-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhrSz72Xe15nMGC/aXUHzseKT0SD35Jq1j08QfNiz84oU+SXnyshYD9NfRGeb7Rw Zee4nGd5azCAr1AtmQJl1g== 0001030798-97-000098.txt : 19970918 0001030798-97-000098.hdr.sgml : 19970918 ACCESSION NUMBER: 0001030798-97-000098 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19970917 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STONEVILLE INSURANCE CO CENTRAL INDEX KEY: 0001036506 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 721341156 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-24739 FILM NUMBER: 97681411 BUSINESS ADDRESS: STREET 1: 633 NORTH STATE ST STE 200 CITY: JACKSON STATE: MS ZIP: 39202-7817 BUSINESS PHONE: 6013527817 MAIL ADDRESS: STREET 1: STONEVILLE INSURANCE CO STREET 2: 633 NORTH STATE ST STE 200 CITY: JACKSON STATE: MS ZIP: 39202-7817 S-4/A 1 STONEVILLE INS. CO. AMEND. FOUR TO FORM S-4 Registration No. 333-24739 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- AMENDMENT NUMBER FOUR TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ STONEVILLE INSURANCE COMPANY (Exact name of registrant as specified in its charter) Mississippi 6331 72-1341156 (State or other jurisdiction (Primary Standard Industrial (IRS Employer Identi- of incorporation or Classification Code Number) fication Number) organization) Harry E. Vickery Harry E. Vickery Stoneville Insurance Company Delta Agricultural and Industrial Trust 633 North State Street, Suite 200 633 North State Street, Suite 200 Jackson, Mississippi 39202-7817 Jackson, Mississippi 39202-7817 (601) 352-7817 (601) 352-7817 (Address, including zip code, (Name, address, including zip and telephone number, including code, and telephone number, area code of registrant's including area code, of agent principal executive offices) for service) Copies to: David L. Martin, Esq. L. Keith Parsons, Esq. Watkins Ludlam & Stennis, P.A. 633 North State Street P. O. Box 427 Jackson, Mississippi 39205-0427 Telephone Number: (601)949-4701 Approximate date of commencement of proposed sale of securities to the public: As soon as practicable after the effective date of this Registration Statement and the liquidation of Delta Agricultural and Industrial Trust and capitalization of Stoneville Insurance Company have been consummated pursuant to the Plan and Agreement of Reorganization and Conversion described in this Prospectus. If the securities being registered on this form are being offered in conjunction with the formation of a holding company and there is compliance with General Instruction G, check the following box. /__/ CALCULATION OF REGISTRATION FEE ================================================================================ Proposed Maximum Title of Each Class of Securities to Amount Offering Price be Registered to be Registered(1) Per Unit - -------------------------------------------------------------------------------- Common Stock, par value $1.00 650,000 N/A =================================== ==================== ====================== (1) Represents the maximum number of shares of Stoneville Insurance Company common stock to be issued in accordance with the Plan and Agreement of Reorganization and Conversion included as Exhibit A to the attached Prospectus. (2) Estimated in accordance with Rule 457(f)(2) solely for the purpose of calculating the registration fee on the basis of the book value of the trust equity of Delta Agricultural and Industrial Trust as of December 31, 1996. ==================== ====================== ================================================================== Proposed Maximum Aggregate Amount of Offering Price(2) Registration Fee - ------------------------------------------------------------------ $2,600,000 $787.88 == =============================== ============================== THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. STONEVILLE INSURANCE COMPANY CROSS REFERENCE SHEET Caption or Location Items in Form S-4 in Prospectus A. Information About the Transaction 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus....................... Cover Page of Registration Statement; Cross Reference Sheet; Cover Page of the Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus........ Available Information; Incorporation of Certain Documents by Reference; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information...................... Summary; Risk Factors; Selected Financial Data of the Trust; Pro Forma Condensed Balance Sheets and Statements of Income (Unaudited) of the Company 4. Terms of the Transaction......... Summary; The Conversion; The Plan; Description of Company Stock; Comparison of Rights of Former Members of the Trust and Shareholders of the Company 5. Pro Forma Financial Information. Pro Forma Condensed Balance Sheets and Statements of Income (Unaudited) of the Company / 6. Material Contacts with the Company Being Acquired........... Not Applicable 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Under- writers.......................... Not Applicable 8. Interest of Named Experts and Counsel.......................... Legal Opinion; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Comparison of Rights of Former Members of the Trust and Shareholders of the Company B. Information About the Registrant 10. Information with Respect to S-3 Registrants.................. Not Applicable 11 Incorporation of Certain Infor- mation by Reference.............. Not Applicable 12. Information with Respect to S-2 or S-3 Registrants............... Not Applicable 13. Incorporation of Certain Infor- mation by Reference.............. Not Applicable 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants.................. Summary; The Conversion; Business of the Company; Financial Statements; Pro Forma Condensed Balance Sheets and Statements of Income (Unaudited) of the Company C. Information About the Company Being Acquired 15. Information with Respect to S-3 Companies...................... Not Applicable 16. Information with Respect to S-2 or S-3 Companies............... Not Applicable 17. Information with Respect to Companies Other Than S-3 or S-2 Companies.................. Summary; The Conversion; Business of the Trust; Financial Statements; Selected Financial Data of the Trust; Trust Management's Discussion and Analysis of Financial Conditions and Results of Operations D. Voting and Management Information 18. Information if Proxies, Consents or Authorizations Are to be Solicited........................ Not Applicable 19. Information if Proxies, Consents or Authorizations Are Not to be Solicited or in an Exchange Offer............................ Cover Page of Prospectus; Summary; The Special Meeting; The Plan; Business of the Company; Certain Transactions of Relationships iii [Delta Agricultural and Industrial Trust Letterhead] , 1997 To Our Former Members: As you are aware, since the Delta Agricultural and Industrial Trust (the "Trust") was started by the Delta Council in 1991, the purpose of the Trust has been to provide reasonably priced insurance for its insureds. Due to fundamental changes in the workers' compensation market, a key part of the Trust's strategy has been to move gradually toward the formation of a stock insurance company while providing continuity of coverage to its insureds. In December, 1996, Stoneville Insurance Company (the "Company") was formed to become the successor of the Trust. The Board of Trustees believes that the creation of the Company will allow the continuation of the Trust's original mission as well as allow the flexibility in the future to provide services the Trust could not offer. The Board of Trustees of the Trust recently took the next step to make the Company an operating entity by voting to approve and adopt a Plan and Agreement of Reorganization and Conversion of the Trust (the "Plan"). Pursuant to the Plan, the Trust will transfer substantially all of its assets and liabilities (other than insurance liabilities) to the Company in exchange for common stock ("Stock") of the Company, the Trust will be dissolved, and Former Members (as defined in the Plan) of the Trust will receive Stock of the Company on the terms and subject to the conditions set forth in the Plan, all as more fully described in the attached Prospectus (the "Conversion"). Upon completion of the actions set forth in the Plan, the Company will have succeeded to substantially all of the assets and liabilities of the Trust (other than insurance liabilities) and the Company will apply for, and anticipates receiving, a license as a Mississippi stock insurance company eligible to write workers' compensation insurance. Simultaneously with implementation of the Plan, Continental Casualty Company (a member of the CNA Insurance Group) will assume direct responsibility for the insurance liabilities of the Trust, which will relieve the Former Members of the Trust from their joint and several liability with respect to the insurance liabilities of the Trust. The terms of the Conversion and the anticipated business of the Company are described in detail in the enclosed Prospectus. The Board of Trustees of the Trust has unanimously approved the Plan and believes the Conversion is in the best interests of the Trust and its Former Members. No approval by Former Members is necessary for the consummation of the Conversion; however, all Former Members should carefully read the enclosed Prospectus including the section entitled "Risk Factors" to fully understand the Conversion and the plans and prospects of the Company. The Board of Trustees believes that the creation of the Company will best continue the Trust's original mission while providing Former Members the opportunity to participate in the Company's growth potential. By Order of the Board of Trustees William L. Kennedy Chairman of the Board of Trustees PROSPECTUS STONEVILLE INSURANCE COMPANY [insert logo here] DELTA AGRICULTURAL AND STONEVILLE INSURANCE COMPANY INDUSTRIAL TRUST Maximum of 650,000 Shares of Common Stock, $1.00 par value ----------------- This Prospectus is being furnished to former members of Delta Agricultural and Industrial Trust, a Mississippi workers' compensation self insurance trust (the "Trust") in connection with the Plan and Agreement of Reorganization and Conversion of the Trust (the "Plan") and the transactions contemplated thereby, which was adopted and approved by the Trust's Board of Trustees on March 20, 1997 as amended September 11, 1997. A conformed copy of the Plan, as amended, is attached as Exhibit A. Pursuant to the Plan: (i) the Trust will transfer substantially all its assets and liabilities (other than insurance liabilities) to Stoneville Insurance Company (the "Company"); (ii) in exchange for the contribution of such assets and liabilities by the Trust to the Company, the Company will issue shares of its common stock, $1.00 par value (the "Stock") to the Trust; and (iii) the Trust will dissolve and distribute its assets (Stock of the Company) in a liquidating distribution to former members of the Trust ("Former Members"). Former Members of the Trust are those employers who at any time had workers' compensation insurance coverage provided by the Trust for one or more of the following complete accounting years of the Trust: August 1, 1992-July 31, 1993; August 1, 1993-December 31, 1994; January 1, 1995-December 31, 1995; and January 1, 1996-December 31, 1996 (collectively, "Positive Income Fund Years" or individually interchangeably, a "Positive Income Fund Year"). The foregoing transaction is referred to as the "Conversion." As a result of the Conversion, each Former Member shall receive one share of Company Stock for each $4.00 of Trust equity (a "Trust Unit") allocable to such Former Member, except dissenters, who shall receive $4.00 in cash for each Trust Unit allocable to such dissenter. If dissenters' rights are perfected by holders of more than 20% of the Trust Units, then the Conversion will not proceed with the result that no cash or stock will be distributed to any Former Members and this offering will terminate. As of June 30, 1997, there were a total of approximately 595,997 Trust Units allocable to Former Members as a group which at $4.00 per Trust Unit represents the approximately $2,383,989 value, as of June 30, 1997, of the net assets anticipated to be transferred from the Trust to the Company. The actual amount transferred and the number of Trust Units will depend on the results of operations of the Trust between June 30, 1997 and the effective date of the Plan.. Trust Units will be allocated to each Former Member based on a ratio (the "Proportionate Earned Premium") which takes into account the proportion such Former Member's net premiums paid to the Trust for full years bears to the net premiums paid to the Trust for full years by all Former Members. The Proportionate Earned Premium is calculated by dividing (a) the net earned premium derived by the Trust from a Former Member for each Positive Income Fund Year during which the Trust derived a net earned premium for the full Positive Income Fund Year from such Former Member by (b) the total of all such net earned premiums of the Trust. The total of Trust Units allocable to Former Members as a group will be multiplied by each Former Member's Proportionate Earned Premium in order to determine the number of Trust Units (and thereby the Stock or, in the case of dissenters, the amount of cash) to be received by such Former Member as a result of the Conversion. No vote of Former Members is required for the approval or consummation of the Conversion. However, all Former Members should carefully read this Prospectus to understand the Conversion and their rights under the Plan. Consummation of the Conversion is subject to various conditions as set forth in the Plan and described in the Prospectus. ------------------ THIS PROSPECTUS, WHICH IS BEING FURNISHED TO FORMER MEMBERS OF THE TRUST TO ADVISE THEM OF THE TERMS OF THE CONVERSION, ALSO CONSTITUTES THE PROSPECTUS OF THE COMPANY WITH RESPECT TO A MAXIMUM OF 650,000 SHARES OF COMPANY STOCK TO BE ISSUED IN CONNECTION WITH THE CONVERSION. ----------------- No person is authorized to give any information or to make any representation concerning the Conversion not contained in this Prospectus and, if given or made, such information or representation should not be relied upon as having been authorized by the Company or the Trust. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this Prospectus in any jurisdiction, to or from any person to whom it is unlawful to make such offer or solicitation of an offer in such jurisdiction. Neither the delivery of this Prospectus nor any distribution of the securities made under this Prospectus shall, under any circumstances, create any implication that there has been no change in the information set forth herein since the date of this Prospectus. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED CAREFULLY BY FORMER MEMBERS OF THE TRUST IN CONSIDERING THEIR RIGHTS REGARDING THE CONVERSION. THIS STOCK IS PURELY SPECULATIVE. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE WORKERS' COMPENSATION COMMISSION, THE MISSISSIPPI DEPARTMENT OF INSURANCE OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, THE WORKERS' COMPENSATION COMMISSION, THE MISSISSIPPI DEPARTMENT OF INSURANCE OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------ This Prospectus is being first mailed to Former Members of the Trust on or about , 1997. The date of this Prospectus is , 1997. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-4 (together with any amendments thereto, the "Registration Statement") with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Securities Act") of which this Prospectus is a part with respect to the shares of Stock to be issued in connection with the Conversion. This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the Rules and Regulations of the Commission. Such additional information may be obtained from the Commission's principal office in Washington, D.C. Statements contained in this Prospectus or in any document incorporated by reference referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or attached as an annex hereto or such other document, each such statement being qualified in all respects by such reference. Prior to the issuance of the shares of Stock of the Company and registration thereof pursuant to the Registration Statement, neither the Company nor the Trust have been subject to any informational requirements of the Securities Exchange Act of 1934. Subsequent to the registration of the Company's Stock, the Company will be subject to certain informational requirements of the Securities Exchange Act of 1934. ------------------ This Prospectus incorporates documents by reference which are not presented herein or delivered herewith. Copies of any such documents, other than exhibits to such documents which are not specifically incorporated by reference herein, are available without charge, upon the written or oral request of any Former Member of the Trust or prospective Purchaser to whom this Prospectus is delivered. In order to ensure timely delivery of such documents, any request should be made by , 1997 [date at least 10 days after mailing date], and such requests should be directed to the Company's offices at 633 North State Street, Suite 200, Jackson, Mississippi 39202; telephone (601) 352-7817, Attention: Harry E. Vickery, President. ----------------- TABLE OF CONTENTS SUMMARY....................................................1 The Company................................................1 The Trust..................................................1 Definition of Former Members of the Trust..................1 Description of Plan........................................2 Adoption of Plan...........................................3 Reasons for Conversion.....................................3 Dissenters' Rights.........................................3 Effective Date.............................................4 Conditions and Termination.................................4 Assumption Reinsurance Agreement...........................4 Termination of Self Insurer Status.........................5 Business of the Company....................................5 Management of the Company..................................5 Regulation of the Company..................................5 Dividend Policy............................................6 Certain Federal Income Tax Consequences....................6 Accounting Treatment.......................................6 Required Regulatory Approvals..............................6 Comparison of Rights of Former Members of the Trust and Shareholders of the Company ...6 RISK FACTORS...............................................7 Lack of History of Operations..............................7 Limited Operations.........................................7 Capitalization.............................................7 Reliance on Certain Persons................................8 Variability of Operating Results...........................8 Adequacy of Loss Reserves..................................8 Regulation.................................................9 Competition................................................9 Lack of Ratings............................................9 Licensure..................................................9 THE CONVERSION............................................10 Background................................................10 Reasons for Conversion....................................11 Assumption Reinsurance Agreement..........................12 Regulatory Approvals......................................14 Resales of Company Stock..................................14 Certain Federal Income Tax Consequences...................14 Consequences to Former Members ..14 i Consequences to the Trust and the Company ........15 Anticipated Accounting Treatment............................15 THE PLAN....................................................16 General.....................................................16 Effective Date..............................................16 Terms of the Plan ..........................................16 Dissemination of Liquidating Distribution...................18 Conditions..................................................18 Termination.................................................19 PRO FORMA CONDENSED BALANCE SHEETS AND STATEMENTS OF INCOME (UNAUDITED) OF THE COMPANY........................20 THE WORKERS' COMPENSATION INSURANCE SYSTEM..................45 BUSINESS OF THE TRUST.......................................46 History of the Trust........................................46 Operations of the Trust.....................................46 The Commercial Program......................................46 Regulation..................................................47 Employees...................................................47 Trustees....................................................48 Legal Proceedings...........................................48 SELECTED FINANCIAL DATA OF THE TRUST........................49 TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS..............51 Overview....................................................51 Results of Operations.......................................53 Earned Premium ........53 Losses ........53 Other Expenses ........57 Income Taxes ........57 Investment Income ........58 Liquidity and Capital Resources.............................59 General ........59 Liquidity Requirements ........59 Admitted Assets ........60 Commitments ........61 BUSINESS OF THE COMPANY.....................................61 Organization and Purpose....................................61 Company Management's Plan of Operation......................61 Continuation of Commercial Program ........61 ii Provision of Reinsurance ........62 Creation of Other Workers' Compensation Insurance Program ........62 General Operations ........62 Investments ........63 Government Regulation.......................................63 Assumption of Trust Contracts...............................64 Employees...................................................65 Management of the Company...................................65 Executive Compensation......................................66 Legal Proceedings...........................................66 DESCRIPTION OF COMPANY STOCK................................67 COMPARISON OF RIGHTS OF FORMER MEMBERS OF THE TRUST AND SHAREHOLDERS OF THE COMPANY ..................67 Governance..................................................67 Liability...................................................67 Assessment..................................................67 Voting......................................................67 Resale......................................................68 Indemnification of Officers and Directors of the Company....68 Indemnification of Trustees of the Trust.................. .69 Preemptive Rights....................................... .70 Dividends................................................ .70 CERTAIN TRANSACTIONS AND RELATIONSHIPS................. ..71 LEGAL MATTERS........................................... ..71 EXPERTS............................................... ....72 INDEX TO FINANCIAL STATEMENTS........................ ...F-1 iii SUMMARY The following is a brief summary of certain information contained elsewhere in this Prospectus and the documents incorporated herein by reference. This summary does not contain a complete statement of all material information relating to the Conversion and is subject to and qualified in its entirety by reference to the more detailed information and financial statements contained elsewhere in this Prospectus, including any Exhibits and the documents incorporated in this Prospectus by reference. Certain capitalized terms used in this summary are defined elsewhere in this Prospectus. The Company The Company is a Mississippi corporation, with its principal office located 633 North State Street, Suite 200, Jackson, Mississippi 39202, telephone number (601) 352-7817. The Company was incorporated on December 13, 1996. Subsequent to the Conversion, the Company will apply for, and anticipates receiving, a license as a Mississippi stock insurance company eligible to provide workers' compensation insurance within the State of Mississippi. See "Business of the Company -- Organization and Purpose." The Trust The Trust is a Mississippi workers' compensation self insurance trust with its principal office located at 633 North State Street, Suite 200, Jackson, Mississippi, 39202-7817, telephone number (601) 352-7817. The Trust was formed under a Trust Agreement dated August 1, 1991 (the "Trust Agreement"), to provide workers' compensation insurance to its participants. See "Business of the Trust - -- History of the Trust; Operations of the Trust." Definition of Former Members of the Trust Former Members of the Trust are those employers who at any time had workers' compensation insurance coverage provided by the Trust for one or more full Positive Income Fund Years. The Positive Income Fund Years were August 1, 1992-July 31, 1993; August 1, 1993- December 31, 1994; January 1, 1995-December 31, 1995; and January 1, 1996-December 31, 1996. Since July 1, 1996, which is the date of the inception of the Trust's program of workers' compensation insurance coverage provided through TIG Insurance Company (the "Commercial Program"), no employer has paid a premium to the Trust for workers' compensation insurance nor has the Trust issued such insurance. Because the Trust Agreement governing operations of the Trust defines members as those who purchase insurance through the Trust, as a result of the creation of the Commercial Program the Trust ceased having members as contemplated by the provisions of the Trust Agreement. To clarify the rights of Former Members regarding the terms of the Conversion, on March 20, 1997, the Board of Trustees of the Trust unanimously adopted a resolution to clarify and define 1 those who are Former Members of the Trust as those employers who had workers' compensation insurance coverage provided by the Trust for one or more full Positive Income Fund Years. The Trustees included the Positive Income Fund Year as a condition to be a Former Member based on the position of the Mississippi Workers' Compensation Commission that the Conversion should be treated similar to a Trust refund, which would only be payable to employers who had workers' compensation insurance provided by the Trust during years in which the Trust made a profit, i.e. a Positive Income Fund Year. Description of Plan General Description. The Company has been formed to become the successor of the Trust. Pursuant to the Plan: (i) the Trust will transfer substantially all its assets and liabilities (other than insurance liabilities) to the Company; (ii) in exchange for the contribution of the such assets and liabilities by the Trust to the Company, the Company will issue Stock to the Trust; and (iii) the Trust will be liquidated and will distribute to Former Members of the Trust one (1) share of Company Stock for each Trust Unit ($4.00 of value of Trust equity) allocable to such Former Member, except for those Trust Units with respect to which rights of dissent have been exercised (collectively, the "Liquidating Distribution"). As of June 30, 1997, a total of approximately 595,997 Trust Units are available for distribution to Former Members, which represents the approximately $2,383,989 value, as of June 30, 1997, of the net assets anticipated to be transferred to the Company. The actual number of Trust Units will be computed based upon the value of the equity of the Trust as of June 30, 1997, increased by the income of the Trust between such date and the effective date of the Plan minus all expenses incurred between such date and the effective date of the Plan, including amounts reserved to pay estimated expenses of the Trust, but excluding amounts reserved to pay dissenters. The number of Trust Units and the actual amount transferred from the Trust to the Company will depend on the number of dissenters and the expenses of the Conversion and the income of the Trust between June 30, 1997 and the effective date of the Plan. Computation of Number of Shares Each Former Member Will Receive. For purposes of computing the number of shares of Stock (or in the case of dissenters, cash) distributable to each Former Member, each Former Member will have allocated to it a number of Trust Units determined by multiplying the total number of Trust Units by the Proportionate Earned Premium of each Former Member. The Proportionate Earned Premium is calculated by dividing (a) the net earned premium derived by the Trust from a Former Member for each Positive Income Fund Year during which the Trust derived a net earned premium for the full Positive Income Fund Year from such Former Member by (b) $16,166,610, which is the total of all such net earned premiums of the Trust. From time to time, at the request of a Former Member, the Trust will conduct an audit to determine if the amount of premium paid by the Former Member during a particular year was correct. Any such audits conducted between the date hereof and the Effective Date could result in some adjustment to the amount of the total net earned premium of the Trust derived from Former Members for full Positive Income Fund Years; however, it is not expected that such adjustment would be material. See "The Plan -- General; Terms of the Plan; Dissemination of Liquidating Distribution" and "Description of Company of Stock." 2 Computation Assistance. To determine the approximate number of shares a Former Member will receive, the Former Member can divide the premiums paid to the Trust for coverage for a full year in the years August 1, 1992-July 31, 1993; August 1, 1993-December 31, 1994; January 1, 1995-December 31, 1995; and January 1, 1996-December 31, 1996 by $16,166,610 and multiply the result by 595,997. For assistance with this calculation a Former Member can call the Trust collect at (601) 352-7817. Adoption of Plan The Trust's Board of Trustees unanimously approved and adopted the Plan on March 20, 1997. The Plan was amended on September 11, 1997. No vote of Former Members is required to approve or adopt the Plan or consummate the Conversion, because a vote of the members is not required under either state law or under the Trust Agreement. The Trust Agreement provides that the Trust's Board of Trustees may terminate the Trust at any time with the approval of the members of the Trust. However, when the Trust ceased directly providing workers' compensation insurance, the Trust ceased having members as defined by the Trust Agreement. Because there are no members as contemplated by the Trust Agreement, no vote other than the Trust's Board of Trustees is required to approve and adopt the Plan or consummate the Conversion. See "Summary -- Definition of Former Members of the Trust." Reasons for Conversion Formation of the Company is intended to provide a locally controlled, long term source of dependable and reasonably priced insurance without the joint and several liability associated with workers' compensation self-insured pools such as the Trust. As a Mississippi stock insurance company, the Company is permitted by law to expand into a broader range of insurance activities and to have more flexibility in financing activities and other matters than is currently permitted to the Trust as a Mississippi workers' compensation self-insured pool. Formation of the Company also is intended to facilitate the development of an active market in the Company's Stock. See "The Conversion -- Reasons for Conversion; Resales of Company Stock" and "Business of the Company - -- Company Management's Plan of Operation." Dissenters' Rights Former Members of the Trust have the right to dissent from the Plan and receive $4.00 in cash for each of their Trust Units. In order to perfect dissenters' rights, a Former Member wishing to dissent must deliver to the Trust's office written notice of such Former Member's intent to demand payment on or before ______________, 1997 [compute 30 days after the effective date of the Registration Statement]. See "The Plan -- General; Terms of the Plan." If dissenters' rights are perfected by holders of more than 20% of the Trust Units, then the Conversion will not proceed with the result that no cash or stock will be distributed to any Former Members. 3 Effective Date The effective date of the Plan at which time the Company will be capitalized and the Trust liquidated and dissolved (the "Effective Date") will be the close of business on the last day of the month in which all of the conditions to the Plan have been satisfied. See "The Plan -- Effective Date; Conditions; Termination." Conditions and Termination The Plan may be terminated and abandoned at any time prior to the Effective Date by vote of the Trust's Board of Trustees. In addition, the Plan is subject to certain conditions, which, if not met, also constitute grounds for termination. Such conditions include: (i) an opinion from Watkins Ludlam & Stennis, P.A. shall have been received, to the effect that the Conversion will be treated, for federal income tax purposes, as a tax-free transaction as to the Trust, the Company, and to those Former Members who receive Stock of the Company; (ii) the Assumption Reinsurance Agreement described elsewhere herein shall have become effective; and (iii) dissenters' rights shall not be perfected by holders of more than twenty percent (20%) of the Trust Units. See "The Plan - -- Conditions; Termination." Assumption Reinsurance Agreement The Trust and the Company have entered into an Assumption Reinsurance Agreement (the "Assumption Reinsurance Agreement") with Continental Casualty Company ("Continental"), a member of the CNA Insurance Group. In a self insured pool such as the Trust, all persons who have ever purchased insurance from the pool are jointly and severally liable for the loss obligations of one another which were incurred during the time period such person was an insured. The Assumption Reinsurance Agreement provides that Continental will assume the Trust's insurance liabilities and the joint and several liability of any employers to whom the Trust provided insurance and that such employers will be able to look directly to Continental for coverage and claims payments without the necessity of making a claim against the Trust. Each Former Member of the Trust which accepts a Liquidating Distribution will be deemed to have agreed to look solely to Continental for coverage, to release the Trust from further insurance obligations, and to release the Former Members of the Trust from joint and several liability. In addition, all Former Members will be required to sign and return an Assumption Certificate evidencing their agreement to the assumption by Continental as a condition to receiving the Liquidating Distribution applicable to such Former Member and participating in the offering of stock described in this Prospectus. The purpose of this requirement is to ensure that the objective of releasing Former Members from joint and several liability and effectively transferring this liability to Continental is accomplished. 4 Under the terms of the Assumption Reinsurance Agreement, the Company has the option to reinsure Continental for the Trust's former insurance which Continental directly assumed. See "The Conversion -- Assumption Reinsurance Agreement" and "Business of the Company -- Company Management's Plan of Operation." Termination of Self Insurer Status Upon consummation of the Assumption Reinsurance Agreement, the Trust will surrender its Certificate of Authority to the Workers' Compensation Commission. See "The Conversion -- Regulatory Approvals." Business of the Company Upon completion of the Conversion, the Company anticipates being licensed by the Mississippi Department of Insurance (the "Department of Insurance") to write workers' compensation insurance in the State of Mississippi. The Company anticipates that it will continue the Commercial Program as well as create workers' compensation programs through other insurers. The Company may obtain income through the provision of reinsurance to Continental and to TIG Insurance Company and TIG Reinsurance Company through the Commercial Program, through investment income and through the creation and management of workers' compensation programs similar to the Commercial Program. See "Business of the Company -- Company Management's Plan of Operation." The Company does not anticipate directly writing insurance until it is eligible to receive a rating from an insurance rating organization, which is anticipated to be at least five years after the date of licensure. Having a favorable rating is important to a company writing insurance on a direct basis because the absence of a rating, or a low rating, will make the company's products less attractive to insureds. See "Business of the Company -- Company Management's Plan of Operation." Management of the Company The officers and directors of the Company are William L. Kennedy (Director and Chairman of the Board), Harry E. Vickery (Director and President) and David R. White (Director, Secretary, Treasurer and Vice President). See "Business of the Company -- Management of the Company; Executive Compensation." Regulation of the Company The Company will be subject to the regulation of the Department of Insurance although control over the delivery of benefits is generally under the purview of the Workers' Compensation Commission. The regulatory policies of both the Workers' Compensation Commission (applicable to the Trust) and the Department of Insurance (applicable to the Company) are designed to encourage responsible operation and solvency. The principal difference in regulatory requirements 5 between the two regulatory entities is that the Department of Insurance's reporting requirements are more detailed and its regulatory powers are more extensive than those of the Workers' Compensation Commission. In addition, commercial insurance companies are allowed to set their rates at any level, subject only to Department of Insurance disapproval, thus allowing commercial insurers to quickly respond to market changes. This is in contrast with premium setting by pools such as the Trust, the rates of which must be analyzed and approved by the Workers' Compensation Commission. See "The Conversion -- Regulatory Approvals"; "The Workers' Compensation Insurance System"; and "Business of the Company -- Government Regulation." Dividend Policy The payment of dividends by the Company is subject to regulatory restrictions. See "Comparison of the Rights of Former Members of the Trust and Shareholders of the Company -- Dividends." Certain Federal Income Tax Consequences Where a Former Member exercises the right to dissent and receives cash in exchange for Trust Units, such cash will be treated as having been received by the Former Member as a distribution in redemption of the Trust Units subject to the provisions and limitations of Section 302 of the Internal Revenue Code of 1986, as amended (the "Code"). Where a Former Member receives shares of Company Stock in exchange for Trust Units, no gain or loss will be recognized by the Former Member on the Company Stock received. No gain or loss will be recognized by the Trust or the Company with respect to the Conversion. See "The Conversion - -- Certain Federal Income Tax Consequences." Accounting Treatment The Conversion is a reorganization of entities under common control, the accounting for which is similar to a pooling of interests. See "The Conversion -- Anticipated Accounting Treatment." Required Regulatory Approvals The Conversion does not require regulatory approval from either the Workers' Compensation Commission or the Department of Insurance. See "The Conversion -- Regulatory Approvals." Comparison of Rights of Former Members of the Trust and Shareholders of the Company There are material differences between the rights of Former Members of the Trust and rights of shareholders of the Company. These differences include the following: Former Members are jointly and severally liable for loss obligations of the Trust during the period such Former Members were insureds of the Trust, while stockholders of the Company will not be liable for the obligations 6 of the Company and the Company Stock will be nonassessable; Former Members have no voting rights while holders of Company Stock are entitled to one vote per share held on each matter submitted to a vote of the shareholders; and Former Members may not sell or transfer their interest in the Trust, while holders of Company Stock may freely transfer their shares, subject to applicable securities laws. See "Comparison of Rights of Former Members of the Trust and Rights of Shareholders of the Company." RISK FACTORS The following risk factors should be considered carefully by Former Members and Purchasers in evaluating whether to become holders of Company Stock. These factors should be considered in conjunction with other information included and incorporated by reference in this Prospectus. Lack of History of Operations The Company is a newly formed Mississippi corporation and has no history of operations. Although the Company will be the successor in interest to the Trust and plans to capitalize on relationships between the Trust and its present and former insureds, there can be no assurance that the Company will succeed or meet its objectives. See "Business of the Company -- Organization and Purpose; Company Management's Plan of Operation." Limited Operations The Company anticipates that initially its sole potential sources of revenue are investment income, premiums generated from the provision of reinsurance under the Assumption Reinsurance Agreement if the Company elects to provide such reinsurance, premiums generated from the provision of reinsurance under the Commercial Program if the Company elects to provide such reinsurance, and the creation and management of any program similar to the Commercial Program. See "The Conversion -- Assumption Reinsurance Agreement" and "Business of the Company -- Company Management's Plan of Operations." The Company does not plan to write insurance directly until it receives a favorable rating of at least an A-, which the Company anticipates will be at least five years from the date of licensure. See "Risk Factors -- Lack of Ratings." Capitalization The Company anticipates it will exceed the statutory minimum capital and surplus requirements of the Department of Insurance for writing workers' compensation insurance in Mississippi. However, the Company initially will be thinly capitalized. In the early years, the Company may incur losses. Losses in excess of those anticipated by management during the initial years of the Company's operations or otherwise could result in the Company failing to meet the statutory minimum capital and surplus requirements. In that event, the Company could be placed under certain operating and other restrictions by the Department of Insurance, the Company could be placed under supervision by the Department of Insurance, or the Department of Insurance could 7 seek to appoint a receiver or liquidator for the Company. See "Business of the Company -- Company Management's Plan of Operations; Government Regulation." Reliance on Certain Persons The success of the Company will be substantially dependent on the services of Harry E. Vickery (Director, President of the Company) and David R. White (Director, Secretary, Treasurer, and Vice President). The loss of the services of one or both persons could have an adverse impact on the Company's ability to reach its objectives. See "Business of the Company -- Management of the Company" and "Certain Transactions and Relationships." Variability of Operating Results Historically, the workers' compensation industry has been cyclical, generally characterized by periods of overcapacity which result in lower premium rates followed by periods of scarcity resulting in higher rates. Premium rates, and thus profitability, can be affected significantly by many factors including competition, the severity and frequency of claims, interest rates, regulations, court decisions, the judicial climate, and general economic conditions and trends, all of which are outside of the Company's control. These factors could contribute to significant variation of results of operations from year to year. Changes in economic conditions can lead to reduced premium levels due to lower payrolls as well as increased claims due to the tendency of workers who are laid off to submit worker's compensation claims. Legislative and regulatory changes can also contribute to variable operating results for worker's compensation insurance businesses. See "The Conversion -- Reasons for Conversion" and "The Workers' Compensation Insurance System." Adequacy of Loss Reserves The Company will be required to maintain reserves to cover its estimated ultimate liability for losses with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves do not represent an exact calculation of liabilities but rather are estimates involving actuarial projections at a given time of what the Company expects the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity. See "Business of the Company -- Government Regulation." In light of present facts and current legal interpretations, management of the Company believes that adequate provisions will have been made for loss reserves upon the Conversion. In making this determination, management has considered the claims experience of the Trust, loss development history for prior accident years for the Trust, estimates of future trends of claims frequency and severity and the proposed underwriting activities of the Company. However, establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. Subsequent actual experience could result in loss reserves being too high or too low. 8 Future loss development could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. Regulation The Company's worker's compensation insurance operations will initially be conducted only in Mississippi and will be subject to supervision and regulation by the Department of Insurance. Such supervision and regulation relate to numerous aspects of an insurance company's business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders rather than investors or stockholders of an issuer. In the event an insurance company does not comply with the rules and regulations promulgated by the Department of Insurance, the Department of Insurance may utilize a number of enforcement mechanisms against the noncomplying company, including supervision, receivership, or liquidation. See "Business of the Company -- Government Regulation." Competition The insurance industry is characterized by competition primarily on the basis of price. However, availability and quality of products, quality and speed of service (including claims service), financial strength, distribution systems and technical expertise are also important elements of competition. Many of the Company's competitors are larger and have greater resources than the Company. See "Business of the Company -- Company Management's Plan of Operations." Lack of Ratings Rating organizations review the financial performance and condition of insurers. The Company will initially not be rated as a result of having less than five consecutive years of operating experience. The absence of a rating could make the Company's reinsurance product less attractive to potential ceding companies (the companies which would transfer the insurance risk to the Company) because the ceding insurer will not have an independent third party evaluation of the Company's financial status. As a result, the ceding companies may require pledged collateral or a letter of credit as a condition for ceding insurance to the Company. Licensure Upon completion of the Conversion, the Company expects to be licensed by the Department of Insurance as a provider of workers' compensation insurance. Although the Company believes it will meet all requirements for licensure and has undertaken discussions with the Department of Insurance to that effect, the Department of Insurance is not required to grant such licensure. 9 THE CONVERSION Background and Recommendation of the Trust's Board of Trustees. During late 1995, management of the Trust began discussing the best method of continuing to fulfill the Trust's mission of ensuring long term availability of reasonably priced workers' compensation insurance to its core agricultural and industrial clients. Due to fundamental changes in the workers' compensation insurance market, management of the Trust determined that the conversion of the Trust into a commercial stock company would best suit the needs of the Trust's insureds. See "The Workers' Compensation Insurance System." In reaching its recommendation to pursue the Conversion, the Trust's Board of Trustees examined a number of options. Because of the current low premiums being charged by workers' compensation insurers, the Trust could not offer competitively priced workers' compensation insurance. The Board considered simply dissolving the Trust and returning the remaining assets to Former Members or leaving the Trust dormant while continuing with the Commercial Program (both with and without terminating the joint and several liability of the insureds) but these strategies conflicted with the Trust's original mission to ensure long term availability of reasonably priced workers' compensation insurance to its core agricultural and industrial clients. Although the Commercial Program has produced more competitive rates than the Trust, the Trustees do not wish to rely upon the Commercial Program as a long term solution because there is no assurance that TIG will continue writing insurance under the Commercial Program. In addition, TIG's rates may become uncompetitive. The Trustees believe that the workers' compensation market will experience another period of scarcity and higher premium rates as a result of excessive price competition (as the market experienced in the late 1980's and early 1990's). The Trustees also believe that in such event a commercial insurance company structure will provide more flexibility for assuring coverage of the Trust's target market through reinsurance or other arrangements. In addition, dissolution or dormancy of the Trust would not allow Former Members an opportunity to participate in the long term growth potential of a company that they owned. Further, in the event of dissolution of the Trust, the cash liquidation proceeds would be taxable to the recipients, while receipt of Company Stock is not. On March 20, 1997, the Trustees of the Trust (William L. Kennedy, Aven Whittington, Merlin Richardson, and S. Hall Barrett, Jr.) unanimously voted to approve and adopt the Plan. The Trustees amended the Plan effective September 11, 1997. The Company approved and adopted the Plan and the sale of its stock to the Trust and related transactions on the same date. For additional explanation of the Trustees' reasons for approving the Plan, see "The Conversion -- Reasons for Conversion." THE BOARD OF TRUSTEES OF THE TRUST HAS UNANIMOUSLY VOTED FOR APPROVAL AND ADOPTION OF THE PLAN AND BELIEVES THAT THE CONVERSION IS IN THE BEST INTERESTS OF THE TRUST AND THE FORMER MEMBERS. 10 Reasons for Conversion The Changing Workers Compensation Market At the time the Trust was organized, workers' compensation insurance written by commercial insurers in Mississippi was becoming difficult and expensive to obtain as a result of losses experienced by commercial insurers. Mississippi's experience paralleled a national trend of limited availability of workers' compensation insurance which prompted the formation of self insured pools across the United States. See "The Workers' Compensation Insurance System." However, as a result of structural changes in the workers' compensation market, such as tort reform and better loss analysis, premiums charged by commercial workers' compensation carriers have lessened while availability of insurance has increased. As a result, self insured pools such as the Trust have found it difficult to compete with commercial insurance companies on a cost of premium basis because commercial insurers generally have greater financial resources and, due to different regulatory requirements, can change their pricing strategy much more rapidly than can the self insured pools. See "Business of the Trust -- Regulation" and "Trust Management's Discussion and Analysis of Financial Conditions and Operation." Although availability of workers' compensation insurance has increased, the industry remains highly cyclical, which could result in periods of scarcity and high premiums in the future. As a result of the changing nature of the workers' compensation market, effective July 1, 1996 the Trust ceased writing workers' compensation insurance and created the Commercial Program with TIG Insurance Company ("TIG") and TIG Reinsurance Company. Under the Commercial Program, TIG (an "A" (excellent) rated commercial insurance company according to A. M. Best Company), provides workers' compensation to Former Members and other persons through the Trust's network of agents. The Trust created the Commercial Program in order to maintain coverage of its insureds at reasonable rates as the Trust planned for the Conversion. The Trust continues to operate primarily to service and "run off" business written prior to July 1, 1996. Joint and Several Liability In a self insurance pool such as the Trust, all insureds are jointly and severally liable for the loss obligations of one another during the periods such persons were insured by the pool. Upon the effectiveness of the Assumption Reinsurance Agreement which is a condition precedent of the Plan becoming effective, Continental will insure the joint and several liability obligations of all the insureds of the Trust. In the future, the shareholders of the Company will not be jointly and severally liable for any obligations arising out of policies written by the Company. See "Comparison of the Rights of Former Members of the Trust and Shareholders of the Company -- Liability; Assessment." 11 Ability to Write Other Lines of Business Mississippi law prohibits self insured workers' compensation trusts from writing any type of insurance other than workers' compensation insurance. As a commercial stock company, assuming appropriate licensure, the Company could write and/or participate in insurance programs to provide lines of insurance business in addition to workers' compensation. In the event the Company desired to participate in other lines of business, the Department of Insurance would require the Company to maintain higher levels of capital and surplus ($600,000 and $900,000, respectively) than is required for a single line company which, like the Company, will write only workers' compensation ($400,000 and $600,000, respectively). Though the Company does not anticipate becoming licensed to write other lines of business in the near future, management of the Trust and the Company believe the ability to do so will allow the Company to be more responsive to the future needs of its target market than a self insured workers' compensation trust. Ability to Write Insurance in Other States Self insurers such as the Trust cannot write workers' compensation insurance outside of Mississippi. As a commercial insurer, assuming appropriate licensure and financial strength, the Company could write insurance in other states. The Company does not plan to directly write insurance for at least five years after the Conversion (in order to allow time to be rated). However, under certain circumstances it can participate in workers' compensation programs similar to the Commercial Program in other states without seeking licensing or any additional statutory capital or surplus requirements in those states, provided that another company that is licensed in the state is directly writing the business. There are currently no such arrangements in place with respect to other states. to See "Business of the Company -- Company Management's Plan of Operation -- Creation of Other Workers' Compensation Insurance Programs." Ability to Raise Additional Capital If self insured workers' compensation trusts require additional capital, their principal options would be to either increase premiums or assess their members jointly and severally. As a commercial insuror, the Company's shareholders are not liable to assessment and capital needs may be met through the sale of stock. At present, the Company has no plans to issue additional stock after the Conversion. See "Comparison of the Rights of Members of the Trust and Shareholders of the Company -- Liability; Assessment" and "Business of the Company -- Government Regulation." Assumption Reinsurance Agreement The Trust and the Company have entered into the Assumption Reinsurance Agreement dated as of March 20, 1997, with Continental, a member of the CNA Insurance Group. The Assumption Reinsurance Agreement was subsequently amended effective September 5, 1997. The CNA 12 Insurance Group has a rating by the A. M. Best Company of "A" (Excellent). This rating applies to the group's nine-member intercompany pool which includes Continental. The Assumption Reinsurance Agreement provides that Continental will assume the Trust's insurance liabilities and the joint and several liability of any employers to whom the Trust provided insurance from the inception of the Trust and that such employers will be able to look directly to Continental for coverage and claims payments without the necessity of making a claim against the Trust. Each Former Member of the Trust which accepts a Liquidating Distribution will be deemed to have agreed to look solely to Continental for coverage, to release the Trust from further insurance obligations, and to release the Former Members of the Trust from joint and several liability. In addition, all Former Members will be required to sign and return an Assumption Certificate evidencing their agreement to the assumption by Continental and to release the Former Members from joint and several liability as a condition to receiving the Liquidating Distribution applicable to such Former Member. The Assumption Reinsurance Agreement will become effective when the Trust pays to Continental a total premium not to exceed $1,875,000 composed of $1,625,000 in reserves to be transferred to Continental for use in paying claims made against the Trust (which amount may be adjusted downward depending on claims settled), and $250,000 as a fee to Continental for the provision of coverage. David R. White, who is an officer and director of the Company, or an affiliate of Mr. White, will be paid a commission of $25,000 by Continental in connection with the transaction. See "Risk Factors -- Capitalization;" "Business of the Company -- Government Regulation;" and "Trust Management's Discussion and Analysis of Financial Conditions and Results of Operations." Under the terms of the Assumption Reinsurance Agreement, the Company has the option to reinsure Continental with respect to the insurance which Continental directly assumed ("Stoneville Reinsurance"). No consideration shall be paid or due to or from either the Company or Continental for Stoneville Reinsurance. Under the terms of the Assumption Reinsurance Agreement, Stoneville may exercise Stoneville Reinsurance on March 1, 1998, by providing written notice to Continental on or prior to such exercise date. If Stoneville exercises Stoneville Reinsurance, Continental and Stoneville shall enter into a Reinsurance Agreement in a form acceptable to Continental with such acceptability criteria to be based on customary industry practice and with such acceptance by Continental not to be unreasonably withheld. If Stoneville Reinsurance is provided, reserves allocable to such risk reinsured by the Company will be transferred to the Company, thus allowing the Company to invest those funds and generate income. The Company will be required to fund a trust account with a financial institution acceptable to Continental and the Company with the amount of funds necessary for Continental to receive full financial statement credit for such reinsurance and with the terms and conditions of such trust to comply with the law of Continental's state of domicile such that Continental shall receive full financial statement credit for such reinsurance. The Assumption Reinsurance Agreement is unrelated to and will have no effect on the ongoing operations of the Trust's Commercial Program. 13 Regulatory Approvals No formal regulatory approvals from either the Workers' Compensation Commission or the Department of Insurance are required in order for the Trust to consummate the Conversion. The Company must be licensed as an insurance company by the Department of Insurance prior to commencing operations as a workers' compensation insurer. The Company believes such licensure will be granted upon the consummation of the Conversion. See "Business of the Company -- Government Regulations." The Trust has provided copies of the Plan, as amended, a copy of this Prospectus, and other information to the Workers' Compensation Commission. Immediately prior to the consummation of the Conversion, the Trust will surrender its Certificate of Authority to the Workers' Compensation Commission. Resales of Company Stock All shares of Company Stock received by Former Members of the Trust in the Conversion will be freely transferable, except that shares of Company Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of the Trust before the Conversion may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such persons who become affiliates of the Company), or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of the Trust or the Company generally include individuals or entities that control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal shareholders of such party in the case of the Company, or certain Trustees or Former Members in the case of the Trust. See "Comparison of the Rights of Former Members of the Trust and Shareholders of the Company -- Resale." Certain Federal Income Tax Consequences The following discussion of certain federal income tax consequences of the Conversion is based on provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the regulations thereunder, judicial authority, and administrative rulings and practice as of the date hereof. Watkins Ludlam & Stennis, P.A. has furnished an opinion of counsel to the effect that the Conversion will be treated as a tax free transaction as to the Trust, the Company, and to those Former Members who receive Stock of the Company. Consequences to Former Members Former Members receiving cash as a result of the Conversion will be treated as having received cash as a distribution in redemption of the Trust Units. Such distribution will be taxable, subject to the provisions and limitations of Code Section 302. No gain or loss will be recognized by the Former Members upon their receipt of Company Stock solely in exchange for their Trust 14 Units by virtue of Code Section 354(a)(1). The basis of the Company Stock to be received by the Former Members will be the same as the Former Members' basis in the Trust Units allocable to such Former Members, under Code Section 358(a)(1). The holding period of the Company Stock received by the Former Members will include, in each instance, the period during which the Former Members had an interest in the equity of the Trust as determined under the Plan, provided that such Trust equity constituted a capital asset on the date of the exchange, pursuant to Code Section 1223(1). Consequences to the Trust and the Company No gain or loss will be recognized by the Trust or the Company as a result of the Conversion under Code Sections 361(a) and 1032(a), respectively. The basis of the assets of the Trust in the hands of the Company will be the same as the basis of those assets in the hands of the Trust immediately prior to the transfer under Code Section 362(b). The holding period of the assets of the Trust in the hands of the Company will include the period during which such assets were held by the Trust under Code Section 1223(2). EACH FORMER MEMBER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH FORMER MEMBER OF THE CONVERSION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, FOREIGN AND OTHER TAX LAWS. THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE CONVERSION WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF EACH FORMER MEMBER OF THE TRUST. Anticipated Accounting Treatment The Conversion is a reorganization of entities under common control, the accounting for which is similar to a pooling of interests. Under this method of accounting, the recorded assets of the Trust will be carried forward to the Company at their recorded amounts, income of the Company will include income of the Trust for the entire fiscal year in which the Conversion occurs and the reported income of the Trust for prior periods will be combined with and included as income of the Company. 15 THE PLAN General The terms of the Conversion are contained in the Plan, a copy of which is attached to the Prospectus as Exhibit A. The statements in this Prospectus are qualified entirely by reference to the Plan. Upon the satisfaction of the conditions to the effectiveness of the Plan: (i) the Trust will transfer substantially all its assets and liabilities (other than insurance liabilities) to the Company; (ii) in exchange for the contribution of such assets and liabilities by the Trust to the Company, the Company will issue shares of its $1.00 par value Stock to the Trust with each share of such Stock to be valued for purposes of the exchange at $4.00 per share; and (iii) the Trust will dissolve and distribute its assets (stock of the Company) to Former Members of the Trust, with the exception of Former Members who elect to dissent from the transaction, who will receive $4.00 for each share of Stock to which they would have been entitled to under the Plan. The Plan fixes the value of the Stock based on a per share measurement of $4.00 of Trust equity (one Trust Unit) per share of Stock. The per share valuation is designed to result in the Company issuing an appropriate number of shares so that it will have the minimum levels of statutory capital and surplus as required by law. In Mississippi, the par value of stock issued by an insurance company cannot be less than $1.00. The Company will be considered a single line commercial insurance company by the Department of Insurance so long as it writes only workers' compensation insurance. Single line commercial insurance companies such as the Company must at all times meet and maintain a minimum capital (the par value of the issued and outstanding stock) and surplus (generally the difference between the issuance price of the stock and its par value) levels of $400,000 and $600,000, respectively. The Company anticipates that it will exceed the minimum levels of capital and surplus. See "Trust Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Results of Operations -- Liquidity Requirements." Effective Date The Plan is dated as of March 20, 1997, and was subsequently amended effective , 1997. The Plan will become effective as of the Effective Date, which is the close of business on the last day of the month during which all conditions to the Plan have been satisfied. The capitalization of the Company and the liquidation and dissolution of the Trust shall be deemed to have occurred simultaneously and completely as of the Effective Date. Terms of the Plan As of the Effective Date, the Trust will transfer to the Company substantially all of the assets and liabilities (other than insurance liabilities) of the Trust in return for the number of shares of Stock of the Company equal to the assets and liabilities of the Trust transferred by the Trust to the Company measured by $4.00 of Trust equity (one Trust Unit) per share of Company Stock. The 16 value of the assets and liabilities to be transferred to the Company is anticipated to be $2,383,989, which is the value of the equity of the Trust as of June 30, 1997, increased by the estimated income of the Trust between such date and the Effective Date of the Plan minus all expenses incurred between such date and the effective date of the Plan, including amounts reserved to pay estimated expenses of the Trust, but excluding amounts reserved to pay dissenters. At that point, the Trust will own all the issued and outstanding shares of Stock of the Company. Immediately thereafter, the Trust will be liquidated. Upon liquidation of the Trust, each Former Member shall receive its Liquidating Distribution of one share of Company Stock for each Trust Unit allocable to such Former member, except dissenters, who shall receive $4.00 in cash for each Trust Unit allocable to such dissenter. As of June 30, 1997, there were a total of approximately 595,997 Trust Units allocable to Former Members which represents the approximately $2,383,989 value, as of June 30, 1997, of the net assets which will be transferred to the Company. The actual amount transferred from the Trust to the Company will depend the results of operations of the Trust between June 30, 1997 and the Effective Date of the Plan. In the event that the expenses set aside for the Conversion are less than anticipated and/or few Former Members exercise dissenters' rights and/or the Trust income is greater than projected, then the remaining amounts shall be transferred from the Trust to the Company as a contribution to capital of the Company. For purposes of computing the number of shares of Stock (or in the case of dissenters, cash) distributable to each Former Member, each Former Member of the Trust will have allocated to it a number of Trust Units determined by multiplying the total number of Trust Units by the Proportionate Earned Premium of each Former Member. Proportionate Earned Premium is computed by dividing (a) the net earned premium derived by the Trust from a Former Member for each Positive Income Fund Year during which the Trust derived a net earned premium for the full Positive Income Fund Year from such Former Member by (b) the total of all such net earned premiums of the Trust. The Proportionate Earned Premium is designed to allocate to each Former Member an amount of Trust Units in proportion to that Former Member's economic contribution to the Trust. This computation, including the use of only Positive Income Fund Years, is similar to the one used for determining a member refund in a self insured pool, is similar to the method that would be used if the Trust were liquidating and distributing cash, and was chosen based on discussions with the Workers' Compensation Commission. Mississippi law does not provide for dissenters' rights in transactions involving trusts. However, based on discussions with the Workers' Compensation Commission, the Plan includes a version of dissenters' rights which is designed to allow dissenters to dissent from the Plan and receive $4.00 in cash for each Trust Unit allocable to such persons upon perfection of dissenters' rights. Payments to dissenters shall be paid by the Trust in an amount (to be determined as of the Effective Date) which will satisfy certain published Internal Revenue Service Guidelines so as not to cause the Conversion to lose its characterization as a tax free transaction as to the Trust, the Company, and those Former Members who receive Stock of the Company. Any excess over such amount shall be paid to dissenters by the Company (contemporaneously with the payments made 17 to dissenters from funds of the Trust) out of operating funds or from the proceeds of a loan that the Company will obtain for that purpose and not out of assets transferred to the Company from the Trust pursuant to the Plan. The Company's intent is to pay debt service on any loan obtained to pay dissenters out of future earnings of the Company and not out of funds transferred from the Trust. In order to perfect dissenters' rights, a Former Member wishing to dissent must deliver to the Trust's office at 633 North State Street, Suite 200, Jackson, Mississippi 39202-7817, before ___________, 1997 [compute 30 days after the Effective Date of the Registration Statement], written notice of such Former Member's intent to demand payment. Payment to dissenters who have perfected their dissenters' rights shall be made within 60 days after the Effective Date. If dissenters' rights are perfected by holders of more than 20% of the Trust Units, then the Conversion will not proceed with the result that no cash or stock will be distributed to any Former Members. As of the Effective Date, following the Liquidating Distribution, the Trust shall be dissolved. Subsequent to the dissolution of the Trust, any amounts remaining not needed to pay expenses or dissenters, if any, shall be transferred to the Company. Dissemination of Liquidating Distribution Promptly after the Effective Date, each Former Member will receive an Assumption Certificate which will evidence Continental's assumption of the insurance liabilities of the Trust, including the joint and several liability obligations of each of the Trust's insureds to the other. Each Former Member must sign and return the Assumption Certificate to the Trust at which time the Trust will tender to the Former Member such Former Member's Stock in the Company or such amount as may be due if such Former Member has complied with the dissenters' procedures as set forth in the Plan. The purpose of this requirement is to ensure that the objective of releasing Former Members from joint and several liability and effectively transferring this liability to Continental is accomplished. Conditions The obligation of the Trust to consummate the Plan is subject to the following conditions: (i) the Assumption Reinsurance Agreement being in effect; (ii) receipt of an opinion from Watkins Ludlam & Stennis, P.A. to the effect that the Conversion will be treated as a tax-free transaction as to the Trust, the Company, and to those Former Members who receive Stock of the Company; and (iii) dissenter's rights shall not be perfected by holders of more than twenty percent (20%) of the Trust Units. 18 Termination The Plan may be terminated at any time by vote of the Trustees of the Trust or if all conditions to the Plan have not been satisfied by December 31, 1997. In the event the Plan is terminated, the Conversion will not proceed. The Trustees of the Trust will at that point determine whether to allow the Trust to become dormant, liquidate the Trust, and/or cause the Assumption Reinsurance Agreement to become effective. 19 PRO FORMA CONDENSED BALANCE SHEETS AND STATEMENTS OF INCOME (UNAUDITED) OF THE COMPANY Pro Forma Condensed Balance Sheets The following proforma condensed balance sheets are presented as of December 31, 1996 and June 30, 1997. The December 31, 1996 proforma balance sheets give effect to the conversion as if the conversion was in place effective December 31, 1996. They also assume that the Assumption Reinsurance Agreement with CNA was in place effective December 31, 1996. The June 30, 1997 proforma balance sheets give effect to the conversion as if the conversion was in place effective June 30, 1997. They also assume that the Assumption Reinsurance Agreement with CNA was in place effective December 31, 1996. The pro forma condensed balance sheets with the notation "20% Dissent" assume that Former Members representing at least 20% of the equity of the Trust will perfect dissenters' rights under the Plan. The pro forma condensed balance sheets with the notation "No Dissenters" assume that no Former Members will perfect dissenters' rights under the Plan. Pro Forma Condensed Statements of Income Two pro forma condensed statements of income are presented for the year ended December 31, 1996 and two for the six month period ending June 30, 1997. The 1996 pro forma condensed statements of income give effect to the Conversion as if the Conversion had been in place January 1, 1996. They also assume that the TIG Commercial Insurance Program, which began July 1, 1996, was in effect as of January 1, 1996. The pro forma condensed statements of income for the six months ended June 30, 1997 give effect to the conversion as if the conversion had taken place December 31, 1996, the CNA Assumption Reinsurance Agreement was in place effective December 31, 1996, and the TIG Commercial Insurance Program became effective July 1, 1996. The pro forma condensed statements of income with the notation "20% Dissent" assume that Former Members representing at least 20% of the equity of the Trust at December 31, 1996 will perfect dissenters rights under the Plan. The pro forma condensed statements of income with the notation "No Dissenters" assume that no Former members of the Trust will perfect dissenters' rights under the Plan. The pro forma information is based upon historical financial statements of the Trust giving effect to the transactions as a reorganization of entities under common control, and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma financial statements. 20 The unaudited pro forma condensed balance sheets and statements of income have been prepared by management of the Company based upon financial statements of the Trust and the Company which are included elsewhere herein. The pro forma balance sheets and statements of income may not be indicative of the financial condition that would have existed if the conversion had become effective on December 31, 1996 or January 1, 1996 or if the TIG Commercial Program had been in effect on January 1, 1996. In particular, the pro forma financial statements contain no adjustments for the exercise of rights of the company to provide reinsurance under the TIG Commercial Program and the Assumption Reinsurance Agreement with Continental. The pro forma condensed balance sheets and statements of income should be read in conjunction with financial statements and related notes of the Company and the Trust contained elsewhere herein. 21
Pro Forma Balance Sheet (No Dissenters) December 31, 1996 Trust Trust Stoneville Stoneville Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Pro Forma Pro Forma Adj Trust # Adjustments Balance Company Adjustments Balance # ----------- ----- --------------------------------------------------------------------------------- Assets Cash and Cash Equivalents $1,359,965 $1,359,965 $19,970 $19,970 Invested assets 3,361,332 1 (3,014,234) 347,098 Notes receivable 20,000 20,000 7 Accrued interest receivable 52,410 52,410 6 Reinsurance receivables, net 660,986 2 (660,986) 0 of uncollectible amounts Excess insurance premium 89,860 89,860 overpayment Capital equipment leases at cost less accumulated depreciation 13,517 13,517 Prepaid expenses 21,798 21,798 Income tax refund receivable 152,862 3 327,990 480,852 Other assets 575 575 ----------- ----- ----------------------------------------- ------------------------------- Total Assets $5,733,305 ($3,347,230) $2,386,075 $19,970 $0 $19,970 =========== ===== ========================================= =============================== Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss 2,834,220 4 (2,834,220) 0 adjustment expenses Reserve for premium 384,863 384,863 adjustment Notes payable 0 0 20,000 20,000 9 Accounts payable and 56,290 56,290 407 407 8 accrued liabilities Capital lease obligations 4,038 4,038 ----------- ----- ----------------------------------------- ------------------------------- Total Liabilities 3,279,411 (2,834,220) 445,191 20,407 0 20,407 =========== ===== ========================================= =============================== Stockholders' Equity Common Stock 500,000 shares issued and outstanding $1 par value 0 0 10 Retained Earnings 2,463,130 5 (513,010) 1,950,120 (437) (437) 11 Unrealized decline in market value of equity securities less applicable future tax benefit (9,236) (9,236) ----------- ----- ----------------------------------------- ------------------------------- Total Stockholders' Equity 2,453,894 (513,010) 1,940,884 (437) 0 (437) ----------- ----- ----------------------------------------- ------------------------------- Total Liabilities and $5,733,305 ($3,347,230) $2,386,075 $19,970 $0 $19,970 Stockholders' Equity =========== ===== ========================================= ===============================
Inter-Co. Combined Elimination Pro Forma Adjustments Balance Assets ------------------ -------- Cash and Cash Equivalents $1,379,935 Invested assets 347,098 Notes receivable (20,000) 0 Accrued interest receivable (407) 52,003 Reinsurance receivables, net 0 of uncollectible amounts Excess insurance premium 89,860 overpayment Capital equipment leases at 0 cost less accumulated depreciation 13,517 Prepaid expenses 21,798 Income tax refund receivable 480,852 Other assets 575 --------- ---------------- Total Assets ($20,407) $2,385,638 ========= ================ Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss $0 adjustment expenses Reserve for premium 384,863 adjustment Notes payable (20,000) 0 Accounts payable and (407) 56,290 accrued liabilities Capital lease obligations 4,038 --------- ---------------- Total Liabilities (20,407) 445,191 ========= ================ Stockholders' Equity Common Stock 500,000 shares issued and outstanding $1 par value 500,000 500,000 Retained Earnings (500,000) 1,449,683 Unrealized decline in market 0 value of equity securities less applicable future tax benefit (9,236) --------- ---------------- Total Stockholders' Equity 0 1,940,447 --------- ---------------- Total Liabilities and ($20,407) $2,385,638 Stockholders' Equity ========= ================
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet December 31, 1996 (No Dissenters) Trust Adjustments Adjustment Number Description Amount 1 Adjustment for the payment of the CNA Premium of $2,764,234 plus a fee of $250,000 out of the investments of the Trust. $(3,014,234) 2 Adjustment to remove the reinsurance receivable from the Books of the Trust. This receivable will be transferred to CNA along with outstanding insurance claims. $ (660,986) ========== 3 Adjustment to the income tax refund receivable due to the change in taxable income as a result of the CNA Assumption Reinsurance Agreement as shown following: Loss from liability transfer $591,000 CNA fee 250,000 --------- Decrease in taxable income 841,000 Tax Decrease (34% Federal and 5% State) $ 327,990 =========== * Loss from the CNA transfer is calculated as follows: Liability transfered $2,834,220 Premium Paid Excluding Fee (2,764,234) Reinsurance Receivable Transferred ( 660,986) ------------ Loss $ 591,000 ========= 4 Adjustment to reserve for losses to remove claims liability transferred to CNA $(2,834,220) 5 Adjustments to Retained Earnings a Loss from CNA Assumption Reinsurance Agreement (See Adjustment # 3 above.) $ (591,000) 22 Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet December 31, 1996 (No Dissenters) b Fee expense to CNA for Assumption Agreement ( 250,000) c Tax adjustment as a result of the CNA transaction. (See Adjustment # 3 above.) 327,990 ------- Total Adjustment # 5 $(513,010) ========== Inter-Company Eliminating Entries Adjustment Number Description Amount 6 Eliminate accrued interest receivable from $( 407) Stoneville to the Trust ============ 7 Eliminate note receivable from Stoneville $( 20,000) to Trust ============= 8 Eliminate accrued interest payable to Trust $( 407) from Stoneville ============= 9 Eliminate notes payable from Stoneville to $( 20,000) the Trust ============= 10 Record issuance of 500,000 shares of common stock, $1.00 par value $ 500,000 ============= 11 Record use of $500,000 of Trust to issue 500,000 shares of common stock, $1.00 par $ ( 500,000) value of Stoneville Insurance Co. ============= 23
Pro Forma Balance Sheet (20% Dissent) December 31, 1996 Trust Trust Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Trust # Adjustments Balance Company ---------------------------------- ----------------------------- Assets Cash and Cash Equivalents $1,359,965 $1,359,965 $19,970 Invested assets 3,361,332 1 (3,114,234) 247,098 Notes receivable 20,000 20,000 Accrued interest receivable 52,410 52,410 Reinsurance receivables, net of uncollectible 660,986 2 (660,986) 0 amounts Excess insurance premium overpayment 89,860 89,860 Capital equipment leases at cost less accumulated depreciation 13,517 13,517 Prepaid expenses 21,798 21,798 Income tax refund receivable 152,862 3 327,990 480,852 Other assets 575 575 ---------------------------------- ----------------------------- Total Assets $5,733,305 ($3,447,230) $2,286,075 $19,970 ================================== ============================= Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss adjustment 2,834,220 4 (2,834,220) 0 expenses Reserve for premium adjustment 384,863 384,863 Notes payable 0 0 20,000 Accounts payable and accrued liabilities 56,290 56,290 407 Capital lease obligations 4,038 4,038 ---------------------------------- ----------------------------- Total Liabilities 3,279,411 (2,834,220) 445,191 20,407 ---------------------------------- ----------------------------- Stockholders' Equity Common Stock 400,000 issued and outstanding $1 par value 0 Retained Earnings 2,463,130 5 (613,010) 1,850,120 (437) Unrealized decline in market value of equity securities less applicable future tax benefit (9,236) (9,236) ---------------------------------- ----------------------------- Total Stockholders' Equity 2,453,894 (613,010) 1,840,884 (437) ---------------------------------- ----------------------------- Total Liabilities and Stockholders' Equity $5,733,305 ($3,447,230) $2,286,075 $19,970 ================================== =============================
Stoneville Stoneville Inter-Co. Combined Adj Pro Forma Pro Forma Adj Elimination Pro Forma # Adjustments Balance # Adjustments Balance -------------------- ----------------------------------- -------------- Assets Cash and Cash Equivalents $19,970 $1,379,935 Invested assets 247,098 Notes receivable 9 (20,000) 0 Accrued interest receivable 8 (407) 52,003 Reinsurance receivables, net of uncollectible 0 amounts Excess insurance premium overpayment 89,860 Capital equipment leases at cost less 0 accumulated depreciation 13,517 Prepaid expenses 21,798 Income tax refund receivable 480,852 Other assets 575 -------------------- ----------------------------------- -------------- Total Assets $0 $19,970 ($20,407) $2,285,638 ==================== =================================== ============== Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss adjustment $0 expenses Reserve for premium adjustment 384,863 Notes payable 6 288,089 308,089 11 (20,000) 288,089 Accounts payable and accrued liabilities 407 10 (407) 56,290 Capital lease obligations 4,038 -------------------- ----------------------------------- -------------- Total Liabilities 288,089 308,496 (20,407) 733,280 -------------------- ----------------------------------- -------------- Stockholders' Equity Common Stock 400,000 issued and outstanding $1 par value 0 12 400,000 400,000 Retained Earnings 7 (288,089) (288,526) 13 (400,000) 1,161,594 Unrealized decline in market value of equity 0 securities less applicable future tax benefit (9,236) -------------------- ----------------------------------- -------------- Total Stockholders' Equity (288,089) (288,526) 0 1,552,358 -------------------- ----------------------------------- -------------- Total Liabilities and Stockholders' Equity $0 $19,970 ($20,407) $2,285,638 ==================== =================================== ==============
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet December 31, 1996 (20% Dissent) Trust Adjustments Adjustment Number Description Amount 1 Adjustments to Investments a Payment of the CNA Premium of $2,764,234 plus a fee of $250,000 out of the investments of the Trust. $(3,014,234) b Payment of $100,000 to Dissenters who have perfected their rights. The balance of disbursement to dissenters will be made from Stoneville with borrowed funds. (100,000) ------------ Total of Adjustment # 1 $(3,114,234) =========== 2 Adjustment to remove the reinsurance receivable from the Books of the Trust. This receivable will be transferred to CNA along with outstanding insurance claims. $ (660,986) =========== 3 Adjustment to the income tax refund receivable due to the change in taxable income as a result of the CNA Assumption Reinsurance Agreement as shown following: Loss from liability transfer $591,000* CNA fee 250,000 --------- Decrease in taxable income 841,000 Tax Decrease (34% Federal and 5% State) $ 327,990 =========== * Loss from the CNA transfer is calculated as follows: Liability transfered $2,834,220 Premium Paid Excluding Fee (2,764,234) Reinsurance Receivable Transferred ( 660,986) ------------ Loss $ (591,000) =========== 4 Adjustment to reserve for losses to remove claims liability transferred to CNA $(2,834,220) 5 Adjustments to Retained Earnings a Loss from CNA Assumption Reinsurance Agreement (See Adjustment # 3 above.) $(591,000) b Fee expense to CNA for Assumption Agreement ( 250,000) c Payment of $100,000 to Dissenters who have perfected their rights. The balance to be paid by Stoneville. ( 100,000) d Tax adjustment as a result of the CNA transaction. (See Adjustment # 3 above.) 327,990 ----------- 24 Total Adjustment # 5 $( 613,010) ===========
25
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet December 31, 1996 (20% Dissent) Stoneville Adjustments Adjustment Number Description Amount 6 Adjustment to notes payable to record a loan obtained for the purpose of paying dissenters rights on balance of 20% dissenters. Loan is assumed obtained 12/31/96. No Interest is assumed accrued. $ 288,089 =========== 7 Adjustment to retained earnings to pay balance of Dissenters rights with funds borrowed at 12/31/96 for such purpose. The Trust is assumed to have made a $100,000 for the same purpose. $ (288,089) ============ Inter-Company Eliminating Entries 8 Eliminate accrued interest receivable from Stoneville to the Trust $( 407) =========== 9 Eliminate note receivable from Stoneville toTrust $( 20,000) ============ 10 Eliminate accrued interest payable to Trust from Stoneville $( 407) =========== 11 Eliminate notes payable from Stoneville to the Trust $( 20,000) =========== 12 Record issuance of 400,000 shares of common stock, $1.00 par value $ 400,000 =========== 13 Record use of $400,000 of Trust to issue 400,000 shares of common stock, $1.00 par value of Stoneville Insurance Co. $( 400,000) ===========
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Pro Forma Statement of Income Year Ended December 31, 1996 (No Dissenters) Trust Trust Stoneville Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Adj Pro Forma Trust # Adjustments Amount Company # Adjustments ---------------------------------------------------------------------------------------------- Revenue Premiums earned $2,077,351 1 (2,077,351) $0 Premiums ceded (89,860) 2 $89,860 0 ---------------------------------------------------------------------------------------------- Net premiums earned 1,987,491 0 Investment income 297,076 3 (45,888) 251,188 Net realized gains and losses on securities available-for-sale (37,286) (37,286) Other (422,850) (422,850) ---------------------------------------------------------------------------------------------- Total Revenue 1,824,431 (2,033,379) (208,948) 0 0 ---------------------------------------------------------------------------------------------- Expenses Loss and loss adjustment 916,592 4 (959,032) (42,440) expenses Service company fees 299,322 5 (299,322) 0 Regulatory fees 28,548 6 (28,548) 0 General expenses 450,959 7 (201,089) 249,870 437 ---------------------------------------------------------------------------------------------- 0 Total Expenses 1,695,421 (1,487,991) 207,430 437 0 ---------------------------------------------------------------------------------------------- Net Income Before Income Tax Prov. 129,010 (545,388) (416,378) (437) 0 Provision for income tax 98,768 8 (103,284) (4,516) ----------------------------------------------------------------------------------------------- Net Income $30,242 ($442,104) ($411,862) ($437) $0 ===============================================================================================
Stoneville Inter-Co. Combined Pro Forma Adj Elimination Pro Forma Amount # Adjustments Amount -------------------------------------------------------- Revenue Premiums earned $0 Premiums ceded ------------------------------------------------------- Net premiums earned 0 Investment income 9 (407) 250,781 Net realized gains and losses on securities available-for-sale (37,286) Other (422,850) ------------------------------------------------------- Total Revenue 0 (407) (209,355) ------------------------------------------------------- Expenses Loss and loss adjustment expenses (42,440) Service company fees 0 Regulatory fees 0 General expenses 437 10 (407) 249,900 ------------------------------------------------------ Total Expenses 437 (407) 207,460 ------------------------------------------------------ Net Income Before Income Tax Prov. (437) 0 (416,815) Provision for income tax (4,516) ------------------------------------------------------ Net Income ($437) $0 ($412,299) ======================================================
Stoneville Insurance Company Adjustments to Pro Forma Statement of Income Year Ended December 31, 1996 (No Dissenters) Trust Adjustments Adjustment Number Description Amount 1 Remove premiums earned as a result of assuming the TIG Commercial Program began on January 1, 1996, and $ (2,077,351) that as a result no premium was written in 1996. 2 Remove premium ceded as a result of assuming the TIG Commercial Program began on January 1, 1996, and that as a result no premium was written or ceded in 1996. $ 89,860 ============= 3 Adjustment to investment income as a result of having less cash available to invest in 1996. Average cash available for investment was reduced from $5,339,216 to $4,517,770 due to the elimination of premium income netted against a reduction in claims related expenses as a result of assuming the TIG Commercial Program began on January 1, 1996. Cash available for investment was increased by a reduction in income taxes paid. The Trust experienced a 5.58% return on its average cash and investments in 1996. This adjustment calculates the difference in investment income based on the reduced amount available for investment. $( 45,888) ============== 4 Loss and loss adjustment expenses are reduced by the claims expenses attributable to 1996 business. The claims expense category reflects a negative balance of $42,440 after this adjustment due to reduction in prior years estimated loss reserves which the Trust continued to run-off in 1996. $( 959,032) ============= 5 Service company fees are eliminated due to an assumption of current claims processing by TIG. Prior year claims processing is covered as a part of reserves for losses and loss adjustment expenses. $( 299,322) ============= 6 Regulatory fees are eliminated as a part of the TIG Commercial Program arrangement. $( 28,548) ==============
27
Stoneville Insurance Company Adjustments to Pro Forma Statement of Income Year Ended December 31, 1996 (No Dissenters) Adjustment Number Description Amount 7 Adjustment is made for the legal and accounting expenses directly attributable to the costs of conversion of the Trust Incurred by the Trust in 1996. $( 201,089) ============= 8 Adjustment is made to reduce income tax expense (current and deferred) as a result of decreased taxable income due to assuming the TIG Commercial Program began on January 1, 1996. Federal taxable income is reduced to $(19,679), creating a deferred tax benefit of $6,690. State income taxes are $2,166 for a total tax benefit of $4,524. Federal tax rate is 34% and the Mississippi rate is 5%. $( 103,284) ============= Inter-Company Eliminating Entries 9 Eliminate interest income from Stoneville $( 407) ============== 10 Eliminate interest expense to the Trust $( 407) ==============
28
Pro Forma Statement of Income Year Ended December 31, 1996 (20% Dissent) Trust Trust Stoneville Stoneville Stoneville Inter-Co. Combined Delta A&I Adj Pro Forma Pro Forma Insurance Adj Pro Forma Pro Forma Adj Elimination Pro Forma Trust # Adjustments Amount Company # Adjustments Amount # Adjustments Amount --------------------------------------------------------------------------- ----------------------------- Revenue Premiums earned $2,077,351 1 ($2,077,351) $0 $0 Premiums ceded (89,860) 2 $89,860 0 0 ------------------------------------------------ --------------------- ------ --------------------------- Net premiums earned 1,987,491 0 0 Investment income 297,076 3 (48,668) 248,408 10 (407) 248,001 Net realized gains and losses on securities available-for-sale (37,286) (37,286) (37,286) Other (422,850) (422,850) (422,850) ------------------------------------------------ --------------------- ------ ------------------------- Total Revenue 1,824,431 (2,036,159) (211,728) 0 0 0 (407) (212,135) ------------------------------------------------ --------------------- ------ ------------------------- Expenses Loss and loss adjustment expenses 916,592 4 (959,032) (42,440) (42,440) Service company fees 299,322 5 (299,322) 0 0 Regulatory fees 28,548 6 (28,548) 0 0 General expenses 450,959 7 (201,089) 249,870 437 9 34,319 34,756 11 (407) 284,219 ------------------------------------------------ --------------------- ------ ------------------------- 0 Total Expenses 1,695,421 (1,487,991) 207,430 437 34,319 34,756 (407) 241,779 ------------------------------------------------ --------------------- ------ ------------------------- Net Income Before Income Tax Provision 129,010 (548,168) (419,158) (437) (34,319) (34,756) 0 (453,914) Provision for income tax 98,768 8 (118,372) (19,604) (19,604) ------------------------------------------------- --------------------- ------ ------------------------- Net Income $30,242 ($429,796) ($399,554) ($437) ($34,319) ($34,756) $0 ($434,310) ================================================= ===================== ====== =========================
Stoneville Insurance Company Adjustments to Pro Forma Statement of Income Year Ended December 31, 1996 (20% Dissent) Trust Adjustments Adjustment Number Description Amount 1 Remove premiums earned as a result of assuming the TIGCommercial Program began on January 1, 1996, $ (2,077,351) and that as a result no premium was written in 1995. =============== 2 Remove premium ceded as a result of assuming the TIG Commercial Program began on January 1, 1996 and that as a result, no premium was written or ceded in 1996. $ 89,860 ============= 3 Adjustment to investment income as a result of having less cash available to invest in 1996. Average cash available for investment was reduced from $5,339,216 to $4,467,770 due to the elimination of premium income netted against a reduction in claims related expenses as a result of assuming the TIG Commercial Program began on January 1, 1996. Cash was also decreased by the payment to Dissenters and was increased by a reduction in income taxes paid. The Trust experienced a 5.58% return on its average cash and investments in 1996. This adjustment calculates the difference in investment income based on the reduced amount available for investment. $( 48,668) ============== 4 Loss and loss adjustment expenses are reduced by the claims expenses attributable to 1996 business. The claims expense category reflects a negative balance of $42,440 after this adjustment due to reduction in prior years estimated loss reserves which the Trust continued to run-off in 1996. $( 959,032) ============= 5 Service company fees are eliminated due to an assumption of current claims processing by TIG. Prior year claims processing is covered as a part of reserves for losses and loss adjustment expenses. $( 299,322) ============= 6 Regulatory fees are eliminated as a part of the TIG Commercial Program arrangement. $( 28,548) ==============
29
Stoneville Insurance Company Adjustments to Pro Forma Statement of Income Year Ended December 31, 1996 (20% Dissent) Adjustment Number Description Amount 7 Adjustment is made for the legal and accounting expenses directly attributable to the costs of conversion of the Trust Incurred by the Trust in 1996. $( 201,089) ============= 8 Adjustment is made to reduce income tax expense (current and deferred) as a result of decreased taxable income due to assuming the TIG Commercial Program began on January 1, 1996. Taxable income is reduced to $(56,778), creating a deferred tax benefit of $19,304 federal and $300 state for a total of $19,604. Federal tax rate is 34% and the Mississippi rate is 5%. $( 118,372) ============= Stoneville Adjustments 9 Adjust for interest expense incurred as a result of Stoneville borrowing $381,326 at 9% interest to pay Dissenters. $ 34,319 ============= Inter-Company Eliminating Entries 10 Eliminate interest income from Stoneville $( 407) ============== 11 Eliminate interest expense to the Trust $( 407) ==============
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Pro Forma Balance Sheet June 30, 1997 (No Dissenters) Trust Trust Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Trust # Adjustments Balance Company ------------------------------ ----------------------- Assets Cash and Cash Equivalents $1,878,940 1 ($389,292) $1,489,648 $19,970 Invested assets 1,745,063 1 (1,745,063) 0 Notes receivable 20,000 20,000 Accrued interest receivable 41,356 41,356 Reinsurance receivables, net of uncollectible amounts 660,986 2 (660,986) 0 Excess insurance premium overpayment 89,860 89,860 Capital equipment leases at cost less accumulated depreciation 11,107 11,107 Prepaid expenses 24,665 24,665 Income tax refund receivable 190,279 3 327,990 518,269 Deferred tax asset 40,489 40,489 Other assets 10,533 10,533 --------------------------- -------------------------- Total Assets $4,713,278 ($2,467,351) $2,245,927 $19,970 =========================== ========================== Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss adjustment expenses 1,954,341 4 (1,954,341) 0 Reserve for premium adjustment 324,672 324,672 Notes payable 0 0 20,000 Accounts payable and accrued liabilities 46,408 46,408 995 Capital lease obligations 3,868 3,868 --------------------------- -------------------------- Total Liabilities 2,329,289 (1,954,341) 374,948 20,995 --------------------------- -------------------------- Stockholders' Equity Common Stock 500,000 issued and outstanding $1 par value 0 Retained Earnings 2,390,686 5 (513,010) 1,877,676 (1,025) Unrealized decline in market value of equity securities less applicable future tax benefit (6,697) (6,697) --------------------------- -------------------------- Total Stockholders' Equity 2,383,989 (513,010) 1,870,979 (1,025) --------------------------- -------------------------- Total Liabilities and Stockholders' $4,713,278 ($2,467,351) $2,245,927 $19,970 Equity =========================== ==========================
Stoneville Stoneville Inter-Co. Combined Adj Pro Forma Pro Forma Adj Elimination Pro Forma # Adjustments Balance # Adjustments Balance ------------------------------------ ----- -------------------------- Assets Cash and Cash Equivalents $19,970 $1,509,618 Invested assets 0 Notes receivable 7 (20,000) 0 Accrued interest receivable 6 (995) 40,361 Reinsurance receivables, net of uncollectible amounts 0 Excess insurance premium overpayment 89,860 Capital equipment leases at cost less 0 accumulated depreciation 11,107 Prepaid expenses 24,665 Income tax refund receivable 518,269 Deferred tax asset 40,489 Other assets 10,533 ------------------------------------------------------------------- Total Assets $0 $19,970 ($20,995) $2,244,902 =================================================================== Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss adjustment expenses $0 Reserve for premium adjustment 324,672 Notes payable 20,000 9 (20,000) 0 Accounts payable and accrued liabilities 995 8 (995) 46,408 Capital lease obligations 3,868 ---------------------------------------------------------------- Total Liabilities 0 20,995 (20,995) 374,948 ----------------------- ---------------------------------------- Stockholders' Equity Common Stock 500,000 issued and outstanding $1 par value 0 10 500,000 500,000 Retained Earnings (1,025) 11 (500,000) 1,376,651 Unrealized decline in market value of equity securities 0 less applicable future tax benefit (6,697) --------------------------------------------------------------- Total Stockholders' Equity 0 (1,025) 0 1,869,954 --------------------------------------------------------------- Total Liabilities and Stockholders' $0 $19,970 ($20,995) $2,244,902 Equity ===============================================================
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet June 30, 1997 (No Dissenters) Trust Adjustments Adjustment Number Description Amount 1 Adjustment for the payment of the CNA Premium of $1,884,355 plus a fee of $250,000. $1,745,063 comes from invested assets and $389,292 from cash. The premium payment to CNA is less than the premium payment shown on the December, 1996 proforma as a result of claims paid and adjustments made to reserves from 1/1/97-6/30/97. $(2,134,355) =========== 2 Adjustment to remove the reinsurance receivable from the Books of the Trust. This receivable will be transferred to CNA along with outstanding insurance claims. $ (660,986) =========== 3 Adjustment to the income tax refund receivable due to the change in taxable income as a result of the CNA Assumption Reinsurance Agreement as shown following: Loss from liability transfer $591,000 CNA fee 250,000 --------- Decrease in taxable income 841,000 Tax Decrease (34% Federal and 5% State) $ 327,990 =========== * Loss from the CNA transfer is calculated as follows: Liability transfered $1,954,341 Premium Paid Excluding Fee (1,884,335) Reinsurance Receivable Transferred ( 660,986) Loss ( $591,000) 4 Adjustment to reserve for losses to remove claims liability transferred to CNA $(1,954,341)
31
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet June 30, 1997 (No Dissenters) 5 Adjustments to Retained Earnings a Loss from CNA Assumption Reinsurance Agreement (See Adjustment # 3 above.) $ (591,000) b Fee expense to CNA for Assumption Agreement ( 250,000) c Tax adjustment as a result of the CNA transaction. (See Adjustment # 3 above.) 327,990 -------------- Total Adjustment # 5 $ (513,010) ============= Inter-Company Eliminating Entries Adjustment Number Description Amount 6 Eliminate accrued interest receivable from Stoneville to the Trust $( 995) ============= 7 Eliminate note receivable from Stoneville toTrust $( 20,000) ============= 8 Eliminate accrued interest payable to Trust from Stoneville $( 995) ============= 9 Eliminate notes payable from Stoneville to the Trust $( 20,000) ============= 10 Record issuance of 500,000 shares of common stock, $1.00 par value $ 500,000 =========== 11 Record use of $500,000 of Trust to issue 500,000 shares of common stock, $1.00 par value of Stoneville Insurance Co. $( 500,000) ===========
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Pro Forma Balance Sheet (20% Dissent) June 30, 1997 Trust Trust Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Trust # Adjustments Balance Company ----------------------------------------------- ------------- Assets Cash and Cash Equivalents $1,878,940 1 ($489,292) $1,389,648 $19,970 Invested assets 1,745,063 1 (1,745,063) 0 Notes receivable 20,000 20,000 Accrued interest receivable 41,356 41,356 Reinsurance receivables, net of uncollectible 660,986 2 (660,986) 0 amounts Excess insurance premium overpayment 89,860 89,860 Capital equipment leases at cost less accumulated depreciation 11,107 11,107 Prepaid expenses 24,665 24,665 Income tax refund receivable 190,279 3 327,990 518,269 Deferred tax asset 40,489 40,489 Other assets 10,533 10,533 ----------------------------------------------- ------------- Total Assets $4,713,278 ($2,567,351) $2,145,927 $19,970 =============================================== ============= Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss adjustment 1,954,341 4 (1,954,341) 0 expenses Reserve for premium adjustment 324,672 324,672 Notes payable 0 0 20,000 Accounts payable and accrued liabilities 46,408 46,408 995 Capital lease obligations 3,868 3,868 ----------------------------------------------- ------------- Total Liabilities 2,329,289 (1,954,341) 374,948 20,995 ----------------------------------------------- ------------- Stockholders' Equity Common Stock 400,000 issued and outstanding $1 par value 0 Retained Earnings 2,390,686 5 (613,010) 1,777,676 (1,025) Unrealized decline in market value of equity securities less applicable future tax benefit (6,697) (6,697) ----------------------------------------------- ------------- Total Stockholders' Equity 2,383,989 (613,010) 1,770,979 (1,025) ----------------------------------------------- ------------- Total Liabilities and Stockholders' Equity $4,713,278 ($2,567,351) $2,145,927 $19,970 =============================================== =============
Stoneville Stonveville Inter-Co. Combined Adj Pro Forma Pro Forma Adj Elimination Pro Forma # Adjustments Balance # Adjustments Balance -------------------- ---------------------------------- -------------- Assets Cash and Cash Equivalents $19,970 $1,409,618 Invested assets 0 Notes receivable 9 (20,000) 0 Accrued interest receivable 8 (995) 40,361 Reinsurance receivables, net of uncollectible 0 amounts Excess insurance premium overpayment 89,860 Capital equipment leases at cost less 0 accumulated depreciation 11,107 Prepaid expenses 24,665 Income tax refund receivable 518,269 Deferred tax asset 40,489 Other assets 10,533 -------------------- ---------------------------------- -------------- Total Assets $0 $19,970 ($20,995) $2,144,902 ==================== ================================== ============== Liabilities and Stockholders' Equity Liabilities Reserve for losses and loss adjustment $0 expenses Reserve for premium adjustment 324,672 Notes payable 6 273,991 293,991 11 (20,000) 273,991 Accounts payable and accrued liabilities 995 10 (995) 46,408 Capital lease obligations 3,868 -------------------- ---------------------------------- -------------- Total Liabilities 273,991 294,986 (20,995) 648,939 -------------------- ---------------------------------- -------------- Stockholders' Equity Common Stock 400,000 issued and outstanding $1 par value 0 12 400,000 400,000 Retained Earnings 7 (273,991) (275,016) 13 (400,000) 1,102,660 Unrealized decline in market value of equity 0 securities less applicable future tax benefit (6,697) -------------------- ---------------------------------- -------------- Total Stockholders' Equity (273,991) (275,016) 0 1,495,963 -------------------- ---------------------------------- -------------- Total Liabilities and Stockholders' Equity $0 $19,970 ($20,995) $2,144,902 ==================== ================================== ==============
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet June 30, 1997 (20% Dissent) Trust Adjustments Adjustment Number Description Amount 1 Adjustments to Investments a Payment of the CNA Premium of $1,884,355 plus a fee of $250,000 out of the investments of the Trust. The premium payment to CNA is less than the premium payment shown on the December, 1996 proforma as a result of claims paid and adjustments made to reserves from 1/1/97-6/30/97. $(2,134,355) b Payment of $100,000 to Dissenters who have perfected their rights. The balance of disbursement to dissenters will be made from Stoneville with borrowed funds. (100,000) ------------ Total of Adjustment # 1 *($1,745,063 paid from invested funds and $489,292 from cash) $(2,234,355)* ============ 2 Adjustment to remove the reinsurance receivable from the Books of the Trust. This receivable will be transferred to CNA along with outstanding insurance claims. $ (660,986) ============ 3 Adjustment to the income tax refund receivable due to the change in taxable income as a result of the CNA Assumption Reinsurance Agreement as shown following: Loss from liability transfer $591,000 CNA fee 250,000 -------- Decrease in Taxable Income 841,000 Tax Decrease (34% Federal and 5% State) $ 327,990 =========== * Loss from the CNA transfer is calculated as follows: Liability transferred $1,954,341 Premium Paid Excluding Fee (1,884,355) Reinsurance Receivable Transferred (660,986) ----------- Loss ($ 591,000) 4 Adjustment to reserve for losses to remove claim liability transferred to CNA $(1,954,341) ============ 5 Adjustments to Retained Earnings a Loss from CNA Assumption Reinsurance Agreement (See Adjustment # 3 above.) ($591,000) b Fee expense to CNA for Assumption Agreement ( 250,000) c Payment of $100,000 to Dissenters who have perfected their rights. The balance to be paid by Stoneville. ( 100,000) d Tax adjustment as a result of the CNA transaction. (See #3) 327,990 ------------ Total Adjustment # 5 $( 613,010) ===========
33
Stoneville Insurance Company Adjustments to Pro Forma Balance Sheet June 30, 1997 (20% Dissent) Stoneville Adjustments Adjustment Number Description Amount 6 Adjustment to notes payable to record a loan obtained for the purpose of paying dissenters rights on balance of 20% dissenters. Loan is assumed obtained 6/30/97. $ 273,991 =========== 7 Adjustment to retained earnings to pay balance of Dissenters rights with funds borrowed at 6/30/97 for such purpose. The Trust is assumed to have made a $100,000 for the same purpose $( 273,991) =========== Inter-Company Eliminating Entries 8 Eliminate accrued interest receivable from Stoneville to the Trust $( 995) =========== 9 Eliminate note receivable from Stoneville to Trust $( 20,000) =========== 10 Eliminate accrued interest payable to Trust from Stoneville $( 995) =========== 11 Eliminate notes payable from Stoneville to the Trust $( 20,000) ========== 12 Record issuance of 400,000 shares of common stock, $1.00 par value. $ 400,000 =========== 13 Record use of $400,000 of Trust to issue 400,000 shares of common stock, $1.00 par value of Stoneville Insurance Co. $( 400,000) ===========
34
Pro Forma Statement of Income Six Months Ended June 30, 1997 (No Dissenters) Trust Trust Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Trust # Adjustments Amount Company ----------------------------------- -------------------------- - Revenue Premiums earned $0 $0 $0 Premiums ceded 0 $0 0 ----------------------------------- -------------------------- - Net premiums earned 0 0 Investment income 91,444 1 (59,335) 32,109 Net realized gains and losses on securities available-for-sale 0 0 Other (9,115) (9,115) ----------------------------------- -------------------------- - Total Revenue 82,329 (59,335) 22,994 0 ----------------------------------- -------------------------- - Expenses Loss and loss adjustment expenses 0 0 0 Service company fees 0 0 0 Regulatory fees 11,502 2 (11,502) 0 General expenses 183,760 3 (160,000) 23,760 588 ----------------------------------- -------------------------- - 0 Total Expenses 195,262 (171,502) 23,760 588 ----------------------------------- -------------------------- - Net Income Before Income Tax Provision (112,933) 112,167 (766) (588) Provision for income tax (40,489) 4 43,516 3,027 ----------------------------------- -------------------------- - Net Income ($72,444) $68,651 ($3,793) ($588) =================================== ========================== =
Stoneville Stoneville Inter-Co. Combined Adj Pro Forma Pro Forma Adj Elimination Pro Forma # Adjustments Amount # Adjustments Amount ----- -------------------------- ------ ----------------------------- Revenue Premiums earned $0 Premiums ceded 0 ----- -------------------------- ------ ----------------------------- Net premiums earned 0 Investment income 5 (588) 31,521 Net realized gains and losses on securities available-for-sale 0 Other (9,115) ----- -------------------------- ------ ----------------------------- Total Revenue 0 0 (588) 22,406 ----- -------------------------- ------ ----------------------------- Expenses Loss and loss adjustment expenses 0 Service company fees 0 Regulatory fees 0 General expenses 588 6 (588) 23,760 ----- -------------------------- ------ ----------------------------- Total Expenses 0 588 (588) 23,760 ----- -------------------------- ------ ----------------------------- Net Income Before Income Tax Provision 0 (588) 0 (1,354) Provision for income tax 3,027 ----- -------------------------- ------ ----------------------------- Net Income $0 ($588) $0 ($4,381) ===== ========================== ====== ============================
Stoneville Insurance Company Adjustments to Pro Forma Statement of Income Six Months Ended June 30, 1997 (No Dissenters) Trust Adjustments Adjustment Number Description Amount 1 Adjustment to investment income as a result of having less cash available to invest. Cash available for investment was reduced by $2,134,355 due to the payment to CNA for the Assumption Reinsurance Agreement. A 5.56% rate of return was used to calculate the difference in investment income. $( 59,335) ============== 2 Regulatory fees are eliminated as a part of the TIG Commercial Program arrangement. $( 11,502) ============== 3 Adjustment is made for the legal and accounting expenses directly attributable to the costs of conversion of the Trust Incurred by the Trust in 1996. $( 160,000) ============= 4 Adjustment is made to increase income tax expense as a result of increased taxable income due to decreased operating expense. Taxable income increased to $7,761, eliminating the tax benefit and creating current tax of $3,027. Federal tax rate is 34% and the Mississippi rate is 5%. $ 43,516 ============= Inter-Company Eliminating Entries 5 Eliminate interest income from Stoneville $( 588) ============== 6 Eliminate interest expense to the Trust $( 588) ==============
35
Pro Forma Statement of Income Six Months Ended June 30, 1997 (20% Dissent) Trust Trust Stoneville Stoneville Stoneville Delta A&I Adj Pro Forma Pro Forma Insurance Adj Pro Forma Pro Forma Trust # Adjustments Amount Company # Adjustments Amount ------------ ------ ------------------------- ----------------------------------------------- Revenue Premiums earned $0 $0 $0 Premiums ceded 0 $0 0 ------------ ------ ------------------------- ----------------------------------------------- Net premiums earned 0 0 Investment income 91,444 1 (62,115) 29,329 Net realized gains and losses on securities available-for-sale 0 0 Other (9,115) (9,115) ------------ ------ ------------------------- ----------------------------------------------- Total Revenue 82,329 (62,115) 20,214 0 0 0 ------------ ------ ------------------------- ----------------------------------------------- Expenses Loss and loss adjustment expenses 0 0 0 Service company fees 0 0 0 Regulatory fees 11,502 2 (11,502) 0 General expenses 183,760 3 (160,000) 23,760 588 5 9,647 10,235 ------------ ------ ------------------------- ----------------------------------------------- 0 Total Expenses 195,262 (171,502) 23,760 588 9,647 10,235 ------------ ------ ------------------------- ----------------------------------------------- Net Income Before Income Tax (112,933) 109,387 (3,546) (588) (9,647) (10,235) Provision Provision for income tax (40,489) 4 38,669 (1,820) ------------ ------ ------------------------- ----------------------------------------------- Net Income ($72,444) $70,718 $1,726 ($588) ($9,647) ($10,235) ============ ====== ========================= ===============================================
Inter-Co. Combined Adj Elimination Pro Forma # Adjustments Amount -------------------------------------- Revenue Premiums earned $0 Premiums ceded 0 -------------------------------------- Net premiums earned 0 Investment income 6 (588) 28,741 Net realized gains and losses on securities available-for-sale 0 Other (9,115) -------------------------------------- Total Revenue (588) 19,626 -------------------------------------- Expenses Loss and loss adjustment expenses 0 Service company fees 0 Regulatory fees 0 General expenses 7 (588) 33,407 -------------------------------------- Total Expenses (588) 33,407 -------------------------------------- Net Income Before Income Tax 0 (13,781) Provision Provision for income tax (1,820) -------------------------------------- Net Income $0 ($11,961) ======================================
Stoneville Insurance Company Adjustments to Pro Forma Statement of Income Six Months Ended June 30, 1997 (20% Dissent) Trust Adjustments Adjustment Number Description Amount 1 Adjustment to investment income as a result of having less cash available to invest. Cash available for investment was reduced by $2,234,355 due to the payment to CNA for the Assumption Reinsurance Agreement and the payment to Dissenters. A 5.56% rate of return was used to calculate the difference in investment income. $( 62,115) ============== 2 Regulatory fees are eliminated as a part of the TIG Commercial Program arrangement. $( 11,502) ============== 3 Adjustment is made for the legal and accounting expenses directly attributable to the costs of conversion of the Trust Incurred by the Trust in 1996. $( 160,000) ============= 4 Adjustment is made to increase income tax expense as a result of increased taxable income due to decreased operating expense. Taxable income increased to ($4,666), creating a current tax benefit of $1,820. Federal tax rate is 34% and the Mississippi rate is 5%. $ 38,669 ============= Stoneville Adjustments 5 Adjust for interest expense incurred as a result of Stoneville borrowing $214,381 at 9% interest for six months to pay dissenters. $ 9,647 ============= Inter-Company Eliminating Entries 6 Eliminate interest income from Stoneville $( 588) ============== 7 Eliminate interest expense to the Trust $( 588) ==============
36 THE WORKERS' COMPENSATION INSURANCE SYSTEM Workers' compensation is a legal system designed to provide financial protection to employees in the event they are injured while working. Each state has its own workers' compensation law which governs the benefit structure and the administration of the system. The intent of workers' compensation is to provide financial security for employees, normally for a limited time period but, in certain cases, for the remainder of an employee's natural life. In Mississippi, employers which employ five or more employees must obtain workers' compensation insurance coverage. Oversight with regard to commercial insurors is generally under the purview of the Department of Insurance, although control over the delivery of benefits is handled by the Workers' Compensation Commission. Throughout the years, the determination of base rates for workers' compensation premiums for commercial insurors has been in most cases handled by the National Council on Compensation Insurance ("NCCI"), which recommends base premium rate changes to the insurance departments for over thirty states. Based on the NCCI recommendations, the insurance departments typically adopt the base rates with any revisions they deem necessary. In addition to commercial insurers, self insured workers' compensation pools (such as the Trust) also exist. The pools, usually formed as trusts, allow employers to pay premiums into the pool and claims are deducted from the amount of funds available. The participants in pools are typically jointly and severally liable for any funding shortfall. The workers' compensation market is cyclical. In the late 1980's and early 1990's, commercial workers' compensation carriers were losing money across the United States due to an imbalance between claims costs and premium revenues. The result was a scarcity of competitively priced workers' compensation insurance coverage in a number of states, including Mississippi. As a response, self insured pools such as the Trust were formed in order to ensure that employers could obtain workers' compensation insurance. Due to structural changes in the workers' compensation market such as tort reform and better loss analysis, commercial workers' compensation carriers have become active in Mississippi once again. The result has been increased competition by carriers to write workers' compensation insurance for employers with low loss histories. Premium rates have also begun to decrease. With a view to increasing competition, a recent trend has been for a number of states to legislate open rating for commercial insurance companies, which means premium rates are subject to the open market. The Department of Insurance has moved to the open rating concept by adopting the "loss costs" system which became effective as of March 1, 1996. The "loss costs" methodology reflects a change in philosophy; the Department of Insurance previously set a blanket premium rate from which commercial insurers could deviate or otherwise lower their rates. As a result, many insurers clustered around the set rate. Under the "loss costs" 37 system, insurers are free to set their rates at any level, subject only to Department of Insurance disapproval. This is in contrast with premium setting by pools, the rates of which must be analyzed and approved by the Workers' Compensation Commission. See "Reasons for Conversion -- The Changing Workers' Compensation Market." BUSINESS OF THE TRUST History of the Trust The Trust was formed under a Trust Agreement dated August 1, 1991, by members of the Delta Council of Stoneville, Mississippi, as a response to the unavailability of workers' compensation insurance at reasonable prices. The Trust was originally organized to provide workers' compensation insurance to cotton gin owners, but has since expanded its workers' compensation insurance activities. See " Summary -- The Trust." Operations of the Trust From the beginning of the Trust through June 30, 1996, the Trust sold its workers' compensation insurance through a nonexclusive network of agents. With the inception of the Commercial Program (described below), the Trust ceased providing direct insurance coverage and arranged for the Trust's agent network to place its insureds with a commercial insurer in accordance with a program jointly designed by the Trust and the commercial insurer. The Commercial Program Effective July 1, 1996, pursuant to an Insurance Placement Agreement by and between the Trust, TIG and TIG Reinsurance Company (the "Insurance Placement Agreement") the Trust ceased writing workers' compensation insurance directly and moved the persons who wished to maintain their affiliation with the Trust to the Trust's Commercial Program. Under the Commercial Program, TIG (an "A" (Excellent) rated commercial insurance company according to the A.M. Best Company), provides workers' compensation insurance primarily to Former Members of the Trust and other persons through the Trust's network of agents. The Trust created the Commercial Program in order to allow its insureds to take advantage of the lower rates being offered by commercial insurers while preparing the Trust for conversion to a Mississippi domestic stock insurance company, which the Board of Trustees believes will best assure long term availability of reasonably priced workers' compensation insurance. The Insurance Placement Agreement provides that the Trust (or the Company as the Trust's successor) may provide reinsurance with respect to policies issued by TIG under the Commercial Program. As part of the creation of the Commercial Program, the Trust also entered into a Representative Agreement (the "Representative Agreement") with MRM Underwriters, Inc. ("MRM") by which MRM acts as the Trust's representative for marketing the Commercial Program and allocates to Delta Administration, Inc. certain amounts for oversight and administration of the 38 Commercial Program and the Trust's operations. MRM is responsible for marketing the program as a general agent of TIG and for overall administration of the program. Delta Administration, Inc. is responsible for sending bills, collections, liaison, program oversight, and obtaining association endorsements. Pursuant to the Representative Agreement, MRM receives 7.8% of the collected premiums generated by the Commercial Program and Delta Administration, Inc. is paid 3.5% of such amounts. The Representative Agreement was entered into on July 1, 1996 and will continue until terminated. The Representative Agreement shall automatically terminate with no notice required upon (i) the bankruptcy, receivership, assignment for the benefit of creditors or similar action of MRM or the commencement of any such proceedings by or against MRM; (ii) the termination of the general agency relationship between TIG and MRM; or (iii) the termination of the Placement Agreement between TIG and the Trust for any reason. The obligations of the Trust under the Representative Agreement will be assumed by the Company subsequent to the Conversion for the duration of the Commercial Program. MRM is controlled by David R. White, who is an officer and director of the Company. Delta Administration, Inc. is controlled by Harry E. Vickery, who is the Administrator of the Trust and is an officer and director of the Company. See "Business of the Trust -- Employees; and Assumption of Trust Contracts" and "Certain Transactions and Relationships." Regulation The operations of the Trust are regulated by the Workers' Compensation Commission. Any changes in premium rates must be approved by the Workers' Compensation Commission, and operations of the Trust are subject to the oversight of the Workers' Compensation Commission. Employees The Trust has no employees. From its inception, the activities of the Trust have been managed by third parties. The Administrator of the Trust, Harry E. Vickery, has managed the activities of the Trust since October 1, 1993, through Delta Administration, a sole proprietorship, which was incorporated as Delta Administration, Inc. in 1996 (collectively, "Delta Administration"). Delta Administration has two employees. From the inception of the Trust until October 1, 1993, Harry E. Vickery served as Chairman of the Board of Trustees of the Trust. When Mr. Vickery assumed his current duties as Administrator of the Trust effective October 1, 1993, he resigned from the Board of Trustees of the Trust. Under the Commercial Program, pursuant to the Representative Agreement, Delta Administration is paid 3.5% of the collected premiums generated by the Commercial Program to manage the activities of the Trust. Delta Administration also receives $3,800 a month from the Trust in exchange for administrative services. From these funds, Delta Administration pays the office expenses of the Trust including rent, salaries of its employees who administer the Trust, and sponsor fees. See "Certain Transactions and Relationships." 39 Trustees The Trustees of the Trust are William L. Kennedy, Aven Whittington, Merlin Richardson, and S. Hall Barrett, Jr. If the Conversion takes place, employers and/or businesses with which the Trustees are affiliated will be allocated approximately the following amounts of Trust Units: employer/affiliate of William L. Kennedy - 8,600 Trust Units; employer/affiliate of Aven Whittington - 2,362 Trust Units; employer/affiliate of Merlin Richardson - 0 Trust Units; employer/affiliate of S. Hall Barrett, Jr. - 6,200 Trust Units. Legal Proceedings On April 21, 1997, the Trust initiated an arbitration proceeding with the National Association of Securities Dealers, Inc. ("NASD") Office of Dispute Resolution against Bear Stearns Securities Corp., Bear Stearns & Co; Axiom Capital Management, Inc.; Kevin Connors; and Michael Guttenberg (the "Securities Arbitration"). In the Securities Arbitration Statement of Claims, the Trust asks for $2,062,185 in actual and punitive damages as a result of improper trading on its account by the persons listed above. The Securities Arbitration is in its initial phase and arbitrators have not yet been appointed. See "Trust Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Results of Operations -- Losses." Other than the Securities Arbitration, there are no material legal proceedings pending, nor are any material legal proceedings known by the Trust to be contemplated by governmental authorities or other parties to which the Trust is or might become a party. The Trust continually engages in defending workers' compensation insurance claims, which is an ordinary part of its business. Management does not believe that any such claims will materially impact the Trust's liquidity or results of operations. 40 SELECTED FINANCIAL DATA OF THE TRUST The following selected financial data reflect the operations of the Trust since January 1, 1995. The data for full fiscal years has been derived from financial statements examined by Richard L. Eaton, independent certified public accountant whose report with respect thereto appears elsewhere in this Prospectus. See "Trust Management's Discussion and Analysis of Financial Condition and Results of Operations." 41 Selected Financial Data of the Trust For the Six Months Ended June 30, 1997 and 1996, and the Years Ended December 31, 1996 and 1995 June 30, December 31, 1997 1996 1996 1995 -------------------------------------------------------- Earned Premium $0 $2,127,334 $2,077,351 $5,659,925 Premium Ceded 0 (89,860) (89,860) (335,973) Net Investment Income 91,444 147,583 297,076 328,027 Realized Investment Gains (Losses) 0 983 (37,286) (159,557) Other (9,115) (286,085) (422,850) 0 -------------------------------------------------------- Total Revenue $82,329 $1,899,955 $1,824,431 $5,492,422 ======================================================== Excess Revenue over Expense Before Income Tax Provision $(112,933) $96,570 $129,010 $1,948,286 ======================================================== Excess Revenue over Expense (72,444) $(25,946) $30,242 $1,304,626 ======================================================== Total Assets $4,713,278 $6,744,379 $5,733,305 $8,156,720 ======================================================== Total Liabilities $2,329,289 $4,368,358 $3,279,411 $5,790,992 ======================================================== 42 TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Overview The Trust was created by Delta Council, a Mississippi non-profit corporation August 1, 1991. Although the sponsoring organization is tax-exempt, the Trust is taxable for both Federal and State income tax purposes. While the trust was established to provide workers compensation coverage to its members on a consistent basis at a reasonable price rather than to generate profits, the trustees and members of the Trust recognize the importance of operating in such a manner that will yield positive operating results, since positive operating results produce an entity that will consistently be able to provide the insurance protection needed at reasonable rates to its members. The Trust operates under a Certificate of Authority granted by the Workers' Compensation Commission. The Workers' Compensation Commission regulates the establishment of rates charged by self-insured groups, the payment of claims, the payment of refunds to members, investments and other areas that may fall within their purview. See "Business of the Trust -- Regulation." Effective March 1, 1996, the Department of Insurance moved to an open rating concept by adopting the "loss costs" system. This has resulted in a major change in the method of calculating premium rates a commercial insurance carrier charges employers for worker's compensation insurance. This change resulted in Mississippi worker's compensation commercial insurance rates dropping significantly in 1996. However, since the rates charged by self-funded worker's compensation trusts in Mississippi are regulated by the Workers' Compensation Commission, neither the Trust nor any of the other self-funded groups in Mississippi were able to reduce rates in a timely manner to the level of the commercial carriers. As a result of this disparity in rates, management of the Trust sought an alternative arrangement that would allow its members to benefit from lower market rates and still retain its base of insureds. See "The Workers' Compensation Insurance System." In conjunction with TIG and TIG Reinsurance Company, the Trust created the Commercial Program, under which effective as of July 1, 1996, the Trust ceased writing workers' compensation insurance directly and moved the persons who wished to maintain their affiliation with the Trust to the Trust's Commercial Program. Consequently, the Trust had no underwriting income or expense from July 1, 1996 through December 31, 1996. See "Business of the Trust - -- The Commercial Program." While the Trust receives no current income from the Commercial Program, the Company may participate in this block of business on a reinsurance basis after the conversion of the Trust is completed. The Insurance Placement Agreement permits the Company to determine the amount of reinsurance it may provide at any point in time. The initial level of reinsurance is expected to be no more than 25% of the volume of business currently written within the Commercial Program. 43 Any profit to the Company from the provision of reinsurance to the Commercial Program in 1998 is anticipated to be substantially less than the profit realized by the Trust during each of the two years immediately preceding the establishment of the Commercial Program when the Trust provided workers' compensation insurance on a direct basis. This is due to the overall reduction of commercial rates in Mississippi in the workers compensation market during 1996. Consequently, the Company may elect not to participate in the reinsurance of the Commercial Program when rates are low and to participate to a greater degree when rates are higher. Since the Company's percentage participation is expected to be no more than 25%, the net contribution to the profits of the Company from this block of business will be limited. The Trust and the Company have entered into the Assumption Reinsurance Agreement whereby Continental will assume all of the claims liabilities of the Trust for business written prior to July 1, 1996. The Trust will pay Continental an amount not to exceed $1,875,000 consisting of $1,625,000 in reserves required to pay claims liabilities (which amount may be adjusted downward depending on claims settled) plus a non-refundable fee of $250,000 for handling claims. Under the Assumption Reinsurance Agreement, the Company has the right on March 1, 1998 to provide reinsurance to Continental pertaining to the claims liabilities assumed by Continental pursuant to the Assumption Reinsurance Agreement. If such reinsurance is put in place, a portion of the assets the Trust transferred to Continental will be transferred back to the Company along with any associated liability. The Company will be required to fund a trust account with a financial institution acceptable to Continental and the Company with the amount of funds necessary for Continental to receive full financial statement credit for such reinsurance and with the terms and conditions of such trust to comply with the law of Continental's state of domicile such that Continental shall receive full financial statement credit for such reinsurance. No decision has been made as to whether the Company will exercise its right to provide reinsurance. Without taking into account the Company's reinsurance rights, the impact of the Assumption Reinsurance Agreement on the financial condition of the Company, as successor to the Trust, will be to eliminate liabilities to policyholders and to make a corresponding substantial reduction in the assets of the Company. Without taking into account the Company's reinsurance rights, the impact of the Assumption Reinsurance Agreement on the results of operations of the Company, as successor to the Trust, will be to eliminate claims expenses and also to eliminate the revenue realized when claims are settled for less than the amount reserved for such claims or when the amount of such reserves is determined to be too high. If the Company exercises its reinsurance rights to the extent of such reinsurance the Company's liabilities to policyholders would increase and there would be a corresponding increase in the assets of the Company. Likewise, if the Company exercises its reinsurance rights to the extent of such reinsurance, the Company would have claims expenses and would realize revenue when claims are settled for less than the amount reserved for such claims or when the amount of such reserves is determined to be too high. Although in the past the business insured by the Trust has been profitable, it is impossible to predict whether the obligations ceded to Continental will be profitable. Whether the Company will exercise reinsurance rights is also unknown at this time. For 44 these reasons, it is impossible to predict with accuracy what financial impact these reinsurance rights will have on the Company. Results of Operations Earned Premium Net earned premium for the year ended December 31, 1996 was $1,987,491 compared to $5,323,952 for the year ended December 31, 1995, a decrease of $3,336,461. This decrease was due to the fact that, pursuant to the Commercial Program, the insureds of the Trust who wished to maintain their affiliation with the Trust were transferred to TIG effective July 1, 1996 and the Trust consequently had no earned premium during the last six months of 1996. Historically, the Trust has earned a larger portion of its premium during the last six months of each calendar year. For the six month period ended June 30, 1997, the Trust had no earned premium as a result of the TIG Commercial Program arrangement. This compares to earned premium of $2,037,474 for the six months ended June 30, 1996. Losses Losses and loss adjustment expenses are generally a function of the amount of payroll expended by Trust members. Consequently, as a result of having only six months of payroll used in calculating earned premium in 1996, loss and loss adjustment expenses decreased to $916,592 in 1996 from $2,448,722 in 1995. Loss and loss adjustment expenses are determined actuarially each year and adjustments to previous years' estimates included in current year loss expenses. After such adjustments, loss and loss adjustment expense as a percentage of earned premium amounted to forty-six percent (46%) in both 1996 and 1995. Losses and loss adjustment expenses determined without regard to adjustments for previous years' estimates were 49% and 54% for the years ended December 31, 1996 and 1995 respectively. As a result of having no premium income during the six months ended June 30, 1997, there were no losses or loss adjustment expenses for this period. For the six months ended June 30, 1996, loss and loss adjustment expenses totaled $1,248,334. The Trust has maintained a significantly faster payout pattern than is generally the case within the workers' compensation insurance industry. This rapid payout pattern reduces the discount that is applied to the reserves for the value of investment income that is assumed to be earned on invested funds. The Trust assumes a 5.5% interest rate in discounting the required reserves. Open claims at December 31, 1996 were 96 compared to 240 at December 31, 1995. Open claims at June 30, 1997 were 61 compared to 259 at June 30, 1996. 45 There have been no recent significant changes in the mix of business written by the Trust. At the inception of the Trust, the insureds consisted primarily of agricultural operations in the Mississippi Delta region. In 1993, in addition to agricultural risks, the Trust began covering risks that included restaurants, trucking companies and a variety of retail and service industry employers. The mix of insureds has remained relatively constant since that point. The following schedules detail (i) the changes in unpaid claims and claim adjustment expenses from 1994-1996; and (ii) an analysis of loss reserve development from the inception of the Trust. 46
Reconciliation of Beginning and Ending Loss and Loss Adjustment Expense Reserves 1996 1995 1994* -------- ---- ----- Reserves for unpaid losses and loss adjustment expenses - beginning of year 3,713,923 3,849,169 2,818,567 Incurred losses and loss adjustment expenses: Provision for current year 959,032 2,558,087 2,986,083 Increase (decrease) in estimates for losses occurring in prior years (42,440) (109,365) (432,568) ----------- ----------- ----------- Total incurred claims and claim adjustment expenses 916,592 2,448,722 2,553,515 Payments for losses and loss adjustment expenses incurred in: Current year (369,070) (1,197,368) (706,834) Prior years (1,384,325) (1,388,900) (850,479) Other: Increase (decrease) in service company fee reserve (42,900) 2,300 34,400 ----------- ----------- ----------- Reserve for unpaid losses and loss adjustment expenses - end of year $ 2,834,220 $ 3,713,923 $ 3,849,169 =========== =========== =========== *The fiscal year end of the Trust changed from July 31 to December 31 in 1994. Opening balance is as of January 1, 1993.
47
Analysis of Loss Reserve Development Year Ended 12/31/96 12/31/95 12/31/94* 07/31/94 07/31/93 07/31/92 Gross reserve for losses and loss adjustment expenses $ 2,834,220 $ 3,713,923 $ 3,849,169 $ 2,613,482 $ 2,241,465 $ 935,500 Reinsurance receivable 660,986 708,509 836,427 774,371 774,371 0 ---------------------------------------------------------------------------------- Net reserve for losses and loss adjustment expenses 2,173,234 3,005,414 3,012,742 1,839,111 1,467,094 935,500 Cumulative paid through: One year later 1,380,545 1,256,360 293,850 982,835 396,232 Two years later 1,789,225 806,375 1,276,685 452,024 Three years later 972,189 1,046,477 458,668 Four years later 1,233,020 493,276 Five years later 481,434 Retroactively re-estimated net liability for unpaid loss and LAE as of: End of year 2,173,234 3,005,414 3,012,742 1,839,111 1,467,094 935,500 One year later 2,910,717 2,805,055 933,643 1,432,178 507,143 Two years later 2,526,407 1,686,618 1,046,377 459,507 Three years later 1,472,901 1,623,695 450,102 Four years later 1,485,586 557,787 Five years later 540,239 --------------------------------------------------------------------------------- Net cumulative (deficiency) redundancy -- $ 94,697 $ 486,335 $ 366,210 ($ 18,492) $ 395,261 =========== *The Trust changed its fiscal year to a calendar year in 1994.
48 Other Expenses Other expenses that are directly related to members' payroll expense levels and consequently premium income are service company fees and excess insurance premiums. Service company fees, the fees paid to an outside claims administrator, decreased from $626,332 in 1995 to $299,322 in 1996 as a result of a decrease in premium income together with a rate decrease negotiated with the servicing company. There were no service company fees for the period ended June 30, 1997 due to the claims being handled through the TIG Commercial Program arrangement. For the same period in 1996, service company fees totaled $299,322. Regulatory fees were virtually unchanged, decreasing from $30,858 in 1995 to $28,548 in 1996. For the period ending June 30, 1997 and 1996, regulatory fees amounted to $11,502 and $14,274 respectively. These fees are levied by the Workers' Compensation Commission and are based on the medical and indemnity payments paid to claimants during the previous calendar year. Consequently, the level of premium income does not have a direct effect on these expenses. General expenses increased from $438,224 in 1995 to $450,959 in 1996. The increase was due primarily to the expense involved in the structuring and implementation of the Commercial Program and in the analysis and planning of the dissolution of the Trust in conjunction with the formation of the Company. The Trust incurred general expenses primarily relating to the formation of the Company totaling $183,760 in the first quarter of 1997 compared to general expenses for the first six months in 1996 of $241,455. Income Taxes The current tax provision of the Trust decreased to $98,768 in 1996 from $643,660 in 1995 as a result of decreased taxable income. In 1996, the tax provision represents a large percentage of the net income before tax because for tax purposes the Trust can only deduct capital losses up to the amount of its gains. Since the Trust could not deduct the net loss from the sale of its securities in 1996, its taxable income was significantly higher than financial statement net income, thus creating a large tax provision in comparison to net income before tax. Because of a change in the investment philosophy of the Trust to invest in primarily fixed income securities, it appears unlikely that the Trust will experience future capital gains which would allow it to benefit from the capital loss carryforwards generated on the sale of securities in 1996 and 1995. Consequently, Trust management does not believe that such loss carryforwards will be utilized. For temporary differences between the tax basis of assets and liabilities, a deferred tax liability or asset account is established. At December 31, 1995 a deferred tax asset existed as a result of the future tax benefit the Trust would receive from the sale of securities in which the Trust had current unrealized losses. During 1996, it became apparent that the Trust may not be able to fully realize a tax benefit from the eventual sale of such securities at a loss unless the Trust was likely to have future capital gains to offset such losses. Since only minimal capital gains were likely due to 49 a change in the investment portfolio of the Trust, the deferred tax asset was eliminated in 1996 to reflect the net expected tax benefit from the sale of securities at a loss. The Trust made 1996 estimated income tax payments during the first half of 1996 based on the income tax paid in 1995. However, since the Trust discontinued writing business July 1, 1996, the taxable income of the Trust was significantly less than in 1995, creating an income tax overpayment. At December 31, 1996, the Trust had overpaid Federal income taxes by $134,488 and Mississippi income taxes by $18,374, resulting in a total income tax refund due of $152,862, at that date. Due to an absence of premium income for the quarter ended June 30, 1997 and with continuing costs involved in its conversion, the Trust experienced a net loss of $112,933 creating a current income tax benefit of $40,489 compared to a provision for income tax of $122,516 for the same quarter of 1996. Investment Income Investment income decreased from $328,027 in 1995 to $297,076 in 1996. This decrease was a result of having less cash available for investment in 1996. Cash and investments at December 31, 1996 and 1995 were $4,721,297 and $5,957,135 respectively. This decrease was a result of the discontinuance of premium income effective July 1, 1996 coupled with the Trust's continuing obligation to pay existing claims. Numerous claims were settled during the last six months of 1996, further reducing cash available for investment. Investment income decreased from $147,583 for the six months ended June 30, 1996 to $91,444 for the same period in 1997. The decline was due to a further decrease in cash available for investment as a result of the Trust continuing to pay existing claims without current premium income. The Statements of Revenue and Expenses for the years ended December 31, 1996 and 1995 reflect net realized losses from the sale of securities available-for-sale $37,286 and 159,557 respectively. Additionally, a 1996 loss on the sale of "trading securities" in the amount of $422,850 is presented as "Other"on the statement in accordance with generally accepted accounting principles. The losses in 1995 were primarily the result of a decline in the value of certain foreign currency based securities. The investment policy of the Trust no longer permits investment in foreign securities. With respect to the 1996 losses, the Trust has initiated arbitration proceedings against the brokerage firm to recover its losses. As of December 31, 1996, the Trust had liquidated virtually all of its equity security holdings with this firm. For the period ending June 30, 1997 the Trust sustained an additional loss on the sale of "trading securities" in the amount of $9,115. The Trust experienced a loss on the sale of "trading securities" in the same period of the preceding year in the amount of $286,085. 50 Effective April 1, 1997, the Trust engaged the services of Investek Capital Management, Inc. ("Investek") to assist in the management of the Trust's investment portfolio. Investek has substantial experience in the management of insurance company investment portfolios. Liquidity and Capital Resources General The liquidity and capital requirements for a workers' compensation carrier is significantly different from other property and casualty carriers. Workers' Compensation carriers generally have use of premium dollars for investment purposes for longer periods of time because claims may be paid over a fifteen year or longer period. Because of this long payment period, investment income becomes a major source of revenue for most carriers. Consequently, discounting the liability for future claims payments for the present value of investment income that will be earned on the funds available for future expected payments becomes a significant factor in estimating a carrier's claims liability. Liquidity Requirements Historically, the Trust has needed liquidity primarily to meet claims obligations. The Trust and the Company have entered into the Assumption Reinsurance Agreement whereby Continental will assume all of the claims liabilities of the Trust as of September 5, 1997. The Trust will pay Continental an amount not to exceed $1,875,000 consisting of $1,625,000 in reserves required to pay claims liabilities (which amount may be adjusted downward depending on claims settled) plus a non-refundable fee of $250,000 for handling claims. As a result of this arrangement, the Trust and the Company's need for liquidity has been substantially eliminated, unless the Company exercises its reinsurance rights. Under the Assumption Reinsurance Agreement, the Company has the right on March 1, 1998 to provide reinsurance to Continental pertaining to the claims liabilities assumed by Continental pursuant to the Assumption Reinsurance Agreement. If such reinsurance is put in place, a portion of the assets the Trust transferred to Continental will be transferred back to the Company along with any associated liability. The Company will be required to fund a trust account with a financial institution acceptable to Continental and the Company with the amount of funds necessary for Continental to receive full financial statement credit for such reinsurance and with the terms and conditions of such trust to comply with the law of Continental's state of domicile such that Continental shall receive full financial statement credit for such reinsurance. No decision has been made as to whether the Company will exercise its right to provide reinsurance. Although in the past the business insured by the Trust has been profitable, it is impossible to predict whether the obligations ceded to Continental will be settled for less than the reserves transferred to Continental. For these reasons, it is impossible to predict with accuracy what financial impact these reinsurance rights will have on the Company. 51 The Company may participate in business written through the Commercial Program on a reinsurance basis after the conversion of the Trust is completed. The Insurance Placement Agreement permits the Company to determine the amount of reinsurance it may provide at any point in time. If the Company elects to provide such reinsurance liabilities and corresponding assets would be transferred to the Company. The effect of such transfer would depend on the amount and timing of the reinsurance and the profitability of the business transferred all of which are unknown at this time. For these reasons, it is impossible to predict with accuracy what financial impact these reinsurance rights will have on the Company. The Trust will also need liquidity to pay amounts owed to dissenters. The Trust will pay an amount (to be determined as of the Effective Date) which will satisfy certain published Internal Revenue Service Guidelines so as not to cause the Conversion to lose its characterization as a tax free transaction as to the Trust, the Company, and those Former Members who receive Stock of the Company. Any excess over such amount shall be paid to dissenters by the Company (contemporaneously with the payments made to dissenters from funds of the Trust) out of operating funds or from the proceeds of a loan that the Company will obtain for that purpose and not out of assets transferred to the Company from the Trust pursuant to the Plan. The Company's intent is to pay debt service on any loan obtained to pay dissenters out of future earnings of the Company and not out of funds transferred from the Trust. The actual amount payable by the Trust will be determined on the Effective Date so that any changes in the Trust'`s financial position may be taken into account in determining the amount the Trust may pay to dissenters without jeopardizing their tax free status of the transaction as noted above. After payments have been made pursuant to the Assumption Reinsurance Agreement and all existing liabilities of the Trust have been paid (assuming no dissenters), it is anticipated that the Trust will have approximately $1.5 million in cash, investments and other liquid assets with which to capitalize the Company. In order to be licensed by the Department of Insurance, the Company must maintain $400,000 in capital and $600,000 in surplus on a statutory basis. It is anticipated that the Company will have in excess of the minimum required capital and surplus. Admitted Assets The Company will be required to maintain its books on the statutory basis of accounting. Currently the Trust maintains its books on a GAAP (generally accepted accounting principals) basis. As far as the Company is concerned, initially the major difference in the statutory and GAAP basis of accounting lies in the classification of assets as admitted or non-admitted. Under the statutory basis, only admitted assets will be permitted to be included as assets on the Company's balance sheet. At December 31, 1996 the Trust owned certain investments that are not considered admitted assets for statutory accounting purposes. In January, 1997, the Trust sold the major portion of these non-admitted investment assets for cash in order to qualify them as admitted assets upon transfer to the Company. Other non-admitted assets totaling $125,750 are fixed assets of $13,517, prepaid expenses of $21,798 and receivables and other assets totaling $90,435. Non-admitted assets at June 30, 1997 totaled $176,654. 52 Commitments Both the Trust and the Company, as successor to the Trust, have ongoing commitments for administrative services to Delta Administration in the approximate amount of $3,800 per month as well as other normal operating expenses. Under the Commercial Program, pursuant to the Representative Agreement, Delta Administration is also paid 3.5% of the collected premiums generated by the Commercial Program to manage the activities of the Trust. See "Certain Transactions and Relationships." BUSINESS OF THE COMPANY Organization and Purpose The Company was organized on December 13, 1996, as a Mississippi business corporation with the purpose of succeeding to the assets of the Trust pursuant to the Conversion and thereafter functioning as a commercial stock insurance company licensed to write workers' compensation insurance in the State of Mississippi. The Company must at all times meet and maintain a minimum capital and surplus level of $400,000 and $600,000, respectively. As of the Effective Date of the Conversion, the Company anticipates that it will exceed the minimum levels of capital and surplus. In order for the Department of Insurance to issue the Company a license as a workers' compensation insurer, immediately following the Conversion the Company must place one-half of its statutory capital ($200,000) on deposit with the Treasurer of the State of Mississippi and submit evidence of such deposit and the required levels of capital and surplus to the Department of Insurance, and pay a $200 license fee. Until the Effective Date of the Plan, the Company will have no material assets or liabilities. Because the Company has no material assets as of the date hereof, selected financial data of the Company is not included in this Prospectus; for financial statements of the Company, see "Index to Financial Statements." Upon the completion of the Conversion, the Company expects to be licensed as a workers' compensation insurer by the Department of Insurance. Company Management's Plan of Operation Continuation of Commercial Program The Company plans to continue with the Commercial Program begun by the Trust. Until the Company has received a rating from a recognized insurance rating organization (which requires five years of continuous operations), it plans to continue the Commercial Program and/or initiate similar programs with other insurers. 53 There is currently substantial price competition in the workers' compensation market. The Company plans to continually examine the Commercial Program and any other similar programs it may provide in order to ensure such programs are competitive. Provision of Reinsurance The Company may provide reinsurance to Continental in accordance with the Assumption Reinsurance Agreement and it may provide reinsurance to TIG in accordance with the Insurance Placement Agreement. See "Trust Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources -- Liquidity Requirements." When an insurance company provides reinsurance, the amount of the insurance obligation which the company providing the reinsurance assumes is specifically defined. Further, the insurance obligation assumed is to the ceding insurer (the company which is transferring the insurance risk to the company providing reinsurance) and not an individual insured. In the event that the Company provides reinsurance to Continental or TIG, the Company expects to have excess coverage which will limit its exposure. Under the Assumption Reinsurance Agreement, the Company has the right on March 1, 1998 to provide reinsurance to Continental pertaining to the claims liabilities assumed by Continental pursuant to the Assumption Reinsurance Agreement. If such reinsurance is put in place, the assets remaining of the assets the Trust transferred to Continental will be transferred back to the Company along with any associated liability. Creation of Other Workers' Compensation Insurance Programs In addition to the Commercial Program, the Company may develop workers' compensation insurance programs with other large carriers. It is anticipated that these programs will be structured in a manner similar to the current Commercial Program. The Company would participate as a reinsurer of the business written by the commercial carriers. It is anticipated that the Company's level of risk participation in these programs would vary. Due to the integration of stop loss policies into the program at relatively low levels, the potential loss to the Company on this program would be greatly minimized. General Operations The Company plans to concentrate its business activities on providing workers' compensation for businesses in the agricultural and industrial sectors in Mississippi and, in the future if desirable opportunities arise, in nearby states. Company management believes that it has a base of experience in agricultural workers' compensation risk (such as cotton gins) which is transferable to other states. In addition, so long as the Company is licensed as a workers' compensation insurer in Mississippi, it may participate under certain circumstances in workers' compensation programs similar to the Commercial Program without licensure by such other states. 54 Company management also has identified a potential client population in the insureds and former insureds of self insurance pools such as the Trust. The factors that rendered the Trust noncompetitive have affected other pools, in some instances causing insolvencies. The Company believes that it is well positioned to identify the insureds of such pools and place them in programs such as the Commercial Program as well as to arrange for the placement of coverage with other insurers to terminate the joint and several liability of insureds in such pools. Assuming operation as set forth above, management of the Company believes that the Company's business activities should allow the Company to satisfy its cash needs without seeking additional financing for the next twelve months. However, in the event that operations do not meet projected targets, the Company will be required to obtain financing for shortfall amounts through debt financing or the issuance of additional equity securities. Investments Management of the Company's portfolio of investments will be a significant part of the Company's business. The Company's investments are limited by statutes and other regulations which restrict a large portion of such investments to specific categories. The Company is expected to invest in securities and other investments authorized by applicable state laws and regulations and receive income from such investments in the form of interest, dividends and capital gains. The Company expects to follow an investment policy designed to maximize yield to the extent consistent with liquidity requirements and preservation of assets. The Company has retained Investek Capital Management, Inc. as its investment advisor. Investek currently manages over $1.1 billion and has substantial experience in investing funds of insurance companies. Government Regulation The Company will be subject to regulation by the Department of Insurance although control over the delivery of benefits is generally under the purview of the Workers' Compensation Commission. The primary purpose of regulation by the Department of Insurance is to provide safeguards for policyholders rather than to protect the interests of shareholders. The Department of Insurance has broad administrative powers relating to the licensing of insurers and their agents, the regulation of trade practices, transactions with affiliates, investments, deposits of securities, the form and content of financial statements, accounting practices, reporting requirements, sales literature, insurance policy forms and the maintenance of specified reserves and capital and surplus. Workers' compensation insurers such as the Company must maintain reasonable ratios between net written premiums and statutory surplus in order to be consistent with sound underwriting practices and requirements of insurance regulators and rating agencies. Accordingly, an insurance company's volume of net written premiums is limited by the amount of its statutory surplus. As the premium volume of the Company grows, its statutory surplus must also increase so that the ratio of net written premiums to statutory surplus does not become too high. The Company's objective will be to maintain the ratio of net written premiums to statutory surplus within the maximum guidelines of the NAIC. 55 Insurance companies are required by law to maintain reserves for claims. These reserves are intended to cover the probable ultimate cost of settling all claims incurred and unpaid, including those not yet reported. Reserves will be determined by the Company in accordance with applicable law. Reserves will be monitored by the Company using a variety of techniques for analyzing claim cost and frequency data and other economic factors. Among other techniques, the Company expects to periodically compare estimated and actual expenses for settled claims and adjust its reserve estimates, if necessary, on the basis of such comparisons. Claim reserves are estimates only, and it is possible that ultimate liability may exceed or be less than such estimates. Under Mississippi law, workers' compensation insurers must maintain a reserve for losses as well as a reserve for unearned premiums. The assets constituting the unearned premium reserve must be withdrawn from use by the Company for its general purposes and are gradually released over the life of the policy. Upon being licensed by the Department of Insurance, the Company will automatically become a member of the Mississippi Insurance Guaranty Association (the "Guaranty Association"). The purpose of the Guaranty Association is to provide a mechanism for the payment of claims made by insureds against an insolvent insurer. The Association may assess insurers to pay the obligations of the Association in accordance with a statutory formula based on net direct premiums written. Upon being authorized by the Department of Insurance to write workers' compensation insurance in Mississippi, the Company will be required to be a member of the Mississippi Workers' Compensation Assigned Risk Pool ("the "Pool") and to participate in the Mississippi Workers' Compensation Assigned Risk Plan (the "Plan"). The purpose of the Pool is to be a reinsurance mechanism for the Plan. The Pool may assess insurers to pay the obligations of the Pool in proportion to the insurers' direct net workers' compensation premium writings in Mississippi. So long as the Company does not directly write workers' compensation insurance, it will not be subject to assessment by the Pool. In a stock insurance company structure such as the Company's, there is no personal liability of the shareholders in the event the insurer becomes insolvent and is not able to pay claims. The claims are assumed by the Guaranty Association. This is in contrast to the joint and several liability of members of group self insurers such as the Trust. Assumption of Trust Contracts The Company and the Trust have entered into an Assignment and Assumption Agreement dated as of March 20, 1997, which provides that upon the Conversion, the Trust will assign, and the Company will assume, the Trust's rights under the Insurance Placement Agreement, the Representative Agreement, agreements relating to claims administration, and certain other agreements and rights of the Trust. 56 Employees The Company will initially have no employees. The Company will be administered by Delta Administration on the same financial and operational basis as the Trust. See "The Trust -- Employees" and "Certain Transactions and Relationships." The Company anticipates that it will continue to utilize the services of Mr. Vickery through Delta Administration to manage the day to day operations of the Company. Management of the Company The names of the executive officers and directors of the Company and their respective ages and positions with the Company are set forth as follows: Name Age Position William L. Kennedy 46 Chairman of the Board of Directors, Chief Executive Officer Harry E. Vickery 62 President, Director David R. White 47 Secretary, Treasurer, Vice President, Director William L. Kennedy resides in Inverness, Mississippi. He holds a BS degree in Entomology from Mississippi State University. He has worked with Duncan Gin, Inc. since 1972 and currently serves as President and Chief Operating Officer of Duncan Gin, Inc. Duncan Gin, Inc. is a multiline agricultural marketing entity and is the largest cotton ginning operation in Mississippi. He has served from inception on the Board of Trustees of the Delta Agricultural & Industrial Trust and is presently Chairman of the Trust. Harry Vickery resides in Jackson, Mississippi. From 1962-1993, Mr. Vickery was involved in the automobile business in Greenville, Mississippi. Mr. Vickery was one of the original members of the Board of Trustees of the Trust from inception until 1993 when he became Administrator. Mr. Vickery was President and a director of Vickery Chevrolet Oldsmobile Co., Inc. which filed a Chapter 11 bankruptcy petition in 1993. All assets of Vickery Chevrolet Oldsmobile Co., Inc. were sold and the bankruptcy case was subsequently dismissed. David R. White resides in Jackson, Mississippi. He holds a BS degree from the University of Mississippi in Accounting and Business Administration. He has been involved in the insurance business since 1987 and has served as President and Chief Operating Officer of MRM Underwriters, Inc. since that date. He holds a number of awards in the insurance field and has served as president of insurance associations both on the local and state level. All directors hold office until the next annual meeting of shareholders of the Company or until their successors have been elected and qualified. Unless changed by the action of the Board 57 of Directors, the number of directors shall be no fewer than three (3) nor more than seven (7). Officers serve at the discretion of the Board of Directors. There are no family relationships between the directors and officers. Executive Compensation There are no current plans to pay compensation to officers or directors other than for (i) attendance at meetings; and (ii) activities undertaken on behalf of the Company with approval by the board of directors. MRM and Delta Administration, entities controlled by David R. White and Harry E. Vickery, respectively, received funds as a result of providing services to the Trust. MRM received commission income as a result of providing insurance and services to the Trust and Delta Administration provided management services to the Trust. See "The Trust -- Employees"; "The Company -- Employees"; and "Certain Transactions and Relationships." Legal Proceedings Following the Conversion, the company will succeed to the Trust's claim in the Securities Arbitration. See "Business of the Trust -- Legal Proceedings" and "Trust Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Results of Operations -- Losses." Other than the pending involvement of the Company in the Securities Arbitration as successor to the Trust, the Company is not involved in any pending legal proceeding nor are any material legal proceedings known by the Company to be contemplated by governmental authorities other parties, to which the Company is or might become a party. 58 DESCRIPTION OF COMPANY STOCK The Company is authorized to issue 100,000,000 shares of common stock, $1.00 par value, of which up to 650,000 will be issued and outstanding upon the Effective Date of the Plan. When issued, the Stock will be fully paid and nonassessable. The Company's Stock does not have preemptive rights. Holders of shares of the Company's Stock are entitled to one vote per share in all matters to be voted on by shareholders, except that holders are entitled to cumulate their votes in the election of directors. See "Comparison of Rights of Former Members of the Trust and Shareholders of the Company." COMPARISON OF RIGHTS OF FORMER MEMBERS OF THE TRUST AND SHAREHOLDERS OF THE COMPANY There are important differences between the rights of shareholders of the Company ("Shareholders") and Former Members of the Trust. Governance The Company will be subject to the Mississippi Business Corporation Act ("MBCA") and not to general trust law. Shareholders of the Company will elect a Board of Directors who will oversee governance of the Company. Former Members of the Trust have no voting or governance rights. Liability Former Members of the Trust are jointly and severally liable for the obligations of the Trust which were incurred during such Former Member's period of membership. Shareholders of the Company will not be liable for the obligations of the Company or their fellow shareholders except to the extent of their investment in the Stock. Assessment Former Members of the Trust are assessable in the event the Trust is unable to adequately discharge its financial obligations which were incurred during such Former Member's period of membership. The Stock of the Company is nonassessable. Voting Former Members of the Trust have no voting rights. Shareholders of the Company will be entitled to one vote for each share held on each matter submitted to a vote at a meeting of the Shareholders, with the exception that Shareholders may cumulate their votes for directors. 59 Resale Former Members of the Trust may not sell or transfer their interest in the Trust. Shareholders in the Company may freely sell or transfer their shares, subject to applicable securities laws. See "The Conversion -- Resales of Company Stock." Indemnification of Officers and Directors of the Company Subject to the terms and conditions of the Bylaws of the Company, the Company is required to indemnify any person who was or is a party or is threatened to be made a party to a threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative because he is or was serving as an officer or director of the Company, or while serving as a director of the Company, is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. Indemnification is available for an obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan) or reasonable expenses (including counsel fees) incurred with respect to such proceeding. Indemnification permitted in connection with a proceeding by or in the right of the Company shall be limited to reasonable expenses incurred in connection with the proceeding. Under the Bylaws, the Company may not indemnify a director unless the person indemnified shall have conducted himself in good faith and reasonably believed, in the case of conduct in his official capacity with the Company, that his conduct was in its best interests, and in all other cases, that his conduct was at least not opposed to its best interests, and in the case of any criminal proceeding, that he had no reasonable cause to believe his conduct was unlawful. Such a determination shall be made by the Board of Directors by majority vote of a quorum consisting of disinterested directors, or if a quorum cannot be obtained, by majority vote of a committee duly designated by the Board of Directors, by special legal counsel, by the shareholders of the Company, or by a court of competent jurisdiction. The termination of a proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct. The Company may not indemnify a director in connection with a proceeding by or in the right of the Company in which the director was adjudged liable to the Company or in connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. The Company must pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if the director furnishes the Company a written affirmation of his good faith belief that he has met the applicable standard of conduct if the director furnishes the Company a written undertaking, executed personally or on his behalf, to repay the advance if it shall be ultimately determined that he did not meet the standard of conduct and a determination is made that the facts then known to those making the determination would not preclude indemnification. The undertaking to repay must be an unlimited general 60 obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. The Bylaws authorize the Company to purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee or agent of the Company or who, while a director, officer, employee or agent of the Company, is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against liability asserted against or incurred by him in that capacity or arising from his status as a director, officer, employee or agent, whether or not the Company would have power to indemnify him against such liability. The Bylaws authorize the Board of Directors of the Company to make any further indemnity, including advance of expenses, to and to enter contracts of indemnity with any director, officer, employee or agent, except an indemnity against his gross negligence or willful misconduct. The Company must pay or reimburse expenses incurred by a director in connection with his appearance as a witness in a proceeding at a time when he has not been made a named defendant or respondent to the proceeding when his appearance as a witness is in connection with his serving as a director of the Company. The Company's Articles of Association include a provision limiting the personal liability of a director to the Company or its shareholders for monetary damages with the exception of liability arising out of (i) the amount of a financial benefit received by a director to which he is not entitled, (ii) an intentional infliction of harm on the corporation or the shareholders, (iii) violation of certain provisions of the MBCA, or (iv) an intentional violation of criminal law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 or under the securities laws of various states may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission and certain state securities commissioners such indemnification is against public policy and is therefore unenforceable. Indemnification of Trustees of the Trust The Trust Agreement of the Trust (the "Trust Agreement") provides for mandatory indemnification of the Trustees against all costs and expenses (including attorneys' fees) incurred in connection with any claim in which a Trustee may be involved by virtue of his position in the Trust. The indemnification is not operative with respect to: (i) a person gaining any personal profit or advantage; (ii) the dishonesty of a person; (iii) a person's conflict of interest; (iv) willful violation of a statute or ordinance committed by a person or with the person's knowledge or consent; or (v) any matter as to which a person shall have been finally adjudged in such action, suit or proceeding to be liable for misconduct in the performance of his duties. The Trust Agreement further provides that the rights of indemnification set forth therein shall not be deemed exclusive of any rights to 61 which those indemnified may be entitled and the Board of Trustees, by vote of disinterested Trustees, may provide any further indemnification it feels justified. Preemptive Rights Under the MBCA, a shareholder does not have preemptive rights unless such rights are specifically granted. The Company's Articles of Association do not provide for preemptive rights. Because the Trust is an unincorporated entity and issues no shares, preemptive rights are not applicable. Dividends Under Mississippi law, the Company may pay cash dividends only from actual net surplus determined on a statutory basis. In addition, "extraordinary dividends" or "extraordinary distributions" may not be paid until thirty (30) days after the Commissioner of Insurance has received notice of the declaration thereof and has not within such period disapproved such payment, or the Commissioner has approved such payment within such thirty (30) day period. Extraordinary dividends or distributions are defined as any dividend or distribution of cash or other property whose fair market value together with that of other dividends or distributions made within the preceding twelve months exceeds the lesser of (i) ten percent (10%) of the Company's surplus as regards policyholders as of the December 31 next preceding, or (ii) the net income of such insurer, not including realized capital gains, for the twelve month period ending the December 31 next preceding, but shall not include pro-rata distributions of any class of the insurer's own securities. In determining whether a dividend or distribution is extraordinary, an insurer may carry forward net income from the previous two (2) calendar years that has not already been paid out as dividends. Payment of dividends (also called refunds) by the Trust are restricted to any monies for a full accounting year of the Trust (a "Fund Year") in excess of the amount necessary to fund all obligations for that Fund Year which have been declared to be refundable by the Board of Trustees with the approval of the Workers' Compensation Commission and which shall be payable not less than twelve (12) months after the end of the Fund Year. The Workers' Compensation Commission will not consider refunds for a particular Fund Year for approval until financial statements are available reflecting fund equity for that Fund Year at the period ending 24 months after the end of that Fund Year. After approval of a refund for a particular Fund Year: (i) up to 33% of the equity for that Fund Year could be approved for distribution as a refund during the period beginning 24 months after the closing of that Fund Year; (ii) up to 50% of the remaining equity for that Fund Year could be approved for distribution as a refund during the period beginning 36 months after the closing of that Fund Year; (iii) up to 50% of the remaining equity for that Fund Year could be approved for distribution as a refund during the period beginning 48 months after the closing of that Fund Year; and (iv) up to 100% of the remaining equity for that Fund Year could be approved for distribution as a refund during the period beginning 60 months after the closing of that Fund Year. Each refund distribution requires a separate application and approval after financial results are available reflecting the Fund Year equity balance at the relevant time (i.e., 24 months after the close of the Fund Year; 36 months after the close of the Fund Year, etc.). 62 CERTAIN TRANSACTIONS AND RELATIONSHIPS David R. White is an officer and director of the Company and controls MRM. Through the Representative Agreement and MRM's General Agent Agreement with TIG, MRM receives a percentage of the premiums written through the Commercial Program. It is anticipated that the Company will become the assignee of the Trust's rights under the Representative Agreement and that MRM will continue providing such services to the Company. MRM brokers directors and officers coverage and excess workers' compensation coverage for the Trust. In 1995, 1996, and for the period from January 1, 1997 - June 30, 1997, MRM received direct and indirect compensation from the Trust and the Company in the aggregate amounts of $131,290; $137,716; and $121,400, respectively, for such years. Mr. White, or an affiliate of Mr. White, will be paid a commission of $25,000 by Continentalin connection with the Assumption Reinsurance Agreement. Harry E. Vickery is an officer and director of the Company and serves as Administrator of the Trust and owns all the issued and outstanding stock of Delta Administration. Under the Commercial Program, pursuant to the Representative Agreement, Delta Administration, which is a licensed insurnace agency, is paid 3.5% of the collected premiums generated by the Commercial Program to manage the activities of the Trust. Delta Administration also receives $3,800 a month from the Trust in exchange for administrative services. From these funds, Delta Administration pays the office expenses of the Trust including rent, salaries of its employees who administer the Trust, and sponsor fees. Mr. Vickery, through Delta Administration, acts as an agent for the Commercial Program through MRM. Mr. Vickery will continue to sell coverage through the Commercial Program in addition to his management role in the Company. In the event that the Company creates other insurance programs, it is anticipated that Delta Administration will provide services similar to those provided under the Commercial Program. In 1995, 1996, and for the period from January 1, 1997 - June 30, 1997, Delta Administration received direct and indirect compensation from the Trust and the Company in the aggregate amounts of $111,991; $114,207; and $74,907, respectively, for such years. After payment by Delta Administration of office expenses of the Trust, Mr. Vickery's gross compensation in 1995 was $87,092 and $104,451 in 1996. Prior to the commencement of the Commercial Program, Delta Administration was paid directly by the Trust for its services. As a part of the Conversion, the Trust's obligations regarding Delta Administration will be assumed by the Company. LEGAL MATTERS The validity of the shares of Stock to be issued in connection with the Conversion will be passed upon for the Company and the Trust by Watkins Ludlam & Stennis, P.A., Jackson, 63 Mississippi. Certain of the tax consequences of the Conversion will be passed upon by Watkins Ludlam & Stennis, P.A. EXPERTS The audited financial statements and financial statement schedules of the Trust included in this Prospectus and elsewhere in the Registration Statement have been examined by Richard L. Eaton, independent certified public accountant, Jackson, Mississippi, for the periods and to the extent set forth in his reports and are included herein in reliance upon the reports of such firm, given upon his authority as an expert in accounting and auditing. 64 INDEX TO FINANCIAL STATEMENTS Delta Agricultural and Industrial Trust Financial Statements for the Years ended December 31, 1996 and 1995 Report of Independent Auditor F-3 Balance Sheets as of December 31, 1996 and 1995 F-4 Statements of Revenues and Expenses for Years Ended December 31, 1996 and 1995 F-5 Statements of Changes in Trust Equity for Years Ended December 31, 1996 and 1995 F-6 Statements of Cash Flows for Years Ended December 31, 1996 and 1995 F-7 Notes to Financial Statements F-9 Schedules to Financial Statements F-21 Delta Agricultural and Industrial Trust Compiled Financial Statements for the Six Months Ended June 30, 1997 and 1996 Balance Sheets as of June 30, 1997 and 1996 F-27 Statements of Revenues and Expenses for Six Months Ended June 30, 1997 and 1996 F-28 Statements of Changes in Trust Equity for Six Months Ended June 30, 1997 and 1996 F-29 Statements of Cash Flows for Six Months Ended June 30, 1997 and 1996 F-30 Notes to Financial Statements F-32 Stoneville Insurance Company Financial Statements for the Years Ended December 31, 1996 and 1995 Report of Independent Auditor F-44 Balance Sheet as of December 31, 1996 F-45 Statement of Income for Year Ending December 31, 1996 F-46 Statement of Changes in Stockholders' Equity for Year Ended December 31, 1996 F-47 Statement of Cash Flows for Year Ended December 31, 1996 F-48 Notes to Financial Statements F-49 F-1 INDEX TO FINANCIAL STATEMENTS (cont.) Stoneville Insurance Company Compiled Financial Statements for the Six Months Ended June 30, 1997 and 1996 Balance Sheet as of June 30, 1997 F-52 Statement of Income for the Six Months Ending June 30, 1997 F-53 Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 1997 F-54 Statement of Cash Flows for the Six Months Ended June 30, 1997 F-55 Notes to Financial Statements F-56
F-2 RICHARD L. EATON CERTIFIED PUBLIC ACCOUNTANT (A PROFESSIONAL CORPORATION) POST OFFICE BOX 16603 JACKSON, MISSISSIPPI 39236 ____________ TELEPHONE: (601) 956-9751 FAX: (601) 956-7415 MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS MISSISSIPPI SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS Board of Trustees Delta Agricultural and Industrial Trust Jackson, Mississippi I have audited the accompanying balance sheets of Delta Agricultural and Industrial Trust as of December 31, 1996 and 1995 and the related statements of revenue and expenses, changes in trust equity and cash flows for the years then ended. These financial statements are the responsibility of management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements present fairly, in all material respects, the financial position of Delta Agricultural and Industrial Trust as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/Richard L. Eaton Richard L. Eaton Jackson, Mississippi January 29, 1997 F-3
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Balance Sheets December 31, 1996 and 1995 1996 1995 ----------- ------------ Assets Investments: Trading securities (at fair value) Equity securities $ 1,696,944 $ 0 Securities available-for-sale (at fair value) Fixed maturities (amortized cost - $1,150,740 and $0) 1,141,504 0 Equity securities (amortized cost - $0 and $2,580,133) 0 2,469,692 Securities held-to-maturity (at amortized cost) Fixed maturities (fair value $521,940 and $2,246,853) 522,884 2,247,145 ----------- ----------- Total Investments 3,361,332 4,716,837 Cash and Cash Equivalents 1,359,965 1,240,298 Premiums receivable net of uncollectible amount 0 1,337,030 Notes receivable 20,000 0 Accrued interest receivable 52,410 90,736 Reinsurance receivables, net of uncollectible amounts 660,986 708,509 Excess insurance premium overpayment 89,860 0 Capital equipment leases at cost less accumulated depreciation of $9,775 and $5,759 13,517 16,782 Prepaid expenses 21,798 2,622 Income tax refund receivable 152,862 0 Deferred tax asset 0 43,331 Other assets 575 575 ----------- ------------ Total Assets $ 5,733,305 $ 8,156,720 =========== =========== Liabilities and Trust Equity Liabilities Reserve for losses and loss adjustment expenses $ 2,834,220 $ 3,713,923 Unearned premiums 0 1,466,279 Reserve for premium adjustment 384,863 0 Accounts payable and accrued liabilities 56,290 207,762 Income taxes payable 0 394,048 Capital lease obligations 4,038 8,980 ----------- ----------- Total Liabilities 3,279,411 5,790,992 ----------- ----------- Trust Equity Retained earnings 2,463,130 2,432,888 Net unrealized loss on securities available for sale, net of deferred taxes (9,236) (67,160) ------------ ----------- Total Trust Equity 2,453,894 2,365,728 ------------ ----------- Total Liabilities and Trust Equity $ 5,733,305 $ 8,156,720 ============ =========== See accompanying notes to financial statements.
DELTA AGRICULTURAL & INDUSTRIAL TRUST Statements of Revenue and Expenses For the Years Ended December 31, 1996 and 1995 1996 1995 ----------- ------------ Revenue Premiums earned $ 2,077,351 $ 5,659,925 Premiums ceded (89,860) (335,973) ------------ ------------ Net premiums earned 1,987,491 5,323,952 Investment income 297,076 328,027 Net realized gains and losses on securities available-for-sale (37,286) (159,557) Other (422,850) 0 ------------ ----------- Total Revenue 1,824,431 5,492,422 ============ ========== Expenses Loss and loss adjustment expenses 916,592 2,448,722 Service company fees 299,322 626,332 Regulatory fees 28,548 30,858 General expenses 450,959 438,224 ----------- ---------- Total Expenses 1,695,421 3,544,136 ----------- ---------- Excess Revenue over Expenses Before Income Tax Provision 129,010 1,948,286 Provision for income tax 98,768 643,660 ----------- ---------- Excess Revenue over Expenses $ 30,242 $ 1,304,626 =========== ============
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Changes in Trust Equity For the Years Ended December 31, 1996 and 1995 1996 1995 ---------- ---------- Trust Equity - Beginning of Year $2,365,728 $1,023,330 Excess Revenue over Expenses 30,242 1,304,626 Change in net unrealized loss on securities available for sale net of change in deferred taxes 57,924 37,772 ----------- ---------- Trust Equity - End of Year $2,453,894 $2,365,728 ========== ========== See accompanying notes to financial statements.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Cash Flows For the Years Ended December 31, 1996 and 1995 1996 1995 ----------------- ----------------- Cash Flows From Operating Activities Premiums collected $ 2,688,450 $ 7,034,172 Losses and loss adjustment expenses paid (1,748,772) (2,456,050) Refunds and premium adjustments paid (449,415) (297,576) Administrative expenses paid (1,056,948) (1,463,647) Income taxes paid (625,678) (1,012,930) Investment income received 335,402 225,407 Net (increase) decrease in trading securities 429,528 0 Interest paid (855) (43,037) ----------- ----------- Net Cash Provided by Operating Activities (428,288) 1,986,339 ----------- ----------- Cash Flows From Investing Activities Proceeds from sales of available-for-sale securities 3,185,627 1,139,184 Purchase of available-for-sale securities (2,631,979) (1,434,328) Proceeds from maturities of held-to-maturity securities 0 2,882,300 Purchases of held-to-maturity securities 0 (5,540,465) Capital expenditures (751) (2,991) ----------- ----------- Net Cash Provided by Investing Activities 552,897 (2,956,300) ----------- ----------- Cash Flows From Financing Activities Principal payments under capital lease obligations (4,942) (6,235) ----------- ----------- Net Cash Used in Financing Activities (4,942) (6,235) ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 119,667 (976,196) Cash and Cash Equivalents at Beginning of Year 1,240,298 2,216,494 ----------- ----------- Cash and Cash Equivalents at End of Year $ 1,359,965 $ 1,240,298 =========== =========== Continued See accompany notes and accountant's report.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Cash Flows (Continued) For the Years Ended December 31, 1996 and 1995 Reconciliation of net income to net cash provided 1996 1995 ----------------- ----------------- by Operating Activities Net Income $ 30,242 $ 1,304,626 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,818 3,424 (Gain) or loss on sale of investments 460,136 159,557 Decrease in trading securities 429,528 0 Decrease in premiums receivable 1,337,030 1,070,626 Decrease (increase) in prepaid expenses (19,176) 158,981 Decrease (increase) in accrued interest receivable 38,326 (90,736) Increase in notes and other receivables (109,860) 0 Amortization of bond premium (discount) 12,646 (11,884) Decrease in unpaid losses and loss adjustment expenses (832,180) (7,328) Increase (decrease) in unearned premiums (1,466,279) 134,256 Decrease in accounts payable and accrued expenses (151,472) (365,914) Increase in premium adjustment reserve 384,863 0 Decrease in income tax liability (546,910) (369,269) ----------- ----------- Net cash provided by operating activities ($ 428,288) $ 1,986,339 =========== =========== See accompanying notes to financial statements.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 1: Description and Operation of the Trust The Delta Agricultural and Industrial Trust was formed under a Trust Agreement, dated August 1, 1991, between the Delta Council, a Mississippi nonprofit corporation and the Board of Trustees of Delta Agricultural and Industrial Trust. The Trust, which is an entity subject to Federal and Mississippi Income Tax, was created to take advantage of Section 71-3-75 (3) of the Mississippi Code of 1972, as amended, which allows employers to form a pool for the purpose of self-insuring their liabilities under the Mississippi Workers' Compensation Law, versus purchasing insurance coverage from a commercial insurance company. The primary purpose of the Trust has been to provide its members with a source of consistent Workers Compensation insurance coverage at reasonable rates, regardless of the cyclical swings of the commercial insurance market. As a result of forming the Trust, members have the benefit of self-insurance while at the same time spreading the risk of self insurance among a group of employers. While the primary purpose of the Trust is to provide workers compensation coverage to its members on a consistent basis at a reasonable price rather than the generation of profits, the Trustees of the Trust recognize the importance of operating in such a manner that will yield positive operating results. The Trustees believe that as long as the Trust operates in a profitable manner, its ability to service the members of the Trust remains strong. Each member's contribution of funds to the Trust is computed similarly to the method employed by commercial insurance companies in determining premium rates. However, should the Trust be unable to sufficiently discharge all of its obligations, it would assess the members amounts needed to make up the deficiency. While the Trust has never assessed any of its members as a result of a deficiency, the members of the Trust are jointly and severally liable for the obligations of the trust. Due to changes in the Mississippi workers compensation market in early 1996, the Trust determined that the interests of its members would best be served by entering into an arrangement with a commercial insurance company whereby the Trust would discontinue writing coverage for its members effective July 1, 1996 and would encourage its members to move their workers' compensation insurance to the commercial carrier. Consequently the Trust had no premium revenue for the period July 1 through December 31, 1996. The Trust, or any successor to the Trust may, at its discretion, begin writing workers compensation for its members again at anytime. In conjunction with the transfer of the Trust's insurance operation to a commercial carrier, management of the Trust began the process of forming a stock insurance company with the DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 objective of allowing members of the Trust to become shareholders in the stock company. Under the plan, electing members would receive stock in the new company with a book value equivalent to the book value in the Trust at the date of conversion. The Plan also provides for the elimination of the joint and several liability of its members. As of the balance sheet date, this process was not complete. Note 2: Summary of Significant Accounting Policies The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. The Significant accounting policies used to prepare the financial statements are summarized below: Trading Securities Bonds, notes, common stocks and mutual fund shares held principally for resale in the near term are classified as trading account securities and recorded at their fair values. Realized and unrealized gains and losses on trading account securities are included in other income. Securities Held-to-Maturity Bonds, notes and certificates of deposit (with maturities of more than three months) for which the Trust has the intent and ability to hold to maturity are reported at amortized cost, adjusted for amortization of premiums or discounts and other than temporary declines in fair value. Securities Available-for-Sale Bonds, notes, common stock and certificates of deposit (with maturities of more than three months) not classified as either trading or held-to-maturity are reported at fair value, adjusted for other than temporary declines in fair value, with unrealized gains and losses excluded from losses and reported as a separate component of trust equity. Realized gains and losses are determined on the specific identification method. Cash Equivalents For the purpose of presentation in the Trust's statements of cash flows, cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash and (b) so near to maturity that they present insignificant risk of changes in value due to changing interest rates. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 2: Summary of Significant Accounting Policies (continued) Premium Revenue Recognition Insurance premiums are recognized as revenue on a pro rata basis over the policy term. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums. In determining premium rates, the Trust begins with rates established by NCCI (National Council of Commissioners of Insurance), determined by a prescribed worker classification code. The Trust then applies an experience modifier that may either increase, decrease or make no change to the NCCI rate based on an individual employer's claims history. To this modified rate, the Trust then applies a self-insured discount rate of fifteen percent (15%). After calculating the self-insured modified premium, a Premium Volume discount, as specified by NCCI, is applied based on the premium level of the insured to arrive at the total discounted premium amount. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. Amounts due from reinsurers are shown as reinsurance receivables, net of uncollectible amounts on the balance sheets. Liabilities for losses and loss adjustment expenses are not reduced by the amounts receivable from reinsurers. Amounts ceded to reinsurer's are shown as a reduction of earned premium on the statements of revenue. Capital Equipment Leases Certain assets of the Trust were acquired under capital lease arrangements. Such assets are recorded at their original cost and depreciated under the straight-line method over the estimated useful lives of the respective assets. Depreciation expense is included in "General Expenses". Policy Acquisition Costs All Trust member contracts renew annually on a calendar year basis. Consequently, there are ordinarily no unamortized policy acquisition costs at December 31 to be presented on the balance sheet. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 2: Summary of Significant Accounting Policies (continued) Insurance Liabilities The liability for losses and loss-adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in earnings currently. Income Taxes Income tax provisions are based on the asset and liability method. A deferred tax asset or liability is provided for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Such differences are related principally to the unrealized loss in the market value of available-for-sale securities. Note 3: Investments Major categories of net investment income are summarized as follows: 1996 1995 ------------ -------- Fixed Maturities $169,037 $180,645 Equity Securities 105,291 128,638 Short-term Investments 22,748 18,744 ----------- ---------- Total $297,076 $328,027 ======== ======== The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses, and amortized cost for available-for-sale and held-to-maturity securities by major security type at December 31, 1996 and 1995 are as follows: DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 3: Investments (continued)
Available-for-Sale Securities as of December 31, 1996 and 1995 December 31, 1996 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value Bank certificates of deposit $ 524,166 $ 889 $ 2,915 $ 522,140 Obligations of states and political subdivisions 626,574 13 7,223 619,364 ---------- ---------- ---------- ---------- Total $1,150,740 $ 902 $ 10,138 $1,141,504 ========== ========== ========== ==========
December 31, 1995 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value Equity securities $ 2,580,183 $ 1,026 $ 111,517 $ 2,469,692 ----------- ------------ ---------- ----------- Total $ 2,580,183 $ 1,026 $ 111,517 $ 2,469,692 =========== ============ ========== ===========
Held-to-Maturity Securities as of December 31, 1996 and 1995 December 31, 1996 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of the U.S. Government $ 98,966 $ 0 $ 944 $ 98,022 Bank certificates of deposit 423,918 0 0 423,918 ------------ ---------------------------------- ------------ Total $ 522,884 $ 0 $ 944 $ 521,940 =========== ================= ============= ==========
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 3: Investments (continued) December 31, 1995 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of the U.S. Government $ 94,829 $ 0 $ 1,758 $93,071 Bank certificates of deposit 1,973,896 1,210 0 1,975,106 Obligations of states and political subdivisions 178,420 256 0 178,676 ---------- ---------- ---------- ---------- Total $2,247,145 $ 1,466 $ 1,758 $2,246,853 ========== ========== ========== ==========
Gross realized gains and losses on sales of available-for-sale securities were: 1996 1995 --------- ------- Gross realized gains: Fixed maturities $ 2,407 $ 7,481 Equity securities 30,502 14,192 -------- ---------- Total $ 32,909 $ 21,673 ======== ========== Gross realized losses: Bank certificates of deposit $ 6,039 0 Equity securities 64,155 181,231 -------- --------- Total $70,194 $181,231 ======= ======== The Trust also realized net losses in trading securities in the amount of $415,929 in 1996. Trading security gains and losses are included in "Other Income". Additionally, as a result of transferring certain securities from the available-for-sale category to the trading category at December 31, 1996, $6,921 in realized losses were included in "Other Income". DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 3: Investments (continued) The scheduled maturities of available-for-sale and held-to-maturity securities at December 31, 1996 were as follows: Held-to-Maturity Securities Amortized Cost Fair Value Due in one year or less $522,884 $522,010 -------- -------- Total $522,884 $522,010 ======== ======== Available-for-Sale Securities: Amortized Cost Fair Value Due in one year or less $181,350 $181,533 Due after one year through five years 448,884 446,497 Due after five years through ten years 520,505 513,474 ------- ------- Total $ 1,150,739 $1,141,504 ============= ========== Because their likelihood of sale increased, securities with an amortized cost of $948,293 previously classified as held-to-maturity were transferred to the available-for-sale category. The fair value of such securities at the time of transfer was $948,099, creating an unrealized loss of $194. This reclassification was made as a result of the arrangement with the commercial insurance carrier (described in Note 1) to begin writing coverage for Trust members effective July 1, 1996. As a result of this arrangement, the Trust would not receive any premium income for an unknown period of time, creating less cash available for the payment of claims and other Trust expenses. In order to have sufficient cash to pay Trust expenses, it is possible that certain securities the trust planned to hold until maturity may have to be sold prior to their maturity. Consequently, these investments have been reclassified to the available-for-sale category. Only investments with a maturity of less than one year remain in the held-to-maturity category. This reclassification has been made as a result of an event that could not be anticipated in the previous year and that was isolated, non-recurring and unusual for the Trust in accordance with paragraph 8 of SFAS 115. There were no securities that were non-income producing for the year ended December 31, 1996. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 4: Reserve for Losses and Loss Adjustment Expenses Reserves for losses and loss adjustment expenses at December 31, 1996 and 1995 consisted of the following: 1996 1995 ---------- --------- Case-basis reserves $2,053,357 $2,383,549 Incurred but unreported claims 727,763 1,234,374 Service company fees 53,100 96,000 ---------- ---------- Total Reserves $2,834,220 $3,713,923 ========== ========== Included in case-basis reserves are amounts that are to be paid by a reinsurer. The amounts due from the reinsurer are $660,986 and $708,509 in 1996 and 1995 respectively. While the excess carrier has made all required payments through December 31, 1996, the Trust retains the ultimate liability for the payment of claims. Additionally, the reserves have been discounted using an average interest rate of 5.5% per annum and using the Trust's historical payout pattern combined with national payment trends. Note 5: Reserve for Premium Adjustment The premium amounts paid by members of the Trust are determined initially each policy year from member provided estimates of their annual payroll by worker classification code. The member is then subject to an audit of their payroll data to determine the accuracy of their estimate. Any necessary premium adjustments are made based on audited payroll information. For the period ended June 30, 1996, management elected to audit less than 100% of the Trust membership. Due to the limited number of audits performed, a reserve was established for premium adjustments that management estimates could be due in the event members who were not audited request such an audit. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 6: Minimum Lease Payments The Trust leases certain business equipment that are treated as capital leases in accordance with SFAS-13. Following are the present values of the minimum lease payments under these leases as of December 31, 1996 and 1995. 1996 1995 -------- ------ 1996 $6,095 1997 3,172 2,450 1998 1,208 1,174 ------ ------ $4,380 $9,719 ====== ====== Note 7: Excess Insurance The Trust acquired excess coverage insurance for accidents occurring during the period January 1, 1996 through June 30, 1996. The specific coverage limits the Trust's liability to $350,000 per claim incurred during this period. For claims incurred prior to January 31, 1992, the claim retention level was $200,000 with a maximum benefit of $10,000,000. Claims incurred from February 1, 1992 through July 31, 1992 have a retention level of $250,000 and a maximum benefit of $10,000,000. No claims are expected to exceed the maximum benefit. Although the excess carrier has made all required payments through December 31, 1996, the Trust retains the ultimate liability for the payment of claims. The premium paid by the Trust for excess insurance is based on the manual premium of the Trust. Such manual premium is estimated at the beginning of the year and a premium payment made based on a full year's estimated manual premium. However, since the Trust discontinued writing coverage effective July 1, 1996 the Trust was entitled to a refund of a portion of the annual premium it paid for excess insurance for 1996. Based on the 1996 manual premium of the Trust, an overpayment of $89,860 exists as of December 31, 1996. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 8: Income Taxes The Trust is a taxable entity subject to Internal Revenue Code Section 831 and related provisions. The provision for income tax for 1996 and 1995 from continuing operations consists of the following: 1996 1995 ---- ---- Current Income Tax Federal $ 81,142 $549,712 State 17,626 93,948 Deferred 0 0 -------- -------- TOTAL $ 98,768 $643,660 ======== ======== The effective income tax rates varied from the U.S. federal statutory rate for the years ended December 31 as follows: 1996 1995 ------- ----- Federal statutory income tax rate 34.0% 34.0% Unused net capital loss 65.6 3.6 Dividends received deduction (12.1) (2.0) Tax exempt interest (6.1) (1.9) State income taxes, net of federal benefit and other (18.5) (5.5) Effective income tax rate 62.9% 28.2% ==== ==== The Trust had capital loss carryforwards at December 31, 1996 and 1995 of $1,037,257 and $577,121 respectively. These loss carryforwards can only be utilized if the Trust experiences future capital gains from the sale of investments. The trust made changes to its investment policy in 1996, discontinuing the practice of acquiring financial instruments in anticipation of realizing capital gains on the sale of such investments. As a result of this change, it is unlikely that these loss carryforwards will be utilized. Consequently, no deferred tax benefit or related deferred tax asset has been recognized in the financial statements for the eventual use of such loss carryforwards. If not used against future capital gains, these capital loss carryforwards will expire beginning in 1999 and extending through 2001. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 Note 8: Income Taxes (continued) The components of the net deferred tax (asset) liability at December 31 were as follows: 1996 1995 ----------- -------- Deferred tax assets: Unrealized Loss on available-for-sale Securities $ 0 $ 43,331 Valuation allowance 0 0 -------- -------- Total deferred tax asset 0 $ 43,331 -------- -------- Deferred tax liabilities 0 0 -------- -------- Net deferred tax (asset) liability $ 0 $(43,331) ======== ======== The 1995 balance sheet of the Trust presents a deferred tax asset in the amount of $43,331. This amount reflects what management believed was a temporary unrealized decline in the market value of its securities available for sale. The amount reflects the future tax benefit the Trust would have received if such securities were sold at the market value at that date. This amount was also applied to the gross decline in market value of investments to arrive at the net unrealized depreciation of securities available-for-sale, net of deferred taxes. It was determined in 1996 that the possibility of the Trust being able to utilize the losses resulting from such a sale would be remote and therefore no deferred tax benefit was recorded at December 31, 1996. As described in Note 1, the Trust discontinued writing business effective July 1, 1996, reducing taxable income for 1996 significantly below 1995 levels. Estimated income tax payments for the first half of 1996 were based on Income Tax paid in 1995, consequently an overpayment was created. At December 31, 1996, the Trust was due a refund of $134,488 from the Internal Revenue Service and $18,374 from the State of Mississippi. Note 9: Notes Receivable At December 31, 1996 the balance sheet of the Trust reflects a note receivable of $20,000. Additionally, $407 of accrued interest due on this note is included in accrued interest receivable. This note is due on demand from Stoneville Insurance Company. Under the plan described in Note 1, Stoneville would be the successor of the Trust in its conversion to a stock insurance company. Note 9: Related Party Transactions (continued) DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Years Ended December 31, 1996 and 1995 The Trust maintained an arrangement with Delta Administration, Inc. (Formerly Delta Administration) whereby Delta Administration provides administration services to the Trust. Harry Vickery is the President of Delta Administration, Inc. and will also be the president of Stoneville Insurance Company, the planned successor to the Trust in its conversion to a stock insurance company. Delta Administration, Inc.'s fee for providing such services was based upon 1.5% of the manual premium of the Trust through June 30, 1996. Effective July 1, 1996, the fee was changed to $3,800 per month. The fee earned by Delta Administration, Inc. was $74,207 and $111,991 in 1996 and 1995, respectively. Delta Administration, Inc. is also compensated for their services by the commercial insurance carrier participating in the Commercial Program described in Note 1. The Trust engaged the services of Sedgwick of Mississippi to administer claims for the Trust. Sedgwick's fee was based upon 7.2% of the manual premium of the Trust through June 30, 1996. A portion of this fee was used to compensate the marketing agency of the Trust's insurance program, Mississippi Risk Management, Inc. The President of Mississippi Risk Management, Inc. will become an officer of Stoneville Insurance Company, the successor to the Trust under the Plan of Conversion described in Note 1. Note 10: Concentration of Credit Risk At December 31, 1996 the Trust had cash account balances in excess of the federally insured limit at its primary depository institution. At December 31, 1995 premiums receivable were due from various members of the Trust. Because only locations in Mississippi are eligible for coverage, the majority of the members conduct business exclusively in the state of Mississippi. Additionally, reinsurance receivables of $660,986 and $708,509 in 1996 and 1995 respectively, are due from one reinsurer. Note 11: Contingencies In the normal course of operations, the Trust is involved in litigation related to certain claims. In the opinion of management, the reserve for losses and loss adjustment expenses is sufficient to cover these claims. Therefore, it believes the disposition of these matters will not have a material adverse effect on the Trust's financial position.
Delta Agricultural and Industrial Trust Schedule I - Summary of Investments Other than Investments in Related Parties December 31, 1996 and 1995 Balance 1996 Sheet Type of Investment Cost Value Amount --------------------------------------------------------- Fixed maturities: Bonds: United States Government and government agencies and authorities $98,966 $98,022 $98,966 States, municipalities and political subdivisions 626,574 619,364 619,364 Certificates of deposit 948,084 946,058 946,058 ------------------------------------------------------------- Total fixed maturities 1,673,624 1,663,444 1,664,388 ------------------------------------------------------------- Equity securities: Common stocks: Industrial, miscellaneous and all other 1,696,944 1,696,944 1,696,944 ------------------------------------------------------------- Total investments $3,370,568 $3,360,388 $3,361,332 ============================================================= 1995 Fixed maturities: Bonds: United States Government and government agencies and authorities $94,829 $93,071 $94,829 States, municipalities and political subdivisions 178,420 178,676 178,420 Certificates of deposit 1,973,896 1,975,106 1,973,896 ------------------------------------------------------------- Total fixed maturities 2,247,145 2,246,853 2,247,145 ============================================================= Equity securities Common stocks: Industrial, miscellaneous and all other 2,580,183 2,469,692 2,469,692 ------------------------------------------------------------- Total investments $4,827,328 $4,716,545 $4,716,837 =============================================================
Delta Agricultural and Industrial Trust Schedule III - Supplementary Insurance Information December 31, 1996 and 1995 Deferred Future Policy Other Policy Benefits, Amortization Policy Benefits, Claims and Net Claims, loss of Deferred Other Acquistion Claims and Unearned Benefits Premium Investment and Settlem. Policy Operating Premiums Segment Costs Loss Exp. Premiums Payable Revenue Income Expenses Acq. Costs Expenses Written ------------------ ---------------------------------- ----------------------- ------------- ------------------------ 1996 See Note $0 $2,834,220 $0 $0 $1,987,491 $297,076 $1,215,914 $0 $479,507 $2,077,351 ------------------ ---------------------------------- ----------------------- ------------- ------------------------ 1995 See Note $0 $3,713,923 $1,466,279 $0 $5,323,952 $328,027 $3,075,054 $0 $469,082 $5,659,925 ------------------ ---------------------------------- ----------------------- ------------- ---------------------- Note: Delta Agricultural and Industrial Trust wrote only Workers' Compensation Insurance during 1995 and 1996. Therefore, there were no segments to report.
Delta Agricultural and Industrial Trust Schedule IV - Reinsurance December 31, 1996 and 1995 Percentage Ceded to Assumed of Amount Gross Other From Other Net Assumed to Amount Companies Companies Amount Net ------------------------------------------------------------------------------------- Premiums Property and Liability Insurance* 1996 $2,077,351 $89,860 $0 $1,987,491 0.00% ===================================================================================== 1995 $5,659,925 $335,973 $0 $5,323,952 0.00% ===================================================================================== * Workers' Compensation
Delta Agricultural and Industrial Trust Schedule V - Valuation and Qualifying Accounts December 31, 1996 and 1995 Additions --------------------------------------------- Balance Charged Charged Balance Beginning of to Costs to Other End of Description Period & Expense Accounts Deductions Period ----------------------- ------------------------------ -------------- ------------------------------ Allowance deducted from asset to which it applies: Allowance for doubtful accounts: Year ended December 31, 1995 (Note A) $97,332 - - $80,555 $16,777 Year ended December 31, 1996 (Note A) 16,777 - - 16,777 0 Allowance for Unrealized losses on securities available-for-sale Year ended December 31, 1995 (Note C) 158,987 - - 48,496 110,491 Year ended December 31, 1996 (Note B) 110,491 - - 101,255 9,236 Note A - Uncollected receivables written off net of recoveries. Note B - Loss recognized on securities sold or reclassified as "Trading Securities". Note C - Loss recognized on securities sold and write-up of marketable securities previously written down.
Delta Agricultural and Industrial Trust Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations December 31, 1996 and 1995 Claims and Claim Deferred Reserve for Adjustment Expenses Amortization Paid Claims Affiliation Policy Unpaid Claims Net Incurred Related to of Deferred and Claim ------------------ with Acquistion and Claim Unearned Earned Investment Current Prior Policy Acq. Adjustment Premiums Registrant Costs Adj. Expense Discount Premium Premiums Income Year Years Costs Expenses Written - ----------------------------------------------------------- ----------------------------------------------- ----------------------- 1996 Registrant $0 $2,834,220 $237,894 $0 $1,987,491 $297,076 $959,032 ($42,440) $0 $1,796,295 $2,077,351 -- ----------------------------------------- -------------------------------------------------------------- -------- 1995 Registrant $0 $3,713,923 $251,104 $1,466,279 $5,323,952 $328,027$2,558,087($109,365) $0 $2,583,968 $5,659,925 Note: Delta Agricultural and Industrial Trust has no subsidiaries.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Balance Sheets June 30, 1997 1997 1996 --------------- ---------------- Assets Investments: Trading securities (at fair value) Equity securities $247 $2,405,721 Securities available-for-sale (at fair value) Fixed maturities (amortized cost - $1,163,781 and $2,324,472) 1,157,084 2,293,551 Securities held-to-maturity (at amortized cost) Fixed Maturities (fair value - $586,816 and $195,053) 587,732 196,898 --------------- ---------------- Total Investments 1,745,063 4,896,170 Cash and Cash Equivalents 1,878,940 881,582 Premiums receivable net of uncollectible amount 0 41,445 Notes receivable 20,000 0 Accrued interest receivable 41,356 63,085 Reinsurance receivables, net of uncollectible amounts 660,986 660,986 Excess insurance premium overpayment 89,860 89,860 Other receivables 9,958 0 Capital equipment leases at cost less accumulated depreciation of $12,087 and $8,168 11,107 15,926 Prepaid expenses 24,665 21,636 Income taxes receivable 190,279 73,114 Deferred Tax Asset 40,489 0 Other assets 575 575 --------------- ---------------- Total Assets $4,713,278 $6,744,379 =============== ================ Liabilities and Trust Equity Liabilities Reserve for losses and loss adjustment expenses $1,954,341 $3,990,583 Unearned premiums 0 0 Reserve for premium adjustment 324,672 366,936 Accounts payable and accrued liabilities 46,408 4,883 Income taxes payable 0 0 Capital lease obligations 3,868 5,956 --------------- ---------------- Total Liabilities 2,329,289 4,368,358 --------------- ---------------- Trust Equity Retained earnings 2,390,686 2,406,942 Net unrealized loss on securities available for sale, net of deferred taxes (6,697) (30,921) --------------- ---------------- Total Trust Equity 2,383,989 2,376,021 --------------- ---------------- Total Liabilities and Trust Equity $4,713,278 $6,744,379 =============== ================
See accompanying notes and accountant's report.
DELTA AGRICULTURAL & INDUSTRIAL TRUST Statements of Revenue and Expenses For the Six Months Ended June 30, 1997 1997 1996 ----------------- ----------------- Revenue Premiums earned $0 $2,127,334 Premiums ceded 0 (89,860) ----------------- ----------------- Net premiums earned 0 2,037,474 Investment income 91,444 147,583 Net realized gains and losses on securities available-for-sale 0 983 Other (9,115) (286,085) ----------------- ----------------- Total Revenue 82,329 1,899,955 ----------------- ----------------- Expenses Loss and loss adjustment expenses 0 1,248,334 Service company fees 0 299,322 Regulatory fees 11,502 14,274 General expenses 183,760 241,455 ----------------- ----------------- Total Expenses 195,262 1,803,385 ----------------- ----------------- Excess Revenue over Expenses Before Income Tax Provision (112,933) 96,570 Provision (benefit) for income taxes (all current) (40,489) 122,516 ----------------- ----------------- Excess Revenue over Expenses ($72,444) ($25,946) ================= =================
See accompanying notes and accountant's report
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Changes in Trust Equity For the Six Months Ended June 30, 1997 1997 1996 ----------------- ----------------- Trust Equity - Beginning of Year $2,453,894 $2,365,728 Excess Revenue over Expenses (72,444) (25,946) Change in net unrealized loss on securities available for sale net of change in deferred taxes 2,539 36,239 ----------------- ----------------- Trust Equity - End of Period $2,383,989 $2,376,021 ================= =================
See accompanying notes and accountant's report.
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Cash Flows For the Six Months Ended June 30, 1997 1997 1996 ------------------ ------------------- Cash Flows From Operating Activities Premiums collected $0 $1,956,640 Losses and loss adjustment expenses paid (879,879) (971,674) Refunds and premium adjustments paid (60,241) 0 Administrative expenses paid (208,011) (847,156) Income taxes paid (37,417) (589,678) Investment income received 105,953 167,011 Net (increase) decrease in trading securities 1,680,339 (49,168) Interest paid 0 (634) ------------------ ------------------- Net Cash Provided by Operating Activities 600,744 (334,659) ------------------ ------------------- Cash Flows From Investing Activities Proceeds from sales of available-for-sale securities 0 619,545 Purchase of available-for-sale securities 0 (1,054,025) Purchases of held-to-maturity securities (589,285) (100,000) Transfer of held-to-maturity security to cash equivalent 507,686 515,000 Capital expenditures 0 (1,553) ------------------ ------------------- Net Cash Provided by Investing Activities (81,599) (21,033) ------------------ ------------------- Cash Flows From Financing Activities Principal payments under capital lease obligations (170) (3,024) ------------------ ------------------- Net Cash Used in Financing Activities (170) (3,024) ------------------ ------------------- Net Increase (Decrease) in Cash and Cash Equivalents 518,975 (358,716) Cash and Cash Equivalents at Beginning of Year 1,359,965 1,240,298 ------------------ ------------------- Cash and Cash Equivalents at End of Period $1,878,940 $881,582 ================== =================== Continued
See accompanying notes and accountant's report
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Statements of Cash Flows (Continued) For the Six Months Ended June 30, 1997 1997 1996 ----------------------------------------------- Reconciliation of net income to net cash provided by Operating Activities Net Income ($72,444) ($25,946) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,919 2,409 (Gain) or loss on sale of investments 0 (983) Decrease (increase) in trading securities 1,696,697 (49,168) Unrealized loss on trading securities 0 286,085 Decrease in premiums receivable 0 1,295,585 Decrease (increase) in prepaid expenses (2,867) (19,014) Decrease (increase) in accrued interest receivable 11,054 27,651 Increase in notes and other receivables (9,958) 0 Amortization of bond premium (discount) 2,201 8,382 Decrease (increase) in reserve for in unpaid loss (gain) and loss (879,879) 276,660 adjustment expenses Increase (decrease) in unearned premiums 0 (1,466,279) Decrease in accounts payable and accrued expenses (9,882) (202,879) Increase (decrease) in premium adjustment reserve (60,191) 0 Decrease in income tax liability (77,906) (467,162) ----------------------------------------------- Net cash provided by operating activities $600,744 ($334,659) ===============================================
See accompanying notes and accountant's report. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 1: Description and Operation of the Trust The Delta Agricultural and Industrial Trust was formed under a Trust Agreement, dated August 1, 1991, between the Delta Council, a Mississippi nonprofit corporation and the Board of Trustees of Delta Agricultural and Industrial Trust. The Trust, which is an entity subject to Federal and Mississippi Income Tax, was created to take advantage of Section 71-3-75 (3) of the Mississippi Code of 1972, as amended, which allows employers to form a pool for the purpose of self-insuring their liabilities under the Mississippi Workers' Compensation Law, versus purchasing insurance coverage from a commercial insurance company. The primary purpose of the Trust has been to provide its members with a source of consistent Workers Compensation insurance coverage at reasonable rates, regardless of the cyclical swings of the commercial insurance market. As a result of forming the Trust, members have the benefit of self-insurance while at the same time spreading the risk of self insurance among a group of employers. While the purpose of the Trust is to provide workers compensation coverage to its members on a consistent basis at a reasonable price rather than the generation of profits, the Trustees of the Trust recognize the importance of operating in such a manner that will yield positive operating results. The Trustees believe that as long as the trust operates in a profitable manner, its ability to service the members of the Trust remains strong. Each member's contribution of funds to the Trust is computed similarly to the method employed by commercial insurance companies in determining premium rates. However, should the Trust be unable to sufficiently discharge all of its obligations, it would assess the members amounts needed to make up the deficiency. While the Trust has never assessed any of its members as a result of a deficiency, the members of the Trust are jointly and severally liable for the obligations of the Trust. Due to changes in the Mississippi workers compensation market in early 1996, the Trust determined that the interests of its members would best be served by entering into an arrangement with a commercial insurance company whereby the Trust would discontinue writing coverage for its members effective July 1, 1996 and would encourage its members to move their workers' compensation insurance to the commercial carrier. Consequently the Trust has had no premium revenue since June 30, 1996. The Trust, or any successor to the Trust may, at its discretion, begin writing workers compensation for its members again at anytime. In conjunction with the transfer of the Trust's insurance operation to a commercial carrier, management of the Trust began the process of forming a stock insurance company with the objective of allowing members of the Trust to become shareholders in the stock company. Under the plan, electing members would receive stock in the new DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 1: Description and Operation of the Trust (continued) company with a book value equivalent to the book value in the Trust at the date of conversion. The Plan also provides for the elimination of the joint and several liability of its members. As of the balance sheet date, this process was not complete. The financial statements include all adjustments which in the opinion of management are necessary to make the financial statements not misleading. Note 2: Summary of Significant Accounting Policies The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. The Significant accounting policies used to prepare the financial statements are summarized below: Trading Securities Bonds, notes, common stocks and mutual fund shares held principally for resale in the near term are classified as trading account securities and recorded at their fair values. Realized and unrealized gains and losses on trading account securities are included in other income. Securities Held-to-Maturity Bonds, notes and certificates of deposit (with maturities of more than three months) for which the Trust has the intent and ability to hold to maturity are reported at amortized cost, adjusted for amortization of premiums or discounts and other than temporary declines in fair value. Securities Available-for-Sale Bonds, notes, common stock and certificates of deposit (with maturities of more than three months) not classified as either trading or held-to-maturity are reported at fair value, adjusted for other than temporary declines in fair value, with unrealized gains and losses excluded from losses and reported as a separate component of trust equity. Realized gains and losses are determined on the specific identification method. Cash Equivalents For the purpose of presentation in the Trust's statements of cash flows, cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash and (b) so near to maturity that they present DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 2: Summary of Significant Accounting Policies (continued) insignificant risk of changes in value due to changing interest rates. Premium Revenue Recognition Insurance premiums are recognized as revenue on a pro rata basis over the policy term. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums. In determining premium rates, the Trust begins with rates established by NCCI (National Council of Commissioners of Insurance), determined by a prescribed worker classification code. The Trust then applies an experience modifier that may either increase, decrease or make no change to the NCCI rate based on an individual employer's claims history. To this modified rate, the Trust then applies a self-insured discount rate of fifteen percent (15%). After calculating the self-insured modified premium, a Premium volume discount, as specified by NCCI, is applied based on the premium level of the insured to arrive at the total discounted premium amount. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. Amounts due from reinsurers are shown as reinsurance receivables, net of uncollectible amounts on the balance sheets. Liabilities for losses and loss adjustment expenses are not reduced by the amounts receivable from reinsurers. Amounts ceded to reinsurers are shown as a reduction of earned premium on the statements of revenue. Capital Equipment Leases Certain assets of the Trust were acquired under capital lease arrangements. Such assets are recorded at their original cost and depreciated under the straight-line method over the estimated useful lives of the respective assets. Depreciation expense is included in "General Expenses". Policy Acquisition Costs Since the Trust has not had any insurance contracts in force since June 30, 1996, as a result of the commercial program described in Note 1, no unamortized policy acquisition costs existed at June 30, 1997. Additionally, during 1996, insured's were billed quarterly for premiums. Consequently, there were also no unamortized policy acquisition costs as DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 2: Summary of Significant Accounting Policies (continued) of June 30, 1996. Insurance Liabilities The liability for losses and loss-adjustment expenses includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed and any adjustments are reflected in earnings currently. Income Taxes Income tax provisions are based on the asset and liability method. A deferred tax asset or liability is provided for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Note 3: Investments Major categories of net investment income are summarized as follows: 1997 1996 ------------ -------- Fixed Maturities $ 81,980 $ 97,279 Equity Securities 0 40,036 Short-term Investments 9,464 10,268 -------- -------- Total $ 91,444 $147,583 ======== ======== The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses, and amortized cost for available-for-sale and held-to-maturity securities by major security type at June 30, 1997 and 1996 are as follows: DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 3: Investments (continued)
Available-for-Sale Securities as of June 30, 1997 and 1996 June 30, 1997 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value Bank certificates of deposit $ 538,019 $ 606 $ 2,663 $ 535,962 Obligations of states and political subdivisions 625,762 558 5,198 621,122 ---------- ---------- ---------- ---------- Total $1,163,781 $ 1,164 $ 7,861 $1,157,084 ========== ========== ========== ==========
June 30, 1996 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value Bank certificates of deposit $ 1,697,086 $ 10,910 $ 13,028 $ 1,685,148 Obligations of states and political subdivisions 627,386 0 18,983 608,403 ------------ --------------- ------------- ------------- Total $ 2,324,472 $ 1,090 $ 32,011 $ 2,293,551 =========== ============ ============ ===========
Held-to-Maturity Securities as of June 30, 1997 and 1996 June 30, 1997 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value Obligations of the U.S. Government Corporations and Agencies $ 587,732 $ 0 $ 916 $ 586,816 ----------- ----------------- --------------- ----------- Total $ 587,732 $ 0 $ 916 $ 586,816 =========== ================= =============== ===========
DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 3: Investments (continued) June 30, 1996 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of the U.S. Government $ 96,898 $ 0 $ 1,845 $ 95,053 Bank certificates of deposit 100,000 0 0 100,000 -------- -------- -------- -------- Total $196,898 $ 0 $ 1,845 $195,053 ======== ======== ======== ========
Gross realized gains and losses on sales of available-for-sale securities were: 1997 1996 --------- ------- Gross realized gains: Fixed maturities $ 0 $ 2,253 ---------- --------- Total $ 0 $ 2,253 ========== ========= Gross realized losses: Fixed maturities $ 0 $ 1,270 ---------- --------- Total $ 0 $ 1,270 ========== ========= The Trust also realized net losses in trading securities in 1996 and 1995 in the amounts of $9,114 and $43,019 respectively. Trading security gains and losses are included in "Other Income". Additionally, $243,067 of unrealized losses on trading securities were included in "Other Income" for period ending June 30, 1996. The scheduled maturities of available-for-sale and held-to-maturity securities at June 30, 1997 were as follows: DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 3: Investments (continued) Held-to-Maturity Securities Amortized Cost Fair Value Due in one to five years $201,967 $ 201,540 Due after ten years 385,765 $ 385,276 --------- --------- Total $ 587,732 $ 586,816 ========= ========= Available-for-Sale Securities: Amortized Cost Fair Value Due in one year or less $ 448,446 $ 448,695 Due after one year through five years 195,325 193,511 Due after five years through ten years 520,010 514,878 ---------- ---------- Total $1,163,781 $1,157,084 ========== ========== There were no securities that were non-income producing for the twelve months prior to June 30, 1997. Note 4: Reserve for Losses and Loss Adjustment Expenses Reserves for losses and loss adjustment expenses at June 30, 1997 and 1996 consisted of the following: 1997 1996 ---------- --------- Case-basis reserves $1,805,603 $2,660,209 Incurred but unreported claims 95,639 1,234,374 Service company fees 53,100 96,000 ---------- ---------- Total Reserves $1,954,341 $3,990,583 ========== ========== Included in case-basis reserves are amounts that are to be paid by a reinsurer. The amounts due from the reinsurer are $660,986 in 1997 and 1996. While the excess carrier has made all required payments through June 30, 1997, the Trust retains the ultimate liability for the payment of claims. Additionally, the reserves have been discounted using an average interest rate of 5.5% per annum and using the Trust's historical payout pattern combined with national payment trends. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 5: Reserve for Premium Adjustment The premium amounts paid by members of the Trust are determined initially each policy year from member provided estimates of their annual payroll by worker classification code. The member is then subject to an audit of their payroll data to determine the accuracy of their estimate. Any necessary premium adjustments are made based on audited payroll information. For the period ended June 30, 1996, management elected to audit less than 100% of the Trust membership. Due to the limited number of audits performed, a reserve was established for premium adjustments that management estimates could be due in the event members who were not audited request such an audit. Note 6: Minimum Lease Payments The Trust leases certain business equipment that are treated as capital leases in accordance with SFAS-13. Following are the present values of the minimum lease payments under these leases as of June 30, 1997 and 1996. 1997 1996 -------- ------ 1996 $2,332 1997 $2,660 2,450 1998 1,208 1,174 -------- ------- $ 3,868 $5,956 ======== ====== Note 7: Excess Insurance The Trust acquired excess coverage insurance for accidents occurring during the period January 1, 1996 through June 30, 1996. The specific coverage limits the Trust's liability to $350,000 per claim incurred during this period. The reserve for losses and loss adjustment expenses is shown net of expected recoveries on this coverage. For claims incurred prior to January 31, 1992, the claim retention level was $200,000 with a maximum benefit of $10,000,000. Claims incurred from February 1, 1992 through July 31, 1992 have a retention level of $250,000 and a maximum benefit of $10,000,000. No claims are expected to exceed the maximum benefit. Although the excess carrier has made all required payments through June 30, 1997, the Trust retains the ultimate liability for the payment of claims. DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 7: Excess Insurance (continued) The premium paid by the Trust for excess insurance is based on the manual premium of the Trust. Such manual premium is estimated at the beginning of the year and a premium payment made based on a full year's estimated manual premium. However, since the Trust discontinued writing coverage effective July 1, 1996 the Trust was entitled to a refund of a portion of the annual premium it paid for excess insurance for 1996. Based on the 1996 manual premium of the Trust, an overpayment of $89,860 exists as of June 30, 1997 and June 30, 1996. Note 8: Income Taxes The Trust is a taxable entity subject to Internal Revenue Code Section 831 and related provisions. The provision for income tax for 1997 and 1996 from continuing operations consists of the following: 1997 1996 ---- ---- Current Income Tax Provision (Benefit) Federal $(34,896) $107,000 State (5,593) 15,513 -------- -------- TOTAL $(40,489) $122,516 ======== ======== The effective income tax rates varied from the U.S. Federal Statutory Rate for the years ended December 31 as follows: 1997 1996 -------- ------ Federal Statutory Income Tax Rate 34.0% 34.0% Unused net capital loss 2.7 100.3 Dividends received deduction, Tax exempt interest, and other (5.8) (23.5) ----- ---- Effective income tax rate 30.90% 110.8% ====== ======= The Trust had capital loss carryforwards at December 31, 1996 and 1995 of $1,037,257 and $577,121 respectively. These loss carryforwards can only be utilized if the Trust experiences future capital gains from the sale of investments. The Trust made changes to its investment policy in 1996, discontinuing the practice of acquiring financial instruments in anticipation of realizing capital gains on the sale of such investments. As a result of this change, it is unlikely that these loss DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 8: Income Taxes (continued) carryforwards will be utilized. Consequently, no deferred tax benefit or related deferred tax asset has been recognized in the financial statements for the eventual use of such loss carryforwards. If not used against future capital gains, these capital loss carryforwards will expire beginning in 1999 and extending through 2001. The components of the net deferred tax (asset) liability at June 30 were as follows: 1997 1996 -------- ------- Deferred tax assets: $40,489 $ 0 Net Operating loss carryback 0 0 ------- ------- Total deferred tax asset 40,489 0 ------- ------- Deferred tax liabilities 0 0 ------- ------- Net deferred tax (asset) liability $40,489 $ 0 ======= ======= The Trust had certain unrealized losses on securities available-for-sale which ordinarily would create a deferred tax asset, the benefit from which would be realized upon the sale of such securities. It was determined in 1996; however, that the possibility of the Trust being able to utilize the losses resulting from such a sale would be remote and therefore no deferred tax benefit was recorded as of the balance sheet dates. Note 9: Related Party Transactions At June 30, 1997 the balance sheet of the Trust reflects a note receivable of $20,000. Additionally, $995 of accrued interest due on this note is included in accrued interest receivable. This note is due on demand from Stoneville Insurance Company. Under the plan described in Note 1, Stoneville would be the successor of the Trust in its conversion to a stock insurance company. The Trust maintained a arrangement with Delta Administration, Inc. (Formerly Delta Administration) whereby Delta Administration provides administration services to the Trust. Harry Vickery is the President of Delta Administration, Inc., and will also be the President of Stoneville Insurance Company, the planned successor to the Trust in its conversion to a stock insurance company. Delta Administration, Inc.'s fee for providing such services was based upon 1.5% of the manual premium of the Trust through June 30, 1996. Effective July 1, 1996, the fee was changed to $3,800 per month. The fee earned by Delta Administration, Inc. through June 30 was $51,407 DELTA AGRICULTURAL AND INDUSTRIAL TRUST Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 9: Related Party Transactions (continued) and $22,800 in 1997 and 1996 respectively. Delta Administration, Inc., is also compensated for their services by the commercial insurance carrier participating in the Commercial Program described in Note 1. The Trust engaged the services of Sedgwick of Mississippi to administer claims for the Trust. Sedgwick's fee was based upon 7.2% of the manual premium of the Trust through June 30, 1996. A portion of this fee was used to compensate the marketing agency of the Trust's insurance program, Mississippi Risk Management, Inc. The President of Mississippi Risk Management, Inc. Will become an officer of Stoneville Insurance Company, the successor to the Trust under the Plan of Conversion described in Note 1. Note 10: Concentration of Credit Risk At June 30, 1996 premiums receivable were due from various members of the Trust. Because only locations in Mississippi are eligible for coverage, the majority of the members conduct business exclusively in the state of Mississippi. Additionally, reinsurance receivables of $660,986 in 1997 and 1996 respectively, are due from one reinsurer. Note 11: Contingencies In the normal course of operations, the Trust is involved in litigation related to certain claims. In the opinion of management, the reserve for losses and loss adjustment expenses is sufficient to cover these claims. Therefore, it believes the disposition of these matters will not have a material adverse effect on the Trust's financial position. STONEVILLE INSURANCE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 RICHARD L. EATON CERTIFIED PUBLIC ACCOUNTANT (A PROFESSIONAL CORPORATION) POST OFFICE BOX 16603 JACKSON, MISSISSIPPI 39236 ____________ TELEPHONE: (601) 956-9751 FAX: (601) 956-7415 MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS MISSISSIPPI SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Stoneville Insurance Company Jackson, Mississippi I have audited the accompanying balance sheet of Stoneville Insurance Company as of December 31, 1996 and the related statements of income, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements present fairly, in all material respects, the financial position of Stoneville Insurance Company as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Richard L. Eaton Richard L. Eaton Jackson, Mississippi March 6, 1997 STONEVILLE INSURANCE COMPANY Balance Sheet December 31, 1996 Assets Cash in Bank $ 19,970 -------- Total Assets $ 19,970 ======== Liabilities Notes Payable $ 20,000 Accrued Interest Payable 407 -------- Total Liabilities 20,407 ======== Stockholders' Equity Common Stock 0 Retained Earnings (437) -------- Total Stockholders' Equity (437) -------- Total Liabilities and Stockholders' Equity $ 19,970 ======== See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY Statement of Income For the Year Ending December 31, 1996 Revenue $ 0 ----- Expenses Bank Charges 30 Interest Expense 407 ----- Total Expenses 437 ----- Net Income ($437) ===== See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY Statement of Changes in Stockholders' Equity For the Year Ended December 31, 1996 Total Common Retained Stockholders' Stock Earnings Equity ------------------------------------- Balance at Beginning of Year $ 0 $ 0 $ 0 Net Income (Loss) 0 437 $437 ------------------------------------- Balance at End of Year $ 0 $437 $437 ===================================== See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY Statement of Cash Flows For the Year Ended December 31, 1996 Cash Flows From Operating Activities Bank charges paid ($30) -------------------- Net Cash Provided by Operating Activities (30) -------------------- Cash Flows From Financing Activities Loan proceeds 20,000 -------------------- Net Cash Provided by Financing Activities 20,000 -------------------- Net Increase (Decrease) in Cash and Cash Equivalents 19,970 Cash and Cash Equivalents at Beginning of Year 0 -------------------- Cash and Cash Equivalents at End of Year $19,970 ==================== Reconciliation of Net Income to Cash Flows Provided by Operating Activities Net income ($437) Increase in accrued interest payable 407 -------------------- Net Cash Provided by Operating Activities ($30) ==================== See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY Notes to Financial Statements For the Year Ended December 31, 1996 Note 1: Description and Operation of the Company Stoneville Insurance Company (The Company) is a developmental stage insurance company formed in August, 1996 to become the successor to the Delta Agricultural and Industrial Trust, (The Trust), a Mississippi self-funded workers compensation insurance trust. The Trust has been in operation since August, 1991 providing workers compensation insurance coverage initially to agricultural and industrial concerns in the Mississippi Delta region, and later to numerous industries throughout Mississippi. The Trust was an alternative to the high cost of insurance acquired through the Mississippi assigned risk pool or through commercial carriers. Each member's contribution of funds to the Trust was computed similarly to the method employed by commercial insurance companies in determining premium rates. However, if the Trust was unable to sufficiently discharge all of its obligations, it would assess members the amount needed to make up any deficiency. The insureds of the Trust are jointly and severally liable for the obligations of the Trust. Due to changes in the Mississippi workers compensation market in early 1996, the Trust determined that the interests of its members would best be served by converting into a Mississippi domestic insurance company in which the members of the Trust could become shareholders. The Trust entered into an arrangement with a commercial insurance company whereby the Trust discontinued writing coverage for its members effective July 1, 1996 and encouraged its members to move their workers' compensation insurance to the recommended commercial carrier. The Trust or any successor to the Trust has the right to reinsure as much of the business transferred to the commercial carrier as they deem appropriate. The Trust began the process of forming a stock insurance company (Stoneville Insurance Company) with the objective of allowing the members of the Trust to become shareholders in the stock company. Under the plan, qualifying insureds of the Trust would receive stock in the new company with a book value equivalent to the book value in the Trust at the date of conversion and all remaining assets and liabilities of Trust would be transferred to Stoneville Insurance Company. The plan also provides for the elimination of the joint and several liability of the Trust's insureds. Although Stoneville has been formed, the conversion process had not been completed. Upon completion of the conversion process, the Company is expected to be licensed by the Mississippi Department of Insurance. STONEVILLE INSURANCE COMPANY Notes to Financial Statements For the Year Ended December 31, 1996 Other than the opening of a checking account with funds borrowed from the Trust, the Company had no activity during 1996. Note 2: Summary of Significant Accounting Policies The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. No significant accounting policies are described due to the absence of activity. Note 3: Notes Payable At December 31, 1996 the balance sheet of the Company reflects a note payable of $20,000. This is a demand note due to the Trust that provides for interest at the applicable federal rate. Accrued and unpaid interest at December 31, 1996 amount to $407. This note would be eliminated upon the completion of the plan of conversion described in Note 1. STONEVILLE INSURANCE COMPANY FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 STONEVILLE INSURANCE COMPANY Balance Sheet June 30, 1997 Assets Cash in Bank $19,970 ----------------- Total Assets $19,970 ================= Liabilities Notes Payable $20,000 Accrued Interest Payable 995 ----------------- Total Liabilities 20,995 ----------------- Stockholders' Equity Common Stock 0 Retained Earnings (1,025) ----------------- Total Stockholders' Equity (1,025) ----------------- Total Liabilities and Stockholders' Equity $19,970 ================= See accompanying notes and accountant's report. STONEVILLE INSURANCE COMPANY Statement of Income For the Six Months Ended June 30, 1997 Revenue $0 ----------------- Expenses Interest Expense 588 ----------------- Total Expenses 588 ----------------- Net Income ($588) ================= See accompanying notes and accountant's report. STONEVILLE INSURANCE COMPANY Statement of Changes in Stockholders' Equity For the Six Months Ended June 30, 1997 Total Common Retained Stockholders' Stock Earnings Equity ------------- -------------------------------- Balance at Beginning of Year $0 ($437) ($437) Net Income (Loss) 0 (588) ($588) ------------- ----------------------------- Balance at End of Period $0 ($1,025) ($1,025) ============= ============================= See accompanying notes and accountant's report. STONEVILLE INSURANCE COMPANY Statement of Cash Flows For the Six Months Ended June 30, 1997 Cash Flows From Operating Activities $0 ----------------- Net Cash Provided by Operating Activities 0 ----------------- Cash Flows From Financing Activities 0 ----------------- Net Cash Provided by Financing Activities 0 ----------------- Net Increase (Decrease) in Cash and Cash Equivalents 0 Cash and Cash Equivalents at Beginning of Year 19,970 ----------------- Cash and Cash Equivalents at End of Year $19,970 ================= Reconciliation of Net Income to Cash Flows Provided by Operating Activities Net income ($588) Increase in accrued interest payable 588 ----------------- Net Cash Provided by Operating Activities $0 ================= See accompanying notes and accountant's report. STONEVILLE INSURANCE COMPANY Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 1: Description and Operation of the Company Stoneville Insurance Company (The Company) is a developmental stage insurance company formed in August, 1996 to become the successor to the Delta Agricultural and Industrial Trust, (The Trust), a Mississippi self-funded workers compensation insurance trust. The Trust has been in operation since August, 1991 providing workers compensation insurance coverage initially to agricultural and industrial concerns in the Mississippi Delta region, and later to numerous industries throughout Mississippi. The Trust was an alternative to the high cost of insurance acquired through the Mississippi assigned risk pool or through commercial carriers. Each member's contribution of funds to the Trust was computed similarly to the method employed by commercial insurance companies in determining premium rates. However, if the Trust was unable to sufficiently discharge all of its obligations, it would assess members the amount needed to make up any deficiency. The members of the Trust are jointly and severally liable for the obligations of the Trust. Due to changes in the Mississippi workers compensation market in early 1996, the Trust determined that the interests of its members would best be served by entering into an arrangement with a commercial insurance company whereby the Trust discontinued writing coverage for its members effective July 1, 1996 and encouraged its members to move their workers' compensation insurance to the recommended commercial carrier. The Trust or any successor to the Trust has the right to reinsure as much of the business transferred to the commercial carrier as they deem appropriate. In conjunction with the transfer of the Trust's insurance operation to a commercial carrier, management of the trust began the process of forming a stock insurance company (Stoneville Insurance Company) with the objective of allowing the members of the Trust to become shareholders in the stock company. Under the plan, electing members would receive stock in the new company with a book value equivalent to the book value in the Trust at the date of conversion and all remaining assets and liabilities of Trust would be transferred to Stoneville Insurance Company. The Plan also provides for the elimination of the joint and several liability of its members. Although Stoneville has been formed, the conversion process had not been completed. Upon completion of the conversion process, the Company is expected to be licensed by the Mississippi Department of Insurance. The Company was inactive during the first six months of 1997. 30 STONEVILLE INSURANCE COMPANY Notes to Financial Statements For the Six Months Ended June 30, 1997 Note 1: Description and Operation of the Company (continued) The interim statements include all adjustments which in the opinion of management are necessary in order to make the financial statements not misleading. Note 2: Summary of Significant Accounting Policies The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. No significant accounting policies are described due to the absence of activity. Note 3: Notes Payable At June 30, 1997 the balance sheet of the Company reflects a note payable of $20,000. This is a demand note due to the Trust described in Note 1 that provides for interest at the applicable federal rate. Accrued and unpaid interest at June 30, 1997 amounts to $995. This note would be eliminated upon the completion of the plan of conversion described in Note 1. 31 EXHIBIT A PLAN AND AGREEMENT OF REORGANIZATION AND CONVERSION OF DELTA AGRICULTURAL AND INDUSTRIAL TRUST As Amended Effective September 11, 1997 This Plan and Agreement of Reorganization and Conversion (the "Conversion Agreement") is made and entered into as of this 11th day of September, 1997, by and between Delta Agricultural and Industrial Trust, a Mississippi workers' compensation self insured trust (the "Trust") and Stoneville Insurance Company ("Stoneville"). 1. Definitions a. "Board" means the board of directors of Stoneville. b. "Commercial Program" means the Trust's program of commercial insurance written through TIG Insurance Company which commenced on July 1, 1996. c. "Continental" means Continental Casualty Company, an Illinois stock insurance company. d. "Dissenters" means those Former Members who dissent from the Plan and who have perfected their dissenters' rights as set forth herein. e. "Former Members" means those Persons who at any time have had workers' compensation insurance provided by the Trust for one or more full Positive Income Fund Years. f. "Person" means any individual, corporation, partnership, joint venture, association or other form of organization. g. "Plan" means this Plan and Agreement of Reorganization and Conversion of the Trust. h. "Positive Income Fund Year" means a complete accounting year of the Trust which resulted in positive net income for the Trust. A list of Positive Income Fund Years is set forth on Schedule A attached hereto. i. "Proportionate Earned Premium" means the percentage derived by dividing (a) the net earned premium derived by the Trust from a Former Member for each Positive Income Fund Year during which the Trust derived a net earned premium for the full Positive Income Fund Year from such Former Member by (b) the total of all such net earned premiums of the Trust. j. "Registration Statement" means the registration statement for certain shares of Stoneville stock to be filed with the Securities and Exchange Commission on Form S-4. k. "Reinsurance Agreement" means that certain Assumption Reinsurance Agreement by and among the Trust, Stoneville, and Continental. l. "Stoneville" means Stoneville Insurance Company, a Mississippi stock insurance company. m. "Trust" means Delta Agricultural and Industrial Trust, a Mississippi workers' compensation self insured trust. n. "Trustees" shall mean the board of Trustees of the Trust. o. "Trust Unit" means each Four Dollars ($4.00) of equity of the Trust. 2. Effective Date. The Trust shall begin taking the actions as set forth herein as of the date hereof. The effective date of the Plan shall be, and the capitalization of Stoneville and the liquidation and dissolution of the Trust (Sections 5, 7 and 8) shall be deemed to have occurred simultaneously and completely as of the close of business on the last day of the month during which the conditions precedent as set forth in Section 11 hereof have been satisfied (the "Effective Date"). 3. Certificate of Authority. On or prior to the Effective Date, the Trust will surrender its Certificate of Authority to serve as a workers' compensation self insurance trust to the Mississippi Workers' Compensation Commission. 4. Reserve for Expenses. On or prior to the Effective Date, all known or ascertainable liabilities of the Trust shall be promptly paid or provided for. There shall also be set aside, in cash, securities, or other assets, a reserve fund in an amount up to One Hundred Fifty Thousand Dollars ($150,000) for the payment of estimated expenses, taxes and payment of Dissenters. 5. Capitalization of Stoneville. As of the Effective Date, the Trust will transfer to Stoneville all of the assets of the Trust other than amounts required to consummate the Reinsurance Agreement and the reserve for expenses as set forth in Section 4 hereof in return for that number of shares of capital stock of Stoneville equal to the Trust equity transferred by the Trust to Stoneville measured by Four Dollars ($4.00) of Trust equity (one Trust Unit) per share of Stoneville common stock less the amount Stoneville is required to pay dissenters, which shall be all the issued and outstanding shares of stock of Stoneville. 6. Dissenter's Rights. Members and Former Members may dissent from the Plan and receive Four Dollars ($4.00) in cash for each Trust Unit allocable to such Persons upon perfection of dissenters' rights pertaining to such Trust Units allocable to such Persons. Payments to Dissenters shall be paid by the Trust in an amount (to be determined as of the Effective Date) which will satisfy certain published Internal Revenue Service Guidelines so as not to cause the transaction described in the Plan to lose its characterization as a tax free transaction as to the Trust, the Company and those Former Members who receive Stock of the Company. Any excess over such amount shall be paid to Dissenters by Stoneville (contemporaneously with the payments made to Dissenters from funds of the Trust) out of operating funds or from the proceeds of a loan that Stoneville will obtain for that purpose and not out of assets transferred to Stoneville from the Trust pursuant to the Plan. In order to perfect dissenters' rights, a Former Member wishing to dissent must deliver to the Trust's office at 633 North State Street, Suite 200, Jackson, Mississippi 39202-7817 written notice of such Former Member's intent to demand payment within thirty (30) days after the effective date of Stoneville's Registration Statement. 7. Computation and Payment of Liquidating Distribution. For purposes of computing the number of shares of Stoneville common stock (or in the case of Dissenters, cash) distributable from the Trust to each Former Member, each Former Member of the Trust will have allocated to it a number of Trust Units determined by multiplying the total number of Trust Units by the Proportionate Earned Premium of each Former Member. Upon liquidation of the Trust, each Former Member shall thereupon receive one share of Stoneville common stock for each Trust Unit allocable to such Former Member, except Dissenters, who shall receive Four Dollars ($4.00) in cash for each Trust Unit allocable to such Dissenter in accordance with Section 6 above (collectively, the "Liquidating Distribution"). The Liquidating Distribution shall be disbursed to Former Members as of the Effective Date. 8. Dissolution. As of the Effective Date, following the Liquidating Distribution as set forth in Section 7, the Trust shall be dissolved and shall furnish notice of such dissolution to the Mississippi Workers' Compensation Commission and take any other such action as the Trustees shall deem necessary or appropriate including the completion of distribution of any remaining funds subsequent to dissolution. 9. Distribution of Remaining Funds. At such time as the Trustees of the Trust (as dissolved) may determine that all liabilities of the Trust have been paid or provided for and there is no need for the reserve fund established pursuant to Section 4 above, the Trustees of the Trust (as dissolved) shall transfer any amounts remaining in such fund to Stoneville as an additional contribution to capital. 10. Termination. This Plan may be terminated and abandoned (i) at any time by vote of the Trustees or the Board; or (ii) if all conditions precedent as set forth in Section 11 have not been satisfied or waived by December 31, 1997. 11. Conditions Precedent. The Plan shall not become effective until all the following conditions have been satisfied: (i) the Reinsurance Agreement is in effect; (ii) receipt of a favorable opinion from Watkins Ludlam & Stennis, P.A. to the effect that the consummation of the Plan will be treated, for federal income tax purposes, as a tax free transaction as to the Trust, the Company, and to those Former Members who receive Stock of the Company; and (iii) dissenters' rights shall not have been perfected by holders of more than twenty percent (20%) of Trust Units. 12. Dissemination of Share Certificates and Payment of Dissenters. Each Person who was insured by the Trust at any time will be sent an assumption certificate (the "Assumption Certificate") pursuant to the Reinsurance Agreement. Each Former Member must sign and return the Assumption Certificate to the Trust at which time the Former Member shall receive such Person's liquidating Distribution. 13. Governing Law. This Plan shall be governed and construed in accordance with the laws of Mississippi. IN WITNESS WHEREOF, the parties have executed this Plan as of the day and year set forth above. TRUST: STONEVILLE: DELTA AGRICULTURAL AND STONEVILLE INSURANCE COMPANY INDUSTRIAL TRUST By:/s/ Harry E. Vickery By:/s/ Harry E. Vickery Name/Title: Harry E. Vickery, Name/Title: Harry E. Vickery, Administrator President SCHEDULE A LIST OF POSITIVE INCOME FUND YEARS The following years resulted in positive net income for the Trust: August 1, 1992- July 31, 1993 August 1, 1993- December 31, 1994 January 1, 1995- December 31, 1995 January 1, 1996- December 31, 1996 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following exhibits and financial statement schedules are furnished as a part of this Registration Statement: Exhibit Number Description 2.1 Plan and Agreement of Reorganization and Conversion of the Trust as amended September 11, 1997, included as part of Exhibit A to the Prospectus contained herein 8 Opinion of Watkins Ludlam & Stennis, P.A. regarding tax matters 10.5 Amendment Number One dated September 5, 1997 to Assumption Reinsurance Agreeement between the Trust, Continental, and the Company 23.1 Revised consent of Richard L. Eaton, CPA, independent accountant, with respect to the consolidated financial statements of of the Trust and the Company 27.1 Revised Financial Data Schedule of Stoneville Insurance Company 27.2 Revised Financial Data Schedule of Delta Agricultural and Industrial Trust The following financial statements and financial statement schedules are included in the Prospectus: Financial Statements: Delta Agricultural and Industrial Trust Financial Statements for the Years ended December 31, 1996 and 1995 Report of Independent Auditor Balance Sheets as of December 31, 1996 and 1995 Statements of Revenues and Expenses for Years Ended December 31, 1996 and 1995 Statements of Changes in Trust Equity for Years Ended December 31, 1996 and 1995 Statements of Cash Flows for Years Ended December 31, 1996 and 1995 Notes to Financial Statements Delta Agricultural and Industrial Trust Compiled Financial Statements for the Six Months Ended June 30, 1997 and 1996 Report of Independent Auditor Balance Sheets as of June 30, 1997 and 1996 Statements of Revenues and Expenses for Six Months Ended June 30, 1997 and 1996 Statements of Changes in Trust Equity for Six Months Ended June 30, 1997 and 1996 Statements of Cash Flows for Six Months Ended June 30, 1997 and 1996 Notes to Financial Statements Stoneville Insurance Company Financial Statements for the Years Ended December 31, 1996 and 1995 Report of Independent Auditor Balance Sheet as of December 31, 1996 Statement of Income for Year Ending December 31, 1996 Statement of Changes in Stockholders' Equity for Year Ended December 31, 1996 Statement of Cash Flows for Year Ended December 31, 1996 Notes to Financial Statements Stoneville Insurance Company Compiled Financial Statements for the Six Months Ended June 30, 1997 and 1996 Report of Independent Auditor Balance Sheet as of June 30, 1997 Statement of Income for the Six Months Ending June 30, 1997 Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 1997 Statement of Cash Flows for the Six Months Ended June 30, 1997 Notes to Financial Statements Financial Statement Schedules: Trust Schedules Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule III - Supplementary Insurance Information Scehdule IV - Reinsurance Schedule V - Valuation and Qualifying Accounts Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations All other schedules are omitted because they are not applicable to the Trust under Regulation S-X or because the required information is included in the Financial Statements or the notes thereto. Company Schedules All schedules are omitted because they are not applicable to the Company under Regulation S-X. ITEM 22. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3, Form S-8 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of Regulation S-X at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of Regulation S-X if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment Number 4 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jackson, State of Mississippi on this the 12th day of September, 1997. STONEVILLE INSURANCE COMPANY BY: /s/ Harry E. Vickery Harry E. Vickery President Pursuant to the requirements of the Securities Act of 1933, this Amendment Number 4 to the Registration Statement has been signed by the following persons in the capacities and on the date indicated. NAME TITLE DATE /s/ William L. Kennedy * Chairman of the Board September 12, 1997 - --------------------------- William L. Kennedy and Director (Chief Executive Officer) /s/ Harry E. Vickery President and Director, September 12, 1997 Harry E. Vickery Principal Financial Officer, Principal Accounting Officer /s/ David R. White * Secretary, Treasurer, September 12, 1997 - --------------------------- David R. White Vice President, Director *By: /s/ Harry E. Vickery Harry E. Vickery, Attorney in Fact, pursuant to the power of attorney issued on April 1, 1997 EX-8 2 WLS OPINION REGARDING TAX MATTERS September 12, 1997 Board of Directors Board of Trustees Stoneville Insurance Company Delta Agricultural and Industial Trust 633 North State Street, Suite 200 833 Washington Avenue Jackson, Mississippi 39202 Greenville, Mississippi 38704-5037 Re: The Federal Income Tax Consequences of Certain Matters Arising Under the Corporate Reorganization Provisions of the Internal Revenue Code of 1986, as amended. Gentlemen: We have acted as special counsel to Delta Agricultural and Industrial Trust, a Mississippi workers' compensation self insurance trust (the "Trust"), and Stoneville Insurance Company, a Mississippi corporation (the "Company"), in connection with certain federal income tax matters relating to the transactions described in the Plan and Agreement of Reorganization and Conversion of Delta Agricultural and Industrial Trust (the "Plan"), dated as of March 20, 1997, and as subsequently amended on September 11, 1997. This opinion is furnished to you pursuant to Section 11(ii) of the Plan. Except as otherwise defined herein, all capitalized terms herein have the meanings set forth in the Plan. In connection with this opinion, we have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of the Form S-4 Registration Statement filed by the Company with the Securities and Exchange Commission relating to the Company stock to be issued in connection with the Conversion as hereinafter defined (the "Registration Statement"), the Plan and such other documents as we have deemed necessary or appropriate in order to enable us to render the opinion below. In our examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the Board of Directors Stoneville Insurance Company Board of Trustees Delta Agricultural and Industrial Trust September12, 1997 Page 2 authenticity of all documents submitted to us as originals, the conformity to original documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such copies. In rendering the opinion set forth below, we have relied upon certain written representations and covenants of the parties to the Plan set forth in the Certificates which are attached hereto as Exhibits "A" and "B." In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, pertinent judicial authorities, interpretive rulings of the Internal Revenue Service (the "Service") and such other authorities as we have considered relevant. I. DESCRIPTION OF PROPOSED PLAN OF REORGANIZATION AND CONVERSION The proposed Conversion (as hereinafter defined) will be structured in accordance with the Plan, the laws of the State of Mississippi, the statements and representations of the parties to the transaction, and the following descriptions: 1. On the Effective Date, the following events shall be deemed to have occurred simultaneously. (a) The Trust will transfer substantially all of its assets, less an amount sufficient to pay the Trust's remaining costs and expenses, including amounts required to consummate the Reinsurance Agreement and amounts due to dissenters, to the Company in exchange for Company Stock. After this exchange, the Trust will own all the issued and outstanding shares of stock of the Company. (b) The Trust will distribute to Former Members perfecting dissenters' rights, if any, four dollars ($4.00) in cash in redemption of each Trust Unit held by such Former Members up to an aggregate amount payable to all Former Members perfecting dissenters' rights not to exceed an amount to be determined which will satisfy certain published Service safe harbor guidelines for meeting the requirements for tax-free reorganization treatment (the "Safe Harbor Amount"). (c) The Trust will be liquidated and will distribute to Former Members all the Company Stock on an even exchange basis of one (1) full or fractional share of Company Stock for each full or fractional Trust Unit allocable to such Former Member at December 31, 1996, except for those Trust Units with respect to which rights of dissent Board of Directors Stoneville Insurance Company Board of Trustees Delta Agricultural and Industrial Trust September12, 1997 Page 3 have been exercised. (The steps described in (a) through (c) of this subsection 1. are hereinafter collectively referred to as the "Conversion.") (d) In the event that Former Members as a group perfect dissenters' rights (see 2. below) resulting in an obligation to redeem Trust Units with a value in excess of the Safe Harbor Amount, the excess amount due will be paid to such Former Members by the Company. Such payments, if any, paid by the Company to such Former Members perfecting dissenters rights shall be paid from operating funds of the Company or from a loan obtained by the Company for such purpose and not out of assets transferred to the Company from the Trust pursuant to the Plan. 2. Former Members of the Trust may dissent from the Plan upon perfection of dissenters' rights. If Former Members holding more than twenty percent (20%) of the Trust Units perfect dissenters' rights, the Plan will not become effective and the Conversion will not occur. 3. Subsequent to the liquidation of the Trust, any amounts remaining with the Trust which were not needed to pay expenses or dissenters, if any, shall be contributed to the Company as an additional contribution to capital. 4. After the Conversion, the Former Members of the Trust, with the exception of those perfecting dissenters' rights, will be the shareholders (and own all of the issued and outstanding stock) of the Company. 5. After the Conversion, the Company will continue the historical business of the Trust in a substantially unchanged manner, or use a significant portion of the Trust's historic assets in a business. II. DISCUSSION OF APPLICABLE REORGANIZATION PROVISIONS The parties intend that the Conversion will satisfy the requirements for nonrecognition (i.e., treatment as a tax free reorganization) under section 368(a)(1)(D) of the Code. This Code section describes a non-divisive or acquisitive Type "D" reorganization under which the transferor corporation (the Trust here, which is treated as a corporation for federal income tax purposes) transfers substantially all of its assets to a controlled corporation (the Company here), the stock of which the transferor corporation distributes to its shareholders in pursuance to the Board of Directors Stoneville Insurance Company Board of Trustees Delta Agricultural and Industrial Trust September12, 1997 Page 4 plan of reorganization. The Code describes a Type "D" reoganization involving the transfer of assets to a controlled corporation as follows: 1. A transfer by a corporation, of all or part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer) or any combination thereof, is in control of the corporation to which the assets are transferred /1; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354/2 ... or 356, and 2. In effect, a complete liquidation of the transferor corporation occurs. (Although Code section 354(b) does not explicitly require a complete liquidation of the transferor, the requisite distribution of all of the transferor's properties will have the effect of a complete liquidation.) In addition to the requirements under the Code which have been generally described above, nonrecognition for the Conversion is subject to several other nonstatutory rules that have been established through case law and Treasury Regulations. These requirements involve continuity of proprietary interest, continuity of business enterprise, and the existence of a valid business purpose for the transaction. The judicially developed step transaction doctrine, wherein a series of formally separate steps are considered together as component parts of an overall plan, must also be considered when evaluating whether a transaction, in substance, qualifies as a valid reorganization under Code section 368(a)(1)(D). - -------- 1/The determination of whether a corporation is "controlled" for this purpose is made using the 50% ownership test (by value or voting) of section 304(c) as the "control" threshold, as mandated by Code section 368(a)(2)(H). 2/Code section 354 shall not apply to an exchange in pursuance to a Type "D" reorganization unless (1) the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and (2) the stock or other property received by the transferor corporation, as well as the other properties of such transferor, are distributed under the plan of reorganization, as mandated by Code section 354(b)(1). Board of Directors Stoneville Insurance Company Board of Trustees Delta Agricultural and Industrial Trust September12, 1997 Page 5 III. OPINION In reliance upon the foregoing facts and representations of the parties to the Conversion transactions, and based upon our review of such documents and consideration of such legal matters as we have deemed relevant and sufficient to enable us to render an informed opinion, we are of the opinion that the federal income tax consequences of the proposed Conversion will be as follows: 1. The acquisition by the Company of substantially all of the assets of the Trust in exchange for Company Stock and the liquidation of the Trust and distribution of the Company Stock to the Former Members will constitute a reorganization within the meaning of Code section 368(a)(1)(D). For purposes of this opinion, "substantially all" means at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair maket value of the gross assets of the Trust held immediately prior to the reorganization and Conversion (Rev. Proc. 77-37, 1977-2 C.B. 568, 569 section 3.01). The Trust and the Company will each be "a party to a reorganization" within the meaning of section 368(b) of the Code. 2. No gain or loss will be recognized by the Trust upon the transfer of substantially all of its assets to the Company in exchange for the Company Stock (all of which will be distributed to the Former Members) (Code section 361(a)). 3. No gain or loss will be recognized by the Company on the receipt by the Company of substantially all of the assets of the Trust in exchange for the Company Stock (Code section 1032(a)). 4. No gain or loss will be recognized by the Former Members on the receipt of Company Stock solely in exchange for their Trust Units (Code section 354(a)(1)). 5. Where a dissenting Former Member receives solely cash in exchange for all of his or her Trust Units, such cash will be treated as having been received by the Former Member as a distribution in redemption of his or her Trust Units subject to the provisions and limitations of Code section 302. 6. The basis of the Company Stock to be received by a Former Member will be the same as the Former Member's basis in the Trust Units allocable to such Former Member (Code section 358(a)(1)). Board of Directors Stoneville Insurance Company Board of Trustees Delta Agricultural and Industrial Trust September12, 1997 Page 6 7. The holding period of the Company Stock received by the Former Members will include, in each instance, the period during which the Former Members held an interest in the equity of the Trust as determined under the Plan, provided such Trust equity constituted a capital asset on the date of the exchange (Code section 1223(1)). 8. The basis of the assets of the Trust in the hands of the Company will be the same as the basis of those assets in the hands of the Trust immediately prior to the transfer (Code section 362(b)). 9. The holding period of the assets of the Trust in the hands of the Company will include the period during which such assets were held by the Trust (Code section 1223(2)). We have qualified our opinions by reference to the Code, the Treasury Regulations promulgated thereunder, and existing judicial and administrative interpretations thereof. In so opining, we have relied upon the foregoing facts and representations and have reviewed such documents and have considered such legal matters as we have deemed relevant and sufficient to enable us to render an informed opinion. While we have not been requested nor have we undertaken to make independent investigations to verify the representations and statements described above or set forth in the Certificates attached as Exhibits "A" and "B," based upon our discussions with representatives of the parties and our limited review of certain background material, we believe that it is reasonable for us to rely on such representations and statements. Our opinion is limited to the specific opinions expressed above, and no other opinions are intended nor should they be inferred. An opinion of counsel has no binding effect upon the Service and no assurances can be given that the conclusions reached in any opinion will not be contested by the Service, or if contested, will be sustained by a court. The opinions we have expressed above are based on the facts and representations outlined herein being correct in all material respects as of the dates indicated or at the time of the proposed transactions as the case may be. In the event that one or more of the facts or representations are incorrect for any such time, our opinion would likely be substantially different than that expressed above. The opinion expressed herein is for the sole benefit of the Trust and the Company, together with the Former Members for their use in connection with the proposed Plan of Reorganization and Conversion, and is not to be used, delivered to or relied upon by any other party for any other purpose, and may not be circulated, quoted, or otherwise referred to for any other purpose without our prior written consent. Board of Directors Stoneville Insurance Company Board of Trustees Delta Agricultural and Industrial Trust September12, 1997 Page 7 We consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" and other such locations as it may appear in the Prospectus comprising Part I of the Registration Statement. Very truly yours, /s/ Watkins Ludlam & Stennis, P.A. WATKINS LUDLAM & STENNIS, P.A. EXHIBIT A CERTIFICATE OF DELTA AGRICULTURAL AND INDUSTRIAL TRUST RELATING TO SECTION 368 OPINION ON THE PLAN OF REORGANIZATION AND CONVERSION This Certificate has been requested by the law firm of Watkins Ludlam & Stennis, P.A. in connection with the rendering of its opinion as to certain federal income tax consequences relating to the conversion (the "Conversion") of Delta Agricultural and Industrial Trust (the "Trust") into Stoneville Insurance Company (the "Company") as such transaction is described in that certain Plan and Agreement of Reorganization and Conversion of Delta Agricultural and Industrial Trust dated as of March 20, 1997, and as subsequently amended on September 11, 1997 (the "Plan"). Watkins Ludlam & Stennis, P. A. will rely on the representations stated hereinafter, as well as on other facts, assumptions, and representations described in its opinion letter dated September 12, 1997 (the "WL&S Tax Opinion") in opining on the federal income tax issues stated therein. Accordingly, this Certificate is an integral part of the WL&S Tax Opinion. Unless otherwise noted, all defined or capitalized terms used in this Certificate have the same meaning ascribed to such terms in the Plan or in the WL&S Tax Opinion. The following representations are being made in connection with the Conversion: 1. The Trust is classified and treated as a corporation for federal income tax purposes. 2. The Trust will distribute the Company Stock it receives in the Conversion in pursuance of the Plan. 3. The fair market value of the Company Stock and other consideration received by each Former Member will be approximately equal to the fair market value of the Trust Units surrendered in the exchange. 4. There is no plan or intention by the Former Members who own one percent (1%) or more of the Trust Units, and to the best of the knowledge of the management of the Trust, there is no plan or intention on the part of the remaining Former Members to sell, exchange, or otherwise dispose of a number of shares of Company Stock received in the Conversion that would reduce the Former Members' ownership of Company Stock to a number of shares having a value, as of the date of the Conversion, of less than fifty percent (50%) of the value of all of the formerly outstanding Trust Units of the Trust as of the same date. For purposes of this representation, the Trust Units exchanged for cash or other property or surrendered by dissenters will be treated as outstanding Trust Units on the date of the Conversion. Moreover, Trust Units and Company Stock held by Former Members and otherwise sold, redeemed, or disposed of prior or subsequent to the Conversion will be considered in making this representation. 5. The Company will acquire at least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by the Trust immediately prior to the Conversion. For purposes of this representation, amounts paid by the Trust to dissenters, amounts paid by the Trust to Former Members who receive cash or other property, amounts used by the Trust to pay its reorganization expenses, and all redemptions and distributions (except for regular, Exhibit "A" to Tax Opinion normal dividends) made by the Trust immediately preceding the transfer will be included as assets of the Trust held immediately prior to the Conversion. 6. After the transaction, the Former Members of the Trust will own at least eighty percent (80%) of the total combined voting power of all classes of stock of the Company entitled to vote, or at least eighty percent (80%) of the total value of shares of all classes of stock of the Company. 7. The liabilities of the Trust assumed by the Company, if any, plus the liabilities, if any, to which the transferred assets are subject were incurred by the Trust in the ordinary course of its business and are associated with the assets transferred. 8. The Trust, the Company and the Former Members will pay their respective expenses, if any, incurred in connection with the Conversion. 9. There is no intercorporate indebtedness existing between the Trust and the Company that was issued, acquired, or will be settled at a discount. 10. The Trust is not an investment company as defined in Code section 368 (a)(2)(F)(iii) and (iv). 11. The fair market value of the assets of the Trust transferred to the Company will equal or exceed the sum of the liabilities assumed by the Company, if any, plus the amount of liabilities, if any, to which the transferred assets are subject. 12. The total adjusted basis of the assets of the Trust transferred to the Company will equal or exceed the sum of the liabilities to be assumed by the Company, if any, plus the amount of liabilities, if any, to which the transferred assets are subject. 13. The Trust is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Code section 368(a)(3)(A). The Trust hereby certifies that the officer of the Trust executing this Certificate has knowledge of the pertinent information set forth herein and that he has examined the foregoing representations and, to the best of such officer's knowledge and belief, the representations made are true, complete and correct as of the date, September 12, 1997, of this Certificate, and he further certifies that he is duly authorized and empowered to execute and deliver this Certificate. DELTA AGRICULTURAL AND INDUSTRIAL TRUST By: ____________________________________________ Title:___________________________________________ 9 CERTIFICATE OF STONEVILLE INSURANCE COMPANY RELATING TO SECTION 368 OPINION ON THE PLAN OF REORGANIZATION AND CONVERSION This Certificate has been requested by the law firm of Watkins Ludlam & Stennis, P.A. in connection with the rendering of its opinion as to certain federal income tax consequences relating to the conversion (the "Conversion") of Delta Agricultural and Industrial Trust (the "Trust") into Stoneville Insurance Company (the "Company") as such transaction is described in that certain Plan and Agreement of Reorganization and Conversion of Delta Agricultural and Industrial Trust dated as of March 20, 1997, and as subsequently amended on September 11, 1997 (the "Plan"). Watkins Ludlam & Stennis, P.A. will rely on the representations stated hereinafter, as well as on other facts, assumptions, and representations described in its opinion letter dated September 12, 1997 (the "WL&S Tax Opinion") in opining on the federal income tax issues stated therein. Accordingly, this Certificate is an integral part of the WL&S Tax Opinion. Unless otherwise noted, all defined or capitalized terms used in this Certificate have the same meaning ascribed to such terms in the Plan or in the WL&S Tax Opinion. The following representations are being made in connection with the Conversion: 1. The Company does not own, directly or indirectly, nor has it owned during the past five years, directly or indirectly, any equity of the Trust. 2. The fair market value of the Company Stock and other consideration received by each Former Member will be approximately equal to the fair market value of the Trust Units surrendered in the exchange. 3. There is no plan or intention by the Former Members who own one percent (1%) or more of the Trust Units, and to the best of the knowledge of the management of the Company, there is no plan or intention on the part of the remaining Former Members to sell, exchange, or otherwise dispose of a number of shares of Company Stock received in the transaction that would reduce the Former Members' ownership of Company Stock to a number of shares having a value, as of the date of the Conversion, of less than fifty percent (50%) of the value of all of the formerly outstanding Trust Units of the Trust as of the same date. For purposes of this representation, the Trust Units exchanged for cash or other property, or surrendered by dissenters will be treated as outstanding Trust Units on the date of the Conversion. Moreover, Trust Units and Company Stock held by Former Members and otherwise sold, redeemed, or disposed of prior or subsequent to the Conversion will be considered in making this representation. 4. The Company will acquire at least ninety percent (90%) of the fair market value of the net assets and at least seventy percent (70%) of the fair market value of the gross assets held by the Trust immediately prior to the Conversion. For purposes of this representation, amounts paid by the Trust to dissenters, amounts paid by the Trust to Former Members who receive cash or other property, amounts used by the Trust to pay its reorganization expenses, and all redemptions and distributions (except for regular, Exhibit "B" to Tax Opinion normal dividends) made by the Trust immediately preceding the transfer will be included as assets of the Trust held immediately prior to the Conversion. 5. After the transaction, the Former Members of the Trust will own at least eighty percent (80%) of the total combined voting power of all classes of stock of the Company entitled to vote, or at least eighty percent (80%) of the total value of shares of all classes of stock of the Company. 6. The Company has no plan or intention to reacquire any of its stock issued in the Conversion. 7. The Company has no plan or intention to sell or otherwise dispose of any of the assets of the Trust acquired in the Conversion, except for dispositions made in the ordinary course of business. 8. The liabilities of the Trust assumed by the Company, if any, plus the liabilities, if any, to which the transferred assets are subject were incurred by the Trust in the ordinary course of its business and are associated with the assets transferred. 9. Following the Conversion, the Company will continue the historic business of the Trust or use a significant portion of the Trust's historic business assets in a business. 10. At the time of the Conversion, the Company will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire Company Stock that, if exercised or converted, would affect the Former Members' acquisition or retention of at least eighty percent (80%) of the total combined voting power of all classes of stock of the Company entitled to vote, or at least eighty percent (80%) of the total value of shares of all classes of stock of the Company. 11. The Company, the Trust, and the Former Members will pay their respective expenses, if any, incurred in connection with the Conversion. 12. There is no intercorporate indebtedness existing between the Trust and the Company that was issued, acquired, or will be settled at a discount. 13. The Company is not an investment company as defined in Code section 368(a)(2)(F)(iii)and (iv). 14. The fair market value of the assets of the Trust transferred to the Company will equal or exceed the sum of the liabilities assumed by the Company, if any, plus the amount of liabilities, if any, to which the transferred assets are subject. 15. The Company is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Code section 368(a)(3)(A). 16. There will be no cash paid by the Company to Former Members in lieu of fractional 11 interests of Trust Units exchanged in the Conversion. 17. Any cash payments (in excess of the Safe Harbor Amount) to Former Members who dissent to the Conversion shall be paid (a) from future operating funds or earnings of the Company, or (b) from a loan to be obtained by the Company for the purpose of making such payments to dissenters, and not out of assets transferred to the Company from the Trust pursuant to the Plan. In addition, in the event a loan is obtained for this purpose, the Company intends to pay the debt service from its future operating funds or earnings and not out of assets transferred from the Trust. The Company hereby certifies that the officer of the Company executing this Certificate has knowledge of the pertinent information set forth herein and that he has examined the foregoing representations and, to the best of such officer's knowledge and belief, the representations made are true, complete and correct as of the date, September 12, 1997, of this Certificate, and he further certifies that he is duly authorized and empowered to execute and deliver this Certificate. STONEVILLE INSURANCE COMPANY By:_____________________________________ Title:___________________________________ EX-10.5 3 AMENDMENT ONE TO ASSUMPTION REINSURANCE AGREEMENT AMENDMENT NUMBER ONE TO ASSUMPTION REINSURANCE AGREEMENT This Amendment Number One to Assumption Reinsurance Agreement (the "Amendment") is made and entered into as of the 5th day of September, 1997 by and between Delta Agricultural and Industrial Trust, a Mississippi workers' compensation self insured trust (the "Trust"); Stoneville Insurance Company, a Mississippi stock insurance company ("Stoneville"); and Continental Casualty Company, an Illinois stock insurance company ("Continental"). WHEREAS, the Trust, Stoneville and Continental entered into that certain Assumption Reinsurance Agreement (the "Agreement") as of March 20, 1997, for the purposes as set forth therein, and WHEREAS, the parties have determined that it is in their mutual best interest to amend the Agreement to remove the requirement for Stoneville to provide Additional Collateral (as defined in the Agreement) to Continental as well as to amend the Agreement as further set forth herein. NOW, THEREFORE, in consideration of the foregoing premises and the covenants, provisions and agreements set forth herein, the parties agree as follows: 1. Section 1.3 is amended in its entirety to provide as follows: "Continental Expense" means the sum of Two Hundred Fifty Thousand Dollars ($250,000) which the Trust shall pay the Continental as a part of the Premium. 2. Section 1.5 is amended in its entirety to provide as follows: "Effective Date" means 12:01 a.m., Central Standard Time, September 5, 1997. This Agreement shall become effective only upon the satisfaction of the conditions precedent as set forth in Article 9 hereof. 3. Section 1.13 is amended in its entirety to provide as follows: "Reserves" means as of the date hereof the sum of One Million Six Hundred Twenty-Five Thousand ($1,625,000), less Claims amounts paid between the Effective Date and the date of the relevant transfer of Reserves from the Trust to Continental or from Continental to the Trust or Stoneville as required or permitted by this Agreement, and subject to any other adjustments provided for in this Agreement. The Reserves shall consist of funds allocated specifically to Reported Claims as well as funds allocated to Unreported Claims. 4. Section 3.1 is amended in its entirety to provide as follows: Certificate. Within thirty (30) days after satisfaction of the conditions precedent as set forth in Article 9 hereof, the Trust shall issue and send by first-class mail an Assumption Certificate in the form as set forth on Exhibit D to each of the Trust's insureds as shown on the books and records of the Trust. 5. Section 4.1 of the Agreement is deleted in its entirety. 6. The parties agree that Stoneville shall not provide to Continental the Additional Collateral and all references to such Additional Collateral are hereby deleted from the Agreement including but not limited to Sections 4.2, 7.3, 8.3, and 9.1 as if such references had not been included in the Agreement. 7. Article 7 is amended in its entirety to provide as follows: 7.1. Reinsurance. Stoneville shall have the right to cause Continental to cede to Stoneville all of the Covered Obligations for the purpose of providing reinsurance to Continental pursuant to Stoneville Reinsurance. No consideration shall be paid or due to or from either Stoneville or Continental for Stoneville Reinsurance. 7.2. Notice of Reinsurance. Stoneville may exercise Stoneville Reinsurance on March 1, 1998, by providing written notice to Continental on or prior to such exercise date. If Stoneville exercises Stoneville Reinsurance, Continental and Stoneville shall enter into a Reinsurance Agreement in a form acceptable to Continental with such acceptability criteria to be based on customary industry practice and with such acceptance by Continental not to be unreasonably withheld. 7.3. Effect of Stoneville Reinsurance on Reserves. (a) Upon Stoneville Reinsurance Continental shall transfer to Stoneville the amounts of Reserves entered in the Experience Account. (b) Upon Stoneville Reinsurance, Stoneville agrees to fund a trust account with a financial institution acceptable to Continental and Stoneville with the amount of funds necessary for Continental to receive full financial statement credit for such reinsurance and with the terms and conditions of such trust to comply with the law of Continental's state of domicile such that Continental shall receive full financial statement credit for such reinsurance. 8. Article 8 is deleted in its entirety. 9. Unless specifically amended herein, all other terms and conditions of the Agreement remain in full force and in effect. Unless otherwise specifically stated herein, capitalized terms shall have the meanings assigned to them in the Agreement. The parties have duly executed this Amendment as of the day and year first above written. CONTINENTAL: TRUST: CONTINENTAL CASUALTY COMPANY DELTA AGRICULTURAL AND INDUSTRIAL TRUST By: By: Name/Title: Name/Title: STONEVILLE: STONEVILLE INSURANCE COMPANY By: Name/Title: EX-23.1 4 REVISED CONSENT OF RICHARD L. EATON, CPA EXHIBIT 23.1 CONSENT OF RICHARD L. EATON, CPA, INDEPENDENT ACCOUNTANT Independent Auditors' Consent The Board of Directors Stoneville Insurance Company We consent to the use of (i) our audit report dated January 29, 1997 on the financial statements of Delta Agricultural and Industrial Trust as of December 31, 1996 and 1995; and (ii) our audit report dated March 6, 1997 on the audited financial statements of Stoneville Insurance Company for the year ending December 31, 1996 in the Prospectus comprising Part I of the S-4 Registration Statement of Stoneville Insurance Company. We consent to the use of our name under the heading "Experts" and other such locations as it may appear in the Prospectus comprising Part I of the Registration Statement. RICHARD L. EATON, CPA /s/Richard L. Eaton, CPA Jackson, Mississippi September 12, 1997 EX-27.1 5 FDS STONE. INS. CO. 12/31/96 AND 6/30/97 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
7 YEAR 6-MOS DEC-31-1996 DEC-31-1997 DEC-31-1996 JUN-30-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 19,970 19,970 0 0 0 0 19,970 19,970 0 0 0 0 0 0 0 0 20,407 20,690 0 0 0 0 0 0 (437) (1,025) 19,970 19,970 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (437) (588) 0 0 (437) (588) 0 0 0 0 0 0 (437) (588) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-27.2 6 FDS DELTA A&I 12/31/96,12/31/95, 6/30/97 & 6/30/96
7 YEAR YEAR 6-MOS 6-MOS DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1995 JUN-30-1997 JUN-30-1996 1,141,504 0 1,157,084 2,293,551 522,884 2,247,145 587,732 196,898 521,940 2,246,853 586,816 195,053 1,696,944 2,469,692 247 2,405,721 0 0 0 0 0 0 0 0 3,361,332 4,716,837 1,745,063 4,896,170 1,359,965 1,240,298 1,878,940 881,582 0 0 0 0 0 0 0 0 5,733,305 8,156,720 4,713,278 6,744,379 2,834,220 3,713,923 1,954,341 3,990,583 0 1,466,279 0 0 0 0 0 0 384,863 0 324,672 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,453,894 2,365,728 2,383,989 2,376,021 5,733,305 8,156,720 4,713,278 6,744,379 1,987,491 5,323,952 0 2,037,474 297,076 328,027 91,444 147,583 (37,286) (159,557) 0 983 (422,850) 0 (9,115) (286,085) 1,215,914 3,075,054 0 1,547,656 0 0 0 0 28,548 30,858 11,502 14,274 129,010 1,948,286 (112,933) 96,570 98,768 643,660 (40,489) 122,516 30,242 1,304,626 (72,444) (25,946) 0 0 0 0 0 0 0 0 0 0 0 0 30,242 1,304,626 (72,444) (25,946) 0 0 0 0 0 0 0 0 3,713,923 3,849,169 2,834,220 3,713,923 959,032 2,558,087 0 746,795 (42,440) (109,365) 0 573,289 369,070 1,197,368 0 161,383 1,427,225 1,386,600 879,879 882,041 0 3,713,923 0 3,990,583 0 94,697 0 0
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