UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 333-24739 STONEVILLE INSURANCE COMPANY ----------------------------------------------------------------- (exact name of Registrant as specified in its charter) MISSISSIPPI 72-1341156 ----------------------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Identification of incorporation of organization) Number) 633 North State Street, Suite 200, Jackson, Mississippi 39202-7817 - -------------------------------------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code: (601) 352-7817 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act if 1934 during the preceding 12 months (or for such shorted period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( X ) NO ( ) Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 503,384 Common Shares were outstanding as of September 30, 1999 for financial statement purposes. Transitional Small Business Disclosure Format (check one): Yes [ ] No [x] PART I: FINANCIAL INFORMATION In addition to historical information, this report contains statements which constitute forward-looking statements and information which are based on management's beliefs, plans, expectations and assumptions and on information currently available to management. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," and similar expressions used in this report that do not relate to historical facts are intended to identify forward-looking statements. These statements appear in a number of places in this report, including, but not limited to, statements found in Item 2 "Management's Discussion and Analysis." In particular, future claims may be higher than anticipated and revenues for Stoneville Services Company may not meet expectations. All phases of the Company's operations are subject to a number of risks and uncertainties. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projects in the forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this report, including, without limitation, the portions referenced above, and the uncertainties set forth from time to time in the Company's other public reports and filings and public statements, many of which are beyond the control of the Company, and any of which, or a combination of which, could materially affect the results of the Company's operations and whether forward-looking statements made by the Company ultimately prove to be accurate. Item 1 - Stoneville Insurance Company and Subsidiary Consolidated Financial Statements Consolidated Balance Sheets September 30, 1999 and December 31, 1998 Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity For Periods Indicated Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 Notes to Financial Statements STONEVILLE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1999 and December 31, 1998 September 30 December 31, 1999 1998 ------------ ------------ Assets (Unaudited) Investments: Securities available-for-sale at fair value - amortized cost of $864,977 and $1,139,000 $868,750 $1,175,757 Short-term investments, at cost which approximates market 341,131 342,358 ------------ ------------ Total Investments 1,209,881 1,518,115 Cash and Cash Equivalents 930,829 1,222,322 Premiums and fees receivable 955,428 420,902 Accounts receivable 205,220 Accrued interest receivable 19,819 19,888 Refundable income taxes 38,283 68,618 Reinsurance recoverable 1,023,532 1,023,532 Equipment, net of accumulated depreciation of $43,274 and $27,000 124,486 84,598 Deferred tax assets 278,403 134,715 Other 203,152 9,912 ------------ ------------ Total Assets $4,989,033 $4,502,602 ============ ============ Liabilities Reserve for losses and loss adjustment expenses $1,773,892 $1,780,687 Unearned premiums 1,050,251 475,106 Accounts payable and accrued liabilities 467,322 323,415 Capital lease obligations 7,479 8,341 ------------ ------------ Total Liabilities 3,298,944 2,587,549 ------------ ------------ Shareholders' Equity Common stock ($1 par value; 10,000,000 shares authorized; 503,384 shares issued and outstanding) 503,384 503,384 Retained earnings 1,184,295 1,388,334 Accumulated other comprehensive income - Unrealized gains on securities available for sale, net of income taxes of $1,540 and $14,000 2,410 23,335 ------------ ------------ Total Shareholders' Equity 1,690,089 1,915,053 ------------ ------------ Total Liabilities and Shareholders' Equity $4,989,033 $4,502,602 ============ ============ See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 1999 and 1998 (Unaudited) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ------------------ ----------------- Revenues Net premiums earned (less ceded amount of approximately $151,926 and $304,700 in 1999 and $0 in 1998) $480,345 $210,672 $1,250,277 $350,544 Investment income 23,852 26,621 73,392 65,466 Gain on sale of securities 0 6,387 Administrative and management fees 342,117 131,017 911,332 143,722 Other 0 0 22,109 59,507 --------- -------- ---------- ------- Total Revenues 846,314 368,310 2,263,497 619,239 --------- -------- ---------- ------- Expenses Loss and loss adjustment expenses 378,348 39,032 1,038,415 118,072 Policy acquisition fees 57,673 14,747 119,021 24,538 Program administration fees 59,961 31,723 178,245 52,704 Regulatory fees 28,278 18,312 75,227 37,997 General expenses 414,218 256,991 1,187,975 534,393 --------- -------- ---------- ------- Total Expenses 938,478 360,805 2,598,883 767,704 --------- -------- ---------- ------- Income (loss) before Income Taxes (92,164) 7,505 (335,386)(148,465) Provision (benefit) for income taxes (34,823) 2,927 (131,347) (57,901) --------- -------- ---------- ------- Net Loss (57,341) 4,578 (204,039) (90,564) Other Comprehensive Income, net of income tax effect - Unrealized gain (loss) on investments in securities (2,337) 21,522 (16,925) 19,394 Reclassification of gains included in net income (4,000) --------- -------- ---------- ------- Comprehensive Loss (59,678) 26,100 (224,964) (71,170) ========= ======== ========== ======= Net Loss Per Share $(0.11) $0.01 $(0.41) $(0.18) ========= ======== ========== ======= See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity For Periods Indicated Accumulated Common Stock Other Total ----------------- Retained Comprehensive Shareholders' Shares Amount Earnings Income Equity -------------------------------------------------------------- Balance at January 1, 1998 503,384 $503,384 $1,484,870 $15,852 $2,004,106 1998 Net income (loss) (96,536) (96,536) Net increase in unrealized appreciation of securities available for sale 7,483 7,483 -------------------------------------------------------------- Balance at December 31, 1998 503,384 $503,384 $1,388,334 $23,335 $1,915,053 1999 Net income (loss) (204,039) (204,039) Net decrease in unrealized appreciation of securities available for sale (20,925) (20,925) -------------------------------------------------------------- Balance at September 30, 1999 (UNAUDITED) 503,384 $503,384 $1,184,295 $2,410 $1,690,089 ============================================================== See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1999 and 1998 (Unaudited) 1999 1998 ------------ ------------ Cash Flows From Operating Activities Premiums collected $1,013,468 $1,223,237 Administrative fees collected 778,707 Losses and loss adjustment expenses paid (729,989) (172,159) Administrative expenses paid (1,481,556) (571,316) Income tax refund received 31,351 166,943 Investment income received 76,212 74,617 Other income received 2,278 123,720 Interest paid (685) (401) ------------ ------------ Net Cash Provided by (used in) Operating Activities (310,214) 844,641 ------------ ------------ Cash Flows From Investing Activities Proceeds from sales of available-for-sale securities 478,104 45,097 Purchase of available-for-sale securities (246,394) (251,692) Capital expenditures (212,127) (65,037) ------------ ------------ Net Cash Provided by (used in) Investing Activities 19,583 (271,632) ------------ ------------ Cash Flows From Financing Activities Principal payments under capital lease obligations (862) (2,142) ------------ ------------ Net Cash Used in Financing Activities (862) (2,142) ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (291,493) 570,867 Cash and Cash Equivalents at Beginning of Period 1,222,322 425,493 ------------ ------------ Cash and Cash Equivalents at End of Period $930,829 $996,360 ============ ============ See accompanying notes to financial statements. STONEVILLE INSURANCE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements Quarters Ended September 30, 1999 and 1998 (Unaudited) 1. BASIS OF PRESENTATION These interim consolidated financial statements have been prepared in accordance with the instructions to Form 10Q and do not include all of the information and note disclosures required by generally accepted accounting principles and must be read in conjunction with the 1998 annual statement. The accompanying financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management, the accompanying interim unaudited financial statements contain all adjustments necessary to summarize fairly the statement of financial position and results of operations of the Company for the interim periods. 2. CONSOLIDATION OF SUBSIDIARIES In January, 1999, the Company formed Stoneville Service Company, Inc., a Mississippi corporation owned entirely by Stoneville Insurance Company. Stoneville Service Company, Inc. provides claims and risk control services primarily to Arkansas groups that are self-funded for workers' compensation purposes. In May, 1999, the Company acquired all of the outstanding stock of American Colonial Insurance Company, an Arkansas property and casualty insurance company. Immediately after the acquisition, the name was changed to Stoneville Insurance Company of Arkansas. The Company has begun to write small premium workers' compensation insurance in Arkansas and will reinsure other workers' compensation carriers on a limited risk basis. The Company also plans to provide claims administration and program management services for these insurance programs through its Arkansas subsidiary. The accompanying financial statements present the Company and its subsidiaries, Stoneville Service Company, Inc. and Stoneville Insurance Company of Arkansas, on a consolidated basis. All material inter-company profits, transactions and balances have been eliminated. 3. OPERATIONS OF THE COMPANY The Company was formed to become the successor to the Delta Agricultural and Industrial Trust, a Mississippi self-funded workers' compensation trust. The Company entered the workers' compensation market in the first quarter of 1998 as a reinsurer and began direct writing of workers' compensation insurance in the fourth quarter of 1998. In July, 1998, the Company began providing claims and risk control services as well as program management services to the insurance programs being reinsured by the Company. In January, 1999, the Company began providing claims and risk control services to Arkansas self-funded workers' compensation groups through its newly formed subsidiary, Stoneville Service Company, Inc. The Company also began duplicating its Mississippi workers' compensation programs in Arkansas through Stoneville Insurance Company of Arkansas in the third quarter of 1999. 4. ASSETS PLEDGED Of the $868,750 in securities available-for-sale, $500,000 is pledged as collateral for a letter of credit issued to an insurance carrier that the Company reinsures on a quota share basis. A claim may be made against the letter of credit if the ceding insurer is unable to pay claims from premiums collected by it. 5. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The reserve for losses and loss adjustment expenses ("LAE") is based upon case reserve reports received from ceding insurance companies and the company's own estimates. Loss and LAE reserves also include estimates of incurred but not reported losses based on past experience modified for current trends and estimates of expenses for investigating and settling claims. It is the company's policy not to discount such reserves. Management believes that the reserve for loss and LAE as of September 30, 1999 is adequate to cover ultimate gross cost of losses and LAE incurred through September 30, 1999. The reserve is based on estimates of losses and LAE incurred and, therefore, the amount ultimately paid may be more or less than such estimates. 6. EARNINGS (LOSS) PER SHARE Earnings (loss) per common share is based on net income or (loss) and the weighted average number of shares outstanding during each interim period. The number of shares used in computing earnings per share is 503,384 for the quarter ended September 30, 1999 and 1998. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition - September 30, 1999 Compared to December 31, 1998 Total shareholders' equity decreased by $224,964 or 11.7% from $1,915,053 at December 31, 1998 to $1,690,089 at September 30, 1999. This decrease was caused by a net loss from operations of $204,039 for the first nine months of 1999 and a decrease in unrealized gain on securities available-for- sale of $20,925. Total assets increased by $486,431 or 10.8% at September 30, 1999 compared to December 31, 1998. This increase is due primarily to an increase in premiums and fees receivable as a result of increased volume. Cash and investments decreased a total of $599,727 during the nine months ended September 30, 1999 due largely to the purchase of American Colonial Insurance Company and the formation of Stoneville Service Company, a wholly owned subsidiary of Stoneville Insurance Company, and the start-up costs associated with that operation. Total liabilities increased by $711,395 or 27.5% at September 30, 1999 compared to December 31, 1998. This increase was due partially to the receipt of certain quota share reinsurance agreement payments prior to the time such payments were earned. Additionally, with the increase in premium written and assumed in the first nine months of 1999, unearned premium increased by $575,145. Results of Operations - Quarter Ended September 30, 1999 Compared to Quarter Ended September 30,1998 The Company experienced a net loss of $57,341 during the third quarter of 1999 compared to net income of $4,578 during the third quarter of 1998. This loss is due primarily to the costs associated with the operation of Stoneville Service Company, a claims administration subsidiary which began operations in early 1999. Stoneville Service Company provides claims services to third party self-funded workers' compensation programs. The Company has recently acquired and continues to acquire additional customers which should significantly improve the net operating income of the Company. It is anticipated that this subsidiary will begin generating an operating profit during the second quarter of 2000. As a result of increased workers' compensation premium written and assumed, earned premium during the third quarter of 1999 was $480,345 compared to $210,672 in 1998. Losses and loss adjustment expenses were $378,348 during the third quarter of 1999 compared to $39,032 in the same period in 1998. Other expenses directly associated with the Company's insurance programs totaled $145,912 during the third quarter of 1999 compared to $64,782 in the third quarter of 1998. The increase in expenses directly related to insurance programs was due to increased business written in 1999. Investment income of the Company decreased from $26,621 in the third quarter of 1998 to $23,852 in the third quarter of 1999. This decrease is a result of having less cash available for investment in the third quarter of 1999 compared to 1998 due to increased claims and administrative expense payments during the period. General expenses increased from $256,991 in the third quarter of 1998 to $414,218 in 1999. This increase is due primarily to expenses in the claims administration operation which did not exist during the third quarter of 1998. The Company recorded an income tax benefit for the quarter ended September 30, 1999 in the amount of $34,823 compared to a tax provision for the same quarter in 1998 of $2,927. Results of Operations - Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,1998 The Company experienced a net loss of $204,039 for the nine months ended September 30, 1999 compared to a net loss of $90,564 for the same period in 1998. This increased loss is due to the operating loss sustained in the claims administration subsidiary during 1999 and several significant claims experienced in the Small Workers' Compensation program operated by the Company. The performance of the claims administration subsidiary should improve in the next six months as a result of an increased client base. The Company has reduced the amount of risk taken in the Small Workers' Compensation program by increasing the portion of the risk reinsured from 50% to 90% effective September 1, 1999. As a result of increased workers' compensation premium written and assumed, earned premium during the nine months ended September 30, 1999 was $1,250,277 compared to $350,544 in 1998. Losses and loss adjustment expenses were $1,038,415 during the first nine months of 1999 compared to $118,072 in the same period in 1998. Other expenses directly associated with the Company's insurance programs totaled $372,493 during the period ended September 30, 1999 compared to $115,239 in 1998. The increase in expenses directly related to insurance programs was due to increased business written in 1999. Investment income increased to $73,392 for the nine month period ended September 30, 1999 from $ 65,466 in 1998. Most of the increase in the nine month period came prior to the expenditure of start-up costs in the Stoneville Service Company subsidiary. More cash was available for investment in early 1999 compared to 1998 due to the advance funding of the Company's reinsurance activities in late 1998 and early 1999. For the nine month period ended September 30, 1999, general expenses increased to $1,187,975 from $534,393 in 1998. This increase was due primarily to costs associated with the purchase of American Colonial Insurance Company and the acquisition of an existing claims administrator's customer base in early 1999 as well as the operation of these subsidiaries which did not exist in 1998. The Company recorded a tax benefit of $131,347 for the nine months ended September 30, 1999 compared to a tax benefit of $57,901 for the same period in 1998. Liquidity and Capital Resources Due to the fact that workers' compensation claims are paid over a long period of time, it is anticipated that cash flows from premiums collected will be sufficient to pay any insurance claims that arise during 1999, 2000 and the foreseeable future. As a workers' compensation insurance carrier licensed in the State of Mississippi, the Company is subject to certain minimum capital and surplus requirements. In order to stay in compliance with these minimum requirements, the Company will be required to generate operating profits in 2000 or raise additional capital from other sources. The Company anticipates that its increased customer base will generate sufficient operating profits in 2000 to satisfy regulatory capital and surplus requirements. However, if such operating results are not attained, the Company will have to seek other sources of capital to allow it to maintain an adequate capital structure. The Company is not assured that such capital alternatives will be available if and when they are needed. PART II: OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27: Financial data schedule STONEVILLE INSURANCE COMPANY Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STONEVILLE INSURANCE COMPANY BY: -------------------------------------- Richard L. Eaton, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) DATE: November 13, 1999