compensation from the Company in 1997.
Morgan-White Underwriters also received a commission from Continental in 1998
for the placement of the Assumption and Reinsurance Agreement between the
Company and Continental.
RICHARD L. EATON, CPA
In 1998, Mr. Eaton's accounting firm, Richard L. Eaton, CPA was paid
$10,173.75 for accounting services Mr. Eaton performed prior to Mr. Eaton's
being employed as Chief Financial Officer of the Company.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are furnished or incorporated by reference as a part
of this Form 10- KSB:
Exhibit Number Description
- -------------- -----------
2.1* Plan and Agreement of Reorganization and Conversion of the Trust,
as amended September 11, 1997.
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
10.1* Assumption Reinsurance Agreement dated as of March 20, 1997
between the Trust, Continental, and the Company
10.2* Amendment Number One dated September 5, 1997 to Assumption
Reinsurance Agreement between the Trust, Continental, and the
Company included as Exhibit 10.5 to the Registration Statement on
Form S-4, as amended (File No. 333-24739), filed September 16,
1997.
<PAGE>
10.3 Program Management Agreement dated September 1, 1998 between
Morgan-White Underwriters and the Company
27 Financial Data Schedule.
* Previously filed as Exhibits to to the Company's Registration Statement on
Form S-4 (File No. 333-24739) and incorporated by reference herein.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during
the fiscal quarter ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STONEVILLE INSURANCE COMPANY
By: /s/ Harry E. Vickery
---------------------------------------
Harry E. Vickery, President
Date: March 30, 1999
By: /s/ Richard L. Eaton
---------------------------------------
Richard L. Eaton, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
Date: March 30, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: March 30, 1999 By: /s/ William L. Kennedy
------------------------------------
William L. Kennedy, Director
(Principal Executive Officer)
Date: March 30, 1999 By: /s/ Harry E. Vickery
------------------------------------
Harry E. Vickery, Director
Date: March 30, 1999 By: /s/ David R. White
------------------------------------
David R. White, Director
PROGRAM MANAGEMENT AGREEMENT
This agreement made and entered into this first day of September 1998 between
Stoneville Insurance Company of Jackson, Mississippi hereinafter referred to as
"SIC", and MRM Underwriters, Inc., hereinafter referred to as MRM and supersedes
and replaces all prior agreements between the parties related to this program.
IT IS HEREBY AGREED BETWEEN SIC AND MRM AS FOLLOWS:
1. TERM
A. This Agreement shall be effective as of September 1, 1998 (the
"Effective Date) and shall remain in effect continuously for a
period of ten (10) years ("The Term") unless terminated
pursuant to Paragraph 16 hereof.
B. This Agreement shall automatically, and without any further
action of either party, be extended at the end of the Term, on
each annual anniversary date of the Effective Date for one (1)
additional year (the "Annual Extension"), provided either
party shall have the right to decline the Annual Extension for
the following year on each annual anniversary date by giving
written notice to the other party one hundred and eighty (180)
days prior to such anniversary date. Such notice shall be
given in accordance with Paragraph 22 of this Agreement.
C. This Agreement may be terminated in accordance with the
provisions of Paragraph 16 of this Agreement.
2. APPLICATION OF AGREEMENT
A. The insurance program which constitutes the subject matter of
this Agreement (hereinafter referred to as the "Approved
Program" consists of individual programs as set forth in
Addenda attached hereto and made part hereof. An individual
program is defined as specific coverages relating to workers'
compensation risk classes as documented in Addenda A to this
agreement SIC and MRM hereby acknowledge that both of them and
certain affiliates of each of them have in the past and are
currently involved in the provision of insurance and
insurance-related services which may be considered to compete
in the Classes and Approved Program enumerated in Addendum A.
B. SIC hereby grants Authority to the MRM on an exclusive basis,
except as may be prohibited by law or regulation or, as
excepted herein, to receive and accept proposals for
insurance, to bind coverage only for the Approved Programs
subject to underwriting authorities delegated to the MRM at
SIC's sole discretion. The
1
<PAGE>
territory covered by this Agreement is limited to Insured's
domiciled within the fifty (50) United States, its territories
and possessions and submitted by licensed producing brokers or
agents in the United States. MRM is granted authority to
cancel or non-renew such policies at MRM's underwriting
discretion as permitted by, and in accordance with applicable
laws and regulations as interpreted by SIC. MRM shall have the
right to rely on any such interpretations of law and
regulations by SIC: Such Authority is also subject to the
terms and conditions hereinafter set forth in or pursuant to
written SIC guidelines, practices, or other such instructions
as may be given to MRM by SIC. The underwriting authorities
and guidelines may be changed at SIC's sole discretion. Any
such action by SIC shall not be unreasonably exercised. MRM
hereby acknowledges that certain affiliates have in the past
and are currently involved in the provision of insurance and
insurance-related services which may be considered to compete
in the Classes and Approved Program enumerated in Addendum A.
Any facility established to write business for Insureds domiciled
outside the (50) United States will require a separate written contract
and approval of the current treaty carriers. SIC will expect that only
Approved Program risks will be eligible, and that underwriting
guidelines and authorities as respects this program will take effect.
C. MRM may accept proposals for insurance which comply with the
terms of this Agreement only from duly licensed brokers,
agents or solicitors (the "Subproducer"). SIC agrees that any
amounts payable to any Subproducer for business submitted
under this Agreement, will be its sole responsibility, and MRM
will have no liability for any such compensation.
D. Unless applicable law requires otherwise, MRM shall be
responsible for providing notices of cancellation or
nonrenewal of policies issued under the Approved Program. When
MRM cancels or nonrenews any policy, MRM shall comply with
applicable notification and other regulatory requirements as
interpreted by SIC. If SIC cancels or non-renews a policy,
such compliance is SIC's responsibility. All policies canceled
or non-renewed are to be reported to SIC by copy of the
non-renewal or cancellation notice.
E. It is further agreed that MRM's authority delegated by SIC
shall only apply to MRM and except as specifically approved in
writing by SIC, such authority may not be delegated to others.
F. Nothing contained in this agreement shall be deemed to create
the relationship of employer and employee between SIC and MRM.
G. MRM shall have no authority to purchase reinsurance accept as
referenced in Addendum B.
2
<PAGE>
H. SIC will at all times hold out MRM as its exclusive Program
Manager for the specific Approved Programs, subject to this
Agreement, and agrees to use its best efforts to refer
inquiries to the MRM relating to risks covered by the Approved
Program.
I. SIC agrees that Approved Program risks, or any portion
thereof, specifically declined by or rejected by SIC in
writing, may be submitted by the MRM to other markets.
J. MRM agrees that the Approved Program risks will not be
underwritten by MRM's parent, subsidiaries, or affiliates
subject to the conditions paragraph of 2. J. of this
agreement.
3. COMMISSIONS
SIC shall pay MRM, as commission, a percentage of the premium paid to
SIC, or paid to MRM for the benefit of SIC, as set forth in Addendum C
of this Agreement MRM shall pay SIC a return commission at the same
rate on any return premiums.
4. PREMIUM AND ACCOUNTS
A. SIC is responsible for the collection of all premiums. Account
current statements, in a format mutually acceptable to SIC and
MRM are to be rendered monthly to MRM no later than the tenth
day of the month following the processing date of any
transactions.
B. If, after reasonable effort by SIC to collect premium, any
premium which has not been paid by the insured within the time
period provided in Paragraph A above, MRM shall promptly
cancel such Insureds insurance coverage for nonpayment of
premium. Upon request by SIC, MRM will not accept any business
under the approved Program from Subproducers who cause SIC's
inability to collect premiums due.
C. The MRM agrees to provide SIC a copy of the MRM's most current
financial statements by January 15 of each calendar year this
agreement is in force. SIC acknowledges and agrees that such
financial statements will be unaudited.
5. CLAIMS
A. All claims made against policies issued as part of the
Approved Program shall be handled in conformity with Addendum
D of this Agreement.
3
<PAGE>
6. INDEMNIFICATION
A. SIC shall indemnify and hold MRM harmless against all
expenses, losses, fines, penalties, disputes, claims and
liabilities, whether legal or otherwise including attorneys'
fees and costs of investigation of defense incident thereto
arising as a result of:
(1) SIC's acts, errors or omissions, except to the extent
MRM has caused or contributed to such acts, errors or
omissions;
(2) MRM's appropriate use of forms supplied by SIC,
and/or MRM's compliance with instructions,
procedures, or interpretations established by SIC;
(3) The use of any advertisement, statement or
publication identifying the name of SIC which has
been duly authorized by SIC.
B. MRM shall indemnify and hold SIC harmless against all
expenses, losses, fines, penalties, disputes, claims and
liabilities, whether legal or otherwise, including attorneys'
fees and costs of investigation and defense incident thereto
arising as a result of:
(1) MRM's, acts, errors or omissions, except to the
extent SIC has caused or contributed to such acts,
errors or omissions;
(2) MRM's failure to follow instructions, procedures, or
interpretations established by SIC.
Notwithstanding the foregoing, MRM shall not be liable to, nor
required to indemnify or hold harmless SIC, if MRM was acting
upon the instruction or with the express written approval of
SIC.
C. SIC and MRM agree, as a condition to such mutual
indemnification, to promptly notify each other of any claim or
suit against them and to allow the indemnitor to make such
investigation as indemnitor deems prudent and, subject to
written approval of indemnity, make settlement or defense
thereof.
7. ERRORS AND OMISSIONS
MRM shall obtain and maintain in effect throughout the Term of this
Agreement an Errors and Omissions Policy and a separate Fidelity Bond.
Said policies and bonds may be written on a blanket basis. The minimum
amounts of the coverages for each type of policy described will be five
million dollars ($5,000,000) for E&O and five hundred ($500,000)
4
<PAGE>
for Fidelity Bonds respectively; provided, however, such minimum
amounts are subject to annual revision based on the level of exposure
to loss.
8. EXPENSES
Except as may otherwise be set forth herein, or agreed to in writing by
SIC, SIC shall not be responsible for any expenses of MRM whatsoever.
9. SUPPLIES
Any supplies furnished to MRM by SIC, including Underwriting, Claims,
Administrative and Financial manuals, shall always remain the property
of SIC and all unused supplies shall be promptly returned upon demand
to SIC or its designated representative, except as defined in Addendum
E.
10. OUTSIDE SERVICES
MRM is authorized to select and to make assignments to such outside
service organization as it deems necessary in accordance with SIC's
Administrative and Underwriting Guidelines which are incorporated as if
fully set forth herein and made a part hereof to service the business
produced hereafter. SIC will promptly reimburse MRM monthly for the
actual expenses paid directly by MRM as billed by MRM for the following
services:
A. Errors & Omission Vetting and Defense Attorneys
B. Auditors
The expenses incurred must be established by Expense Reimbursement
Voucher in a format provided by SIC. The MRM agrees to maintain
supporting documentation for all such reimbursable expenses.
11. ADVERTISING
MRM and SIC shall be jointly responsible for developing all promotional
activities or materials, advertising, promotional text or copy, or
other promotional items or materials relating to the Approved Programs.
MRM shall not use any such items or materials, advertising, text or
copy which (i) bears the name or logo of SIC or any service mark
trademark or tradename relating to the Approved Programs, or (ii) which
identifies any of the insurance coverages offered under the Approved
Programs, without the prior written consent of SIC; such consent not to
be unreasonably withheld. All cost and expenses incurred in developing
any promotional items or materials, advertising, text or copy described
in (i) above shall be borne equally by MRM and SIC and these costs.
shall not exceed five hundred thousand dollars in any one calendar year
No cost over $1,000 shall
5
<PAGE>
be undertaken without the prior written consent of SIC and MRM. All
other costs and expenses shall be the sole responsibility of the party
incurring such costs and expenses, unless prior agreement has been
made.
12. NON-WAIVER OF RIGHTS
Forbearance, neglect or failure by either party to enforce any or all
of the provisions of this Agreement or to insist upon strict compliance
by the other party shall not be construed as a waiver of any rights or
privileges of the fast party. A waiver of a past act or circumstance
shall not constitute or be a course of conduct or waiver of any
subsequent action or circumstance. The exercise of any right or remedy
under this Agreement shall not affect the rights or remedies of the
parties available at law or in equity.
13. CONFORMITY TO STATUTE
Terms of this Agreement which are in conflict with the statutes of the
state(s) wherein this Agreement applies are hereby amended to conform
with such applicable statutes.
14. AUDITS
SIC shall have the right to conduct inspections and audits of any or
all of MRM's files and documents related to SIC's business under this
Agreement at any tune during ordinary business hours upon reasonable
notice, and MRM shall cooperate with SIC in conducting such inspections
and audits. It is expressly understood and agreed that this right
includes without limitations the right to audit premium trust account
records and all accounting records affecting the Approved Program. SIC
agrees to provide MRM with a written report of audit reached at time of
wrap-up by mutual agreement within 15 working days of the completion of
the audit MRM agrees to develop specific action plans to address
operational deficiencies identified in such audits within 30 days of
receipt of written audit results and will provide SIC with monthly
updates of status until all improvements have been achieved. SIC
reserves the right to verify these improvements.
15. SUSPENSION OR TERMINATION OF AGREEMENT
A. This Agreement shall terminate:
(1) Automatically, without notice, in any state which
MRM's license or authorization to engage in an
insurance business has been revoked or suspended by
any regulatory body. Such termination shall apply
only to the state in which the MRM's license or
authorization has been revoked or suspended. MRM will
notify SIC upon receipt of such regulatory notice of
suspension or revocation.
6
<PAGE>
(2) Immediately upon written notice from either party to
the other in the event of the other's fraud, willful
misconduct, or material breach of any of the terms of
the Agreement or in the event the other shall fail
pay any sums due under this Agreement within ten (10)
business days following written notice of non-payment
of such funds when due. Either party may terminate
this Agreement immediately upon written notice to the
other party in the event of any action placing a
party in receivership, and a party may also terminate
this Agreement in the event the other party shall
make an assignment for the benefit of creditors,
generally not to pay its debts as they become due or
admit in writing its inability to pay its debts as
they become due, file a petition commencing a
voluntary case under any chapter of the Bankruptcy
Code, 11 U.S.C. Sect 101 et seq, (the "Bankruptcy
Code"), be adjudicated an insolvent, file a petition
seeking for itself a reorganization, arrangement,
composition, readjustment, rehabilitation,
liquidation, dissolution, or similar arrangement
under the Bankruptcy Code or any other present or
future statute, law, rule or regulation, or a case,
proceeding or other action that either results in
such entry, adjudication, relief or issuance or entry
of any other order of judgment having a similar
effect, or remains un-dismissed for thirty (30) days.
(3) Upon written notice if legislative, judicial, or
regulatory developments, in SIC'S sole judgment make
continuation of the Approved Program untenable. In
the event such developments, in SIC's sole judgment,
make continuation of the individual Approved Program
untenable in a particular state or states, SIC may,
at its sole option, either continue the Approved
Program or withdraw the individual Approved Program
from that state or states.
(4) At SIC's option, upon MRM's failure to purchase and
maintain insurance under Paragraph 7.
(5) Upon loss of reinsurance applicable to the Approved
Program by SIC; provided that SIC or MRM is unable to
obtain replacement reinsurance reasonably acceptable
to SIC applicable to the Approved Program within
ninety (90) days.
(6) By mutual written agreement of the parties.
B. If this Agreement is terminated pursuant to Paragraph 16 A,
(3), (4), (5) or (6) above, then;
(1) for a period of one year, or for any greater period
required-by law, following termination, MRM shall
continue to represent SIC subject to the
7
<PAGE>
terms, conditions, responsibilities and obligations
contained in this Agreement as if this Agreement had
not been terminated, in addition, the following
conditions shall apply:
C. MRM will not solicit or bind any new risk under the Approved
Program.
(1) MRM will retain authority to service in-force.
insurance contracts up to their expiration date.
(2) MRM may renew for a period not to exceed one year
those insurance contracts which meet SIC'S
underwriting standards in effect at the time of such
renewal. Rates on such renewal policies will conform
to the pricing parameters in effect at the time the
Agreement is terminated.
(3) MRM may add to, or increase limits on, insurance
policies in effect, but only with SIC's prior written
approval, such approval not to be unreasonably
withheld.
D. MRM will not continue to represent SIC following termination
if any of the following have occurred:
(1) SIC has terminated this agreement because o MRM's
fraud, insolvency, willful misconduct, or material
breach of any provisions of this Agreement.
(2) If any public authority cancels or declines to renew
MRM's agents, license or certificate of authority;
provided, however, that such prohibition against
representing SIC shall apply only in the state or
states in which such authority issues such
cancellation or declination.
(3) If there has been a transfer or sale of all or a
majority interest in MRM's business by stock
certificate transfer or otherwise, to any third party
or parties, other than any parent, subsidiary or
affiliate of MRM, and SIC did not agree to extend any
form of contract to the successor firm.
16. SALE, TRANSFER, CONSOLIDATION OR MERGER OF MRM
A. MRM shall promptly notify SIC in writing in the event that
sale, assignment, transfer, consolidation or merger of MRM in
whole or in majority part is contemplated. SIC at its sole
option, may elect to enter into negotiations to purchase MRM
and MRM will negotiate exclusively with SIC for a period of
fourteen (14) days in a good faith effort to reach a mutually
acceptable agreement.
8
<PAGE>
B. Notwithstanding the provisions of Paragraph 16.C.(2)(c), SIC
may terminate this Agreement immediately by giving MRM written
notice in the event of any sale, assignment, or transfer of
all or a majority interest of MRM by stock certificate
transfer or otherwise to any third party or parties, or the
consolidation or merger of MRM with a successor firm other
than any parent, subsidiary or affiliate of MRM. MRM agrees to
provide SIC prompt written notice as soon as such sale,
assignment, transfer, consolidation or merger is agreed upon.
SIC may, but is not obligated to, do one of the following:
(1) Enter into a new Program Agent Agreement with the
successor, or;
(2) Permit MRM to assign or transfer this Agreement upon
SIC's express written consent to a party acceptable
to SIC.
C. The transfer or sale of all or part of the business of MRM
under item 17.B shall not in any event affect the rights of
SIC hereunder nor obligate SIC to contract with any successor
or assignee of MRM. If SIC does not enter into a new
Management Agreement, then this Agreement shall terminate and
the provisions of Paragraph 16.C of this Agreement shall
apply.
17. ADMINISTRATIVE AND UNDERWRITING GUIDELINES
As used in this agreement the term "Administrative Guidelines" means
the procedures established by SIC for the binding of coverage and
endorsements and for the servicing of the insurance business thereto
under the Approved Programs outlined herein, and the criteria for
selection of outside service organizations, and the term "Underwriting
Guidelines" means the underwriting authorities rules and procedures
established by SIC for the acceptance of risks under the Approved
Program outlined herein. The Administrative and Underwriting Guidelines
may be amended from time to time by SIC through written notice directed
to MRM. Any such amendment or modification shall become effective upon
the date of receipt by the MRM of such written communication.
18. INDEPENDENT CONTRACTOR
MRM is acting under this Agreement as an independent contractor with
full power and authority to determine the means, manner and method of
performance of its duties, subject to the Administrative and
Underwriting Guidelines and other limitations and obligations imposed
upon MRM by this Agreement, and with full responsibility and liability
of its acts, errors and omissions in its performance of this Agreement,
MRM agrees it is not an employee of SIC and it is not entitled to any
benefits available to SIC employees.
9
<PAGE>
19. AMENDMENTS TO AGREEMENT
This Agreement and the Addenda attached may be amended only by an
instrument in writing executed by both parties, except where provision
is made for amendment only by action of SIC. All amendments made by SIC
must be made by an authorized representative of SIC.
20. CHOICE OF LAWS
This Agreement shall be construed according to the laws of the State of
Mississippi.
21. NOTICE
Unless otherwise provided for in this agreement, any Notice required
under this Agreement shall be given by regular first class mail,
prepaid, and shall be mailed the respective parties as follows:
David R. White, President Harry Vickery, President
MRM Underwriters, Inc. Stoneville Insurance Company
407 Briarwood Drive, Suite 201 633 North State Street, Suite 200
Jackson, MS 39206 Jackson, MS 39202
Any address change may be made by Notice to the other party.
22. CONFIDENTIALITY
MRM acknowledges and agrees that all SIC information, except as
specified below, which it comes to know by reason of this Agreement,
including but not limited to SIC's list of customers and Manuals, is
confidential to SIC and will not be disclosed to unauthorized third
parties or used for unauthorized purposes. MRM will use the same
standard of care (and bind its employees, agents or representatives to
such standard) to prevent disclosure of such information as it uses to
protect its own confidential information.
SIC acknowledges and agrees that all MRM information except as
specified below, which it comes to know by reason of this Agreement,
including but not limited to MRM's list of customers and Manuals, is
confidential to MRM and win not be disclosed to unauthorized third
parties or used for unauthorized purposes. SIC will use the same
standard of care (and bind its employees, agents or representatives to
such standard) to prevent disclosure of such information as it uses to
protect its own confidential information.
Information received by either party under this Agreement will not be
considered confidential if:
10
<PAGE>
(1) The information was known to such party at the time
of executing the original Agreement between SIC and
MRM Underwriters, Inc. dated September 1, 1998.
(2) The information was in the public domain at the time
it was disclosed without breach of this Agreement; or
(3) The information was independently developed by such
party; or
(4) The information becomes available to the public
through no fault of such party; or
(5) The information is received in good faith by such
party from a third party who is not subject to an
obligation of confidentiality owed to the other party
hereto; or
(6) The information was disclosed to a third party
without restriction by the other party hereto.
Anything to the contrary notwithstanding, information or material
delivered by one party to the other prior to the effective date of this
Agreement is hereby deemed to be confidential at the time of delivery.
In the event that either party hereto is requested or required in a
judicial, administrative or governmental proceeding to disclose any
information, material, records or files of the other party which are
obtained as the result of this Agreement such party will provide the
other party with prompt notice of such request(s) so that the other
party may seek an appropriate protective order or waive compliance with
the provisions of this Agreement.
Upon termination or expiration of this Agreement MRM and SIC and their
employees shall return to the other all written, descriptive, or
related matter of any type.
The obligation of SIC and MRM pursuant to this Section 23 shall survive
the termination of this Agreement.
23. COMPLETE AGREEMENT
This Agreement, together with the Addenda attached hereto and made a
part of hereof, contains the full and complete Program Management
Agreement between the parties.
IN WITNESS WHEREOF, SIC and MRM have caused this Agreement to be executed by
their duly authorized respective officers this first day of September, 1998.
<PAGE>
[SIGNATURES]
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0001036506
<NAME> Stoneville Insurance Company
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 1,518,115
<DEBT-CARRYING-VALUE> 1,481,358
<DEBT-MARKET-VALUE> 1,518,115
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,518,115
<CASH> 1,222,322
<RECOVER-REINSURE> 1,023,532
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 4,502,602
<POLICY-LOSSES> 1,780,687
<UNEARNED-PREMIUMS> 475,106
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 8,341
0
0
<COMMON> 503,384
<OTHER-SE> 1,411,669
<TOTAL-LIABILITY-AND-EQUITY> 4,502,602
1,691,374
<INVESTMENT-INCOME> 93,978
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 302,984
<BENEFITS> 1,269,134
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 224,702
<INCOME-PRETAX> (158,256)
<INCOME-TAX> (61,720)
<INCOME-CONTINUING> (96,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,536)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
