<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1999
REGISTRATION NO. 333-76393
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1/A
AMENDMENT NO. 1
TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CHANDLER (U.S.A.), INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 6331 73-1325906
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
1010 MANVEL AVENUE
CHANDLER, OKLAHOMA 74834
(405) 258-0804
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
W. BRENT LAGERE, CHAIRMAN
1010 MANVEL AVENUE
CHANDLER, OKLAHOMA 74834
(405) 258-0804
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
DAVID G. MCLANE RODNEY L. MOORE
Gardere & Wynne, L.L.P. Vinson & Elkins L.L.P.
1601 Elm Street, Suite 3000 2001 Ross Avenue, Suite 3700
Dallas, Texas 75201-4761 Dallas, Texas 75201-2975
(214) 999-3000 (214) 220-7700
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
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 SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION
DATED , 1999
[LOGO]
CHANDLER (U.S.A.), INC.
$24,000,000
% SENIOR DEBENTURES DUE 2014
<TABLE>
<S> <C>
THE COMPANY: THE DEBENTURES:
- Chandler (U.S.A.), Inc. - RANKING
- We are a wholly owned The debentures are general
subsidiary of Chandler senior unsecured
Insurance (Barbados), obligations, rank equal in
Ltd., which is wholly right of payment to each
owned by Chandler other and to all existing
Insurance Company, Ltd., and future senior
whose common stock is unsecured obligations,
traded on the Nasdaq Stock rank senior to all
Market. existing and future junior
TRADING FORMAT: obligations and are
- The debentures have been effectively junior to
approved for listing on secured obligations to the
the American Stock Exchange, extent of the collateral
subject to official notice securing such obligations.
of issuance. - REDEMPTION
We may redeem the
debentures at any time, in
whole or in part, without
penalty or premium, after ,
2009.
- SINKING FUND
There is no sinking fund.
</TABLE>
------------------------
<TABLE>
<CAPTION>
PER DEBENTURE TOTAL
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Price.......................................................................................
Underwriter's Discount......................................................................
Proceeds, before expenses...................................................................
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
SOUTHWEST SECURITIES
<PAGE>
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" INCLUDING, IN
PARTICULAR, THE STATEMENTS ABOUT CUSA'S PLANS, STRATEGIES AND PROSPECTS UNDER
THE HEADINGS "SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALTHOUGH WE BELIEVE THAT
OUR PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN OR SUGGESTED BY SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH
PLANS, INTENTIONS AND EXPECTATIONS WILL BE ACHIEVED, AND WE CAUTION YOU THAT OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED IN OUR
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF CUSA TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHER THINGS, (1)
GENERAL ECONOMIC AND BUSINESS CONDITIONS; (2) INTEREST RATE CHANGES; (3)
COMPETITION AND REGULATORY ENVIRONMENT IN WHICH CUSA OPERATES; (4) CLAIMS
FREQUENCY; (5) CLAIMS SEVERITY; (6) THE NUMBER OF NEW AND RENEWAL POLICY
APPLICATIONS SUBMITTED BY CUSA'S AGENTS; (7) THE ABILITY OF CUSA AND ITS THIRD
PARTY PROVIDERS, AGENTS AND REINSURERS TO ADEQUATELY ADDRESS YEAR 2000 PROBLEMS;
(8) OTHER FACTORS SUCH AS THE ONGOING LITIGATION MATTERS INVOLVING A SIGNIFICANT
CONCENTRATION OF OWNERSHIP OF ITS INDIRECT PARENT'S COMMON STOCK; (9) MATTERS
DISCUSSED UNDER THE HEADING "RISK FACTORS"; AND (10) THE LITIGATION DESCRIBED
UNDER THE HEADING "LEGAL PROCEEDINGS."
2
<PAGE>
SUMMARY
ON THE COVER PAGE, IN THIS SUMMARY AND IN THE "RISK FACTORS" SECTION, THE
WORDS "CUSA," "WE," "OURS" AND "US" REFER ONLY TO CHANDLER (U.S.A.), INC., AND
NOT TO ANY OF OUR SUBSIDIARIES, DIRECT OR INDIRECT PARENTS, OR AFFILIATES, OR
THE UNDERWRITER. THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS
OFFERING. IT LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO
YOU. FOR A MORE COMPLETE UNDERSTANDING OF THIS OFFERING, WE ENCOURAGE YOU TO
READ THIS ENTIRE DOCUMENT AND THE DOCUMENTS WE HAVE REFERRED YOU TO.
THESE DEBENTURES ARE THE SOLE LIABILITY OF CUSA AND ARE NOT GUARANTEED BY
ANY OF OUR SUBSIDIARIES OR AFFILIATES.
CUSA
We engage in various property and casualty insurance operations through our
wholly owned subsidiaries National American Insurance Company ("NAICO"), a
Nebraska insurance company, and LaGere & Walkingstick Insurance Agency, Inc., an
Oklahoma corporation ("L&W"). Our business strategy is to facilitate the
marketing and writing of insurance products offered by NAICO through a network
of independent agents, totaling approximately 250 at March 31, 1999. Independent
agents originate substantially all of NAICO's business. Our objective is to
develop and maintain through NAICO a leading position in NAICO's insurance
markets and capitalize on growth opportunities in new markets and geographic
regions, while adjusting the mix and volume of NAICO's business and risk
retention to respond to changes in market conditions and manage NAICO's risk
exposure.
NAICO is one of the leading writers of commercial business insurance in
Oklahoma, providing primarily property and casualty insurance for businesses in
various industries. NAICO writes various property and casualty insurance
products through four primary marketing programs. The programs are:
- standard property and casualty;
- political subdivisions, including school districts, municipalities and
counties;
- surety bonds, including construction bonds and bail bonds; and
- group accident and health.
NAICO is licensed to write property and casualty insurance in 44 states and
the District of Columbia and is authorized by the United States Department of
the Treasury to write surety bonds for contractors on federal projects. The
lines of insurance written by NAICO through its programs are automobile
liability, workers compensation, surety, automobile physical damage, accident
and health, property, inland marine and other liability lines. Currently, NAICO
is rated as "A- (Excellent)" by A.M. Best Company, an insurance rating agency.
In 1998, NAICO received an "A (Strong)" rating from Standard and Poor's rating
agency. These ratings reflect the opinions of the rating agencies as to the
financial condition and operating performance of NAICO and do not relate to the
debentures.
L&W is an independent insurance agency that represents various insurance
companies providing a variety of property and casualty, individual and group
life, medical and disability income coverages. L&W also acts as a surplus lines
broker specializing in risk management and brokering insurance primarily for
commercial enterprises.
THE OFFERING
<TABLE>
<S> <C>
Issuer...................................... Chandler (U.S.A.), Inc.
Total Amount of Debentures Offered.......... $24,000,000 in principal amount of %
Senior Debentures due 2014.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Maturity Date............................... , 2014
Interest Payment Dates...................... Payment frequency -- every six months on
and .
First payment -- , 1999
Optional Redemption......................... On or after , 2009, we may redeem
some or all of the debentures at any time,
without penalty or premium.
Ranking..................................... The debentures are general unsecured
obligations, rank equal in right of payment to
each other and to all existing and future
senior unsecured obligations, rank senior to
all existing and future junior obligations,
and are effectively junior to secured
obligations to the extent of the collateral
securing such obligations, including any
borrowing under our future secured credit
facilities.
Restrictive Covenants....................... The indenture governing the debentures will
contain certain restrictive covenants,
including covenants that limit subsidiary
debt, issuance or sale of subsidiary stock,
incurring of liens, sale-leaseback
transactions, mergers, consolidations and
sales of assets.
Use of Proceeds............................. CUSA plans to use the proceeds of this
offering to retire existing bank debt, which
was $8.9 million at March 31, 1999; to repay
amounts due Chandler Insurance (Barbados),
Ltd., which was $13.1 million at March 31,
1999, and which do not bear interest and do
not have a stated maturity date; and for
general corporate purposes.
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary financial data has been derived from the consolidated financial
statements of CUSA and its subsidiaries. The consolidated balance sheets of CUSA
and its subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, comprehensive income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1998, have been audited by Deloitte & Touche LLP, independent auditors,
whose report expresses an unqualified opinion and includes an explanatory
paragraph relating to litigation. Data for the three months ended March 31, 1998
and 1999 have been derived from CUSA's unaudited interim consolidated financial
statements, including the consolidated balance sheet at March 31, 1999, and the
related statement of operations and cash flow for the three months ended March
31, 1998 and 1999, and the notes thereto included in this prospectus. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for the three-month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year. The
summary financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of CUSA and the notes thereto.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ----------------------
1996 1997 1998 1998 1999
--------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) (UNAUDITED)
OPERATING DATA
Revenues
Net premiums earned............................... $ 78,336 $ 80,702 $ 52,424 $ 12,105 $ 16,396
Interest income, net.............................. 5,663 6,130 4,904 1,393 1,044
Realized investment gains, net.................... 157 790 1,036 15 52
Commissions, fees and other income................ 3,413 2,345 1,744 677 365
--------- --------- -------------- --------- -----------
Total revenues...................................... 87,569 89,967 60,108 14,190 17,857
--------- --------- -------------- --------- -----------
Operating expenses
Losses and loss adjustment expenses............... 48,766 47,905 36,042 7,949 10,521
Policy acquisition costs.......................... 27,910 23,346 10,735 2,840 3,365
General and administrative expenses............... 13,074 12,065 11,235 3,069 2,660
Interest expense.................................. 146 442 887 125 216
Litigation expenses, net.......................... (230) 923 423 129 57
--------- --------- -------------- --------- -----------
Total operating expenses............................ 89,666 84,681 59,322 14,112 16,819
--------- --------- -------------- --------- -----------
Income (loss) before income taxes................... (2,097) 5,286 786 78 1,038
Net income (loss)................................... $ (1,780) $ 3,005 $ 433 $ (10) $ 616
--------- --------- -------------- --------- -----------
--------- --------- -------------- --------- -----------
Cash provided by (applied to):
Operating activities.............................. 1,784 8,074 (10,288) (3,264) (4,736)
Investing activities.............................. (7,554) (1,840) 9,894 (1,491) 917
Financing activities.............................. 6,078 (2,643) (1,085) 1,285 454
OTHER DATA
Combined loss and underwriting expense ratio (1).... 107% 98% 102% 130% 97%
EBITDA (2).......................................... $ 184 $ 7,832 $ 4,007 $ 768 $ 1,771
Ratio of earnings to fixed charges (3).............. -- 7.54 1.73 1.38 4.49
Pro forma ratio of earnings to fixed charges (4).... -- 2.34
Interest coverage ratio (5)......................... 1.3 17.7 4.5 6.1 8.2
Pro forma interest coverage ratio (6)............... 1.9 3.3
<CAPTION>
DECEMBER 31, 1998 AS OF MARCH 31, 1999
------------------------- ----------------------
ACTUAL ADJUSTED(7) ACTUAL ADJUSTED(7)
--------- -------------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and investments................................ $ 94,947 $ 95,735 $ 89,219 $ 89,556
Total assets........................................ 223,351 225,679 223,051 224,928
Unpaid losses and loss adjustment expenses.......... 80,701 80,701 82,892 82,892
Notes payable....................................... 9,410 -- 8,934 --
Amounts due to affiliate............................ 12,219 -- 13,149 --
Debentures.......................................... -- 24,000 -- 24,000
Total liabilities................................... 174,090 176,461 173,981 175,898
Shareholder's equity................................ 49,261 49,218 49,070 49,030
</TABLE>
5
<PAGE>
- ------------------------
(1) Litigation expenses are not considered underwriting expenses; therefore,
such expenses have been excluded from this ratio. The 1996 underwriting
expense ratio was increased by four percentage points by a reinsurance
arbitration adjustment and the termination of relations with NAICO's former
surety bond underwriting manager.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Although EBITDA is not a measure calculated
in accordance with generally accepted accounting principles, CUSA has
included information concerning EBITDA in this prospectus because it is
commonly used by certain investors and analysts as a measure of a company's
ability to service its debt obligations. EBITDA should not be used as an
alternative to, or be considered more meaningful than, net income or cash
flow provided by operating, investing and financing activities as an
indicator of our performance. Our definition of EBITDA may not be comparable
with similarly titled measures disclosed by other companies.
The following table sets forth our calculation of EBITDA for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EBITDA
Net Income (loss)........................ $ (1,780) $ 3,005 $ 433 $ (10) $ 616
Federal income tax provision (benefit)... (316) 2,281 353 88 422
Interest expense......................... 146 442 887 125 216
Depreciation and amortization............ 2,134 2,104 2,334 565 517
--------- --------- --------- --------- ---------
EBITDA................................... $ 184 $ 7,832 $ 4,007 $ 768 $ 1,771
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(3) For purposes of calculating the ratio of earnings to fixed charges, (a)
earnings consist of earnings before income taxes plus fixed charges and (b)
fixed charges consist of interest expense, amortization of deferred
financing costs and one-third of rental expense, which is the portion we
consider representative of the interest factor. Earnings were insufficient
to cover fixed charges in 1996 by $2.1 million.
(4) The pro forma ratio of earnings to fixed charges for 1998 and for the three
months ended March 31, 1999, are calculated in the same manner as the ratio
of earnings to fixed charges, as described in (3) above; however fixed
charges have been adjusted to include the increase in interest expense which
would have resulted if the offering had been consummated and the proceeds
had been used to repay our outstanding bank debt and amounts due Chandler
Insurance (Barbados), Ltd. See "Use of Proceeds." Earnings would have been
insufficient to cover fixed charges in 1998 by $253,000.
(5) The interest coverage ratio is calculated by dividing EBITDA by interest
expense. It indicates how many times the earnings before interest expense,
income taxes, depreciation and amortization could decline before we would be
unable to cover our interest obligations. We feel this ratio is useful in
that it provides an indication of our ability to cover our interest
obligations.
(6) The pro forma interest coverage ratio for 1998 and for the three months
ended March 31, 1999, are calculated in the same manner as the interest
coverage ratio, as described in (5) above; however, interest expense has
been adjusted to include the increase in interest expense which would have
resulted if the offering had been consummated and the proceeds used to pay
CUSA's outstanding bank debt.
(7) As adjusted on a pro forma basis to give effect to the offering and the
application of the net proceeds therefrom, after deducting underwriter's
discount and estimated expenses of the offering.
6
<PAGE>
THE CHANDLER ORGANIZATION
The following chart illustrates the present corporate structure of CUSA, our
subsidiaries and certain other affiliated entities and the primary business
operations conducted by each. The debentures are the sole liability of CUSA and
will be issued by CUSA. See "Security Ownership of Certain Beneficial Owners."
[CHART]
7
<PAGE>
RISK FACTORS
A prospective investor should consider carefully all of the information
contained in this prospectus before deciding whether to purchase the debentures
offered hereby and, in particular, the following factors:
WE ARE DEPENDENT ON DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE OPERATIONS OF
OUR SUBSIDIARIES TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE DEBENTURES.
WE MAY NOT BE ABLE TO SATISFY OUR OBLIGATIONS UNDER THE DEBENTURES IF OUR
SUBSIDIARIES ARE PROHIBITED BY STATE LAW OR REGULATIONS FROM PAYING DIVIDENDS
OR MAKING OTHER PAYMENTS TO US.
We have no significant operations independent of NAICO and L&W. We will be
primarily dependent on shareholder dividends and other payments from NAICO to
meet our debt obligations, including our obligations under the debentures. The
debentures are solely our obligation and not guaranteed by our subsidiaries or
affiliates. NAICO is subject to various state statutory and regulatory
restrictions, primarily in its state of incorporation, which limit the amount of
dividends or other payments by insurance companies to their shareholders and
affiliates. The restrictions are generally based on certain levels of surplus,
operating income and investment income, as determined under statutory accounting
practices. To the extent that these restrictions limit NAICO's ability to pay
dividends or other payments to us, our ability to satisfy our obligations under
the debentures may also be limited. See "Business--Regulation--Restrictions on
Shareholder Dividends."
NAICO IS DEPENDENT ON INCOME FROM, AND THE VALUE OF, ITS INVESTMENTS FOR A
SIGNIFICANT PORTION OF ITS EARNINGS. IF THE INCOME FROM NAICO'S INVESTMENT
PORTFOLIO DECLINES, NAICO'S ABILITY TO PAY DIVIDENDS OR MAKE OTHER PAYMENTS TO
US COULD BE ADVERSELY AFFECTED. ANY DECLINE IN DIVIDENDS OR OTHER PAYMENTS
COULD ADVERSELY AFFECT OUR ABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL
OF THE DEBENTURES.
NAICO, like other property and casualty insurance companies, depends on
income from its investment portfolio for a significant portion of its earnings.
Various factors outside of NAICO's control could have a material adverse effect
on NAICO's investment income in future periods, including factors such as:
- a significant decline in investment yields in NAICO's investment
portfolio;
- a default by the issuers of securities which NAICO owns; or
- a change in interest rates.
We cannot assure you that NAICO will not suffer a significant decline in
investment income in future periods. A decline in NAICO's investment income
could adversely affect NAICO's ability to pay dividends or other payments to us.
In addition, NAICO's ability to write insurance is dependent upon NAICO
maintaining sufficient levels of statutory surplus, which is the excess of
assets over liabilities calculated in accordance with accounting practices
prescribed or permitted by state insurance regulatory authorities. Statutory
surplus is directly affected by net income and unrealized gains on securities
determined in accordance with statutory accounting practices. A decline in
NAICO's statutory surplus would adversely affect the amount of insurance that
NAICO is permitted to write. Any material decline in the amount of insurance
that NAICO is permitted to write could result in a decrease in earnings, which
could have a material adverse effect on our company, including the financial
condition of NAICO and the ability of NAICO to pay dividends or other payments
to us. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
8
<PAGE>
IF NAICO'S LOSS RESERVES ARE INADEQUATE, THE ABILITY OF NAICO TO PAY DIVIDENDS
OR MAKE OTHER PAYMENTS TO US WOULD BE AFFECTED. THIS COULD ADVERSELY AFFECT
OUR ABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE DEBENTURES.
NAICO is directly liable for losses and loss adjustment expenses under the
terms of the insurance policies that it writes. Loss adjustment expenses are
expenses incurred to investigate and settle claims under outstanding policies.
NAICO maintains reserves to cover its estimated ultimate liability for unpaid
losses and loss adjustment expenses. These reserves do not represent an exact
measurement of liability, but are estimates based upon historical data and
anticipated future events such as:
- actuarial projections of what NAICO, at a given time, expects to be the
cost of the ultimate settlement and administration of claims reflecting
facts and circumstances then known;
- estimates of future trends in claims severity and frequency;
- judicial theories of liability; and
- other factors such as variables in claims handling procedures, economic
factors and judicial and legislative trends and actions.
These factors are not directly quantifiable, particularly on a prospective
basis. Because of the uncertainties in establishing loss and loss adjustment
expense reserves, actual losses and loss adjustment expenses may deviate,
perhaps substantially, from the reserves reflected in our consolidated financial
statements. Any material deficiency in reserve estimates, as compared to actual
losses, could result in a decrease in net income, which could have a material
adverse effect on our company, including the financial condition of NAICO and
the ability of NAICO to pay dividends or other payments to us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Claim
Costs and Loss Reserves" and "Business--Reserves."
CERTAIN STATE AND FEDERAL REGULATIONS GOVERNING THE INSURANCE INDUSTRY MAY
DIRECTLY OR INDIRECTLY AFFECT OUR COMPANY AND ITS SUBSIDIARIES. ACCORDINGLY,
THESE REGULATIONS MAY IMPAIR OUR ABILITY TO PAY INTEREST ON AND REPAY THE
PRINCIPAL OF THE DEBENTURES.
Because NAICO is an insurance company, our company and its subsidiaries are
subject to extensive regulatory oversight in the jurisdictions in which they
conduct business. The laws and regulations associated with this oversight
provide for the following:
- licensing of insurance companies and agents;
- limitations on the nature and amount of certain investments;
- approval of policy forms and premium rates;
- setting of capital and surplus requirements;
- setting of requirements for the deposit of securities for the benefit of
policyholders;
- limitations on shareholder dividends and other payments to affiliates;
- limitations on the ability to withdraw from certain lines of business such
as personal lines and workers compensation; and
- restrictions on the size of risks which may be insured by a single
company.
State insurance departments also routinely make financial and market conduct
examinations and may assess fines for violations of the myriad state regulations
affecting the insurance business. From time to time, the insurance regulatory
framework has been the subject of increased legislative and administrative
scrutiny. At any one time, there may be numerous initiatives within state
legislatures to alter and, in many cases, increase state authority to regulate
insurance companies and their businesses. Most states also regulate affiliated
groups, such as our company and its parents and subsidiaries, under insurance
holding company laws. This regulation is generally for the benefit of
policyholders rather than creditors or shareholders. We cannot predict the
future impact of increasing or changes to existing
9
<PAGE>
regulation on the operations of our company and its subsidiaries. Changes in
state laws and regulation, or interpretations or applications thereof by state
regulatory authorities, particularly in Nebraska, Oklahoma or Texas, could have
a material adverse effect on our company.
Although the federal government does not directly regulate the business of
insurance, federal initiatives often indirectly affect the insurance business in
a variety of ways. Current and proposed federal measures which may significantly
affect the insurance business include federal government participation in
asbestos and other product liability claims, pension and other employee benefit
plan regulations, examination of the taxation of insurers and reinsurers,
minimum levels of liability insurance and automobile safety regulations.
Furthermore, federal regulation of the health care industry may directly or
indirectly impact the business of insurance. The implementation of any of these
federal initiatives could have a material adverse effect on the insurance
industry and our company and its subsidiaries.
BECAUSE NAICO'S MAIN SOURCES OF PREMIUMS ARE TEXAS AND OKLAHOMA, UNFAVORABLE
CHANGES IN THE ECONOMIC OR REGULATORY ENVIRONMENT OF THOSE TWO STATES MAY
AFFECT OUR ABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE
DEBENTURES.
A significant portion of NAICO's gross premiums have been written in recent
years in the states of Oklahoma and Texas. Approximately $111 million, or 82%,
of NAICO's direct written premiums in 1998 were in the states of Oklahoma and
Texas. The loss of a significant amount of premiums written in either of these
states, whether due to regulatory changes, competitive changes, economic
downturns in these states or other reasons, would have a material adverse effect
on our company.
OUR INABILITY OR FAILURE TO OBTAIN REINSURANCE COULD ADVERSELY AFFECT US AND OUR
SUBSIDIARIES. AN ABSENCE OF REINSURANCE COULD MATERIALLY AFFECT OUR ABILITY TO
PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE DEBENTURES.
To reduce the potential impact of unusually severe or frequent losses, NAICO
may transfer, or "cede", a portion of its gross premiums to reinsurers in
exchange for the reinsurers' agreements to share covered losses with NAICO.
Although reinsurance agreements make the assuming reinsurer liable to the ceding
insurance company to the extent of the risk ceded, the ceding insurance company
is not relieved of its primary liability to its insureds and therefore bears a
credit risk with respect to its reinsurers. We cannot assure you that NAICO's
reinsurers will pay all reinsurance claims on a timely basis, if at all. The
failure by NAICO's reinsurers to pay reinsurance claims on a timely basis could
have a material adverse effect on NAICO and our company, including the financial
condition of NAICO and the ability of NAICO to pay dividends or other payments
to us.
The amount and cost of reinsurance available to companies writing property
and casualty insurance are subject, in large part, to prevailing market
conditions which are beyond the control of such companies. NAICO's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends to a great extent upon its ability to obtain adequate
reinsurance in amounts and at rates that will not adversely affect its
competitive position. Due to uncertainties regarding the future availability of
reinsurance, we cannot assure you that NAICO will be able to maintain its
current reinsurance arrangements which generally are subject to annual renewal.
If NAICO is unable to renew such arrangements upon their expiration on terms
acceptable to NAICO, then it would be forced to either bear the associated
increase in net exposures or reduce the amount of risk that it underwrites.
Either of these could have a material adverse effect on our company, including
the financial condition of NAICO and the ability of NAICO to pay dividends or
other payments to us.
10
<PAGE>
OUR PENDING LITIGATION INVOLVING CENTRA COULD AFFECT OUR FINANCIAL CONDITION AS
WELL AS OUR SUBSIDIARIES. IF THE LITIGATION CONCLUDES UNFAVORABLY FOR US, OUR
ABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE DEBENTURES COULD BE
AFFECTED.
Under the heading "Legal Proceedings," we describe our relationship to
CenTra, Inc. and its affiliates, the extensive litigation between our company
and its affiliates and the CenTra group and the current status of any judgments,
court orders and appeals.
Should this litigation be modified, reversed or decided adversely to either
CUSA or NAICO, such event could have a material adverse effect on our company,
including the financial condition of NAICO and the ability of NAICO to pay
dividends or other payments to our company. Such material adverse effect could
arise from the payment of related litigation expenses, any adverse judgment that
might be entered and sustained, any settlement amounts or any indemnification
claims asserted against CUSA or NAICO by any of the individual defendants in
excess of any available insurance coverage. Also, future legal actions could
result in us or our subsidiaries incurring significant legal costs.
THE ENVIRONMENT IN WHICH WE OPERATE CONSISTS OF SEVERAL UNPREDICTABLE FACTORS
WHICH AFFECT OUR PROFITABILITY. AN ADVERSE CHANGE AMONG ANY OF THESE FACTORS
MAY LEAD TO OUR INABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE
DEBENTURES.
NAICO's financial results, like the results of other property and casualty
and accident and health insurers, historically have been subject to significant
fluctuations. NAICO's profitability is affected significantly by a number of
factors, including:
- severity and frequency of claims, including catastrophes;
- court decisions and the judicial climate, which could lead to
unpredictable damage awards;
- fluctuations in interest rates and other changes in the investment
environment which affect market prices of investments and the income from
those investments;
- inflationary pressures that affect the size of losses;
- general economic and business conditions; and
- competition.
Further, underwriting results have been cyclical in the property and
casualty insurance industry. Protracted periods of overcapacity have caused
reduced premium rates, resulting in higher combined loss and underwriting
expense ratios. Periods of undercapacity have caused increased premium rates,
resulting in lower combined loss and underwriting expense ratios. The combined
loss and underwriting expense ratio is the traditional measure of underwriting
experience for property and casualty insurance companies. The combined loss and
underwriting ratio is the sum of the ratios of:
- incurred losses and loss adjustment expenses to net premiums earned, often
referred to as the "loss ratio"; and
- underwriting expenses to net premiums written and assumed, often referred
to as the "underwriting expense ratio."
Extended periods of overcapacity could have a material adverse effect on
NAICO, including NAICO's ability to pay dividends or other payments to us.
11
<PAGE>
NAICO OPERATES IN A HIGHLY COMPETITIVE INDUSTRY AND ACCORDINGLY MAY LOSE
BUSINESS TO WELL ESTABLISHED, HIGHER RATED INSURANCE COMPANIES. INCREASES IN
COMPETITIVE PRESSURE MAY ADVERSELY AFFECT OUR PROFITS, RESULTING IN OUR
INABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF THE DEBENTURES.
NAICO operates in a highly competitive industry. Competition in the property
and casualty insurance industry is based on many factors, including:
- the overall financial strength of the insurer;
- ratings by rating agencies;
- premiums charged;
- policy terms and conditions;
- services and products offered;
- reputation;
- agent compensation; and
- experience of the insurer's management.
NAICO's competitors range from smaller regional independent insurance
companies to major worldwide insurance companies. Many of NAICO's competitors
are larger, have greater financial, marketing and management resources, have
more favorable ratings by ratings agencies and offer more diversified insurance
coverages than NAICO.
We cannot assure you that NAICO will maintain its current competitive
position in the markets in which it currently operates or that NAICO will be
able to establish a competitive position in new geographic regions or markets
into which NAICO elects to expand its operations. NAICO may face increased
competition in the future from other insurance companies which may adversely
affect NAICO's competitive position and, in turn, could have a material adverse
effect on the ability of NAICO to pay dividends or other payments to us.
NAICO'S INABILITY TO MAINTAIN FAVORABLE RATINGS WITH A.M. BEST COMPANY AND
STANDARD & POOR'S MAY CAUSE A DECREASE IN BUSINESS. A RESULTING DECREASE IN
BUSINESS MAY AFFECT OUR ABILITY TO PAY INTEREST ON AND REPAY THE PRINCIPAL OF
THE DEBENTURES.
Increased public and regulatory concerns regarding the financial stability
of insurance companies have resulted in greater emphasis being placed by
policyholders upon insurance company ratings by A.M. Best Company and by other
entities, including Standard & Poor's, and have created some measure of
competitive advantage for insurance carriers with higher ratings. A.M. Best
Company's ratings range from the highest rating of "A++ (Superior)" to the
lowest rating of "F (In Liquidation)," and Standard & Poor's ratings range from
the highest rating of "AAA (Extremely Strong)" to the lowest rating of "R
(Regulatory Action)." In evaluating a company's financial and operating
performance, A.M. Best Company and Standard & Poor's review factors such as:
- a company's profitability, leverage and liquidity;
- a company's book of business;
- the adequacy and soundness of a company's reinsurance program;
- the quality and estimated market value of a company's assets;
- the adequacy of a company's reserves; and
- the experience and competency of a company's management.
NAICO is currently rated "A- (Excellent)" by A. M. Best Company and "A
(Strong)" by Standard & Poor's. There can be no assurance that NAICO will be
able to maintain these ratings. Any downgrade in ratings could materially and
adversely affect the business of NAICO and its ability to pay
12
<PAGE>
dividends and other payments to us and the Standard & Poor's rating of the
debentures. The ratings are not in any way a measure of protection offered to
investors in the debentures, and you should not rely upon them with respect to
making an investment in the debentures.
OUR FUTURE SUCCESS DEPENDS ON OUR MANAGEMENT STAFF AND CERTAIN KEY EMPLOYEES. A
LOSS OF ANY OF THESE INDIVIDUALS COULD DIRECTLY OR INDIRECTLY RESULT IN A
DECREASE IN PROFITS WHICH COULD AFFECT OUR ABILITY TO PAY INTEREST ON AND
REPAY THE PRINCIPAL OF THE DEBENTURES.
We believe that our future success will depend to a significant extent upon
the services of certain key executive officers, particularly W. Brent LaGere,
our Chairman of the Board and Mark T. Paden, our Chief Operating Officer.
Additionally, our ability to write profitable insurance business is dependent on
our ability to maintain a staff of qualified underwriter and service personnel.
Uncontrollable circumstances such as the death or incapacity of key officers and
employees could adversely impact NAICO and its ability to pay dividends and
other payments to us.
BECAUSE THERE IS NO ESTABLISHED TRADING MARKET FOR THESE DEBENTURES, YOU MAY BE
UNABLE TO SELL OR TRADE THESE DEBENTURES.
The debentures will constitute a new issue of securities with no established
trading market. Although the debentures have been approved for listing on the
American Stock Exchange, subject to official notice of issuance, we cannot
assure you that an active trading market will develop and be maintained. If a
trading market does not develop or is not maintained, you may experience
difficulty in reselling the debentures or may be unable to sell them at all. If
a market for the debentures does develop, any such market may be discontinued at
any time. As a result, you cannot be sure that you will be able to sell your
debentures in the future or that any such sale will be at a price equal to or
greater than the initial offering price. We have been informed by Southwest
Securities, Inc. that, following the completion of the offering, it currently
intends to make a market in the debentures. However, it may cease its
market-making at any time. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act or the Exchange Act.
Accordingly, we cannot provide assurance as to the development or liquidity of
any market for the debentures.
YEAR 2000 PROBLEMS EXIST IN OUR INDUSTRY. WE CANNOT ENSURE THAT OUR COMPUTER
SYSTEMS, OR THE COMPANIES WE DO BUSINESS WITH, ARE YEAR 2000 COMPLIANT, NOR
CAN WE ACCURATELY PREDICT THE OUTCOME OF SUCH NONCOMPLIANCE. BECAUSE WE DEPEND
HEAVILY ON COMPUTER SYSTEMS, ANY YEAR 2000 PROBLEMS MAY AFFECT OUR
PROFITABILITY RESULTING IN OUR INABILITY TO PAY INTEREST ON AND REPAY THE
PRINCIPAL OF THE DEBENTURES.
We are heavily dependent upon complex information technology systems for all
phases of our operations, including without limitation customer service,
insurance processing, risk analysis, underwriting and loss reserving. Computer
software, hardware, microprocessor chips and other computer equipment use two
digits to identify a particular year, and therefore may not recognize the number
"00" or may recognize it as a year prior to 1999. Unless computer equipment and
software programs are modified to correct these Year 2000 Problems, errors could
result. We believe, based on the information currently available, that the most
reasonably likely worst case scenarios resulting from Year 2000 Problems
include:
- Legal risks arising from failure of NAICO or L&W to provide contracted
services, deal with claims on a timely basis, provide pertinent data to
those dependent upon the data and similar risks;
- Increased operational costs due to manual processing, data corruption or
disaster recovery;
- Inability to bill or invoice;
- Lost revenue resulting from the inability to render accurate billing and
from the inability to efficiently market insurance products;
13
<PAGE>
- Increased legal and accounting expenses;
- Fines and associated expenses resulting from inability to comply with
regulatory requirements; and
- Failure of management controls.
Any of the previously mentioned Year 2000 Problems could have a material
adverse effect on CUSA, including the financial condition of NAICO and NAICO's
ability to pay dividends or other payments to us.
We cannot predict the adverse impact, if any, of Year 2000 Problems upon our
agents, reinsurers and others with whom we do business. It is possible that the
credit or operating ability of others with whom we maintain commercial
relationships may be adversely affected by one or more unforeseen circumstances
caused by Year 2000 Problems. However, we do not have control over these third
parties and, as a result, we cannot currently determine to what extent future
operating results may be adversely affected by the failure of these third
parties to successfully address their Year 2000 Problems.
We continue to study the complex issues related to insurance coverage for
losses arising from the myriad potential fact situations connected with Year
2000 Problems and NAICO's liability to its insureds. We believe that the
coverages NAICO provides do not extend to the types of losses which are most
likely to occur as a result of Year 2000 Problems, and NAICO has made no
provisions for loss reserves based on potential Year 2000 Problems. We expect
NAICO to utilize coverage exclusion endorsements based on the individual
underwriting of commercial accounts, and NAICO has adopted endorsements to its
policies based on forms provided and filed for approval with various regulatory
authorities by Insurance Services Office, Inc. ("ISO"), an insurance services
company which provides regulatory research and filing support to insurance
companies. Use of these special endorsements is governed by the law and
regulatory policies of states in which NAICO is authorized to do business. ISO
may, from time to time, modify such forms and NAICO may or may not modify its
coverages accordingly.
It is possible that future court interpretations of policy language based on
specific facts, or legislation mandating coverage, could result in coverage for
losses attributable to Year 2000 Problems. Such decisions or legislation could
have a material adverse impact on our company. It is also possible that NAICO
may incur expenses defending claims for which it is ultimately determined there
is no insurance coverage. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness Disclosures."
USE OF PROCEEDS
The net proceeds from the sale of the debentures offered hereby are
estimated to be approximately $22,460,000 after deducting discounts and fees and
expenses in connection therewith. CUSA intends to use the net proceeds to repay
all outstanding indebtedness under bank credit facilities, all amounts owed to
Chandler Barbados, and for other general corporate purposes. The indebtedness
outstanding under one bank credit facility was incurred in 1996 ($4.5 million)
and in 1998 ($6.2 million), to repay amounts due Chandler Barbados. The bank
credit facility has a floating interest rate equal to 1% over the prime rate
published in the Wall Street Journal, which was 7.75% at December 31, 1998 and
March 31, 1999. CUSA also borrowed $2.3 million with an interest rate of 7.5%
per annum in February 1998 under a separate bank credit facility to finance the
purchase of equipment that was previously leased. The aggregate amount of
indebtedness outstanding under CUSA's bank credit facilities and amounts due
Chandler Barbados at March 31, 1999, was $8.9 million and $13.1 million,
respectively. The amounts borrowed from Chandler Barbados, which were incurred
for general corporate purposes, do not bear interest and do not have a stated
maturity date but are payable on demand. Any proceeds that are not immediately
applied as described herein will be invested by CUSA in accordance with NAICO's
standard investment policies until needed for general corporate purposes.
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of CUSA at
December 31, 1998, and March 31, 1999, and as adjusted on a pro forma basis to
reflect the issuance of the debentures and the application of the net proceeds
therefrom, after deducting underwriter's discount and estimated expenses of the
offering. See "Use of Proceeds" and CUSA's Consolidated Financial Statements
included elsewhere herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
---------------------- ----------------------
ACTUAL ADJUSTED ACTUAL ADJUSTED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Notes payable................................. $ 9,410 $ -- $ 8,934 $ --
Amounts due Chandler Barbados................. 12,219 -- 13,149 --
Debentures.................................... -- 24,000 -- 24,000
Shareholder's equity
Common stock................................ 2 2 2 2
Paid-in surplus............................. 60,584 60,584 60,584 60,584
Accumulated deficit......................... (12,040) (12,083) (11,424) (11,464)
Accumulated other comprehensive income...... 715 715 (92) (92)
---------- ---------- ---------- ----------
Total shareholder's equity................ 49,261 49,218 49,070 49,030
---------- ---------- ---------- ----------
Total capitalization...................... $ 70,890 $ 73,218 $ 71,153 $ 73,030
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data has been derived from the consolidated financial
statements of CUSA and its subsidiaries. The consolidated balance sheets of CUSA
and its subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, comprehensive income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1998, have been audited by Deloitte & Touche LLP, independent auditors,
whose report expresses an unqualified opinion and includes an explanatory
paragraph relating to litigation. The Operating Data for the years ended
December 31, 1994 and 1995, and the Balance Sheet Data at December 31, 1994,
1995 and 1996, has been derived from CUSA and its subsidiaries financial
accounts; such accounts having been included in the consolidated financial
statements of Chandler Cayman. Data for the three months ended March 31, 1998
and 1999, have been derived from CUSA's unaudited interim consolidated financial
statements, including the consolidated balance sheet at March 31, 1998 and 1999,
the related consolidated statements of operations and cash flows for the three
months ended March 31, 1998 and 1999, and the notes thereto included in the
prospectus. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for the three-month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of CUSA and the notes
thereto.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS) (UNAUDITED)
OPERATING DATA
Revenues
Net premiums earned.................... $ 63,676 $ 68,584 $ 78,336 $ 80,702 $ 52,424 $ 12,105 $ 16,396
Interest income, net................... 5,438 5,494 5,663 6,130 4,904 1,393 1,044
Realized investment gains, net......... 7 262 157 790 1,036 15 52
Commissions, fees and other income..... 2,646 2,911 3,413 2,345 1,744 677 365
--------- --------- --------- --------- --------- --------- ---------
Total revenues........................... 71,767 77,251 87,569 89,967 60,108 14,190 17,857
--------- --------- --------- --------- --------- --------- ---------
Operating expenses
Losses and loss adjustment expenses.... 42,922 44,460 48,766 47,905 36,042 7,949 10,521
Policy acquisition costs............... 17,541 22,000 27,910 23,346 10,735 2,840 3,365
General and administrative expenses.... 11,532 11,706 13,074 12,065 11,235 3,069 2,660
Interest expense....................... 2 52 146 442 887 125 216
Litigation expenses, net............... 1,394 579 (230) 923 423 129 57
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses................. 73,391 78,797 89,666 84,681 59,322 14,112 16,819
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes........ (1,624) (1,546) (2,097) 5,286 786 78 1,038
Net income (loss)........................ $ (1,467) $ (2,358) $ (1,780) $ 3,005 $ 433 $ (10) $ 616
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Cash provided by (applied to):
Operating activities................... (7,725) (5,288) 1,784 8,074 (10,288) (3,264) (4,736)
Investing activities................... 1,278 2,196 (7,554) (1,840) 9,894 (1,491) 917
Financing activities................... 3,972 3,108 6,078 (2,643) (1,085) 1,285 454
OTHER DATA
Combined loss and underwriting expense
ratio (1)............................ 104% 106% 107% 98% 102% 130% 97%
EBITDA (2)............................. $ 771 $ 613 $ 184 $ 7,832 $ 4,007 $ 768 $ 1,771
Ratio of earnings to fixed charges
(3).................................. -- -- -- 7.54 1.73 1.38 4.49
Pro forma ratio of earnings to fixed
charges (4).......................... -- 2.34
Interest coverage ratio (5)............ 385.5 11.8 1.3 17.7 4.5 6.1 8.2
Pro forma interest coverage ratio
(6).................................. 1.9 3.3
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and investments..................... $ 90,599 $ 93,697 $ 99,098 $ 107,957 $ 94,947 $ 103,999 $ 89,219
Total assets............................. 250,747 230,265 198,972 202,787 223,351 207,077 223,051
Unpaid losses and loss adjustment
expenses............................... 143,437 116,149 78,114 73,721 80,701 73,264 82,892
Notes payable............................ -- 300 4,391 2,796 9,410 10,806 8,934
Amounts due to affiliate................. 18,475 21,583 23,548 19,918 12,219 13,194 13,149
Total liabilities........................ 204,731 182,702 154,445 154,351 174,090 158,586 173,981
Shareholder's equity..................... 46,016 47,563 44,527 48,436 49,261 48,491 49,070
</TABLE>
- ------------------------------
(1) Litigation expenses are not considered underwriting expenses; therefore,
such expenses have been excluded from this ratio. The 1996 underwriting
expense ratio was increased by four percentage points by a reinsurance
arbitration adjustment and the termination of relations with NAICO's former
surety bond underwriting manager.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Although EBITDA is not a measure calculated
in accordance with generally accepted accounting principles, CUSA has
included information concerning EBITDA in this prospectus because it is
commonly used by certain investors and analysts as a measure of a company's
ability to service its debt obligations. EBITDA should not be used as an
alternative to, or be considered more meaningful than, net income or cash
flow provided by operating, investing and financing activities as an
indicator of CUSA's performance. CUSA's definition of EBITDA may not be
comparable with similarly titled measures disclosed by other companies.
The following table sets forth our calculation of EBITDA for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA
Net Income (loss).................................... $ (1,467) $ (2,358) $ (1,780) $ 3,005 $ 433 $ (10) $ 616
Federal income tax provision (benefit)............... (157) 812 (316) 2,281 353 88 422
Interest expense..................................... 2 52 146 442 887 125 216
Depreciation and amortization........................ 2,393 2,107 2,134 2,104 2,334 565 517
--------- --------- --------- --------- --------- --------- ---------
EBITDA............................................... $ 771 $ 613 $ 184 $ 7,832 $ 4,007 $ 768 $ 1,771
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(3) For purposes of calculating the ratio of earnings to fixed charges, (a)
earnings consist of earnings before income taxes plus fixed charges and (b)
fixed charges consist of interest expense, amortization of deferred
financing costs and one-third of rental expense, which is the portion we
consider representative of the interest factor. Earnings were insufficient
to cover fixed charges in 1994, 1995 and 1996 by $1.6 million, $1.5 million
and $2.1 million, respectively.
(4) The pro forma ratio of earnings to fixed charges for 1998 and for the three
months ended March 31, 1999, are calculated in the same manner as the ratio
of earnings to fixed charges, as described in (3) above; however fixed
charges have been adjusted to include the increase in interest expense which
would have resulted if the offering had been consummated and the proceeds
had been used to repay CUSA's outstanding bank debt and amounts due Chandler
Barbados. See "Use of Proceeds." Earnings would have been insufficient to
cover fixed charges in 1998 by $253,000.
(5) The interest coverage ratio is calculated by dividing EBITDA by interest
expense. It indicates how many times the earnings before interest expense,
income taxes, depreciation and amortization could decline before CUSA would
be unable to cover its interest obligations. We feel this ratio is useful in
that it provides an indication of our ability to cover our interest
obligations.
(6) The pro forma interest coverage ratio for 1998 and for the three months
ended March 31, 1999, are calculated in the same manner as the interest
coverage ratio, as described in (5) above; however, interest expense has
been adjusted to include the increase in interest expense which would have
resulted if the offering had been consummated and the proceeds used to pay
CUSA's outstanding bank debt.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
References to CUSA contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations section refer to CUSA and its
subsidiaries on a consolidated basis unless otherwise indicated.
CUSA is engaged in various property and casualty insurance operations
through its wholly owned subsidiaries, NAICO and L&W. NAICO writes various
property and casualty insurance products through four separate marketing
programs: standard property and casualty, political subdivisions, surety bonds
(including both bail bonds and construction bonds) and group accident and
health. The lines of insurance written by NAICO are commercial coverages
consisting of automobile liability, workers compensation, surety, automobile
physical damage, accident and health, property, inland marine and other
liability lines, which include general and professional liability lines. L&W
represents various personal and commercial lines insurance companies in
marketing property and casualty insurance. L&W also markets individual and group
life, medical and disability income coverage. L&W places the majority its
business with NAICO. Business produced by L&W and placed with NAICO constituted
approximately 28% of NAICO's direct premiums written and assumed in 1998.
Many factors determine the profitability of an insurance company including
regulation and rate competition; the frequency and severity of claims; the cost,
availability and collectibility of reinsurance; interest rates; inflation;
general business conditions; and jury awards, court decisions and legislation
expanding the extent of coverage and the amount of compensation due for injuries
and losses.
CLAIM COSTS AND LOSS RESERVES
Insurance companies provide in their financial statements reserves for
unpaid losses and loss adjustment expenses which are estimates of the expense of
investigation and settlement of all reported and incurred but not reported
losses under their previously issued insurance policies and reinsurance
contracts. In estimating reserves, insurance companies use various standardized
methods based on historical experience and payment and reporting patterns for
the type of risk involved. The application of these methods necessarily involves
subjective determinations by the personnel of the insurance company. Inherent in
the estimates of the ultimate liability for unpaid claims are expected trends in
claim severity, claim frequency and other factors that may vary as claims are
settled. The amount of and uncertainty in the estimates are affected by such
factors as the amount of historical claims experience relative to the
development period for the type of risk, knowledge of the actual facts and
circumstances, and the amount of insurance risk retained. The ultimate cost of
insurance claims can be adversely affected by increased costs, such as medical,
repair expenses, costs of providing legal defense for policyholders, increased
jury awards and court decisions and legislation that expand insurance coverage
after the insurance policy was priced and sold. Accordingly, the loss and loss
adjustment expense reserves may not accurately predict an insurance company's
ultimate liability for unpaid claims.
NAICO periodically reviews the reserve estimates relating to insurance
business written or assumed by NAICO and the methods used to arrive at such
reserve estimates. NAICO also retains independent professional actuaries who
review such reserve estimates and methods. Any changes in the estimates are
reflected in current operating results. See Notes to Consolidated Financial
Statements.
The loss settlement period on insurance claims for property damage is
relatively short. The more severe losses for bodily injury and workers
compensation claims have a much longer loss settlement period and may be paid
out over several years. It is often necessary to adjust estimates of liability
on a loss either upward or downward between the time a claim arises and the time
of payment. Workers compensation indemnity benefit reserves are determined based
on statutory benefits prescribed by state law and are estimated based on the
same factors generally discussed above which may include, where state law
permits, inflation adjustments for rising benefits over time. Generally, the
more costly
18
<PAGE>
automobile liability claims involve one or more severe bodily injuries or
deaths. The ultimate cost of these types of claims is dependent on various
factors including the relative liability of the parties involved, the number and
severity of injuries and the legal jurisdiction where the incident occurred.
NAICO does not ordinarily insure against environmental matters as that term
is commonly used. However, in some cases, regulatory filings made on behalf of
an insured can make NAICO directly liable to the regulatory authority for
property damage, which could include environmental pollution. In those cases
NAICO ordinarily has recourse against the insured or the surety bond principal
for amounts paid. NAICO has insured certain trucking companies and pest control
operators who are required to provide proof of insurance which in some cases
assures payment for clean-up and restoration of damage resulting from sudden and
accidental release or discharge of contaminants or other substances which may be
classified as pollutants. NAICO also provides surety bonds for construction
contractors who use or have control of such substances and for contractors who
remove and dispose of asbestos as a part of their contractual obligations.
NAICO also insures independent oil and gas producers who may purchase
coverage for the escape of oil, saltwater, or other substances which may be
harmful to persons or property, but may not generally be classified as
pollutants. NAICO maintains claims records which segregate this type of risk for
the purpose of evaluating environmental risk exposure. Based upon the nature of
such lines of business with NAICO's insureds, and current data regarding the
limited severity and infrequency of such matters, it appears that potential
environmental risks are not a significant portion of claims reserves and
therefore would not likely have a material adverse impact, if any, on the
financial condition of CUSA.
NAICO's statutory-based reserves (reserves calculated in accordance with
accounting practices prescribed or permitted by an insurer's domiciliary state
insurance regulatory authorities for purposes of financial reporting to
regulators) do not differ from its reserves reported on the basis of generally
accepted accounting principles ("GAAP"). NAICO does not discount its reserves
for unpaid losses and loss adjustment expenses. See Notes 1(e) and 3 of Notes to
Consolidated Financial Statements.
ECONOMIC CONDITIONS
The impact of a recession on CUSA would depend on its duration and severity.
A prolonged downturn in the economy could result in decreased demand for NAICO's
insurance products and an increase in uncollectible premiums and/or reinsurance
recoverables. In addition, an economic downturn could result in an increase in
the number of insurance claims if insureds decrease expenditures that promote
safety. Much of NAICO's insurance business is concentrated in the Southwest and
Midwest areas of the United States. Approximately $111 million, or 82%, of
NAICO's direct written premiums in 1998 were in the states of Oklahoma and
Texas. An economic downturn in these states could have a significant adverse
impact on CUSA. A recession might also cause defaults on fixed-income securities
owned by NAICO. Management believes it has mitigated the impact of a recession
by employing conservative underwriting practices and strict credit policies and
maintaining a high-quality investment portfolio.
Periods of inflation have varying effects on CUSA's subsidiaries as well as
other companies in the insurance industry. Inflation contributes to higher
claims and related costs and operating costs as well as higher interest rates
which generally provide for potentially higher interest rates on investable cash
flow and decreases in the market value of existing fixed-income securities.
Premium rates and commissions, however, are not significantly affected by
inflation because competitive forces generally control such rates.
NAICO's underwriting philosophy is to forego underwriting risks from which
it is unable to obtain what it believes to be adequate premium rates. The effect
of inflation on the operations of CUSA was not significant during the period
from 1996 through 1998.
19
<PAGE>
REGULATION
NAICO is subject to regulation by government agencies in the jurisdictions
in which it does business. The nature and extent of such regulations vary from
jurisdiction to jurisdiction, but typically involve prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates, forms
and policies used for many lines of insurance, standards of solvency and minimum
amounts of capital and surplus which must be maintained, establishment of
reserves required to be maintained for unearned premiums, unpaid losses and loss
adjustment expenses or for other purposes, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
company, licensing of insurers and agents, deposits of securities for the
benefit of policyholders and the filing of periodic reports with respect to
financial condition and other matters. In addition, regulatory examiners perform
periodic examinations of insurance companies. Such regulation is generally
intended for the protection of policyholders rather than shareholders or
creditors.
In addition to the regulatory oversight of CUSA's insurance subsidiaries,
CUSA is also subject to regulation under the Nebraska Insurance Holding Company
System Act (the "Holding Company Act"). The Holding Company Act contains certain
reporting requirements including those requiring Chandler Cayman, as the
ultimate parent company, to file information relating to its capital structure,
ownership and financial condition and general business operations of its
insurance subsidiaries. The Holding Company Act contains special reporting and
prior approval requirements with respect to transactions among affiliates. The
Holding Company Act also imposes certain requirements upon any person
controlling or seeking to control an insurance company domiciled in Nebraska.
Control is generally presumed to exist if any person, directly or indirectly,
owns, controls, holds with the power to vote or holds proxies representing 10%
or more of the voting securities of the insurance company or of any other person
or entity controlling the insurance company. The 10% presumption is not
conclusive and control may be found to exist at less than 10%. Persons owning
any securities of CUSA or Chandler Cayman must comply with the Holding Company
Act.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided. These
include the redefinition of risk exposure in areas such as product liability,
environmental damage and workers compensation. In addition, individual state
insurance departments may prevent premium rates for some classes of insureds
from reflecting the level of risk assumed by the insurer for those classes. Such
developments may adversely affect the profitability of various lines of
insurance. In some cases, these adverse effects on profitability can be
minimized through coverage repricing, if permitted by applicable regulations, or
limitations or cessation of the affected business.
COMPETITION
NAICO operates in a highly competitive industry and faces competition from
domestic and foreign insurers, many of which are larger, have greater financial,
marketing and management resources, have more favorable ratings by ratings
agencies and offer more diversified insurance coverages than NAICO.
A company's capacity to write insurance policies is dependent on a variety
of factors including its net worth or "surplus," the lines of business written,
the types of risk insured and its profitability. Since the late 1980's, the
industry has generally had excess underwriting capacity. This condition has
resulted in depressed premium rates and expanded policy terms, which generally
occur when excess underwriting capacity exists. NAICO continues to experience
pricing competition as the conditions of heightened price competition and
impaired underwriting performance continue in the industry as a whole.
20
<PAGE>
SUMMARY FINANCIAL DATA
The summary statements of operations below were derived from the audited
statements of operations for the twelve months ended December 31, 1996, 1997 and
1998. The summary statements of operations for the three month period ended
March 31, 1998 and 1999, were derived from CUSA's unaudited interim consolidated
statements of operations. Management's discussion and analysis that follows is
based in part on this summary information.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues
Net premiums earned..................................... $ 78,336 $ 80,702 $ 52,424 $ 12,105 $ 16,396
Interest income, net.................................... 5,663 6,130 4,904 1,393 1,044
Realized investment gains, net.......................... 157 790 1,036 15 52
Commission, fees and other income....................... 3,413 2,345 1,744 677 365
--------- --------- --------- --------- ---------
Total revenue........................................... 87,569 89,967 60,108 14,190 17,857
--------- --------- --------- --------- ---------
Operating expenses
Losses and loss adjustment expenses..................... 48,766 47,905 36,042 7,949 10,521
Policy acquisition costs................................ 27,910 23,346 10,735 2,840 3,365
General and administrative expenses..................... 13,074 12,065 11,235 3,069 2,660
Interest expense........................................ 146 442 887 125 216
Litigation expenses, net................................ (230) 923 423 129 57
--------- --------- --------- --------- ---------
Total operating expenses.................................. 89,666 84,681 59,322 14,112 16,819
--------- --------- --------- --------- ---------
Income (loss) before income taxes......................... (2,097) 5,286 786 78 1,038
Net income (loss)......................................... $ (1,780) $ 3,005 $ 433 $ (10) $ 616
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
ANALYSIS OF INSURANCE PROGRAM RESULTS OF OPERATIONS
The following tables summarize the net premiums earned and the financial
year (losses incurred and recognized by CUSA regardless of the year in which the
claim occurred) and accident year (losses incurred by CUSA for a particular year
regardless of the period in which CUSA recognizes the costs) loss and loss
adjustment expense ("LAE") ratios (computed by dividing losses and loss
adjustment expenses by net premiums earned) in each of the years presented. The
first table is summarized by major insurance program and includes all lines of
insurance written in each program. The second table is summarized by line of
insurance written and includes all net premiums earned and net losses and loss
adjustment expenses incurred from all insurance programs for that particular
line:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
INSURANCE PROGRAMS 1996 1997 1998
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STANDARD PROPERTY AND CASUALTY
Net premiums earned............................................................ $ 31,799 $ 44,887 $ 29,234
Financial year loss & LAE ratio................................................ 59.2% 68.4% 76.3%
Accident year loss & LAE ratio................................................. 62.3% 68.7% 73.6%
POLITICAL SUBDIVISIONS
Net premiums earned............................................................ $ 11,655 $ 12,416 $ 10,435
Financial year loss & LAE ratio................................................ 68.2% 58.1% 80.5%
Accident year loss & LAE ratio................................................. 73.0% 63.7% 73.6%
SURETY BONDS
Net premiums earned............................................................ $ 9,392 $ 10,533 $ 7,456
Financial year loss & LAE ratio................................................ 9.7% 7.9% 17.9%
Accident year loss & LAE ratio................................................. 38.2% 11.1% 20.2%
GROUP ACCIDENT AND HEALTH
Net premiums earned............................................................ $ 317 $ 2,303 $ 4,610
Financial year loss & LAE ratio................................................ 47.9% 43.3% 89.5%
Accident year loss & LAE ratio................................................. 99.5% 68.9% 72.6%
NONSTANDARD PRIVATE-PASSENGER AUTOMOBILE
Net premiums earned............................................................ $ 16,595 $ 8,841 $ 482
Financial year loss & LAE ratio................................................ 86.2% 72.2% (37.8)%
Accident year loss & LAE ratio................................................. 84.2% 62.7% 20.3%
OTHER
Net premiums earned............................................................ $ 8,578 $ 1,722 $ 207
Financial year loss & LAE ratio................................................ 77.2% 102.6% 20.7%
Accident year loss & LAE ratio................................................. 54.1% 84.7% 86.0%
TOTAL
Net premiums earned............................................................ $ 78,336 $ 80,702 $ 52,424
Financial year loss & LAE ratio................................................ 62.3% 59.4% 68.8%
Accident year loss & LAE ratio................................................. 64.9% 60.1% 65.5%
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
LINES OF INSURANCE 1996 1997 1998
- --------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
WORKERS COMPENSATION
Net premiums earned............................................................ $ 35,273 $ 35,646 $ 9,937
Financial year loss & LAE ratio................................................ 57.7% 70.3% 66.3%
Accident year loss & LAE ratio................................................. 58.0% 72.5% 75.3%
AUTOMOBILE LIABILITY
Net premiums earned............................................................ $ 16,433 $ 13,704 $ 11,419
Financial year loss & LAE ratio................................................ 90.5% 75.7% 75.2%
Accident year loss & LAE ratio................................................. 77.5% 70.8% 73.2%
OTHER LIABILITY
Net premiums earned............................................................ $ 7,022 $ 10,014 $ 11,357
Financial year loss & LAE ratio................................................ 61.5% 47.1% 66.3%
Accident year loss & LAE ratio................................................. 67.9% 43.8% 54.1%
SURETY
Net premiums earned............................................................ $ 9,495 $ 10,671 $ 7,619
Financial year loss & LAE ratio................................................ 9.6% 8.0% 18.1%
Accident year loss & LAE ratio................................................. 37.9% 11.1% 20.5%
AUTOMOBILE PHYSICAL DAMAGE
Net premiums earned............................................................ $ 6,788 $ 5,726 $ 4,702
Financial year loss & LAE ratio................................................ 73.3% 60.0% 85.8%
Accident year loss & LAE ratio................................................. 76.5% 60.7% 84.3%
ACCIDENT AND HEALTH
Net premiums earned............................................................ $ 564 $ 2,529 $ 4,610
Financial year loss & LAE ratio................................................ 59.1% 43.1% 91.1%
Accident year loss & LAE ratio................................................. 90.5% 70.6% 72.6%
PROPERTY
Net premiums earned............................................................ $ 1,467 $ 1,912 $ 2,332
Financial year loss & LAE ratio................................................ 113.8% 74.1% 135.8%
Accident year loss & LAE ratio................................................. 108.6% 77.9% 128.0%
INLAND MARINE
Net premiums earned............................................................ $ 1,294 $ 500 $ 448
Financial year loss & LAE ratio................................................ 113.4% 195.6% 125.9%
Accident year loss & LAE ratio................................................. 150.4% 122.9% 103.5%
TOTAL
Net premiums earned............................................................ $ 78,336 $ 80,702 $ 52,424
Financial year loss & LAE ratio................................................ 62.3% 59.4% 68.8%
Accident year loss & LAE ratio................................................. 64.9% 60.1% 65.5%
</TABLE>
PURCHASE OF ADDITIONAL REINSURANCE
In 1998, NAICO believed that reinsurance market conditions were conducive to
the purchase of additional reinsurance. During the first quarter of 1998, NAICO
purchased additional reinsurance under its workers compensation and casualty
reinsurance programs. During the second quarter of 1998, NAICO purchased
additional reinsurance for its construction surety bond reinsurance program.
During the second quarter of 1997, management concluded that it would be in
NAICO's best interest to substantially reduce its underwriting risk in the
California portion of the nonstandard private-passenger automobile program. In
July 1997, NAICO purchased additional reinsurance for this portion of the
program.
The purchase of the additional reinsurance coverages in 1997 and 1998
substantially reduced the per occurrence retention for NAICO's workers
compensation, casualty, surety bond and nonstandard private-passenger automobile
lines of business, but resulted in significantly lower net premiums earned,
losses and loss adjustment expenses and policy acquisition costs. See
"--Premiums Earned" and "--Policy Acquisition Costs."
23
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
PREMIUMS EARNED
The following tables set forth premiums earned on a gross basis (before
reductions for premiums ceded to reinsurers) and on a net basis (after such
reductions) for each insurance program as well as each line of insurance, for
the three month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
GROSS PREMIUMS
EARNED NET PREMIUMS EARNED
-------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
-------------------- --------------------
INSURANCE PROGRAMS 1999 1998 1999 1998
- ------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Standard property and casualty..................................... $ 21,635 $ 17,177 $ 8,774 $ 6,520
Political subdivisions............................................. 7,181 5,810 3,042 2,458
Surety bonds....................................................... 3,555 2,674 2,344 1,564
Group accident and health.......................................... 2,596 1,411 2,286 1,021
Nonstandard private-passenger automobile........................... 88 2,586 -- 286
Other.............................................................. (82) 390 (50) 256
--------- --------- --------- ---------
TOTAL............................................................ $ 34,973 $ 30,048 $ 16,396 $ 12,105
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
GROSS PREMIUMS
EARNED NET PREMIUMS EARNED
-------------------- --------------------
THREE MONTHS ENDED THREE MONTHS ENDED
-------------------- --------------------
LINES OF INSURANCE 1999 1998 1999 1998
- ------------------------------------------------------------------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Workers compensation............................................... $ 12,071 $ 11,502 $ 2,538 $ 2,437
Automobile liability............................................... 4,789 5,553 3,380 2,776
Other liability.................................................... 5,602 3,671 3,515 2,456
Surety............................................................. 3,602 2,712 2,391 1,602
Automobile physical damage......................................... 1,617 1,702 1,363 1,165
Accident and health................................................ 2,595 1,419 2,286 1,021
Property........................................................... 3,923 2,990 765 554
Inland marine...................................................... 774 499 158 94
--------- --------- --------- ---------
TOTAL............................................................ $ 34,973 $ 30,048 $ 16,396 $ 12,105
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Gross premiums earned increased 16% in the first quarter of 1999. Net
premiums earned increased 35% in the first quarter of 1999. The increases are
primarily attributable to increased premium production in Oklahoma and Texas.
Gross premiums earned in the standard property and casualty program
increased 26% in the first quarter of 1999. Net premiums earned increased 35% in
the first quarter of 1999. The increases are primarily attributable to increased
production in Texas.
Gross premiums earned in the political subdivisions program increased 24% in
the first quarter of 1999. Net premiums earned increased 24% in the first
quarter of 1999 due primarily to expansion of the school districts program in
Texas and Missouri and increased production in Oklahoma.
Gross premiums earned in the surety bond program increased 33% in the first
quarter of 1999. Net premiums earned increased 50% in the first quarter of 1999
due primarily to increased production in California and New Mexico.
24
<PAGE>
Gross premiums earned in the group accident and health program increased 84%
in the first quarter of 1999. Net premiums earned increased 124% in the first
quarter of 1999 due primarily to a new program covering Oklahoma employers on a
fully insured basis which was effective January 1, 1999. Net premiums earned for
this program were $1.2 million in the first quarter of 1999. NAICO discontinued
writing new policies for the excess portion of its group accident and health
program effective April 1, 1999.
During 1997, NAICO discontinued the Oklahoma and Arizona portions of its
nonstandard private-passenger automobile program. Effective July 1, 1997, NAICO
entered into a 100% quota share reinsurance agreement to fully reinsure the risk
in the California portion of the program. NAICO has discontinued the California
program.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At March 31, 1999, CUSA's investment portfolio consisted primarily of fixed
income U.S. government, high-quality corporate and tax exempt bonds, with
approximately 7% invested in cash and money market instruments. Income generated
from this portfolio is largely dependent upon prevailing levels of interest
rates. CUSA's portfolio contains no junk bonds or real estate investments.
Net interest income decreased 25% in the first quarter of 1999 due to a
reduction in invested assets. Invested assets declined from $104.0 million at
March 31, 1998, to $89.2 million at March 31, 1999, due primarily to the
purchase of additional reinsurance coverages in 1998.
COMMISSIONS, FEES AND OTHER INCOME
CUSA's income from commissions, fees and other income decreased 46% in the
first quarter of 1999. The majority of CUSA's income from commissions, fees and
other income are from L&W's brokerage commissions and fees.
L&W's brokerage commissions and fees before intercompany eliminations were
$2.0 million in the first quarter of 1999 versus $1.8 million in the first
quarter of 1998. A large portion of the brokerage commissions and fees for L&W
is incurred by NAICO and thus eliminated in the consolidation of CUSA's
subsidiaries.
L&W disposed of certain equipment in the first quarter of 1998 that resulted
in a gain of approximately $145,000 which was included in other income.
LOSSES AND LOSS ADJUSTMENT EXPENSES
CUSA estimates losses and loss adjustment expenses based on historical
experience and payment and reporting patterns for the type of risk involved.
These estimates are based on data available at the time of the estimate and are
periodically reviewed by independent professional actuaries. See
"Business--Reserves."
The percentage of losses and loss adjustment expenses to net premiums earned
("loss ratio") was 64.2% for the first quarter of 1999 and 65.7% in the first
quarter of 1998. Storm-related losses from wind and hail totaled $441,000 in the
first quarter of 1999 and increased the loss ratio by 2.7 percentage points.
Storm-related losses totaled $115,000 in the first quarter of 1998, and
increased the 1998 loss ratio by 1.0 percentage points.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the acquisition of
new and renewal business and generally include direct costs such as premium
taxes, commissions to agents and ceding companies and premium-related
assessments and indirect costs such as salaries and expenses of personnel who
25
<PAGE>
perform and support underwriting activities. NAICO also receives ceding
commissions from certain of the reinsurers who assume premiums from NAICO under
certain reinsurance contracts and the ceding commissions are accounted for as a
reduction of policy acquisition costs. Direct policy acquisition costs and
ceding commissions are deferred and amortized over the terms of the policies.
Recoverability of such deferred costs is dependent on the related unearned
premiums on the policies being more than expected claim losses. NAICO considers
anticipated interest income in determining if a premium deficiency exists.
The following table sets forth CUSA's policy acquisition costs for each of
the three month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commissions expense................................................................ $ 4,436 $ 3,580
Other premium related assessments.................................................. 400 506
Premium taxes...................................................................... 426 827
Excise taxes....................................................................... 46 65
Dividends to policyholders......................................................... 87 75
Other expense...................................................................... 30 68
--------- ---------
Total direct expenses.............................................................. 5,425 5,121
Indirect underwriting expenses..................................................... 3,824 2,989
Commissions received from reinsurers............................................... (5,852) (5,991)
Adjustment for deferred acquisition costs.......................................... (32) 721
--------- ---------
Net policy acquisition costs....................................................... $ 3,365 $ 2,840
--------- ---------
--------- ---------
</TABLE>
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 26.4% for the first quarter of 1999 and 27.6% for the
first quarter of 1998. Commission expense as a percentage of gross written and
assumed premiums was 12.6% for the first quarter of 1999 versus 12.2% for the
1998 quarter. The 1999 commission rate increased due primarily to a higher
proportion of surety bond direct written and assumed premiums to total direct
written and assumed premiums in the 1999 quarter. Surety bonds have historically
had a higher commission rate than the Company's other lines of business which is
normal for the industry.
Indirect underwriting expenses were 10.9% and 10.2% of total direct written
and assumed premiums in the three month periods ended March 31, 1999 and 1998,
respectively. Indirect expenses include general overhead and administrative
costs associated with the acquisition of new and renewal business, some of which
is relatively fixed in nature, thus, the percentage of such expenses to direct
written and assumed premiums will vary depending on the Company's overall
premium volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 7.5% and 10.0% of gross premiums
earned and commissions, fees and other income in the first quarter of 1999 and
1998, respectively. General and administrative expenses have historically not
varied in direct proportion to the Company's revenues. A portion of such
expenses is allocated to policy acquisition costs (indirect underwriting
expenses) and loss and loss adjustment expenses based on various factors
including employee counts, salaries, occupancy and specific identification.
Because certain types of expenses are fixed in nature, the percentage of such
expenses to revenues will vary depending on the Company's overall premium
volume.
26
<PAGE>
INTEREST EXPENSE
Interest expense increased 73% in the first quarter of 1999 due primarily to
increased levels of bank debt during the 1999 quarter.
LITIGATION AND LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving the CenTra Group. Litigation expenses decreased 56% in the
first quarter of 1999 due to decreased activity related to the CenTra
litigation. Increased or renewed activity could result in greater litigation
expenses in the future.
NET INCOME (LOSS)
As a result of the factors described above, CUSA reported net income of
$616,000 in the first quarter of 1999 compared to a net loss of $12,000 in the
first quarter of 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
PREMIUMS EARNED
The following tables set forth premiums earned on a gross basis (before
reductions for premiums ceded to reinsurers) and on a net basis (after such
reductions) for each insurance program as well as each line of insurance, as of
December 31 for each year presented:
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
---------------------------------- -------------------------------
INSURANCE PROGRAMS 1996 1997 1998 1996 1997 1998
- -------------------------------------------- ---------- ---------- ---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Standard property and casualty.............. $ 45,066 $ 62,841 $ 76,458 $ 31,799 $ 44,887 $ 29,234
Political subdivisions...................... 19,314 21,503 25,091 11,655 12,416 10,435
Surety bonds................................ 11,416 12,320 11,915 9,392 10,533 7,456
Group accident and health................... 512 3,379 6,067 317 2,303 4,610
Nonstandard private-passenger automobile.... 16,595 14,303 6,015 16,595 8,841 482
Other....................................... 10,426 2,362 488 8,578 1,722 207
---------- ---------- ---------- --------- --------- ---------
TOTAL....................................... $ 103,329 $ 116,708 $ 126,034 $ 78,336 $ 80,702 $ 52,424
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
---------------------------------- -------------------------------
LINES OF INSURANCE 1996 1997 1998 1996 1997 1998
- -------------------------------------------- ---------- ---------- ---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Workers compensation........................ $ 47,248 $ 47,198 $ 48,699 $ 35,273 $ 35,646 $ 9,937
Automobile liability........................ 17,898 20,672 20,005 16,433 13,704 11,419
Other liability............................. 9,412 13,593 17,593 7,022 10,014 11,357
Surety...................................... 11,519 12,458 12,078 9,495 10,671 7,619
Automobile physical damage.................. 6,945 7,072 6,307 6,788 5,726 4,702
Accident and health......................... 830 3,697 6,074 564 2,529 4,610
Property.................................... 7,473 10,331 12,916 1,467 1,912 2,332
Inland marine............................... 2,004 1,687 2,362 1,294 500 448
---------- ---------- ---------- --------- --------- ---------
TOTAL....................................... $ 103,329 $ 116,708 $ 126,034 $ 78,336 $ 80,702 $ 52,424
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
</TABLE>
Gross premiums earned, before reductions for premiums ceded to reinsurers,
increased 13% and 8% in 1997 and 1998, respectively. The increases are primarily
attributable to increased production in
27
<PAGE>
Oklahoma and Texas. Net premiums earned, after such reductions, increased 3% in
1997 and decreased 35% in 1998. The reduction in net premiums earned in 1998 was
due primarily to the purchase of additional reinsurance for NAICO's workers
compensation, casualty and nonstandard private-passenger automobile insurance
programs described previously. See "--Purchase of Additional Reinsurance."
Gross premiums earned in the standard property and casualty program
increased 39% and 22% in 1997 and 1998, respectively. The increases are
primarily attributable to increased production in Oklahoma and contiguous
states, principally Texas. Net premiums earned increased 41% in 1997 and
decreased 35% in 1998, due primarily to the purchase of additional reinsurance
in 1998 as previously described.
Gross premiums earned in the political subdivisions program increased 11%
and 17% in 1997 and 1998, respectively, from the prior years, due primarily to
the expansion of the school districts portion of the program in Texas and
Missouri and increased production in Oklahoma. Net premiums earned increased 7%
in 1997 and decreased 16% in 1998, due primarily to the purchase of additional
reinsurance in 1998 as previously described.
Gross premiums earned in the surety bond program increased 8% in 1997 and
decreased 3% in 1998. Net premiums earned in the surety bond program increased
12% in 1997 and decreased 29% in 1998. Net premiums earned from surety bonds
produced by L&W increased 22% in 1997 and decreased 35% in 1998. Increased
competition, higher reinsurance costs, and/or changes in risk retained
contributed to the decline in 1998. The remaining reduction in 1998 was
attributable to production and reinsurance adjustments related to the runoff of
a portion of the surety bond program which was terminated on December 31, 1995.
During 1996, NAICO began writing excess group accident and health coverage
for small to medium sized employers generally in Oklahoma and Texas. During
1997, NAICO began offering fully insured group accident and health coverage on a
limited basis. Gross premiums earned in the group accident and health program
increased 560% and 80% in 1997 and 1998, respectively. Net premiums earned in
the group accident and health program increased 626% and 100% in 1997 and 1998,
respectively. The significant increase in group accident and health premiums are
primarily the result of the growth expected in start-up programs. NAICO is
currently evaluating this program and may modify or discontinue certain portions
of this program in 1999.
Nonstandard private-passenger automobile gross premiums decreased 14% and
58% in 1997 and 1998, respectively. Net premiums earned in the nonstandard
private passenger automobile premiums decreased 47% and 95% in 1997 and 1998,
respectively. During 1997, NAICO discontinued the Oklahoma and Arizona portions
of its nonstandard private-passenger automobile program. Effective July 1, 1997,
NAICO entered into a 100% quota share reinsurance agreement to fully reinsure
the risk in the California portion of the program. NAICO has discontinued the
California program.
NAICO participates in various mandatory pools covering workers compensation
for insureds that were unable to purchase this coverage from an insurance
company on a voluntary basis. In addition, NAICO receives direct assignments to
write workers compensation for such insureds in certain states in lieu of
participation in related pools. The majority of the change found in NAICO's
other programs is attributable to participation in the pools covering workers
compensation and from direct assignments (included in "Other" in the preceding
table). NAICO's net premiums earned from the previously mentioned mandatory
pools and workers compensation assignments decreased 79% and 96% in 1997 and
1998, respectively. The declines in 1997 and 1998 were attributable to decreased
activity from the pools and fewer assignments in certain states. Both the size
of the involuntary market and NAICO's relative participation in states having a
mandatory pool mechanism declined in these years.
28
<PAGE>
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At December 31, 1998, CUSA's investment portfolio consisted primarily of
fixed income U.S. Government, high-quality corporate and tax exempt bonds, with
less than 10% invested in cash and money market instruments. Income generated
from this portfolio is largely dependent upon prevailing levels of interest
rates. CUSA's portfolio contains no junk bonds or real estate investments.
Net interest income increased 8% in 1997. Net interest income decreased 20%
in 1998, due primarily to lower interest rates in 1998 and a reduction in
invested assets due to the purchase of additional reinsurance in 1998. In
addition, during the fourth quarter of 1997 NAICO shifted a portion of its fixed
maturities portfolio from taxable to tax exempt bonds (which generally have a
lower before-tax yield). Income from tax exempt securities was $1 million in
1998 as compared to $112,000 in 1997.
Net realized investment gains were $157,000, $790,000 and $1 million in
1996, 1997 and 1998, respectively. Increased net realized investment gains in
1997 resulted primarily from NAICO shifting a portion of its fixed maturities
portfolio from taxable to tax exempt bonds (which generally have a lower yield)
and NAICO's sale of common stock of Century Business Services, Inc. The Century
Business Services stock was received by NAICO in early 1997 as a part of a 1996
settlement with a former underwriting manager.
The average net yield on NAICO's portfolio, including net realized
investment gains, was 6.0% in 1996, 6.5% in 1997 and 5.9% in 1998. The average
net yield on NAICO's portfolio excluding net realized investment gains for these
years was 6.3%, 5.9% and 5.5%, for 1996, 1997, and 1998 respectively.
COMMISSIONS, FEES AND OTHER INCOME
CUSA's income from commissions, fees and other income decreased 31% and 26%
for 1997 and 1998, respectively. The majority of CUSA's income from commissions,
fees and other income are from L&W's brokerage commissions and fees.
L&W's brokerage commissions and fees before intercompany eliminations were
$8.5 million in 1996, $9.0 million in 1997 and $8.5 million in 1998. The
decrease in 1998 is primarily a result of increased competition and general
declines in premium rates. A portion of the brokerage commissions and fees for
L&W is incurred by NAICO and thus eliminated in the consolidation of CUSA's
subsidiaries.
L&W disposed of certain equipment in 1998 that resulted in a gain of
approximately $145,000 before provision for federal income tax.
Fees generated by Network Administrators, Inc., a wholly owned subsidiary of
CUSA, were $722,000 in 1996 and $435,000 in 1997. Network no longer functions as
a third-party administrator and did not generate any income in 1998.
LOSSES AND LOSS ADJUSTMENT EXPENSES
CUSA estimates losses and loss adjustment expenses based on historical
experience and payment and reporting patterns for the type of risk involved.
These estimates are based on data available at the time of the estimate and are
periodically reviewed by independent professional actuaries. See
"Business--Reserves."
The percentage of losses and loss adjustment expenses to net premiums earned
was 62.3%, 59.4% and 68.8% in 1996, 1997 and 1998, respectively. The increase in
the 1998 loss ratio was primarily the result of additional loss development from
prior accident years which was recognized in 1998, and an
29
<PAGE>
increase in storm-related losses. The prior year loss development recognized in
1998 totaled $1.7 million and increased the loss ratio by 3.2 percentage points.
Storm-related losses from wind and hail totaled $1.5 million in 1998 compared to
$459,000 in 1997, and increased the loss ratio for 1998 by 2.9 percentage
points.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the acquisition of
new and renewal business and generally include direct costs such as premium
taxes, commissions to agents and ceding companies and premium-related
assessments and indirect costs such as salaries and expenses of personnel who
perform and support underwriting activities. NAICO also receives ceding
commissions from certain of the reinsurers who assume premiums from NAICO under
certain reinsurance contracts and the ceding commissions are accounted for as a
reduction of policy acquisition costs. Direct policy acquisition costs and
ceding commissions are deferred and amortized over the terms of the policies.
Recoverability of such deferred costs is dependent on the related unearned
premiums on the policies being more than expected claim losses. NAICO considers
anticipated interest income in determining if a premium deficiency exists.
The following table sets forth CUSA's policy acquisition costs for each of
the three years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Commissions expense....................................... $ 16,489 $ 15,860 $ 15,472
Other premium related assessments......................... 1,258 744 928
Premium taxes............................................. 2,705 3,400 3,144
Excise taxes.............................................. 109 153 161
Dividends to policyholders................................ 454 1,155 242
Other expense............................................. 365 146 151
---------- ---------- ----------
Total direct expenses..................................... 21,380 21,458 20,098
---------- ---------- ----------
Indirect underwriting expenses............................ 14,831 13,464 13,858
Commissions received from reinsurers...................... (7,835) (11,571) (26,776)
Adjustment for deferred acquisition costs................. (466) (5) 3,555
---------- ---------- ----------
Net policy acquisition costs.............................. $ 27,910 $ 23,346 $ 10,735
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 33.5%, 28.4% and 25.3% in 1996, 1997 and 1998,
respectively. For these periods, commission expense as a percentage of gross
written and assumed premiums was 15.3%, 12.9% and 11.5%. The commission rate for
a portion of the surety bond program varies inversely with the loss ratio
pursuant to a commission arrangement contingent on the loss experience of the
program. The expected loss ratio for that portion of the surety bond program was
lowered in 1996, which increased the percentage of net policy acquisition costs
to net premiums earned by 2.0 percentage points. In 1998, the commission rate
for a portion of the surety bond program was lowered due to an increase in the
expected loss ratio which reduced the percentage of net policy acquisition costs
to net premiums earned by 2.2 percentage points. In addition, the 1998
commission rate declined due to the lower proportion of surety bond direct
written and assumed premiums to total direct written and assumed premiums.
Surety bonds have historically had a higher commission rate than NAICO's other
lines of business.
30
<PAGE>
Indirect underwriting expenses were 13.7%, 10.9% and 10.3% of direct written
and assumed premiums in 1996, 1997 and 1998, respectively. Indirect expenses
include general overhead and administrative costs associated with the
acquisition of new and renewal business, some of which is relatively fixed in
nature, thus, the percentage of such expenses to direct written and assumed
premiums will vary depending on NAICO's overall premium volume. CUSA incurred
$1.5 million in indirect underwriting expenses related to the termination of an
arrangement with a surety bond underwriting manager and settlement of associated
litigation, which was 1.4% of direct written and assumed premiums in 1996.
Commissions received from reinsurers increased in 1997 as a result of the 100%
quota-share reinsurance arrangement for the California portion of the
nonstandard private-passenger automobile program which was effective July 1,
1997. NAICO received commissions totaling $1.9 million and $909,000 during 1997
and 1998, respectively, under this quota-share reinsurance arrangement. During
1998, NAICO received commissions from reinsurers totaling approximately $13.8
million related to the purchase of additional reinsurance under its workers
compensation and casualty reinsurance programs. See "--Purchase of Additional
Reinsurance."
NAICO incurred $2.1 million, $527,000 and $50,000 in indirect underwriting
expenses for uncollectible ceded reinsurance in 1996, 1997 and 1998,
respectively. The 1996 amount includes an arbitration award which was made in
favor of NAICO against certain reinsurers for $1.1 million less than had been
recorded. NAICO reduced its reinsurance recoverables accordingly.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 12.2%, 10.1% and 8.8% of gross
premiums earned and commissions, fees and other income in 1996, 1997 and 1998,
respectively. General and administrative expenses have historically not varied
in direct proportion to CUSA's revenues. A portion of such expenses is allocated
to policy acquisition costs (indirect underwriting expenses) and loss and loss
adjustment expenses based on various factors, including employee counts,
salaries, occupancy and specific identification. Because certain types of
expenses are fixed in nature, the percentage of such expenses to revenues will
vary depending on CUSA's overall premium volume. General and administrative
expenses decreased 7.7% in 1997, due primarily to $441,000 in litigation-related
expenses related to the termination of an agreement with a former underwriting
manager and $527,000 in litigation-related expenses related to the reinsurance
arbitration discussed below which were incurred in 1996. General and
administrative expenses decreased 6.9% in 1998, due primarily to a reduction in
costs attributable to Network. Network ceased functioning as a third party
administrator during 1997.
INTEREST EXPENSE
Interest expense increased 203% in 1997, and increased 101% in 1998, due
primarily to increased levels of bank debt. See "--Liquidity and Capital
Resources."
LITIGATION EXPENSE
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving the CenTra Group. Litigation expenses increased from a
credit of $230,000 in 1996 to an expense of $923,000 in 1997 due to CUSA's
recovery of a portion of its litigation expenses from its director and officers
liability insurer in 1996. Litigation expenses decreased from $923,000 in 1997
to $423,000 in 1998 as the number and complexity of litigated issues diminished.
Increased or renewed activity could result in greater litigation expenses in
1999 or future years.
See "Legal Proceedings" and Note 10 to Consolidated Financial Statements.
31
<PAGE>
NET INCOME (LOSS)
As a result of the factors described above, CUSA reported net income of
$433,000 in 1998 compared to net income of $3 million in 1997 and a net loss of
$1.8 million in 1996.
Net income for 1996 was affected by charges totaling $1.5 million for the
settlement attributed to legal proceedings and related matters arising from the
termination of an underwriting and production contract with CUSA's former
underwriting manager for a portion of CUSA's surety bond program. In addition,
legal expenses related to this matter were $441,000 reflected in general and
administrative expenses for 1996. CUSA's results for 1996 also reflect a charge
totaling $1.1 million from an arbitration award that was lower than expected.
Legal expenses related to this arbitration award were $527,000 reflected in
general and administrative expenses for 1996.
In 1996, CUSA also recorded an $881,000 estimated recovery of costs from its
directors and officers liability insurer related to CUSA's claim for
reimbursable amounts previously paid for defense and litigation costs associated
with the litigation involving the CenTra Group. See "Legal Proceedings" and Note
10 to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
CUSA is a holding company receiving cash principally through borrowings and
subsidiary dividends and other payments, subject to various regulatory
restrictions described in "Regulation" and the Notes to Consolidated Financial
Statements. The capacity of insurance companies to write insurance is based on
maintaining liquidity and capital resources sufficient to pay claims and
expenses as they become due. The primary sources of liquidity for CUSA's
subsidiaries are funds generated from insurance premiums, investment income,
capital contributions from CUSA and proceeds from sales and maturities of
portfolio investments. The principal expenditures are payment of losses and loss
adjustment expenses, insurance operating expenses and commissions.
NAICO maintains a liquid operating position and follows investment
guidelines that are intended to provide for an acceptable return on investment
while preserving capital, maintaining sufficient liquidity to meet obligations
and keeping a sufficient margin of capital and surplus to ensure unimpaired
ability to write insurance.
NAICO purchases fixed-maturity investments to support its investment
strategies which are developed based on many factors including rate of return,
maturity, credit risk, tax considerations, regulatory requirements and its mix
of business. At the time of purchase, investments in debt securities that NAICO
has the positive intent and ability to hold to maturity are classified as held
to maturity and reported at amortized cost; all other debt securities are
reported at fair value. Investments classified as trading are actively and
frequently bought and sold with the objective of generating income on short-term
differences in price. Realized and unrealized gains and losses on securities
classified as trading account assets are recognized in current operations. NAICO
has not classified any investments as trading account assets. Securities not
classified as held to maturity or trading are classified as available for sale,
with the related unrealized gains and losses excluded from earnings and reported
net of tax as a separate component of shareholder equity until realized.
In 1996 and 1997, CUSA provided $1.8 million and $8.1 million, respectively,
in cash from operations. During 1998, CUSA used $10.3 million cash in operations
due primarily to the purchase of additional reinsurance described previously. To
augment maturities and reposition its portfolio, NAICO chose to liquidate
certain fixed maturity securities that were available for sale prior to their
maturities. In the first quarter of 1999, CUSA used $4.7 million in cash from
operations due primarily to increases in premiums receivable and reinsurance
recoverables, less an increase in unpaid losses and loss adjustment expenses,
which generally correspond to the increase in written premiums in the 1999
quarter and
32
<PAGE>
to the purchase of additional reinsurance coverages in 1998. CUSA used $3.3
million in cash from operations in the first quarter of 1998.
Cash flows from investing activities were primarily the result of normal
purchases and sales of investment securities, and in 1997 NAICO sold the common
stock of Century Business Services, Inc. for a total of $2.5 million. The
Century Business Services common stock was received as a part of NAICO's 1996
settlement with a former underwriting manager. Net realized investment gains
before income taxes in 1997 and 1998 were $790,000 and $1.0 million,
respectively, from the sale of investments. Net realized investment gains were
$52,000 and $15,000 in the first quarter of 1999 and 1998, respectively. In
addition, in 1998, NAICO received proceeds of $36.2 million from the sale of
fixed-income securities that were available for sale prior to their maturity.
The average maturity of CUSA's investments was 4.7 years and 4.5 years at
December 31, 1997 and 1998, respectively, and was 4.3 years at March 31, 1999.
NAICO is required to deposit securities with regulatory agencies in several
states in which it is licensed as a condition of conducting operations in the
state. At March 31, 1999 and December 31, 1998, the total amount of cash and
investments restricted for NAICO as a result of these arrangements was $8.1
million and $8.2 million, respectively.
Cash flows from financing activities are affected by the level of activity
related to transactions with affiliates and bank borrowings. During 1996, CUSA
borrowed $4.5 million in bank debt for a three year term. During the fourth
quarter of 1997, the related loan agreement was amended to provide for
additional borrowings up to $8.5 million and to revise the term to five years
with interest payable at a floating rate equal to 1% over the prime rate
published in the Wall Street Journal, which was 7.75% at December 31, 1998 and
March 31, 1999. During March 1998, CUSA borrowed an additional $6.2 million on
the note and the proceeds were used to repay amounts due to Chandler Barbados.
The outstanding balance of the note was $7.4 million at December 31, 1998, and
$7.1 million at March 31, 1999. The bank note is collateralized by shares of
NAICO stock owned by CUSA.
In February 1998, CUSA entered into a five year loan agreement with a bank
having a principal amount of $2.3 million and an interest rate of 7.75%. In
September 1998, the interest rate was reduced to 7.5%. Monthly payments are
approximately $46,000 including principal and interest. The outstanding balance
of the note was $1.9 million at December 31, 1998 and $1.8 million at March 31,
1999. The loan is collateralized by certain equipment which was purchased with
the proceeds of the loan. The equipment had previously been leased by CUSA.
At December 31, 1998, CUSA's subsidiaries were committed under
noncancellable operating leases for certain equipment and office space. Rental
payments under these leases were $1.1 million in both 1996 and 1997 and were
$503,000 for 1998. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................................ $ 367
2000................................................................ 282
2001................................................................ 235
2002................................................................ 135
2003................................................................ 91
------
$ 1,110
------
------
</TABLE>
The Company is also currently planning for the construction of a new office
building with approximately 46,000 square feet of usable space.
The Company believes that working capital requirements, debt service
obligations and operating expenditures are expected to be funded from cash flows
provided by operations.
33
<PAGE>
DISCLOSURES ABOUT MARKET RISK
CUSA's consolidated balance sheets include a certain amount of assets and
liabilities whose fair values are subject to market risk. Due to NAICO's
significant investment in fixed-maturity investments, interest rate risk
represents the largest market risk factor affecting CUSA's consolidated
financial position. Increases and decreases in prevailing interest rates
generally translate into increases and decreases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the credit worthiness of the issuer, prepayment options,
relative values of alternative investments, liquidity of the instrument and
other general market conditions.
As of March 31, 1999, and December 31, 1998, substantially all of the
investments of NAICO were in fixed-maturity investments (rated Aa3 or AA- or
better by Moody's Investors Service, Inc. or Standard & Poor's, respectively),
interest-bearing money market accounts and a collateralized repurchase
agreement. CUSA does not hold any investments classified as trading account
assets or derivative financial instruments.
The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates on CUSA's fixed-maturity investment portfolio.
It is assumed that the changes occur immediately and uniformly, with no effect
given to any steps that management might take to counteract that change. The
hypothetical changes in market interest rates reflect what could be deemed best
and worst case scenarios. The fair values shown in the following table are based
on contractual maturities. Significant variations in market interest rates could
produce changes in the timing of repayments due to prepayment options available.
The fair value of such instruments could be affected and, therefore, actual
results might differ from those reflected in the following table:
<TABLE>
<CAPTION>
ESTIMATED
FAIR
VALUE AFTER
HYPOTHETICAL
FAIR VALUE AT CHANGE IN
DECEMBER 31, 1998 INTEREST RATE
----------------- HYPOTHETICAL -------------
CHANGE IN
INTEREST RATE
(BP=BASIS POINTS)
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Fixed-maturity investments (1).......................... $ 81,309 100 bp increase $ 78,466
200 bp increase 75,789
100 bp decrease 84,331
200 bp decrease 87,547
</TABLE>
- --------------------------
(1) Excludes short-term investments with a fair value of $4.3 million as
management does not feel that these investments are exposed to significant
interest rate risk due to their maturity dates.
The table above illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at December 31, 1998, would reduce the
estimated fair value of NAICO's fixed-maturity investments by approximately $5.5
million at that date.
In addition to NAICO's fixed-maturity investments, CUSA also has notes
payable that are subject to interest rate risk. The table below presents the
carrying value of the instruments (which approximates fair value), as well as
the average interest rate and the principal payments categorized by expected
maturity dates.
<TABLE>
<CAPTION>
NOTES PAYABLE- NOTES PAYABLE-
MATURITY DATES FIXED RATE (2) VARIABLE RATE (3)
- --------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
1999........................................................... $ 500 $ 1,549
2000........................................................... 458 1,690
2001........................................................... 495 1,848
2002........................................................... 533 2,375
2003........................................................... 27 --
------ ------
Total.......................................................... $ 2,013 $ 7,462
------ ------
------ ------
</TABLE>
- --------------------------
(2) Average interest rate is 7.5%.
(3) Interest is payable at a floating rate equal to 1% over the prime rate
published in the Wall Street Journal, which was 7.75% at December 31, 1998,
and March 31, 1999.
34
<PAGE>
CENTRA LITIGATION
Under the heading "Legal Proceedings" we describe the extensive CenTra
litigation between CUSA and its affiliates and the CenTra group. While CUSA is a
party to the CenTra litigation, the litigation primarily relates to disputes
between its affiliates and CenTra and its affiliates.
While CUSA believes that it is likely that it and its affiliates will
ultimately prevail as to all material claims asserted in the litigation, should
the litigation be modified, reversed or decided adversely to either CUSA or
NAICO, such event could have a material adverse effect on CUSA, including the
financial condition of NAICO and the ability of NAICO to pay dividends or other
payments to CUSA.
YEAR 2000 READINESS DISCLOSURES
Computer software, hardware, microprocessor chips and other computer
equipment use two digits to identify a particular year, and therefore may not
recognize the number "00" or may recognize it as a year prior to 1999. Unless
computer equipment and software programs are modified to correct these Year 2000
Problems, errors could result. These errors could cause damage to personal
property and disrupt business practices and functions. In addition to potential
problems from computer systems, potential problems could arise from equipment
with embedded chips, such as vaults, elevators, aircraft and other systems not
generally classified as information technology systems.
CUSA is heavily dependent upon complex information technology computer
systems for its operations. CUSA has taken action to attempt to identify the
nature and extent of the work required to assess and remediate Year 2000
Problems with respect to its systems, products and infrastructures, including
non-information technology systems, none of which are considered critical to
operations. CUSA began work in 1995 to prepare its financial, information and
other computer-based systems for the year 2000, including updating existing
legacy systems, and such work as currently planned is substantially complete at
this time. CUSA estimates that it has spent $350,000 updating these systems to
address Year 2000 Problems, and such costs were expensed as they were incurred,
primarily in 1996 and 1997.
During the fourth quarter of 1998, CUSA retained an independent consultant
to prepare a plan for testing its information technology systems. In late 1998,
CUSA determined that the testing would be performed by its employees, and this
testing is anticipated to be completed during the first half of 1999. During the
fourth quarter of 1998, CUSA incurred approximately $150,000 in additional
expenses to evaluate its information systems and in preparation of plans to test
its information systems.
Evaluation and testing of CUSA's efforts to address Year 2000 Problems is
ongoing. CUSA estimates the additional cost of the testing to be approximately
$115,000, of which approximately $60,000 was incurred during the first quarter
of 1999, which includes the use of internal employees, cost of external software
to enhance testing efforts and computer rental costs. These costs will be
expensed during 1999 as incurred. This estimate is based on currently available
information. CUSA continues to evaluate the estimated costs associated with
future efforts based on actual experience. These efforts may involve additional
costs. CUSA is also formulating and studying contingency plans with completion
expected by mid-1999.
CUSA believes, based on the information currently available, that the most
reasonably likely worst case scenarios resulting from Year 2000 Problems
include:
- Legal risks arising from failure of NAICO or L&W to provide contracted
services, deal with claims on a timely basis, provided pertinent data to
those dependent upon the data and similar risks;
- Increased operational costs due to manual processing, data corruption or
disaster recovery;
35
<PAGE>
- Inability to bill or invoice;
- Lost revenue resulting from the inability to render accurate billing and
from the inability to efficiently market insurance products;
- Increased legal and accounting expenses;
- Fines and associated expenses resulting from inability to comply with
regulatory requirements; and
- Failure of management controls.
Any previously mentioned Year 2000 Problems could have a material adverse
effect on CUSA, including the financial condition of NAICO and NAICO's ability
to pay dividends or other payments to CUSA.
It is possible that the credit or operating ability of agents, reinsurers
and others with whom CUSA maintains commercial relationships may be adversely
affected by one or more unforeseen circumstances caused by Year 2000 Problems.
However, CUSA does not have control over these third parties and, as a result,
it cannot currently determine to what extent future operating results may be
adversely affected by the failure of these third parties to successfully address
their Year 2000 Problems. However CUSA is developing plans to attempt to
minimize identified third-party exposures. CUSA has requested information from
its major vendors and service providers to assess their Year 2000 readiness.
CUSA currently is evaluating this information. However, CUSA cannot predict the
adverse impact, if any, of Year 2000 Problems upon parties with whom it does
business.
CUSA continues to study the complex issues related to insurance coverage for
losses arising from the myriad potential fact situations connected with Year
2000 Problems and NAICO's liability to its insureds. CUSA believes that the
coverages NAICO provides do not extend to the types of losses which are most
likely to occur as a result of Year 2000 Problems, and NAICO has made no
provisions for loss reserves based on potential Year 2000 Problems. NAICO
expects to utilize coverage exclusion endorsements based on the individual
underwriting of commercial accounts, and it has adopted endorsements to its
policies based on forms provided and filed for approval with various regulatory
authorities by Insurance Services Office, Inc. ("ISO"), an insurance services
company which provides regulatory research and filing support to insurance
companies. Use of these special endorsements is governed by the law and
regulatory policies of states in which NAICO is authorized to do business.
It is possible that future court interpretations of policy language based on
specific facts, or legislation mandating coverage, could result in coverage for
losses attributable to Year 2000 Problems. Such decisions or legislation could
have a material adverse impact on CUSA. It is also possible that NAICO may incur
expenses defending claims for which it is ultimately determined there is no
insurance coverage.
CERTAIN TAX MATTERS
During 1996, the IRS conducted a field examination of the U.S. Federal
income tax returns of CUSA and its wholly owned subsidiaries for the years 1993
and 1994. The IRS completed the examination in 1996, and there were no proposed
adjustments to tax liabilities.
SUBSEQUENT EVENT
NAICO is a major insurer of businesses, cities, towns and school districts
in Oklahoma. As a result, NAICO incurs weather-related losses. On May 3, 1999,
tornadoes, hail and strong winds caused severe damage to property owned or used
by NAICO insureds. NAICO estimates total insured damages at approximately $22.0
million. Giving effect to NAICO's applicable reinsurance, all of which is with
unaffiliated reinsurers, NAICO estimates its net loss before income tax benefit
resulting from
36
<PAGE>
these storms at $2.0 million, although that amount could change as more
information regarding insured damages becomes known.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in financial statements. In
addition, SFAS No. 130 requires CUSA to classify items of other comprehensive
income by their nature in a separate financial statement or as a component of
the statement of operations or the statement of shareholder's equity and display
the accumulated balance of other comprehensive income separately in the
shareholder's equity section of the consolidated balance sheets. CUSA adopted
SFAS No. 130 on January 1, 1998, as required. The adoption of SFAS No. 130
resulted in revised and additional disclosures but had no effect on the
consolidated financial position, results of operations or liquidity of CUSA.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. The
standard sets criteria for reporting disclosures about a company's products and
services, geographic areas and major customers. CUSA adopted SFAS No. 131 on
January 1, 1998, as required.
ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that CUSA recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. CUSA will adopt
SFAS No. 133 on January 1, 2000, as required. CUSA's management believes that
adoption of SFAS No. 133 will not have a material impact on its consolidated
financial position or results of operations.
37
<PAGE>
BUSINESS
OVERVIEW
Through its wholly owned subsidiaries, CUSA operates in two lines of
business: property and casualty insurance and insurance agency operations.
NAICO is one of the leading commercial business insurance writers in
Oklahoma, providing primarily property and casualty coverage for businesses in
various industries. NAICO has a network of independent agents, totaling
approximately 250 at March 31, 1999, that market NAICO's insurance products.
Independent agents originate substantially all of NAICO's business. NAICO is
licensed to write property and casualty coverage in 44 states and the District
of Columbia and is authorized by the United States Department of the Treasury to
write surety bonds for contractors on federal projects. Currently, NAICO is
rated as "A- (Excellent)" by A.M. Best Company, an insurance rating agency. In
1998, NAICO received an "A (Strong)" rating from Standard & Poor's rating
agency.
L&W is an independent insurance agency that represents various insurance
companies providing a variety of property and casualty, individual and group
life, medical and disability income coverages. L&W also acts as a surplus lines
broker specializing in risk management and brokering insurance primarily for
commercial enterprises.
CUSA is an Oklahoma corporation which is wholly owned by Chandler Barbados,
which, in turn, is wholly owned by Chandler Cayman, a publicly traded Cayman
Islands company (NASDAQ: CHANF). CUSA is headquartered in Chandler, Oklahoma, in
facilities also occupied by NAICO and L&W. CUSA provides administrative services
for NAICO and L&W. CUSA's address is 1010 Manvel Avenue, Chandler, Oklahoma
74834 and phone number is 405-258-0804.
STRATEGY
CUSA's business strategy is to facilitate the marketing and writing of
insurance products offered by NAICO through independent agents. NAICO's
objective is to develop and maintain a leading position in its insurance markets
and capitalize on growth opportunities in new markets and geographic regions
while adjusting the mix and volume of its business and risk retention to respond
to changes in market conditions and to manage its risk exposure. To achieve
these objectives, CUSA intends to:
PRESERVE AND STRENGTHEN ITS COMPETITIVE POSITION IN OKLAHOMA. NAICO
intends to focus its business efforts to preserve and strengthen its status
as a leading writer of commercial business insurance in Oklahoma. NAICO
intends to continue to offer customized programs to markets such as school
districts, political subdivisions and private commercial enterprises.
EXPAND GEOGRAPHICALLY. In 1995, NAICO began expanding its marketing and
writing of insurance products in Texas. As of March 31, 1999, NAICO had
approximately 125 contracted agents marketing its insurance products in
Texas. In 1998, approximately 28% of NAICO's direct premiums written and
assumed came from Texas. NAICO believes significant opportunities exist to
expand new
programs and lines of insurance in Texas. In addition to continuing its
efforts to expand its market position in Texas, NAICO anticipates pursuing
opportunities in states in the Southwest and Midwest, subject to competitive
market conditions.
MARKET TO NEW CUSTOMERS AND OFFER NEW PROGRAMS. NAICO has taken
advantage of market opportunities to offer insurance programs to political
subdivisions and to add construction surety bonds and group accident and
health policies to its portfolio of insurance products. NAICO intends to
monitor the insurance market closely to discover additional opportunities to
market to new categories of customers and to expand its portfolio of
insurance products.
38
<PAGE>
EXPAND DISTRIBUTION CHANNELS. NAICO intends to expand its network of
approximately 250 independent agents as of March 31, 1999, which includes
approximately 125 independent agents in Texas and 90 independent agents in
Oklahoma.
MAINTAIN QUALITY SERVICE. NAICO strives to provide exceptional services
to its agents and to its insureds. Agents have access to the members of
NAICO's management team, which includes experienced and well-trained
underwriting personnel and experienced claims adjusters who have the ability
to make decisions quickly. NAICO intends to continue to offer quality
services to its agents and to its insureds.
UTILIZE THE REINSURANCE MARKETS. NAICO cedes a portion of its insurance
risks and insurance premiums to selected reinsurers. By selectively
utilizing available opportunities in the reinsurance market, including those
available through Chandler Barbados, NAICO is able to diversify its
insurance risk, reducing NAICO's exposure to high policy limits and
catastrophic events. NAICO considers numerous factors in developing its
reinsurance program, including the financial stability of the reinsurers,
the reinsurer's ability to provide sufficient collateral, if required,
reinsurance coverage offered and price. NAICO intends to continue to
maintain its reinsurance program, subject to market conditions on favorable
terms.
MAINTAIN CONSERVATIVE FINANCIAL AND UNDERWRITING POLICIES. NAICO has
traditionally maintained conservative financial and underwriting policies.
NAICO's investment guidelines do not permit investments in fixed maturity
securities with a rating below AA- or the purchase of equities.
PROGRAMS
NAICO writes various property and casualty insurance products through four
primary marketing programs. The programs are standard property and casualty,
political subdivisions, contract surety bonds and group accident and health.
The following table shows gross premiums earned and net premiums earned by
insurance program for the years 1996, 1997 and 1998. The term "net premiums
earned" means net premiums written less the increases or plus the decreases in
the unearned premiums reserve for the unexpired portion of the policy term
beyond the current accounting period.
<TABLE>
<CAPTION>
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
---------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
INSURANCE PROGRAMS 1996 1997 1998 1996 1997 1998
- ----------------------------------------------------- ---------- ---------- ---------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Standard property and casualty....................... $ 45,066 $ 62,841 $ 76,458 $ 31,799 $ 44,887 $ 29,234
Political subdivisions............................... 19,314 21,503 25,091 11,655 12,416 10,435
Surety bonds......................................... 11,416 12,320 11,915 9,392 10,533 7,456
Group accident and health............................ 512 3,379 6,067 317 2,303 4,610
Nonstandard private-passenger automobile(1).......... 16,595 14,303 6,015 16,595 8,841 482
Other(2)............................................. 10,426 2,362 488 8,578 1,722 207
---------- ---------- ---------- --------- --------- ---------
TOTAL................................................ $ 103,329 $ 116,708 $ 126,034 $ 78,336 $ 80,702 $ 52,424
---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- --------- --------- ---------
</TABLE>
- ------------------------
(1) The nonstandard private-passenger automobile program was discontinued in
1997.
(2) This category is comprised primarily of the run-off of other discontinued
programs and NAICO's participation in various mandatory workers compensation
pools and assigned risks.
39
<PAGE>
STANDARD PROPERTY AND CASUALTY PROGRAM
NAICO offers workers compensation, automobile liability and physical damage,
general and umbrella liability and property coverages under its standard
property and casualty program. In marketing these products, NAICO targets
companies in the construction, retail, manufacturing, wholesale, service, oil
and gas, and retail industries. NAICO writes this business principally in
Oklahoma and Texas.
POLITICAL SUBDIVISIONS PROGRAM
Under the political subdivisions program, NAICO writes insurance policies
for school districts, counties and municipalities. As of March 31, 1999, NAICO
insured 501 school districts in Oklahoma. In 1996, NAICO began marketing its
political subdivisions program in Texas and as of March 31, 1999, insured 141
school districts in Texas. The coverages offered include workers compensation,
automobile liability, automobile physical damage, general liability, property
and school board legal liability.
In 1991, NAICO began writing property and casualty insurance for
municipalities and counties in Oklahoma. NAICO has also begun writing property
and casualty insurance for municipalities and counties in Texas and Missouri.
The coverages offered include workers compensation, automobile and general
liability, automobile physical damage, property and public officials liability
insurance. As of March 31, 1999, NAICO insured 289 municipalities and counties
in Oklahoma, Texas and Missouri.
SURETY BOND PROGRAM
NAICO writes surety bonds, commonly referred to as contract performance
bonds, to secure the performance of contractors and suppliers on construction
projects. Individual bonds generally do not exceed $5 million, and an individual
contractor generally does not have "work in progress" for both bonded and
unbonded jobs in excess of $10 million. A substantial portion of this business
is written in Oklahoma, Texas, New Mexico and California. NAICO also writes bail
bonds, which guarantee that the principal will discharge obligations set by the
court, as well as other types of miscellaneous bonds.
GROUP ACCIDENT AND HEALTH PROGRAM
In January 1996, NAICO began offering excess accident and health coverage
for small to medium-sized employers that self-insure a portion of their company
medical plans. During 1997, NAICO began offering fully insured group accident
and health coverage on a limited basis. NAICO generally writes this business in
Oklahoma and Texas. NAICO is currently evaluating this program and may modify or
discontinue certain portions of this program during 1999.
LINES OF INSURANCE
The lines of insurance written by NAICO through its programs are automobile
liability, workers compensation, surety, automobile physical damage, accident
and health, property, inland marine and other liability lines, which include
general and professional liability lines. The following table shows net
40
<PAGE>
premiums earned as a percentage of total net premiums earned by each line of
insurance written by NAICO during the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1994 1995 1996 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Automobile liability............................................... 15% 21% 21% 17% 22%
Other liability.................................................... 6% 7% 9% 13% 22%
Workers compensation............................................... 44% 42% 45% 44% 19%
Surety............................................................. 29% 19% 12% 13% 14%
Automobile physical damage......................................... 4% 9% 9% 7% 9%
Accident and health................................................ 1% -- 1% 3% 9%
Property........................................................... 1% 2% 2% 2% 4%
Inland marine...................................................... -- -- 1% 1% 1%
--- --- --- --- ---
Total............................................................ 100% 100% 100% 100% 100%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
AGENCY AND BROKERAGE
L&W is appointed by insurers to solicit applications for insurance policies,
primarily in Oklahoma. L&W represents various personal and commercial lines
insurance companies in marketing property and casualty insurance. L&W also
markets individual and group life, medical and disability income coverage. Major
target classes of business include political subdivisions, health care
facilities, transportation companies, manufacturers, contractors, energy
businesses, retailers, wholesalers and service organizations. L&W places a large
portion of its property and casualty business with NAICO. It also acts as a
surplus lines broker specializing in risk management and brokering insurance for
commercial enterprises. L&W places direct agency business as well as business
from other agents with specialty insurance companies. As of January 31, 1999,
L&W had 44 full time employees and shares administrative services with NAICO and
CUSA.
L&W acts as a broker for NAICO, accepting applications for insurance and
surety bonds from independent agents who, in many instances, are not agents
appointed directly by NAICO. L&W also acts as an underwriter for a significant
portion of NAICO's surety bond program.
UNDERWRITING AND CLAIMS
Independent insurance agents submit applications for insurance coverage for
prospective customers to NAICO. NAICO reviews a prospective risk in accordance
with its specific underwriting guidelines. If the risk is approved and coverage
is accepted by the insured, NAICO issues an insurance policy.
NAICO has maintained a continuous contractual relationship with an
underwriting manager for its bail bond program. During 1996, 1997 and 1998, the
gross written premiums in this program were $2.7 million, $2.6 million and $2.8
million, respectively. This underwriting manager operates through a network of
bail bond agents who submit applications to the underwriting manager. If the
application meets the specific guidelines set by the underwriting manager, a
bail bond is issued. This underwriting manager is an independent contractor and
is responsible for collection of all premiums and payment of all commissions to
bail bond agents. Additionally, it is responsible for all claims and recoveries
and is required to maintain collateral security for each bond.
NAICO's claim department reviews and administers all claims. When a claim is
received, it is reviewed and assigned to an in-house claim adjuster based on the
type and geographic location of the claim, its severity and its class of
business. NAICO's claim department is responsible for reviewing each claim,
obtaining necessary documentation and establishing loss and loss adjustment
expense reserves.
41
<PAGE>
NAICO's in-house claims staff handles and supervises the claims, coordinates
with outside legal counsel and independent claims adjusters if necessary, and
processes the claims to conclusion.
REINSURANCE
In the ordinary course of business, NAICO cedes insurance risks and a
portion of the insurance premiums to its reinsurers under various reinsurance
contracts that cover individual risks (facultative reinsurance) or entire
classes of business (treaty reinsurance). Reinsurance provides greater
diversification of insurance risk associated with business written and also
reduces NAICO's exposure from high policy limits or from catastrophic events and
hazards of an unusual nature. Amounts recoverable from reinsurers are estimated
in a manner consistent with the claim liability associated with the reinsured
policies. In formulating its reinsurance programs, NAICO considers numerous
factors, including the financial stability of the reinsurer, the reinsurer's
ability to provide sufficient collateral (if required), reinsurance coverage
offered and price.
Treaty reinsurance may be ceded under treaties on both a pro rata or
proportional basis (where the reinsurer shares proportionately in premiums and
losses) and an excess of loss basis (where only losses above a specific amount
are reinsured). The availability, costs and limits of reinsurance purchased
varies from year to year based upon prevailing market conditions, reinsurers'
underwriting results and NAICO's desired risk retention levels. A majority of
NAICO's reinsurance programs renew on January 1, April 1 or July 1 of each year.
NAICO renewed all January 1, 1999 reinsurance programs. At the present time,
NAICO expects to renew the reinsurance programs that renew on April 1 or July 1,
1999 as applicable.
NAICO has structured separate reinsurance programs for construction surety
bonds, property (including inland marine), workers compensation, casualty
(including automobile liability and physical damage, general liability, umbrella
liability and related professional liability) and group accident and health.
Chandler Barbados reinsures NAICO for a portion of the risk on NAICO's
contstruction surety bonds, workers compensation and casualty reinsurance
programs.
Under the 1997 workers compensation reinsurance program, NAICO retained 80%
of the first $500,000 of loss per occurrence. Effective February 1, 1998,
NAICO's retention was reduced to 35% of the first $10,000 of loss per
occurrence.
Under the 1997 casualty reinsurance program, NAICO retained 80% of the first
$500,000 of loss per occurrence. Effective February 1, 1998, NAICO's retention
was reduced to 80% of the first $250,000 of loss per occurrence.
Under the 1997 surety bond reinsurance program, NAICO retained 90% of the
first $500,000 per bond or per principal (e.g., contractor). NAICO's retention
under the surety bond reinsurance program was reduced to 50% of the first
$500,000 per bond or per principal, effective January 1, 1998, and was further
reduced to 50% of the first $250,000 per bond or per principal effective April
1, 1998.
Under the property reinsurance program, NAICO retains 30% of the first
$500,000 of risk for each loss per location. Under the group accident and health
program, NAICO retains the first $50,000 in excess of the self-insured retention
for each insured person, each policy and the first $100,000 (or the first
$250,000 for cases exceeding 400 covered employees) of losses in excess of the
self-insured aggregate retention. NAICO retains the first $100,000 of risk for
each insured person for fully insured cases under its group accident and health
program.
NAICO purchases catastrophe protection for its automobile physical damage
and certain property coverages, to limit its retention for single loss
occurrences involving multiple policies and/or policyholders resulting from
perils such as floods, winds and severe storms. This catastrophe protection is
purchased primarily from Lloyd's of London, which has no A.M. Best Company
rating. NAICO also purchases facultative reinsurance when it writes a risk with
limits of liability exceeding the maximum limits of its treaties or when it
otherwise considers such action appropriate.
42
<PAGE>
The following table sets forth certain information related to NAICO's four
largest unaffiliated reinsurers and Chandler Barbados determined on the basis of
net reinsurance recoverables as of December 31, 1998.
<TABLE>
<CAPTION>
CEDED
NET REINSURANCE
REINSURANCE PREMIUM FOR
RECOVERABLE THE YEAR
AS OF ENDED A.M.
DECEMBER 31, DECEMBER 31, BEST CO.
NAME OF REINSURER 1998 (1) 1998 RATING
- --------------------------------------------------------------------------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Chandler Barbados.......................................................... $ 19,081 $ 18,878 --(2)
First Excess and Reinsurance Corporation................................... 15,613 21,420 A
Reliance Insurance Company................................................. 13,948 19,111 A-
SCOR Reinsurance Company................................................... 5,196 8,061 A+
Jefferson Insurance Company of New York.................................... 2,345 3,638 A
------------ ------------
Top five reinsurers........................................................ $ 56,183 $ 71,108
------------ ------------
------------ ------------
All reinsurers............................................................. $ 73,156 $ 87,671
------------ ------------
------------ ------------
Percentage of total represented by top five reinsurers..................... 77% 81%
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(1) Includes losses and loss adjustment expenses paid and outstanding, unpaid
losses and loss adjustment expenses and unearned premium reserves
recoverable from reinsurers as of December 31, 1998.
(2) Chandler Barbados owns 100% of the common stock of CUSA, which in turn owns
100% of the common stock of NAICO. Although Chandler Barbados is not subject
to the minimum capital, audit, reporting and other requirements imposed by
regulation upon United States reinsurance companies, as a foreign reinsurer,
it is required to secure its reinsurance obligations by depositing
acceptable securities in trust for NAICO's benefit. At December 31, 1998,
Chandler Barbados had cash and investments with a fair value of $25.3
million deposited in a trust account for the benefit of NAICO.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to CUSA; consequently, allowances are established for amounts deemed
uncollectible. During 1996, 1997 and 1998, NAICO charged to policy acquisition
costs $2.1 million, $527,000 and $50,000, respectively, in uncollectible
reinsurance recoverables from unaffiliated reinsurers.
LOSS AND UNDERWRITING EXPENSE RATIOS
The combined loss and underwriting expense ratio ("Combined Ratio") is the
traditional measure of underwriting experience for property and casualty
insurance companies. It is the sum of the ratios of (i) incurred losses and loss
adjustment expenses to net premiums earned ("loss ratio") and (ii) underwriting
expenses to net premiums written and assumed ("underwriting expense ratio").
The following table shows the underwriting experience of NAICO for the
periods indicated by line of insurance written. Adjustments to reserves made in
subsequent periods are reflected in the year of adjustment. In the following
table, incurred losses include paid losses and loss adjustment expenses, net
43
<PAGE>
changes in case reserves for losses and loss adjustment expenses and net changes
in reserves for incurred but not reported losses and loss adjustment expenses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Automobile liability:
Net premiums earned............................ $ 9,602 $ 14,218 $ 16,433 $ 13,704 $ 11,419
Loss ratio..................................... 90% 78% 90% 76% 75%
Other liability:
Net premiums earned............................ $ 3,635 $ 4,985 $ 7,022 $ 10,014 $ 11,357
Loss ratio..................................... 60% 56% 61% 47% 66%
Workers compensation:
Net premiums earned............................ $ 28,174 $ 28,522 $ 35,273 $ 35,646 $ 9,937
Loss ratio..................................... 72% 67% 58% 70% 66%
Surety:
Net premiums earned............................ $ 18,170 $ 13,113 $ 9,495 $ 10,671 $ 7,619
Loss ratio..................................... 46% 50% 10% 8% 18%
Automobile physical damage:
Net premiums earned............................ $ 2,363 $ 5,881 $ 6,788 $ 5,726 $ 4,702
Loss ratio..................................... 94% 66% 73% 60% 86%
Accident and health:
Net premiums earned............................ $ 658 $ 200 $ 564 $ 2,529 $ 4,610
Loss ratio..................................... 60% -36% 59% 43% 91%
Property:
Net premiums earned............................ $ 982 $ 1,369 $ 1,467 $ 1,912 $ 2,332
Loss ratio..................................... 80% 73% 114% 74% 136%
Inland marine:
Net premiums earned............................ $ 92 $ 266 $ 1,294 $ 500 $ 448
Loss ratio..................................... 47% 42% 113% 196% 126%
Total:
Net premiums earned............................ $ 63,676 $ 68,584 $ 78,336 $ 80,702 $ 52,424
Loss ratio..................................... 67% 65% 62% 59% 69%
Underwriting expense ratio (1)................. 37% 41% 45% 39% 33%
Combined Ratio (1)............................. 104% 106% 107% 98% 102%
</TABLE>
- ------------------------
(1) Litigation expenses are not considered underwriting expenses; therefore,
such costs have been excluded from these ratios. The 1996 underwriting
expense ratio was increased by four percentage points by a reinsurance
arbitration adjustment and the termination of relations with NAICO's former
surety bond underwriting manager.
RESERVES
Insurance companies provide in their financial statements reserves for
unpaid losses and loss adjustment expenses which are estimates of the expense of
investigation and settlement of all reported and incurred but not reported
losses under their previously issued insurance policies and/or reinsurance
contracts. In estimating reserves, insurance companies use various standardized
methods based on historical experience and payment and reporting patterns for
the type of risk involved. The application of these methods involves subjective
determinations by the personnel of the insurance company. Inherent in the
estimates of the ultimate liability for unpaid claims are expected trends in
claim severity, claim frequency and other factors that may vary as claims are
settled. The amount of and uncertainty in the estimates are affected by such
factors as the amount of historical claims experience relative to the
44
<PAGE>
development period for the type of risk, knowledge of the actual facts and
circumstances and the amount of insurance risk retained. The ultimate cost of
insurance claims can be adversely affected by increased costs, such as medical
expenses, repair expenses, costs of providing legal defense for policyholders,
increased jury awards and court decisions and legislation that expand insurance
coverage after the insurance policy was priced and sold. Accordingly, the loss
and loss adjustment expense reserves may not accurately predict an insurance
company's ultimate liability for unpaid claims.
NAICO periodically reviews the reserve estimates relating to insurance
business written or assumed by NAICO and the methods used to arrive at such
reserve estimates. NAICO also retains independent professional actuaries who
review such reserve estimates and methods. Any changes in the estimates are
reflected in current operating results. Salvage and subrogation recoverables are
accrued using the "case basis" method for large recoverables and statistical
estimates based on historical experience for smaller recoverables. Recoverable
amounts deducted from NAICO's net liability for losses and loss adjustment
expenses were approximately $2.8 million and $4.3 million at December 31, 1997
and 1998, respectively. NAICO's statutory-based reserves (reserves calculated in
accordance with an insurer's domiciliary state insurance regulatory authorities)
do not differ from its GAAP reserves. NAICO does not discount its reserves for
unpaid losses and loss adjustment expenses.
NAICO participates in various pools covering workers compensation risks for
insureds who were unable to purchase this coverage from an insurance company on
a voluntary basis. In addition, NAICO receives direct assignments to write
workers compensation for such insureds in lieu of participating in the pools.
The consolidated financial statements reflect the reserves for unpaid losses and
loss adjustment expenses and net premiums earned from its participation in the
pools and from these direct assignments.
There may be significant reporting lags between the occurrence of the
insured loss and the time it is actually reported to the insurer. The inherent
uncertainties in estimating insurance reserves are generally greater for
casualty coverages, such as workers compensation, general and automobile
liability, than for property coverages primarily due to the longer period of
time that typically elapses before a definitive determination of ultimate loss
can be made, which is also affected by changing theories of legal liability and
changing political climates.
There are significant additional uncertainties in estimating the amount of
reserves required for environmental, asbestos-related and other latent exposure
claims, including a lack of historical data, long reporting delays and complex
unresolved legal issues regarding policy coverage and the extent and timing of
any such contractual liability. Courts have reached different and frequently
inconsistent conclusions as to when the loss occurred, what claims are covered,
under what circumstances the insurer has an obligation to defend, how policy
limits are determined and how policy exclusions are applied and interpreted.
The loss settlement period on insurance claims for property damage is
relatively short. The more severe losses for bodily injury and workers
compensation claims have a much longer loss settlement period and may be paid
out over several years. It is often necessary to adjust estimates of liability
on a loss either upward or downward from the time a claim arises to the time of
payment. Workers compensation indemnity benefit reserves are determined based on
statutory benefits described by state law and are estimated based on the same
factors generally discussed above, which may include, where state law permits,
inflation adjustments for rising benefits over time.
Generally, the more costly automobile liability claims involve one or more
severe bodily injuries or deaths. The ultimate cost of these types of claims is
dependent on various factors including the relative liability of the parties
involved, the number and severity of injuries and the legal jurisdiction in
which the incident occurred.
45
<PAGE>
The following table sets forth a reconciliation of NAICO's beginning and
ending reserves for losses and loss adjustment expenses which are net of
reinsurance deductions for the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net balance before provision for uncollectible
reinsurance at beginning of year...................... $ 62,216 $ 63,610 $ 57,710 $ 53,068 $ 52,872
Net losses and loss adjustment expenses incurred related
to:
Current year.......................................... 42,513 46,011 48,569 46,645 34,313
Prior years........................................... 409 (1,551) 197 1,260 1,729
---------- ---------- ---------- ---------- ----------
Total............................................... 42,922 44,460 48,766 47,905 36,042
---------- ---------- ---------- ---------- ----------
Net paid losses and loss adjustment expenses related to:
Current year.......................................... (15,059) (19,589) (22,503) (19,909) (19,495)
Prior years........................................... (26,469) (30,771) (30,905) (28,192) (30,243)
---------- ---------- ---------- ---------- ----------
Total............................................... (41,528) (50,360) (53,408) (48,101) (49,738)
---------- ---------- ---------- ---------- ----------
Net balance before provision for uncollectible
reinsurance at end of year............................ 63,610 57,710 53,068 52,872 39,176
Adjustment to reinsurance recoverables on unpaid losses
for uncollectible reinsurance......................... 698 630 777 1,163 745
---------- ---------- ---------- ---------- ----------
Net balance at end of year.............................. $ 64,308 $ 58,340 $ 53,845 $ 54,035 $ 39,921
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table represents the development of NAICO's net balance sheet
reserves for 1989 through 1998. The top line of the table shows the net reserves
at the balance sheet date for each of the indicated years. This represents the
estimated amounts of claims and claim expenses, net of reinsurance deductions,
arising in the current and all prior years that are unpaid at the balance sheet
date, including the net reserve for incurred but not reported claims. The upper
portion of the table shows the cumulative net amounts paid as of successive
years with respect to that reserve liability. The estimate for unpaid losses and
loss adjustment expenses changes as more information becomes known about the
frequency and severity of claims for individual years. The next portion of the
table shows the revised estimated amount of the previously recorded net reserve
based on experience as of the end of each succeeding year. The heading "net
cumulative (deficiency) redundancy" represents the cumulative aggregate change
in the estimates over all prior years. The last portion of the table provides a
reconciliation of the net amounts to the gross amounts before any deductions for
reinsurance for the last seven years presented.
In evaluating the information in the following table, it should be noted
that each amount includes the effects of all changes in amounts for prior
periods. For example, the amount of the deficiency recorded in 1992 for claims
that occurred in 1989 will be included in the cumulative deficiency amount for
years 1989, 1990, 1991 and 1992. This table does not present accident or policy
year development data. Conditions and trends that have affected development of
the liability in the past may not necessarily occur in the future.
46
<PAGE>
Accordingly, it may not be appropriate to extrapolate future deficiencies or
redundancies based on this table.
<TABLE>
<CAPTION>
DEVELOPMENT OF RESERVES
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserve for unpaid
losses and loss
adjustment
expenses(1)............ $ 25,621 $ 40,528 $ 47,432 $ 46,604 $ 51,648 $ 64,308 $ 58,340 $ 53,845 $ 54,035
Net paid (cumulative) as
of
One year later......... 16,158 27,512 27,588 26,849 26,469 30,771 30,906 28,192 30,243
Two years later........ 28,467 40,576 40,797 39,770 38,655 44,459 43,229 40,390
Three years later...... 34,115 44,701 47,379 46,360 44,495 50,743 47,933
Four years later....... 36,260 46,042 50,798 48,538 47,143 53,496
Five years later....... 36,734 46,805 51,355 50,057 47,787
Six years later........ 37,090 47,087 52,639 50,312
Seven years later...... 37,356 47,429 52,830
Eight years later...... 37,566 47,441
Nine years later....... 37,601
Net liability
re-estimated as of(1)
One year later......... 31,198 44,820 50,268 51,951 52,058 62,757 58,537 55,105 55,764
Two years later........ 35,266 46,589 51,191 50,845 50,135 60,817 57,890 54,983
Three years later...... 36,395 46,572 51,908 51,076 49,385 61,022 57,432
Four years later....... 36,952 46,726 52,263 50,465 49,307 60,913
Five years later....... 37,014 47,042 52,234 50,594 49,258
Six years later........ 37,121 47,268 52,801 50,552
Seven years later...... 37,324 47,544 52,874
Eight years later...... 37,568 47,647
Nine years later....... 37,676
Net cumulative
(deficiency)
redundancy............. $ (12,055) $ (7,119) $ (5,442) $ (3,948) $ 2,390 $ 3,395 $ 908 $ (1,138) $ (1,729)
SUPPLEMENTAL GROSS DATA:
Gross liability after reclassification of pools--end of
year.................................................... $ 210,892 $ 167,187 $ 143,437 $ 116,149 $ 78,114 $ 73,721
Reclassification of pool liabilities(1)................... (18,875) (15,694) -- -- -- --
--------- --------- --------- --------- --------- ---------
Gross liability before reclassification of pools--end of
year(1)................................................. 192,017 151,493 143,437 116,149 78,114 73,721
Reinsurance recoverable................................... 145,413 99,845 79,129 57,809 24,269 19,686
--------- --------- --------- --------- --------- ---------
Net liability--end of year(1)............................. $ 46,604 $ 51,648 $ 64,308 $ 58,340 $ 53,845 $ 54,035
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Gross re-estimated liability--latest(1)................... $ 194,747 $ 149,510 $ 142,449 $ 119,284 $ 89,498 $ 83,522
Re-estimated recoverable--latest.......................... 144,195 100,252 81,536 61,852 34,515 27,758
--------- --------- --------- --------- --------- ---------
Net re-estimated liability--latest(1)..................... $ 50,552 $ 49,258 $ 60,913 $ 57,432 $ 54,983 $ 55,764
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Gross cumulative (deficiency) redundancy.................. $ (2,730) $ 1,983 $ 988 $ (3,135) $ (11,384) $ (9,801)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
1998
---------
<S> <C>
Net reserve for unpaid
losses and loss
adjustment
expenses(1)............ $ 39,921
Net paid (cumulative) as
of
One year later.........
Two years later........
Three years later......
Four years later.......
Five years later.......
Six years later........
Seven years later......
Eight years later......
Nine years later.......
Net liability
re-estimated as of(1)
One year later.........
Two years later........
Three years later......
Four years later.......
Five years later.......
Six years later........
Seven years later......
Eight years later......
Nine years later.......
Net cumulative
(deficiency)
redundancy............. $ --
SUPPLEMENTAL GROSS DATA:
Gross liability after rec
year................... $ 80,701
Reclassification of pool --
---------
Gross liability before re
year(1)................ 80,701
Reinsurance recoverable.. 40,780
---------
Net liability--end of yea $ 39,921
---------
---------
Gross re-estimated liabil
Re-estimated recoverable-
Net re-estimated liabilit
Gross cumulative (deficie
</TABLE>
- ------------------------
(1) The December 31, 1993, and prior amounts do not include the reclassification
of pool liabilities.
47
<PAGE>
REGULATION
REGULATION IN GENERAL
NAICO is subject to regulation by government agencies in the jurisdictions
in which it does business. The nature and extent of such regulation vary from
jurisdiction to jurisdiction, but typically involve prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates, forms
and policies used for many lines of insurance, standards of solvency and minimum
amounts of capital and surplus which must be maintained, establishment of
reserves required to be maintained for unearned premiums, unpaid losses and loss
adjustment expenses or for other purposes, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
company, licensing of insurers and agents, deposits of securities for the
benefit of policyholders and the filing of periodic reports with respect to
financial condition and other matters. In addition, regulatory examiners perform
periodic financial and market conduct examinations of insurance companies. Such
regulation is generally intended for the protection of policyholders rather than
security holders or creditors.
NAICO is required to deposit securities with regulatory agencies in several
states in which it is licensed as a condition of conducting operations in the
state.
In addition to the regulatory oversight of NAICO, Chandler Cayman is also
subject to regulation under the laws of the Cayman Islands and CUSA and all its
affiliates are subject to regulation under the Nebraska Insurance Holding
Company System Act (the "Holding Company Act"). The Holding Company Act contains
certain reporting requirements including those requiring Chandler Cayman, as the
ultimate parent company, to file information relating to its capital structure,
ownership and financial condition and the general business operations of its
insurance subsidiaries. The Holding Company Act contains special reporting and
prior approval requirements with respect to transactions among affiliates.
NAICO is also affected by a variety of state and federal legislative and
regulatory measures and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These include redefinitions
of risk exposure in areas such as product liability, environmental damage and
workers compensation. In addition, individual state insurance departments may
prevent premium rates for some classes of insureds from reflecting the level of
risk assumed by the insurer for those classes. Such developments may adversely
affect the profitability of various lines of insurance. In some cases, these
adverse effects on profitability can be minimized through re-pricing, if
permitted by applicable regulations, of coverages or limitations or cessation of
the affected business.
The activities of L&W related to insurance brokerage and agency services and
claims administration services are subject to licensing and regulation by the
jurisdictions in which it conducts such activities. In addition, most
jurisdictions require that certain individuals engaging in brokerage and agency
activities be personally licensed. As a result, a number of L&W's employees are
so licensed.
INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL
NAICO is a domestic property and casualty insurance company organized under
the insurance laws of Nebraska (the "Insurance Code"). The Insurance Code
provides that the acquisition or change of "control" of a domestic insurer or of
any person that controls a domestic insurer cannot be consummated without the
prior approval of the Nebraska Department of Insurance. A person seeking to
acquire control, directly or indirectly, of a domestic insurance company or of
any person controlling a domestic insurance company must generally file with the
relevant insurance regulatory authority an application for change of control
containing certain information required by statute and published regulations and
provide a copy of such to the domestic insurer. In Nebraska, control is
generally presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote or holds proxies representing 10% or more
of the
48
<PAGE>
voting securities of the insurance company or of any other person or entity
controlling the insurance company. The 10% presumption is not conclusive and
control may be found to exist at less than 10%.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of any
non-domestic insurance company admitted in that state. While such
pre-notification statutes do not authorize the state agency to disapprove the
change of control, such statutes do authorize issuance of a cease and desist
order with respect to any such non-domestic insurer if certain conditions exist
such as undue market concentration.
Any future transactions that would constitute a change in control of
Chandler Cayman, Chandler Barbados or CUSA would also generally require prior
approval by the Nebraska Department of Insurance and would require
pre-acquisition notification in those states which have adopted pre-acquisition
notification provisions and in which the insurers are admitted. Because such
requirements are primarily for the benefit of policyholders, they may deter,
delay or prevent certain transactions that could be advantageous to the security
holders or creditors of CUSA.
RESTRICTIONS ON SHAREHOLDER DIVIDENDS
A significant portion of CUSA's consolidated assets represents assets of
NAICO that may not be immediately transferable to CUSA in the form of
shareholder dividends, loans, advances or other payments.
Statutes and regulations governing NAICO and other insurance companies
domiciled in Nebraska regulate the payment of shareholder dividends and other
payments by NAICO to CUSA. Under applicable Nebraska statutes and regulations,
NAICO is permitted to pay shareholder dividends only out of statutory earned
surplus. To the extent NAICO has statutory earned surplus, NAICO may pay
shareholder dividends only to the extent that such dividends are not defined as
extraordinary dividends or distributions. If the dividends are, under applicable
statutes and regulations, extraordinary dividends or distributions, regulatory
approval must be obtained. Under the applicable Nebraska statute, and subject to
the availability of statutory earned surplus, the maximum shareholder dividend
that may be declared (or cash or property distribution that may be made) by
NAICO in any one calendar year without regulatory approval is the greater of:
- NAICO's statutory net income, excluding realized capital gains, for the
preceding calendar year plus statutory net income, excluding realized
capital gains, from the second and third preceding calendar years, that
was not paid in dividends or other distributions; or
- 10% of NAICO's statutory policyholders' surplus as of the preceding
calendar year end, not to exceed NAICO's statutory earned surplus.
As of December 31, 1998, NAICO had statutory earned surplus of $12.6
million. Applying the Nebraska statutory limits described above, the maximum
shareholder dividend NAICO may pay in 1999 without approval of the Nebraska
Department of Insurance is $7.3 million. The maximum shareholder dividend that
NAICO could have paid in 1998 was $8.1 million; however, $6.0 million in
shareholder dividends were paid by NAICO to CUSA in 1998. The maximum
shareholder dividend that NAICO could have paid in 1997 and 1996, respectively,
was $4.2 million and $4.0 million; NAICO did not pay any shareholder dividends
during those years.
In addition to the statutory limits described above, the amount of
shareholder dividends and other payments to affiliates permitted can be further
limited by contractual or regulatory restrictions or other agreements with
regulatory authorities restricting dividends and other payments, including
regulatory restrictions that are imposed as a matter of administrative policy.
If insurance regulators determine that payment of a shareholder dividend or
other payments to an affiliate (such as payments under a tax sharing agreement,
payments for employee or other services, or payments pursuant to a surplus note)
would be
49
<PAGE>
hazardous to such insurance company's policyholders or creditors, the regulators
may block such payments that would otherwise be permitted without prior
approval. See "Risk Factors."
RISK-BASED CAPITAL
The National Association of Insurance Commissioners has adopted a
methodology for assessing the adequacy of statutory surplus of domestic property
and casualty insurers. This methodology is described in the Risk Based Capital
Model Act (the "RBC Model Act"), a model recommended by the National Association
of Insurance Commissioners for adoption. The RBC Model Act includes a risk-based
capital requirement that requires insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in the insurance company's mix of
products and investment portfolio. The formula is designed to allow state
insurance regulators to identify potential under-capitalized companies. Under
the formula, an insurer determines its "risk-based capital" ("RBC") by taking
into account certain risks related to the insurer's assets (including risks
related to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). The RBC rules provide for different levels of
regulatory attention depending on the ratio of a company's total adjusted
capital to its "authorized control level" of RBC. Insurers below the specific
ratios are classified within certain levels, each of which requires specific
corrective action. The levels and ratios are as follows:
<TABLE>
<CAPTION>
RATIO OF TOTAL ADJUSTED CAPITAL TO
AUTHORIZED CONTROL LEVEL RBC
REGULATORY EVENT (1) (LESS THAN OR EQUAL TO)
- -------------------------------------------------------------- -----------------------------------
<S> <C>
Company Action Level (2)...................................... 2.0
Regulatory Action Level (3)................................... 1.5
Authorized Control Level (4).................................. 1.0
Mandatory Control Level (5)................................... 0.7
</TABLE>
- ------------------------
(1) When an insurer's ratio exceeds 2.0, it is not subject to regulatory
attention under the RBC Model Act.
(2) "Company Action Level" requires an insurer to prepare and submit an RBC Plan
to the insurance commissioner of their state of domicile. After review, the
insurance commissioner will notify the insurer if the Plan is satisfactory.
(3) "Regulatory Action Level" requires the insurer to submit an RBC Plan, or if
applicable, a Revised RBC Plan to the insurance commissioner of their state
of domicile. After examination or analysis, the insurance commissioner will
issue an order specifying corrective actions to be taken.
(4) "Authorized Control Level" authorizes the insurance commissioner to take
such regulatory actions considered necessary to protect the best interest of
the policyholders and creditors of an insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control (i.e.
rehabilitation or liquidation).
(5) "Mandatory Control Level" authorizes the insurance commissioner to take
actions necessary to place the insurer under regulatory control (i.e.
rehabilitation or liquidation).
The ratios of total adjusted capital to authorized control level RBC for NAICO
were 5.9:1 and 7.5:1 at December 31, 1997 and 1998, respectively. Therefore,
NAICO's capital exceeds the level that would trigger regulatory action pursuant
to the risk-based capital requirement.
NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS-IRIS RATIOS
The National Association of Insurance Commissioners Insurance Regulatory
Information System ("IRIS") was developed by a committee of state insurance
regulators and is primarily intended to assist
50
<PAGE>
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 11 industry ratios and specifies "usual values" for each ratio.
Departure from the "usual values," which fluctuate annually, on four or more
ratios generally leads to inquiries from individual state insurance
commissioners. NAICO had three 1998 ratios that were outside of the "usual
values." In 1998, NAICO experienced a "change in net writings" of minus 43%,
compared to a usual value of plus or minus 33%. NAICO's gross premiums written
during 1998 increased 9%; however, the purchase of additional reinsurance
coverages resulted in significantly lower net premiums written. NAICO's "surplus
aid to surplus" during 1998 was 15% compared to a usual value of less than 15%.
Ceding commissions received from reinsurers increased significantly during 1998
due to the purchase of additional reinsurance coverages. NAICO's "investment
yield" as calculated using the IRIS formula was 4.2% during 1998 compared to a
usual value of 4.5% to 10%. NAICO maintains a high-quality investment portfolio,
approximately 19% of which was invested in tax-exempt bonds as of December 31,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Reinsurance." NAICO had no ratios which
varied from the "usual value" ranges in 1997.
EMPLOYEES
At December 31, 1998, CUSA and its subsidiaries had approximately 357
full-time employees. CUSA and its subsidiaries generally have enjoyed good
relations with their employees.
PROPERTY
CUSA and its subsidiaries own and occupy three office buildings with
approximately 81,000 square feet of usable space in Chandler, Oklahoma, and an
additional office building with approximately 46,000 square feet of usable space
is planned for construction in Chandler, Oklahoma, during 1999. CUSA's
subsidiaries also lease approximately 10,000 square feet in the aggregate for
its branch offices. CUSA believes such space is sufficient for its operations
for the foreseeable future.
LEGAL PROCEEDINGS
CENTRA LITIGATION--GENERAL BACKGROUND
CenTra, Inc. is a Detroit-based holding company primarily engaged in the
trucking industry. Beginning in 1987, NAICO insured CenTra's automobile
liability, general liability and workers compensation risks through reinsurance
arrangements involving DuraRock Underwriters, Ltd., a Barbados company and an
affiliate of CenTra, its predecessor Can-Am Underwriters, Ltd. and Chandler
Barbados. In addition to the insurance arrangements, CenTra and its affiliates
have been significant shareholders in Chandler Cayman, holding approximately
22.7% of Chandler Cayman's common stock at July 1, 1992. Three present or former
executive officers of CenTra, Norman E. Harned, Ronald W. Lech and M.J. Moroun,
are directors of Chandler Cayman.
Beginning in 1992, the relationships between Chandler Cayman and CenTra
deteriorated largely due to differences about the CenTra insurance program,
CenTra's failure to make timely premium payments and CenTra's role in an
anticipated management-led tender offer by a Chandler Cayman subsidiary for a
majority of the outstanding Chandler Cayman Stock. In an apparent attempt to
block the tender offer and seize control of Chandler Cayman, CenTra began, on
July 1, 1992, a series of common stock purchases and offers to purchase that
would, over the following two weeks, place almost one-half of Chandler Cayman's
common stock with CenTra and its affiliates. On July 1 and 2, 1992, CenTra made
an offer to CUSA to purchase 1,117,679 common shares of Chandler Cayman. These
common shares were either owned by CUSA (567,350 common shares), Cactus
Southwest Corp. (169,858 common shares) or the Universal Insurance Group
(380,471 common shares). The shares held by Cactus Southwest Corp. and Universal
Insurance Group were pledged to NAICO and L&W to collateralize certain
receivables. CUSA declined
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<PAGE>
the offer. On July 2, 1992, NAICO and NAICO Indemnity, an affiliate, canceled
the CenTra insurance policies for non-payment of premiums effective September 5,
1992. On July 2, 1992, CenTra made an offer to Cactus Southwest Corp. to
purchase its 169,858 common shares of Chandler Cayman. On July 7, 1992, the
Nebraska Department of Insurance (the "Department") ordered CenTra to cease and
desist purchases of Chandler Cayman's common shares. On July 9, 1992, M.J.
Moroun withdrew CenTra's prior offer to Cactus Southwest Corp. and offered to
purchase the same common shares himself. At the same time, he began purchasing
common shares of Chandler Cayman in the open market. On July 10, 1992, the
Department ordered CenTra and its affiliates and Messrs. M.J. Moroun, Harned and
Lech to cease and desist purchases of Chandler Cayman's common shares. On the
same date, M.J. Moroun made an offer to the Universal Insurance Group to
purchase its 380,471 common shares of Chandler Cayman, and M.J. Moroun made
further open market purchases. On July 11, 1992, M.J. Moroun paid $100,000 to
the Universal Insurance Group for an irrevocable proxy and contracted with it
for the purchase of its Chandler Cayman common shares. On July 12, 1992, M.J.
Moroun contracted with Cactus Southwest Corp. for the purchase of its common
shares of Chandler Cayman. On July 13, 1992, further open market purchases were
made in the name of Can-Am Investments, Ltd., a later formed Bahamian affiliate
of CenTra. Also on July 13, 1992, the District Court for Lancaster County,
Nebraska entered a temporary restraining order against CenTra, Messrs. M.J.
Moroun, Harned and Lech, John and Jane Doe, XYZ Corporation, and their
affiliates known and unknown, prohibiting further purchases of Chandler Cayman
common shares. On July 14 and 17, 1992, the stock brokerage firm through which
the open market purchases were made purportedly substituted Can-Am for M.J.
Moroun as the purchaser on the July 9 and 10 sales confirmations. At some time
after July 13, 1992, M.J. Moroun assigned his rights to purchase the pledged
shares of Chandler Cayman owned by the Universal Insurance Group and Cactus
Southwest Corp. to Can-Am; neither CenTra nor Can-Am now claim ownership or any
interest in the Chandler Cayman shares. During the second quarter of 1997,
ownership of the 380,471 common shares of Chandler Cayman owned by Universal
Insurance Group was transferred to L&W as payment for one of the agent's debts.
In December 1997, 114,146 common shares owned by Cactus Southwest Corp. were
transferred to Chandler Management Cayman and the balance of the its common
shares was transferred to unaffiliated persons and entities. These transactions
had the effect of canceling the debts secured by the Chandler Cayman shares.
Through the above transactions, CenTra and its affiliates acquired, or
contracted to acquire, an additional 26.5% of Chandler Cayman's common stock,
bringing their total claimed stock ownership to 49.2% in July 1992. The
management-led tender offer, which commenced on July 9, 1992 without knowledge
of the open market purchases, was withdrawn on July 23, 1992. As these
developments unfolded, CenTra or its affiliates or both initiated litigation in
Oklahoma, Arkansas and Michigan, and an administrative proceeding in Nebraska,
the domicile of NAICO.
CENTRA LITIGATION--OKLAHOMA
BACKGROUND OF OKLAHOMA LAWSUIT. On July 16, 1992, CenTra and Messrs. M.J.
Moroun, Lech and Harned filed a lawsuit in the United States District Court for
the Western District of Oklahoma against Chandler Cayman, the other corporations
participating in the tender offer, and various individuals including certain
officers and employees of Chandler Cayman and its subsidiaries and the remaining
directors of Chandler Cayman, except Mr. Paul Maestri. The lawsuit sought
declaratory and injunctive relief to prevent the tender offer alleging breaches
of fiduciary and other duties and violations of the federal securities laws.
After the tender offer was withdrawn, the plaintiffs amended their complaint on
August 5, 1992, alleging breaches of fiduciary and other duties by commencing
the tender offer and violations of federal securities laws in the tender offer
and in certain transactions since 1988. Chandler Cayman and the other defendants
denied any breaches of duty or violations of law and Chandler Cayman filed
various counterclaims against CenTra and various affiliates alleging breaches of
fiduciary duties and violations of federal securities laws in their attempts to
seize control of Chandler Cayman through the July 1992 stock purchases, and
sought damages, costs and attorney fees. Chandler Cayman also asserted a
52
<PAGE>
counterclaim against M.J. Moroun, individually, based upon his alleged violation
of Section 16(b) of the Exchange Act regarding "short swing" profits.
On January 6, 1993, the plaintiffs filed a second amended complaint (1)
asserting violations of federal securities laws and a breach of contract claim
in a 1988 stock purchase; (2) asking the court to declare invalid and
unenforceable a corporate resolution based on Article XI of Chandler Cayman's
Articles of Association (prohibiting certain business combinations) that
prohibits Can-Am and its affiliates (including CenTra) from voting their shares
of Chandler Cayman's common stock; and (3) asserting derivative claims for
fiduciary misconduct, unjust enrichment, fraud and/or breach of contract in the
tender offer, for management bonuses in 1988 and 1989, in Chandler Cayman's
purchase of three management-related agencies in 1988, and for assorted improper
personal benefits. All of these derivative claims seek unspecified damages,
restitution and/or injunctive relief on behalf of Chandler Cayman, including
punitive damages, attorneys' fees and costs. In 1994 the plaintiffs made a
request to file a third amended complaint. The Court denied that request.
A three member committee ("Special Committee"), who are on the board of
directors of NAICO and are not named in the lawsuits, investigated the
derivative claims. The Special Committee concluded that neither Chandler Cayman
nor its subsidiaries should take action against the individual defendants
regarding the claims relating to the tender offer, the management bonuses and
the agency purchases. As to the allegedly improper personal benefits, the
Special Committee found that some were ordinary and necessary business expenses
while others were not. The Special Committee recommended that the recipients
reimburse CUSA for all improper personal benefits, the full value of which was
$135,000. The Special Committee's recommendations were implemented, and
reimbursement was made. The respective Boards of Directors of Chandler Cayman
and its affected subsidiaries accepted the report and recommendations of the
Special Committee and retained special legal counsel to implement the
recommendations of the Special Committee. Messrs. M.J. Moroun, Lech and Harned
dissented.
On July 20, 1992, CenTra sued NAICO in the Circuit Court of Macomb County,
Michigan alleging that NAICO and certain officers and directors wrongfully
canceled insurance policies issued to CenTra. CenTra claimed that the
cancellation was retaliation for CenTra's decision not to participate in the
tender offer, requested that the policies be reinstated, and sought monetary
damages for the wrongful cancellation. The case was removed to the U.S. District
Court for the Eastern District of Michigan. NAICO replied that the cancellation
was proper based on CenTra's continuing failure to pay premiums. After two
extensions of the cancellation date, the policies were canceled effective on
September 5, 1992, after CenTra acquired replacement insurance. On August 26,
1992, CenTra deposited $700,000 with the court clerk under court order as
security for premiums due under the NAICO policies. On October 13, 1992, the
court granted NAICO's and the other defendant's motion to transfer the action to
the U.S. District Court for the Western District of Oklahoma. On January 27,
1993, CenTra filed an application in the Court of Appeals for the Sixth Circuit
contending that the district court abused its discretion by transferring the
case to Oklahoma. The application was denied. CenTra then filed a motion in the
U.S. District Court in Oklahoma to transfer the case to Michigan. The U.S.
District Court in Oklahoma retained jurisdiction of the case. NAICO filed a
claim seeking payment of the unpaid premiums and contended that the
cancellations were proper and denied that CenTra suffered any damages as a
result of the cancellations, or any action taken by NAICO associated with the
cancellations.
OKLAHOMA JUDGMENTS--APRIL 22, 1997 AND MARCH 10, 1998. On February 13,
1997, trial commenced in the United States District Court in Oklahoma City,
Oklahoma (the "Oklahoma Federal Court") in the consolidated cases involving
CenTra and certain of its affiliates, officers and directors (the "CenTra
Group") and Chandler Cayman and certain of its affiliates, officers and
directors. On April 1, 1997, at the close of all of the evidence, the Court
entered judgment in favor of NAICO on CenTra's claims for alleged wrongful
cancellation of CenTra's insurance with NAICO and the affiliate in 1992. See
CenTra Litigation--Other. The remaining issues were submitted to a jury.
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<PAGE>
On April 9, 1997, the jury returned verdicts on all claims. On April 22,
1997, the Oklahoma Federal Court entered judgments on all verdicts returned. One
judgment against Chandler Cayman requires the CenTra Group to return stock it
purchased in 1990 to Chandler Cayman in return for a payment of $5,099,133 from
Chandler Cayman. Another judgment was against both Chandler Cayman and its
affiliate, Chandler Barbados, and in favor of CenTra and its affiliate, Ammex,
Inc. ("Ammex"). CenTra and Ammex were awarded $6,882,500 in connection with a
1988 stock purchase agreement. Both judgments related to an alleged failure by
Chandler Cayman to adequately disclose the fact that ownership of Chandler
Cayman's stock may be subject to regulation by the Department under certain
circumstances. Judgment was also entered in favor of CenTra and against certain
officers and/or directors of Chandler Cayman on the securities claims relating
to CenTra's 1990 purchases and the failure to disclose the application of
Nebraska insurance law, but the judgments were $1 against each individual
defendant on those claims. On ten derivative claims brought by CenTra, the jury
found in CenTra's favor on three. Certain officers were directed to repay
bonuses received for the years 1988 and 1989 totaling $711,629 and a total of
$25,000 for personal use of corporate aircraft. These amounts are included in
other assets in the accompanying consolidated balance sheets. On the remaining
claim relating to the acquisition of certain insurance agencies in 1988, the
jury awarded $1 each against six officers and/or directors.
Judgment was also entered in favor of NAICO and NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. During 1998, the judgment was paid by
funds held by the Oklahoma Federal Court aggregating, with interest, $820,185.
DuraRock, a CenTra affiliate, claims $725,000 is owed to it by NAICO and NAICO
Indemnity under certain reinsurance treaties. NAICO and NAICO Indemnity dispute
that claim. In November 1998, DuraRock demanded arbitration and NAICO and NAICO
Indemnity responded by appointing an arbitrator. No arbitration hearings have
been held. The Oklahoma Federal Court's judgment also upheld a resolution
adopted by Chandler Cayman's Board of Directors in August 1992 pursuant to
Article XI of Chandler Cayman's Articles of Association preventing CenTra and
its affiliates from voting their Chandler Cayman stock.
The jury found in favor of CenTra on Chandler Cayman's claim against CenTra
for breach of a standstill agreement contained in a 1988 stock exchange
agreement. The jury denied Chandler Cayman's claim against Messrs. Harned, Lech
and Moroun based upon their alleged breach of fiduciary duty as directors. The
jury also denied Chandler Cayman's claim against Mr. Moroun individually for
violation of Section 16(b) of the Securities Exchange Act of 1934 regarding
short swing profits.
As a result of the Oklahoma Federal Court judgments, Chandler Cayman
recorded a net charge for the litigation matters described above during the
first quarter of 1997 totaling approximately $8.3 million ($8.5 million
including provision for federal income tax). In addition, Chandler Cayman
recorded the return of 517,500 shares of Chandler Cayman's stock in conjunction
with the stock rescission judgment as a decrease to shareholders' equity in the
amount of approximately $4.9 million with the remaining amount included in the
charge for litigation matters. The charge includes approximately $4.6 million as
an estimate of interest, costs and related attorney fees. The charge includes an
estimated recovery by Chandler Barbados of $2.7 million from Chandler Cayman's
directors and officers liability insurer (the "D&O Insurer") for costs
associated with the defense and litigation of these matters. Chandler Cayman and
its subsidiaries are entitled to a total of $5 million under the applicable
insurance policy to the extent they have advanced reimburseable expenses. Some
amounts have been previously paid without dispute and Chandler Cayman is
negotiating with the insurer for payment of the policy balance. CUSA and its
affiliates could recover the remaining policy limits or could compromise its
claim, and could incur significant costs in either case. The estimated insurance
recovery is based upon these variable factors. The charge also includes the
amount of judgments in favor of CUSA on the derivative claims discussed above.
On March 10, 1998, the Oklahoma Federal Court disposed of all post-trial
motions filed by the parties. The parties had asked the Oklahoma Federal Court
to vacate or modify judgments unfavorable to them and requested the Oklahoma
Federal Court to award prejudgment interest. The Oklahoma Federal Court
overruled all pending motions except a motion by Chandler Cayman and Chandler
Barbados to
54
<PAGE>
require CenTra and its affiliates to deliver 1,142,625 shares of Chandler Cayman
common stock they own or control upon payment of the $6,882,500 judgment which
was entered in CenTra's favor in April 1997. Chandler Cayman recorded the return
of 1,142,625 shares of Chandler Cayman's stock in conjunction with the order as
a decrease to shareholders' equity as of December 31, 1997, and reduced the
previous first quarter of 1997 net charge for litigation matters by $6,882,500.
The CenTra parties were directed to deliver the shares upon payment of the
judgment. On March 16, 1998 the CenTra Group filed motions for an award of costs
and attorney fees totaling approximately $4.7 million. On April 21, 1998, the
Oklahoma Federal Court denied the CenTra Group's request. The CenTra Group did
not appeal this decision within the time permitted by applicable law.
Accordingly, Chandler Cayman reduced the previous first quarter of 1997 net
charge for litigation matters by $3.8 million during the second quarter of 1998.
In subsequent papers filed with the appellate court, CenTra asserts as error the
Oklahoma Federal Court's denial of attorney fees.
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court and filed the initial
appellate brief on September 9, 1998. All briefing was completed on January 4,
1999 and the appeals are being considered by the U.S. Court of Appeals for the
10th Circuit. Chandler Cayman cannot predict when a decision on the appeals will
be made. The CenTra Group's appeals are based upon the Oklahoma Federal Court's
failure to award prejudgment interest, the Oklahoma Federal Court's refusal to
permit the CenTra Group to amend certain pleadings to assert new claims, the
Oklahoma Federal Court's modification of the judgment for $6,882,500 to require
CenTra to return shares of Chandler Cayman's stock upon payment of the judgment,
and the Oklahoma Federal Court's entry of judgment in favor of NAICO and certain
officers and directors on CenTra's claim based upon cancellation of its
insurance policies by NAICO in 1992. The CenTra Group is also attempting to
appeal the Oklahoma Federal Court's denial of attorney fees but not the denial
of costs. Chandler Cayman believes the appeal of this issue is untimely and
therefore barred by law. Chandler Cayman has elected not to appeal any of the
judgments. The individual officers and directors against whom judgments were
entered as described above have all filed appeals.
The judgments on the derivative claims described above were all entered in
favor of CUSA. CUSA, is, therefore, the judgment creditor in connection with
those derivative claim judgments. CUSA appointed Messrs. Runyan, Anderson and
Gilmore to comprise a Special Litigation Committee on April 25, 1997. That
Special Litigation Committee meets on a regular basis and has been delegated the
authority of CUSA's Board of Directors regarding all issues related to the
CenTra litigation in the Oklahoma Federal Court, including the derivative claim
judgments.
On April 28, 1997, Chandler Cayman's Board of Directors appointed a
Committee of the Board (the "Committee") to deal with all matters arising from
the Oklahoma litigation. The Committee was delegated all authority of the Board
on these issues. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. That Committee has
retained independent counsel. The individual members of the Committee review
issues relating to litigation strategy, officer and director indemnification and
claims made under Chandler Cayman's director and officer liability insurance
policy on a regular basis in conjunction with a similar committee composed of
CUSA's directors. The Committee meets quarterly and participates in regular
telephone briefings and discussions with its counsel and members of the CUSA
Special Litigation Committee.
Because all shares of Chandler Cayman's stock owned by the CenTra Group are
held by the U.S. District Court for the District of Nebraska (the "Nebraska
Court"), it is unclear when or if the CenTra Group will be able to comply with
the Oklahoma Federal Court's order. Chandler Cayman believes that it is not
required to pay the judgments until the CenTra Group can deliver the shares to
Chandler Cayman. See "--CenTra Litigation--Nebraska."
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on CUSA and could negatively impact
CUSA's future earnings. CUSA's management believes that adequate financial
resources are available to pay the judgments as they currently exist or as they
may be modified on appeal. As a holding company, CUSA may receive cash through
equity sales,
55
<PAGE>
borrowings and dividends from its subsidiaries. Chandler Barbados and NAICO are
subject to various regulations which restrict their ability to pay shareholder
dividends. A reduction in the amount of invested assets, or an increase in
borrowings resulting from potential payments of these judgments would reduce
investment earnings or increase operating expenses in future periods.
CENTRA LITIGATION--NEBRASKA
ADMINISTRATIVE. NAICO, which is domiciled in Nebraska, is regulated by the
Department. The Department requires a Form A application and prior approval by
the Department from anyone seeking to acquire control, directly or indirectly,
of an insurance company regulated by the Department. CenTra, Can-Am and their
affiliates filed a Form A application with the Department to which CUSA and
certain of its affiliates objected. On October 28, 1992, the Department denied
CenTra's Form A application. The Department found that (1) the financial
condition of the CenTra Group might jeopardize the financial stability of NAICO
or prejudice the interests of policyholders; (2) the competence, experience and
integrity of the CenTra Group is such that it would not be in the best interests
of policyholders or NAICO or the public for the CenTra Group to control NAICO;
and (3) the acquisition is likely to be hazardous or prejudicial to the public.
The CenTra Group appealed the Department's order to the Lancaster County
District Court for the State of Nebraska ("District Court"). The District Court
affirmed the Department's order on September 21, 1993. On December 1, 1995, the
Nebraska Supreme Court affirmed the Department and the District Court decisions.
On May 13, 1996, the U.S. Supreme Court denied the CenTra Group's Petition for
Writ of Certiorari, thereby declining to review the decision of the Nebraska
Supreme Court.
NEBRASKA COURT ACTION. On October 6, 1995, Agnes Anne Moroun, sister of
M.J. Moroun, purported to acquire 1,441,000 shares of the voting stock of
Chandler Cayman (the "Shares") from Can-Am, an affiliate of three of Chandler
Cayman's directors, M.J. Moroun, Norman E. Harned and Ronald W. Lech. In
response to that action, NAICO filed a lawsuit on October 11, 1995, in the
District Court seeking an order sequestering the Shares based upon alleged
violations of the Nebraska Holding Company Systems Act and orders of the
Nebraska Department of Insurance. NAICO also sought a temporary order enjoining
further transfers of the Shares and an order requiring the custodian of the
Shares, Dean Witter, to deliver them to the court. Agnes Anne Moroun, M.J.
Moroun, Norman E. Harned and others removed the action to the Nebraska Court on
October 17, 1995. The Nebraska Department of Insurance intervened on that same
date requesting relief substantially similar to that requested by NAICO. The
Honorable Warren K. Urbom conducted a hearing on October 18, 1995, and on
October 30, 1995, granted the relief requested by NAICO. On October 31, 1995,
the order was amended and was extended to 700 shares of Chandler Cayman held by
Can-Am and was extended to include the CenTra Group's claim to rights to acquire
stock of Chandler Cayman. Dean Witter was directed to cause share certificates
to be issued and delivered to the Clerk of the Nebraska Court. On November 8,
1995, the share certificates were issued listing Can-Am as the shareholder of
1,441,700 shares of Chandler Cayman pursuant to the order of the Nebraska Court.
On November 2, 1995, Agnes Anne Moroun and the other defendants filed responsive
pleadings and counterclaims against NAICO and the Director of Insurance of the
State of Nebraska ("Insurance Director"). The counterclaims sought declaratory
relief confirming the validity of the purported October 6, 1995, transfer of the
Shares and that the Insurance Director and the courts of the State of Nebraska
are without authority to sequester the Shares. The counterclaims also seek a
judgment determining that NAICO's current management controls Chandler Cayman
without the approval of the Insurance Director and incidental relief. The
Nebraska Court ruled in favor of NAICO on the counterclaims.
On March 25, 1997, the Nebraska Court, pursuant to the Nebraska Insurance
Holding Company Systems Act, ordered CenTra and certain of its affiliates to
divest all Chandler Cayman shares owned by them, regardless of when purchased.
The CenTra defendants own or control 3,133,450 Chandler Cayman shares. All such
shares are currently in the possession of the Nebraska Court pursuant to the
1995 and 1997 orders of the Nebraska Court, including the shares subject to the
Oklahoma Federal Court stock
56
<PAGE>
rescission judgments. CenTra's shares represent approximately 45.1% of the
outstanding stock, including the shares subject to the Oklahoma Federal Court
stock rescission judgments and the stock held by subsidiaries. The Nebraska
Court directed NAICO, the CenTra defendants and the Nebraska Department of
Insurance to submit proposals to the Nebraska Court by April 21, 1997, for the
"orderly divestiture and disposition of the stock."
CenTra subsequently appealed the March 25, 1997, order of the Nebraska Court
to the United States Court of Appeals for the Eighth Circuit. CenTra's appeal of
this order resulted in a delay of the deadlines for submitting the proposals. On
October 7, 1997, the Honorable Warren K. Urbom, U.S. District Judge for the
Nebraska Court, ordered CenTra, M.J. Moroun and others to deliver into the
registry of the Nebraska Court by November 6, 1997, all shares of Chandler
Cayman stock owned or controlled by them or their affiliates not previously
tendered, to await the outcome of the appeal of his divestiture order. CenTra
requested a stay of that order. The stay was denied by Judge Urbom and CenTra
was again ordered to deliver their shares to the Nebraska Court, this time by
January 12, 1998. CenTra appealed that order to the U.S. Court of Appeals for
the Eighth Circuit, which affirmed Judge Urbom's order. On February 9, 1998,
CenTra deposited an additional 1,691,750 shares with the Nebraska Court. Until
the final proposals are submitted and accepted, Chandler Cayman and CUSA are
unable to predict the effect of the divestiture order on the rights, limitations
or other regulation of ownership of the stock of any existing or prospective
holders of Chandler Cayman's common stock, or the effect on the market price of
Chandler Cayman's stock.
On July 29, 1998, the U.S. Court of Appeals for the Eighth Circuit affirmed
the Nebraska Court's order that the CenTra Group will be divested of ownership
of control of its Chandler Cayman shares. This ruling allows the Nebraska Court
to consider divestiture plans which may be submitted by NAICO, the Nebraska
Department of Insurance and the CenTra Group. All Chandler Cayman shares owned
or controlled by the CenTra Group remain in the Nebraska Court's possession
pending further orders by that court. On October 28, 1998, the CenTra Group
filed pleadings in the Nebraska Court requesting the appointment of a special
master to supervise the divestiture and an independent trustee to hold and vote
Chandler Cayman's shares owned by the CenTra Group in accordance with specific
instructions pending the final implementation of a divestiture plan. NAICO
objected to the CenTra proposal on November 25, 1998, and responded with a
divestiture plan of its own (the "NAICO Plan"). The Nebraska Court rejected the
CenTra proposal and CenTra responded to the NAICO Plan on December 28, 1998. The
Nebraska Court has made no ruling on the NAICO Plan. NAICO's Plan includes a
proposal whereby Chandler Cayman would acquire and cancel the shares of Chandler
Cayman stock owned or acquired by the CenTra Group. The NAICO Plan has been
approved by Chandler Cayman's executive committee of the Board of Directors, and
the Boards of Directors of CUSA and NAICO. The Department generally supports the
NAICO Plan. The Nebraska Court has given no indication regarding when it will
rule on the NAICO Plan.
On March 27, 1997, the Nebraska Court declined to exercise jurisdiction over
550,329 shares of Chandler Cayman stock held as security by Chandler Cayman
subsidiaries for debts owed by two former agents but in which CenTra claimed to
have option rights. The Nebraska Court's ruling cleared the way for the
subsidiaries to begin the process of disposing of these shares to retire the
agents' debts to the subsidiaries. CenTra did not appeal this order. During the
second quarter of 1997, the 380,471 shares owned by Universal Insurance Group
were transferred to L&W as payment for one of the agent's debts. In December
1997, 114,146 shares owned by Cactus Southwest Corp. were transferred to
Chandler Management Cayman and the balance of the shares was transferred to
unaffiliated persons and entities. These transactions had the effect of
canceling the debts secured by the shares.
CENTRA LITIGATION--OTHER
On September 25, 1997, NAICO learned that several CenTra affiliates had
filed two lawsuits in state court in Macomb County, Michigan against NAICO,
NAICO Indemnity and certain NAICO officers asserting the same claims made and
tried in the Oklahoma lawsuit described above. See "--CenTra
Litigation--Oklahoma." Those claims were purportedly prosecuted by CenTra on its
own behalf and on
57
<PAGE>
behalf of its subsidiaries. The Oklahoma Federal Court previously entered a
judgment against CenTra on these claims. The damages sought are unspecified but
the claims are based upon NAICO's cancellation of CenTra's insurance in 1992.
NAICO and NAICO Indemnity contend that the Oklahoma Federal Court's adjudication
is conclusive as to all claims. The lawsuits were removed to the U.S. District
Court for the Eastern District of Michigan, Southern Division (the "Michigan
Federal Court"). On February 28, 1998, the Michigan Federal Court ordered the
lawsuits transferred to the Oklahoma Federal Court. They have now been
consolidated and have been assigned to the same judge who presided over the
action concluded in April 1997. See "--CenTra Litigation--Oklahoma." Dispositive
motions filed by NAICO, NAICO Indemnity and the other defendants are currently
under consideration by the Oklahoma Federal Court, but that court has stayed
ruling pending a decision by the 10th Circuit Court of Appeals on CenTra's
appeal of the April 1, 1997, judgment on the same claims. See "--CenTra
Litigation--Oklahoma."
During the first quarter of 1997 Chandler Barbados concluded an arbitration
proceeding involving DuraRock and Chandler Barbados recorded approximately
$315,000 in litigation and settlement expenses related to this matter. Chandler
Cayman also resolved various issues resulting in settlement of litigation and
arbitration proceedings among subsidiaries of Chandler Cayman and CenTra
affiliates, and recorded litigation and settlement expenses of approximately
$147,000 in the fourth quarter of 1997.
In the CenTra litigation, certain officers of CUSA and Chandler Cayman and
Chandler Cayman's directors other than Messrs. M.J. Moroun, Harned, Lech and
Maestri were named as defendants. In accordance with its Articles of
Association, Chandler Cayman and its subsidiaries have advanced the litigation
expenses of these persons in exchange for undertakings to repay such expenses if
those persons are later determined to have breached the standard of conduct
provided in the Articles of Association. Chandler Barbados has paid expenses
totaling approximately $2.2 million as of December 31, 1998. A portion of these
expenses relate to claims which have been dismissed or which were decided in
favor of the officers and directors. In addition, certain expenses may be
recovered from the D&O Insurer. As a result of various events in 1995, Chandler
Barbados and CUSA recorded $654,000 and $164,000, respectively, estimated
recoveries of costs from the D&O Insurer related to a $1 million claim for
reimbursable amounts previously paid that relate to allowable defense and
litigation costs for such parties. In 1996, Chandler Barbados and CUSA recorded
additional estimated recoveries of $102,000 and $880,000, respectively. Chandler
Barbados and CUSA received payments for the 1995 claim during 1996 in the amount
of $636,000 and $159,000, respectively. In connection with the Oklahoma Federal
Court judgments, Chandler Barbados recorded an additional estimated recovery of
$2.7 million from the D&O Insurer. Chandler Cayman and its subsidiaries are
entitled to a total of $5 million under the applicable insurance policy to the
extent they have advanced reimbursable expenses. Some amounts have been
previously paid without dispute and Chandler Cayman is negotiating with the D&O
Insurer for payment of the policy balance. Chandler Cayman and its subsidiaries
could recover the remaining policy limits or could compromise their claim, and
could incur significant costs in either case. The estimated insurance recovery
is based upon these variable factors. Except for the recovery of a portion of
the litigation costs from the D&O Insurer, no provision has been made in the
accompanying consolidated financial statements related to the advancement of
litigation expenses to certain defendants. The Special Litigation Committees of
CUSA and Chandler Cayman were delegated the authority of the boards of directors
to deal with all issues arising from the Oklahoma litigation including the issue
of officer and director indemnification.
At the present time CUSA and its affiliates are actively participating in
court proceedings, possible discovery actions and rights of appeal concerning
these various legal proceedings; therefore, CUSA and its affiliates are unable
to predict the outcome of such litigation with certainty or the effect of such
ongoing litigation on future operations.
OTHER LITIGATION
CUSA and its subsidiaries are not parties to any other material litigation
other than as is routinely encountered in their respective business activities.
58
<PAGE>
MANAGEMENT
The directors and executive officers of CUSA are as follows:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- -------------------------------------------------- -------------------------------------------------------- ---
<S> <C> <C>
W. Brent LaGere................................... Chairman of the Board, Chief Executive Officer and 53
President
Mark T. Paden..................................... Executive Vice President, Chief Operating Officer, Chief 42
Financial Officer and Director
Brenda B. Watson.................................. Executive Vice President of NAICO and L&W 58
Richard L. Evans.................................. Vice President--Claims and Director 52
R. Patrick Gilmore................................ Secretary, General Counsel and Director 48
Mark C. Hart...................................... Vice President--Finance and Treasurer 43
Larry B. McMillon................................. Vice President--Administration 54
Robert L. Rice.................................... Director 64
Robert A. Anderson................................ Director 60
W. Timothy Runyan................................. Director 51
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of CUSA:
W. BRENT LAGERE has been a director, Chairman of the Board and Chief
Executive Officer of CUSA since 1988. He is also President of CUSA and has been
employed by CUSA or its subsidiaries since 1971.
MARK T. PADEN was elected Executive Vice President and Chief Operating
Officer of CUSA, NAICO and L&W in May 1998. Mr. Paden has served as Chief
Financial Officer of NAICO since January 1988 and of L&W since May 1987, and has
also served as Vice President--Finance of NAICO from January 1988 through May
1998 and of L&W from May 1987 through May 1998. Mr. Paden has also been a
director of CUSA since July 1988, a director of NAICO since November 1992 and a
director of L&W since October 1992.
BRENDA B. WATSON has been Executive Vice President of Chandler Cayman and
NAICO since October 1988, was a Vice President of Chandler Cayman for three
years prior thereto, and has been a director of Chandler Cayman since September
1985. Since October 1988 she has served in officer and director capacities for
various subsidiaries of Chandler Cayman pursuant to an employment contract with
CUSA.
RICHARD L. EVANS has served as Vice President--Claims for CUSA and its
subsidiaries since 1987. He joined L&W as a claims manager in 1979. He has
served as a director of CUSA since May 1990.
R. PATRICK GILMORE has served as General Counsel for CUSA and its
subsidiaries since 1988 and currently also serves as corporate Secretary. He has
been a director of CUSA since 1990.
MARK C. HART has served as Vice President--Finance and Treasurer of CUSA and
its subsidiaries since May 1998. He has also served as Vice President of CUSA
since March 1994, Controller of NAICO since March 1990, Assistant Treasurer of
NAICO since March 1994 and Assistant Treasurer for CUSA since June 1992.
LARRY B. MCMILLON has served as a Vice President--Administration of CUSA and
NAICO since 1989. He was an Executive Vice President and Controller for W. H.
Braum, Inc. before joining CUSA.
ROBERT L. RICE has been a director of CUSA since June 1993 and a director of
L&W since May 1997. He has for more than 20 years engaged in private practice as
a Certified Public Accountant. Mr. Rice is not employed by CUSA nor does he have
any business relationship with CUSA.
59
<PAGE>
ROBERT A. ANDERSON has been a director of NAICO since 1990, a director of
L&W since 1993 and a director of CUSA since 1997. He currently is Vice Chairman
of Security National Bank in Omaha, Nebraska, and has served in that capacity
since 1996. He was the President of First Westroad Bank in Omaha, Nebraska, from
1974-1996. He is not employed by CUSA nor does he have any business relationship
with CUSA.
W. TIMOTHY RUNYAN has been a director of CUSA since 1993, and a director of
NAICO since 1990. He currently is a logistics executive and consultant. Since
1990, he has been President, Chief Executive Officer and a director of Central
Courier Corporation. Since 1988, he has been the Chairman of the Board,
President, Chief Executive Officer and director of The Wilmore Group. From 1980
until 1987, he was President and director of United Forwarding, Inc. From 1989
until 1998, he was President and director of K.S.M. Carriers, Inc. He is not
employed by CUSA nor does he have any business relationship with CUSA.
In the civil proceeding CenTra, Inc. v. Chandler Insurance Company, Ltd.,
et. al, Case No. CIV-92-1301-M, in the U.S. District Court for the Western
District of Oklahoma, judgment was entered in favor of CenTra and against
Messrs. LaGere, Paden, Evans, Rice, Ms. Watson and one former director of CUSA
in the amount of $1.00 each, finding a violation of Section 10(b) of the
Exchange Act and a violation of Section 11(a) of the Securities Act based upon a
failure by Chandler Cayman and certain of its officers and directors to disclose
the applicability of the Nebraska Insurance Holding Company Act to purchasers of
stock of Chandler Cayman in a public offering. The judgments are currently being
appealed.
The following table sets forth the compensation paid or to be paid by CUSA
and its subsidiaries as well as certain other compensation paid or accrued,
during the years indicated, to the Chairman and Chief Executive Officer and the
four other highest paid executive officers of CUSA and its subsidiaries (the
"Named Executives") for such period in all capacities in which they served.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(2) ($)(3) ($)(4)
- ------------------------------------------------ --------- ---------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
W. Brent LaGere................................. 1998 $ 397,361 $ -- N/A $ 36,596
Chairman of the Board, CEO and 1997 389,340 -- N/A 37,471
President of CUSA, NAICO and L&W 1996 378,610 -- N/A 40,148
Mark T. Paden................................... 1998 209,300 -- N/A 4,900
Executive Vice President, COO & CFO 1997 178,637 -- N/A 4,975
of CUSA, NAICO and L&W 1996 173,188 -- N/A 12,752
Brenda B. Watson................................ 1998 221,607 -- N/A 8,100
Executive Vice President of NAICO and 1997 216,882 -- N/A 8,475
L&W 1996 211,182 -- N/A 15,552
Richard L. Evans................................ 1998 218,190 -- N/A 6,200
Vice President--Claims of CUSA, 1997 211,873 -- N/A 6,275
NAICO and L&W 1996 205,896 -- N/A 13,752
R. Patrick Gilmore.............................. 1998 192,400 -- N/A 2,660
Secretary and General Counsel of CUSA 1997 186,833 -- N/A 2,100
and NAICO, Vice President of L&W 1996 183,173 -- N/A 2,100
</TABLE>
- ------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by
the Named Executives as well as amounts earned but deferred at their
election.
60
<PAGE>
(2) All Named Executives are eligible to participate in bonus plans based upon
premium production and profitability.
(3) CUSA provides various perquisites to certain employees including the Named
Executives. In each case, the value of the perquisites provided to each
Named Executive did not exceed ten percent of such Named Executive's annual
salary and bonus.
(4) The amounts shown under this column represent contributions by CUSA and its
subsidiaries to a 401(k) plan ($11,552 for each of the Named Executives in
1996, $3,475 in 1997 and $3,600 in 1998, except for Mr. Gilmore whose 1996
and 1997 contributions were $600 and whose 1998 contribution was $1,160) and
the premiums paid or to be paid by CUSA and its subsidiaries under life
insurance arrangements with the Named Executives. A portion of the premiums
($36,000, $25,800 and $24,900 in 1996, 1997 and 1998, respectively) were
paid under split dollar life insurance plans. Under these plans, CUSA and
its subsidiaries pay the premiums for life insurance issued to the Named
Executive. Repayment of the premiums is secured by the death benefit or the
cash surrender value of the policy, if any, if the Named Executive cancels
and surrenders the policy.
OPTIONS EXERCISED AND HOLDINGS
No options were exercised by the Named Executives during 1998 and there were
no unexercised options or stock appreciation rights held by the Named Executives
as of December 31, 1998.
DIRECTOR COMPENSATION
Directors who are employees of CUSA do not receive additional compensation
for serving as directors. Each non-employee director of CUSA is paid $1,000 per
day for any meeting or committee meeting attended. However, if a non-employee
director is attending meetings for two or more affiliates of CUSA on the same
day, his compensation is $750 per day for any meeting or committee meeting of
CUSA attended. If a non-employee director attends the meeting by telephonic
conference, his compensation is $500 per day for any meeting or committee
meetings so attended.
EMPLOYMENT AGREEMENTS
CUSA has an employment agreement with W. Brent LaGere, Chairman of the Board
and Chief Executive Officer of Chandler Cayman, CUSA and its subsidiaries. Under
this agreement, Mr. LaGere's base compensation is established at not less than
$250,000 per year. In the event that Mr. LaGere is terminated without cause, as
defined in the agreement, he is entitled to received his base compensation for
the remainder of the term of the agreement, but in no event for more than 60
months. The agreement will terminate upon Mr. LaGere attaining age 70, unless
earlier terminated by CUSA for cause. In addition to his base compensation, Mr.
LaGere is eligible to receive certain benefits and to participate in certain
incentive bonus plans offered by CUSA and its subsidiaries.
CUSA has an employment agreement with Brenda Watson, a director and
executive officer of Chandler Cayman and L&W, and an executive officer of NAICO.
Under this agreement, Ms. Watson's base compensation is established at not less
than $125,000 per year. The agreement terminates on December 31, 2003, unless
earlier terminated by CUSA for cause, as defined in the agreement. In the event
that Ms. Watson is terminated without cause, she is entitled to receive her base
compensation through the termination date. In addition to her base compensation,
Ms. Watson is eligible to receive certain benefits and to participate in certain
incentive bonus plans offered by CUSA and its subsidiaries.
61
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
CUSA is an indirect wholly owned subsidiary of Chandler Cayman. The table
below shows: (1) the number and percentage of outstanding shares of each class
of the capital stock of Chandler Cayman that, as of December 31, 1998, are
beneficially owned by (a) each director of Chandler Cayman and CUSA, (b) each
Named Executive, (c) each executive officer of Chandler Cayman and (d) all
directors and executive officers of CUSA and Chandler Cayman as a group and (2)
the combined percentage of all classes of the capital stock of Chandler Cayman
that is beneficially owned by each such person or group of persons.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NUMBER OF
NAME OF DIRECTOR OR EXECUTIVE OFFICER SHARES(1) PERCENT(2)
- ---------------------------------------------------------------- --------------- -----------
<S> <C> <C>
W. Brent LaGere................................................. 471,465(3) 7.4%
Mark T. Paden................................................... 26,310 *
Brenda B. Watson................................................ 53,566 *
Richard L. Evans................................................ 53,014 *
Norman E. Harned................................................ 3,133,900(5) 49.0%
Paul A. Maestri................................................. 20,000(4) *
M.J. Moroun..................................................... 3,133,900(5) 49.0%
James M. Jacoby................................................. -- (6) --
Robert L. Rice.................................................. 20,000(4) *
Ronald W. Lech.................................................. 3,133,900(5) 49.0%
Larry A. Davis.................................................. -- (6) --
Steven R. Butler................................................ 1,000 *
Mark C. Hart.................................................... 2,515 *
Larry B. McMillon............................................... 20,290 *
R. Patrick Gilmore.............................................. 11,000 *
Robert A. Anderson.............................................. -- --
W. Timothy Runyan............................................... -- --
All directors and executive officers as a group (17 persons).... 3,813,060(7) 59.4%
</TABLE>
- ------------------------
* Less than 1%
(1) Except as otherwise indicated, each person has the sole power to vote and
dispose of all shares, and the sole power to exercise any options listed
opposite his or her name.
(2) In the above table, any shares which have been awarded but not issued under
Chandler Cayman's Directors' Stock Option and Stock Grant Plan (the
"Directors' Plan") are deemed to be outstanding solely for the purpose of
computing the number and percentage of Chandler Cayman's common shares that
he owns. Such shares, if any, are not included in the computations for any
other person. These percentages are computed based on 6,397,233 shares of
common stock outstanding including 1,660,125 common shares rescinded through
litigation but excluding 544,475 common shares owned by a subsidiary of
Chandler Cayman which are eligible to vote. The percentages for "All
directors and executive officers as a group" is computed based on 6,417,233
shares of common stock which include the shares discussed in Footnote 7
below.
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<PAGE>
(3) Includes: 348,390 common shares owned by the W. Brent LaGere Irrevocable
Trust and 45,000 common shares owned by W&L Holding Corp., a corporation 49%
of which is owned by the W. Brent LaGere Irrevocable Trust. Mr. LaGere
disclaims beneficial ownership of the shares held by W&L Holding and the
trust. The power to vote and dispose of the shares held by W&L Holding is
shared with Benjamin T. Walkingstick, who also owns 49% of W&L Holding. The
business address of Mr. LaGere is 1010 Manvel Avenue, Chandler, Oklahoma
74834.
(4) Includes: 10,000 common shares issued during 1998 pursuant to the Directors'
Plan and 10,000 common shares which have been awarded and will be issued
during 1999. These totals do not include 31,500 common shares issuable under
outstanding options the exercisability of which is subject to Chandler
Cayman shareholder approval.
(5) Includes: 1,360,125 common shares owned by CenTra; and 1,441,700 common
shares owned by Can-Am; 290,000 common shares owned by Ammex, Inc.; 25,000
common shares owned by DuraRock, which is owned by Matthew T. Moroun, M.J.
Moroun's son; 15,000 common shares owned by Matthew T. Moroun; 250 common
shares held by Mr. Harned; 200 common shares held by Mr. Lech; and 1,625
common shares owned by Agnes A. Moroun, M.J. Moroun's sister.
(6) These totals do not include 1,500 shares issuable under outstanding options
the exercisability of which is subject to Chandler Cayman shareholder
approval.
(7) Includes 20,000 common shares which have been awarded and will be issued
during 1999 pursuant to the Directors' Plan.
SHAREHOLDERS HOLDING OVER FIVE PERCENT
Listed below are persons, other than those listed previously under "Security
Ownership of Certain Beneficial Owners and Management", who are known by CUSA to
own beneficially more than 5% of the common stock of Chandler Cayman as of
December 31, 1998.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NUMBER OF
NAME OF SHAREHOLDER SHARES(1) PERCENT(2)
- ---------------------------------------------------------------- --------------- -----------
<S> <C> <C>
CenTra Group (CenTra, Can-Am, Ammex, and Messrs. M.J. Moroun,
Lech and Harned, Agnes A. Moroun and Matthew T. Moroun)....... 3,133,900(3) 49.0%
Benjamin T. Walkingstick
1001 Manvel Avenue, Chandler, Oklahoma 74834.................. 401,029(4) 6.3%
Marvel List, Trustee of the W. Brent LaGere Irrevocable Trust
420 Bennett Boulevard, Chandler, Oklahoma 74834............... 398,077 6.2%
</TABLE>
- ------------------------
(1) Except as otherwise indicated, each person or group has the sole power to
vote and dispose of all shares and the sole power to exercise any options
listed opposite his or her name.
(2) In the above table, any shares that a person can acquire through the
exercise of options are deemed to be outstanding solely for the purpose of
computing the number and percentage of Chandler Cayman's common shares that
he or she owns. Such shares, if any, are not included in the computations
for any other person. These percentages are computed based on 6,397,233
shares of common stock outstanding, including 1,660,125 common shares
rescinded through litigation but excluding 544,475 common shares owned by a
subsidiary of Chandler Cayman which are eligible to vote.
(3) The CenTra Group has filed a Schedule 13D with the Securities and Exchange
Commission reporting collective beneficial ownership of 49.2% of Chandler
Cayman's common shares as of July 1992. This percentage included certain
common shares the CenTra Group contracted to acquire subject to regulatory
approval. The beneficial ownership set forth above includes: 1,360,125
common shares owned by CenTra; 1,441,700 common shares owned by Can-Am;
290,000 common shares owned by
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Ammex; 25,000 common shares owned by DuraRock, which is owned by Matthew T.
Moroun, M.J. Moroun's son; and 15,000 common shares owned by Matthew T.
Moroun; 250 common shares held by Mr. Harned; 200 common shares held by Mr.
Lech; and 1,625 common shares owned by Agnes A. Moroun, M.J. Moroun's
sister.
Chandler Cayman includes the ownership of Messrs. Harned and Lech and Agnes
A. Moroun in the beneficial ownership of the CenTra Group because of their
present or former employment and other relationships with CenTra and M.J.
Moroun and their involvement in CenTra's attempts to take control of
Chandler Cayman.
The business address of CenTra, Can-Am, and Messrs. M.J. Moroun and Harned
is 12225 Stephens Road, Warren, Michigan 48089. The business address of Mr.
Lech is 5301 Lauren Court, Bloomfield Hills, Michigan 48302-2941.
(4) Includes 45,000 common shares owned by W&L Holding, a corporation 49% of
which is owned by Mr. Walkingstick. The power to vote and dispose of the
shares held by W&L Holding is shared with the W. Brent LaGere Irrevocable
Trust, which also owns 49% of W&L Holding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June and November 1998, W. Brent LaGere purchased, on behalf of and for
the benefit of the Chandler (U.S.A.), Inc. 401(k) Thrift Plan 52,000 and 80,000
shares, respectively, of common stock of Chandler Cayman. On November 19, 1998,
the Plan acquired these and other Chandler Cayman shares at no profit to Mr.
LaGere.
CUSA leases a rural property from Davenport Farms, Inc., a corporation owned
by Messrs. LaGere, Evans and Paden. CUSA has placed three mobile homes on the
property, drilled a water well connected to the mobile homes and made other
smaller improvements to the property. Its personnel maintains these
improvements. These mobile homes and the property provide hunting, fishing,
lodging, dining and other outdoor recreational activities for the entertainment
of customers and business associates of CUSA and/or its subsidiaries. CUSA pays
no rent to Davenport Farms but reimburses it for one-half of the utilities and
for hunting supplies. CUSA has also agreed to indemnify Davenport Farms for
claims arising out of its use of the property. CUSA retains the right to remove
all structures located upon the property when the lease terminates. In 1996,
1997 and 1998, CUSA incurred approximately $184,000, $159,000 and $217,000,
respectively, in expenses associated with this property.
Prior to May 1, 1997, Benjamin T. Walkingstick was an employee of CUSA
pursuant to an employment agreement dated October 28, 1988 (the "Employment
Agreement") and served as an executive officer and director of Chandler Cayman
and certain of its subsidiaries. Effective May 1, 1997, Mr. Walkingstick
resigned these positions and ceased to be an employee of CUSA. He continues to
be a consultant to CUSA and its subsidiaries pursuant to the Employment
Agreement and continues to receive compensation at an annual rate of $323,291
under the Employment Agreement through October 2000 at which time he reaches age
70.
On September 18, 1997, Mr. Walkingstick and L&W entered into an agreement
providing that Mr. Walkingstick will produce insurance business only through L&W
as an independent contractor (the "Insurance Agreement"). Mr. Walkingstick will
receive one-half of all commissions upon any business he produces which was not
previously written by L&W and is liable for payment of all premiums due upon
such business. The Insurance Agreement may be terminated by either party at any
time upon thirty days written notice. Upon termination, the insurance policy
expirations or renewal rights (ownership) of the insurance business produced by
Mr. Walkingstick shall remain the property of L&W. Mr. Walkingstick is required
to maintain his own support staff. Commissions paid to Mr. Walkingstick under
this arrangement were $10,832 and $10,603 during 1997 and 1998, respectively.
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During 1996, CUSA transferred 567,350 shares of Chandler Cayman stock to
Chandler Cayman. In consideration for the stock, CUSA's intercompany payable was
reduced by the fair value of the stock at the time of the transaction which was
$2,169,387. CUSA realized a gain of approximately $22,000 from this transaction.
During 1997, L&W acquired 494,617 shares of Chandler Cayman's common stock
from two former agents of NAICO and L&W as payment for debts owed to L&W and
NAICO. L&W transferred those shares during 1997 to Chandler Management Cayman an
affiliate who, in turn assumed debt of L&W to Chandler Barbados in the amount of
approximately $2.5 million, the fair value of the shares.
In connection with an intercompany loan, CUSA has owed Chandler Barbados
approximately $16.3 million, $16.3 million and $7.0 million during 1996, 1997
and 1998, respectively. In connection with an intercompany loan, L&W has owed
Chandler Barbados approximately $7.2 million, $3.7 million and $5.2 million
during 1996, 1997 and 1998, respectively. In connection with an intercompany
loan, L&W has owed Chandler Management Cayman approximately $34,912 and $34,912
during 1997 and 1998, respectively.
NAICO received $120,793 from CenTra in 1997 in connection with insurance
premiums. CenTra beneficially owns approximately 49% of the stock of Chandler
Cayman, the indirect parent of NAICO. NAICO also ceded approximately $9.0
million, $5.4 million and $2.1 million in 1996, 1997 and 1998, respectively, in
unpaid losses, allocated loss adjustment expenses, written premiums and incurred
losses to Durarock, an affiliate of CenTra.
CUSA and its subsidiaries paid $181,000 and $194,000 in 1996 and 1997,
respectively, to Union National Bank in connection with certain automobile
leases. Ben Walkingstick was an executive officer and director of CUSA and its
subsidiaries during 1996 and 1997 and is the Chairman of the Board of Union
National Bank.
CUSA and its subsidiaries paid $65,651, $66,130 and $142,694 in 1996, 1997
and 1998, respectively, for services rendered by Gardere & Wynne, L.L.P. David
G. McLane, a partner of Gardere & Wynne, L.L.P., served as Secretary of NAICO
during 1996, 1997 and 1998.
NAICO and Chandler Barbados engage in various reinsurance arrangements from
time to time. The current financial effect of those arrangements is described in
Notes 11 and 12 to the Consolidated Financial Statements. CUSA anticipates that
NAICO and Chandler Barbados will in the future continue to engage in similar
reinsurance arrangements.
CUSA believes that the transactions described above with directors or
officers are and will continue to be on terms no less favorable to CUSA than
could be obtained from unaffiliated parties.
DESCRIPTION OF DEBENTURES
GENERAL
CUSA will issue the debentures under an indenture between CUSA and U.S.
Trust Company of Texas, N.A., as Trustee, a copy of which is available upon
written request to CUSA at the address shown on page 40.
The following description summarizes certain provisions of the indenture and
the debentures and is not complete, although we believe that it summarizes all
of the material terms of the debentures. In this description, the term "CUSA"
refers only to CUSA and not to any of its subsidiaries. We urge you to read the
indenture because it, and not this description, defines your rights as a holder
of the debentures.
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BRIEF DESCRIPTION OF THE DEBENTURES
The debentures:
- are general unsecured obligations of CUSA;
- rank equal in right of payment with all other unsecured and unsubordinated
indebtedness of CUSA;
- are limited to $24 million aggregate principal amount; and
- are redeemable by CUSA after , 2009, without penalty or
premium.
PRINCIPAL, MATURITY AND INTEREST
CUSA will issue the debentures only in fully registered form, without
coupons, in denominations of $1,000 and multiples of $1,000. You will not be
charged a service fee for any registration of transfer or exchange of
debentures, but CUSA may require payment of an amount sufficient to cover any
applicable transfer tax or other similar governmental charge.
The debentures will mature on , 2014. Each debenture will bear
interest at the annual rate shown on the front cover of this prospectus from
, 1999, or from the most recent date to which interest has been paid
or provided for, to but excluding the next interest payment date, and interest
will be payable semiannually on and of each year, commencing
, 1999, to holders of record at the close of business on the
or immediately preceding that or .
METHODS OF RECEIVING PAYMENTS ON THE DEBENTURES
Principal and interest on the debentures will be payable at an office or
agency of CUSA. One will be maintained for that purpose in the City and State of
New York, which initially will be the corporate trust office of the Trustee. At
the option of CUSA, payment of interest may be made by check mailed to the
registered holders of the debentures at their registered addresses. In addition,
the debentures may be exchanged or transferred at the office in New York.
OPTIONAL REDEMPTION
CUSA may not redeem the debentures prior to , 2009. The debentures
will be redeemable at the option of CUSA, in whole or in part, after ,
2009, if CUSA gives at least 30 but not more than 60 days' prior notice, at a
redemption price equal to 100% of their principal amount plus accrued and unpaid
interest to the date of redemption.
If money sufficient to pay the redemption price of and accrued interest on
all debentures (or portions of debentures) to be redeemed on the redemption date
is deposited with the Trustee on or before the redemption date and certain other
conditions are satisfied, on and after that date interest will cease to accrue
on the debentures (or those portions of debentures) called for redemption.
RANKING
The indebtedness evidenced by the debentures will be senior indebtedness of
CUSA and will be direct unsecured obligations of CUSA, ranking equal with all
other unsecured and unsubordinated indebtedness of CUSA. CUSA is a holding
company and, because subsidiary debt may be paid before any payments to CUSA,
the debentures will be effectively subordinated to all existing and future
liabilities, including indebtedness, of CUSA's subsidiaries. See "The Chandler
Organization" and "--Certain Covenants-- Limitations on Subsidiary Debt."
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CERTAIN COVENANTS
LIMITATIONS ON SUBSIDIARY DEBT
CUSA will not permit any subsidiary of CUSA to incur or maintain any Debt or
issue any preferred stock except:
(1) Debt outstanding on the date of original issuance of the debentures
after giving effect to the application of the proceeds from the
debentures;
(2) Debt or preferred stock held by CUSA or a wholly owned subsidiary of
CUSA, but only so long as held by CUSA or the subsidiary;
(3) Debt incurred or preferred stock issued by a person (which term includes
all entities and all governments and agencies and political subdivisions
thereof) before (a) that person became a subsidiary of CUSA, (b) that
person merges into or consolidates with a subsidiary of CUSA, or (c)
another subsidiary of CUSA merges into or consolidates with that person
in a transaction that results in such person becoming a subsidiary of
CUSA, or Debt incurred or preferred stock issued by a person and
thereafter assumed by a subsidiary of CUSA in a transaction in which the
property of that person is sold, leased or otherwise disposed of as an
entirety or substantially as an entirety to that subsidiary, in each such
case in which the Debt or preferred stock was not incurred or issued in
anticipation of that transaction;
(4) Debt incurred to finance all or any part of the purchase price or the
cost of construction of or improvements to the present or future
property, whether real or personal, of CUSA or any subsidiary incurring
such debt in an amount not to exceed the greater of the fair market value
or actual cost of acquisition or construction of such property,
construction or improvements or additions thereto;
(5) Debt or preferred stock that is exchanged for, or the proceeds of which
are used to refinance or refund, any Debt or preferred stock permitted to
be outstanding under clauses (1) through (4) above or any extension or
renewal thereof:
(a) in an amount not to exceed the principal amount of the Debt, in the
case of Debt, or the liquidation preference of the preferred stock,
in the case of preferred stock, that is being exchanged, refinanced
or refunded, and
(b) provided that the Debt to be incurred or preferred stock to be issued
does not require the payment of all or a portion of the principal or
liquidation value thereof (except, in the case of Debt, upon an event
of default or "change of control" or similar occurrence) prior to the
scheduled maturity or maturities of the Debt or preferred stock being
refinanced or refunded;
(6) Debt arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from guarantees or letters
of credit, surety bonds or performance bonds securing any obligations of
any subsidiary of CUSA under those agreements in each case incurred in
connection with the disposition of any business assets of any subsidiary
of CUSA, other than guarantees of Debt or other obligations incurred by
any person acquiring all or any portion of those business assets for the
purpose of financing that acquisition, in an amount not to exceed the
gross proceeds actually received by that subsidiary in connection with
that disposition; and
(7) Debt not otherwise permitted to be incurred under clauses (1) through
(6) above which, together with all other outstanding Debt incurred under
this clause (7), has an aggregate principal amount of not more than $2.0
million.
Under the indenture "Debt" means with respect to any person, and whether or
not contingent,
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(1) every obligation of that person for money borrowed,
(2) every obligation of that person under bonds (other than surety or
fidelity bonds issued by that person in the ordinary course of business),
debentures, notes or other similar instruments,
(3) every reimbursement obligation of that person under letters of credit,
bankers' acceptances or similar facilities issued for the account of that
person other than as entered into in the ordinary course of business,
(4) every obligation of that person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of
business),
(5) every capital lease obligation of that person,
(6) the maximum fixed redemption or repurchase price of redeemable stock of
that person at the time of determination,
(7) every payment obligation of that person under interest rate swap or
similar agreements or foreign currency hedge, exchange or similar
agreements at the time of determination, and
(8) every obligation of the type referred to in clauses (1) through (7) of
another person and all dividends of another person the payment of which,
in either case, that person has guaranteed or is responsible or liable
for, directly or indirectly, and all such obligations of another person
that are secured by (or for which the holder has an existing right,
contingent or otherwise, to be secured by) any lien on property owned by
that person; PROVIDED that if the obligation so secured is not that
person's legal liability in full, the amount of the obligation for the
purposes of this definition will be limited to the lesser of the amount
of the obligation secured by the lien or the fair market value of the
assets securing the lien.
"Debt" does not include obligations owed under the terms of insurance or
reinsurance policies or agreements.
CUSA and its subsidiaries will be deemed to have incurred Debt if they
create, issue, incur, assume, guarantee or otherwise become liable for such
Debt. Additionally, they will be deemed to have incurred Debt if they are
required under GAAP or otherwise to record the Debt on their balance sheet,
except when such recording is a result of a change in GAAP.
LIMITATIONS ON ISSUANCES OR DISPOSITIONS OF STOCK OF SUBSIDIARIES.
CUSA will not, and will not permit any subsidiary to, issue, sell or
otherwise dispose of any shares of capital stock of any subsidiary except for
(1) director's qualifying shares, if required by applicable state laws; (2)
shares or other dispositions to CUSA or to one or more wholly owned subsidiaries
of CUSA; (3) the sale or other disposition of all or any part of the capital
stock of any subsidiary for consideration which is at least equal to the fair
value of such capital stock as determined by CUSA's board of directors (acting
in good faith); or (4) any issuance, sale, assignment, transfer or other
disposition made in compliance with an order of a court or regulatory authority
of competent jurisdiction, other than an order issued at the request of CUSA,
any subsidiary or any affiliate of CUSA or any subsidiary.
LIMITATIONS ON LIENS
CUSA will not incur, and will not permit any subsidiary to incur, any lien
on any property or assets of CUSA or any subsidiary to secure Debt unless the
debentures (and, if required by its governing instruments, any other Debt of
CUSA or of any subsidiary that is not subordinate to the debentures) are secured
(1) equally and ratably with that Debt as to such property or assets for so long
as that Debt will be so secured or (2) in the event that the Debt is Debt of
CUSA which is subordinate in right of payment to
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the debentures, with priority over the Debt as to such property or assets for so
long as that Debt will be secured.
The preceding restrictions will not apply to liens existing at the date of
the indenture, or to:
(1) liens securing only the debentures;
(2) liens in favor of CUSA;
(3) liens on property of a person existing at the time (a) that person
becomes a subsidiary of CUSA, (b) that person is merged into or
consolidated with CUSA (or any subsidiary of CUSA), (c) any subsidiary of
CUSA merges into or consolidates with that person or (d) the property of
that person is sold, leased or otherwise disposed of as an entirety or
substantially as an entirety to CUSA or a subsidiary, in each case not
securing Debt incurred in anticipation of that transaction;
(4) liens on property existing at the time of acquisition thereof;
(5) liens on property of CUSA or any subsidiary of CUSA securing
(a) all or any portion of the cost of acquiring, constructing, altering,
improving or repairing any property, real or personal, or
improvements used or to be used in connection with such property, or
(b) Debt incurred by CUSA or any subsidiary before or within one year
after the later of the acquisition, the completion of construction,
alteration, improvement or repair, or the commencement of commercial
operation, which Debt is incurred for the purpose of financing all or
any part of the purchase price or such construction, alteration,
improvement or repair,
provided that, in case of clause (a) or (b) above, the liens are created
not later than one year after such acquisition, construction, alteration,
improvement or repair, or the commencement of commercial operation,
whichever is later, are limited to the property acquired, constructed,
altered, approved or repaired and do not secure Debt in excess of the
cost of such acquisition, construction, alteration, improvement or
repair;
(6) liens in favor of the United States or any State, territory or
possession thereof, or any department, agency, instrumentality or
political subdivision of the United States or any State, territory or
possession thereof, to secure partial, progress, advance or other
payments pursuant to any contract or statute or to secure any Debt
incurred for the purpose of financing all or any part of the purchase
price or the cost of constructing or improving the property subject to
those liens;
(7) liens in favor of any insurance company to secure the obligations of any
subsidiary under any insurance or reinsurance agreement or arrangement
(whether facultative or treaty) granted or incurred in the ordinary
course of business, to the extent required under such insurance or
reinsurance agreement or arrangement;
(8) mechanics', workmen's, materialmen's or similar liens arising in the
ordinary course of business;
(9) liens to secure any extension, renewal, refinancing or refunding (or
successive extensions, renewals, refinancings or refundings), in whole or
in part, of any Debt secured by liens referred to in the above clauses
(1) to (7) so long as such liens do not extend to any other property
(other than improvements to that property) and the principal amount of
the Debt so secured is not increased;
(10) liens to secure Debt in an aggregate principal amount not to exceed
$2.0 million at any one time outstanding (without duplication of any
other Debt specified in clauses (1) through (9) above or clauses (11) or
(12) below);
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(11) liens securing Debt owed by CUSA to one or more wholly owned
subsidiaries of CUSA (but only if that Debt is held by such wholly owned
subsidiaries); and
(12) pledges or deposits by a person under worker's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Debt) or leases to which that person is a party, or deposits
to secure public or statutory obligations of that person or deposits of
cash or U.S. government bonds or other fixed maturity investments to
secure performance, surety or appeal bonds to which that person is a
party or which are otherwise required of that person, or deposits as
security for insurance or reinsurance obligations, contested taxes or
import duties or for the payment of rent or other obligations of like
nature, in each case incurred in the ordinary course of business.
LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS
CUSA will not, and will not permit any of its subsidiaries, to enter into
any sale and leaseback transaction regarding any property or assets (except for
a period of up to three years) unless:
(1) CUSA or the subsidiary would be entitled to incur a lien on such
property or assets to secure Debt under the provisions described in
clauses (1) through (12) of the second paragraph under "Limitations on
Liens" above in an amount equal to the Attributable Value of the sale and
leaseback transaction without equally and ratably securing the
debentures; or
(2) CUSA applies an amount equal to the Attributable Value for such sale and
leaseback transaction within six months of such sale to the defeasance or
retirement (other than any mandatory retirement, mandatory prepayment or
sinking fund payment or by payment at maturity) of Debt securities or
other debt for borrowed money of CUSA or a subsidiary that matures more
than one year after the creation of such Debt or to the purchase,
construction or development of other comparable property.
"Attributable Value" means, as to any particular lease under which any
person is at the time liable other than a capital lease obligation, and at any
date as of which the amount thereof is to be determined, the total net amount of
rent required to be paid by that person under such lease during the initial term
thereof as determined under GAAP, discounted from the last date of such initial
term to the date of determination at an annual rate equal to the discount rate
which would apply to a capital lease obligation with like term under GAAP. The
net amount of rent required to be paid under a lease for any such period will be
the amount of rent payable by the lessee with respect to that period after
excluding amounts required to be paid on account of insurance, taxes,
assessments, utility, operating and labor costs and similar charges. In the case
of any lease which is terminable by the lessee upon the payment of a penalty,
the net amount will also include the amount of the penalty, but no rent will be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated. "Attributable Value" means, as to a capital
lease obligation under which any person is at the time liable and at any date as
of which the amount thereof is to be determined, the capitalized amount thereof
that would appear on the face of a balance sheet of that person under GAAP.
REPORTS
CUSA will file on a timely basis with the SEC, to the extent the SEC accepts
such filings and whether or not CUSA has a class of securities registered under
the Exchange Act, the annual reports, quarterly reports and other documents that
CUSA would be required to file if it were subject to Section 13 or 15(d) of the
Exchange Act.
CUSA also will:
(1) file with the Trustee (with exhibits), and provide without cost to each
holder (without exhibits), copies of those reports and documents within
15 days after the date on which CUSA files those reports and documents
with the SEC or the date on which CUSA would be required to file those
reports and documents if CUSA were subject to Section 13 or 15(d) of the
Exchange Act; and
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(2) if the filing of those reports and documents with the SEC is not
accepted by the SEC or is prohibited under the Exchange Act, supply at
its cost copies of those reports and documents (including any exhibits
thereto) to any holder promptly on its written request.
LIMITATIONS ON MERGERS AND CONSOLIDATIONS
CUSA will not consolidate with or merge into any person, or sell, lease,
convey, transfer or otherwise dispose of all or substantially all of its assets
to any person, unless:
(1) the person formed by or surviving such consolidation or merger (if other
than CUSA), or to which the sale, lease, conveyance, transfer or other
disposition will be made (collectively, the "Successor"), is a
corporation organized and existing under the laws of the United States or
any State thereof or the District of Columbia, and the Successor assumes
by supplemental indenture in a form satisfactory to the Trustee all of
the obligations of CUSA under the indenture and under the debentures;
(2) immediately after the transaction becomes effective, no Default or Event
of Default exists; and
(3) CUSA or such person shall have delivered to the Trustee an officer's
certificate and an opinion of counsel, each in a form satisfactory to the
Trustee and stating that the conditions specified in clauses (1) and (2)
above have been satisfied.
DEFAULTS
An Event of Default is defined in the indenture as:
(1) a default in any payment of interest on any debenture when due and
payable, continued for 30 days;
(2) a default in the payment of principal of any debenture when due and
payable at its stated maturity, upon required redemption or repurchase,
upon declaration or otherwise;
(3) the failure by CUSA to comply with any other covenants in the indenture
that will not have been remedied by the end of a period of 60 days after
written notice to CUSA by the Trustee or to CUSA and the Trustee by the
holders of at least 25% in principal amount of the outstanding
debentures;
(4) acceleration of, or failure by CUSA to pay when due, any Debt within any
applicable grace period after final maturity or the acceleration of that
Debt by the holders thereof because of a default if the total amount of
that Debt unpaid or accelerated exceeds $5.0 million or its foreign
currency equivalent (the "cross acceleration provision") and that failure
continues for 20 days after receipt of the notice specified in the
indenture;
(5) certain events of bankruptcy, insolvency or reorganization of CUSA or
any subsidiary that would be a "Significant Subsidiary" of CUSA within
the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC (a
"Significant Subsidiary") (the "bankruptcy provision");
(6) certain events of receivership, liquidation, conservation or
custodianship of CUSA or any Significant Subsidiary or the taking
possession of CUSA or any Significant Subsidiary by a receiver,
liquidator, assignee, custodian, rehabilitator, conservator, supervisor,
trustee, sequestrator or similar official; or
(7) the rendering of any judgment or decree for the payment of money in
excess of $5.0 million or its foreign currency equivalent at the time it
is entered against CUSA or any subsidiary which is not discharged, waived
or stayed if
(a) an enforcement proceeding is commenced by any creditor and not stayed
or abandoned within 30 days following the commencement, or
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(b) the judgment or decree remains outstanding for a period of 60 days
following the judgment and is not discharged, waived or stayed and, in
either case, the default continues for ten days after written notice
specifying the failure and requiring CUSA to remedy the same will have
been given to CUSA by the Trustee or to CUSA and the Trustee by the
holders of at least 25% in principal amount of the then outstanding
debentures (the "judgment default provision").
If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of CUSA) occurs and is
continuing, the Trustee or the holders of at least 25% in principal amount of
the outstanding debentures by notice to CUSA may declare the principal of and
accrued interest on all the debentures to be due and payable. Upon this
declaration, the principal and accrued interest will be due and payable
immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency, reorganization, receivership, liquidation, conservation or
custodianship of CUSA or of any Significant Subsidiary occurs, the principal of
and accrued interest on all the debentures will become immediately due and
payable without any declaration or other act on the part of the Trustee or any
holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding debentures may rescind any acceleration of the
debentures and its consequences.
The holders of at least a majority in principal amount of the outstanding
debentures may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that would
cause the Trustee to be personally liable. Before taking any action under the
indenture, the Trustee will be entitled to indemnification satisfactory to it
against all losses and expenses caused by taking or not taking that action.
AMENDMENTS AND WAIVERS
Generally, the indenture may be amended and any past default or compliance
with any provisions may also be waived with the written consent of the holders
of a majority in principal amount of the debentures then outstanding. However,
without the consent of each holder of an outstanding debenture affected thereby,
no amendment may:
(1) reduce the amount of debentures whose holders must consent to an
amendment or waiver;
(2) reduce the rate of or extend the time for payment of interest on any
debenture;
(3) reduce the principal of or extend the stated maturity of any debenture;
(4) change the time at which any debenture may be redeemed as described
under "Optional Redemption" above;
(5) make any debenture payable in money other than that stated in the
debenture;
(6) impair the right of any holder to receive payment of principal of and
interest on that holder's debentures on or after the due dates therefor
or to institute suit for the enforcement of any payment on or for that
holder's debentures; or
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
The indenture contains customary provisions under which, without the consent
of any holder of debentures, CUSA and the Trustee may amend the indenture to
cure any ambiguity, omission, defect or inconsistency, to provide for the
assumption by a successor corporation of CUSA's obligations, to comply with any
requirement of the SEC in connection with the qualification of the indenture
under the Trust Indenture Act and to make other changes that do not adversely
affect the rights of any holder in any material respect. The consent of the
holders of the debentures is not necessary under the indenture to
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approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, CUSA is required
to mail to debentureholders a notice briefly describing such amendment. However,
the failure to give such notice to all holders of the debentures, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A holder may transfer or exchange debentures as provided in the indenture.
Upon any transfer or exchange, the registrar and the Trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and CUSA may require a holder to pay any taxes required by law or
permitted by the indenture. CUSA is not required to transfer or exchange any
debenture selected for redemption or to transfer or exchange any debenture for a
period of 15 days prior to a selection of debentures to be redeemed. The
debentures will be issued in registered form and the registered holder of a
debenture will be treated as the owner of that debenture for all purposes.
DEFEASANCE
CUSA at any time may terminate all of its obligations under the debentures
and the indenture, commonly called a "legal defeasance," except for obligations
such as those for the defeasance trust and obligations to register the transfer
or exchange of the debentures, to replace mutilated, destroyed, lost or stolen
debentures and to maintain a registrar and paying agent for the debentures. CUSA
at any time may terminate its obligations under the covenants described under
"Certain Covenants," the operation of the cross acceleration provision, the
bankruptcy provisions for subsidiaries and the judgment default provision
described under "Defaults" above (commonly called a "covenant defeasance").
CUSA may exercise its legal defeasance option even if it has previously
exercised its covenant defeasance option. If CUSA exercises its legal defeasance
option, payment of the debentures may not be accelerated because of an Event of
Default with respect thereto. If CUSA exercises its covenant defeasance option,
payment of the debentures may not be accelerated because of an Event of Default
specified in clause (3), (4), (6) or (7) under "Defaults" above.
In order to exercise either defeasance option, CUSA must irrevocably deposit
in trust with the Trustee money or U.S. government obligations for the payment
of principal, premium (if any) and interest on the debentures to redemption or
maturity, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an opinion of counsel to the effect that
holders of the debentures will not recognize income, gain or loss for Federal
income tax purposes as a result of that deposit and defeasance and will be
subject to Federal income tax on the same amounts and in the same manner and at
the same times as would have been the case if that deposit and defeasance had
not occurred (and, in the case of legal defeasance only, that opinion of counsel
must be based on a ruling of the IRS or other change in applicable Federal
income tax law).
CONCERNING THE TRUSTEE
The U.S. Trust Company of Texas, N.A. is to be the Trustee under the
indenture and has been appointed by CUSA as registrar and paying agent for the
debentures.
GOVERNING LAW
The indenture provides that it and the debentures will be governed by, and
construed under, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences relating to the purchase, ownership and disposition of the
debentures offered hereby on original issue, but does not purport to be a
complete analysis of all potential tax consequences. This discussion is based
upon provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
the Treasury Regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect as of the date hereof, and all of
which are subject to change (possibly on a retroactive basis) or different
interpretation. There can be no assurance that the Internal Revenue Service (the
"Service") will not challenge one or more of the tax consequences described
herein. CUSA intends to treat the debentures as indebtedness for federal income
tax purposes, and the balance of the discussion is based on the assumption that
such treatment will be respected. CUSA has not sought and will not seek any
rulings from the Service with respect to the positions of CUSA discussed herein,
and there can be no assurance that the Service will not take a different
position concerning the tax consequences of the purchase, ownership or
disposition of the debentures or that any such position would be sustained.
The tax treatment of a holder of the debentures may vary depending on such
person's particular situation or status. This summary does not address all tax
consequences that may be applicable to a holder of the debentures, nor does it
address the tax consequences that may be applicable to (a) persons that may be
subject to special treatment under United States federal income tax law, such as
S corporations, insurance companies, banks, thrift institutions, regulated
investment companies, real estate investment trusts, tax-exempt organizations,
broker-dealers or taxpayers subject to alternative minimum tax, (b) persons that
will hold debentures as part of a position in a "straddle" or as part of a
"hedging," "conversion" or other integrated investment transaction for federal
income tax purposes, or (c) persons that do not hold debentures as capital
assets (within the meaning of Section 1221 of the Code). The following
discussion does not consider all aspects of United States federal income tax
that may be relevant to the purchase, ownership, and disposition of the
debentures by such holder in light of his personal circumstances. In addition,
the description does not consider the effect of any applicable foreign, state,
local or other tax laws or estate or gift tax considerations.
INVESTORS CONSIDERING THE PURCHASE OF DEBENTURES SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THEIR PARTICIPATION IN THE OFFERING AND THEIR OWNERSHIP AND DISPOSITION OF THE
DEBENTURES AND THE EFFECT THAT THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH
TAX CONSEQUENCES.
UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of the
debentures that is a citizen or resident of the United States, or any state
thereof, or a corporation, partnership or other entity, created or organized in
or under the laws of the United States, of any political subdivision thereof, or
the District of Columbia (unless, in the case of a partnership, Treasury
Regulations provide otherwise) an estate the income of which is subject to
United States federal income tax regardless of source or that is otherwise
subject to United States federal income tax on a net income basis in respect of
the debentures, or a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trusts. Notwithstanding the preceding sentence, to the extent provided in
Treasury Regulations, certain trusts in existence on August 20, 1996, and
treated as a United States person prior to such date, that elect to continue to
be treated as United States persons and that hold debentures will also be United
States Holders.
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INTEREST
The stated interest on the debentures will be includable in a United States
Holder's gross income as ordinary income for United States federal income tax
purposes at the time it is paid or accrued in accordance with the United States
Holder's method of tax accounting. The debentures will not have original issue
discount.
AMORTIZABLE BOND PREMIUM
If the United States Holder's basis in the debentures exceeds the amount
payable at the maturity date (or earlier call date, if appropriate), the United
States Holder may elect, under Section 171 of the Code, to amortize such excess
as amortizable bond premium over the remaining term of the debentures (taking
into account earlier call dates, as appropriate), under a constant-yield
formula. The amount amortized in any year will be treated as a reduction of the
United States Holder's interest income from the debenture. An election under
Section 171 of the Code is available only if the debentures are held as capital
assets. This election is revocable only with the consent of the Service and
applies to all debt obligations owned or acquired by the United States Holder on
or after the first day of the first taxable year to which the election applies.
To the extent amortizable bond premium is applied to reduce a United States
Holder's interest income from the debentures, such holder's adjusted tax basis
in the debentures will be reduced.
A debenture may be called or submitted for redemption prior to maturity. See
"Description of Debentures--Optional Redemption." An earlier call date is
treated as the maturity date of the debenture and the amount of amortizable bond
premium is determined by treating the amount payable on such call date as the
amount payable at maturity, if such calculation produces a smaller amortizable
bond premium than the method described in the preceding paragraph. If a United
States Holder is required to amortize and deduct the amortizable bond premium by
reference to a certain call date, the debenture will be treated as maturing on
that date for the amount then payable. If the debenture is not redeemed on that
call date, the debenture will be treated as reissued on that date for the amount
of the call price on that date. If a debenture purchased at a premium is
redeemed prior to its maturity, a United States Holder who has elected to deduct
the amortizable bond premium may be permitted to deduct any remaining
unamortized amortizable bond premium in the taxable year of the redemption.
MARKET DISCOUNT
The market discount rules generally provide that, if a United States Holder
of a debt instrument purchases it at a "market discount" and thereafter receives
any partial payment of principal on or realizes gain upon a disposition or a
retirement of the debt instrument, the lesser of such gain or the portion of the
market discount that has accrued on a straight-line basis (or on a constant
yield basis, if such alternative rate of accrual has been elected by the holder
under Section 1276(b) of the Code) while the debt instrument was held by such
United States Holder will be taxed as ordinary income at the time of such
disposition. For purposes of determining the amount taxed as ordinary income in
the case of a United States Holder disposing of a debt instrument acquired at a
market discount in a transaction other than a sale, exchange or involuntary
conversion (such as a gift), such holder will be treated as realizing an amount
equal to the fair market value of the debt instrument on such disposition.
"Market discount" with respect to the debentures will be the amount, if any, by
which the stated redemption price at maturity exceeds the United States Holder's
basis in the debenture immediately after such holder's acquisition, subject to a
DE MINIMIS exception.
A United States Holder who acquires a debenture at a market discount also
may be required to defer all or a portion of any interest expense that otherwise
may be deductible on any indebtedness incurred or maintained to purchase or
carry such debenture until the United States Holder disposes of the debenture in
a taxable transaction. Moreover, to the extent of any accrued market discount on
such debentures, any
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partial principal payment with respect to such debentures will be includable as
ordinary income upon receipt.
A United States Holder of debentures acquired at a market discount may elect
for federal income tax purposes to include market discount in gross income as
the discount accrues, either on a straight-line basis or on a constant yield
basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the Service. To the extent that the market discount is included in gross
income pursuant to such election, the United States Holder's adjusted tax basis
in such debentures will be increased. If a United States Holder of debentures
makes such an election, the foregoing rules with respect to the recognition of
ordinary income on sales and other dispositions of such debt instruments, and
with respect to the deferral of interest deductions on indebtedness incurred or
maintained to purchase or carry such debt instruments, would not apply.
REDEMPTION, SALE OR OTHER DISPOSITION OF DEBENTURES
Generally, any redemption, sale, exchange, retirement at maturity or other
disposition of debentures by a United States Holder would result in taxable gain
or loss equal to the difference between the sum of the amount of cash and the
fair market value of other property received (except to the extent that cash
received is attributable to accrued interest income or market discount not
previously included in income, which portion of the consideration would be taxed
as ordinary income) and the United States Holder's adjusted tax basis in the
debentures. The adjusted tax basis of a United States Holder will generally be
equal to the purchase price of the debenture increased by the amount of accrued
market discount, if any, which the United States Holder elected to include in
gross income on an annual basis and reduced by any amortizable bond premium
applied against the United States Holder's income prior to sale or redemption of
the debenture and by any payments of principal on the debenture. Subject to the
above discussion of market discount, such gain or loss would be long-term
capital gain or loss if the United States Holder's holding period for the
debentures exceeded one year. In the case of a United States Holder who is an
individual, such long-term capital gain will generally be subject to tax at a
20% maximum federal income tax rate.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments to a
United States Holder on a debenture (including stated interest payments and
payments of the proceeds from the sale, exchange, redemption, retirement at
maturity or other disposition of a debenture), unless such holder is a
corporation or comes within certain exempted categories and, when required,
demonstrates that fact. In addition, a United States Holder of a debenture may
be subject to backup withholding at the rate of 31 percent with respect to such
payments, unless such United States Holder (a) is a corporation or comes within
certain other exempt categories and, when required, demonstrates its exemption
or (b) provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding, properly reports interest and
otherwise complies with applicable requirements of the backup withholding rules.
A United States Holder of a debenture who does not provide CUSA with the
holder's correct taxpayer identification number may be subject to penalties
imposed by the Service. Any amount paid as backup withholding would be
creditable against the United States Holder's federal income tax liability and
may entitle such holder to a refund upon furnishing the required information to
the Service.
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any beneficial
owner of a debenture that is not a United States Holder.
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INTEREST
Generally, interest income of a Non-United States Holder that is not
effectively connected with a United States trade or business will be subject to
a withholding tax at a 30% rate (or, if applicable, a lower treaty rate).
However, interest paid on a debenture by CUSA or any paying agent to a
Non-United States Holder will qualify for the "portfolio interest exemption" and
therefore will not be subject to United States federal income tax or withholding
tax, provided that such interest income is not effectively connected with a
United States trade or business of the Non-United States Holder and provided
that the Non-United States Holder (i) does not actually or constructively own
10% or more of the combined voting power of all classes of stock of CUSA
entitled to vote, (ii) is not a "controlled foreign corporation" related to CUSA
actually or constructively through stock ownership, (iii) is not a bank which
acquired the debentures in consideration for an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of business and
(iv) either (a) provides a Form W-8 (or a suitable substitute form) signed under
penalties of perjury by the beneficial owner of the debenture that includes its
name and address and certifies as to its non-United States status in compliance
with applicable law and regulations, or (b) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business holds the debenture and provides a
statement to CUSA or its agent under penalties of perjury in which it certifies
that such a Form W-8 (or a suitable substitute form) has been received by it
from the Non-United States Holder or qualifying intermediary and furnishes CUSA
or its agent with a copy thereof.
Except to the extent that an applicable treaty otherwise provides, a
Non-United States Holder generally will be taxed in the same manner as a United
States Holder with respect to interest if the interest income is effectively
connected with a United States trade or business of the Non-United States
Holder. Effectively connected interest received by a foreign corporation may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate (or, if applicable, a lower treaty rate). Even though such
effectively connected interest is subject to income tax, and may be subject to
the branch profits tax, it is not subject to withholding tax if the Holder
delivers a properly executed Form 4224 to the payor.
Treasury Regulations generally effective for payments made after December
31, 2000, modify certain of the certification requirements described above. It
is possible that CUSA and other withholding agents may request new withholding
exemption forms from holders in order to qualify for continued exemption from
withholding under the Treasury Regulations when they become effective.
SALE, EXCHANGE OR REDEMPTION OF THE DEBENTURES
A Non-United States Holder of a debenture will generally not be subject to
United States federal income tax or withholding tax on any gain realized on the
sale, exchange, redemption, retirement at maturity or other disposition of the
debenture unless (1) such gain is effectively connected with a United States
trade or business of the Non-United States Holder, or (2) in the case of a
Non-United States Holder who is an individual (a) such holder is present in the
United States for a period or periods aggregating 183 days or more during the
taxable year of the disposition and certain other conditions are met or (b) the
holder is subject to tax pursuant to the provisions of the Code applicable to
certain United States expatriates. Non-United States Holders should consult
applicable income tax treaties, which may provide different rules.
DEATH OF A NON-UNITED STATES HOLDER
A debenture held by an individual who is a Non-United States Holder at the
time of death will not be includable in the decedent's gross estate for United
States federal estate tax purposes, provided that such holder or beneficial
owner did not at the time of death actually or constructively own 10% or more of
the total combined voting power of all classes of stock of CUSA entitled to
vote, and provided that, at the time of death, payments, with respect to such
debenture, would not have been effectively connected with the
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conduct by such Non-United States Holder of a trade or business within the
United States. For United States federal estate tax purposes, a "Non-United
States Holder" is an individual who is neither a citizen nor a domiciliary of
the United States. Whether an individual is considered a "domiciliary" of the
United States for estate tax purposes is generally determined on the basis of
all of the facts and circumstances.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
CUSA must report annually to the Service and to each Non-United States
Holder any interest income that is subject to withholding, or that is exempt
from withholding tax pursuant to a tax treaty, or interest that is exempt from
United States tax under the portfolio interest exemption. United States
information reporting requirements and backup withholding tax will not apply to
payments on a debenture to a Non-United States Holder if a Form W-8 (or a
suitable substitute form) is duly provided in the manner described in
"Non-United States Holders--Interest" by such holder, provided that the payor
does not have actual knowledge that the holder is a United States person.
Information reporting requirements and backup withholding tax will not apply
to any payment of the proceeds of the sale of a debenture effected outside the
United States by a foreign office of a "broker" (as defined in applicable
Treasury Regulations), unless such broker is a United States person, a foreign
person that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or a "controlled foreign
corporation" for United States federal income tax purposes or, for payments
after December 31, 2000, a partnership with certain connections to the United
States. Payment of the proceeds of any such sale effected outside the United
States by a foreign office of any broker that is described in the preceding
sentence will not be subject to backup withholding tax, but will be subject to
information reporting requirements unless such broker has documentary evidence
in its records that the beneficial owner is a Non-United States Holder and
certain other conditions are met, or the beneficial owner otherwise establishes
an exemption. Payment of the proceeds of any such sale to or through the United
States office of a broker is subject to information reporting and backup
withholding requirements, unless the beneficial owner of the debenture provides
a Form W-8 (or a suitable substitute form) in the manner described in
"Non-United States Holders--Interest" or otherwise establishes an exemption.
Treasury Regulations generally effective for payments made after December
31, 2000, modify certain of the certification requirements for backup
withholding. It is possible that CUSA and other withholding agents may request
new withholding exemption forms from holders in order to qualify for continued
exemption from backup withholding under the Treasury Regulations when they
become effective.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
such Non-United States Holder's federal income tax liability, if any, provided
that the required information is furnished to the Service.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES NOT
CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE PURCHASER'S
SITUATION OR STATUS. ACCORDINGLY, EACH PURCHASER OF DEBENTURES SHOULD CONSULT
ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT, INCLUDING THOSE
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL DEBENTURES
Debentures offered and sold pursuant to this prospectus will be issued in
the form of one or more registered debentures in global form, without interest
coupons (collectively, the "Global Debentures"). The Global Debentures will be
deposited on the date of the closing of the sale of the debentures with, or on
behalf of, DTC, and registered in the name of Cede & Co., as nominee of DTC, or
will remain in the custody of the Trustee pursuant to the FAST Balance
Certificate Agreement between DTC and the Trustee.
Except as set forth below, the Global Debentures may be transferred, in
whole and not in part, solely to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global Debentures may not be
exchanged for debentures in physical, certificated form ("Certificated
Debentures") except in the limited circumstances described below.
All interests in the Global Debentures may be subject to the procedures and
requirements of DTC.
EXCHANGES AMONG THE GLOBAL DEBENTURES
Any beneficial interest in one of the Global Debentures that is transferred
to a person who takes delivery in the form of an interest in another Global
Debenture will, upon transfer, cease to be an interest in such Global Debenture
and become an interest in the other Global Debenture and, accordingly, will
thereafter be subject to all transfer restrictions, if any, and other procedures
applicable to beneficial interests in such other Global Debenture for as long as
it remains such an interest.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL DEBENTURES
The description of the operations and procedures of DTC set forth below is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of DTC and are subject to change by it from time to
time. Neither CUSA nor Southwest Securities takes any responsibility for these
operations or procedures, and investors are urged to contact DTC or its
participants directly to discuss these matters.
DTC has advised CUSA that it is (1) a limited purpose trust company
organized under the laws of the State of New York, (2) a "banking organization"
within the meaning of the New York Banking Law, (3) a member of the Federal
Reserve System, (4) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (5) a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Investors who are not
Participants may beneficially own securities held by or on behalf of DTC only
through Participants or Indirect Participants.
CUSA expects that pursuant to procedures established by DTC (1) upon deposit
of each Global Debenture, DTC will credit the accounts of Participants
designated by Southwest Securities with an interest in the Global Debenture and
(2) ownership of the debentures will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with respect
to the interests of Participants) and the records of Participants and the
Indirect Participants (with respect to the interests of persons other than
Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the debentures represented by
a Global Debenture to such persons may be limited. In addition, because DTC can
act only on behalf of its Participants, who in turn act on behalf of persons who
hold interests through Participants,
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the ability of a person having an interest in debentures represented by a Global
Debenture to pledge or transfer such interest to persons or entities that do not
participate in DTC's system, or to otherwise take actions in respect of such
interest, may be affected by the lack of a physical definitive security in
respect of such interest.
So long as DTC or its nominee is the registered owner of a Global Debenture,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the debentures represented by the Global Debenture for all purposes
under the Indenture. Except as provided below, owners of beneficial interests in
a Global Debenture will not be entitled to have debentures represented by such
Global Debenture registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Debentures, and will not be considered
the owners or holders thereof under the indenture for any purpose, including
with respect to the giving of any direction, instruction or approval to the
Trustee thereunder. Accordingly, each holder owning a beneficial interest in a
Global Debenture must rely on the procedures of DTC and, if such holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such holder owns its interest, to exercise any rights of a holder
of debentures under the indenture or such Global Debenture. CUSA understands
that under existing industry practice, in the event that CUSA requests any
action of holders of debentures, or a holder that is an owner of a beneficial
interest in a Global Debenture desires to take any action that DTC, as the
holder of such Global Debenture, is entitled to take, DTC would authorize the
Participants to take such action and the Participants would authorize holders
owning through such Participants to take such action or would otherwise act upon
the instruction of such holders. Neither CUSA nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of debentures by DTC, or for maintaining, supervising
or reviewing any records of DTC relating to such debentures.
Payments with respect to the principal of, and premium, if any, and interest
on, any debentures represented by a Global Debenture registered in the name of
DTC or its nominee on the applicable record date will be payable by the Trustee
to or at the direction of DTC or its nominee in its capacity as the registered
holder of the Global Debenture representing such debentures under the indenture.
Under the terms of the indenture, CUSA and the Trustee may treat the persons in
whose names the debentures, including the Global Debentures, are registered as
the owners thereof for the purpose of receiving payment thereon and for any and
all other purposes whatsoever. Accordingly, neither CUSA nor the Trustee has or
will have any responsibility or liability for the payment of such amounts to
owners of beneficial interests in a Global Debenture (including principal,
premium, if any, and interest). Payments by the Participants and the Indirect
Participants to the owners of beneficial interests in a Global Debenture will be
governed by standing instructions and customary industry practice and will be
the responsibility of the Participants or the Indirect Participants and DTC.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
CERTIFICATED DEBENTURES
If (1) CUSA notifies the Trustee in writing that DTC is no longer willing or
able to act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within 60
days of such notice or cessation, (2) CUSA, at its option, notifies the Trustee
in writing that it elects to cause the issuance of debentures in definitive form
under the indenture or (3) upon the occurrence of certain other events as
provided in the indenture, then, upon surrender by DTC of the Global Debentures,
Certificated Debentures will be issued to each person that DTC identifies as the
beneficial owner of the debentures represented by the Global Debentures. Upon
any such issuance, the Trustee is required to register such Certificated
Debentures in the name of such person or persons (or the nominee of any thereof)
and cause the same to be delivered thereto.
Neither CUSA nor the Trustee shall be liable for any delay by DTC or any
Participant or Indirect Participant in identifying the beneficial owners of the
related debentures and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the debentures to be issued).
80
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
dated the date hereof, Southwest Securities, Inc., as the underwriter has agreed
to purchase, and CUSA has agreed to sell to it, the debentures.
The Underwriting Agreement provides that the obligation of the underwriter
to purchase the debentures is subject to certain conditions, and that, if any
debentures are purchased by the underwriter under the Underwriting Agreement,
all of the debentures agreed to be purchased by the underwriter under the
Underwriting Agreement must be purchased.
CUSA has been advised by the underwriter that it proposes to offer the
debentures initially at the public offering price set forth on the cover page of
this prospectus and to selected dealers, who may include the underwriter, at the
public offering price less a concession not to exceed % of the principal
amount of the debentures. The underwriter or such selected dealers may reallow a
commission to other dealers not to exceed % of the principal amount of the
debentures. After the initial public offering of the debentures, the public
offering price, the concession to selected dealers and the reallowance to other
dealers may be changed by the underwriter.
In the Underwriting Agreement, CUSA has agreed to indemnify the underwriter
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments that the underwriter may be required to make.
Although there currently is no public market for the debentures, the
debentures have been approved for listing on the American Stock Exchange,
subject to official notice of issuance. CUSA has been advised by the underwriter
that it currently intends to make a market in the debentures; however, the
underwriter is not obligated to do so. Any market-making may be discontinued at
any time, for any reason, without notice. If the underwriter ceases to act as a
market maker for the debentures for any reason, no assurance can be made that
another firm or person will make a market in the debentures. No assurance can be
made that an active market for the debentures will develop or, if a market does
develop, of the liquidity of any such trading market for the debentures or at
what prices the debentures will trade.
To facilitate the offering of the debentures, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
debentures. Specifically, the underwriter may over-allot in connection with this
offering, creating short positions in the debentures for its own account. In
addition, to cover over-allotments or to stabilize the price of the debentures,
the underwriter may bid for, and purchase, debentures in the open market.
Finally, the underwriter may reclaim selling concessions allowed to an
underwriter or dealer for distributing debentures in this offering, if the
underwriter repurchases previously distributed debentures in transactions that
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the debentures above
independent market levels. The underwriter is not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters in connection with the offering are being passed upon
for CUSA by Gardere & Wynne, L.L.P., Dallas, Texas, and for the underwriter by
Vinson & Elkins L.L.P., Dallas, Texas. David G. McLane, a partner in Gardere &
Wynne, L.L.P., is an Assistant Secretary of Chandler Cayman and NAICO and the
beneficial owner of 27,000 shares of common stock of Chandler Cayman.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1998 and
for the years ended December 31, 1996, 1997 and 1998 included in this prospectus
and the related financial statement schedules included elsewhere in the
Registration Statement have been audited by Deloitte & Touche LLP,
81
<PAGE>
independent auditors, as stated in their report appearing herein (which
expresses an unqualified opinion and includes an explanatory paragraph relating
to litigation) and their report appearing elsewhere in the Registration
Statement, and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
CUSA has filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act covering the debentures. This
prospectus, which is part of the Registration Statement, does not contain all of
the information in the Registration Statement and the exhibits thereto. For
further information concerning CUSA and the debentures, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith, copies
of which may be inspected at the Commission's public reference facilities at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at the Northeast
Regional Office located at 7 World Trade Center, New York, New York 10048 and at
the Midwest Regional Office located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, or copies of which may be obtained from the Commission
at such office upon payment of the fees prescribed by the Commission. The
summaries in this prospectus of additional information included in the
Registration Statement or any exhibit are qualified in their entirety by
reference to the information or exhibit filed with the Commission. The
Commission maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains information concerning CUSA.
CUSA intends to furnish its debentureholders with annual reports containing
audited financial statements and quarterly reports for each of the first three
quarters of each fiscal year containing interim unaudited financial information.
82
<PAGE>
CHANDLER (U.S.A.), INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 1996, 1997 and 1998....... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998................. F-6
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1996, 1997 and 1998....... F-7
Notes to Consolidated Financial Statements................................................................. F-8
Consolidated Balance Sheet as of March 31, 1999 (unaudited) and December 31, 1998.......................... F-40
Unaudited Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998......... F-41
Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 1999 and
1998..................................................................................................... F-42
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998......... F-43
Notes to Unaudited Consolidated Financial Statements....................................................... F-44
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Chandler (U.S.A.), Inc.:
We have audited the accompanying consolidated balance sheets of Chandler
(U.S.A.), Inc. and subsidiaries ("CUSA"), a wholly owned subsidiary of Chandler
Insurance (Barbados), Ltd., which is a wholly owned subsidiary of Chandler
Insurance Company, Ltd., as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of CUSA's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Chandler (U.S.A.), Inc. and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, CUSA, its
parent and affiliates are involved in various legal proceedings the outcome of
which is uncertain.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 22, 1999
F-2
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale, at fair value
Restricted................................................................... $ 8,029 $ 7,702
Unrestricted................................................................. 87,799 76,567
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $353 and $354 in 1997 and 1998, respectively)......... 346 344
Unrestricted (fair value $977 and $978 in 1997 and 1998, respectively)....... 876 839
Equity securities available for sale, at fair value............................ 124 191
--------- ---------
Total investments............................................................ 97,174 85,643
Cash and cash equivalents........................................................ 10,783 9,304
Premiums receivable, less allowance for non-collection of $115 and $200 at 1997
and 1998, respectively......................................................... 27,582 28,468
Reinsurance recoverable on paid losses, less allowance for non-collection of $275
at 1997 and 1998, respectively................................................. 3,069 2,760
Reinsurance recoverable on unpaid losses, less allowance for non-collection of
$390 and $330 at 1997 and 1998, respectively................................... 9,770 28,867
Reinsurance recoverable on unpaid losses from related parties.................... 9,916 11,913
Prepaid reinsurance premiums..................................................... 9,662 22,448
Prepaid reinsurance premiums to related parties.................................. 5,893 7,168
Deferred policy acquisition costs................................................ 3,475 --
Property and equipment, net...................................................... 5,868 8,071
Other assets..................................................................... 9,666 9,911
Licenses, net.................................................................... 4,344 4,194
Excess of cost over net assets acquired, net..................................... 5,252 4,604
Covenants not to compete, net.................................................... 333 --
--------- ---------
Total assets..................................................................... $ 202,787 $ 223,351
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses..................................... $ 73,721 $ 80,701
Unearned premiums.............................................................. 42,389 50,647
Policyholder deposits.......................................................... 4,830 4,936
Notes payable.................................................................. 2,796 9,410
Accrued taxes and other payables............................................... 5,711 3,755
Premiums payable............................................................... 4,504 10,960
Premiums payable to related parties............................................ 482 1,462
Amounts due to affiliate....................................................... 19,918 12,219
--------- ---------
Total liabilities................................................................ 154,351 174,090
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares issued... 2 2
Paid-in surplus................................................................ 60,584 60,584
Accumulated deficit............................................................ (12,473) (12,040)
Accumulated other comprehensive income:
Unrealized gain on investments available for sale, net of income tax......... 323 715
--------- ---------
Total shareholder's equity....................................................... 48,436 49,261
--------- ---------
Total liabilities and shareholder's equity....................................... $ 202,787 $ 223,351
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Premiums and other revenues
Direct premiums written and assumed........................................ $ 108,059 $ 123,088 $ 134,293
Reinsurance premiums ceded................................................. (13,902) (26,221) (68,793)
Reinsurance premiums ceded to related parties.............................. (11,523) (15,310) (18,878)
---------- ---------- ----------
Net premiums written and assumed......................................... 82,634 81,557 46,622
Decrease (increase) in unearned premiums................................... (4,298) (855) 5,802
---------- ---------- ----------
Net premiums earned...................................................... 78,336 80,702 52,424
Interest income, net......................................................... 5,663 6,130 4,904
Realized investment gains, net............................................... 157 790 1,036
Commissions, fees and other income........................................... 3,413 2,345 1,744
---------- ---------- ----------
Total premiums and other revenues........................................ 87,569 89,967 60,108
---------- ---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts ceded to related
parties of $7,343, $11,510 and $12,484 in 1996, 1997 and 1998,
respectively............................................................. 48,766 47,905 36,042
Policy acquisition costs, net of ceding commissions received from related
parties of $4,939, $5,114 and $6,916 in 1996, 1997 and 1998,
respectively............................................................. 27,910 23,346 10,735
General and administrative expenses........................................ 13,074 12,065 11,235
Interest expense........................................................... 146 442 887
Litigation expenses, net................................................... (230) 923 423
---------- ---------- ----------
Total operating costs and expenses....................................... 89,666 84,681 59,322
---------- ---------- ----------
Income (loss) before income taxes............................................ (2,097) 5,286 786
Federal income tax provision (benefit)....................................... (317) 2,281 353
---------- ---------- ----------
Net income (loss).......................................................... $ (1,780) $ 3,005 $ 433
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Net income (loss)................................................................. $ (1,780) $ 3,005 $ 433
--------- --------- ---------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period....................... (1,746) 2,160 1,631
Less: Reclassification adjustment for gains included in net income (loss)..... (157) (790) (1,036)
--------- --------- ---------
Other comprehensive income (loss), before income tax.............................. (1,903) 1,370 595
Income tax (expense) benefit related to items of other comprehensive income
(loss).......................................................................... 647 (466) (203)
--------- --------- ---------
Other comprehensive income (loss), net of income tax.............................. (1,256) 904 392
--------- --------- ---------
Comprehensive income (loss)....................................................... $ (3,036) $ 3,909 $ 825
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................................... $ (1,780) $ 3,005 $ 433
Add (deduct):
Adjustments to reconcile net income (loss) to cash provided by
(applied to) operating activities:
Realized investment gains, net...................................... (157) (790) (1,036)
Net (gains) losses on sale of property and equipment................ (23) 3 (137)
Amortization and depreciation expense............................... 2,134 2,104 2,334
Provision for non-collection of premiums............................ 1,768 52 152
Provision for non-collection of reinsurance recoverables............ 2,077 527 50
Net change in non-cash balances relating to operating activities:
Premiums receivable............................................... 1,847 (1,246) (1,038)
Reinsurance recoverable on paid losses............................ (1,250) 596 (160)
Reinsurance recoverable on unpaid losses.......................... 25,150 2,859 (18,679)
Reinsurance recoverable on unpaid losses from related parties..... 8,244 1,337 (1,997)
Prepaid reinsurance premiums...................................... (301) (4,192) (12,786)
Prepaid reinsurance premiums to related parties................... (130) (1,332) (1,275)
Deferred policy acquisition costs................................. (465) (5) 3,475
Other assets...................................................... (1,018) 25 (448)
Unpaid losses and loss adjustment expenses........................ (38,036) (4,392) 6,980
Unearned premiums................................................. 4,729 6,379 8,258
Policyholder deposits............................................. (468) 814 106
Accrued taxes and other payables.................................. 94 112 (1,956)
Premiums payable.................................................. (618) 2,440 6,456
Premiums payable to related parties............................... (13) (222) 980
--------- --------- ---------
Cash provided by (applied to) operating activities.................. 1,784 8,074 (10,288)
--------- --------- ---------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases........................................................... (27,073) (32,518) (47,602)
Sales............................................................... 8,929 18,674 36,177
Maturities.......................................................... 6,780 7,969 21,531
Unrestricted fixed maturities held to maturity:
Maturities.......................................................... 2,409 310 100
Restricted fixed maturities, net...................................... 2,000 2,105 2,800
Equity securities available for sale:
Sales............................................................... -- 2,459 --
Cost of property and equipment purchased.............................. (674) (884) (3,481)
Proceeds from sale of property and equipment.......................... 95 45 369
Other................................................................. (20) -- --
--------- --------- ---------
Cash provided by (applied to) investing activities.................. (7,554) (1,840) 9,894
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from notes payable............................................. 4,500 -- 8,548
Payments on notes payable............................................... (409) (1,595) (1,934)
Proceeds from borrowing from affiliate.................................. 10,662 6,754 9,543
Payments on borrowing from affiliate.................................... (8,675) (7,802) (17,242)
--------- --------- ---------
Cash provided by (applied to) financing activities.................. 6,078 (2,643) (1,085)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........................ 308 3,591 (1,479)
Cash and cash equivalents at beginning of year.......................... 6,884 7,192 10,783
--------- --------- ---------
Cash and cash equivalents at end of year................................ $ 7,192 $ 10,783 $ 9,304
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDER'S
STOCK SURPLUS DEFICIT INCOME EQUITY
---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996...................... $ 2 $ 60,584 $ (13,698) $ 675 $ 47,563
Net loss...................................... -- -- (1,780) -- (1,780)
Change in unrealized loss on investments
available for sale, net of income tax....... -- -- -- (1,256) (1,256)
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1996.................... 2 60,584 (15,478) (581) 44,527
Net income.................................... -- -- 3,005 -- 3,005
Change in unrealized gain on investments
available for sale, net of income tax....... -- -- -- 904 904
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1997.................... 2 60,584 (12,473) 323 48,436
Net income.................................... -- -- 433 -- 433
Change in unrealized gain on investments
available for sale, net of income tax....... -- -- -- 392 392
---------- ---------- ------------ ------------- ------------
Balance, December 31, 1998.................... $ 2 $ 60,584 $ (12,040) $ 715 $ 49,261
---------- ---------- ------------ ------------- ------------
---------- ---------- ------------ ------------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) BASIS OF PRESENTATION
Chandler (U.S.A.), Inc. ("CUSA") is a holding company organized and
domiciled in Oklahoma. CUSA's wholly-owned subsidiaries are engaged in various
insurance operations. The insurance products offered by CUSA through its
subsidiary, National American Insurance Company, include property and casualty
insurance coverage primarily for businesses in various industries, political
subdivisions, surety bonds for small contractors and group accident and health
insurance in the United States of America ("U.S."). A substantial part of the
business is conducted through individual independent insurance agencies and
underwriting managers, primarily in the Southwest and Midwest areas of the U.S.
One of CUSA's subsidiaries, LaGere and Walkingstick Insurance Agency, operates
as an independent insurance agency based in Chandler, Oklahoma, and represents
various insurance companies that provide a variety of property and casualty,
life and accident and health coverages, and acts as a surplus lines broker
specializing in risk management and brokering insurance for commercial
enterprises.
CUSA is wholly owned by Chandler Insurance (Barbados), Ltd. ("Chandler
Barbados") which, in turn, is wholly owned by Chandler Insurance Company, Ltd.
("Chandler Cayman"), a Cayman Islands company.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CUSA and all
wholly-owned subsidiaries. The following are the significant subsidiaries of
CUSA:
- National American Insurance Company ("NAICO").
- LaGere and Walkingstick Insurance Agency, Inc. ("L&W").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
(c) IMPAIRMENT OF LONG-LIVED ASSETS
CUSA periodically evaluates the carrying value of long-lived assets to be
held and used when changes in events and circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
separately identifiable anticipated undiscounted cash flow from such asset is
less than its carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that fair
values are reduced for disposal costs.
(d) REVENUE RECOGNITION
Premiums are generally recognized as earned on a pro rata basis over the
policy period, which is in proportion to the insurance protection provided. The
portion of premiums that will be earned in the future
F-8
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
are deferred and reported as unearned premiums. Amounts paid for ceded
reinsurance premiums are reported as prepaid reinsurance premiums and amortized
over the remaining contract period in proportion to the amount of the insurance
protection provided. Commission revenues are generally recognized when coverage
is effective and premiums are billed.
(e) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Losses and loss adjustment expenses are charged to income as incurred. The
reserve for unpaid losses and loss adjustment expenses represents the
accumulation of estimates for reported losses and includes provisions for losses
incurred but not reported based on data available at this time. The methods of
determining such estimates and establishing resulting reserves are periodically
reviewed and updated, and adjustments therefrom are necessary to maintain an
adequate reserve for unpaid losses and loss adjustment expenses. As more fully
explained in Note 3, such estimates are management's best estimates of the
expected values. The actual results may vary from these values because the
evaluation of losses is inherently subjective and susceptible to significant
changing factors.
(f) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs that vary with and are primarily related to the
acquisition of new and renewal business (such as premium taxes, agents'
commissions and a portion of other underwriting expenses) are deferred and
amortized over the terms of the policies. Recoverability of such deferred costs
is dependent on the related unearned premiums on the policies being more than
expected claim losses. CUSA considers anticipated interest income in determining
if a premium deficiency exists. Due to CUSA's purchase of additional reinsurance
during 1998, CUSA's deferred ceding commissions exceed the deferred policy
acquisition costs related to direct and assumed business by approximately
$80,000, and is recorded in accrued taxes and other payables at December 31,
1998. Certain policy acquisition costs, such as policyholder dividends, are
expensed directly. NAICO expensed $454,000, $1.2 million and $242,000 during
1996, 1997 and 1998, respectively, for dividends to policyholders primarily on
participating workers compensation policies. Gross written premiums for
participating policies were $4.7 million, $3.6 million and $2.3 million in 1996,
1997 and 1998, respectively.
(g) PROPERTY AND EQUIPMENT
Real estate and improvements and other property and equipment are stated at
cost and depreciated using the straight-line method over their useful lives
which range from 3 to 31 years. Property and equipment consisted of the
following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Real estate and improvements............................................ $ 5,384 $ 5,760
Other property and equipment............................................ 7,624 10,142
--------- ---------
13,008 15,902
Accumulated depreciation................................................ (7,140) (7,831)
--------- ---------
$ 5,868 $ 8,071
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
Depreciation expense was approximately $844,000, $858,000 and $1,047,000 for
1996, 1997 and 1998, respectively.
(h) INTANGIBLE ASSETS
The cost of insurance licenses acquired is amortized over 40 years using the
straight-line method. Covenants not to compete were amortized by the
straight-line method over 10 years. The excess of cost over net assets acquired
is amortized by the straight-line method over 15-17 years. Intangible assets
included the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Licenses.............................................................. $ 5,991 $ 5,991
Excess of cost over net assets acquired............................... 10,748 10,748
Covenants not to compete.............................................. 4,000 --
---------- ----------
20,739 16,739
Accumulated amortization.............................................. (10,810) (7,941)
---------- ----------
$ 9,929 $ 8,798
---------- ----------
---------- ----------
</TABLE>
(i) POLICYHOLDER DEPOSITS
NAICO requires certain policyholders to pay a deposit at inception of
coverage to secure payment of future premiums and deductibles on claims
incurred. It is expressly agreed between NAICO and the policyholder that the
funds will be used by NAICO only in the event the policyholder fails to pay any
premiums, deductibles or other charges when due. NAICO has established a
liability for these deposits in an amount equal to that due the policyholders
based on insurance premiums reported as of the balance sheet date.
(j) INVESTMENTS
At the time of purchase, investments in debt securities that CUSA has the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost; all other debt securities are reported
at fair value. Investments classified as trading are actively and frequently
bought and sold with the objective of generating income on short-term
differences in price. Realized and unrealized gains and losses on securities
classified as trading account assets are recognized in current operations. CUSA
has not classified any investments as trading account assets. Securities not
classified as held to maturity or trading are classified as available for sale,
with the related unrealized gains and losses excluded from earnings and reported
net of tax as a separate component of shareholder's equity until realized.
Realized gains and losses on sales of securities are based on the specific
identification method. Declines in the fair market value of investment
securities below their carrying value that are other than temporary are
recognized in earnings.
F-10
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
(k) INCOME TAXES
CUSA uses an asset and liability approach for accounting for income taxes.
Deferred income taxes are recognized for the tax consequences of temporary
differences and carryforwards by applying enacted tax rates applicable to future
years to differences between the financial statement amounts and the tax bases
of existing assets and liabilities. A valuation allowance is established if it
is more likely than not that some portion of the deferred tax asset will not be
realized.
(l) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, CUSA considers
all highly liquid investments with original maturities of 14 days or less to be
cash equivalents. For cash and cash equivalents, the carrying amount is a
reasonable estimate of fair value.
(m) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes, and noncash investing and
financing activities were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash payments during the year for:
Interest................................................................ $ 141 $ 504 $ 941
Income taxes............................................................ 574 1,855 170
Change in unrealized gain (loss) on securities available for sale......... $ (1,903) $ 1,370 $ 595
Provision (benefit) for federal income taxes.............................. 647 (466) (203)
--------- --------- ---------
Net increase (decrease) in shareholder's equity........................... $ (1,256) $ 904 $ 392
--------- --------- ---------
--------- --------- ---------
Transfers to restricted securities, net................................... $ 2,125 $ 508 $ 2,501
</TABLE>
During 1996, CUSA transferred 567,350 shares of Chandler Cayman stock to
Chandler Cayman. In consideration for the stock, CUSA's intercompany payable was
reduced by the fair value of the stock at the time of the transaction which was
$2,169,387.
In January 1997, NAICO received publicly traded common stock valued at
approximately $2.2 million at the settlement date as a result of settling
certain legal disputes with a former underwriting manager for a portion of the
surety bond program.
During 1997, NAICO received shares of common stock with a fair value of
approximately $124,000 in connection with an unaffiliated entity's conversion to
a for-profit corporation. See Note 2.
During 1997, L&W acquired 494,617 shares of Chandler Cayman's common stock
from two former agents of NAICO and L&W as payment for debts owed to L&W and
NAICO. L&W transferred those shares during 1997 to Chandler Insurance
Management, Ltd. ("Chandler Management Cayman") an affiliate who, in turn
assumed debt of L&W to Chandler Barbados in the amount of approximately $2.5
million, the fair value of the shares.
F-11
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES (CONTINUED)
(n) REINSURANCE
Management believes all of CUSA's reinsurance contracts with reinsurers meet
the criteria for risk transfer and the revenue and cost recognition provisions
in order to be accounted for as reinsurance. As more fully explained in Note 11,
reinsurance contracts do not relieve CUSA from its obligation to policyholders.
In addition, failure of reinsurers to honor their obligations could result in
losses to CUSA.
(o) RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. In addition, SFAS No. 130 requires CUSA to classify
items of other comprehensive income by their nature in a separate financial
statement or as a component of the consolidated statement of operations or the
consolidated statement of shareholder's equity and display the accumulated
balance of other comprehensive income separately in the shareholder's equity
section of the consolidated balance sheets. CUSA adopted SFAS No. 130 on January
1, 1998 as required. The adoption of SFAS No. 130 resulted in revised and
additional disclosures but had no effect on the consolidated financial position,
results of operations or liquidity of CUSA.
Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments and related information. Operating
segments are components of a company about which separate financial information
is available that is regularly evaluated by the chief operating decision
maker(s) in deciding how to allocate resources and assess performance. SFAS No.
131 establishes criteria for reporting disclosures about a company's products
and services, geographic areas and major customers. CUSA adopted SFAS No. 131 on
January 1, 1998 as required. See Note 13.
(p) ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that CUSA recognizes all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. CUSA will
adopt SFAS No. 133 on January 1, 2000 as required. Management of CUSA believes
that adoption of SFAS No. 133 will not have a material impact on CUSA's
consolidated financial position or results of operations.
F-12
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 2. INVESTMENTS AND INTEREST INCOME
Net interest income and investment gains are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest on fixed-maturity investments..................................... $ 5,196 $ 5,633 $ 4,704
Interest on cash equivalents............................................... 467 497 200
--------- --------- ---------
Interest income, net....................................................... 5,663 6,130 4,904
--------- --------- ---------
Realized gains--fixed-maturity investments, net............................ 135 487 1,036
Realized investment gains--equities, net................................... 22 303 --
--------- --------- ---------
Realized investment gains, net............................................. 157 790 1,036
--------- --------- ---------
$ 5,820 $ 6,920 $ 5,940
--------- --------- ---------
--------- --------- ---------
</TABLE>
These amounts are net of investment expenses, which are minimal.
The amortized cost and fair values of investments are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
- --------------------------------------------------------
FIXED MATURITIES AVAILABLE FOR SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 37,695 $ 317 $ (106) $ 37,906 $ 37,906
Debt securities issued by foreign governments........... 1,516 -- (14) 1,502 1,502
Obligations of states and political subdivisions........ 20,365 168 (9) 20,524 20,524
Corporation obligations................................. 24,372 93 (136) 24,329 24,329
Public utilities........................................ 8,066 65 (42) 8,089 8,089
Mortgage-backed securities.............................. 3,449 30 (1) 3,478 3,478
----------- ----------- ----- --------- ---------
$ 95,463 $ 673 $ (308) $ 95,828 $ 95,828
----------- ----------- ----- --------- ---------
----------- ----------- ----- --------- ---------
FIXED MATURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 1,222 $ 109 $ (1) $ 1,330 $ 1,222
----------- ----------- ----- --------- ---------
----------- ----------- ----- --------- ---------
EQUITY SECURITIES AVAILABLE FOR SALE:
Corporate stock......................................... $ -- $ 124 $ -- $ 124 $ 124
----------- ----------- ----- --------- ---------
----------- ----------- ----- --------- ---------
</TABLE>
F-13
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 2. INVESTMENTS AND INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
----------- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
- --------------------------------------------------------
FIXED MATURITIES AVAILABLE FOR SALE:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 39,650 $ 233 $ (58) $ 39,825 $ 39,825
Debt securities issued by foreign governments........... 1,510 9 -- 1,519 1,519
Obligations of states and political subdivisions........ 12,178 318 -- 12,496 12,496
Corporation obligations................................. 23,092 289 (45) 23,336 23,336
Public utilities........................................ 6,221 141 (18) 6,344 6,344
Mortgage-backed securities.............................. 725 24 -- 749 749
----------- ----------- ----- --------- ---------
$ 83,376 $ 1,014 $ (121) $ 84,269 $ 84,269
----------- ----------- ----- --------- ---------
----------- ----------- ----- --------- ---------
FIXED MATURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 1,183 $ 149 $ -- $ 1,332 $ 1,183
----------- ----------- ----- --------- ---------
----------- ----------- ----- --------- ---------
EQUITY SECURITIES AVAILABLE FOR SALE:
Corporate stock......................................... $ -- $ 191 $ -- $ 191 $ 191
----------- ----------- ----- --------- ---------
----------- ----------- ----- --------- ---------
</TABLE>
During 1997, NAICO received 19,371 shares of class B common stock of
Insurance Services Office, Inc. ("ISO") in connection with ISO's conversion to a
for-profit corporation. ISO has placed certain limitations on the transfer or
sale of the class B common stock, one of which restricts ownership of the shares
to insurance companies whose primary activity is the writing of insurance or the
reinsuring of risk written by insurance companies.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The maturities of investments in fixed maturities at
December 31, 1998 are shown below:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less............................................ $ 11,565 $ 11,598 $ 266 $ 268
Due after one year through five years.............................. 37,625 37,885 917 1,064
Due after five years through ten years............................. 31,448 31,953 -- --
Due after ten years................................................ 2,013 2,084 -- --
----------- ----------- ----------- -----------
82,651 83,520 1,183 1,332
Mortgage-backed securities......................................... 725 749 -- --
----------- ----------- ----------- -----------
$ 83,376 $ 84,269 $ 1,183 $ 1,332
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-14
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 2. INVESTMENTS AND INTEREST INCOME (CONTINUED)
Realized gains and losses from sales of fixed maturities and equity
securities are shown below:
<TABLE>
<CAPTION>
GROSS GROSS
REALIZED REALIZED
GAINS LOSSES
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
1996............................................................. $ 177 $ 20
1997............................................................. 829 39
1998............................................................. 1,081 45
</TABLE>
NAICO is required by several states to deposit securities with state
regulators as a condition of doing business in those states. As of December 31,
1997 and 1998, the carrying value of these deposits totaled $8,246,000 and
$8,171,000, respectively.
NOTE 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
NAICO provides a reserve for estimated losses (reported and unreported) and
loss adjustment expenses based on historical experience and payment reporting
patterns for the type of risk involved. These estimates are based on data
available at the time of the estimate and such estimates are periodically
reviewed by independent professional actuaries. Inherent in the estimates of the
ultimate liability for unpaid claims are expected trends in claim severity,
claim frequency and other factors that may vary as claims are settled. The
amount and uncertainty in the estimates are affected by such factors as the
amount of historical claims experience relative to the development period for
the type of risk, knowledge of the actual facts and circumstances, and the
amount of insurance risk retained. The ultimate cost of insurance claims can be
adversely affected by increased costs such as medical expenses, repair expenses,
costs of providing legal defense for policyholders, increased jury awards and
court decisions and legislation that define and expand insurance coverage
subsequent to the time that the insurance policy was priced and sold. Salvage
and subrogation recoverables are accrued using the "case basis" method for large
recoverables and statistical estimates based on historical experience for
smaller recoverables. Recoverable amounts deducted from NAICO's net liability
for unpaid losses and loss adjustment expenses were approximately $2,782,000 and
$4,285,000 at December 31, 1997 and 1998, respectively. Although such estimates
are management's best estimates of the expected values, the ultimate liability
for unpaid claims may vary from these values. NAICO does not discount the
liability for unpaid losses and loss adjustment expenses.
F-15
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
The following table sets forth a reconciliation of the beginning and ending
unpaid losses and loss adjustment expenses which are net of reinsurance
deductions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net balance before provision for uncollectible reinsurance at
beginning of year................................................. $ 57,710 $ 53,068 $ 52,872
---------- ---------- ----------
Net losses and loss adjustment expenses incurred related to:
Current year...................................................... 48,569 46,645 34,313
Prior years....................................................... 197 1,260 1,729
---------- ---------- ----------
Total........................................................... 48,766 47,905 36,042
---------- ---------- ----------
Net paid losses and loss adjustment expenses related to:
Current year...................................................... (22,503) (19,909) (19,495)
Prior years....................................................... (30,905) (28,192) (30,243)
---------- ---------- ----------
Total........................................................... (53,408) (48,101) (49,738)
---------- ---------- ----------
Balance before provision for uncollectible reinsurance at end of
year.............................................................. 53,068 52,872 39,176
Adjustments to reinsurance recoverables on unpaid losses for
uncollectible reinsurance......................................... 777 1,163 745
---------- ---------- ----------
Net balance at end of year.......................................... $ 53,845 $ 54,035 $ 39,921
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NAICO does not ordinarily insure against environmental matters as that term
is commonly used. However, in some cases, regulatory filings made by NAICO on
behalf of an insured can make NAICO directly liable to the regulatory authority
for property damage which could include environmental pollution. In those cases,
NAICO ordinarily has recourse against the insured or the surety bond principal
for amounts paid. NAICO has insured certain trucking companies and pest control
operators that are required to provide proof of insurance which in some cases
assures payment for clean-up and remediation of damage resulting from sudden and
accidental release or discharge of contaminants or other substances which may be
classified as pollutants. NAICO also provides surety bonds for construction
contractors that use or have control of such substances and for contractors that
remove and dispose of asbestos as a part of their contractual obligations. NAICO
also insures independent oil and gas producers that may purchase coverage for
the escape of oil, saltwater, or other substances which may be harmful to
persons or property, but may not generally be classified as pollutants. NAICO
maintains claims records which segregate this type of risk for the purpose of
evaluating environmental risk exposure. Based upon the nature of such lines of
business with insureds of NAICO, and current data regarding the limited severity
and infrequency of such matters, it appears that potential environmental risks
are not a significant portion of claims reserves and therefore would not likely
have a material impact, if any, on the consolidated financial condition or
results of operations of CUSA.
F-16
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 4. NOTES PAYABLE
During 1996, CUSA borrowed $4.5 million from a bank for a three year term.
During the fourth quarter of 1997, the related loan agreement was amended to
provide for additional borrowings up to $8.5 million and to revise the term to
five years with interest payable at a floating rate equal to 1% over the prime
rate published in the Wall Street Journal, which was 7.75% at December 31, 1998.
The revised monthly payment is approximately $179,000 including principal and
interest. The principal balance of the note was approximately $2,646,000 and
$7,397,000 at December 31, 1997 and 1998, respectively. The principal balance at
December 31, 1998 is net of an unamortized loan origination fee of $65,000.
Among other things, the loan agreement precludes CUSA from paying shareholder
dividends, issuing stock and limits its ability to incur indebtedness. The Bank
has informed CUSA that it will consent to the debenture offering described in
Note 5, and will waive any restrictions set forth in the loan agreement which
might otherwise prohibit CUSA from consummating the offering. Moreover, the loan
agreement requires that certain restrictive covenants relating to a minimum
capital requirement and debt coverage ratio be met. At December 31, 1998, CUSA
was in compliance with all financial covenants. Proceeds from the note were used
to repay amounts due to Chandler Barbados. The bank note is collateralized by
the shares of NAICO stock owned by CUSA.
CUSA has a note payable related to the acquisition of Network
Administrators, Inc., an inactive subsidiary of CUSA, with a balance of $150,000
and $75,000 at December 31, 1997 and 1998, respectively. The note has an
interest rate of 7% per annum and has a final installment of $75,000 plus
interest due on October 11, 1999.
In February 1998, CUSA entered into a five year loan agreement with a bank
having a principal amount of $2,300,000 and an interest rate of 7.75% per annum.
Monthly payments are approximately $46,000 including principal and interest.
Effective September 28, 1998, the interest rate was reduced to 7.5% per annum.
The principal balance of the note was approximately $1,938,000 at December 31,
1998. The loan is collateralized by certain equipment which was purchased with
the proceeds of the loan. The equipment had previously been leased by CUSA.
The annual maturities of the notes payable, based upon the amounts
outstanding as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................................ $ 2,049
2000................................................................ 2,148
2001................................................................ 2,343
2002................................................................ 2,908
2003................................................................ 27
------
$ 9,475
------
------
</TABLE>
F-17
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 5. SUBSEQUENT EVENT
CUSA intends to offer debentures in the aggregate principal amount of
$24,000,000 (the "debentures"). The terms of the debentures including the
interest rate and redemption date have not been determined. CUSA plans to use
the proceeds of the offering to repay amounts due to Chandler Barbados; to
retire the debt described in Note 4 above; and for general corporate purposes.
CUSA's subsidiaries and affiliates will not be obligated by the debentures.
Accordingly, the debentures will be effectively subordinated to all existing and
future liabilities and obligations of CUSA's existing and future subsidiaries.
NOTE 6. SHAREHOLDER'S EQUITY
CAPITAL STOCK
In addition to the regulatory oversight of NAICO by the Nebraska Department
of Insurance, Chandler Cayman and CUSA are also subject to regulation under the
Nebraska Insurance Holding Company Systems Act (the "Holding Company Act"). In
addition to various reporting requirements imposed on Chandler Cayman and CUSA,
the Holding Company Act requires any person who seeks to acquire or exercise
control over NAICO (which is presumed to exist if any person owns 10% or more of
Chandler Cayman's or CUSA's outstanding voting stock) to file and obtain
approval of certain applications with the Nebraska Department of Insurance
regarding their proposed ownership of such shares.
STATUTORY FINANCIAL INFORMATION AND MINIMUM CAPITAL REQUIREMENTS
NAICO is required to file financial statements with state regulatory
authorities prepared on a statutory basis which differs from GAAP. Statutory net
income and statutory surplus of NAICO are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory net income......................................... $ 998 $ 6,737 $ 6,877
Statutory surplus............................................ $ 42,373 $ 45,283 $ 45,327
</TABLE>
The National Association of Insurance Commissioners has adopted risk-based
capital ("RBC") standards for domestic property and casualty insurance
companies. The RBC standards are designed to assist insurance regulators in
analytically determining a level of capital and surplus that would be sufficient
to withstand reasonably foreseeable adverse events associated with underwriting
risk, investment risk, credit risk and loss reserve risk. NAICO is subject to
the RBC standards. Based on available information, management believes NAICO
complied with the RBC standards at December 31, 1997 and 1998.
At periodic intervals, various insurance regulatory authorities routinely
examine the required financial statements as part of their legally prescribed
oversight of the insurance industry. Based on these examinations, the regulators
can direct such financial statements to be adjusted in accordance with their
findings.
DIVIDEND RESTRICTIONS
The amount of cash shareholder dividends that NAICO can pay to CUSA within
any one year without the approval of the Nebraska Department of Insurance is
generally limited to the greater of (i) statutory net income excluding realized
capital gains for the preceding year (statutory net income excluding realized
F-18
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 6. SHAREHOLDER'S EQUITY (CONTINUED)
capital gains from the second and third preceding years, less any dividends
paid, may be carried forward), or (ii) 10% of statutory surplus as regards
policyholders as of the preceding December 31 with such amount not to exceed
NAICO's statutory earned surplus. Based on this criteria the maximum shareholder
dividend NAICO may pay in 1999 without the approval of the Nebraska Department
of Insurance is approximately $7.3 million. Prior to 1998, NAICO (during the
ownership by CUSA) had not paid any cash shareholder dividends. During 1998,
NAICO paid a cash shareholder dividend of $6.0 million to CUSA.
See Note 4 regarding a bank loan which precludes CUSA from paying
shareholder dividends. The future payment of shareholder dividends also depends
upon the earnings, financial position and cash requirements of CUSA, as well as
regulatory limitations, and such other factors as the Board of Directors may
deem relevant.
NAICO is subject to regulations which restrict its ability to pay dividends
to policyholders. The maximum amount of available policyholder dividends is
limited to statutory earned surplus (approximately $12.6 million as of December
31, 1998). NAICO paid approximately $526,000, $423,000 and $561,000 in
policyholder dividends during 1996, 1997 and 1998, respectively.
NOTE 7. INCOME TAXES
CUSA and its wholly-owned subsidiaries file a consolidated Federal income
tax return. The income taxes reflected in the accompanying consolidated
statements of operations differs from that expected using Federal enacted income
tax rates as noted by the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Computed income tax expense at 34%................................. $ (713) $ 1,797 $ 267
Increase (decrease) in income taxes resulting from:
Amortization of licenses and other intangibles................... 380 380 362
Nontaxable income from legal settlement.......................... (110) -- --
Investment income on tax exempt securities....................... -- (32) (298)
Other, net....................................................... 126 136 22
--------- --------- ---------
Federal income tax provision (benefit)............................. $ (317) $ 2,281 $ 353
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Federal income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
1996................................................................ $ (592) $ 275 $ (317)
1997................................................................ 2,389 (108) 2,281
1998................................................................ 52 301 353
</TABLE>
F-19
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 7. INCOME TAXES (CONTINUED)
Deferred tax expense (benefit) relating to temporary differences includes
the following components:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loss reserve discounts............................................. $ 450 $ (97) $ 921
Unearned premiums.................................................. (292) (58) 395
Deferred policy acquisition costs.................................. 158 1 (1,209)
Reserve for uncollectible premium receivables and reinsurance
recoverables..................................................... 45 188 (9)
Depreciation and lease expense..................................... (134) (164) (60)
Other.............................................................. 48 22 263
--------- --------- ---------
$ 275 $ (108) $ 301
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effect of temporary differences between the consolidated financial
statement carrying amounts and tax bases of assets and liabilities that give
rise to significant portions of the net deferred tax assets, which are included
in other assets, at December 31, relate to the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Loss reserve discounts................................................. $ 3,694 $ 2,832
Unearned premiums...................................................... 1,825 1,430
Reserve for uncollectible premiums receivable and reinsurance
recoverables......................................................... 39 180
Net operating loss carryforwards--State................................ 1,559 1,670
Other.................................................................. 288 253
Valuation allowance...................................................... (1,559) (1,670)
--------- ---------
Total deferred tax assets................................................ 5,846 4,695
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs...................................... 1,181 (27)
Depreciation and lease expense......................................... 743 693
Unrealized gain on investments available for sale...................... 166 368
Other.................................................................. 182 590
--------- ---------
Total deferred tax liabilities........................................... 2,272 1,624
--------- ---------
Net deferred tax assets.................................................. $ 3,574 $ 3,071
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998, CUSA had net operating loss carryforwards available
for Oklahoma state tax purposes totaling approximately $27.8 million which
expire in the years 2005 through 2014. A valuation allowance has been provided
for the tax effect of the state net operating loss carryforwards because
realization of such amounts is not considered more likely than not.
F-20
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 8. EMPLOYEE BENEFITS
CUSA and its subsidiaries participate in a defined contribution retirement
plan established under Section 401(k) of the Internal Revenue Code. All full
time employees who have completed one year of service and attained age 21 may
elect to participate in the 401(k) plan. Participants may contribute up to 15%
of compensation, not to exceed the statutory limitations which for 1998 was
$10,000. CUSA matches 50% of the first $2,000, 40% of the next $3,000, 30% of
the next $3,000 and 25% of the remaining employee contributions up to a maximum
employer contribution of $3,600 per employee per year. In addition, CUSA may
make additional annual contributions to the 401(k) plan at its discretion.
CUSA's expense for 401(k) plan contributions was $249,000, $254,000 and $259,000
for 1996, 1997 and 1998, respectively.
NOTE 9. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value amounts have
been determined by CUSA, using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates of fair values presented herein are not necessarily indicative of
the amounts that CUSA could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
A number of CUSA's significant assets (including deferred policy acquisition
costs, property and equipment, reinsurance recoverables, prepaid reinsurance
premiums, licenses and excess of cost over net assets acquired) and liabilities
(including unpaid losses and loss adjustment expenses and unearned premiums) are
not considered financial instruments. Based on the short term nature or other
relevant characteristics, CUSA has concluded that the carrying value of other
assets and liabilities considered financial instruments, such as cash
equivalents, premiums receivable, policyholder deposits, accrued taxes and other
payables, notes payable and premiums payable, approximates their fair value as
of December 31, 1997 and 1998. The estimated fair values of CUSA's
fixed-maturity and equity security investments are disclosed at Note 2.
NOTE 10. LITIGATION
CENTRA LITIGATION--GENERAL BACKGROUND
CenTra, Inc. is a Detroit-based holding company primarily engaged in the
trucking industry. Beginning in 1987, NAICO insured CenTra's automobile
liability, general liability and workers compensation risks through reinsurance
arrangements involving DuraRock Underwriters, Ltd., a Barbados company and an
affiliate of CenTra, its predecessor Can-Am Underwriters, Ltd. and Chandler
Barbados. In addition to the insurance arrangements, CenTra and its affiliates
have been significant shareholders in Chandler Cayman, holding approximately
22.7% of Chandler Cayman's common stock at July 1, 1992. Three present or former
executive officers of CenTra, Norman E. Harned, Ronald W. Lech and M.J. Moroun,
are directors of Chandler Cayman.
Beginning in 1992, the relationships between Chandler Cayman and CenTra
deteriorated largely due to differences about the CenTra insurance program,
CenTra's failure to make timely premium payments
F-21
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CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
and CenTra's role in an anticipated management-led tender offer by a Chandler
Cayman subsidiary for a majority of the outstanding Chandler Cayman Stock. In an
apparent attempt to block the tender offer and seize control of Chandler Cayman,
CenTra began, on July 1, 1992, a series of common stock purchases and offers to
purchase that would, over the following two weeks, place almost one-half of
Chandler Cayman's common stock with CenTra and its affiliates. On July 1 and 2,
1992, CenTra made an offer to CUSA to purchase 1,117,679 common shares of
Chandler Cayman. These common shares were either owned by CUSA (567,350 common
shares), Cactus Southwest Corp. (169,858 common shares) or the Universal
Insurance Group (380,471 common shares). The shares held by Cactus Southwest
Corp. and Universal Insurance Group were pledged to NAICO and L&W to
collateralize certain receivables. CUSA declined the offer. On July 2, 1992,
NAICO and NAICO Indemnity, an affiliate, canceled the CenTra insurance policies
for non-payment of premiums effective September 5, 1992. On July 2, 1992, CenTra
made an offer to Cactus Southwest Corp. to purchase its 169,858 common shares of
Chandler Cayman. On July 7, 1992, the Nebraska Department of Insurance (the
"Department") ordered CenTra to cease and desist purchases of Chandler Cayman's
common shares. On July 9, 1992, M.J. Moroun withdrew CenTra's prior offer to
Cactus Southwest Corp. and offered to purchase the same common shares himself.
At the same time, he began purchasing common shares of Chandler Cayman in the
open market. On July 10, 1992, the Department ordered CenTra and its affiliates
and Messrs. M.J. Moroun, Harned and Lech to cease and desist purchases of
Chandler Cayman's common shares. On the same date, M.J. Moroun made an offer to
the Universal Insurance Group to purchase its 380,471 common shares of Chandler
Cayman, and M.J. Moroun made further open market purchases. On July 11, 1992,
M.J. Moroun paid $100,000 to the Universal Insurance Group for an irrevocable
proxy and contracted with it for the purchase of its Chandler Cayman common
shares. On July 12, 1992, M.J. Moroun contracted with Cactus Southwest Corp. for
the purchase of its common shares of Chandler Cayman. On July 13, 1992, further
open market purchases were made in the name of Can-Am Investments, Ltd., a later
formed Bahamian affiliate of CenTra. Also on July 13, 1992, the District Court
for Lancaster County, Nebraska entered a temporary restraining order against
CenTra, Messrs. M.J. Moroun, Harned and Lech, John and Jane Doe, XYZ
Corporation, and their affiliates known and unknown, prohibiting further
purchases of Chandler Cayman common shares. On July 14 and 17, 1992, the stock
brokerage firm through which the open market purchases were made purportedly
substituted Can-Am for M.J. Moroun as the purchaser on the July 9 and 10 sales
confirmations. At some time after July 13, 1992, M.J. Moroun assigned his rights
to purchase the pledged shares of Chandler Cayman owned by the Universal
Insurance Group and Cactus Southwest Corp. to Can-Am; neither CenTra nor Can-Am
now claim ownership or any interest in the Chandler Cayman shares. During the
second quarter of 1997, ownership of the 380,471 common shares of Chandler
Cayman owned by Universal Insurance Group was transferred to L&W as payment for
one of the agent's debts. In December 1997, 114,146 common shares owned by
Cactus Southwest Corp. were transferred to Chandler Management Cayman and the
balance of the its common shares was transferred to unaffiliated persons and
entities. These transactions had the effect of canceling the debts secured by
the Chandler Cayman shares.
Through the above transactions, CenTra and its affiliates acquired, or
contracted to acquire, an additional 26.5% of Chandler Cayman's common stock,
bringing their total claimed stock ownership to 49.2% in July 1992. The
management-led tender offer, which commenced on July 9, 1992 without knowledge
of the open market purchases, was withdrawn on July 23, 1992. As these
developments
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<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
unfolded, CenTra or its affiliates or both initiated litigation in Oklahoma,
Arkansas and Michigan, and an administrative proceeding in Nebraska, the
domicile of NAICO.
CENTRA LITIGATION--OKLAHOMA
BACKGROUND OF OKLAHOMA LAWSUIT. On July 16, 1992, CenTra and Messrs. M.J.
Moroun, Lech and Harned filed a lawsuit in the United States District Court for
the Western District of Oklahoma against Chandler Cayman, the other corporations
participating in the tender offer, and various individuals including certain
officers and employees of Chandler Cayman and its subsidiaries and the remaining
directors of Chandler Cayman, except Mr. Paul Maestri. The lawsuit sought
declaratory and injunctive relief to prevent the tender offer alleging breaches
of fiduciary and other duties and violations of the federal securities laws.
After the tender offer was withdrawn, the plaintiffs amended their complaint on
August 5, 1992, alleging breaches of fiduciary and other duties by commencing
the tender offer and violations of federal securities laws in the tender offer
and in certain transactions since 1988. Chandler Cayman and the other defendants
denied any breaches of duty or violations of law and Chandler Cayman filed
various counterclaims against CenTra and various affiliates alleging breaches of
fiduciary duties and violations of federal securities laws in their attempts to
seize control of Chandler Cayman through the July 1992 stock purchases, and
sought damages, costs and attorney fees. Chandler Cayman also asserted a
counterclaim against M.J. Moroun, individually, based upon his alleged violation
of Section 16(b) of the Exchange Act regarding "short swing" profits.
On January 6, 1993, the plaintiffs filed a second amended complaint (1)
asserting violations of federal securities laws and a breach of contract claim
in a 1988 stock purchase; (2) asking the court to declare invalid and
unenforceable a corporate resolution based on Article XI of Chandler Cayman's
Articles of Association (prohibiting certain business combinations) that
prohibits Can-Am and its affiliates (including CenTra) from voting their shares
of Chandler Cayman's common stock; and (3) asserting derivative claims for
fiduciary misconduct, unjust enrichment, fraud and/or breach of contract in the
tender offer, for management bonuses in 1988 and 1989, in Chandler Cayman's
purchase of three management-related agencies in 1988, and for assorted improper
personal benefits. All of these derivative claims seek unspecified damages,
restitution and/or injunctive relief on behalf of Chandler Cayman, including
punitive damages, attorneys' fees and costs. In 1994 the plaintiffs made a
request to file a third amended complaint. The Court denied that request.
A three member committee ("Special Committee"), who are on the board of
directors of NAICO and are not named in the lawsuits, investigated the
derivative claims. The Special Committee concluded that neither Chandler Cayman
nor its subsidiaries should take action against the individual defendants
regarding the claims relating to the tender offer, the management bonuses and
the agency purchases. As to the allegedly improper personal benefits, the
Special Committee found that some were ordinary and necessary business expenses
while others were not. The Special Committee recommended that the recipients
reimburse CUSA for all improper personal benefits, the full value of which was
$135,000. The Special Committee's recommendations were implemented, and
reimbursement was made. The respective Boards of Directors of Chandler Cayman
and its affected subsidiaries accepted the report and recommendations of the
Special Committee and retained special legal counsel to implement the
recommendations of the Special Committee. Messrs. M.J. Moroun, Lech and Harned
dissented.
F-23
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
On July 20, 1992, CenTra sued NAICO in the Circuit Court of Macomb County,
Michigan alleging that NAICO and certain officers and directors wrongfully
canceled insurance policies issued to CenTra. CenTra claimed that the
cancellation was retaliation for CenTra's decision not to participate in the
tender offer, requested that the policies be reinstated, and sought monetary
damages for the wrongful cancellation. The case was removed to the U.S. District
Court for the Eastern District of Michigan. NAICO replied that the cancellation
was proper based on CenTra's continuing failure to pay premiums. After two
extensions of the cancellation date, the policies were canceled effective on
September 5, 1992, after CenTra acquired replacement insurance. On August 26,
1992, CenTra deposited $700,000 with the court clerk under court order as
security for premiums due under the NAICO policies. On October 13, 1992, the
court granted NAICO's and the other defendant's motion to transfer the action to
the U.S. District Court for the Western District of Oklahoma. On January 27,
1993, CenTra filed an application in the Court of Appeals for the Sixth Circuit
contending that the district court abused its discretion by transferring the
case to Oklahoma. The application was denied. CenTra then filed a motion in the
U.S. District Court in Oklahoma to transfer the case to Michigan. The U.S.
District Court in Oklahoma retained jurisdiction of the case. NAICO filed a
claim seeking payment of the unpaid premiums and contended that the
cancellations were proper and denied that CenTra suffered any damages as a
result of the cancellations, or any action taken by NAICO associated with the
cancellations.
OKLAHOMA JUDGMENTS--APRIL 22, 1997 AND MARCH 10, 1998. On February 13,
1997, trial commenced in the United States District Court in Oklahoma City,
Oklahoma (the "Oklahoma Federal Court") in the consolidated cases involving
CenTra and certain of its affiliates, officers and directors (the "CenTra
Group") and Chandler Cayman and certain of its affiliates, officers and
directors. On April 1, 1997, at the close of all of the evidence, the Court
entered judgment in favor of NAICO on CenTra's claims for alleged wrongful
cancellation of CenTra's insurance with NAICO and the affiliate in 1992. See
CenTra Litigation--Other. The remaining issues were submitted to a jury.
On April 9, 1997, the jury returned verdicts on all claims. On April 22,
1997, the Oklahoma Federal Court entered judgments on all verdicts returned. One
judgment against Chandler Cayman requires the CenTra Group to return stock it
purchased in 1990 to Chandler Cayman in return for a payment of $5,099,133 from
Chandler Cayman. Another judgment was against both Chandler Cayman and its
affiliate, Chandler Barbados, and in favor of CenTra and its affiliate, Ammex,
Inc. ("Ammex"). CenTra and Ammex were awarded $6,882,500 in connection with a
1988 stock purchase agreement. Both judgments related to an alleged failure by
Chandler Cayman to adequately disclose the fact that ownership of Chandler
Cayman's stock may be subject to regulation by the Department under certain
circumstances. Judgment was also entered in favor of CenTra and against certain
officers and/or directors of Chandler Cayman on the securities claims relating
to CenTra's 1990 purchases and the failure to disclose the application of
Nebraska insurance law, but the judgments were $1 against each individual
defendant on those claims. On ten derivative claims brought by CenTra, the jury
found in CenTra's favor on three. Certain officers were directed to repay
bonuses received for the years 1988 and 1989 totaling $711,629 and a total of
$25,000 for personal use of corporate aircraft. These amounts are included in
other assets in the accompanying consolidated balance sheets. On the remaining
claim relating to the acquisition of certain insurance agencies in 1988, the
jury awarded $1 each against six officers and/or directors.
Judgment was also entered in favor of NAICO and NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. During
F-24
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
1998, the judgment was paid by funds held by the Oklahoma Federal Court
aggregating, with interest, $820,185. DuraRock, a CenTra affiliate, claims
$725,000 is owed to it by NAICO and NAICO Indemnity under certain reinsurance
treaties. NAICO and NAICO Indemnity dispute that claim. In November 1998,
DuraRock demanded arbitration and NAICO and NAICO Indemnity responded by
appointing an arbitrator. No arbitration hearings have been held. The Oklahoma
Federal Court's judgment also upheld a resolution adopted by Chandler Cayman's
Board of Directors in August 1992 pursuant to Article XI of Chandler Cayman's
Articles of Association preventing CenTra and its affiliates from voting their
Chandler Cayman stock.
The jury found in favor of CenTra on Chandler Cayman's claim against CenTra
for breach of a standstill agreement contained in a 1988 stock exchange
agreement. The jury denied Chandler Cayman's claim against Messrs. Harned, Lech
and Moroun based upon their alleged breach of fiduciary duty as directors. The
jury also denied Chandler Cayman's claim against Mr. Moroun individually for
violation of Section 16(b) of the Securities Exchange Act of 1934 regarding
short swing profits.
As a result of the Oklahoma Federal Court judgments, Chandler Cayman
recorded a net charge for the litigation matters described above during the
first quarter of 1997 totaling approximately $8.3 million ($8.5 million
including provision for federal income tax). In addition, Chandler Cayman
recorded the return of 517,500 shares of Chandler Cayman's stock in conjunction
with the stock rescission judgment as a decrease to shareholders' equity in the
amount of approximately $4.9 million with the remaining amount included in the
charge for litigation matters. The charge includes approximately $4.6 million as
an estimate of interest, costs and related attorney fees. The charge includes an
estimated recovery by Chandler Barbados of $2.7 million from Chandler Cayman's
directors and officers liability insurer (the "D&O Insurer") for costs
associated with the defense and litigation of these matters. Chandler Cayman and
its subsidiaries are entitled to a total of $5 million under the applicable
insurance policy to the extent they have advanced reimburseable expenses. Some
amounts have been previously paid without dispute and Chandler Cayman is
negotiating with the insurer for payment of the policy balance. CUSA and its
affiliates could recover the remaining policy limits or could compromise its
claim, and could incur significant costs in either case. The estimated insurance
recovery is based upon these variable factors. The charge also includes the
amount of judgments in favor of CUSA on the derivative claims discussed above.
On March 10, 1998, the Oklahoma Federal Court disposed of all post-trial
motions filed by the parties. The parties had asked the Oklahoma Federal Court
to vacate or modify judgments unfavorable to them and requested the Oklahoma
Federal Court to award prejudgment interest. The Oklahoma Federal Court
overruled all pending motions except a motion by Chandler Cayman and Chandler
Barbados to require CenTra and its affiliates to deliver 1,142,625 shares of
Chandler Cayman common stock they own or control upon payment of the $6,882,500
judgment which was entered in CenTra's favor in April 1997. Chandler Cayman
recorded the return of 1,142,625 shares of Chandler Cayman's stock in
conjunction with the order as a decrease to shareholders' equity as of December
31, 1997, and reduced the previous first quarter of 1997 net charge for
litigation matters by $6,882,500. The CenTra parties were directed to deliver
the shares upon payment of the judgment. On March 16, 1998 the CenTra Group
filed motions for an award of costs and attorney fees totaling approximately
$4.7 million. On April 21, 1998, the Oklahoma Federal Court denied the CenTra
Group's request. The CenTra Group did not appeal this decision within the time
permitted by applicable law. Accordingly, Chandler Cayman reduced the previous
first quarter of 1997 net charge for litigation matters by $3.8 million during
the second quarter of 1998. In subsequent
F-25
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
papers filed with the appellate court, CenTra asserts as error the Oklahoma
Federal Court's denial of attorney fees.
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court and filed the initial
appellate brief on September 9, 1998. All briefing was completed on January 4,
1999 and the appeals are being considered by the U.S. Court of Appeals for the
10th Circuit. Chandler Cayman cannot predict when a decision on the appeals will
be made. The CenTra Group's appeals are based upon the Oklahoma Federal Court's
failure to award prejudgment interest, the Oklahoma Federal Court's refusal to
permit the CenTra Group to amend certain pleadings to assert new claims, the
Oklahoma Federal Court's modification of the judgment for $6,882,500 to require
CenTra to return shares of Chandler Cayman's stock upon payment of the judgment,
and the Oklahoma Federal Court's entry of judgment in favor of NAICO and certain
officers and directors on CenTra's claim based upon cancellation of its
insurance policies by NAICO in 1992. The CenTra Group is also attempting to
appeal the Oklahoma Federal Court's denial of attorney fees but not the denial
of costs. Chandler Cayman believes the appeal of this issue is untimely and
therefore barred by law. Chandler Cayman has elected not to appeal any of the
judgments. The individual officers and directors against whom judgments were
entered as described above have all filed appeals.
The judgments on the derivative claims described above were all entered in
favor of CUSA. CUSA, is, therefore, the judgment creditor in connection with
those derivative claim judgments. CUSA appointed Messrs. Runyan, Anderson and
Gilmore to comprise a Special Litigation Committee on April 25, 1997. That
Special Litigation Committee meets on a regular basis and has been delegated the
authority of CUSA's Board of Directors regarding all issues related to the
CenTra litigation in the Oklahoma Federal Court, including the derivative claim
judgments.
On April 28, 1997, Chandler Cayman's Board of Directors appointed a
Committee of the Board (the "Committee") to deal with all matters arising from
the Oklahoma litigation. The Committee was delegated all authority of the Board
on these issues. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. That Committee has
retained independent counsel. The individual members of the Committee review
issues relating to litigation strategy, officer and director indemnification and
claims made under Chandler Cayman's director and officer liability insurance
policy on a regular basis in conjunction with a similar committee composed of
CUSA's directors. The Committee meets quarterly and participates in regular
telephone briefings and discussions with its counsel and members of the CUSA
Special Litigation Committee.
Because all shares of Chandler Cayman's stock owned by the CenTra Group are
held by the U.S. District Court for the District of Nebraska (the "Nebraska
Court"), it is unclear when or if the CenTra Group will be able to comply with
the Oklahoma Federal Court's order. Chandler Cayman believes that it is not
required to pay the judgments until the CenTra Group can deliver the shares to
Chandler Cayman. See "--CenTra Litigation--Nebraska."
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on CUSA and could negatively impact
CUSA's future earnings. CUSA's management believes that adequate financial
resources are available to pay the judgments as they currently exist or as they
may be modified on appeal. As a holding company, CUSA may receive cash through
equity sales, borrowings and dividends from its subsidiaries. Chandler Barbados
and NAICO are subject to various
F-26
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
regulations which restrict their ability to pay shareholder dividends. A
reduction in the amount of invested assets, or an increase in borrowings
resulting from potential payments of these judgments would reduce investment
earnings or increase operating expenses in future periods.
CENTRA LITIGATION--NEBRASKA
ADMINISTRATIVE. NAICO, which is domiciled in Nebraska, is regulated by the
Department. The Department requires a Form A application and prior approval by
the Department from anyone seeking to acquire control, directly or indirectly,
of an insurance company regulated by the Department. CenTra, Can-Am and their
affiliates filed a Form A application with the Department to which CUSA and
certain of its affiliates objected. On October 28, 1992, the Department denied
CenTra's Form A application. The Department found that (1) the financial
condition of the CenTra Group might jeopardize the financial stability of NAICO
or prejudice the interests of policyholders; (2) the competence, experience and
integrity of the CenTra Group is such that it would not be in the best interests
of policyholders or NAICO or the public for the CenTra Group to control NAICO;
and (3) the acquisition is likely to be hazardous or prejudicial to the public.
The CenTra Group appealed the Department's order to the Lancaster County
District Court for the State of Nebraska ("District Court"). The District Court
affirmed the Department's order on September 21, 1993. On December 1, 1995, the
Nebraska Supreme Court affirmed the Department and the District Court decisions.
On May 13, 1996, the U.S. Supreme Court denied the CenTra Group's Petition for
Writ of Certiorari, thereby declining to review the decision of the Nebraska
Supreme Court.
NEBRASKA COURT ACTION. On October 6, 1995, Agnes Anne Moroun, sister of
M.J. Moroun, purported to acquire 1,441,000 shares of the voting stock of
Chandler Cayman (the "Shares") from Can-Am, an affiliate of three of Chandler
Cayman's directors, M.J. Moroun, Norman E. Harned and Ronald W. Lech. In
response to that action, NAICO filed a lawsuit on October 11, 1995, in the
District Court seeking an order sequestering the Shares based upon alleged
violations of the Nebraska Holding Company Systems Act and orders of the
Nebraska Department of Insurance. NAICO also sought a temporary order enjoining
further transfers of the Shares and an order requiring the custodian of the
Shares, Dean Witter, to deliver them to the court. Agnes Anne Moroun, M.J.
Moroun, Norman E. Harned and others removed the action to the Nebraska Court on
October 17, 1995. The Nebraska Department of Insurance intervened on that same
date requesting relief substantially similar to that requested by NAICO. The
Honorable Warren K. Urbom conducted a hearing on October 18, 1995, and on
October 30, 1995, granted the relief requested by NAICO. On October 31, 1995,
the order was amended and was extended to 700 shares of Chandler Cayman held by
Can-Am and was extended to include the CenTra Group's claim to rights to acquire
stock of Chandler Cayman. Dean Witter was directed to cause share certificates
to be issued and delivered to the Clerk of the Nebraska Court. On November 8,
1995, the share certificates were issued listing Can-Am as the shareholder of
1,441,700 shares of Chandler Cayman pursuant to the order of the Nebraska Court.
On November 2, 1995, Agnes Anne Moroun and the other defendants filed responsive
pleadings and counterclaims against NAICO and the Director of Insurance of the
State of Nebraska ("Insurance Director"). The counterclaims sought declaratory
relief confirming the validity of the purported October 6, 1995, transfer of the
Shares and that the Insurance Director and the courts of the State of Nebraska
are without authority to sequester the Shares. The counterclaims also seek a
judgment determining that NAICO's current management controls Chandler Cayman
without the approval of the
F-27
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
Insurance Director and incidental relief. The Nebraska Court ruled in favor of
NAICO on the counterclaims.
On March 25, 1997, the Nebraska Court, pursuant to the Nebraska Insurance
Holding Company Systems Act, ordered CenTra and certain of its affiliates to
divest all Chandler Cayman shares owned by them, regardless of when purchased.
The CenTra defendants own or control 3,133,450 Chandler Cayman shares. All such
shares are currently in the possession of the Nebraska Court pursuant to the
1995 and 1997 orders of the Nebraska Court, including the shares subject to the
Oklahoma Federal Court stock rescission judgments. CenTra's shares represent
approximately 45.1% of the outstanding stock, including the shares subject to
the Oklahoma Federal Court stock rescission judgments and the stock held by
subsidiaries. The Nebraska Court directed NAICO, the CenTra defendants and the
Nebraska Department of Insurance to submit proposals to the Nebraska Court by
April 21, 1997, for the "orderly divestiture and disposition of the stock."
CenTra subsequently appealed the March 25, 1997, order of the Nebraska Court
to the United States Court of Appeals for the Eighth Circuit. CenTra's appeal of
this order resulted in a delay of the deadlines for submitting the proposals. On
October 7, 1997, the Honorable Warren K. Urbom, U.S. District Judge for the
Nebraska Court, ordered CenTra, M.J. Moroun and others to deliver into the
registry of the Nebraska Court by November 6, 1997, all shares of Chandler
Cayman stock owned or controlled by them or their affiliates not previously
tendered, to await the outcome of the appeal of his divestiture order. CenTra
requested a stay of that order. The stay was denied by Judge Urbom and CenTra
was again ordered to deliver their shares to the Nebraska Court, this time by
January 12, 1998. CenTra appealed that order to the U.S. Court of Appeals for
the Eighth Circuit, which affirmed Judge Urbom's order. On February 9, 1998,
CenTra deposited an additional 1,691,750 shares with the Nebraska Court. Until
the final proposals are submitted and accepted, Chandler Cayman and CUSA are
unable to predict the effect of the divestiture order on the rights, limitations
or other regulation of ownership of the stock of any existing or prospective
holders of Chandler Cayman's common stock, or the effect on the market price of
Chandler Cayman's stock.
On July 29, 1998, the U.S. Court of Appeals for the Eighth Circuit affirmed
the Nebraska Court's order that the CenTra Group will be divested of ownership
of control of its Chandler Cayman shares. This ruling allows the Nebraska Court
to consider divestiture plans which may be submitted by NAICO, the Nebraska
Department of Insurance and the CenTra Group. All Chandler Cayman shares owned
or controlled by the CenTra Group remain in the Nebraska Court's possession
pending further orders by that court. On October 28, 1998, the CenTra Group
filed pleadings in the Nebraska Court requesting the appointment of a special
master to supervise the divestiture and an independent trustee to hold and vote
Chandler Cayman's shares owned by the CenTra Group in accordance with specific
instructions pending the final implementation of a divestiture plan. NAICO
objected to the CenTra proposal on November 25, 1998, and responded with a
divestiture plan of its own (the "NAICO Plan"). The Nebraska Court rejected the
CenTra proposal and CenTra responded to the NAICO Plan on December 28, 1998. The
Nebraska Court has made no ruling on the NAICO Plan. NAICO's Plan includes a
proposal whereby Chandler Cayman would acquire and cancel the shares of Chandler
Cayman stock owned or acquired by the CenTra Group. The NAICO Plan has been
approved by Chandler Cayman's executive committee of the Board of Directors, and
the Boards of Directors of CUSA and NAICO. The Department generally supports the
NAICO Plan. The Nebraska Court has given no indication regarding when it will
rule on the NAICO Plan.
F-28
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
On March 27, 1997, the Nebraska Court declined to exercise jurisdiction over
550,329 shares of Chandler Cayman stock held as security by Chandler Cayman
subsidiaries for debts owed by two former agents but in which CenTra claimed to
have option rights. The Nebraska Court's ruling cleared the way for the
subsidiaries to begin the process of disposing of these shares to retire the
agents' debts to the subsidiaries. CenTra did not appeal this order. During the
second quarter of 1997, the 380,471 shares owned by Universal Insurance Group
were transferred to L&W as payment for one of the agent's debts. In December
1997, 114,146 shares owned by Cactus Southwest Corp. were transferred to
Chandler Management Cayman and the balance of the shares was transferred to
unaffiliated persons and entities. These transactions had the effect of
canceling the debts secured by the shares.
CENTRA LITIGATION--OTHER
On September 25, 1997, NAICO learned that several CenTra affiliates had
filed two lawsuits in state court in Macomb County, Michigan against NAICO,
NAICO Indemnity and certain NAICO officers asserting the same claims made and
tried in the Oklahoma lawsuit described above. See "--CenTra
Litigation--Oklahoma." Those claims were purportedly prosecuted by CenTra on its
own behalf and on behalf of its subsidiaries. The Oklahoma Federal Court
previously entered a judgment against CenTra on these claims. The damages sought
are unspecified but the claims are based upon NAICO's cancellation of CenTra's
insurance in 1992. NAICO and NAICO Indemnity contend that the Oklahoma Federal
Court's adjudication is conclusive as to all claims. The lawsuits were removed
to the U.S. District Court for the Eastern District of Michigan, Southern
Division (the "Michigan Federal Court"). On February 28, 1998, the Michigan
Federal Court ordered the lawsuits transferred to the Oklahoma Federal Court.
They have now been consolidated and have been assigned to the same judge who
presided over the action concluded in April 1997. See "--CenTra
Litigation--Oklahoma." Dispositive motions filed by NAICO, NAICO Indemnity and
the other defendants are currently under consideration by the Oklahoma Federal
Court, but that court has stayed ruling pending a decision by the 10th Circuit
Court of Appeals on CenTra's appeal of the April 1, 1997, judgment on the same
claims. See "--CenTra Litigation--Oklahoma."
During the first quarter of 1997 Chandler Barbados concluded an arbitration
proceeding involving DuraRock and Chandler Barbados recorded approximately
$315,000 in litigation and settlement expenses related to this matter. Chandler
Cayman also resolved various issues resulting in settlement of litigation and
arbitration proceedings among subsidiaries of Chandler Cayman and CenTra
affiliates, and recorded litigation and settlement expenses of approximately
$147,000 in the fourth quarter of 1997.
In the CenTra litigation, certain officers of CUSA and Chandler Cayman and
Chandler Cayman's directors other than Messrs. M.J. Moroun, Harned, Lech and
Maestri were named as defendants. In accordance with its Articles of
Association, Chandler Cayman and its subsidiaries have advanced the litigation
expenses of these persons in exchange for undertakings to repay such expenses if
those persons are later determined to have breached the standard of conduct
provided in the Articles of Association. Chandler Barbados has paid expenses
totaling approximately $2.2 million as of December 31, 1998. A portion of these
expenses relate to claims which have been dismissed or which were decided in
favor of the officers and directors. In addition, certain expenses may be
recovered from the D&O Insurer. As a result of various events in 1995, Chandler
Barbados and CUSA recorded $654,000 and $164,000, respectively, estimated
recoveries of costs from the D&O Insurer related to a $1 million claim for
reimbursable amounts previously paid that relate to allowable defense and
litigation costs for such parties. In 1996,
F-29
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
Chandler Barbados and CUSA recorded additional estimated recoveries of $102,000
and $880,000, respectively. Chandler Barbados and CUSA received payments for the
1995 claim during 1996 in the amount of $636,000 and $159,000, respectively. In
connection with the Oklahoma Federal Court judgments, Chandler Barbados recorded
an additional estimated recovery of $2.7 million from the D&O Insurer. Chandler
Cayman and its subsidiaries are entitled to a total of $5 million under the
applicable insurance policy to the extent they have advanced reimbursable
expenses. Some amounts have been previously paid without dispute and Chandler
Cayman is negotiating with the D&O Insurer for payment of the policy balance.
Chandler Cayman and its subsidiaries could recover the remaining policy limits
or could compromise their claim, and could incur significant costs in either
case. The estimated insurance recovery is based upon these variable factors.
Except for the recovery of a portion of the litigation costs from the D&O
Insurer, no provision has been made in the accompanying consolidated financial
statements related to the advancement of litigation expenses to certain
defendants. The Special Litigation Committees of CUSA and Chandler Cayman were
delegated the authority of the boards of directors to deal with all issues
arising from the Oklahoma litigation including the issue of officer and director
indemnification.
F-30
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 10. LITIGATION (CONTINUED)
At the present time CUSA and its affiliates are actively participating in
court proceedings, possible discovery actions and rights of appeal concerning
these various legal proceedings; therefore, CUSA and its affiliates are unable
to predict the outcome of such litigation with certainty or the effect of such
ongoing litigation on future operations.
OTHER LITIGATION
CUSA and its subsidiaries are not parties to any other material litigation
other than as is routinely encountered in their respective business activities.
NOTE 11. COMMITMENTS AND CONTINGENCIES
REINSURANCE
In the ordinary course of business, NAICO cedes insurance to other insurers
and reinsurers under various reinsurance treaties that cover individual risks
(facultative reinsurance) or entire classes of business (treaty reinsurance).
Reinsurance provides greater diversification of business written and also
reduces NAICO's exposure arising from high limits of liability or from hazards
of an unusual nature. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy.
NAICO has structured separate reinsurance programs for construction surety
bonds, property, workers compensation, casualty (including automobile liability
and physical damage, general liability, umbrella liability and related
professional liability) and group accident and health. Chandler Barbados
reinsures NAICO for a portion of the risk on the construction surety bonds,
workers compensation and casualty reinsurance programs.
During the first quarter of 1998, NAICO purchased additional reinsurance
under its workers compensation and casualty reinsurance programs that
substantially reduced its net retention in these lines of business. During the
second quarter of 1998, NAICO purchased additional reinsurance under its
construction surety bond reinsurance program. In July 1997, NAICO purchased
additional reinsurance for the California portion of the nonstandard
private-passenger automobile program. The purchase of the additional reinsurance
coverages in 1997 and 1998 substantially reduced the per occurrence retention
for NAICO's workers compensation, casualty, surety bond and private-passenger
automobile lines of business, but results in significantly lower net premiums
earned, losses and loss adjustment expenses and policy acquisition costs.
In addition, NAICO purchases catastrophe protection to limit its retention
for single loss occurrences involving multiple policies and/or policyholders,
such as floods, winds and severe storms. NAICO also purchases facultative
reinsurance when it writes a risk with limits of liability exceeding the maximum
limits of its treaties or when it otherwise considers such action appropriate.
Treaty reinsurance may be ceded under treaties on both a pro rata or
proportional basis (where the reinsurer shares proportionately in premiums and
losses) and an excess of loss basis (where only losses above a specific amount
are reinsured). The availability, costs and limits of reinsurance purchased can
vary from year to year based upon prevailing market conditions, reinsurers
underwriting results and NAICO's desired retention levels. A majority of NAICO's
reinsurance programs renew on January 1, April 1 or
F-31
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
July 1 of each year. NAICO renewed all January 1, 1999 reinsurance programs. At
the present time, NAICO expects to renew the reinsurance programs that renew on
April 1 and July 1, 1999.
In formulating its reinsurance programs, NAICO considers numerous factors,
the most important of which are the financial stability of the reinsurer,
including its ability to provide sufficient collateral if required, reinsurance
coverage offered and price.
NAICO periodically reviews certain prospective single year reinsurance
treaties, subject to commutation provisions therein, to determine if it is
advantageous to assume the estimated loss exposure on expired insurance policies
covered by such treaties in exchange for return premiums. Commutation of such
reinsurance treaties will be determined in future periods based on timely review
of all available data. Beginning in 1996, NAICO reviewed the historical results
for reinsurance contracts with similar commutation provisions and began accruing
for such commutations where a commutation election was considered probable,
which resulted in an increase in net premiums earned of $730,000, $918,000 and
$931,000 in 1996, 1997 and 1998, respectively.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to CUSA; consequently, allowances are established for amounts deemed
uncollectible. NAICO charged $2,078,000, $527,000 and $50,000 to policy
acquisition costs during 1996, 1997 and 1998, respectively, for estimated
uncollectible reinsurance recoverables from certain unaffiliated reinsurers.
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Direct.................................. $ 103,801 $ 98,550 $ 123,014 $ 116,101 $ 134,436 $ 126,017
Assumed................................. 4,258 4,780 74 608 (143) 17
Ceded................................... (25,425) (24,994) (41,531) (36,007) (87,671) (73,610)
---------- ---------- ---------- ---------- ---------- ----------
Net Premiums............................ $ 82,634 $ 78,336 $ 81,557 $ 80,702 $ 46,622 $ 52,424
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
Losses and loss adjustment expenses are reported net of the effect of
reinsurance recoveries and recoverables in the consolidated statements of
operations. Ceded losses and loss adjustment expenses were $9.4 million, $18.6
million and $54.9 million for 1996, 1997 and 1998, respectively.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
NAICO conducts its business through individual independent insurance
agencies and underwriting managers. Certain of these underwriting managers have
provided collateral to NAICO to secure a portion of the premiums receivable.
Substantially all of the principal shareholders of the independent agencies and
underwriting managers have provided personal guarantees for payment of premiums
to NAICO. NAICO also requires certain policyholders to pay a deposit at the time
of inception of coverage to secure payment of future premiums or other policy
related obligations. Receivables under installment plans do not exceed the
corresponding liability for unearned premiums. Premiums receivable at December
31, 1997 and 1998, were $27.6 million and $28.5 million, respectively.
Receivables for deductibles, in most cases, are secured
F-32
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
by cash deposits and letters of credit. At December 31, 1998, CUSA maintained
custody of such letters of credit securing these and other transactions totaling
approximately $10.5 million, which is a reasonable estimate of their fair value.
These letters of credit are not reflected in the accompanying consolidated
financial statements.
There were no unaffiliated independent insurance agents that produced 10% or
more of NAICO's direct written and assumed premiums during 1996, 1997 or 1998.
NAICO's largest underwriting manager was responsible for underwriting $11.9
million, $12.3 million and $4.0 million of NAICO's direct written and assumed
premiums for the California and Arizona portions of the nonstandard
private-passenger automobile program in 1996, 1997 and 1998, respectively. The
program underwritten by this underwriting manager was discontinued in 1998.
NAICO's bail bond underwriting manager was responsible for gross written
premiums of $2.7 million, $2.6 million and $2.8 million during 1996, 1997 and
1998, respectively.
Approximately $28.6 million, or 39% of NAICO's reinsurance recoverables and
prepaid reinsurance premiums at December 31, 1998 are collateralized by premiums
payable to the reinsurers, securities pledged in trust or letters of credit for
the benefit of NAICO. CUSA believes the above value of such collateral is a
reasonable estimate of their fair value. NAICO's reinsurance contracts include
provisions for offsets against premiums owed to the reinsurers.
The following table sets forth certain information related to NAICO's net
reinsurance recoverables as of December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------
<S> <C> <C> <C>
NET
REINSURANCE CEDED A.M.
RECOVERABLE REINSURANCE BEST CO.
NAME OF REINSURER (1) PREMIUM RATING
- --------------------------------------------------------------------------- -------------- ----------- -------------
(IN THOUSANDS)
Chandler Barbados.......................................................... $ 19,081 $ 18,878 --(2)
First Excess and Reinsurance Corporation................................... 15,613 21,420 A
Reliance Insurance Company................................................. 13,948 19,111 A-
SCOR Reinsurance Company................................................... 5,196 8,061 A+
Jefferson Insurance Company of New York.................................... 2,345 3,638 A
------- -----------
Top five reinsurers...................................................... $ 56,183 $ 71,108
------- -----------
------- -----------
All reinsurers........................................................... $ 73,156 $ 87,671
------- -----------
------- -----------
Percentage of total represented by top five reinsurers..................... 77% 81%
------- -----------
------- -----------
</TABLE>
- ------------------------
(1) Includes losses and loss adjustment expenses paid and outstanding, unpaid
losses and loss adjustment expenses and unearned premium reserves
recoverable from reinsurers as of December 31, 1998.
(2) Chandler Barbados owns 100% of the common stock of CUSA, which in turn owns
100% of the common stock of NAICO. Although Chandler Barbados is not subject
to the minimum capital, audit, reporting and other requirements imposed by
regulation upon United States reinsurance companies, as a foreign reinsurer,
it is required to secure its reinsurance obligations by depositing
acceptable
F-33
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
securities in trust for NAICO's benefit. At December 31, 1998, Chandler
Barbados had cash and investments with a fair value of $25.3 million
deposited in a trust account for the benefit of NAICO.
In the fourth quarter of 1998, a group of NAICO's agents in Oklahoma and
Texas formed a Cayman Islands based reinsurance company. The primary purpose of
that company is to reinsure a portion of NAICO's net retained liability on
workers compensation, casualty and physical damage business which is placed with
NAICO by these agents. That company's reinsurance obligations to NAICO are
secured by funds held by NAICO and by funds deposited into a trust account for
NAICO's benefit. NAICO loaned funds to certain of the agents which are secured
by the agent's stock in the reinsurance company. The outstanding loan balances
at December 31, 1998 consist of 24 individual loans totaling approximately
$977,000 and are include in other assets in the accompanying consolidated
balance sheet.
OTHER
See Note 10 regarding contingencies relating to litigation matters.
CUSA entered into employment contracts with two executive officers of CUSA
and two employees of CUSA's subsidiaries during 1988. Each employment agreement
has an initial term of 10 years, extended by one additional year for each year
worked beyond the fifth year, with final termination at age 70. The aggregate
annual commitment for base salaries under these agreements is approximately
$982,000. Under certain limited circumstances, such officers could receive base
salaries subsequent to an early termination of their employment subject to
certain continued obligations to CUSA.
Effective May 1, 1997 one of these former executive officers, Benjamin T.
Walkingstick, resigned as an executive officer and ceased to be employed by
CUSA, but continues to serve as a consultant. On September 18, 1997, he entered
into a separate contract with L&W relating to insurance sales on a commission
basis. Commissions paid under this agreement totaled $10,832 and $10,603 during
1997 and 1998, respectively. Effective January 1, 1999, Brenda B. Watson, an
executive officer and director of Chandler Cayman and an executive officer of
NAICO and L&W, agreed to modify her employment agreement so that it terminates
on January 1, 2004.
In addition, certain executives are eligible to participate in bonus plans
based upon premium production and/or profitability.
NAICO is subject to a variety of assessments related to insurance
activities, including those by state guaranty funds and workers compensation
second-injury funds. The amounts and timing of such assessments are beyond the
control of NAICO. NAICO provides for these charges on a current basis by
applying historical factors to premiums earned. Actual results may vary from
these values and adjustments therefrom are necessary to maintain an adequate
reserve for these assessments. The reserve for unpaid assessments was
approximately $865,000 and $851,000 at December 31, 1997 and 1998, respectively.
In certain cases, NAICO is permitted to recover a portion of its assessments
generally as a reduction to premium taxes paid to certain states. NAICO has
recorded receivables in the amount that it expects to recover of approximately
$64,000 and $54,000 at December 31, 1997 and 1998, respectively.
F-34
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, CUSA's subsidiaries were committed under
noncancellable operating leases for certain equipment and office space. Rental
payments under these leases were $1.1 million in both 1996 and 1997 and were
$503,000 for 1998. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999................................................................ $ 367
2000................................................................ 282
2001................................................................ 235
2002................................................................ 135
2003................................................................ 91
------
$ 1,110
------
------
</TABLE>
NOTE 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
OPERATING TRANSACTIONS
The net effect of CUSA's primary operating transactions with related parties
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
<CAPTION>
(In thousands)
<S> <C> <C>
BALANCE SHEETS
Premiums receivable...................................................... $ 302 $ --
Reinsurance recoverable on unpaid losses................................. 9,916 11,913
Prepaid reinsurance premiums............................................. 5,893 7,168
Unpaid losses and loss adjustment expenses, net of unaffiliated
reinsurance recoverable................................................ 10 --
Accrued taxes and other payables......................................... 70 --
Premiums payable......................................................... 482 1,462
Amounts due to affiliate................................................. 19,918 12,219
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
<CAPTION>
(In thousands)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Net premiums written and assumed ceded to related parties.... $ 11,523 $ 15,310 $ 18,878
Losses and loss adjustment expenses ceded to related
parties.................................................... 7,343 11,510 12,484
Policy acquisition costs ceded to related parties............ 4,939 5,114 6,916
</TABLE>
NAICO and NAICO Indemnity provided insurance coverage and risk management
services for CenTra and certain of its affiliates (see Note 10). All such
policies were canceled effective September 5, 1992, or expired as of September
30, 1992. As of December 31, 1997, the unpaid premiums and other
F-35
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS (CONTINUED)
amounts due from CenTra to Chandler Cayman's subsidiaries were $788,625 as
reflected by the April 22, 1997 jury verdicts. CUSA's subsidiaries had recorded
a receivable of $302,000 related to the judgment. The judgment was paid by funds
held by the Oklahoma Federal Court aggregating, with interest, $820,185. CUSA
received $313,862 of the funds paid by the Oklahoma Federal Court. The remaining
amount was due NAICO Indemnity. A CenTra affiliate, DuraRock claims $725,000 is
owed to it by NAICO and NAICO Indemnity under certain reinsurance treaties.
NAICO and NAICO Indemnity dispute that claim. Liberty Bell Agency, Inc.
("Liberty Bell"), an affiliate of CenTra, has administered claims under the
CenTra insurance program. NAICO and NAICO Indemnity reimburse Liberty Bell for
their share of claim payments, but are not obligated for DuraRock's share.
DuraRock reinsured NAICO and NAICO Indemnity for substantially all CenTra
risks underwritten by them. As a part of a settlement of certain related
litigation, National Union Fire Insurance Company of Pittsburgh ("National
Union") agreed to assume the reinsurance obligations of DuraRock effective March
31, 1993. Reinsurance recoverables from National Union totaled approximately
$6.0 million, $2.8 million and $1.4 million as of December 31, 1996, 1997 and
1998, respectively. The reduction in reinsurance recoverables as well as to the
corresponding liabilities for unpaid losses and loss adjustment expenses is
based upon information provided by Liberty Bell and National Union. Although
NAICO's and NAICO Indemnity's risks are fully reinsured, they are ultimately
liable as the policy-issuing company. If National Union does not meet its
obligations, such failure could adversely affect NAICO and CUSA (see Notes 10
and 11).
OTHER
See Note 11 regarding an insurance commission agreement in 1997.
CUSA leases and has made certain improvements to a rural property in which
certain directors and/or officers of CUSA own interests. Under the lease, no
cash rental is paid, but a subsidiary of CUSA drilled a water well on the
property and maintains certain structures it regularly uses. This property
provides recreational activities for the entertainment of customers and business
associates of CUSA. CUSA incurred approximately $184,000, $159,000 and $217,000
in expenses associated with its use of this property during 1996, 1997 and 1998,
respectively.
NOTE 13. SEGMENT INFORMATION
CUSA has two reportable operating segments: property and casualty insurance
and agency. The segments are managed separately due to the differences in the
nature of the insurance products and services sold.
The property and casualty segment accounted for 90.7%, 90.6% and 87.1% of
1996, 1997 and 1998 consolidated revenues before intersegment eliminations,
respectively. The insurance products are underwritten by NAICO and are marketed
through independent insurance agencies, including L&W. NAICO underwrites various
lines of property and casualty insurance, including surety bonds and workers
compensation insurance. NAICO's main areas of concentration include the
construction, manufacturing, oil and gas, wholesale, service and retail
industries along with political subdivisions. The property and casualty segment
operates primarily in Oklahoma and Texas, and other surrounding states. Oklahoma
accounted for approximately 59%, 55% and 55% of gross written premiums in 1996,
1997 and 1998, respectively,
F-36
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 13. SEGMENT INFORMATION (CONTINUED)
while Texas accounted for approximately 7%, 18% and 28% of gross written
premiums during the same years. Management evaluates the property and casualty
segment's performance on the basis of growth in gross written premiums and
income before income taxes.
The agency segment accounted for 9.3%, 9.4% and 12.9% of 1996, 1997 and 1998
consolidated revenues before intersegment eliminations, respectively. L&W is
appointed by insurers to solicit applications for policies of insurance,
primarily in Oklahoma. L&W represents personal and commercial lines insurance
companies, and markets property and casualty, individual and group life, medical
and disability income coverages. Major target classes of business are political
subdivisions, healthcare facilities, transportation companies, manufacturers,
contractors, oil & gas, retailers, wholesalers and service organizations. A
large portion of certain classes of business produced by L&W is placed with
NAICO. L&W also acts as a surplus lines broker specializing in risk management
and brokering insurance for commercial enterprises. L&W acts as the underwriter
for a significant portion of NAICO's construction surety bond program. L&W
places direct agency business as well as business from other agents with
specialty insurance companies. Management evaluates the agency segment's
performance on the basis of commission income generated and income before income
taxes.
CUSA accounts for intercompany sales and transactions as if they were to
third parties and attempts to set fees consistent with those that would apply in
arm's length transactions with a nonaffiliate. There can be no assurance the
rates charged reflect those that would have been agreed upon following an arm's
length negotiation.
F-37
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 13. SEGMENT INFORMATION (CONTINUED)
The following table presents a summary of CUSA's operating segments for the
years ended December 31:
<TABLE>
<CAPTION>
PROPERTY
AND ALL INTERSEGMENT REPORTED
AGENCY CASUALTY OTHER ELIMINATIONS BALANCES
--------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1996
Revenues from external customers....................... $ 1,893 $ 79,855 $ -- $ -- $ 81,748
Intersegment revenues.................................. 6,798 248 -- (7,046) --
Interest income, net................................... 70 5,593 -- -- 5,663
Interest expense....................................... -- 146 -- -- 146
Depreciation and amortization expense.................. 121 873 1,047 -- 2,041
Segment profit (loss) before income taxes (1).......... 99 (1,378) (818) -- (2,097)
Segment assets......................................... $ 7,930 $ 195,817 $ -- $ (4,775) $ 198,972
1997
Revenues from external customers....................... $ 1,763 $ 81,284 $ -- $ -- $ 83,047
Intersegment revenues.................................. 7,277 201 -- (7,478) --
Interest income, net................................... 56 6,074 -- -- 6,130
Interest expense....................................... 1 441 -- -- 442
Depreciation and amortization expense.................. 121 887 1,048 -- 2,056
Segment profit (loss) before income taxes (1).......... 167 7,089 (1,970) -- 5,286
Segment assets......................................... $ 6,177 $ 203,125 $ -- $ (6,515) $ 202,787
1998
Revenues from external customers....................... $ 1,561 $ 52,607 $ -- $ -- $ 54,168
Intersegment revenues.................................. 7,088 197 -- (7,285) --
Interest income, net................................... 55 4,849 -- -- 4,904
Interest expense....................................... 2 885 -- -- 887
Depreciation and amortization expense.................. 107 1,090 981 -- 2,178
Segment profit (loss) before income taxes (1).......... 227 1,963 (1,404) -- 786
Segment assets......................................... $ 5,323 $ 222,620 $ -- $ (4,592) $ 223,351
</TABLE>
- ------------------------
(1) Includes net realized investment gains.
Net premiums earned and losses and loss adjustment expenses within the
property and casualty segment can be identified to CUSA designated insurance
programs. CUSA's Chief Operating Decision Makers review net premiums earned and
losses and loss adjustment expenses in assessing the performance of an insurance
program. In addition, CUSA's Chief Operating Decision Makers consider many other
factors such as the lines of business offered within an insurance program and
the states in which the insurance programs are offered. Certain discrete
financial information is not readily available by insurance program, including
assets, interest income, and investment gains or losses, allocated to each
insurance program. CUSA does not consider its insurance programs to be
reportable segments, however, the
F-38
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE 13. SEGMENT INFORMATION (CONTINUED)
following supplemental information pertaining to each insurance program's net
premiums earned and losses and loss adjustment expenses is presented for the
property and casualty segment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
INSURANCE PROGRAM 1996 1997 1998
- ------------------------------------------------------------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
NET PREMIUMS EARNED
Standard property and casualty............................... $ 31,799 $ 44,887 $ 29,234
Political subdivisions....................................... 11,655 12,416 10,435
Surety bonds................................................. 9,392 10,533 7,456
Group accident and health.................................... 317 2,303 4,610
Nonstandard private-passenger automobile..................... 16,595 8,841 482
Other........................................................ 8,578 1,722 207
--------- --------- ---------
$ 78,336 $ 80,702 $ 52,424
--------- --------- ---------
--------- --------- ---------
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty............................... $ 18,834 $ 30,709 $ 22,318
Political subdivisions....................................... 7,950 7,218 8,403
Surety bonds................................................. 908 828 1,335
Group accident and health.................................... 152 998 4,126
Nonstandard private-passenger automobile..................... 14,302 6,386 (182)
Other........................................................ 6,620 1,766 42
--------- --------- ---------
$ 48,766 $ 47,905 $ 36,042
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table shows the detail of intersegment eliminations for
segment assets shown in the previous table:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Segment asset eliminations
Investment in subsidiaries..................................... $ 365 $ 365 $ 365
Other consolidating adjustments................................ 4,410 6,150 4,227
--------- --------- ---------
$ 4,775 $ 6,515 $ 4,592
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-39
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
MARCH 31, ------------
1999
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale, at fair value..................................
Restricted........................................................................ $ 7,649 $ 7,702
Unrestricted...................................................................... 74,241 76,567
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $351 and $354 in 1999 and 1998, respectively).............. 343 344
Unrestricted (fair value $965 and $978 in 1999 and 1998, respectively)............ 856 839
Equity securities available for sale, at fair value................................. 191 191
----------- ------------
Total investments................................................................. 83,280 85,643
Cash and cash equivalents............................................................. 5,939 9,304
Premiums receivable, less allowance for non-collection of $200 at 1999 and 1998....... 31,072 28,468
Reinsurance recoverable on paid losses, less allowance for non-collection of $275 at
1999 and 1998....................................................................... 1,915 2,760
Reinsurance recoverable on unpaid losses, less allowance for non-collection of $297
and $330 at 1999 and 1998, respectively............................................. 33,108 28,867
Reinsurance recoverable on unpaid losses from related parties......................... 11,037 11,913
Prepaid reinsurance premiums.......................................................... 22,553 22,448
Prepaid reinsurance premiums to related parties....................................... 7,101 7,168
Deferred policy acquisition costs..................................................... -- --
Property and equipment, net........................................................... 8,037 8,071
Other assets.......................................................................... 10,411 9,911
Licenses, net......................................................................... 4,156 4,194
Excess of cost over net assets acquired, net.......................................... 4,442 4,604
----------- ------------
Total assets.......................................................................... $ 223,051 $ 223,351
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses.......................................... $ 82,982 $ 80,701
Unearned premiums................................................................... 50,772 50,647
Policyholder deposits............................................................... 5,013 4,936
Notes payable....................................................................... 8,934 9,410
Accrued taxes and other payables.................................................... 2,752 3,755
Premiums payable.................................................................... 10,119 10,960
Premuims payable to related parties................................................. 260 1,462
Amounts due to affiliate............................................................ 13,149 12,219
----------- ------------
Total liabilities..................................................................... 173,981 174,090
----------- ------------
Commitments and contingencies (Note 2)
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares issued........ 2 2
Paid-in surplus..................................................................... 60,584 60,584
Accumulated deficit................................................................. (11,424) (12,040)
Accumulated other comprehensive income:
Unrealized gain (loss) on investments available for sale, net of income tax..... (92) 715
----------- ------------
Total shareholder's equity............................................................ 49,070 49,261
----------- ------------
Total liabilities and shareholder's equity............................................ $ 223,051 $ 223,351
----------- ------------
----------- ------------
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
F-40
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed..................................................... $ 35,098 $ 29,400
Reinsurance premiums ceded.............................................................. (14,053) (14,329)
Reinsuance premiums ceded to related parties............................................ (4,563) (6,494)
---------- ----------
Net premiums written and assumed...................................................... 16,482 8,577
Decrease (increase) in unearned premiums................................................ (86) 3,528
---------- ----------
Net premiums earned................................................................... 16,396 12,105
Interest income, net...................................................................... 1,044 1,393
Realized investment gains, net............................................................ 52 15
Commissions, fees and other income........................................................ 365 677
---------- ----------
Total premiums and other revenues..................................................... 17,857 14,190
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts ceded to related parties of $2,931
and $1,665 in 1999 and 1998, respectively............................................. 10,521 7,949
Policy acquisition costs, net of ceding commissions received from related parties of
$1,636 and $2,367 in 1999 and 1998, respectively...................................... 3,365 2,840
General and administrative expenses..................................................... 2,660 3,069
Interest expense........................................................................ 216 125
Litigation expenses, net................................................................ 57 129
---------- ----------
Total operating costs and expenses.................................................... 16,819 14,112
---------- ----------
Income before income taxes................................................................ 1,038 78
Federal income tax provision.............................................................. (422) (88)
---------- ----------
Net income (loss)..................................................................... $ 616 $ (10)
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
F-41
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income (loss)........................................................................... $ 616 $ (10)
--------- ---------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period................................. (1,170) 117
Less: Reclassification adjustment for gains included in net income (loss)............... (52) (15)
--------- ---------
Other comprehensive income (loss), before income tax........................................ (1,222) 102
Income tax benefit (provision) related to items of other comprehensive income (loss)........ 415 (35)
--------- ---------
Other comprehensive income (loss), net of income tax........................................ (807) 67
--------- ---------
Comprehensive income (loss)................................................................. $ (191) $ 57
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
F-42
<PAGE>
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating activities
Net income (loss)......................................................................... $ 616 $ (10)
Add (deduct):
Adjustments to reconcile net income (loss) to cash applied to operating activities:
Realized investment gains, net........................................................ (52) (15)
Net gains on sale of equipment........................................................ (8) (145)
Amortization and depreciation......................................................... 517 565
Provision for non-collection of premiums.............................................. 30 67
Provision for non-collection of reinsurance recoverables.............................. -- 150
Net change in non-cash balances relating to operating activities:
Premiums receivable................................................................. (2,634) (1,859)
Reinsurance recoverable on paid losses.............................................. 775 458
Reinsurance recoverable on unpaid losses............................................ (4,171) (12,930)
Reinsurance recoverable on unpaid losses from related parties....................... 876 9,516
Prepaid reinsurance premiums........................................................ (105) (11,232)
Prepaid reinsurance premiums to related parties..................................... 67 8,352
Deferred policy acquisition costs................................................... -- 722
Other assets........................................................................ (84) 147
Unpaid losses and loss adjustment expenses.......................................... 2,281 (457)
Unearned premiums................................................................... 125 (647)
Policyholder deposits............................................................... 77 284
Accrued taxes and other payables.................................................... (1,003) (768)
Premiums payable.................................................................... (841) 5,020
Premiums payable to related parties................................................. (1,202) (482)
--------- ---------
Cash applied to operating activities...................................................... (4,736) (3,264)
--------- ---------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases............................................................................... (4,044) (12,441)
Sales................................................................................... 3,048 --
Maturities.............................................................................. 2,124 12,627
Unrestricted fixed maturities held to maturity:
Maturities.............................................................................. -- 100
Restricted fixed maturities, net.......................................................... -- 300
Cost of property and equipment purchased.................................................. (257) (2,377)
Proceeds from sale of property and equipment.............................................. 46 300
--------- ---------
Cash provided by (applied to) investing activities...................................... 917 (1,491)
--------- ---------
FINANCING ACTIVITIES
Proceeds from notes payable............................................................... -- 8,548
Payments on notes payable................................................................. (476) (538)
Proceeds from borrowing from affiliate.................................................... 1,568 (8,109)
Payments on borrowing from affiliate...................................................... (638) 1,384
--------- ---------
Cash provided by financing activities................................................... 454 1,285
--------- ---------
Decrease in cash and cash equivalents during the period..................................... (3,365) (3,470)
Cash and cash equivalents at beginning of period............................................ 9,304 10,783
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 5,939 $ 7,313
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
F-43
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules of the Securities and Exchange
Commission. They do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there have been no material changes in the
information included in the Company's audited consolidated financial statements
and notes thereto included elsewhere in this document. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for the three-month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler
(U.S.A.), Inc. ("CUSA" or the "Company") and all subsidiaries. The following
represents the significant subsidiaries:
- National American Insurance Company ("NAICO")
- LaGere & Walkingstick Insurance Agency, Inc.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
NOTE 2. LITIGATION
In the Company's audited, consolidated financial statements and notes
thereto included elsewhere in this document, recent developments updating the
CenTra, Inc. ("CenTra") litigation were described. The following supplements
that description.
CENTRA LITIGATION--OKLAHOMA
The Company has previously reported concerning the background and status of
litigation involving CenTra and certain of its affiliates, officers and
directors (the "CenTra Group") in the United States District Court for the
Western District of Oklahoma ("Oklahoma Federal Court").
As previously reported, the trial of that litigation concluded on April 22,
1997, when the Oklahoma Federal Court entered judgments on various jury
verdicts. One judgment against Chandler Insurance Company, Ltd. ("Chandler
Cayman") requires the CenTra Group to return stock it purchased in 1990 to
Chandler Cayman in return for payment of $5,099,133 from Chandler Cayman.
Another judgment was against both Chandler Cayman and its affiliate, Chandler
Insurance (Barbados), Ltd ("Chandler Barbados"), and in favor of CenTra and its
affiliate, Ammex, Inc. CenTra and Ammex were awarded $6,882,500 in connection
with a 1988 stock purchase agreement. Both judgments related to an alleged
failure by Chandler Cayman to adequately disclose the fact that ownership of
Chandler Cayman's stock may be subject to regulation by the Nebraska Department
of Insurance under certain circumstances. Judgment was also entered in favor of
CenTra and against certain officers and/or directors of Chandler Cayman on the
securities claims relating to CenTra's 1990 purchases and the failure to
disclose the application of Nebraska insurance law, but the judgments were $1
against each individual defendant on those claims. On ten derivative claims
brought by CenTra, the jury found in CenTra's favor on three. Certain officers
were directed to repay to CUSA bonuses received for the years 1988 and 1989
totaling $711,629 and a total of $25,000 for personal use of corporate aircraft.
These amounts are included in other assets in the
F-44
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. LITIGATION (CONTINUED)
accompanying consolidated balance sheets. On the remaining claim relating to the
acquisition of certain insurance agencies in 1988, the jury awarded $1 each
against six officers and/or directors.
Judgment was also entered in favor of NAICO and an affiliate of the Company,
NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"), on counterclaims against
CenTra for CenTra's failure to pay insurance premiums. Judgment was for the
amount of $788,625. During 1998, the judgment was paid by funds held by the
Oklahoma Federal Court aggregating, with interest, $820,185. DuraRock
Reinsurance, Ltd. ("DuraRock"), a CenTra affiliate, claims $725,000 is owed to
it by NAICO and NAICO Indemnity under certain reinsurance treaties. NAICO and
NAICO Indemnity dispute that claim. In November 1998, DuraRock demanded
arbitration and NAICO and NAICO Indemnity responded by appointing an arbitrator.
No arbitration hearings have been held. The Oklahoma Federal Court's judgment
also upheld a resolution adopted by Chandler Cayman's Board of Directors in
August 1992 pursuant to Article XI of Chandler Cayman's Articles of Association
preventing CenTra and its affiliates from voting their Chandler Cayman stock.
On March 10, 1998, the Oklahoma Federal Court modified the earlier judgment
for $6,882,500 to require the CenTra Group to deliver 1,142,625 shares of
Chandler Cayman common stock they own or control upon payment of the judgment by
Chandler Cayman and Chandler Barbados. On that same date, the Oklahoma Federal
Court also entered an order denying the CenTra Group's request for prejudgment
interest on the judgments entered in favor of the Centra Group. Chandler Cayman
recorded the Oklahoma Federal Court's judgment requiring the return of the
1,142,625 shares of Chandler Cayman's stock as a decrease to shareholders'
equity as of December 31, 1997, and reduced the previous first quarter of 1997
net charge for litigation matters by $6,882,500, during the fourth quarter of
1997.
On March 16, 1998, the CenTra Group filed motions for an award of costs and
attorney fees totaling approximately $4.7 million. On April 21, 1998, the
Oklahoma Federal Court denied the CenTra Group's request. The CenTra Group did
not appeal this decision within the time permitted by applicable law.
Accordingly, Chandler Cayman reduced the previous first quarter of 1997 net
charge for litigation matters by $3.8 million during the second quarter of 1998.
In subsequent papers filed with the appellate court, CenTra asserts as error the
Oklahoma Federal Court's denial of attorney fees.
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court and filed the initial
appellate brief on September 9, 1998. All briefing was completed on January 4,
1999 and the appeals are being considered by the U.S. Court of Appeals for the
10th Circuit. Chandler Cayman cannot predict when a decision on the appeals will
be made. The CenTra Group's appeals are based upon the Oklahoma Federal Court's
failure to award prejudgment interest, the Oklahoma Federal Court's refusal to
permit the CenTra Group to amend certain pleadings to assert new claims, the
Oklahoma Federal Court's modification of the judgment for $6,882,500 to require
CenTra to return shares of Chandler Cayman's stock upon payment of the judgment,
and the Oklahoma Federal Court's entry of judgment in favor of NAICO and certain
officers and directors on CenTra's claim based upon cancellation of its
insurance policies by NAICO in 1992. The CenTra Group is also attempting to
appeal the Oklahoma Federal Court's denial of attorney fees but not the denial
of costs. Chandler Cayman believes the appeal of this issue is untimely and
therefore barred by law. Chandler Cayman has elected not to appeal any of the
judgments. The individual officers and directors against whom judgments were
entered as described above have all filed appeals.
F-45
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. LITIGATION (CONTINUED)
The judgments on the derivative claims described above were all entered in
favor of CUSA. CUSA is, therefore, the judgment creditor in connection with
those derivative claim judgments. CUSA appointed three directors to comprise a
Special Litigation Committee on April 25, 1997. That Special Litigation
Committee meets on a regular basis and has been delegated the authority of the
CUSA Board of Directors regarding all issues related to the CenTra litigation in
the Oklahoma Federal Court, including the derivative claim judgments.
On April 28, 1997, Chandler Cayman's Board of Directors appointed a
Committee of the Board (the "Committee") to deal with all matters arising from
the Oklahoma litigation. The Committee was delegated all authority of the Board
on these issues. The members of the Committee are Messrs. Jacoby, Maestri and
Davis, all of whom are non-parties to the CenTra litigation. That Committee has
retained independent counsel. The individual members of the Committee review
issues relating to litigation strategy, officer and director indemnification,
and claims made under Chandler Cayman's director and officer liability insurance
policy on a regular basis in conjunction with a similar committee composed of
CUSA directors. The Committee meets regularly and participates in telephone
briefings and discussions at least monthly.
Because all shares of Chandler Cayman's stock owed by the CenTra Group are
held by the U.S. District Court for the District of Nebraska ("Nebraska Court"),
it is unclear when or if the CenTra Group will be able to comply with the
Oklahoma Federal Court's order. Chandler Cayman believes that it is not required
to pay the judgments until the CenTra Group can deliver the shares to Chandler
Cayman. See CenTra Litigation--Nebraska.
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on CUSA and could negatively impact
CUSA's future earnings. CUSA's management believes that adequate financial
resources are available to pay the judgments as they currently exist or as they
may be modified on appeal. As a holding company, CUSA may receive cash through
equity sales, borrowings and dividends from its subsidiaries. Chandler Barbados
and NAICO are subject to various regulations which restrict their ability to pay
shareholder dividends. A reduction in the amount of invested assets, or an
increase in borrowings resulting from potential payments of these judgments
would reduce investment earnings or increase operating expenses in future
periods.
CENTRA LITIGATION--NEBRASKA
The Company has previously reported regarding administrative proceedings and
decisions and court actions and decisions involving Chandler Cayman and the
CenTra Group in the State of Nebraska. (See the audited consolidated financial
statements and notes thereto included elsewhere in this document.) The Nebraska
Court ordered CenTra, M.J. Moroun, and others to deliver into the registry of
the Nebraska Court all shares of Chandler Cayman stock owned or controlled by
them or their affiliates and not previously delivered to the Nebraska Court to
await the outcome of the CenTra Group's appeal of a divestiture order entered by
the Nebraska Court on March 25, 1997. On February 9, 1998, CenTra deposited an
additional 1,691,750 shares of Chandler Cayman stock making the total number of
shares on deposit with the Nebraska Court 3,133,450 shares. In his March 25,
1997 order, the Honorable Warren K. Urbom, U.S. District Judge for the Nebraska
Court, ordered the parties to submit divestiture plans. The appeal of that order
by CenTra resulted in a delay of the deadlines for submitting the proposals.
F-46
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2. LITIGATION (CONTINUED)
On July 29, 1998, the U.S. Court of Appeals for the Eighth Circuit affirmed
the Nebraska Court's order that the CenTra Group will be divested of ownership
or control of its Chandler Cayman shares. This ruling allows the Nebraska Court
to consider divestiture plans which may be submitted by NAICO, the Nebraska
Department of Insurance and the CenTra Group. All Chandler Cayman shares owned
or controlled by the CenTra Group remain in the Nebraska Court's possession
pending further orders by that court. On October 28, 1998, the CenTra Group
filed pleadings in the Nebraska Court requesting the appointment of a special
master to supervise the divestiture and an independent trustee to hold and vote
Chandler Cayman's shares owned by the CenTra Group in accordance with specific
instructions pending the final implementation of a divestiture plan. NAICO
objected to the CenTra proposal on November 25, 1998 and responded with a
divestiture plan of its own (the "NAICO Plan"). The Nebraska Court rejected the
CenTra proposal and CenTra responded to the NAICO Plan on December 28, 1998. The
Nebraska Court has made no ruling on the NAICO Plan. NAICO's Plan includes a
proposal whereby Chandler Cayman would acquire and cancel the shares of Chandler
Cayman stock owned or acquired by the CenTra Group. The NAICO Plan has been
approved by Chandler Cayman's executive committee of the board of directors and
the boards of directors of CUSA and NAICO. The Nebraska Department of Insurance
generally supports the NAICO Plan. The Nebraska Court has given no indication
regarding when it will rule on the NAICO Plan.
CENTRA LITIGATION--OTHER
The Company has previously reported regarding two separate lawsuits filed
against NAICO, NAICO Indemnity and certain NAICO officers during 1997 in State
Court in Macomb County, Michigan. As stated in the Company's audited
consolidated financial statements and notes thereto included elsewhere in this
document, NAICO, NAICO Indemnity and the other defendants contend that the
claims which are the basis of these suits are the same claims which were
prosecuted and concluded in NAICO's and NAICO Indemnity's favor by the Oklahoma
Federal Court in April 1997. On February 28, 1998, a Michigan Federal Court
ordered the lawsuits transferred to the Oklahoma Federal Court. They have now
been consolidated and have been assigned to the same judge who presided over the
action concluded in April 1997 (see CenTra Litigation--Oklahoma). Dispositive
motions filed by NAICO, NAICO Indemnity and the other defendants are currently
under consideration by the Oklahoma Federal Court. Ruling on those motions has
been stayed pending the ruling on CenTra's appeal of the April 1, 1997 judgment
on the same claims (see CenTra Litigation--Oklahoma).
At the present time, the CUSA and its affiliates are actively participating
in court proceedings, possible discovery actions and rights of appeal concerning
these various legal proceedings; therefore CUSA is unable to predict the outcome
of such litigation with certainty or the effect of such ongoing litigation on
future operations.
OTHER LITIGATION
The Company and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective business
activities.
F-47
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3. DEBENTURE OFFERING
CUSA intends to offer debentures in the aggregate principal amount of $24
million. The terms of the debentures including the interest rate and redemption
date have not been determined. CUSA plans to use the proceeds of the offering to
repay amounts due to Chandler Barbados; to retire its current bank debt; and for
general corporate purposes. CUSA's subsidiaries and affiliates will not be
obligated by the debentures. Accordingly, the debentures will be effectively
subordinated to all existing and future liabilities and obligations of CUSA's
existing and future subsidiaries.
NOTE 4. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that the Company recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on
the intended use of the derivative and the resulting designation. The Company
will adopt SFAS No. 133 on January 1, 2000 as required. Management of the
Company believes that adoption of SFAS No. 133 will not have a material impact
on the Company's consolidated financial condition or results of operations.
NOTE 5. SEGMENT INFORMATION
The following table presents a summary of the Company's operating segments
for the three-month periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
PROPERTY
AND INTERSEGMENT REPORTED
AGENCY CASUALTY ALL OTHER ELIMINATIONS BALANCES
--------- ---------- --------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Revenues from external customers(1)..................... $ 350 $ 16,411 $ -- $ -- $ 16,761
Intersegment revenues................................... 1,653 54 -- (1,707) --
Segment profit (loss) before income taxes(2)............ (113) 1,369 (218) -- 1,038
Segment assets.......................................... 5,069 227,602 -- (9,620) 223,051
THREE MONTHS ENDED MARCH 31, 1998
Revenues from external customers(1)..................... $ 607 $ 12,175 $ -- -- 12,782
Intersegment revenues................................... 1,323 51 -- (1,374) --
Segment profit (loss) before income taxes(2)............ (3) 471 (390) -- 78
Segment assets.......................................... 5,032 208,048 -- (6,003) 207,077
</TABLE>
- ------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
F-48
<PAGE>
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5. SEGMENT INFORMATION (CONTINUED)
The following supplemental information pertaining to each insurance
program's net premiums earned and losses and loss adjustment expenses is
presented for the property and casualty segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
INSURANCE PROGRAM
- --------------------------------------------------------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty.............................................................. $ 8,774 $ 6,520
Political subdivisions...................................................................... 3,042 2,458
Surety bonds................................................................................ 2,344 1,564
Group accident and health................................................................... 2,286 1,021
Other....................................................................................... (50) 542
--------- ---------
$ 16,396 $ 12,105
--------- ---------
--------- ---------
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty.............................................................. 6,881 4,928
Political subdivisions...................................................................... 2,373 1,536
Surety bonds................................................................................ 305 429
Group accident and health................................................................... 1,556 1,160
Other....................................................................................... (594) (104)
--------- ---------
$ 10,521 $ 7,949
--------- ---------
--------- ---------
</TABLE>
NOTE 6. SUBSEQUENT EVENT
NAICO is a major insurer of businesses, cities, towns and school districts
in Oklahoma. As a result, NAICO incurs weather-related losses. On May 3, 1999,
tornadoes, hail and strong winds caused severe damage to property owned or used
by NAICO insureds. NAICO estimates total insured damages at approximately $22.0
million. Giving effect to NAICO's applicable reinsurance, all of which is with
unaffiliated reinsurers, NAICO estimates its net loss before income tax benefit
resulting from these storms at $2.0 million, although that amount could change
as more information regarding insured damages becomes known.
F-49
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON, OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY CUSA OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
CUSA SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary................................................................... 3
The Chandler Organization................................................. 7
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 14
Capitalization............................................................ 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 38
Legal Proceedings......................................................... 51
Management................................................................ 59
Security Ownership of Directors and Executive Officers.................... 62
Shareholders Holding Over Five Percent.................................... 63
Certain Relationships and Related Transactions............................ 64
Description of Debentures................................................. 65
Certain United States Federal Income Tax Considerations................... 74
Book-Entry; Delivery and Form............................................. 79
Underwriting.............................................................. 81
Legal Matters............................................................. 81
Experts................................................................... 81
Additional Information.................................................... 82
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
UNTIL , 1999, ALL DEALERS THAT AFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
[LOGO]
CHANDLER (U.S.A.), INC.
---------------------
PROSPECTUS
---------------------
$24,000,000
% SENIOR
DEBENTURES DUE 2014
SOUTHWEST SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE DISTRIBUTION
The Registrant estimates that expenses to be paid by CUSA in connection with
the offering described in this Registration Statement will be as follows. All of
the amounts except the SEC registration fee, NASD fee and American Stock
Exchange listing fee are estimates.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
SEC registration fee........................................................... $ 6,672.00
Legal fees and expenses........................................................ 410,000.00
American Stock Exchange listing fee............................................ 10,000.00
Accounting fees and expenses................................................... 135,000.00
Printing expenses.............................................................. 107,000.00
Standard & Poor's rating fee................................................... 12,500.00
Trustee's fees................................................................. 12,000.00
Miscellaneous.................................................................. 6,828.00
-------------
Total...................................................................... $ 700,000.00
-------------
-------------
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement by and between Chandler (U.S.A.), Inc. and
Southwest Securities, Inc.
**3.1 Certificate of Incorporation
**3.2 Bylaws, as amended
*4.1 Form of Indenture to be entered into by and between CUSA as issuer and
U.S. Trust of Texas, N.A. as trustee
*5.1 Legal Opinion of Gardere & Wynne, L.L.P., regarding legality of securities
being registered
**10.1 Employment Agreement, effective as of October 28, 1988, by and between
Chandler (U.S.A.), Inc. and W. Brent LaGere
**10.2 Employment Agreement, effective as of October 28, 1988, by and between
Chandler (U.S.A.), Inc. and Brenda B. Watson (formerly Brenda B. Pair)
**10.3 Amendment to Employment Agreement, effective as of January 1, 1999, by and
between Chandler (U.S.A.), Inc. and Brenda B. Watson
*12.1 Statement of computation of ratios of earnings to fixed charges
**21.1 Subsidiaries of registrant
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of Gardere & Wynne, L.L.P. (included in Exhibit 5.1)
**24.1 Power of Attorney (set forth on page II-4)
**25.1 Statement of eligibility of U.S. Trust of Texas, N.A., dated April 12,
1999
**27.1 Financial Data Schedule
</TABLE>
* Filed herewith.
** Previously filed.
(b) Financial Statement Schedules
See Index to Financial Statement Schedules on page S-1
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chandler, State of
Oklahoma on the 28th day of May, 1999.
<TABLE>
<S> <C> <C>
CHANDLER (U.S.A.), INC.
By: /s/ W. BRENT LAGERE
-----------------------------------------
W. Brent LaGere
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, this Amendment to this
Registration Statement has been signed below by the following persons and in the
capacities indicated on the 28th day of May, 1999.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
President, Chief Executive
/s/ W. BRENT LAGERE Officer and Chairman of
- ------------------------------ the Board of Directors
W. Brent LaGere (principal executive
officer)
Executive Vice President,
Chief Operating Officer,
* Chief Financial Officer
- ------------------------------ and Director
Mark T. Paden (principal financial
officer)
Vice President--Finance,
* Treasurer
- ------------------------------ (principal accounting
Mark C. Hart officer)
*
- ------------------------------ Vice President and
Richard L. Evans Director
*
- ------------------------------ Secretary, General Counsel
R. Patrick Gilmore and Director
*
- ------------------------------ Director
Robert L. Rice
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
*
- ------------------------------ Director
Robert A. Anderson
*
- ------------------------------ Director
W. Timothy Runyan
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ W. BRENT LAGERE
-------------------------
W. Brent LaGere
AS ATTORNEY-IN-FACT
</TABLE>
II-3
<PAGE>
CHANDLER (U.S.A.), INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report.................................................................................... S-2
I Summary of Investments--Other Than Investments in Related Parties.................................... S-3
II Condensed Financial Information of Registrant........................................................ S-4
III Supplementary Insurance Information.................................................................. S-7
IV Reinsurance.......................................................................................... S-8
V Valuation and Qualifying Accounts.................................................................... S-9
VI Supplemental Information (for property-casualty insurance underwriters).............................. S-10
</TABLE>
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Chandler (U.S.A.), Inc.
We have audited the consolidated financial statements of Chandler (U.S.A.), Inc.
and subsidiaries ("CUSA"), a wholly owned subsidiary of Chandler Insurance
(Barbados), Ltd., which is a wholly owned subsidiary of Chandler Insurance
Company, Ltd., as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon (which
expresses an unqualified opinion and includes an explanatory paragraph relating
to litigation) dated February 22, 1999 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedules listed in
Part II of this Registration Statement. These financial statement schedules are
the responsibility of CUSA's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 22, 1999
S-2
<PAGE>
SCHEDULE I
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER
THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
IN THE
BALANCE
TYPE OF INVESTMENT COST FAIR VALUE SHEET
- ---------------------------------------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
FIXED MATURITIES AVAILABLE FOR SALE:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies.................................................................. $ 39,650 $ 39,825 $ 39,825
Debt securities issued by foreign governments............................... 1,510 1,519 1,519
Obligations of states and political subdivisions............................ 12,178 12,496 12,496
Corporate obligations....................................................... 23,092 23,336 23,336
Public utilities............................................................ 6,221 6,344 6,344
Mortgage-backed securities.................................................. 725 749 749
--------- ----------- -------------
83,376 84,269 84,269
FIXED MATURITIES HELD TO MATURITY:
U.S. Treasury securities and obligations of U.S. government corporations and
agencies.................................................................. 1,183 1,332 1,183
EQUITY SECURITIES AVAILABLE FOR SALE:
Corporate stock............................................................. -- 191 191
--------- ----------- -------------
Total investments........................................................... $ 84,559 $ 85,792 $ 85,643
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
S-3
<PAGE>
SCHEDULE II
CHANDLER (U.S.A.), INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
ASSETS 1997 1998
--------- ---------
<S> <C> <C>
Amounts due from subsidiaries............................................. $ 2,383 $ 2,693
Property and equipment, net............................................... 380 2,494
Other assets.............................................................. 2,493 2,346
Excess of cost over net assets acquired, net.............................. 5,252 4,603
Covenants not to compete, net............................................. 333 --
Investments in subsidiaries, net.......................................... 58,425 55,783
--------- ---------
Total assets.............................................................. $ 69,266 $ 67,919
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Notes payable........................................................... $ 2,796 $ 9,410
Accrued taxes and other payables........................................ 1,781 2,194
Amounts due to affiliate................................................ 16,253 7,054
--------- ---------
Total liabilities......................................................... 20,830 18,658
--------- ---------
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares
issued................................................................ 2 2
Paid-in surplus......................................................... 60,584 60,584
Accumulated deficit..................................................... (12,473) (12,040)
Accumulated other comprehensive income:
Unrealized gain on investments held by subsidiary and available for
sale, net of income tax............................................... 323 715
--------- ---------
Total shareholder's equity................................................ 48,436 49,261
--------- ---------
Total liabilities and shareholder's equity................................ $ 69,266 $ 67,919
--------- ---------
--------- ---------
</TABLE>
S-4
<PAGE>
SCHEDULE II
CHANDLER (U.S.A.), INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CHANDLER (U.S.A.), INC.
(PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Revenues
Interest income, net............................................................. $ 8 $ 28 $ 20
Realized investment gains, net................................................... 21 -- --
Commissions, fees and other income............................................... 789 494 449
--------- --------- ---------
Total revenues................................................................. 818 522 469
--------- --------- ---------
Operating costs and expenses
General and administrative expenses.............................................. 4,678 3,184 2,585
Interest expense................................................................. 144 407 809
Litigation expenses, net......................................................... (198) 768 324
--------- --------- ---------
Total operating costs and expenses............................................. 4,624 4,359 3,718
--------- --------- ---------
Loss before income tax benefit..................................................... (3,806) (3,837) (3,249)
Federal income tax benefit......................................................... 1,001 903 716
--------- --------- ---------
Net loss before equity in net income of subsidiaries............................... (2,805) (2,934) (2,533)
Equity in net income of subsidiaries............................................... 1,025 5,939 2,966
--------- --------- ---------
Net income (loss).................................................................. $ (1,780) $ 3,005 $ 433
--------- --------- ---------
--------- --------- ---------
</TABLE>
S-5
<PAGE>
SCHEDULE II
CHANDLER (U.S.A.), INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
OPERATING ACTIVITIES
Net income (loss)................................................................ $ (1,780) $ 3,005 $ 433
Add (deduct):
Adjustments to reconcile net loss to cash provided by (applied to) operating
activities:
Net income of subsidiaries not distributed to parent......................... (1,025) (5,939) (2,966)
Realized investment gains, net............................................... (21) -- --
Net (gains)/losses on sale of property and equipment......................... (19) 1 --
Amortization and depreciation expense........................................ 1,180 1,151 1,188
Provision for non-collection of premiums..................................... 1,534 -- --
Net change in non-cash balances relating to operating activities:
Premiums receivable........................................................ (5,406) 1,784 --
Amounts due from subsidiaries.............................................. (1,637) 1,846 (310)
Other assets............................................................... (454) (673) 147
Accrued taxes and other payables........................................... (1,837) 732 413
--------- --------- ---------
Cash provided by (applied to) operating activities........................... (9,465) 1,907 (1,095)
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of equity securities available for sale....................... 2,169 -- --
Cost of property and equipment purchased......................................... (128) (237) (2,453)
Proceeds from sale of property and equipment..................................... 78 20 133
Payment for purchase of subsidiary............................................... (20) -- --
--------- --------- ---------
Cash provided by (applied to) investing activities:.......................... 2,099 (217) (2,320)
--------- --------- ---------
FINANCING ACTIVITIES
Shareholder dividend from subsidiary............................................. -- -- 6,000
Proceeds from notes payable...................................................... 4,500 -- 8,548
Repayment of notes payable....................................................... (409) (1,595) (1,934)
Proceeds from borrowing from affiliate........................................... 10,049 6,707 6,043
Payments on borrowing from affiliate............................................. (6,774) (6,802) (15,242)
--------- --------- ---------
Cash provided by (applied to) financing activities........................... 7,366 (1,690) 3,415
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................... -- -- --
Cash and cash equivalents at beginning of year..................................... -- -- --
--------- --------- ---------
Cash and cash equivalents at end of year........................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
S-6
<PAGE>
SCHEDULE III
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE
POLICY OTHER
BENEFITS, POLICY AMORTIZATION
DEFERRED LOSSES, CLAIMS CLAIMS, OF DEFERRED
POLICY CLAIMS AND NET LOSSES AND POLICY
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INTEREST SETTLEMENT ACQUISITION
COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended Dec 31, 1996
Property-casualty............. $ 3,470 $ 78,114 $ 36,009 $ 4,016 $ 78,336 $ 5,593 $ 48,766 $ 21,304
Agency........................ -- -- -- -- -- 70 -- 6,606
Other......................... -- -- -- -- -- -- -- --
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
Total......................... $ 3,470 $ 78,114 $ 36,009 $ 4,016 $ 78,336 $ 5,663 $ 48,766 $ 27,910
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
Year ended Dec 31, 1997
Property-casualty............. $ 3,475 $ 73,721 $ 42,389 $ 4,830 $ 80,702 $ 6,074 $ 47,905 $ 16,265
Agency........................ -- -- -- -- -- 56 -- 7,081
Other......................... -- -- -- -- -- -- -- --
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
Total......................... $ 3,475 $ 73,721 $ 42,389 $ 4,830 $ 80,702 $ 6,130 $ 47,905 $ 23,346
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
Year ended Dec 31, 1998
Property-casualty............. $ (80) $ 80,701 $ 50,647 $ 4,936 $ 52,424 $ 4,849 $ 36,042 $ 3,801
Agency........................ -- -- -- -- -- 55 -- 6,934
Other......................... -- -- -- -- -- -- -- --
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
Total......................... $ (80) $ 80,701 $ 50,647 $ 4,936 $ 52,424 $ 4,904 $ 36,042 $ 10,735
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
<CAPTION>
NET
PREMIUMS
OTHER WRITTEN
OPERATING AND
EXPENSES ASSUMED
----------- -----------
<S> <C> <C>
Year ended Dec 31, 1996
Property-casualty............. $ 10,115 $ 82,634
Agency........................ 2,057 --
Other......................... 818 --
----------- -----------
Total......................... $ 12,990 $ 82,634
----------- -----------
----------- -----------
Year ended Dec 31, 1997
Property-casualty............. $ 9,563 $ 81,557
Agency........................ 1,896 --
Other......................... 1,971 --
----------- -----------
Total......................... $ 13,430 $ 81,557
----------- -----------
----------- -----------
Year ended Dec 31, 1998
Property-casualty............. $ 9,601 $ 46,622
Agency........................ 1,540 --
Other......................... 1,404 --
----------- -----------
Total......................... $ 12,545 $ 46,622
----------- -----------
----------- -----------
</TABLE>
S-7
<PAGE>
SCHEDULE IV
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Property-casualty..................................... $ 103,801 $ 25,425 $ 4,258 $ 82,634 5.15%
---------- ----------- ----------- --------- -----
---------- ----------- ----------- --------- -----
Year ended December 31, 1997
Property-casualty..................................... $ 123,014 $ 41,531 $ 74 $ 81,557 0.09%
---------- ----------- ----------- --------- -----
---------- ----------- ----------- --------- -----
Year ended December 31, 1998
Property-casualty..................................... $ 134,436 $ 87,671 $ (143) $ 46,622 (0.31)%
---------- ----------- ----------- --------- -----
---------- ----------- ----------- --------- -----
</TABLE>
S-8
<PAGE>
SCHEDULE V
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING OF PROVISION FOR AT END
PERIOD NON-COLLECTION WRITE-OFFS OF PERIOD
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for non-collection of premiums receivable:
1996......................................................... $ 177 $ 1,768 $ (1,768) $ 177
----- ------ ----------- -----
----- ------ ----------- -----
1997......................................................... $ 177 $ 52 $ (114) $ 115
----- ------ ----------- -----
----- ------ ----------- -----
1998......................................................... $ 115 $ 152 $ (67) $ 200
----- ------ ----------- -----
----- ------ ----------- -----
Allowance for non-collection of reinsurance recoverables on
paid and unpaid losses:
1996......................................................... $ 614 $ 2,078 $ (2,201) $ 491
----- ------ ----------- -----
----- ------ ----------- -----
1997......................................................... $ 491 $ 527 $ (353) $ 665
----- ------ ----------- -----
----- ------ ----------- -----
1998......................................................... $ 665 $ 50 $ (110) $ 605
----- ------ ----------- -----
----- ------ ----------- -----
</TABLE>
S-9
<PAGE>
SCHEDULE VI
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(FOR PROPERTY-CASUALTY INSURANCE UNDERWRITERS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DISCOUNT PAID LOSSES
DEDUCTED AND LOSS
FROM ADJUSTMENT
RESERVES EXPENSES
--------- -----------
<S> <C> <C>
Year ended December 31, 1996 Property-casualty............................................. $ -- $ 53,408
--------- -----------
--------- -----------
Year ended December 31, 1997 Property-casualty............................................. $ -- $ 48,101
--------- -----------
--------- -----------
Year ended December 31, 1998 Property-casualty............................................. $ -- $ 49,738
--------- -----------
--------- -----------
</TABLE>
S-10
<PAGE>
Exhibit 1.1
$24,000,000
CHANDLER (U.S.A.), INC.
_______% SENIOR DEBENTURES DUE APRIL __, 2014
FORM OF UNDERWRITING AGREEMENT
------------------------------
April __, 1999
SOUTHWEST SECURITIES, INC.
1201 ELM STREET, SUITE 3500
Dallas, Texas 75270
Ladies and Gentlemen:
CHANDLER (U.S.A.), INC., an Oklahoma corporation (the "COMPANY"),
proposes to sell $24,000,000 of the Company's _____% Senior Debentures due 2014
(the "SECURITIES"). The Securities are to be issued pursuant to an indenture to
be dated as of the Effective Date (as defined below) (the "INDENTURE"), between
the Company and U.S. Trust Company of Texas, N.A., as trustee (the "TRUSTEE").
This Underwriting Agreement (the "AGREEMENT") sets forth the terms pursuant to
which the Company will issue and sell the Securities to Southwest Securities,
Inc. (the "UNDERWRITER").
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 (Registration
No. 333-___) and one or more amendments thereto with respect to the
Securities have (i) been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and the rules and regulations (the "RULES AND
REGULATIONS") of the Securities and Exchange Commission (the
"Commission") thereunder, (ii) been filed with the Commission under
the Securities Act and (iii) become effective under the Securities
Act. Copies of such registration statement and any amendments thereto
have been delivered by the Company to you as the Underwriter. As used
in this Agreement, "EFFECTIVE Time" means, with respect to the
Registration Statement, the date and the time as of which such
registration statement was declared effective by the Commission;
"EFFECTIVE DATE" means the date of the Effective Time of such
registration statement;
<PAGE>
"PRELIMINARY PROSPECTUS" means each prospectus included in the
Registration Statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Underwriter pursuant
to Rule 424(a) of the Rules and Regulations; "REGISTRATION STATEMENT"
means the Form S-1 registration statement (Registration No.
333-_____), as amended at the Effective Time, including any documents
incorporated by reference therein at such time and all information
contained in the final prospectus filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations in accordance with Section
5(a) hereof and deemed to be a part of such registration statements as
of the Effective Time pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations; and "PROSPECTUS" means such final prospectus,
as first filed with the Commission pursuant to paragraph (1 ) or (4)
of Rule 424(b) of the Rules and Regulations. The Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus.
(b) The Registration Statement conforms, in all material
respects, and the Prospectus and any further amendments or supplements
to the Registration Statement or the Prospectus will, when they become
effective or are filed with the Commission, as the case may be,
conform, in all material respects to the requirements of the
Securities Act and the Rules and Regulations and do not and will not,
as of the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto), contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; PROVIDED that no representation or warranty is
made as to (i) the Trustee's Statement of Eligibility and
Qualification (Form T-l) under the Trust Indenture Act of 1939, as
amended (the "TRUST INDENTURE ACT"), and (ii) information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information relating to
the Underwriter furnished to the Company by or on behalf of any
Underwriter specifically for inclusion therein (the "UNDERWRITER
INFORMATION"). The Indenture conforms in all respects to the
requirements of the Trust Indenture Act of 1939 and the rules and
regulations of the Commission thereunder.
(c) The authorized capital stock of National American Insurance
Company, a Nebraska corporation ("NAICO"), consists solely of 30,000
shares of common stock, par value $250 per share, 20,000 of which have
been duly and validly authorized and issued and are outstanding and
held of record and beneficially by the Company free and clear of any
and all liens, claims or other encumbrances; the authorized capital
stock of LaGere & Walkingstick Insurance Agency, Inc., an Oklahoma
corporation ("L&W" and, together with NAICO, the "Subsidiaries"),
consists solely of 50,000 shares of common stock, par value $1.00 per
share, ______ of which have been duly and validly authorized and
issued and are outstanding and held of record and beneficially by the
Company free and clear of any and all liens, claims or other
encumbrances; the authorized capital stock of the
<PAGE>
Company consists solely of 50,000 shares of common stock, par value
$1.00 per share, ______ of which have been duly and validly authorized
and issued and are outstanding and held of record and beneficially by
Chandler Insurance (Barbados), Ltd., a Barbados company ("CIB"); and
the authorized capital stock of CIB consists solely of __________,
__________ of which are issued and outstanding and held of record and
beneficially by Chandler Insurance Company, Ltd., a Cayman Islands
company ("CIC"). Except as described in the foregoing sentence, there
are no outstanding shares or shares of capital stock of NAICO, L&W,
the Company, or CIB or any other securities, rights (preemptive or
other), subscriptions, calls, warrants, options or other agreements
that give any person or entity the right to (i) purchase or otherwise
receive or be issued any shares or shares of capital stock or other
securities of NAICO, L&W, the Company, or CIB (or any interest
therein) or any security convertible into or exchangeable for any
shares or shares of capital stock or other securities of NAICO, L&W,
the Company, or CIB (or any interest therein), (ii) receive any
dividend, voting or ownership rights similar to those accruing to a
holder of such shares or shares of capital stock or other securities
as described in the foregoing sentence or (iii) participate in the
equity, income or election of directors or officers of NAICO, L&W, the
Company, or CIB.
(d) Except for the outstanding common stock of NAICO and L&W,
all of which is owned of record and beneficially by the Company,
neither the Company nor any Subsidiary owns or holds, directly or
indirectly, any capital stock or other equity interest in any company,
corporation, partnership, limited liability company, joint venture or
other entity other than equity securities held in the ordinary course
of investment activities which do not constitute 5% or more of the
outstanding capital stock or equity interest in any such company,
corporation, partnership, limited liability company, joint venture or
other entity.
(e) The Company and each of the Subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as foreign
corporations in each jurisdiction in which their respective ownership
or lease of property or the conduct of their respective businesses
requires such qualification, and have all power and authority
necessary to own or hold their respective properties and to conduct
the businesses in which they are engaged, except where the failure to
so qualify or have such power or authority would not, singularly or in
the aggregate, have a material adverse effect on the condition
(financial or otherwise), results of operations, business or prospects
of the Company and its Subsidiaries taken as a whole (a "MATERIAL
ADVERSE EFFECT").
(f) CIC is subject to and in full compliance with the reporting
requirements of Section 13 or 15(d) of the Exchange Act.
<PAGE>
(g) The Company has full right, power and authority to execute
and deliver this Agreement, the Indenture and the Securities
(collectively, the "TRANSACTION DOCUMENTS") and to perform its
obligations hereunder and thereunder; and all corporate authorization
required for the due and proper authorization, execution and delivery
of each of the Transaction Documents and the consummation of the
transactions contemplated thereby have been duly and validly given.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company.
(i) The Indenture has been duly authorized by the Company and,
when duly executed and delivered in accordance with its terms by each
of the parties thereto, will constitute a valid and legally binding
agreement of the Company enforceable against the Company in accordance
with its terms, except to the extent that such enforceability may be
limited by applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws affecting creditors'
rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing. On the Effective Date, the Indenture will
conform to the requirements of the Trust Indenture Act and the rules
and regulations of the Commission applicable to an indenture which is
qualified thereunder.
(j) The Securities have been duly authorized for issuance and
sale by the Company and, when duly executed, authenticated, issued and
delivered as provided in the Indenture and paid for as provided
herein, will be duly and validly issued and outstanding and will
constitute valid and legally binding obligations of the Company
entitled to the benefits of the Indenture and enforceable against the
Company in accordance with their terms, except to the extent that such
enforceability may be limited by applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar
laws affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
(k) The execution, delivery and performance by the Company of
each of the Transaction Documents, the issuance, authentication, sale
and delivery of the Securities and compliance by the Company with the
terms thereof and the consummation of the transactions contemplated by
the Transaction Documents will not (i) conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any of the Subsidiaries pursuant to any indenture,
mortgage, deed of trust, loan agreement or other material agreement or
instrument to which CIC or any of its subsidiaries (which include the
Company and the Subsidiaries) is a party or by which CIC or any of its
subsidiaries is bound or to which any of the
<PAGE>
property or assets of CIC or any of its subsidiaries is subject, (ii)
result in any violation of the provisions of the charter or by-laws of
CIC or any of its subsidiaries or any statute or any judgment, order,
decree, rule or regulation of any court or arbitrator or governmental
agency or body having jurisdiction over CIC or any of its subsidiaries
or any of their properties or assets or (iii) require any consent,
approval, authorization or order of, or filing or registration with,
any such court or arbitrator or governmental agency or body under any
such statute, judgment, order, decree, rule or regulation, except, in
the case of this clause (iii), for the registration of the Securities
under the Securities Act and such consents, approvals, authorizations,
filings, registrations or qualifications as may be required to be
obtained or made under the Trust Indenture Act (which shall have been
obtained or made prior to the Effective Date) and applicable state
Blue Sky or securities laws and rules of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the purchase
and distribution of the Securities by the Underwriter hereunder and
certain of their transferees or as described in the Prospectus.
(l) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Securities Act
with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in
any securities being registered pursuant to any registration statement
filed by the Company under the Securities Act.
(m) Neither the Company nor any of the Subsidiaries has
sustained, since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus, any material
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such
date, there has not been any material change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development which would reasonably be
expected to involve a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus.
(n) The Securities and the Indenture conform in all material
respects to the descriptions thereof contained in the Prospectus.
(o) The Company has previously delivered to the Underwriter true
and complete copies of the following (i) the Annual Statements of
NAICO for each of the years ended December 31, 1996, 1997 and 1998,
filed with the Nebraska Insurance Department (including the supporting
memorandum to the actuarial opinions given in connection with such
Annual Statements); and (ii) any annual statutory statements of
<PAGE>
NAICO that were filed for the year ended December 31, 1998, in any
jurisdiction (other than Nebraska) and which differ from the Annual
Statement for the year ended December 31, 1998. Each such statement
referred to in clauses (i) and (ii) above (A) complied in all material
respects with all applicable laws when so filed, (B) was prepared in
accordance with accounting practices required or permitted by the
insurance regulatory authority in the applicable state in which filed,
consistently applied throughout the specified period and in the
comparable period in the immediately preceding year ("SAP"), (C) is
true and complete in all material respects and (D) presents fairly the
financial position of NAICO as of the respective dates thereof and the
related summary of operations and changes in capital and surplus and
in cash flows of NAICO for and during the respective periods covered
thereby. No material deficiency has been asserted by any insurance
regulatory authority with respect to any such statement.
(p) Deloitte & Touche LLP are independent certified public
accountants with respect to the Company and the Subsidiaries within
the meaning of Rule 101 of the Code of Professional Conduct of the
American Institute of Certified Public Accountants ("AICPA") and its
interpretations and rulings thereunder. The historical financial
statements and financial statement schedules (including the related
notes) contained in the Prospectus and the Registration Statement
comply with the applicable requirements under the Securities Act and
the Securities Exchange Act of 1934 (the "EXCHANGE ACT") (including
the requirements of Regulation S-K and Regulation S-X promulgated
thereunder); such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods covered thereby and fairly present the
financial position of the entities purported to be covered thereby at
the respective dates indicated and the results of their operations and
their cash flows for the respective periods indicated; and the
financial information contained in the Prospectus under the headings
"Summary Financial Data," "Selected Consolidated Financial Data,"
"Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" are derived from
the accounting records of the Company and the Subsidiaries and fairly
present the information purported to be shown thereby. The other
historical financial and statistical information and data included in
the Registration Statement are fairly presented.
(q) The statutory reserves and other similar amounts with
respect to losses, benefits, claims, and expenses in respect of
NAICO's insurance business as established or reflected in the December
31, 1998, Annual Statement (i) were determined in accordance with SAP
and generally accepted actuarial assumptions, (ii) were in accordance
with the benefits and risks specified in the related insurance or
reinsurance contracts, and (iii) meet the requirements of the
insurance laws of each applicable jurisdiction. NAICO owns assets that
qualify as legal reserve assets under applicable insurance laws in an
amount at least equal to all such statutory reserves and other similar
amounts of NAICO.
(r) Except as described in the Prospectus, (i) there are no
legal or
<PAGE>
governmental proceedings pending to which CIC or any of its
subsidiaries is a party or of which any property or assets of the
Company or any of the Subsidiaries is the subject which, (A)
singularly or in the aggregate, if determined adversely to CIC or any
of its subsidiaries, could reasonably be expected to have a Material
Adverse Effect or (B) question the validity or enforceability of any
of the Transaction Documents or any action taken or to be taken
pursuant thereto, (ii) to the knowledge of the Company, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others and (iii) there are no writs, judgments,
decrees, injunctions, or similar orders of any person or entity
outstanding against CIC or any of its subsidiaries.
(s) No action has been taken and no statute, rule, regulation or
order has been enacted, adopted or issued by any governmental agency
or body which prevents the issuance of the Securities or suspends the
sale of the Securities in any jurisdiction; no injunction, restraining
order or order of any nature by any federal or state court of
competent jurisdiction has been issued with respect to CIC or any of
its subsidiaries which would prevent or suspend the issuance or sale
of the Securities or the use of the Preliminary Prospectus or the
Prospectus in any jurisdiction; no action, suit or proceeding is
pending against or, to the knowledge of the Company, threatened
against or affecting CIC or any of its subsidiaries before any court
or arbitrator or any governmental agency, body or official, domestic
or foreign, which could reasonably be expected to interfere with or
adversely affect the issuance of the Securities or in any manner draw
into question the validity or enforceability of any of the Transaction
Documents or any action taken or to be taken pursuant thereto; and, to
the knowledge of the Company, the Company has complied with any and
all requests by any securities authority in any jurisdiction for
additional information to be included in the Preliminary Prospectus
and the Prospectus.
(t) Neither the Company nor either Subsidiary is (i) in
violation of its charter or by-laws, (ii) in default, and no event has
occurred which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement or other material agreement or instrument to
which it is a party or by which it is bound or to which any of its
property or assets is subject or (iii) in violation of any law,
ordinance, governmental rule, regulation or court decree to which it
or its property or assets may be subject, except, in the case of
clause (ii) or (iii), such occurrences which, individually or in the
aggregate, have not had and could not reasonably be expected to have a
Material Adverse Effect or adversely affect the consummation of the
transactions contemplated by this Agreement.
(u) The Company and each of the Subsidiaries possess all
licenses, certificates, authorizations and permits issued by, and have
made all declarations and filings with, the appropriate federal, state
or foreign regulatory agencies or bodies which
<PAGE>
are required or necessary for the ownership of their respective
properties or the conduct of their respective businesses as described
in the Prospectus, except where the failure to possess or make the
same would not, singularly or in the aggregate, have a Material
Adverse Effect, and neither the Company nor any of its Subsidiaries
has received notification of any revocation or modification of any
such license, certificate, authorization or permit or has any reason
to believe that any such license, certificate, authorization or permit
will not be renewed in the ordinary course.
(v) SCHEDULE II attached hereto contains a true and complete
list of all jurisdictions in which NAICO is licensed to transact
insurance business and the lines of business for which NAICO is
licensed in each jurisdiction. NAICO owns or validly holds such
insurance licenses, which are valid and in full force and effect. No
such license to transact insurance business is the subject of a
proceeding for suspension or revocation or any similar proceeding and,
to the knowledge of the Company, there is no pending threat of such
suspension or revocation by any such licensing authority.
(w) All outstanding insurance policies, surety and fidelity
bonds and annuity contracts (collectively, "Insurance Contracts")
issued, reinsured or underwritten by NAICO are, to the extent required
under applicable laws, on forms and at rates approved by the insurance
regulatory authority of the jurisdiction where such insurance
contracts were issued or delivered or have been filed with and not
objected to by such authority within the period provided for
objection. All Insurance Contract benefits payable by NAICO or (to the
knowledge of the Company) by any other person or entity that is a
party to or bound by any reinsurance, coinsurance, or other similar
contract with NAICO have been paid in accordance with the terms of the
Insurance Contracts under which they arose, except for such benefits
for which the Company believes there is a reasonable basis to contest
payment. No outstanding Insurance Contract issued, reinsured or
underwritten by NAICO entitles the holder thereof or any other person
or entity to receive dividends, distributions, or other benefits based
on the revenues or earnings of NAICO or any other person or entity. To
the knowledge of the Company, all amounts to which NAICO is entitled
under reinsurance, coinsurance or other similar contracts (including
without limitation amounts based on paid and unpaid losses) are
collectible in the ordinary course of business. To the knowledge of
the Company, each insurance agent, at the time such agent wrote, sold,
or produced business for NAICO, was duly licensed as an insurance
agent (for the type of business written, sold, or produced by such
insurance agent) in the particular jurisdiction in which such agent
wrote, sold, or produced such business. To the knowledge of the
Company, each insurance agent, at the time such agent wrote, sold, or
produced business for L&W, was duly licensed as an insurance agent
(for the type of business written, sold, or produced by such insurance
agent) in the particular jurisdiction in which such agent wrote, sold,
or produced such business.
(x) Neither the Company nor any of the Subsidiaries is an
"investment
<PAGE>
company" or a company "controlled by" an investment company within the
meaning of the Investment Company Act of 1940 (the "Investment Company
Act") and the rules and regulations of the Commission thereunder.
(y) The Company and each of the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted
only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(z) The Company and each of the Subsidiaries own or possess
adequate rights to use all patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights, licenses and know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) (collectively, "IP
RIGHTS") used in the conduct of their respective businesses, except
where the failure to own or possess such IP Rights individually, or in
the aggregate, has not had and could not reasonably be expected to
have a Material Adverse Effect; the conduct of their respective
businesses has not and does not conflict with any such rights of
others, except for such conflicts about which neither the Company nor
any Subsidiary is aware and which conflicts, individually or in the
aggregate, have not had and could not reasonably be expected to have a
Material Adverse Effect; and neither the Company nor the Subsidiaries
has received any notice of any claim of conflict with any such rights
of others.
(aa) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to the Registration Statement.
(bb) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(cc) CIC and each of its subsidiaries is in compliance in all
material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to
any
<PAGE>
"pension plan" (as defined in ERISA) for which the Company or any
Subsidiary would have any liability; neither the Company nor any
Subsidiary has incurred or expects to incur liability under (i) Title
IV of ERISA with respect to termination of, or withdrawal from, any
"pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue
Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for
which the Company or any Subsidiary would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and, to the Company's knowledge,
nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
(dd) CIC and each of its subsidiaries have filed all federal,
state and local income and franchise tax returns required to be filed
through the date hereof and has paid, or made adequate reserve or
provision for the payment of, all taxes due thereon and no tax
deficiency has been determined adversely to CIC or any of its
subsidiaries which was not paid or satisfied in full prior to December
31, 1998.
(ee) Neither the Company nor any of its subsidiaries, nor, to the
Company's knowledge, any director, officer, agent, employee or other
person associated with or acting on behalf of the Company or any of
its subsidiaries, has used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense relating
to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate
funds; violated or is in violation of any provision of the Foreign
Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(ff) None of CIC or any of its subsidiaries does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Florida Statutes Section 517.075.
(gg) Since December 31, 1998, except as otherwise stated in the
Prospectus, (i) there has been no change or development which,
individually or in the aggregate with other changes or developments,
has had or reasonably could be expected to result in a Material
Adverse Effect, whether or not arising in the ordinary course of
business, (ii) none of the Company or any Subsidiary has incurred any
liability or obligation, direct or contingent, other than in the
ordinary course of business which is material to the Company and the
Subsidiaries taken as a whole, (iii) none of the Company or any
Subsidiary has entered into any transaction other than in the ordinary
course of business which is material to the Company and the
Subsidiaries taken as a whole, (iv) there has not been any change in
the capital stock or , except for changes that are not material to the
Company and the Subsidiaries taken as a whole, long-term debt of the
Company or any Subsidiary, and (v) there has not been any dividend or
distribution of any kind declared, paid or made by the Company or any
Subsidiary on any class of its capital stock.
<PAGE>
(hh) No forward-looking statement (within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act)
contained in the Preliminary Prospectus or the Prospectus has been
made or reaffirmed without a reasonable basis or has been made other
than in good faith.
2. PURCHASE AND OFFERING OF THE SECURITIES BY THE UNDERWRITER. On
the basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to issue and to sell
to the Underwriter, and the Underwriter agrees to purchase from the Company,
$24,000,000 principal amount of Securities at a purchase price equal to ____% of
the principal amount thereof. The Company shall not be obligated to deliver any
of the Securities to be delivered except upon payment for all the Securities to
be purchased as provided herein.
The Underwriter proposes to offer the Securities for sale upon the
terms and conditions set forth in the Prospectus.
3. DELIVERY OF AND PAYMENT FOR THE SECURITIES. Delivery of and
payment for the Securities shall be made at the offices of Vinson & Elkins
L.L.P., Dallas, Texas, or at such other place as shall be agreed upon by the
Underwriter and the Company, at 9:00 a.m., Dallas time, on __________, 1999, or
at such other time or date, not later than three full business days after the
date of this Agreement, as shall be agreed upon by the Underwriter and the
Company. This date and time are sometimes referred to as the "DELIVERY DATE." On
the Delivery Date, the Company shall deliver or cause to be delivered the
Securities to the Underwriter for the account of the Underwriter against payment
to or upon the order of the Company of the purchase price. On the Delivery Date,
the Underwriter shall deliver the purchase price to the Company by wire or
book-entry transfer of immediately available funds to such account as the
Company shall specify prior to the Delivery Date or by such other means as the
parties hereto shall agree prior to the Delivery Date. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Securities shall be in definitive fully registered form and
registered in such names and in such denominations as the Underwriter shall
request in writing not less than two full business days prior to the Delivery
Date. For the purpose of expediting the checking and packaging of the
Securities, the Company shall make the Securities available for inspection by
the Underwriter in [NEW YORK, NEW YORK], not later than 2:00 P.M., New York City
time, on the business day prior to the Delivery Date.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Underwriter and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than the Commission's close of business on the second
business day following the execution and delivery
<PAGE>
of this Agreement or, if applicable, such earlier time as may be required by
Rule 430A(a)(3) under the Securities Act; to make no further amendment or any
supplement to the Registration Statement or to the Prospectus except as
permitted herein; to advise the Underwriter, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Underwriter with copies thereof; to
advise the Underwriter, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or the Prospectus or for additional information;
and, in the event of the issuance of any stop order or of any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to obtain
its withdrawal;
(b) To furnish promptly to the Underwriter and to counsel for
the Underwriter a signed copy of the Registration Statement as originally filed
with the Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith;
(c) To deliver promptly to the Underwriter such number of the
following documents as the Underwriter shall reasonably request: (i) conformed
copies of the Registration Statement as originally filed with the Commission and
each amendment thereto (in each case excluding exhibits other than this
Agreement and the computation of per share earnings), (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus and (iii)
any document incorporated by reference in the Prospectus (excluding exhibits
thereto); and, if the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Securities and if
at such time any events shall have occurred as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made
when such Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary to amend or supplement the Prospectus in order to comply
with the Securities Act, to notify the Underwriter and, upon request of the
Underwriter, to prepare and furnish without charge to the Underwriter and to any
dealer in securities as many copies as the Underwriter may from time to time
reasonably request of an amended or supplemented Prospectus which will correct
such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the judgment of the Company or the Underwriter, be required by the
Securities Act or requested by the Commission;
<PAGE>
(e) Prior to filing with the Commission any (i) Preliminary
Prospectus, (ii) amendment to the Registration Statement or supplement to the
Prospectus or (iii) any Prospectus pursuant to Rule 424 of the Rules and
Regulations, to furnish a copy thereof to the Underwriter and counsel for the
Underwriter and obtain the consent of the Underwriter to the filing (which shall
not be unreasonably denied);
(f) As soon as practicable after the Effective Date to make
generally available to the Company's security holders and to deliver to the
Underwriter an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities Act and the
Rules and Regulations;
(g) For a period of five years following the Effective Date, to
furnish to the Underwriter copies of all materials furnished by the Company to
its shareholders and all public reports and all reports and financial statements
furnished by the Company to the principal national securities exchange upon
which the Securities may be listed pursuant to requirements of or agreements
with such exchange or to the Commission pursuant to the Exchange Act or any rule
or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the
Underwriter may reasonably request to qualify the Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriter may
reasonably request and to comply in all material respects with such laws so as
to permit the continuance of sales and dealings therein in such jurisdictions
for as long as may be reasonably necessary to complete the distribution of the
Securities, PROVIDED that in connection therewith the Company shall not be
required to (i) qualify as a foreign corporation in any jurisdiction where it is
not now so qualified or (ii) to file a general consent to service of process or
take any action which would subject the Company to (A) service of process in
suits or other judicial proceedings, other than those arising out of the
offering or sale of the Securities, and (B) taxation in any jurisdiction where
it is not now so subject.
(i) To apply the net proceeds from the sale of the Securities
being sold by the Company as set forth in the Prospectus.
5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter hereunder are subject to the accuracy, when made and on the Delivery
Date, of the representations and warranties of the Company contained herein, to
the performance by the Company of its obligations hereunder, and to each of the
following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 4(a); no stop order suspending
the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose shall have
been initiated or threatened by the Commission; and any request
<PAGE>
of the Commission for inclusion of additional information in the
Registration Statement or the Prospectus or otherwise shall have been
complied with.
(b) The Underwriter shall not have discovered and disclosed to
the Company on or prior to the Delivery Date that the Prospectus or
any amendment or supplement thereto contains an untrue statement of a
fact which, in the opinion of Vinson & Elkins L.L.P., counsel for the
Underwriter, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated
therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the
Indenture, the Securities, the Prospectus and all other legal matters
relating to this Agreement and the transactions contemplated hereby
shall be satisfactory in all material respects to counsel for the
Underwriter, and the Company shall have furnished to such counsel all
documents and information that they may reasonably request to enable
them to pass upon such matters.
(d) Gardere & Wynne, L.L.P. shall have furnished to the
Underwriter its written opinion, as counsel to the Company, addressed
to the Underwriter and dated the Delivery Date, in form and substance
reasonably satisfactory to the Underwriter, substantially to the
effect set forth in ANNEX A hereto.
(e) The Underwriter shall have received from Vinson & Elkins
L.L.P., counsel for the Underwriter, such opinion or opinions, dated
the Effective Date, with respect to such matters as the Underwriter
may reasonably require, and the Company shall have furnished to such
counsel such documents and information as it requests for the purpose
of enabling it to pass upon such matters.
(f) The Company shall have furnished to the Underwriter a letter
(the "INITIAL LETTER") of Deloitte & Touche LLP addressed to the
Underwriter and dated the date hereof, in form and substance
satisfactory to the Underwriter, substantially to the effect set forth
in ANNEX B hereto.
(g) The Company shall have furnished to the Underwriter a letter
(the "BRING-DOWN LETTER") of Deloitte & Touche LLP, addressed to the
Underwriter and dated the Delivery Date (i) confirming that they are
independent public accountants within the meaning of the Securities
Act and are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the Bring-Down Letter
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than three business
days prior to the date of the Bring-Down Letter), that the conclusions
and findings of such accountants with respect to the financial
information and other matters
<PAGE>
covered by the Initial Letter are accurate and (iii) confirming in all
material respects the conclusions and findings set forth in the
Initial Letter.
(h) The Company shall have furnished to the Underwriter a
certificate, dated the Delivery Date, of its Chairman of the Board,
its President or a Vice President and its Chief Financial Officer
stating that:
(i) The representations and warranties of the Company in
Section 1 are true and correct in all material respects as of
such Delivery Date; the Company has complied in all material
respects with all its agreements contained herein; and the
conditions set forth in Sections 5(a) and 5(i) have been
fulfilled in all material respects;
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of the
Effective Date, the Registration Statement and the Prospectus did
not include any untrue statement of a material fact and did not
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (B)
since the Effective Date no event has occurred which should have
been set forth in a supplement or amendment to the Registration
Statement or the Prospectus and was not so set forth; and
(iii) Subsequent to the date of the most recent financial
statements contained in the Prospectus there has been no material
adverse change in the financial position or results of operation
of the Company or any of the Subsidiaries or any change, or any
development which has had or reasonably could be expected to have
a Material Adverse Effect, except as set forth in the Prospectus.
(i) The Indenture shall have been duly executed and delivered by
the Company and the Trustee, and the Securities shall have been duly
executed and delivered by the Company and duly authenticated by the
Trustee.
(j) Subsequent to the execution and delivery of this Agreement
or, if earlier, the dates as of which information is given in the
Prospectus, there shall not have been any change in the capital stock
or long-term debt or any change, or any development involving a
prospective material adverse change, in or affecting the condition
(financial or otherwise), results of operations, business or prospects
of the Company and the Subsidiaries taken as a whole, the effect of
which, in any such case described above, is, in the judgment of the
Underwriter, so material and adverse as to make it impracticable or
inadvisable to proceed with the sale or delivery of the Securities on
the terms and in the manner contemplated by this Agreement or in the
Prospectus (exclusive of any
<PAGE>
amendment or supplement thereto).
(k) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency or body which would, as of the Delivery Date,
prevent the issuance or sale of the Securities; and no injunction,
restraining order or order of any other nature by any federal or state
court of competent jurisdiction shall have been issued as of the
Delivery Date which would prevent the issuance or sale of the
Securities.
(l) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange, the American
Stock Exchange or the over-the-counter market shall have been
suspended or limited, or minimum prices shall have been established on
any such exchange or market by the Commission, by any such exchange or
by any other regulatory body or governmental authority having
jurisdiction, or trading in any securities of the Company on any such
exchange or in the over-the-counter market shall have been suspended,
(ii) any moratorium on commercial banking activities shall have been
declared by federal or New York state authorities, (iii) an outbreak
or escalation of hostilities or a declaration by the United States of
a national emergency or war or (iv) a material adverse change in
general economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States
shall be such) the effect of which, in the case of clauses (iii) or
(iv), is, in the judgment of the Underwriter, so material and adverse
as to make it impracticable or inadvisable to proceed with the sale or
the delivery of the Securities on the terms and in the manner
contemplated by this Agreement and in the Prospectus.
(m) Subsequent to the execution and delivery of this Agreement
(i) no downgrading shall have occurred in the rating accorded the
Securities or NAICO by Standard & Poor's or A.M. Best Company, as
applicable, and (ii) no such organization or any other "nationally
recognized statistical rating organization," as such term is defined
by the Commission for purposes of Rule 436(g)(2) of the rules and
regulations of the Commission under the Securities Act shall have
publicly announced that it has under surveillance or review (other
than an announcement with positive implications of a possible
upgrading), its rating of the Securities or NAICO.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriter.
6. INDEMNIFICATION.
(a) The Company shall indemnify and hold harmless the
Underwriter, its
<PAGE>
affiliates, their respective officers, directors, employees, representatives and
agents, and each person, if any, who controls the Underwriter within the meaning
of the Securities Act or the Exchange Act (collectively referred to for purposes
of this Section 6(a) and Section 7 as the Underwriter), from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, without limitation, any loss, claim, damage, liability or
action relating to purchases and sales of the Securities), to which the
Underwriter may become subject, whether commenced or threatened, under the
Securities Act or any other federal or state statutory law or regulation, at
common law or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Prospectus, the
Registration Statement, the Prospectus or in any amendment or supplement thereto
or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and shall reimburse the Underwriter promptly upon demand for any
legal or other expenses reasonably incurred by the Underwriter in connection
with investigating or defending or preparing to defend against or appearing as a
third party witness in connection with any such loss, claim, damage, liability
or action as such expenses are incurred; PROVIDED, HOWEVER, that the Company
shall not be liable and shall not be required to indemnify the Underwriter in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, an untrue statement or alleged untrue
statement in or omission or alleged omission from the Preliminary Prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with the Underwriter Information; and
PROVIDED, FURTHER, that with respect to any such untrue statement in or omission
from the Preliminary Prospectus, the indemnity agreement contained in this
Section 6(a) shall not inure to the benefit of the Underwriter on account of any
such loss, claim, damage, liability or action arising from the sale of
Securities to any person by the Underwriter if the Underwriter failed to send or
give a copy of the Prospectus, as the same may be amended or supplemented, to
the person within the time required by the Securities Act and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was corrected
in the Prospectus, unless such failure resulted from the non-compliance by the
Company with Section 4(c). For the purpose of the last proviso to the
immediately preceding sentence, the term "Prospectus" shall not be deemed to
include the documents, if any, incorporated therein by reference, and the
Underwriter shall not be obligated to send or give any supplement or amendment
to any document, if any, incorporated by reference in any Preliminary Prospectus
or the Prospectus to any person other than a person to whom the Underwriter had
delivered such incorporated document or documents in response to a written
request therefor. The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to the Underwriter or to any
officer, employee or to any controlling person of the Underwriter.
(b) The Underwriter shall indemnify and hold harmless the
Company, its officers, directors, employees, representatives and agents, and
each person, if any, who controls
<PAGE>
the Company within the meaning of the Securities Act or the Exchange Act
(collectively referred to for purposes of this Section 6(b) and Section 7 as the
Company), from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company may become
subject, whether commenced or threatened, under the Securities Act or any other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in the Preliminary Prospectus, the Registration Statement or the
Prospectus, in any amendment or supplement thereto or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but in each case only
to the extent that the untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with the
Underwriter Information, and shall reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending or preparing to defend against or appearing as a third party witness
in connection with any such loss, claim, damage, liability or action as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying
party in writing of the claim or the commencement of that action; provided,
however, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have under this Section 6 except to the extent
that it has been materially prejudiced (through the forfeiture of substantive
rights or defenses) by such failure; and, provided, further, that the failure to
notify the indemnifying party shall not relieve it from any liability which it
may have to an indemnified party otherwise than under this Section 6. If any
such claim or action shall be brought against an indemnified party, the
indemnifying party shall be entitled to participate therein and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or action, the
indemnifying party shall not be liable to the indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that an indemnified party shall have
the right to employ its own counsel in any such action, but the fees, expenses
and other charges of such counsel for the indemnified party will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
the indemnified party has reasonably concluded (based upon advice of counsel to
the indemnified party) that there may be legal defenses available to it that are
different from or in addition to those available to the indemnifying party and
in the reasonable judgment of such counsel it is advisable for such indemnified
party to employ separate counsel to assert such defenses on its behalf, (iii) a
conflict or potential conflict exists (based upon advice of
<PAGE>
counsel to the indemnified party) between the indemnified party and the
indemnifying party (in which case the indemnifying party will not have the right
to direct the defense of such action on behalf of the indemnified party) or (iv)
the indemnifying party has not in fact employed counsel reasonably satisfactory
to the indemnified party to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees, disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees, disbursements and other charges of more than one separate
firm of attorneys (in addition to any local counsel) at any one time for all
such indemnified party or parties. Each indemnified party, as a condition of the
indemnity agreements contained in Sections 6(a) and 6(b), shall use all
reasonable efforts to cooperate with the indemnifying party in the defense of
any such action or claim. No indemnifying party shall be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final, nonappealable judgment for the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment. No indemnifying party shall, without the prior written
consent of the indemnified party (which consent shall not be unreasonably
withheld), effect any settlement of any pending or threatened proceeding in
respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
The obligations of the Company and the Underwriter in this Section 6
and in Section 7 are in addition to any other liability that the Company or the
Underwriter, as the case may be, may otherwise have, including in respect of any
breaches of representations, warranties and agreements made herein by any such
party.
7. CONTRIBUTION. If the indemnification provided for in Section 6 is
unavailable (other than in accordance with the express terms thereof) or
insufficient to hold harmless an indemnified party under Section 6(a) or 6(b),
then each indemnifying party shall, in lieu of indemnifying such indemnified
party, contribute to the amount paid or payable by such indemnified party as a
result of such loss, claim, damage or liability, or action in respect thereof,
(a) in such proportion as shall be appropriate to reflect the relative benefits
received by the Company on the one hand and the Underwriter on the other from
the offering of the Securities or (b) if the allocation provided by clause (a)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (a) above but
also the relative fault of the Company on the one hand and the Underwriter on
the other with respect to the statements or omissions that resulted in such
loss, claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriter on the other with respect
<PAGE>
to such offering shall be deemed to be in the same proportion as the total net
proceeds from the offering, of the Securities purchased under this Agreement
(after deducting discounts and commissions but before deducting expenses)
received by or on behalf of the Company, on the one hand, and the total
discounts and commissions received by the Underwriter with respect to the
Securities purchased under this Agreement, on the other, bear to the total gross
proceeds from the sale of the Securities under this Agreement, in each case as
set forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to the Company or information supplied by the
Company on the one hand or to the Underwriter's Information on the other, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The Company
and the Underwriter agree that it would not be just and equitable if
contributions pursuant to this Section 7 were to be determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section 7 shall be deemed
to include, for purposes of this Section 7, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending or preparing to defend any such action or claim. Notwithstanding
the provisions of this Section 7, the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total discounts and
commissions received by such Underwriter with respect to the Securities
purchased by it under this Agreement exceeds the amount of any damages which the
Underwriter has otherwise paid or become liable to pay by reason of any untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
8. TERMINATION. The obligations of the Underwriter hereunder may be
terminated by the Underwriter by notice given to and received by the Company
prior to delivery of and payment for the Securities if, prior to that time, any
of the events described in Sections [5(K) OR 5(1)] shall have occurred or if the
Underwriter shall decline to purchase the Securities for any reason permitted
under this Agreement.
9. EXPENSES. The Company shall pay (a) the costs incident to the
authorization, issuance, sale, preparation and delivery of the Securities and
any taxes payable in that connection; (b) the costs incident to the preparation,
printing and distribution of the Preliminary Prospectus, the Registration
Statement and any amendments or supplements thereto; (c) the costs of
distributing the Registration Statement as originally filed and each amendment
thereto and any post-effective amendments thereof (including, in each case,
exhibits), any Preliminary Prospectus, the Prospectus and any amendment or
supplement to the Prospectus or any document incorporated by reference therein,
all as provided in this Agreement; (d) the costs of reproducing and distributing
each of the Transaction Documents; (e) the costs incident to the preparation,
<PAGE>
printing and delivery of the certificates evidencing the Securities, including
stamp duties and transfer taxes, if any, payable upon issuance of the
Securities; (f) the fees and expenses of the Company's counsel and independent
accountants; (g) the fees and expenses of qualifying the Securities under the
securities laws of the several jurisdictions as provided in Section 4(h) and of
preparing, printing and distributing Blue Sky Memoranda (including related
reasonable fees and expenses of counsel for the Underwriter); (h) any fees
charged by rating agencies for rating the Securities; (i) the fees and expenses
of the Trustee and any paying agent (including related fees and expenses of any
counsel to such parties); (j) all expenses and application fees incurred in
connection with the application for the approval of the Securities for
book-entry transfer by DTC; (k) the Underwriter's out-of-pocket expenses
(including reasonable fees and disbursements of counsel) as shall have been
reasonably incurred by the Underwriter in connection with this Agreement and the
proposed purchase of the Securities as contemplated by that certain letter
agreement by and between the Company and the Underwriter dated January 18, 1999;
(l) fees and expenses of the Company and the Underwriter (including without
limitation airfare, hotel and other travel expenses) incurred in connection with
the road show; and (m) all other reasonable costs and expenses incident to the
performance of the obligations of the Company under this Agreement which are not
otherwise specifically provided for in this Section 9; provided, however, that
except as provided in this Section 9, the Underwriter shall pay its own costs
and expenses.
10. NOTICES, ETC. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriter, shall be delivered or sent by mail or
telecopy transmission to Southwest Securities, 1201 Elm Street, Suite
3500, Dallas, Texas 75270, Attention: Jack Greenman (telecopier no.:
(214) 859-9441), with a copy to Vinson & Elkins L.L.P., 3700 Trammell
Crow Center, 2001 Ross Avenue, Dallas, Texas 75201 Attention:
Rodney L. Moore (telecopier no.: (214) 220-7781); or
(b) if to the Company, shall be delivered or sent by mail or
telecopy transmission to the address of the Company set forth in the
Registration Statement, Attention: Brent LaGere (telecopier no.: (405)
258-3140), with a copy to Gardere & Wynne, L.L.P., 1601 Elm Street,
Suite 3000, Dallas, Texas 75201, Attention: David McLane (telecopier
no.: (214) 979-4667).
Any such statements, requests, notices or agreements shall take effect at the
time of receipt thereof. The Company shall be entitled to act and rely upon any
request, consent, notice or agreement given by the Underwriter.
11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the Underwriter, the Company, and
their respective successors. This Agreement and the terms and provisions hereof
are for the sole benefit of only those
<PAGE>
persons, except that (a) the representations, warranties, indemnities and
agreements of the Company contained in this Agreement shall also be deemed to be
for the benefit of the person or persons, if any, who are collectively referred
to as the Underwriter as indicated therein and (b) the indemnity agreement of
the Underwriter contained in Section 6(b) of this Agreement shall be deemed to
be for the benefit of the person or persons, if any, who are collectively
referred to as the Company as indicated therein. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 11, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
12. SURVIVAL. The respective indemnities, rights of contribution,
representations, warranties and agreements of the Company and the Underwriter
contained in this Agreement or made by or on behalf of the Company or the
Underwriter pursuant to this Agreement or any certificate delivered pursuant
hereto shall survive the delivery of and payment for the Securities and shall
remain in full force and effect, regardless of any termination or cancellation
of this Agreement or any investigation made by or on behalf of any of them or
any of their respective affiliates, officers, directors, employees,
representatives, agents or controlling persons.
13. DEFINITION OF THE TERMS "BUSINESS DAY" AND "SUBSIDIARY." For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 under the Securities Act.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
16. HEADINGS. The headings herein are inserted for convenience of
reference only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
If the foregoing correctly sets forth the agreement between the
Company and the Underwriter, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
CHANDLER (U.S.A.), INC.
<PAGE>
ACCEPTED:
SOUTHWEST SECURITIES, INC.
By
---------------------------
Name:
Title:
<PAGE>
SCHEDULE I
<PAGE>
SCHEDULE II
[STATES/LINES OF INSURANCE]
<PAGE>
ANNEX A
[Form of Opinion of Counsel for the Company]
Gardere & Wynne, L.L.P. (or, in the case of certain opinions related
to matters of Oklahoma or Nebraska law, such local counsel as reasonably
acceptable to Underwriter) shall have furnished to the Underwriter their written
opinion, as counsel to the Company, addressed to the Underwriter and dated the
Effective Date, in form and substance reasonably satisfactory to the
Underwriter, substantially to the effect set forth below (and with such
qualifications as may be appropriate and reasonably approved by the
Underwriter):
(i) the Company and each of its Subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as a foreign
corporations in each jurisdiction in which their respective ownership
or lease of property or the conduct of their respective businesses
requires such qualification, and have all power and authority
necessary to own or hold their respective properties and to conduct
the businesses in which they are engaged, except where the failure to
so qualify or have such power or authority would not, singularly or in
the aggregate, have a material adverse effect on the condition
(financial or otherwise), results of operations, business or prospects
of the Company and its Subsidiaries taken as a whole (a "MATERIAL
ADVERSE EFFECT");
(ii) each of NAICO and L&W is a corporation validly existing
and in good standing under the laws of the jurisdiction of its
incorporation, with full corporate power and authority to own, lease
and operate its properties and conduct its business as described in
the Prospectus;
(iii) The authorized capital stock of NAICO consists solely of
30,000 shares of common stock, par value $250 per share, 20,000 of
which have been duly and validly authorized and issued and are
outstanding and held of record and beneficially by the Company free
and clear of any and all liens, claims or other encumbrances; the
authorized capital stock of L&W consists solely of 50,000 shares of
common stock, par value $1.00 per share, ______ of which have been
duly and validly authorized and issued and are outstanding and held of
record and beneficially by the Company free and clear of any and all
liens, claims or other encumbrances; the authorized capital stock of
the Company consists solely of 50,000 shares of common stock, par
value $1.00 per share, ______ of which have been duly and validly
authorized and issued and are outstanding and held of record and
beneficially by Chandler Insurance (Barbados), Ltd., a Barbados
company ("CIB") free and clear of any and all liens, claims or other
encumbrances; and the authorized capital stock of CIB consists solely
of __________, __________ of which
<PAGE>
are issued and outstanding and held of record and beneficially by
Chandler Insurance Company, Ltd., a Cayman Islands company ("CIC").
Except as described in the foregoing sentence, there are no
outstanding shares or shares of capital stock of NAICO, L&W, the
Company, or CIB or any other securities, rights (preemptive or other),
subscriptions, calls, warrants, options or other agreements that give
any person or entity the right to (i) purchase or otherwise receive or
be issued any shares or shares of capital stock or other securities of
NAICO, L&W, the Company, or CIB (or any interest therein) or any
security convertible into or exchangeable for any shares or shares of
capital stock or other securities of NAICO, L&W, the Company, or CIB
(or any interest therein), (ii) receive any dividend, voting or
ownership rights similar to those accruing to a holder of such shares
or shares of capital stock or other securities as described in the
foregoing sentence or (iii) participate in the equity, income or
election of directors or officers of NAICO, L&W, the Company, or CIB;
(iv) the statements in the Prospectus under the caption
"Description of the Debentures," insofar as they purport to constitute
summaries of certain terms of documents referred to therein,
constitute accurate summaries of the terms of such documents in all
material respects;
(v) the statements in the Prospectus under the heading
"Certain United States Federal Income Tax Considerations," to the
extent that they constitute summaries of matters of law or regulation
or legal conclusions, have been reviewed by such counsel and fairly
summarize the matters purported to be described therein in all
material respects; and, to such counsel's knowledge, (a) there are no
current or pending legal or governmental actions, suits or proceedings
required to be described in the Prospectus that are not described
therein as required under the Securities Act and the Rules and
Regulations and (b) there is no contract, indenture, mortgage, loan
agreement, note, lease or other document that are required to be
described in the Prospectus S-1 that are not described as so required
under the Securities Act and Rules and Regulations;
(vi) the Indenture conforms in all material respects with the
requirements of the Trust Indenture Act and the rules and regulations
of the Commission applicable to an indenture which is qualified
thereunder;
(vii) the Company has full corporate power and authority to
execute and deliver each of the Transaction Documents and to perform
its obligations thereunder; and all corporate action required to be
taken by the Company for the due authorization, execution and delivery
of each of the Transaction Documents and the Company's consummation of
the transactions described therein have been duly and validly taken by
or on behalf of the Company;
(viii) the Underwriting Agreement has been duly authorized,
executed and
<PAGE>
delivered by the Company and constitutes a valid and legally binding
agreement of the Company enforceable against the Company in accordance
with its terms;
(ix) the Indenture has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution
and delivery thereof by the Trustee, constitutes a valid and legally
binding agreement of the Company enforceable against the Company in
accordance with its terms;
(x) the Securities have been duly authorized, executed, issued
and delivered by the Company and, assuming due authentication thereof
by the Trustee in accordance with the terms of the Indenture and upon
payment and delivery in accordance with the Underwriting Agreement,
will constitute valid and legally binding obligations of the Company
that are entitled to the benefits of the Indenture and enforceable
against the Company in accordance with their terms;
(xi) each Transaction Document conforms in all material
respects to the description thereof contained in the Prospectus;
(xii) the execution, delivery and performance by the Company of
each of the Transaction Documents, the issuance, sale and delivery of
the Securities by the Company thereunder, the compliance by the
Company with the terms thereof and the consummation of the
transactions described in the Transaction Documents will not (i)
conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant
to any indenture, mortgage, deed of trust, loan agreement or other
material agreement or instrument to which CIC or any of its
subsidiaries (which include the Company and the Subsidiaries) is a
party or by which CIC or any of its subsidiaries is bound or to which
any of the property or assets of CIC or any of its subsidiaries is
subject, (ii) result in any violation of the provisions of the charter
or by-laws of CIC or any of its subsidiaries or any statute or any
judgment, order, decree, rule or regulation of any court or arbitrator
or governmental agency or body having jurisdiction over CIC or any of
its subsidiaries or any of their properties or assets; or (iii)
require any consent, approval, authorization or order of, or filing or
registration with, any such court or arbitrator or governmental agency
or body under any such statute, judgment, order, decree, rule or
regulation, except, in the case of this clause (iii), for such
consents, approvals, authorizations, filings, registrations or
qualifications (A) which shall have been obtained or made prior to the
Effective Date or (B) as may be required to be obtained or made under
applicable state Blue Sky or securities laws in connection with the
offer or the issuance or sale of the Securities under the Underwriting
Agreement;
[(XIII) THE COMPANY AND EACH OF THE SUBSIDIARIES POSSESS ALL
LICENSES,
<PAGE>
CERTIFICATES, AUTHORIZATIONS AND PERMITS ISSUED BY, AND HAVE MADE ALL
DECLARATIONS AND FILINGS WITH, THE APPROPRIATE FEDERAL, STATE OR
FOREIGN REGULATORY AGENCIES OR BODIES WHICH ARE REQUIRED OR NECESSARY
FOR THE OWNERSHIP OF THEIR RESPECTIVE PROPERTIES OR THE CONDUCT OF
THEIR RESPECTIVE BUSINESSES AS DESCRIBED IN THE PROSPECTUS, EXCEPT
WHERE THE FAILURE TO POSSESS OR MAKE THE SAME WOULD NOT, SINGULARLY OR
IN THE AGGREGATE, HAVE A MATERIAL ADVERSE EFFECT, AND NEITHER THE
COMPANY NOR ANY OF ITS SUBSIDIARIES HAS RECEIVED NOTIFICATION OF ANY
REVOCATION OR MODIFICATION OF ANY SUCH LICENSE, CERTIFICATE,
AUTHORIZATION OR PERMIT OR HAS ANY REASON TO BELIEVE THAT ANY SUCH
LICENSE, CERTIFICATE, AUTHORIZATION OR PERMIT WILL NOT BE RENEWED IN
THE ORDINARY COURSE.]
(xiv) SCHEDULE I attached hereto contains a true list of all
jurisdictions in which NAICO is licensed to transact insurance
business and the lines of business for which NAICO is licensed in each
jurisdiction. [NAICO OWNS OR VALIDLY HOLDS SUCH INSURANCE LICENSES,
WHICH ARE VALID AND IN FULL FORCE AND EFFECT.] To our knowledge, no
such license to transact insurance business is the subject of a
pending proceeding for suspension or revocation or any similar
proceeding nor is any such suspension or revocation threatened in
writing by any such licensing authority.
(xv) to the knowledge of such counsel, there are no pending
actions or suits or judicial, arbitral, administrative or other
proceedings to which the Company or any of its subsidiaries is a party
or of which any property or assets of the Company or any of its
subsidiaries is the subject which (A) singularly or in the aggregate,
if determined adversely to the Company or any of its subsidiaries,
could reasonably be expected to have a Material Adverse Effect or (B)
questions the validity or enforceability of any of the Transaction
Documents or any action taken or to be taken pursuant thereto; and to
the knowledge of such counsel, no such proceedings have been
threatened in writing by governmental authorities or threatened by
others;
(xvi) neither the Company nor any of its Subsidiaries is an
"investment company" or a company "controlled by" an "investment
company" within the meaning of the Investment Company Act and the
rules and regulations of the Commission thereunder, without taking
account of any exemption under the Investment Company Act arising out
of the number of holders of the Company's securities;
(xvii) As of the date of the Prospectus and as of the Delivery
Date, the description of the litigation involving the CenTra Group set
forth under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of OperationsCCenTra Litigation," and
"Legal Proceedings" of the Prospectus did not contain and does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
<PAGE>
Such counsel shall also state that they have participated in
conferences with representatives of the Company, representatives of its
independent accountants and representatives of the Underwriter and their counsel
at which conferences the contents of the Prospectus were discussed and, although
such counsel assumes no responsibility for the accuracy, completeness or
fairness of statements contained in the Prospectus (except to the limited extent
expressly stated in paragraph (iv) and (xvi) above), nothing has come to the
attention of such counsel to cause such counsel to believe that either (i) the
Registration Statement contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (other than the financial statements contained therein, as to which
such counsel need express no belief) or (ii) the Prospectus contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (other than the financial statements
contained therein, as to which such counsel need express no belief).
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials which are furnished to the
Underwriter.
<PAGE>
ANNEX B
[Form of Initial Comfort Letter]
The Company shall have furnished to the Underwriter a letter of
Deloitte & Touche, LLP, addressed to the Underwriter and dated the date of the
Underwriting Agreement, in form and substance satisfactory to the Underwriter,
substantially to the effect set forth below:
(i) they are independent certified public accountants with
respect to the Company within the meaning of Rule 101 of the Code of
Professional Conduct of the AICPA and its interpretations and rulings;
(ii) in their opinion, the audited financial statements and
financial statement schedules included in the Registration Statement
and reported on by them comply in form in all material respects with
the accounting requirements of the Securities Act and the related
published rules and regulations of the Commission thereunder that
apply to the Registration Statement;
(iii) based upon a reading of minutes and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters and certain other limited procedures requested by
the Underwriter and described in detail in such letter, nothing has
come to their attention that causes them to believe that the
information included under the headings "Summary--Summary Consolidated
Financial Data," "Capitalization," "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and
"Business" is not in conformity with the disclosure requirements of
Regulation S-K that would apply to the Registration Statement;
(iv) based upon the procedures detailed in such letter with
respect to the period subsequent to the date of the last available
balance sheet, including reading of minutes and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters, nothing has come to their attention that causes
them to believe that (A) at a specified date not more than three
business days prior to the date of such letter, there was any change
in capital stock, increase in long-term debt or decrease in net
current assets as compared with the amounts shown in the [DECEMBER 31,
1998,] audited balance sheet included in the Registration Statement or
(B) for the period from [JANUARY 1, 1999,] to a specified date not
more than three business days prior to the date of such letter, there
were any decreases, as compared with the corresponding period in the
preceding year, in direct premiums written and assumed, net premiums
earned, EBITDA or net income, except in all instances for changes,
increases or decreases that the Registration Statement discloses have
occurred or which are set forth in such letter, in
<PAGE>
which case the letter shall be accompanied by an explanation by the
Company as to the significance thereof unless said explanation is not
deemed necessary by the Underwriter; and
[(V) FOR PURPOSES OF THIS LETTER WE HAVE READ THE 1999 MINUTES
OF THE STOCKHOLDERS, THE BOARD OF DIRECTORS, AND [INCLUDE OTHER
APPROPRIATE COMMITTEES, IF ANY] OF THE COMPANY AND ITS SUBSIDIARIES AS
SET FORTH IN THE MINUTE BOOKS AT JUNE 23, 1999 [OR JULY 20, 1999],
OFFICIALS OF THE COMPANY HAVING ADVISED US THAT THE MINUTES OF ALL
SUCH MEETINGS THROUGH THAT DATE WERE SET FORTH THEREIN; WE HAVE
CARRIED OUT OTHER PROCEDURES TO JUNE 23, 1999 [OR JULY 20, 1999] AS
FOLLOWS (OUR WORK DID NOT EXTEND TO THE PERIOD FROM JUNE 24, 1999, TO
JUNE 28, 1999, INCLUSIVE [ OR JULY 21, 1999, TO JULY 25, 1999]:
WITH RESPECT TO THE THREE-MONTH PERIODS ENDED MARCH 31, 1999 AND 1998,
WE HAVE:
(A) PERFORMED THE PROCEDURES SPECIFIED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS FOR A REVIEW OF INTERIM
FINANCIAL INFORMATION AS DESCRIBED IN SAS NO. 71, INTERIM
FINANCIAL INFORMATION, ON THE UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 1999, AND UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF INCOME, RETAINED EARNINGS
(STOCKHOLDERS' EQUITY), AND CASH FLOWS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1999 AND 1998, INCLUDED IN THE
REGISTRATION STATEMENT.
(B) INQUIRED OF CERTAIN OFFICIALS OF THE COMPANY WHO HAVE
RESPONSIBILITY FOR FINANCIAL AND ACCOUNTING MATTERS WHETHER THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO
IN (V)(A) COMPLY AS TO FORM IN ALL MATERIAL RESPECTS WITH THE
APPLICABLE ACCOUNTING REQUIREMENTS OF THE ACT AND THE RELATED
PUBLISHED RULES AND REGULATIONS.
(VI) WITH RESPECT TO THE PERIOD FROM APRIL 1, 1999 TO MAY 31,
1999 [OR THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998], WE HAVE:
(A) READ THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS1
OF THE COMPANY AND SUBSIDIARIES FOR APRIL AND MAY OF BOTH 1998
AND 1999 FURNISHED US BY THE COMPANY, OFFICIALS OF THE COMPANY
HAVING ADVISED US THAT NO SUCH FINANCIAL STATEMENTS AS OF ANY
DATE OR FOR ANY PERIOD SUBSEQUENT TO MAY 31, 1999, WERE
AVAILABLE.
- ----------
(1) If the interim financial information is incomplete, a sentence similar to
the following should be added: "The financial information for April and May
is incomplete in that it omits the statements of cash flows and other
disclosures."
<PAGE>
[OR (A) READ THE UNAUDITED AMOUNTS FOR SALES, NET INCOME, AND
EARNINGS PER SHARE FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
1999 AND 1998, AS SET FORTH IN PARAGRAPH (IDENTIFY
LOCATION).
(B) PERFORMED THE PROCEDURES SPECIFIED BY THE AMERICAN INSTITUTE
OF CERTIFIED PUBLIC ACCOUNTANTS FOR A REVIEW OF INTERIM
FINANCIAL INFORMATION AS DESCRIBED IN SAS NO. 71, INTERIM
FINANCIAL INFORMATION, ON THE UNAUDITED CONDENSED
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999, AND
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME,
RETAINED EARNINGS (STOCKHOLDERS' EQUITY), AND CASH FLOWS FOR
THE SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998, FROM
WHICH THE UNAUDITED AMOUNTS REFERRED TO IN (VI)(A) ARE
DERIVED.] ]
(B) [OR (C)] INQUIRED OF CERTAIN OFFICIALS OF THE COMPANY WHO
HAVE RESPONSIBILITY FOR FINANCIAL AND ACCOUNTING MATTERS WHETHER THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS REFERRED TO IN (VI)(A) ARE
STATED ON A BASIS SUBSTANTIALLY CONSISTENT WITH THAT OF THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION
STATEMENT.
THE FOREGOING PROCEDURES DO NOT CONSTITUTE AN AUDIT CONDUCTED IN
ACCORDANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS. ALSO, THEY WOULD NOT
NECESSARILY REVEAL MATTERS OF SIGNIFICANCE WITH RESPECT TO THE COMMENTS IN THE
FOLLOWING PARAGRAPH. ACCORDINGLY, WE MAKE NO REPRESENTATIONS REGARDING THE
SUFFICIENCY OF THE FOREGOING PROCEDURES FOR YOUR PURPOSES.
(VII) NOTHING CAME TO OUR ATTENTION AS A RESULT OF THE FOREGOING
PROCEDURES, HOWEVER, THAT CAUSED US2 TO BELIEVE THAT:
(A) (1) ANY MATERIAL MODIFICATIONS SHOULD BE MADE TO THE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DESCRIBED IN
(V)(A), INCLUDED IN THE REGISTRATION STATEMENT, FOR THEM TO
BE IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.3
- ----------
(2) If there had been a change in accounting principle during the interim
period, a reference to that change should be included herein.
(3) SAS No. 71 does not require the accountants to modify the report on a
review of interim financial information for a lack of consistency in the
application of accounting principles provided that the interim financial
information appropriately discloses such matters.
<PAGE>
(2) THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DESCRIBED IN (V)(A) DO NOT COMPLY AS TO FORM IN ALL MATERIAL
RESPECTS WITH THE APPLICABLE ACCOUNTING REQUIREMENTS OF THE
ACT AND THE RELATED PUBLISHED RULES AND REGULATIONS.
(B) (1) AT MAY 31, 1999, THERE WAS ANY CHANGE IN THE CAPITAL STOCK,
INCREASE IN LONG-TERM DEBT, OR DECREASE IN CONSOLIDATED NET
CURRENT ASSETS OR STOCKHOLDERS' EQUITY OF THE CONSOLIDATED
COMPANIES AS COMPARED WITH AMOUNTS SHOWN IN THE MARCH 31,
1999, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
INCLUDED IN THE REGISTRATION STATEMENT, OR (2)FOR THE PERIOD
FROM APRIL 1, 1999, TO MAY 31, 1999, THERE WERE ANY
DECREASES, AS COMPARED TO THE CORRESPONDING PERIOD IN THE
PRECEDING YEAR, IN CONSOLIDATED NET SALES OR IN THE TOTAL OR
PER-SHARE AMOUNTS OF INCOME BEFORE EXTRAORDINARY ITEMS OR OF
NET INCOME, EXCEPT IN ALL INSTANCES FOR CHANGES, INCREASES,
OR DECREASES THAT THE REGISTRATION STATEMENT DISCLOSES HAVE
OCCURRED OR MAY OCCUR.
[OR AT JUNE 30, 1999, THERE WAS ANY CHANGE IN THE
CAPITAL STOCK, INCREASE IN LONG-TERM DEBT OR ANY
DECREASES IN CONSOLIDATED NET CURRENT ASSETS OR
STOCKHOLDERS' EQUITY OF THE CONSOLIDATED COMPANIES AS
COMPARED WITH AMOUNTS SHOWN IN THE MARCH 31, 1999,
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET INCLUDED
IN THE REGISTRATION STATEMENT, EXCEPT IN ALL INSTANCES
FOR CHANGES, INCREASES, OR DECREASES THAT THE
REGISTRATION STATEMENT DISCLOSES HAVE OCCURRED OR MAY
OCCUR.]
AS MENTIONED IN (VI), COMPANY OFFICIALS HAVE ADVISED US THAT NO
CONSOLIDATED FINANCIAL STATEMENTS AS OF ANY DATE OR FOR ANY PERIOD SUBSEQUENT
TO MAY 31, 1999 [OR JUNE 30, 1999], ARE AVAILABLE; ACCORDINGLY, THE
PROCEDURES CARRIED OUT BY US WITH RESPECT TO CHANGES IN FINANCIAL STATEMENT
ITEMS AFTER MAY 31, 1999 [OR JUNE 30, 1999], HAVE, OF NECESSITY, BEEN EVEN
MORE LIMITED THAN THOSE WITH RESPECT TO THE PERIODS REFERRED TO IN (V). WE
HAVE INQUIRED OF CERTAIN OFFICIALS OF THE COMPANY WHO HAVE RESPONSIBILITY FOR
FINANCIAL AND ACCOUNTING MATTERS WHETHER (A) AT JUNE 23, 1999
[OR JULY 20, 1999], THERE WAS ANY CHANGE IN THE CAPITAL STOCK, INCREASE IN
LONG-TERM DEBT OR ANY DECREASES IN CONSOLIDATED NET CURRENT ASSETS OR
STOCKHOLDERS' EQUITY OF THE CONSOLIDATED COMPANIES AS COMPARED WITH AMOUNTS
SHOWN ON THE MARCH 31, 1999, UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
- ----------
(3) SAS No. 71 does not require the accountants to modify the report on a
review of interim financial information for a lack of consistency in the
application of accounting principles provided that the interim financial
information appropriately discloses such matters.
<PAGE>
INCLUDED IN THE REGISTRATION STATEMENT OR (B) FOR THE PERIOD FROM APRIL 1, 1999,
TO JUNE 23, 1999 [OR JULY 1, 1999 TO JULY 20, 1999], THERE WERE ANY DECREASES,
AS COMPARED WITH THE CORRESPONDING PERIOD IN THE PRECEDING YEAR, IN CONSOLIDATED
NET SALES OR IN THE TOTAL OR PER-SHARE AMOUNTS OF INCOME BEFORE EXTRAORDINARY
ITEMS OR OF NET INCOME. ON THE BASIS OF THESE INQUIRIES AND OUR READING OF THE
MINUTES AS DESCRIBED IN (IV OR V?), NOTHING CAME TO OUR ATTENTION THAT CAUSED US
TO BELIEVE THAT THERE WAS ANY SUCH CHANGE, INCREASE, OR DECREASE, EXCEPT IN ALL
INSTANCES FOR CHANGES, INCREASES, OR DECREASES THAT THE REGISTRATION STATEMENT
DISCLOSES HAVE OCCURRED OR MAY OCCUR.]
(v) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth or incorporated
by reference in the Registration Statement agrees with the accounting
records of the Company, excluding any questions of legal
interpretation.
<PAGE>
Exhibit 4.1
CHANDLER (U.S.A.), INC.
____% Senior Debentures due 2014
---------
FORM OF INDENTURE
Dated as of _______, 1999
---------
U.S. TRUST COMPANY OF TEXAS, N.A.
Trustee
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.1 Definitions............................................................................ 1
SECTION 1.2 Other Definitions...................................................................... 8
SECTION 1.3 Incorporation by Reference of Trust Indenture Act...................................... 8
SECTION 1.4 Rules of Construction.................................................................. 9
ARTICLE 2
The Debentures
SECTION 2.1 Form and Dating........................................................................ 9
SECTION 2.2 Execution and Authentication........................................................... 9
SECTION 2.3 Registrar and Paying Agent............................................................. 10
SECTION 2.4 Paying Agent To Hold Money in Trust.................................................... 10
SECTION 2.5 Debentureholder Lists.................................................................. 11
SECTION 2.6 Transfer............................................................................... 11
SECTION 2.7 Replacement Debentures................................................................. 12
SECTION 2.8 Outstanding Debentures................................................................. 12
SECTION 2.9 Temporary Debentures................................................................... 13
SECTION 2.10 Cancelation............................................................................ 13
SECTION 2.11 Defaulted Interest..................................................................... 13
SECTION 2.12 CUSIP Numbers.......................................................................... 13
ARTICLE 3
Redemption
SECTION 3.1 Notices to Trustee.................................................................... 14
SECTION 3.2 Selection of Debentures To Be Redeemed................................................ 14
SECTION 3.3 Notice of Redemption.................................................................. 14
SECTION 3.4 Effect of Notice of Redemption........................................................ 15
SECTION 3.5 Deposit of Redemption Price........................................................... 15
SECTION 3.6 Debentures Redeemed in Part........................................................... 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 4
Covenants
SECTION 4.1 Payment of Debentures................................................................. 16
SECTION 4.2 SEC Reports........................................................................... 16
SECTION 4.3 Limitation on Subsidiary Debt and Preferred Stock..................................... 17
SECTION 4.4 Limitation on Liens................................................................... 17
SECTION 4.5 Limitation on Sale and Leaseback Transactions......................................... 17
SECTION 4.6 Limitation on Mergers and Consolidations.............................................. 17
SECTION 4.7 Limitation on Issuances or Dispositions of Stock of Subsidiaries...................... 18
SECTION 4.8 Compliance Certificate................................................................ 18
SECTION 4.9 Further Instruments and Acts.......................................................... 18
ARTICLE 5
Defaults and Remedies
SECTION 5.1 Events of Default..................................................................... 18
SECTION 5.2 Acceleration.......................................................................... 20
SECTION 5.3 Other Remedies........................................................................ 21
SECTION 5.4 Waiver of Past Defaults............................................................... 21
SECTION 5.5 Control by Majority................................................................... 21
SECTION 5.6 Limitation on Suits................................................................... 21
SECTION 5.7 Rights of Holders To Receive Payment.................................................. 22
SECTION 5.8 Collection Suit by Trustee............................................................ 22
SECTION 5.9 Trustee May File Proofs of Claim...................................................... 22
SECTION 5.10 Priorities............................................................................ 22
SECTION 5.11 Undertaking for Costs................................................................. 23
SECTION 5.12 Waiver of Stay or Extension Laws...................................................... 23
ARTICLE 6
Trustee
SECTION 6.1 Duties of Trustee..................................................................... 23
SECTION 6.2 Rights of Trustee..................................................................... 25
SECTION 6.3 Individual Rights of Trustee.......................................................... 26
SECTION 6.4 Trustee's Disclaimer.................................................................. 26
SECTION 6.5 Notice of Defaults.................................................................... 26
SECTION 6.6 Reports by Trustee to Holders......................................................... 26
SECTION 6.7 Compensation and Indemnity............................................................ 26
SECTION 6.8 Replacement of Trustee................................................................ 27
SECTION 6.9 Successor Trustee by Merger........................................................... 28
SECTION 6.10 Eligibility; Disqualification......................................................... 28
SECTION 6.11 Preferential Collection of Claims Against Company..................................... 29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 7
Discharge of Indenture; Defeasance
SECTION 7.1 Discharge of Liability on Debentures; Defeasance...................................... 29
SECTION 7.2 Conditions to Defeasance.............................................................. 30
SECTION 7.3 Application of Trust Money............................................................ 31
SECTION 7.4 Repayment to Company.................................................................. 31
SECTION 7.5 Indemnity for Government Obligations.................................................. 31
SECTION 7.6 Reinstatement......................................................................... 31
ARTICLE 8
Amendments
SECTION 8.1 Without Consent of Holders............................................................ 32
SECTION 8.2 With Consent of Holders............................................................... 32
SECTION 8.3 Compliance with Trust Indenture Act................................................... 33
SECTION 8.4 Revocation and Effect of Consents and Waivers......................................... 33
SECTION 8.5 Notation on or Exchange of Debentures................................................. 34
SECTION 8.6 Trustee To Sign Amendments............................................................ 34
ARTICLE 9
Miscellaneous
SECTION 9.1 Trust Indenture Act Controls.......................................................... 34
SECTION 9.2 Notices............................................................................... 34
SECTION 9.3 Communication by Holders with Other Holders........................................... 35
SECTION 9.4 Certificate and Opinion as to Conditions Precedent.................................... 35
SECTION 9.5 Statements Required in Certificate or Opinion......................................... 35
SECTION 9.6 When Debentures Disregarded........................................................... 36
SECTION 9.7 Rules by Trustee, Paying Agent and Registrar.......................................... 36
SECTION 9.8 Legal Holidays........................................................................ 36
SECTION 9.9 GOVERNING LAW......................................................................... 36
SECTION 9.10 No Recourse Against Others............................................................ 36
SECTION 9.11 Successors............................................................................ 37
SECTION 9.12 Multiple Originals.................................................................... 37
SECTION 9.13 Table of Contents; Headings........................................................... 37
</TABLE>
<PAGE>
Appendix -- Provisions Relating to Debentures
Exhibit I -- Form of Debenture
Exhibit II -- Assignment Form
Exhibit III -- Form of Letter of Representation
<PAGE>
INDENTURE dated as of ______, 1999, between CHANDLER (U.S.A.), INC., an
Oklahoma corporation (the "COMPANY"), and U.S. TRUST COMPANY OF TEXAS, N.A., as
trustee (the "TRUSTEE").
Each party agrees as follows for the benefit of the other parties and
for the equal and ratable benefit of the Holders of the Company's ____% Senior
Debentures due 2014 issued on the date hereof ("DEBENTURES"). Except as
otherwise provided herein, the Debentures will be limited to $24,000,000 in
aggregate principal amount outstanding.
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 DEFINITIONS.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount of
rent required to be paid by such Person under such lease during the initial term
thereof as determined in accordance with GAAP, discounted from the last date of
such initial term to the date of determination at a rate per annum equal to the
discount rate which would be applicable to a Capital Lease Obligation with like
term in accordance with GAAP. The net amount of rent required to be paid under
any such lease for any such period shall be the aggregate amount of rent payable
by the lessee with respect to such period after excluding amounts required to be
paid on account of insurance, taxes, assessments, utility, operating and labor
costs and similar charges. In the case of any lease which is terminable by the
lessee upon the payment of a penalty, such net amount shall also include the
amount of such penalty, but no rent shall be considered as required to be paid
under such lease subsequent to the first date upon which it may be so
terminated. "Attributable Value" means, as to a Capital Lease Obligation under
which any Person is at the time liable and at any date as of which the amount
thereof is to be determined, the capitalized amount thereof that would appear on
the face of a balance sheet of such Person in accordance with GAAP.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
<PAGE>
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Debt arrangements
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP. The stated
maturity of such obligation shall be the date of the last payment of rent or any
other amount due under such lease or other Debt arrangements prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person.
"Closing Date" means ____, 1999.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it under this Indenture and, thereafter, means the successor
and, for purposes of any provision contained herein and required by the TIA,
each other obligor on the indenture securities.
"Company Request," "Company Order" and "Company Consent" mean a written
request, order or consent, respectively, signed in the name of the Company by
its Chairman of the Board, Chief Executive Officer, Chief Operating Officer,
President or a Vice President, and by its Treasurer, an Assistant Treasurer,
Controller, an Assistant Controller, Secretary or an Assistant Secretary, and
delivered to the Trustee.
"Consolidated Subsidiaries" of any Person means all other Persons that
would be accounted for as consolidated Persons in such Person's financial
statements in accordance with GAAP.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be administered, which
office at the date hereof is located at 2001 Ross Avenue, Suite 2700, Dallas,
Texas 75201.
"Debentures" means the Debentures issued under this Indenture.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds (other
<PAGE>
than surety or fidelity bonds issued by such Person in the ordinary course of
business), debentures, notes or other similar instruments, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such Person
other than as entered into in the ordinary course of business, (iv) every
obligation of such Person issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business), (v) every Capital Lease
Obligation of such Person, (vi) the maximum fixed redemption or repurchase price
of Redeemable Stock of such Person at the time of determination, (vii) every
payment obligation of such Person under interest rate swap or similar agreements
or foreign currency hedge, exchange or similar agreements at the time of
determination and (viii) every obligation of the type referred to in clauses (i)
through (vii) of another Person and all dividends of another Person the payment
of which, in either case, such Person has Guaranteed or is responsible or
liable, directly or indirectly, as obligor, guarantor or otherwise and such
obligations secured by (or for which the holder of such obligation has an
existing right, contingent or otherwise, to be secured by) any Lien on property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such obligation; PROVIDED, that if the obligation so secured has not been
assumed in full by such Person or is otherwise not such Person's legal liability
in full, the amount of such obligation for the purposes of this definition shall
be limited to the lesser of the amount of such obligation secured by such Lien
or the fair market value of the assets or property securing such Lien.
Notwithstanding the foregoing, the term "Debt" shall not include obligations
owed under the terms of insurance or reinsurance policies or agreements.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States, consistently applied, that are in effect from time to time.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person guaranteeing or having the economic effect of
guaranteeing any Debt of any other Person (the "primary obligor") in any manner,
whether directly or indirectly, and including without limitation any obligation
of such Person, (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or to purchase (or to advance or supply funds
for the purchase of) any security for the payment of such Debt, (ii) to purchase
property, securities or services for the purpose of assuring the holder of such
Debt of the payment of such Debt or (iii) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed"
and "Guaranteeing" shall have meanings correlative to the foregoing); PROVIDED,
HOWEVER, that the Guarantee by a Person shall not include endorsements by such
Person for collection or deposit in the ordinary course of business.
"Holder" or "Debentureholder" means the Person in whose name a
Debenture is
<PAGE>
registered on the Registrar's books.
"Incur" means, with respect to any Debt or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
other obligation on the balance sheet of such Person (and "Incurrence,"
"Incurred," "Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); PROVIDED, HOWEVER, that a change in GAAP that results in an
obligation of such Person that exists at such time becoming Debt shall not be
deemed an Incurrence of such Debt.
"Indenture" means this Indenture as amended and supplemented from time
to time.
"Issue Date" means the date on which the Debentures are originally
issued.
"Lien" means, with respect to any property or assets, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit agreement, security
interest, lien, charge, easement (other than any title defect or easement not
materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Officer" means the Chairman of the Board, the Chief Executive Officer,
the Chief Financial Officer, the President, any Vice President, the Treasurer or
the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Debt and Preferred Stock" means (i) Debt outstanding on the
Issue Date after giving effect to the application of the proceeds from the
Debentures, (ii) Debt or Preferred Stock issued to and held by the Company or a
Wholly Owned Subsidiary of the Company, but only so long as held or owned by the
Company or a Wholly Owned Subsidiary of the Company; (iii) Debt Incurred or
Preferred Stock issued by a Person prior to the time (A) such Person became a
Subsidiary of the Company, (B) such Person merges into or consolidates with a
Subsidiary of the Company or (C) another Subsidiary of the Company merges into
or consolidates with such Person (in a transaction in which such Person becomes
a Subsidiary of the Company), or Debt Incurred or Preferred Stock issued by a
Person and thereafter assumed by a Subsidiary of the Company in a transaction in
which the property of such Person is sold, leased or otherwise disposed of as an
entirety or substantially as an entirety to such Subsidiary, in each such case
in which such Debt or Preferred Stock was not Incurred or issued in anticipation
of such transaction; (iv) Debt Incurred for the purpose of financing all or any
part of the purchase price
<PAGE>
or the cost of construction of or improvements to the present or future
property, whether real or personal, of the Company or any Subsidiary
incurring such debt in an aggregate principal amount not to exceed the
greater of the fair
market value or actual cost of acquisition or construction of such property,
construction or improvements (or additions to improvements); (v) Debt or
Preferred Stock that is exchanged for, or the proceeds of which are used to
refinance or refund, any Debt or Preferred Stock permitted to be outstanding
pursuant to clauses (i) through (iv) (or any extension or renewal thereof) (A)
in an aggregate principal amount not to exceed the principal amount of the Debt,
in the case of Debt, or the liquidation preference of the Preferred Stock, in
the case of Preferred Stock, so exchanged, refinanced or refunded and (B)
provided that such Debt or Preferred Stock does not require the payment of all
or a portion of the principal or liquidation value thereof (whether pursuant to
purchase, redemption, defeasance, retirement, sinking fund payment, payment at
stated maturity or otherwise, but excluding any payment or retirement required
by virtue of acceleration of such Debt upon an event of default thereunder or
"change of control" or similar provision thereunder) prior to the scheduled
maturity or maturities of the Debt or Preferred Stock being refinanced or
refunded; (vi) Debt arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations Incurred in connection with
the disposition of any business assets of any Subsidiary of the Company, or from
guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of any Subsidiary of the Company pursuant to such agreements, (other
than Guarantees of Debt or other obligations Incurred by any Person acquiring
all or any portion of such business assets for the purpose of financing such
acquisition) in a principal amount not to exceed the gross proceeds actually
received by any such Subsidiary in connection with such disposition; and (vii)
Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (vi)
above) which, together with the sum of all other outstanding Debt Incurred
pursuant to this clause (vii), has an aggregate principal amount not in excess
of $2.0 million.
"Permitted Liens" means (i) Liens securing only the Debentures; (ii)
Liens in favor of the Company; (iii) Liens on property of a Person existing at
the time (A) such Person becomes a Subsidiary of the Company, (B) is merged into
or consolidated with the Company (or any Subsidiary of the Company) or any
Subsidiary of the Company merges into or consolidates with such Person or (C)
the property of such Person is sold, leased or otherwise disposed of as an
entirety or substantially as an entirety to the Company or a Subsidiary thereof,
in each such case not securing Debt Incurred in anticipation of such
transaction; (iv) Liens on property existing at the time of acquisition thereof;
(v) Liens on property of the Company or any Subsidiary of the Company securing
(A) all or any portion of the cost of acquiring, constructing, altering,
improving or repairing any property, real or personal, or improvements used or
to be used in connection with such property or (B) Debt Incurred by the Company
or any Subsidiary of the Company prior to or within one year after the later of
the acquisition, the completion of construction, alteration, improvement or
repair, or the commencement of commercial operation thereof, which Debt is
Incurred for the purpose of financing all or any part of the purchase price
thereof or such construction, alteration, improvement or repair, provided that,
in the case of clause (A) or (B) above, such Liens (1) are created not later
than one year after such acquisition,
<PAGE>
construction, alteration, improvement or repair, or the commencement of
commercial operation, whichever is later, (2) are limited to the property
acquired, constructed, altered, approved or repaired and (3) do not secure Debt
in excess of the cost of such acquisition, construction, alteration, improvement
or repair; (vi) Liens in favor of the United States of America or any State,
territory or possession thereof (or the District of Columbia), or any
department, agency, instrumentality or political subdivision of the United
States of America or any State, territory or possession thereof (or the District
of Columbia), to secure partial, progress, advance or other payments pursuant to
any contract or statute or to secure any Debt incurred for the purpose of
financing all or any part of the purchase price or the cost of constructing or
improving the property subject to such Liens; (vii) Liens in favor of any
insurance company to secure the obligations of any Subsidiary under any
insurance or reinsurance agreement or arrangement (whether faculative or treaty)
granted or incurred in the ordinary course of business to the extent required
under such insurance or reinsurance agreement or arrangement; (viii) mechanics',
workmen's, materialmen's or similar Liens arising in the ordinary course of
business; (ix) Liens to secure any extension, renewal, refinancing or refunding
(or successive extensions, renewals, refinancings or refundings), in whole or in
part, of any Debt secured by Liens referred to in the foregoing clauses (i) to
(vii) so long as such Lien does not extend to any other property (other than
improvements to such property) and the principal amount of the Debt so secured
is not increased; (x) Liens to secure Debt in an aggregate principal amount not
to exceed $2.0 million at any one time outstanding (without duplication of any
other Debt specified in clauses (i) through (ix) above or clauses (xi) or (xii)
below); (xi) Liens securing Debt owed by the Company to one or more Wholly Owned
Subsidiaries of the Company (but only if such Debt is held by such Wholly Owned
Subsidiaries); and (xii) pledges or deposits by such Person under worker's
compensation laws, unemployment insurance laws or similar legislation, or good
faith deposits in connection with bids, tenders, contracts (other than for the
payment of Debt) or leases to which such Person is a party, or deposits to
secure public or statutory obligations of such Person or deposits of cash or
United States government bonds or other fixed maturity obligations to secure
performance, surety or appeal bonds to which such Person is a party or which are
otherwise required of such Person, or deposits as security for insurance or
reinsurance obligations contested taxes or import duties or for the payment of
rent or other obligations of like nature, in each case incurred in the ordinary
course of business.
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of any other class of Capital Stock of such Person.
"principal" of a Debenture means the principal of the Debenture plus
the premium, if any, payable on the Debenture that is due or overdue or is to
become due at the relevant time.
<PAGE>
"Redeemable Stock" of any Person means any equity security of such
Person that by its terms or otherwise is required to be redeemed prior to the
Stated Maturity of the Debentures or is redeemable at the option of the holder
thereof at any time prior to the Stated Maturity of the Debentures.
"Sale and Leaseback Transaction" of any Person means an arrangement
with any lender or investor or to which such lender or investor is a party
providing for the leasing by such Person of any Principal Property of such
Person which has been or is being sold or transferred by such Person more than
one year after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any Person to
whom funds have been or are to be advanced by such lender or investor on the
security of such property or asset. The stated maturity of such arrangement
shall be the date of the last payment of rent or any other similar amount due
under such arrangement prior to the first date on which such arrangement may be
terminated by the lessee without payment of a penalty.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means any Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency beyond the control of the issuer unless such
contingency has occurred).
"Subsidiary" means, with respect to any Person, any corporation more
than 50% of the outstanding voting stock of which is owned, directly or
indirectly, by such Person, and any partnership, association, limited liability
company, business trust, joint venture or other entity in which such Person owns
more than 50% of the equity interests or has the power (i) to elect a majority
of the board of directors or other governing body or (ii) to direct the
policies, management or affairs thereof.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb), as amended.
"Trustee" means the party named as such in this Indenture until a
successor replaces it hereunder and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President, Vice
President or any other officer or assistant officer of the Trustee assigned by
the Trustee to administer its corporate trust matters.
<PAGE>
"Uniform Commercial Code" means the New York Uniform Commercial Code as
in effect from time to time.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person or by
such Person and one or more Wholly Owned Subsidiaries of such Person.
SECTION 1.2 OTHER DEFINITIONS.
<TABLE>
<CAPTION>
DEFINED IN
TERM SECTION
- ---- -------
<S> <C>
"Bankruptcy Law" 5.1
"covenant defeasance option" 7.1(b)
"Custodian" 5.1
"Defaulted Interest" 2.11
"Event of Default" 5.1
"Insurance Law" 5.1
"legal defeasance option" 7.1(b)
"Legal Holiday" 9.8
"Paying Agent" 2.3
"protected purchaser" 2.7
"Registrar" 2.3
</TABLE>
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. This
Indenture is subject to the mandatory provisions of the TIA, which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Debentures.
"indenture security holder" means a Holder or Debentureholder.
"indenture to be qualified" means this Indenture.
<PAGE>
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the indenture securities.
All other TIA terms used but not otherwise defined in this Indenture
that are defined by the TIA, defined by TIA reference to another statute or
defined by SEC rule have the meanings assigned to them by such definitions.
SECTION 1.4 RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the
plural include the singular;
(6) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP;
(7) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with respect
to such Preferred Stock, whichever is greater.
ARTICLE 2
THE DEBENTURES
SECTION 2.1 FORM AND DATING. Provisions relating to the Debentures are
set forth in APPENDIX, which is hereby incorporated in and expressly made a part
of this Indenture. The Debentures and the Trustee's certificate of
authentication with respect thereto shall each be substantially in the form of
EXHIBIT I hereto, which is hereby incorporated in and expressly made a part of
this Indenture. The Debentures may have notations, legends or endorsements
required by law, stock exchange rule, agreements to which the Company is
subject, if any, or usage (provided that any such notation, legend or
endorsement is in a form acceptable to the Company). The Debenture shall be
dated the date of its authentication.
<PAGE>
SECTION 2.2 EXECUTION AND AUTHENTICATION. One or more Officers shall
sign the Debentures for the Company by manual or facsimile signature.
If an Officer whose signature is on a Debenture no longer holds that
office at the time the Trustee authenticates the Debenture, the Debenture shall
be valid nevertheless.
A Debenture shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Debenture. The
signature shall be conclusive evidence that the Debenture has been authenticated
under this Indenture.
The Trustee shall authenticate and make available for delivery
Debentures as set forth in the Appendix.
The Trustee may appoint an authenticating agent reasonably acceptable
to the Company to authenticate the Debentures. Any such appointment shall be
evidenced by an instrument signed by a Trust Officer, a copy of which shall be
furnished to the Company. Unless limited by the terms of such appointment, an
authenticating agent may authenticate Debentures whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent and provide the Trustee with a copy of the
agreement. An authenticating agent has the same rights as any Registrar, Paying
Agent or agent for service of notices and demands.
SECTION 2.3 REGISTRAR AND PAYING AGENT. The Company shall maintain an
office or agency where Debentures may be presented for registration of transfer
or for exchange (the "Registrar") and an office or agency where Debentures may
be presented for payment (the "Paying Agent"). The Registrar shall keep a
register of the Debentures and of their transfer and exchange. The Company may
have one or more co-registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent, and the term
"Registrar" includes any coregistrars. The Company initially appoints the
Trustee as (i) Registrar and Paying Agent in connection with the Debentures and
(ii) the Debentures Custodian (as defined in the Appendix) with respect to the
Global Debentures (as defined in the Appendix).
The Company shall enter into an appropriate agency agreement with any
Registrar or Paying Agent not a party to this Indenture, which shall incorporate
the terms of the TIA. The agreement shall implement the provisions of this
Indenture that relate to such agent. The Company shall notify the Trustee of the
name and address of any such agent and provide the Trustee with a copy of the
agreement. If the Company fails to maintain a Registrar or Paying Agent, the
Trustee shall act as such and shall be entitled to appropriate compensation
therefor pursuant to Section 6.7. The Company or any of its domestically
organized Wholly Owned Subsidiaries may act as Paying Agent or Registrar.
The Company may remove any Registrar or Paying Agent upon written
notice to such
<PAGE>
Registrar or Paying Agent and to the Trustee; PROVIDED, HOWEVER, that no such
removal shall become effective until acceptance of an appointment by a successor
as evidenced by an appropriate agreement entered into by the Company and such
successor Registrar or Paying Agent, as the case may be, and delivered to the
Trustee. The Registrar or Paying Agent may resign at any time upon written
notice; PROVIDED, HOWEVER, that the Trustee may resign as Paying Agent or
Registrar only if the Trustee also resigns as Trustee in accordance with Section
6.8.
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST. Prior to each due date
of the principal and interest on any Debenture, the Company shall deposit with
the Paying Agent (or if the Company or a Subsidiary is acting as Paying Agent,
segregate and hold in trust for the benefit of the Persons entitled thereto) a
sum sufficient to pay such principal and interest when so becoming due. The
Company shall require each Paying Agent (other than the Trustee) to agree in
writing that the Paying Agent shall hold in trust for the benefit of
Debentureholders or the Trustee all money held by the Paying Agent for the
payment of principal of or interest on the Debentures and shall notify the
Trustee of any default by the Company in making any such payment. If the Company
or a Subsidiary of the Company acts as Paying Agent, it shall segregate the
money held by it as Paying Agent and hold it as a separate trust fund. The
Company at any time may require a Paying Agent other than the Trustee to pay all
money held by it to the Trustee and to account for any funds disbursed by the
Paying Agent. Upon complying with this Section, the Paying Agent shall have no
further liability for the money delivered to the Trustee.
SECTION 2.5 DEBENTUREHOLDER LISTS. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Debentureholders. If the Trustee is not the
Registrar, the Company shall furnish, or cause the Registrar to furnish, to the
Trustee, in writing at least five Business Days before each interest payment
date, dated as of the record date, and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of Debentureholders.
SECTION 2.6 TRANSFER. The Debentures shall be issued in registered form
and shall be transferable only upon the surrender of a Debenture for
registration of transfer. When a Debenture is presented to the Registrar with a
request to register a transfer, the Registrar shall register the transfer as
requested if the requirements of Section 8-401(a)(l) of the Uniform Commercial
Code are met. To permit registration of transfers, the Company shall execute and
the Trustee shall authenticate Debentures at the Registrar's request. The
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges in connection with any transfer pursuant to this
Section. The Company shall not be required to make and the Registrar need not
register transfers of Debentures selected for redemption (except, in the case of
Debentures to be redeemed in part, the portion thereof not to be redeemed) or
any Debentures for a period of 15 days before a selection of Debentures to be
redeemed.
Prior to the due presentation for registration of transfer of any
Debenture, the Company, the Trustee, the Paying Agent and the Registrar may deem
and treat the Person in whose name a Debenture is registered as the absolute
owner of such Debenture for the purpose of receiving
<PAGE>
payment of principal of and interest, if any, on such Debenture and for all
other purposes whatsoever, whether or not such Debenture is overdue, and none of
the Company, the Trustee, the Paying Agent or the Registrar shall be affected by
or be required to act in accordance with notice to the contrary.
Any Holder of a Global Debenture shall, by acceptance of such Global
Debenture, agree that transfers of beneficial interest in such Global Debenture
may be effected only through a book-entry system maintained by (i) the Holder of
such Global Debenture (or its agent) or (ii) any Holder of a beneficial interest
in such Global Debenture, and that ownership of a beneficial interest in such
Global Debenture shall be required to be reflected in a book entry. None of the
Company, the Trustee, the Paying Agent or the Registrar shall have any duty with
respect to or obligation for the maintenance of any book-entry system respecting
any Debenture maintained under these provisions.
All Debentures issued upon any transfer or exchange pursuant to the
terms of this Indenture will evidence the same debt and will be entitled to the
same benefits under this Indenture as the Debentures surrendered upon such
transfer or exchange.
SECTION 2.7 REPLACEMENT DEBENTURES. If a mutilated Debenture is
surrendered to the Registrar or if the Holder of a Debenture claims that the
Debenture has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Debenture if the requirements
of Section 8-405 of the Uniform Commercial Code are met, such that the Holder
(i) satisfies the Company or the Trustee regarding those requirements within a
reasonable time after he has notice of such loss, destruction or wrongful taking
and the Registrar does not register a transfer prior to receiving such
notification, (ii) makes such request to the Company or the Trustee prior to the
Debenture being acquired by a protected purchaser as defined in Section 8-303 of
the Uniform Commercial Code (a "protected purchaser") and (iii) satisfies any
other reasonable requirements of the Trustee. If required by the Trustee or the
Company, such Holder shall furnish an indemnity bond sufficient in the judgment
of the Trustee to protect the Company, the Trustee, the Paying Agent and the
Registrar from any loss that any of them may suffer if a Debenture is replaced.
The Company and the Trustee may charge the Holder for their expenses in
replacing a Debenture. In the event any such mutilated, lost, destroyed or
wrongfully taken Debenture has become or is about to become due and payable, the
Company in its discretion may pay such Debenture instead of issuing a new
Debenture in replacement thereof.
Every replacement Debenture is an additional obligation of the Company.
The provisions of this Section 2.7 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, lost, destroyed or wrongfully taken Debentures.
SECTION 2.8 OUTSTANDING DEBENTURES. Debentures outstanding at any time
are all Debentures authenticated by the Trustee except for those canceled by it,
those delivered to it for cancelation and those described in this Section as not
outstanding. A Debenture does not
<PAGE>
cease to be outstanding because the Company or an Affiliate of the Company holds
the Debenture.
If a Debenture is replaced pursuant to Section 2.7, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Debenture is held by a protected purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or maturity date money sufficient to pay
all principal and interest payable on that date with respect to the Debentures
(or portions thereof) to be redeemed or maturing, as the case may be, then on
and after that date such Debentures (or portions thereof) cease to be
outstanding and interest on them ceases to accrue.
SECTION 2.9 TEMPORARY DEBENTURES. In the event that Definitive
Debentures (as defined in the Appendix) are to be issued under the terms of this
Indenture, until such Definitive Debentures are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Debentures. Temporary
Debentures shall be substantially in the form of Definitive Debentures but may
have variations that the Company considers appropriate for temporary Debentures.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate Definitive Debentures and deliver them in exchange for temporary
Debentures upon surrender of such temporary Debentures at the office or agency
of the Company, without charge to the Holder.
SECTION 2.10 CANCELATION. The Company at any time may deliver
Debentures to the Trustee for cancelation. The Registrar and the Paying Agent
shall forward to the Trustee any Debentures surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel all
Debentures surrendered for registration of transfer, exchange, payment or
cancelation and, at the option of the Trustee, either cremated, shredded or
otherwise disposed of. the Trustee shall execute and forward to the Company an
appropriate certificate describing the Debenture involved and the manner of
disposition. The Company may not issue new Debentures to replace Debentures it
has redeemed, paid or delivered to the Trustee for cancelation. The Trustee
shall not authenticate Debentures in place of canceled Debentures other than
pursuant to the terms of this Indenture.
SECTION 2.11 DEFAULTED INTEREST. If the Company defaults in a payment
of interest on the Debentures, the Company shall pay the defaulted interest
(plus interest on such defaulted interest to the extent lawful) ("Defaulted
Interest") in any lawful manner. The Company may pay the defaulted interest to
the Persons who are Debentureholders on a subsequent special record date. The
Company shall fix or cause to be fixed any such special record date and payment
date to the reasonable satisfaction of the Trustee and shall promptly mail or
cause to be mailed to each Debentureholder a notice that states the special
record date, the payment date and the amount of defaulted interest to be paid.
<PAGE>
SECTION 2.12 CUSIP NUMBERS. The Company in issuing the Debentures may
use "CUSIP" numbers (if then generally in use) for the Debentures. If there are
one or more CUSIP numbers for the Debentures, the Trustee shall use "CUSIP"
numbers in any notice of redemption as a convenience to Holders; PROVIDED,
HOWEVER, that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Debentures or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Debentures, and any such redemption shall
not be affected by any defect in or omission of such numbers.
ARTICLE 3
REDEMPTION
SECTION 3.1 NOTICES TO TRUSTEE. If the Company elects to redeem
Debentures pursuant to paragraph 5 of the Debentures, it shall notify the
Trustee in writing of the redemption date, the principal amount of Debentures to
be redeemed and the paragraph of the Debentures pursuant to which the redemption
will occur.
The Company shall give each notice to the Trustee provided for in this
Section at least 60 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions for redemption set forth herein and
in the Debentures. If fewer than all the Debentures are to be redeemed, the
record date relating to such redemption shall be selected by the Company and
given to the Trustee, which record date shall be not fewer than 15 days after
the date of notice to the Trustee. Any such notice may be canceled at any time
prior to notice of such redemption being mailed to any Holder and upon
cancelation shall thereby be void and of no effect.
SECTION 3.2 SELECTION OF DEBENTURES TO BE REDEEMED. If fewer than all
the Debentures are to be redeemed, the Trustee shall select in its sole
discretion the Debentures to be redeemed pro rata or by lot or by a method that
complies with applicable legal and securities exchange requirements, if any, and
that the Trustee in its sole discretion shall deem to be fair and appropriate
and in accordance with methods generally used at the time of selection by
fiduciaries in similar circumstances. The Trustee shall make the selection from
outstanding Debentures not previously called for redemption. The Trustee may
select for redemption portions of the principal of Debentures that have
denominations larger than $1,000. Debentures and portions of them the Trustee
selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions
of this Indenture that apply to Debentures called for redemption also apply to
portions of Debentures called for redemption. The Trustee shall notify the
Company promptly of the Debentures or portions of Debentures to be redeemed.
SECTION 3.3 NOTICE OF REDEMPTION. At least 30 days but not more than 60
days before a date for redemption of Debentures, the Company shall mail a notice
of redemption by first-class mail to each Holder of Debentures to be redeemed at
such Holder's registered address.
<PAGE>
The notice shall identify the Debentures to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Debentures called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Debentures are to be
redeemed, the certificate numbers and principal amounts of the
particular Debentures to be redeemed;
(6) that, unless the Company defaults in making such
redemption payment or the Paying Agent is prohibited from making such
payment pursuant to the terms of this Indenture, interest on Debentures
(or portion thereof) called for redemption ceases to accrue on and
after the redemption date;
(7) the paragraph of the Debentures pursuant to which the
Debentures called for redemption are being redeemed;
(8) the CUSIP number, if any, printed on the Debentures being
redeemed; and
(9) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Debentures.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption
is mailed, Debentures called for redemption become due and payable on the
redemption date and at the redemption price stated in the notice. Upon surrender
to the Paying Agent, such Debentures shall be paid at the redemption price
stated in the notice, plus accrued interest, if any, to the redemption date;
PROVIDED, HOWEVER, that if the redemption date is after a regular record date
for interest payment and on or prior to the interest payment date, the accrued
interest shall be payable to the Debentureholder of the redeemed Debentures
registered on the relevant record date. Failure to give notice or any defect in
the notice to any Holder shall not affect the validity of the notice to any
other Holder.
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE. Prior to 10:00 a.m. (Dallas
time) on the redemption date, the Company shall deposit with the Paying Agent
(or, if the Company or a Subsidiary is the Paying Agent, shall segregate and
hold in trust) money sufficient to pay the
<PAGE>
redemption price of and accrued interest on all Debentures to be redeemed on
that date other than Debentures or portions of Debentures called for redemption
that have been delivered by the Company to the Trustee for cancelation.
SECTION 3.6 DEBENTURES REDEEMED IN PART. Upon surrender of a Debenture
that is redeemed in part, the Company shall execute and the Trustee shall
authenticate for the Holder (at the Company's expense) a new Debenture equal in
principal amount to the unredeemed portion of the Debenture surrendered. The
Debentures so surrendered shall be canceled.
ARTICLE 4
COVENANTS
SECTION 4.1 PAYMENT OF DEBENTURES. The Company shall promptly pay the
principal of and interest on the Debentures on the dates and in the manner
provided in the Debentures and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture (or if the Company is the Paying
Agent, the Company has segregated and is holding in trust for the benefit of the
Holders) money sufficient to pay all principal and interest then due and the
Trustee or the Paying Agent, as the case may be, is not prohibited from paying
such money to the Debentureholders on that date pursuant to the terms of this
Indenture.
The Company shall pay interest on overdue principal at the rate
specified therefor in the Debentures, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.2 SEC REPORTS. The Company shall file with the SEC, to the
extent the SEC accepts such filings and whether or not the Company has a class
of securities registered under the Exchange Act or is otherwise subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, all annual
reports, quarterly reports and other documents that the Company is required to
file with the SEC or (if the Company is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act) would be required to
file with the SEC if the Company were subject to Section 13 or 15(d) of the
Exchange Act within the time periods such reports and documents are required to
be so filed or (if the Company is not subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act) would be required to be so filed if the
Company were subject to Section 13 or 15(d) of the Exchange Act.
The Company also shall (i) file with the Trustee (with exhibits), and
provide to each Holder (without exhibits), without cost to the Trustee or
Holder, copies of all reports and documents filed by the Company with the SEC
within 15 days after the date on which the Company files such reports and
documents with the SEC or the date on which the Company would be required to
file such reports and documents with the SEC if the Company were subject
<PAGE>
to Section 13 or 15(d) of the Exchange Act; and (ii) if the filing of such
reports and documents with the SEC is not accepted by the SEC or is prohibited
under the Exchange Act, supply at the Company's cost copies of such reports and
documents (including any exhibits thereto) to any Holder promptly on its written
request.
SECTION 4.3 LIMITATION ON SUBSIDIARY DEBT AND PREFERRED STOCK. The
Company shall not permit any Subsidiary of the Company to Incur or suffer to
exist any Debt or issue any Preferred Stock except for Permitted Debt and
Preferred Stock.
SECTION 4.4 LIMITATION ON LIENS. The Company shall not, and shall not
permit any Subsidiary of the Company to, Incur any Lien on any property or
assets of the Company or any Subsidiary to secure Debt without making, or
causing such Subsidiary to make, effective provision for securing the Debentures
(and, if required by its governing instruments, any other Debt of the Company or
of such Subsidiary that is not subordinate to the Debentures) equally and
ratably with such Debt as to such property or assets for so long as such Debt
will be so secured or, in the event such Debt is Debt of the Company which is
subordinate in right of payment to the Debentures, prior to such Debt as to such
property or assets for so long as such Debt will be secured; PROVIDED, HOWEVER,
that nothing contained in this covenant shall prevent, restrict or apply to, and
there shall be excluded from secured Debt in any computation under this Section,
Liens existing on the date of this Indenture or Permitted Liens.
SECTION 4.5 LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company
shall not, and shall not permit any Subsidiary of the Company to, enter into any
Sale and Leaseback Transaction with respect to any property or assets (except
for a period not exceeding three years) unless (i) the Company or such
Subsidiary would be entitled to Incur a Lien on such property to secure Debt by
reason of the provisions described in clauses (i) through (xii) of the
definition of Permitted Liens in an amount equal to the Attributable Value of
such Sale and Leaseback Transaction without equally and ratably securing the
Debentures or (ii) the Company shall apply an amount equal to the Attributable
Value with respect to such Sale and Leaseback Transaction within six months of
such sale to the defeasance or retirement (other than any mandatory retirement,
mandatory prepayment or sinking fund payment or by payment at maturity) of Debt
securities or other debt for borrowed money of the Company or a Subsidiary
thereof that matures more than one year after the creation of such Debt or to
the purchase, construction or development of other comparable property.
SECTION 4.6 LIMITATION ON MERGERS AND CONSOLIDATIONS. The Company shall
not consolidate with or merge into any Person, or sell, lease, convey, transfer
or otherwise dispose of all or substantially all of its assets to any Person,
unless (i) the Person formed by or surviving such consolidation or merger (if
other than the Company), or to which the sale, lease, conveyance, transfer or
other disposition will be made (collectively, the "Successor"), is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia, and the Successor assumes by supplemental indenture
in a form satisfactory to the Trustee of all the obligations of the Company
under the Indenture and under the Debentures, (ii) after giving effect to such
transaction, no Default or Event of Default exists and (iii) the Company or such
Person shall have delivered to the Trustee an officer's certificate
<PAGE>
and an opinion of counsel, each in a form satisfactory to the Trustee and
stating that the conditions specified in clauses (i) and (ii) above have been
satisfied.
SECTION 4.7 LIMITATION ON ISSUANCES OR DISPOSITIONS OF STOCK OF
SUBSIDIARIES. The Company shall not, and will not permit any Subsidiary to,
issue, sell or otherwise dispose of any shares of capital stock of any
Subsidiary except for (i) director's qualifying shares, if required by
applicable state laws, (ii) shares or other dispositions to the Company or to
one or more Wholly Owned Subsidiaries of the Company, (iii) the sale or other
disposition of all or any part of the Capital Stock of any Subsidiary for
consideration which is at least equal to the fair value of such Capital Stock as
determined by the Company's board of directors (acting in good faith) or (iv)
any issuance, sale, assignment, transfer or other disposition made in compliance
with an order of a court or regulatory authority of competent jurisdiction,
other than an order issued at the request of the Company, any Subsidiary or any
affiliate of the Company or any Subsidiary.
SECTION 4.8 COMPLIANCE CERTIFICATE. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company,
beginning with the fiscal year of the Company ending December 31, 1999, an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with Section 314(a)(4) of
the TIA.
SECTION 4.9 FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee,
the Company shall execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
ARTICLE 5
DEFAULTS AND REMEDIES
SECTION 5.1 EVENTS OF DEFAULT. An "Event of Default" occurs if:
(i) the Company defaults in any payment of interest on any
Debenture when the same becomes due and payable, and such default
continues for a period of 30 days;
(ii) the Company defaults in the payment of the principal of
any Debenture when the same becomes due and payable at its Stated
Maturity, upon redemption or repurchase, upon declaration or otherwise;
(iii) the Company fails to comply with any of its agreements
in the Debentures or this Indenture (other than those referred to in
(i) or (ii) above) and such failure continues for 60 days after the
notice specified below;
<PAGE>
(iv) Debt of the Company is not paid within any applicable
grace period after final maturity or the acceleration by the holders
thereof because of a default and the total amount of such Debt unpaid
or accelerated exceeds $5.0 million or its foreign currency equivalent
at the time and such failure continues for 20 days after the notice
specified below;
(v) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(vi) a court of competent jurisdiction enters a judgment,
order or decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any
Significant Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the
Company or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order
or decree remains unstayed and in effect for 60 days;
(vii) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Insurance Law consents to the appointment of
a Custodian of it or for any substantial part of its property or any
state insurance regulatory authority with jurisdiction over the Company
or any Significant Subsidiary enters an order or decree or takes
similar action under any Insurance Law that (A) appoints a Custodian of
the Company or any Significant Subsidiary or for any substantial part
of its property or (B) orders the winding up or liquidation of the
Company or any Significant Subsidiary and, in the case of (A) or
<PAGE>
(B), such order or decree remains unstayed and in effect for 60 days;
(viii) any judgment or decree for the payment of money in
excess of $5 million or its foreign currency equivalent at the time is
entered against the Company or any Significant Subsidiary and is not
discharged, waived or stayed and either (A) there is a period of 30
days following the commencement of an enforcement proceeding has been
commenced by any creditor upon such judgment or decree during which
such proceeding is not stayed or abandoned within 30 days following the
commencement thereof, or (B) there is a period of 60 days following the
entry of such judgment or decree during which such judgment or decree
is not discharged, waived or the execution thereof stayed and, in
either case, the default continues for ten days after the date on which
the notice specified below shall have been given.
The foregoing shall constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, UNITED STATES CODE, or any
similar Federal or state law for the relief of debtors. The term "Insurance Law"
means [CHAPTER 44 OF THE NEBRASKA REVISED STATUTES OF 1943] and all similar
state laws of the State of Nebraska and such other jurisdictions in which the
Company or any Significant Subsidiary conducts business that govern the conduct
or operations of any insurance company, and the rules and regulations
promulgated thereunder. The term "Custodian" means any receiver, trustee,
assignee, liquidator, custodian, conservator, supervisor, rehabilitator,
sequestrator or similar official under any Bankruptcy Law or Insurance Law.
A Default under clause (iii), (iv) or (viii) is not an Event of Default
until the Trustee or the Holders of at least 25% in principal amount of the
outstanding Debentures notify the Company of the Default and the Company does
not cure such Default within the time specified after receipt of such notice.
Such notice must specify the Default, demand that it be remedied and state that
such notice is a "Notice of Default."
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any event which with the giving of notice, the lapse of time or both would
become an Event of Default under clause (iii), (iv) or (viii), its status and
what action the Company is taking or proposes to take with respect thereto.
SECTION 5.2 ACCELERATION. If an Event of Default (other than an Event
of Default specified in Section 5.1(v) or (vi) with respect to the Company)
occurs and is continuing, the Trustee by notice to the Company, or the Holders
of at least 25% in principal amount of the outstanding Debentures by notice to
the Company, may declare the principal of and accrued but unpaid interest on all
the Debentures to be due and payable. Upon such a declaration, such principal
and interest shall be due and payable immediately. If an Event of Default
specified in Section 5.1(v) or (vi) with respect to the Company occurs, the
principal of and interest on all the Debentures shall IPSO FACTO become and be
immediately due and payable without any declaration
<PAGE>
or other act on the part of the Trustee or any Debentureholders. The Holders of
a majority in principal amount of the Debentures by notice to the Trustee may
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of acceleration. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
SECTION 5.3 OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Debentures or to enforce the performance of
any provision of the Debentures or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Debentures or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Debentureholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 5.4 WAIVER OF PAST DEFAULTS. The Holders of a majority in
principal amount of the Debentures by notice to the Trustee may waive an
existing Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Debenture, (ii) a Default arising from the failure
to redeem or purchase any Debenture when required pursuant to the terms of this
Indenture or (iii) a Default in respect of a provision that under Section 8.2
cannot be amended without the consent of each Debentureholder affected. When a
Default is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.
SECTION 5.5 CONTROL BY MAJORITY. The Holders of a majority in principal
amount of the Debentures may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or of exercising
any trust or power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or this Indenture or, subject to
Section 6.1, that the Trustee determines is unduly prejudicial to the rights of
any other Debentureholders or would involve the Trustee in personal liability;
PROVIDED, HOWEVER, that the Trustee may take any other action deemed proper by
the Trustee that is not inconsistent with such direction. Prior to taking any
action hereunder, the Trustee shall be entitled to indemnification satisfactory
to it in its sole discretion against all losses, liabilities and expenses caused
by taking or not taking such action.
SECTION 5.6 LIMITATION ON SUITS. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no Debentureholder
may pursue any remedy with respect to this Indenture or the Debentures unless:
(1) the Holder gives to the Trustee written notice stating
that an Event of Default is continuing;
<PAGE>
(2) the Holders of at least 25% in principal amount of the
Debentures make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in principal amount of the
Debentures do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Debentureholder may not use this Indenture to prejudice the rights of
another Debentureholder or to obtain a preference or priority over another
Debentureholder.
SECTION 5.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal of and special interest and interest on the Debentures held by such
Holder, on or after the respective due dates expressed in the Debentures, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 5.8 COLLECTION SUIT BY TRUSTEE. If an Event of Default
specified in Section 5.1(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
6.7.
SECTION 5.9 TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and the Debentureholders allowed in
any judicial proceedings relative to the Company, any Subsidiary, their
respective creditors or their respective property and, unless prohibited by law
or applicable regulations, may vote on behalf of the Holders in any election of
a trustee in bankruptcy or other Person performing similar functions, and any
Custodian in any such judicial proceeding is hereby authorized by each Holder to
make payments to the Trustee and, in the event that the Trustee shall consent to
the making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and its counsel, and any other amounts due
the Trustee under Section 6.7.
SECTION 5.10 PRIORITIES. If the Trustee collects any money or property
pursuant to this Article 5, it shall pay out the money or property in the
following order:
FIRST: to the Trustee for amounts due under Section 6.7;
<PAGE>
SECOND: to Debentureholders for amounts due and unpaid on the
Debentures for principal and interest, ratably, and any special interest without
preference or priority of any kind, according to the amounts due and payable on
the Debentures for principal, any special interest and interest, respectively;
and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment to
Debentureholders pursuant to this Section. At least 15 days before such record
date, the Trustee shall mail to each Debentureholder and the Company a notice
that states the record date, the payment date and amount to be paid.
SECTION 5.11 UNDERTAKING FOR COSTS. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 5.5 or a suit by Holders of more
than 10% in principal amount of the Debentures.
SECTION 5.12 WAIVER OF STAY OR EXTENSION LAWS. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 6
TRUSTEE
SECTION 6.1 DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent Person
would exercise or use under the circumstances in the conduct of such Person's
own affairs.
(b) Except during the continuance of an Event of Default:
<PAGE>
(1) the Trustee undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, with respect to any certificates or opinions
that are required by any provisions of this Indenture to be delivered
to the Trustee, the Trustee shall examine the certificates and opinions
to determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) this paragraph does not limit the effect of
paragraph (b) of this Section;
(2) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to
any action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 5.2, 5.4 and 5.5.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b), (c) and (g) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
<PAGE>
(i) In the absence of bad faith, negligence or willful
misconduct on the part of the Trustee, the Trustee shall not be responsible for
the application of any money by any Paying Agent other than the Trustee.
SECTION 6.2 RIGHTS OF TRUSTEE.
(a) The Trustee may rely and shall be fully protected in
acting or refraining from acting on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for and shall be fully protected in respect of any action it takes or
omits to take in good faith in reliance on the Officers' Certificate or Opinion
of Counsel.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any attorney or
agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers.
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Debentures shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
Debenture, note or other paper or document unless requested in writing to do so
by the Holders of not less than a majority in principal amount of the Debentures
at the time outstanding, but the Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney.
(g) The Trustee shall be under no obligation to exercise any
of its rights and powers under this Indenture at the request of any Holder of
Debentures unless such Holder shall have offered to the trustee security and
indemnity satisfactory to the Trustee in its sole discretion against any loss,
liability or expense and then only to the extent required by the terms of this
Indenture. The Trustee shall not be deemed to have any knowledge of a Default or
Event of Default other than (i) any Event of Default occurring pursuant to
Section 5.1(i) or 5.1(ii) or (ii)
<PAGE>
any Default or Event of Default of which a Trust Officer shall have received
written notification or obtained actual knowledge.
(h) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Debentures shall be full and complete authorization and protection from
liability with respect to any action taken, omitted or suffered by it hereunder
in good faith and in accordance with the advice or opinion of such counsel.
SECTION 6.3 INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual
or any other capacity may become the owner or pledgee of Debentures and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or
co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 6.10 and 6.11.
SECTION 6.4 TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible
for and makes no representation as to the validity or adequacy of this Indenture
or the Debentures, it shall not be accountable for the Company's use of the
proceeds from the Debentures, and it shall not be responsible for any statement
of the Company in this Indenture or in any document issued in connection with
the sale of the Debentures or in the Debentures other than the Trustee's
certificate of authentication.
SECTION 6.5 NOTICE OF DEFAULTS. If a Default occurs and is continuing
and if it is known to the Trustee, the Trustee shall mail to each
Debentureholder notice of the Default within 30 days after it is actually known
to a Trust Officer, but in no event later than 90 days after the occurrence of
the Event of Default. Except in the case of a Default in payment of principal of
or interest on any Debenture (including payments pursuant to the mandatory
redemption provisions of such Debenture, if any, or any accelerated payment of
principal or interest), the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interests of Debentureholders. The Trustee shall not be deemed
to have any knowledge of a Default or Event of Default other than (i) any Event
of Default occurring pursuant to Section 5.1(i) or 5.1(ii) or (ii) any Default
or Event of Default of which a Trust Officer shall have received written
notification or obtained actual knowledge.
SECTION 6.6 REPORTS BY TRUSTEE TO HOLDERS. As promptly as practicable
after each March 15 beginning with the March 15 following the date of this
Indenture, and in any event prior to April 15 in each year, the Trustee shall
mail to each Debentureholder a brief report dated as of March 15 that complies
with Section 313(a) of the TIA. The Trustee shall also comply with Section
313(b) of the TIA.
A copy of each report at the time of its mailing to Debentureholders
shall be filed with the SEC and each stock exchange (if any) on which the
Debentures are listed. The Company agrees to notify promptly the Trustee
whenever the Debentures become listed on any stock exchange and of any delisting
thereof.
<PAGE>
SECTION 6.7 COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time compensation for its services as may be agreed upon by
the Company and the Trustee. The Trustee's compensation shall not be limited by
any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket expenses,
disbursements and advances incurred or made by it, including costs of
collection, in addition to the compensation for its services. Such expenses
shall include the reasonable compensation and expenses, disbursements and
advances of the Trustee's agents, counsel, accountants and experts. The Company
shall indemnify and defend the Trustee, its directors, officers, employees,
stockholders and agents, against any and all loss, liability or expense
(including reasonable attorneys' fee, disbursements and costs of litigation)
incurred by it or any of them arising out of or in connection with the
administration of this trust and the performance of its duties hereunder. The
Trustee shall notify the Company of any claim for which it may seek indemnity
promptly upon obtaining actual knowledge thereof; PROVIDED, HOWEVER, that any
failure so to notify the Company shall not relieve the Company of its indemnity
obligations hereunder. The Company shall defend the claim and the indemnified
party shall provide reasonable cooperation at the Company's expense in the
defense. Such indemnified parties may have separate counsel and the Company
shall pay the fees and expenses of such counsel and costs of litigation;
PROVIDED, HOWEVER, that the Company shall not be required to pay such fees and
expenses if it assumes such indemnified parties' defense and, in such
indemnified parties' reasonable judgment, there is no conflict of interest
between the Company and such parties in connection with such defense. The
Company need not reimburse any expense or indemnify against any loss, liability
or expense incurred by an indemnified party through such party's own willful
misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Debentures on all money or property held
or collected by the Trustee other than money or property held in trust to pay
principal of and interest and any liquidated damages on particular Debentures.
The Company's payment obligations pursuant to this Section shall
survive the satisfaction or discharge of this Indenture, any rejection or
termination of this Indenture under any bankruptcy law or the resignation or
removal of the Trustee. When the Trustee incurs expenses after the occurrence of
a Default specified in Section 5.1(v) or (vi) with respect to the Company, the
expenses are intended to constitute expenses of administration under the
Bankruptcy Law.
SECTION 6.8 REPLACEMENT OF TRUSTEE. The Trustee may resign at any time
by so notifying the Company. The Holders of a majority in principal amount of
the Debentures may remove the Trustee by so notifying the Trustee and may
appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 6.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of
the Trustee or its
<PAGE>
property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of
a majority in principal amount of the Debentures and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly notify each Holder
of such event and appoint a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Debentureholders. After the successor Trustee has delivered its
written acceptance of appointment, the retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 6.7.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Debentures may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 6.10, any Debentureholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 6.7 shall continue for the
benefit of the retiring Trustee.
SECTION 6.9 SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion
or consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Debentures shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Debentures so authenticated; and in
case at that time any of the Debentures shall not have been authenticated, any
successor to the Trustee may authenticate such Debentures either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Debentures or in this Indenture provided that the certificate of
<PAGE>
the Trustee shall have.
SECTION 6.10 ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all
times satisfy the requirements of TIA ss. 310(a). The Trustee (or in the case of
a corporation or national banking association included in a bank holding company
system, the related bank holding company) shall have a combined capital and
surplus of at least $100,000,000 as set forth in its most recent published
annual report of condition. In addition, if the Trustee is a corporation
included in a banking holding company system, the Trustee, independently of such
bank holding company, shall meet the capital requirements of TIA ss. 310(a)(2).
The Trustee shall comply with TIA ss. 310(B); PROVIDED, HOWEVER, that there
shall be excluded from the operation of TIA ss. 310(b)(1) any indenture or
indentures under which other securities or certificates of interest or
participation in other securities of the Company are outstanding if the
requirements for such exclusion set forth in TIA ss. 310(b)(1) are met.
SECTION 6.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with TIA ss. 311(a), excluding any creditor relationship
listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be
subject to TIA ss. 311(a) to the extent indicated.
ARTICLE 7
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 7.1 DISCHARGE OF LIABILITY ON DEBENTURES; DEFEASANCE.
(a) When (i) the Company delivers to the Trustee all
outstanding Debentures (other than Debentures replaced pursuant to Section 2.7)
for cancelation or (ii) all outstanding Debentures have become due and payable,
whether at maturity or as a result of the mailing of a notice of redemption
pursuant to Article 3 hereof and the Company irrevocably deposits with the
Trustee money or U.S. Government Obligations on which payment of principal and
interest when due will be sufficient to pay at maturity or upon redemption all
outstanding Debentures, including interest thereon to maturity or such
redemption date (other than Debentures replaced pursuant to Section 2.7), and if
in either case the Company pays all other sums payable hereunder by the Company,
then this Indenture shall, subject to Section 7.1(c), cease to be of further
effect. The Trustee shall acknowledge satisfaction and discharge of this
Indenture on demand of the Company accompanied by an Officers' Certificate and
an Opinion of Counsel and at the cost and expense of the Company.
(b) Subject to Sections 7.1(c) and 7.2, the Company at any
time may terminate (i) all of its obligations under the Debentures and this
Indenture ("legal defeasance option") or (ii) its obligations under Sections
4.2, 4.3, 4.4, 4.5, 4.6 and 4.7 and the operation of Sections 5.1(iii), 5.1(iv),
and 5.1(viii) ("covenant defeasance option"). The Company may exercise its legal
defeasance option notwithstanding its prior exercise of its covenant defeasance
option.
<PAGE>
If the Company exercises its legal defeasance option, payment of the
Debentures may not be accelerated because of an Event of Default. If the Company
exercises its covenant defeasance option, payment of the Debentures may not be
accelerated because of an Event of Default specified in Sections 5.1(iii),
5.1(iv) or 5.1(viii).
Upon satisfaction of the conditions set forth herein and upon request
of the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 6.7, 6.8 and in this
Article 7 shall survive until the Debentures have been paid in full. Thereafter,
the Company's obligations in Sections 6.7, 7.4 and 7.5 shall survive.
SECTION 7.2 CONDITIONS TO DEFEASANCE. The Company may exercise its
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations for the payment of principal,
premium (if any) and interest on the Debentures to maturity or
redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and interest
when due on all the Debentures to maturity or redemption, as the case
may be;
(3) 123 days pass after the deposit is made and during the
123-day period no Default specified in Section 5.1(v) or (vi) with
respect to the Company occurs which is continuing at the end of the
period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company and is not prohibited by Article 10;
(5) the Company delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(6) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Debentureholders will not recognize
income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to
<PAGE>
Federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance had not
occurred;
(7) in the case of the covenant defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Debentureholders will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and covenant
defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had
not occurred; and
(8) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Debentures as
contemplated by this Article 7 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Debentures at a future date in
accordance with Article 3.
SECTION 7.3 APPLICATION OF TRUST MONEY. The Trustee shall hold in trust
money or U.S. Government Obligations deposited with it pursuant to this Article
7. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal of and interest on the Debentures. Money and Debentures
so held in trust are not subject to Article 9.
SECTION 7.4 REPAYMENT TO COMPANY. The Trustee and the Paying Agent
shall promptly turn over to the Company upon request any excess money or
Debentures held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall pay to the Company upon written request any money held by
them for the payment of principal or interest that remains unclaimed for two
years, and, thereafter, Debentureholders entitled to the money must look to the
Company for payment as general creditors.
SECTION 7.5 INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay
and shall indemnify the Trustee against any tax, fee or other charge imposed on
or assessed against deposited U.S. Government Obligations or the principal and
interest received on such U.S.
Government Obligations.
SECTION 7.6 REINSTATEMENT. If the Trustee or Paying Agent is unable to
apply any money or U.S. Government Obligations in accordance with this Article 7
by reason of any legal proceeding or by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, the Company's obligations under this Indenture and the
Debentures shall be revived and reinstated as though no deposit had
<PAGE>
occurred pursuant to this Article 7 until such time as the Trustee or Paying
Agent is permitted to apply all such money or U.S. Government Obligations in
accordance with this Article 7; PROVIDED, HOWEVER, that, if the Company has made
any payment of interest on or principal of any Debentures because of the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Debentures to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE 8
AMENDMENTS
SECTION 8.1 WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may
amend this Indenture or the Debentures without notice to or consent of any
Debentureholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation
of the obligations of the Company under this Indenture;
(3) to provide for uncertificated Debentures in addition to or
in place of certificated Debentures; PROVIDED, HOWEVER, that the
uncertificated Debentures are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Debentures are described in Section 163(f)(2)(B) of the Code;
(4) to secure the Debentures;
(5) to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power herein conferred upon
the Company;
(6) to comply with any requirements of the SEC in connection
with qualifying, or maintaining the qualification of, this Indenture
under the TIA;
(7) to make any change that does not adversely affect the
rights of any Debentureholder in any material respect; or
(8) to provide for the issuance of the Exchange Debentures or
Private Exchange Debentures, which shall have terms substantially
identical in all material respects to the Debentures (except that the
transfer restrictions contained in the Debentures shall be modified or
eliminated, as appropriate), and which shall be treated, together with
any outstanding Debentures, as a single issue of Debentures.
After an amendment under this Section becomes effective, the Company
shall mail to Debentureholders a notice briefly describing such amendment. The
failure to give such notice to all Debentureholders, or any defect therein,
shall not impair or affect the validity of an
<PAGE>
amendment under this Section.
SECTION 8.2 WITH CONSENT OF HOLDERS. The Company and the Trustee may
amend this Indenture or the Debentures without notice to any Debentureholder but
with the written consent of the Holders of at least a majority in principal
amount of the Debentures then outstanding (including consents obtained in
connection with a tender offer or exchange for the Debentures). However, without
the consent of each Debentureholder affected, an amendment may not:
(1) reduce the amount of Debentures whose Holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest or any special interest on any Debenture;
(3) reduce the principal of or extend the Stated Maturity of
any Debenture;
(4) change the time at which any Debenture may be redeemed in
accordance with Article 3;
(5) make any Debenture payable in money other than that stated
in the Debenture;
(6) make any change in Section 5.4 or 5.7 or the second
sentence of this Section 8.2.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company
shall mail to Debentureholders a notice briefly describing such amendment. The
failure to give such notice to all Debentureholders, or any defect therein,
shall not impair or affect the validity of an amendment under this Section.
SECTION 8.3 COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to
this Indenture or the Debentures shall comply with the TIA as then in effect.
SECTION 8.4 REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to
an amendment or a waiver by a Holder of a Debenture shall bind the Holder and
every subsequent Holder of that Debenture or portion of the Debenture that
evidences the same debt as the consenting Holder's Debenture, even if notation
of the consent or waiver is not made on the
<PAGE>
Debenture. However, any such Holder or subsequent Holder may revoke the consent
or waiver as to such Holder's Debenture or portion of the Debenture if the
Trustee receives the notice of revocation before the date the amendment or
waiver becomes effective. After an amendment or waiver becomes effective, it
shall bind every Debentureholder. An amendment or waiver becomes effective once
both (i) the requisite number of consents have been received by the Company or
the Trustee and (ii) such amendment or waiver has been executed by the Company
and the Trustee.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Debentureholders entitled to give their consent
or take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Debentureholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 8.5 NOTATION ON OR EXCHANGE OF DEBENTURES. If an amendment
changes the terms of a Debenture, the Trustee may require the Holder of the
Debenture to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Debenture regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Debenture shall issue and the Trustee shall authenticate a
new Debenture that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Debenture shall not affect the validity of such
amendment.
SECTION 8.6 TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 6.1) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment is authorized or permitted by this Indenture and that such amendment
is the legal, valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to customary exceptions, and
complies with the provisions hereof (including Section 8.3).
ARTICLE 9
MISCELLANEOUS
SECTION 9.1 TRUST INDENTURE ACT CONTROLS. If any provision of this
Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 9.2 NOTICES. Any notice or communication shall be in writing
and delivered in person or mailed by first-class mail addressed as follows:
<PAGE>
if to the Company:
Chandler (U.S.A.), Inc.
P.O. Box 9
Chandler, Oklahoma 74834
Attention of: R. Patrick Gilmore, General Counsel
if to the Trustee:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201
Attention of: Corporate Trust Administration
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Debentureholder shall be mailed
to the Debentureholder at the Debentureholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Debentureholder or any
defect in it shall not affect its sufficiency with respect to other
Debentureholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 9.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Debentureholders may communicate pursuant to TIA ss. 312(b) with other
Debentureholders with respect to their rights under this Indenture or the
Debentures. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 9.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon
any request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance satisfactory
to the Trustee stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
SECTION 9.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or
<PAGE>
opinion with respect to compliance with a covenant or condition provided for in
this Indenture shall include:
(1) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 9.6 WHEN DEBENTURES DISREGARDED. In determining whether the
Holders of the required principal amount of Debentures have concurred in any
direction, waiver or consent, Debentures owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Debentures which the Trustee knows are so owned shall be so disregarded. Subject
to the foregoing, only Debentures outstanding at the time shall be considered in
any such determination.
SECTION 9.7 RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee
may make reasonable rules for action by or a meeting of Debentureholders. The
Registrar and the Paying Agent may make reasonable rules for their functions.
SECTION 9.8 LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, a Sunday
or a day on which banking institutions are not required to be open in the State
of New York or Texas. If a payment date is a Legal Holiday, payment shall be
made on the next succeeding day that is not a Legal Holiday, and no interest
shall accrue for the intervening period or any accrued but unpaid interest. If a
regular record date is a Legal Holiday, the record date shall not be affected.
SECTION 9.9 GOVERNING LAW. THIS INDENTURE AND THE DEBENTURES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE
EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION
<PAGE>
WOULD BE REQUIRED THEREBY.
SECTION 9.10 NO RECOURSE AGAINST OTHERS. A director, officer, employee
or stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Debentures or this Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Debenture, each Debentureholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Debentures.
SECTION 9.11 SUCCESSORS. All agreements of the Company in this
Indenture and the Debentures shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successors.
SECTION 9.12 MULTIPLE ORIGINALS. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 9.13 TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
CHANDLER (U.S.A.), INC.
By:
Name:
Title:
U.S. TRUST COMPANY OF TEXAS, N.A.
By:
Name:
Title:
<PAGE>
APPENDIX A
PROVISIONS RELATING TO DEBENTURES,
PRIVATE EXCHANGE DEBENTURES AND EXCHANGE DEBENTURES
1 DEFINITIONS
1.1 DEFINITIONS
For the purposes of this Appendix A the following terms shall have the
meanings indicated below:
"Cedel" means Cedel Bank, S.A., or any successor securities clearing
agency.
"Debentures Custodian" means the custodian with respect to a Global
Debenture (as appointed by the Depositary) or any successor person thereto, who
shall initially be the Trustee.
"Definitive Debenture" means a certificated Debenture that does not
include the Global Debenture Legend.
"Depositary" means The Depository Trust Company, its nominees and their
respective successors.
"Euroclear" means the Euroclear Clearance System or any successor
securities clearing agency.
"Global Debenture Legend" means the legend set forth under that caption
in Exhibit A to this Indenture.
"Regulation S" means Regulation S under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Underwriter" means Southwest Securities, Inc.
"Underwriting Agreement" means the Underwriting Agreement dated March
__, between the Company and the Initial Purchaser.
1.2 OTHER DEFINITIONS
<PAGE>
TERM: DEFINED IN SECTION:
"Agent Members"................................................2.1(b)
"Global Debenture".............................................2.1(a)
2 THE DEBENTURES
2.1 FORM AND DATING
The Debentures issued on the date hereof will be offered and sold by
the Company pursuant to the Underwriting Agreement.
(a) GLOBAL DEBENTURE. Debentures shall be issued in the form
of one global Debenture in definitive, fully registered form (the "Global
Debenture") without interest coupons and bearing the Global Debenture Legend,
which shall be deposited on behalf of the purchasers of the Debentures
represented thereby with the Debentures Custodian, and registered in the name of
the Depositary or a nominee of the Depositary, duly executed by the Company and
authenticated by the Trustee as provided in this Indenture. The aggregate
principal amount of the Global Debenture may from time to time be increased or
decreased by adjustments made on the records of the Trustee and the Depositary
or its nominee as hereinafter provided.
(b) BOOK-ENTRY PROVISIONS. This Section 2.1(b) shall apply
only to a Global Debenture deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(b) and pursuant to an order of the Company, authenticate and
deliver initially one Global Debenture that (a) shall be registered in the name
of the Depositary for such Global Debenture or the nominee of such Depositary
and (b) shall be delivered by the Trustee to such Depositary or pursuant to such
Depositary's instructions.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to the Global Debenture held on
their behalf by the Depositary or by the Trustee as Debentures Custodian or
under such Global Debenture, and the Depositary may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Debenture for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Agent Members, the operation of customary practices of
such Depositary governing the exercise of the rights of a holder of a beneficial
interest in the Global Debenture.
(c) DEFINITIVE DEBENTURES. Except as provided in Section 2.3
or 2.4, owners of
<PAGE>
beneficial interests in the Global Debenture will not be entitled to receive
physical delivery of certificated Debentures.
2.2 AUTHENTICATION. The Trustee shall authenticate and make available
for delivery upon a written order of the Company signed by two Officers
Debentures for original issue on the date hereof in an aggregate principal
amount of $24,000,000 and such order shall specify the amount of the Debentures
to be authenticated and the date on which the original issue of Debentures is to
be authenticated. The aggregate principal amount of Debentures outstanding at
any time may not exceed $24,000,000 except as provided in Section 2.7 of this
Indenture.
2.3 TRANSFER.
(a) TRANSFER OF DEFINITIVE DEBENTURES. When Definitive
Debentures are presented to the Registrar with a request to register the
transfer of such Definitive Debentures, the Registrar shall register the
transfer as requested if its reasonable requirements for such transaction are
met; PROVIDED, HOWEVER, that the Definitive Debentures surrendered for transfer:
(i) shall be duly endorsed or accompanied by a written
instrument of transfer in form reasonably satisfactory to the Company
and the Registrar, duly executed by the Holder thereof or his attorney
duly authorized in writing; and
(ii) are being transferred pursuant to an effective
registration statement under the Securities Act, pursuant to clause (A)
or (B) below, and are accompanied by the following additional
information and documents, as applicable:
(A) if such Definitive Debentures are being delivered
to the Registrar by a Holder for registration in the name of
such Holder, without transfer, a certification from such
Holder to that effect (in the form set forth on the reverse
side of the Initial Debenture); or
(B) if such Definitive Debentures are being
transferred to the Company, a certification to that effect (in
the form set forth on the reverse side of the Initial
Debenture); or
(b) RESTRICTIONS ON TRANSFER OF A DEFINITIVE DEBENTURE FOR A
BENEFICIAL INTEREST IN THE GLOBAL DEBENTURE. A Definitive Debenture may not be
exchanged for a beneficial interest in a Global Debenture except upon
satisfaction of the requirements set forth below. Upon receipt by the Trustee of
a Definitive Debenture, duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Registrar,
together with:
(i) certification (in the form set forth on the reverse side
of the Initial Debenture) that such Definitive Debenture is being
transferred outside the United States in an offshore transaction within
the meaning of Regulation S and in compliance with Rule 904 under the
Securities Act; and
<PAGE>
(ii) written instructions [FROM THE COMPANY?] directing the
Trustee to make, or to direct the Debentures Custodian to make, an
adjustment on its books and records with respect to such Global
Debenture to reflect an increase in the aggregate principal amount of
the Debentures represented by the Global Debenture, such instructions
to contain information regarding the Depositary account to be credited
with such increase,
then the Trustee shall cancel such Definitive Debenture and cause, or direct the
Debentures Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Debentures Custodian, the
aggregate principal amount of Debentures represented by the Global Debenture to
be increased by the aggregate principal amount of the Definitive Debenture to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Debenture
equal to the principal amount of the Definitive Debenture so canceled. If the
Global Debenture is not then outstanding and the Global Debenture has not been
previously exchanged for certificated Debentures pursuant to Section 2.4 of this
Appendix A, the Company shall issue and the Trustee shall authenticate, upon
written order of the Company in the form of an Officers' Certificate, a new
Global Debenture in the appropriate principal amount.
(c) TRANSFER OF GLOBAL DEBENTURE. (i) The transfer of the
Global Debenture or beneficial interests therein shall be effected through the
Depositary, in accordance with this Indenture (including applicable restrictions
on transfer set forth herein, if any) and the procedures of the Depositary
therefor. A transferor of a beneficial interest in the Global Debenture shall
deliver a written order given in accordance with the Depositary's procedures
containing information regarding the participant account of the Depositary to be
credited with a beneficial interest in the Global Debenture and such account
shall be credited in accordance with such order with a beneficial interest in
the Global Debenture and the account of the Person making the transfer shall be
debited by an amount equal to the beneficial interest in the Global Debenture.
(i) Notwithstanding any other provisions of this Appendix
(other than the provisions set forth in Section 2.4), a Global
Debenture may not be transferred as a whole except by the Depositary to
a nominee of the Depositary or by a nominee of the Depositary to the
Depositary or another nominee of the Depositary or by the Depositary or
any such nominee to a successor Depositary or a nominee of such
successor Depositary.
(d) CANCELATION OR ADJUSTMENT OF THE GLOBAL DEBENTURE. At such
time as all beneficial interests in the Global Debenture have either been
exchanged for Definitive Debentures, transferred, redeemed, repurchased or
canceled, such Global Debenture shall be returned by the Depositary to the
Trustee for cancelation or retained and canceled by the Trustee. At any time
prior to such cancelation, if any beneficial interest in a Global Debenture is
exchanged for Definitive Debentures, transferred in exchange for an interest in
another Global Debenture, redeemed, repurchased or canceled, the principal
amount of Debentures represented by such Global Debenture shall be reduced and
an adjustment shall be made on the books and records of the Trustee (if it is
then the Debentures Custodian for such Global Debenture) with respect to such
Global Debenture, by the Trustee or the Debentures Custodian, to reflect such
reduction.
<PAGE>
(e) OBLIGATIONS WITH RESPECT TO TRANSFERS OF DEBENTURES.
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate, Definitive
Debentures and the Global Debenture at the Registrar's request.
(ii) No service charge shall be made for any registration of
transfer, but the Company may require payment of a sum sufficient to
cover any transfer tax, assessments, or similar governmental charge
payable in connection therewith (other than any such transfer taxes,
assessments or similar governmental charge payable upon exchange or
transfer pursuant to Section 2.6 and 8.5).
(iii) Prior to the due presentation for registration of
transfer of any Debenture, the Company, the Trustee, the Paying Agent
or the Registrar may deem and treat the person in whose name a
Debenture is registered as the absolute owner of such Debenture for the
purpose of receiving payment of principal of and interest on such
Debenture and for all other purposes whatsoever, whether or not such
Debenture is overdue, and none of the Company, the Trustee, the Paying
Agent or the Registrar shall be affected by notice to the contrary.
(iv) All Debentures issued upon any transfer pursuant to the
terms of this Indenture shall evidence the same debt and shall be
entitled to the same benefits under this Indenture as the Debentures
surrendered upon such transfer or exchange.
(f) NO OBLIGATION OF THE TRUSTEE.
(i) The Trustee shall have no responsibility or obligation to
any beneficial owner of the Global Debenture, a member of, or a
participant in, the Depositary or any other Person with respect to the
accuracy of the records of the Depositary or its nominee or of any
participant or member thereof, with respect to any ownership interest
in the Debentures or with respect to the delivery to any participant,
member, beneficial owner or other Person (other than the Depositary) of
any notice (including any notice of redemption or repurchase) or the
payment of any amount, under or with respect to such Debentures. All
notices and communications to be given to the Holders and all payments
to be made to Holders under the Debentures shall be given or made only
to the registered Holders (which shall be the Depositary or its nominee
in the case of the Global Debenture). The rights of beneficial owners
in the Global Debenture shall be exercised only through the Depositary
subject to the applicable rules and procedures of the Depositary. The
Trustee may rely and shall be fully protected in relying upon
information furnished by the Depositary with respect to its members,
participants and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or
<PAGE>
inquire as to compliance with any restrictions on transfer
imposed under this Indenture or under applicable law with
respect to any transfer of any interest in any Debenture (including any
transfers between or among Depositary participants, members or
beneficial owners in the Global Debenture) other than to require
delivery of such certificates and other documentation or evidence as
are expressly required by, and to do so if and when expressly required
by, the terms of this Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements hereof.
The Trustee may rely and shall be fully protected in relying upon any
certificate, other documentation or other evidence provided to it
pursuant to the terms of this Indenture that it determines
substantially complies as to form with the express requirements of this
Indenture.
2.4 DEFINITIVE DEBENTURES
(a) The Global Debenture deposited with the Depositary as
Debentures Custodian pursuant to Section 2.1 shall be transferred to the
beneficial owners thereof in the form of Definitive Debentures in an aggregate
principal amount equal to the principal amount of the Global Debenture, in
exchange for the Global Debenture, only if such transfer complies with Section
2.3 and (i) the Depositary notifies the Company that it is unwilling or unable
to continue as a Depositary for such Global Debenture or if at any time the
Depositary ceases to be a "clearing agency" registered under the Exchange Act,
and a successor depositary is not appointed by the Company within 90 days of
such notice, or (ii) an Event of Default has occurred and is continuing or (iii)
the Company, in its sole discretion, notifies the Trustee in writing that it
elects to cause the issuance of certificated Debentures under this Indenture.
(b) If the Global Debenture is transferable to the beneficial
owners thereof pursuant to this Section 2.4 and shall be surrendered by the
Depositary to the Trustee, to be so transferred, in whole or from time to time
in part, without charge, then the Trustee shall authenticate and deliver, upon
such transfer of each portion of such Global Debenture, an equal aggregate
principal amount of Definitive Debentures of authorized denominations. Any
portion of the Global Debenture transferred pursuant to this Section shall be
executed, authenticated and delivered only in denominations of $1,000 and any
integral multiple thereof and registered in such names as the Depositary shall
direct.
(c) Subject to the provisions of Section 2.4(b), the
registered Holder of the Global Debenture may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests through Agent Members, to take any action which a Holder is entitled
to take under this Indenture or the Debentures.
(d) In the event of the occurrence of any of the events
specified in Section 2.4(a)(i), (ii) or (iii), the Company will promptly make
available to the Trustee a reasonable supply of Definitive Debentures in fully
registered form without interest coupons.
<PAGE>
EXHIBIT I
[FORM OF FACE OF DEBENTURE]
[Global Debenture Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
[THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC")], NEW
YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF [CEDE & CO.] OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO [CEDE &
CO.], OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, [CEDE & CO.], HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE
HEREOF.
Each Definitive Debenture will also bear the following legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS
SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS."
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS
SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.
<PAGE>
No. __________
____% Senior Debenture due 2014
CUSIP No. ______
CHANDLER (U.S.A.), INC., an Oklahoma corporation, promises to pay to
[CEDE & CO.], or registered assigns, the principal sum [OF DOLLARS] [LISTED ON
THE SCHEDULE OF INCREASES OR DECREASES IN GLOBAL DEBENTURE ATTACHED HERETO] on
_________, 2014.
Interest Payment Dates: March 1 and September 1.
Record Dates: February 15 and August 15.
Additional provisions of this Debenture are set forth on the other side
of this Debenture.
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
CHANDLER (U.S.A.), INC.
By:
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
U.S. TRUST COMPANY OF TEXAS, N.A.
as Trustee, certifies that this is one of
the Debentures referred to in the Indenture.
By
Authorized Signatory
<PAGE>
[FORM OF REVERSE SIDE OF DEBENTURE]
_____% Senior Debenture due 2014
1. INTEREST
(a) CHANDLER (U.S.A.), INC., an Oklahoma corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Debenture at the rate per annum shown above. The
Company will pay interest semiannually on March 1 and September 1 of each year.
Interest on the Debentures will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from ____________,
1999. Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. METHOD OF PAYMENT
The Company will pay interest on the Debentures (except defaulted
interest) to the Persons who are registered holders of Debentures at the close
of business on the February 15 or August 15 next preceding the interest payment
date even if Debentures are canceled after the record date and on or before the
interest payment date. Holders must surrender Debentures to a Paying Agent to
collect principal payments. The Company will pay principal and interest in money
of the United States of America that at the time of payment is legal tender for
payment of public and private debts. Payments in respect of the Debentures
represented by a Global Debenture (including principal, premium and interest)
will be made by wire transfer of immediately available funds to the accounts
specified by The Depository Trust Company. The Company will make all payments in
respect of a certificated Debenture (including principal, premium and interest),
by mailing a check to the registered address of each Holder thereof; PROVIDED,
HOWEVER, that payments on the Debentures may also be made, in the case of a
Holder of at least $1,000,000 aggregate principal amount of Debentures and at
their expense (except for the Global Certificate Holder), by wire transfer to a
U.S. dollar account maintained by the payee with a bank in the United States if
such Holder elects payment by wire transfer by giving written notice to the
Trustee or the Paying Agent to such effect designating such account no later
than 30 days immediately preceding the relevant due date for payment (or such
other date as the Trustee may accept in its discretion).
3. PAYING AGENT AND REGISTRAR
Initially, U.S. TRUST COMPANY OF TEXAS, a national banking association
(the "Trustee"), will act as Paying Agent and Registrar. The Company may appoint
and change any Paying Agent, Registrar or co-registrar without notice. The
Company or any of its domestically incorporated Wholly Owned Subsidiaries may
act as Paying Agent, Registrar or co-registrar.
<PAGE>
4. INDENTURE
The Company issued the Debentures under an Indenture dated as of April
__, 1999 (the "Indenture"), between the Company and the Trustee. The terms of
the Debentures include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb), as amended (the "TIA"). Terms defined in the Indenture and not
defined herein have the meanings ascribed thereto in the Indenture. The
Debentures are subject to all such terms, and Debentureholders are referred to
the Indenture and the TIA for a statement of those terms.
The Debentures are senior unsecured obligations of the Company limited
to $24,000,000 aggregate principal amount at any one time outstanding (subject
to Section 2.7 of the Indenture). The Indenture imposes certain limitations on
the ability of the Company to, among other things, permit its subsidiaries to
incur certain Debt, incur certain Liens and engage in certain Sale and Leaseback
Transactions.
5. OPTIONAL REDEMPTION
The Debentures will not be redeemable at the Company's option prior to
March __, 2009. The Debentures will be redeemable at the option of the Company,
in whole or in part at any time after ___________, 2009, on not less than 30 nor
more than 60 days' prior notice, at a redemption price equal to 100% of their
principal amount plus accrued and unpaid interest thereon to the date of
redemption. Interest shall be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
If money sufficient to pay the redemption price of and accrued interest
on all Debentures (or portions thereof) to be redeemed on the redemption date is
deposited with the Trustee on or before the redemption date and certain other
conditions are satisfied, on and after such date interest will cease to accrue
on such Debentures (or such portions thereof) called for redemption.
6. SINKING FUND
The Debentures are not subject to any sinking fund.
7. NOTICE OF REDEMPTION
Notice of redemption will be mailed by first-class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Debentures to be redeemed at his or her registered address. Debentures in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued interest on all Debentures (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent on or before the redemption
date and certain other conditions are satisfied, on and after such date interest
ceases to accrue on such Debentures (or such portions thereof) called for
redemption.
<PAGE>
8. DENOMINATIONS; TRANSFER
The Debentures are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer Debentures in
accordance with the Indenture. Upon any transfer or exchange, the Registrar and
the Trustee may require a Holder, among other things, to furnish appropriate
endorsements or transfer documents and to pay any taxes required by law or
permitted by the Indenture. The Registrar need not register the transfer of any
Debentures selected for redemption (except, in the case of a Debenture to be
redeemed in part, the portion of the Debenture not to be redeemed) or to
transfer any Debentures for a period of 15 days prior to a selection of
Debentures to be redeemed.
9. PERSONS DEEMED OWNERS
The registered Holder of this Debenture may be treated as the owner of
it for all purposes.
10. UNCLAIMED MONEY
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its written request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
11. DISCHARGE AND DEFEASANCE
Subject to certain conditions, the Company at any time may terminate
some of or all its obligations under the Debentures and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Debentures to redemption or maturity,
as the case may be.
12. AMENDMENT, WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Debentures may be amended without prior notice to any
Debentureholder but with the written consent of the Holders of at least a
majority in aggregate principal amount of the outstanding Debentures and (ii)
any default or noncompliance with any provision may be waived with the written
consent of the Holders of at least a majority in principal amount of the
outstanding Debentures. Subject to certain exceptions set forth in the
Indenture, without the consent of any Holder of Debentures, the Company and the
Trustee may amend the Indenture or the Debentures (i) to cure any ambiguity,
omission, defect or inconsistency; (ii) to provide for the assumption by a
successor corporation of the obligations of the Company under the Indenture;
(iii) to provide for uncertificated Debentures in addition to or in place of
certificated Debentures; (iv) to secure the Debentures; (v) to add additional
covenants or to surrender rights and powers conferred on the Company; (vi) to
comply with the
<PAGE>
requirements of the SEC in order to effect or maintain the qualification of the
Indenture under the TIA; or (vii) to make any change that does not adversely
affect the rights of any Debentureholder in any material respect.
13. DEFAULTS AND REMEDIES
If an Event of Default occurs (other than an Event of Default relating
to certain events of bankruptcy, insolvency or reorganization of the Company)
and is continuing, the Trustee or the Holders of at least 25% in principal
amount of the outstanding Debentures may declare the principal of and accrued
but unpaid interest on all the Debentures to be due and payable. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Company occurs, the principal of and interest on all the Debentures will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in principal amount of the outstanding Debentures may rescind any
such acceleration with respect to the Debentures and its consequences.
If an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the Holders unless such Holders have
offered to the Trustee indemnity or security against any loss, liability or
expense satisfactory to the Trustee in its sole discretion. Except to enforce
the right to receive payment of principal, premium (if any) or interest when
due, no Holder may pursue any remedy with respect to the Indenture or the
Debentures unless (i) such Holder has previously given the Trustee notice that
an Event of Default is continuing, (ii) Holders of at least 25% in principal
amount of the outstanding Debentures have requested the Trustee in writing to
pursue the remedy, (iii) such Holders have offered the Trustee reasonable
security or indemnity against any loss, liability or expense, (iv) the Trustee
has not complied with such request within 60 days after the receipt of the
request and the offer of security or indemnity and (v) the Holders of a majority
in principal amount of the outstanding Debentures have not given the Trustee a
direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the Holders of a majority in principal amount of the
outstanding Debentures are given the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
14. TRUSTEE DEALINGS WITH THE COMPANY
Subject to certain limitations imposed by the TIA, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Debentures and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
15. NO RECOURSE AGAINST OTHERS
<PAGE>
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Debentures or the Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Debenture, each
Debentureholder waives and releases all such liability. The waiver and release
are part of the consideration for the issue of the Debentures.
16. AUTHENTICATION
This Debenture shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Debenture.
17. ABBREVIATIONS
Customary abbreviations may be used in the name of a Debentureholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
18. GOVERNING LAW
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
19. CUSIP NUMBERS
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Debentures and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Debentureholders. No representation is
made as to the accuracy of such numbers either as printed on the Debentures or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
THE COMPANY WILL FURNISH TO ANY HOLDER OF DEBENTURES UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN IT
THE TEXT OF THIS DEBENTURE.
<PAGE>
EXHIBIT II
ASSIGNMENT FORM
To assign this Debenture, fill in the form below:
I or we assign and transfer this Debenture to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Debenture on the books of the
Company. The agent may substitute another to act for him.
Date: ________________ Your Signature:
Sign exactly as your name appears on the other side of this Debenture.
<PAGE>
[TO BE ATTACHED TO GLOBAL DEBENTURES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL DEBENTURE
The initial principal amount of this Global Debenture is $[ ].
The following increases or decreases in this Global Debenture have been made:
<TABLE>
<S> <C> <C> <C> <C>
Date of Amount of decrease in Amount of increase in Principal amount of this Signature of authorized
Exchange Principal Amount of this Principal Amount of this Global Debenture following signatory of Trustee or
Global Debenture Global Debenture such decrease or increase Debentures Custodian
</TABLE>
<PAGE>
EXHIBIT III
Form of
Transferee Letter of Representation
Chandler (U.S.A.), Inc.
In care of
[ ]
[ ]
[ ]
Ladies and Gentlemen:
This certificate is delivered to request a transfer of $[ ] principal
amount of the ____% Senior Debentures due 2014 (the "Debentures") of Chandler
(U.S.A.), Inc. (the "Company").
Upon transfer, the Debentures would be registered in the name of the
new beneficial owner as follows:
Name:________________________
Address:_____________________
Taxpayer ID Number:__________
The undersigned represents and warrants to you that:
1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")) purchasing for our own account or for the account of such an
institutional "accredited investor" at least $250,000 principal amount of the
Debentures, and we are acquiring the Debentures not with a view to, or for offer
or sale in connection with, any distribution in violation of the Securities Act.
We have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Debentures,
and we invest in or purchase securities similar to the Debentures in the normal
course of our business. We, and any accounts for which we are acting, are each
able to bear the economic risk of our or its investment.
<PAGE>
2. We understand that the Debentures have not been registered under the
Securities Act and, unless so registered, may not be sold except as permitted in
the following sentence. We agree on our own behalf and on behalf of any investor
account for which we are purchasing Debentures to offer, sell or otherwise
transfer such Debentures prior to the date that is two years after the later of
the date of original issue and the last date on which the Company or any
affiliate of the Company was the owner of such Debentures (or any predecessor
thereto) (the "Resale Restriction Termination Date") only (a) to the Company,
(b) pursuant to a registration statement that has been declared effective under
the Securities Act, (c) in a transaction complying with the requirements of Rule
144A under the Securities Act ("Rule 144A"), to a person we reasonably believe
is a qualified institutional investor under Rule 144A (a "QIB") that purchases
for its own account or for the account of a QIB and to whom notice is given that
the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and
sales that occur outside the United States within the meaning of Regulation S
under the Securities Act, (e) to an institutional "accredited investor" within
the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is
purchasing for its own account or for the account of such an institutional
"accredited investor," in each case in a minimum principal amount of Debentures
of $250,000, or (f) pursuant to any other available exemption from the
registration requirements of the Securities Act, subject in each of the
foregoing cases to any requirement of law that the disposition of our property
or the property of such investor account or accounts be at all times within our
or their control and in compliance with any applicable state securities laws.
The foregoing restrictions on resale will not apply subsequent to the Resale
Restriction Termination Date. If any resale or other transfer of the Debentures
is proposed to be made pursuant to clause (e) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from the
transferee substantially in the form of this letter to the Company and the
Trustee, which shall provide, among other things, that the transferee is an
institutional "accredited investor" within the meaning of Rule 501(a)(1), (2),
(3) or (7) under the Securities Act and that it is acquiring such Debentures for
investment purposes and not for distribution in violation of the Securities Act.
Each purchaser acknowledges that the Company and the Trustee reserve the right
prior to the offer, sale or other transfer prior to the Resale Termination Date
of the Debentures pursuant to clause (d), (e) or (f) above to require the
delivery of an opinion of counsel, certifications or other information
satisfactory to the Company and the Trustee.
TRANSFEREE:
By:
<PAGE>
EXHIBIT 5.1
May 28, 1999
Chandler (U.S.A.), Inc.
1010 Manvel Avenue
Chandler, Oklahoma 74834
Gentlemen:
We have served as counsel for Chandler (U.S.A.), Inc., an Oklahoma
Corporation (the "COMPANY"), in connection with the Registration Statement on
Form S-1 (the "REGISTRATION STATEMENT") filed with the Securities and
Exchange Commission in connection with the registration under the Securities
Act of 1933, as amended (the "1933 ACT"), of $24,000,000 principal amount of
the Company's __% Senior Debentures due 2014 (the "DEBENTURES").
We have examined the Registration Statement, the Indenture between the
Company and U.S. Trust Company of Texas, N.A., as trustee, pursuant to which
the Debentures are to be issued (the "INDENTURE"), and such other documents
and such questions of law as we have deemed necessary to render the opinion
expressed below.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as copies, and the authenticity of the originals of
such copied documents. We have also assumed that, with respect to all
persons and entities other than the Company, such persons or entities had the
power (corporate or otherwise) to enter into and perform all of their
obligations under the Indenture, the due authorization by all requisite
action (corporate or otherwise) on the part of such persons or entities, the
due execution and delivery by such persons or entities of such document, and
the validity and binding effect thereof. As to any facts material to the
opinion expressed herein that we did not independently establish or verify,
we have relied upon oral or written statements, certificates, and
representations of officers and other representatives of the Company and
others.
Based upon the foregoing, and subject to the qualifications set forth
below, we are the opinion that when the Debentures are executed and
authenticated in accordance with the terms of the Indenture and delivered in
the manner and for the consideration described in the Registration Statement,
the Debentures will be binding and enforceable obligations of the Company.
<PAGE>
The opinion expressed above is subject to the following qualifications:
1. The binding nature and enforceability of the Debentures may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or transfer, and other similar laws affecting the enforcement of
creditors' rights generally and (ii) equitable principles of general
application and judicial discretion that may limit or affect the availability
or grant of certain equitable remedies in certain instances. In addition,
the binding nature and enforceability of certain of the remedial, waiver, and
other provisions of the Debentures, or of the Indenture for the Debentures,
may be restricted by applicable state law, but such restrictions will not, in
our opinion, render the Debentures invalid as a whole or substantially
interfere with the realization of the principal legal benefits purported to
be provided by the Debentures or by the Indenture for the Debentures (except
to the extent of any procedural delay which may result therefrom). Further,
the binding nature and enforceability of the indemnification provisions of
the Indenture may be limited by public policies embodied in or reflected by
various state and federal securities laws.
2. The opinion expressed herein is limited to the laws of the United
States of America, the laws of the State of Texas, and the corporate laws of
the State of Oklahoma, and we assume no responsibility as to the
applicability or the effect of any other laws. We have assumed that the laws
of the State of New York, which purport to govern the Debentures and the
Indenture, are the same as the laws of the State of Texas with respect to the
binding nature and enforceability of the Debentures.
We consent to the use of this opinion letter as an exhibit to the
Registration Statement and to the use of our name in the Registration
Statement under the heading "Legal Matters." Our consent, however, is not an
admission that we have come within the category of persons whose consent is
required under Section 7 of the 1933 Act or the rules and regulations of the
Securities and Exchange Commission.
Very truly yours,
GARDERE & WYNNE, L.L.P.
By: /s/ David G. McLane
-----------------------------------
David G. McLane, Partner
<PAGE>
EXHIBIT 12.1
CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands except for ratio)
<S> <C> <C> <C> <C> <C> <C> <C>
COMPUTATION OF EARNINGS:
Income (loss) before income taxes $ (1,624) $ (1,546) $ (2,097) $ 5,286 $ 786 $ 78 $ 1,038
Fixed charges, net 321 371 554 808 1,070 $ 203 $ 298
-------- -------- -------- -------- -------- -------- --------
Total earnings $ (1,303) $ (1,175) $ (1,543) $ 6,094 $ 1,856 $ 281 $ 1,336
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
COMPUTATION OF FIXED CHARGES:
Interest Expense $ 2 $ 52 $ 146 $ 442 $ 887 $ 125 $ 216
Amortization of debt issuance expense -- -- 45 3 17 4 4
Interest factor in rental expense 319 319 363 363 166 74 78
-------- -------- -------- -------- -------- -------- --------
Total fixed charges $ 321 $ 371 $ 554 $ 808 $ 1,070 $ 203 $ 298
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
RATIO OF EARNINGS TO FIXED CHARGES (4.06) (3.17) (2.79) 7.54 1.73 1.38 4.49
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PROFORMA RATIO FOR DEBT REFINANCING:
Increase in interest expense relating to
proposed issuance of new debt $ 1,838 $ 469
Decrease in interest expense on debt
presently outstanding that will be retired
with the proceeds of proposed offering (799) (195)
-------- --------
Total adjustment to fixed charges $ 1,039 $ 274
-------- --------
-------- --------
Adjusted earnings $ 1,856 $ 1,336
Adjusted fixed charges $ 2,109 $ 572
Proforma ratio 0.88 2.34
Historical ratio 1.73 4.49
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-76393 of Chandler (U.S.A.), Inc. and subsidiaries of our report dated
February 22, 1999 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to litigation), appearing in the Prospectus,
which is part of this Registration Statement, and of our report dated February
22, 1999 relating to the financial statement schedules appearing elsewhere in
this Registration Statement.
We also consent to the references to us under the headings "Summary Consolidated
Financial Data", "Selected Consolidated Financial Data" and "Experts" in such
Propectus.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
May 28, 1999
