CHANDLER USA INC, S-1, 1999-04-16

CHANDLER USA INC
S-1, 1999-04-16

Previous: FAUQUIER BANKSHARES INC, 10-12G, 1999-04-16

Next: FINANCIALWEB COM INC, 10SB12G, 1999-04-16

<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1999

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
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. / /
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE REGISTRATION FEE
<S> <C> <C>
% Senior Debentures due 2014............................................. $24,000,000 $6,672.00
</TABLE>

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

THE COMPANY:

- Chandler (U.S.A.), Inc.
1010 Manvel Avenue
Chandler, Oklahoma 74834
Telephone: 405-258-0804

- We are a wholly owned subsidiary of Chandler Insurance (Barbados), Ltd.,
which is wholly owned by Chandler Insurance Company, Ltd., whose common
stock is traded on the Nasdaq Stock Market under the symbol CHANF.

- Our wholly owned subsidiary, National American Insurance Company, is one
of the leading writers of property and casualty insurance in Oklahoma.

USE OF PROCEEDS:

- We intend to use the proceeds to retire our existing bank debt and to
repay amounts due Chandler Insurance (Barbados), Ltd. The balance will be
used for general corporate purposes.

TRADING FORMAT:

- The debentures have been approved for listing on the American Stock
Exchange, subject to official notice of issuance.

THE DEBENTURES:

- MATURITY DATE
The debentures will mature on , 2014.

- INTEREST
Cash interest will accrue on the debentures at a rate of % per annum,
and will be payable semi-annually in cash in arrears on and
, commencing on , 1999.

- RANKING
The debentures are general senior 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.

- 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>
<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" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934 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.

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. 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>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- --------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA
Revenues
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 revenues............................................................ 87,569 89,967 60,108
---------- ---------- --------------
Operating expenses
Losses and loss adjustment expenses..................................... 48,766 47,905 36,042
Policy acquisition costs................................................ 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 expenses.................................................. 89,666 84,681 59,322
---------- ---------- --------------
Income (loss) before income taxes......................................... (2,097) 5,286 786
Net income (loss) (1)..................................................... $ (1,780) $ 3,005 $ 433
---------- ---------- --------------
---------- ---------- --------------
Cash provided by (applied to):
Operating activities.................................................... 1,784 8,074 (10,288)
Investing activities.................................................... (7,554) (1,840) 9,894
Financing activities.................................................... 6,078 (2,643) (1,085)
OTHER DATA
Combined loss and underwriting expense ratio (2)........................ 107% 98% 102%
EBITDA (3).............................................................. $ 184 $ 7,832 $ 4,007
Ratio of earnings to fixed charges(4)................................... -- 7.54 1.73
Pro forma ratio of earnings to fixed charges (5)........................ --
Interest coverage ratio (6)............................................. 1.3 17.7 4.5

<CAPTION>
DECEMBER 31, 1998
--------------------------
ACTUAL AS ADJUSTED(7)
---------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and investments...................................................... $ 94,947 $ 97,275
Total assets.............................................................. 223,351 225,679
Unpaid losses and loss adjustment expenses................................ 80,701 80,701
Notes payable............................................................. 9,410 0
Amounts due to affiliate.................................................. 12,219 0
Debentures................................................................ 0 24,000
Total liabilities......................................................... 174,090 176,461
Shareholder's equity...................................................... 49,261 49,218
</TABLE>

- ------------------------

(1) Net income (loss) excluding net litigation and similar expenses (net
expenses related to the CenTra, Inc. litigation, costs related to a
reinsurance arbitration, and costs related to the

5
<PAGE>
termination of relations with NAICO's former surety bond underwriting
manager) was $450,000, $3.6 million and $729,000 in 1996, 1997 and 1998,
respectively.

(2) 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.

(3) 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 years
ended December 31:

<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net Income (loss)............................................... $ (1,780) $ 3,005 $ 433
Federal income tax provision (benefit).......................... (316) 2,281 353
Interest expense................................................ 146 442 887
Depreciation and amortization................................... 2,134 2,104 2,334
--------- --------- ---------
EBITDA.......................................................... $ 184 $ 7,832 $ 4,007
--------- --------- ---------
--------- --------- ---------
</TABLE>

(4) 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.

(5) The pro forma ratio of earnings to fixed charges for 1998 is calculated in
the same manner as the ratio of earnings to fixed charges, as described in
(4) 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.

(6) 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.

(7) As adjusted on a pro forma basis to reflect the issuance to give effect to
the offering and the application of the proceeds therefrom, prior to
deducting underwriter's discount and 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 REPAY DEBT.

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.

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."

OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED IF NAICO'S LOSS RESERVES ARE
INADEQUATE.

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

8
<PAGE>
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."

REGULATION COULD ADVERSELY AFFECT OUR COMPANY AND ITS SUBSIDIARIES.

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; and

- 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 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

9
<PAGE>
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.

GEOGRAPHICAL CONCENTRATION OF THE SOURCE OF NAICO'S PREMIUMS COULD ADVERSELY
AFFECT OUR COMPANY.

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.

FAILURE OR LACK OF REINSURANCE COULD ADVERSELY AFFECT OUR COMPANY AND ITS
SUBSIDIARIES.

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.

THE CENTRA LITIGATION COULD ADVERSELY AFFECT OUR COMPANY AND ITS SUBSIDIARIES.

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.

10
<PAGE>
FLUCTUATIONS OF FINANCIAL RESULTS IN THE INDUSTRY COULD ADVERSELY AFFECT OUR
COMPANY AND ITS SUBSIDIARIES.

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.

NAICO IS IN A HIGHLY COMPETITIVE INDUSTRY.

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.

11
<PAGE>
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 RATINGS ARE SUBJECT TO CHANGE.

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 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.

CERTAIN MEMBERS OF MANAGEMENT AND KEY EMPLOYEES ARE CRITICAL TO OUR COMPANY.

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.

THE ABSENCE OF AN ESTABLISHED TRADING MARKET FOR THE DEBENTURES MAY AFFECT
MARKETABILITY.

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,

12
<PAGE>
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 MAY ADVERSELY AFFECT OUR COMPANY AND ITS SUBSIDIARIES.

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;

- 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.

13
<PAGE>
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 $ million 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
CIB, 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 CIB. 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. 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 CIB at March 31, 1999, was $8.9 million
and $13.1 million, respectively. The amounts borrowed from CIB, 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 as adjusted on a pro forma basis to reflect the issuance
of the debentures and the application of the proceeds therefrom, prior to
deducting underwriter's discount and expenses of the offering. See "Use of
Proceeds" and CUSA's Consolidated Financial Statements included elsewhere
herein.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
<S> <C> <C>
ACTUAL ADJUSTED
---------- ----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Notes payable......................................................... $ 9,410 $ --
Amounts due to CIB.................................................... 12,219 --
Debentures............................................................ -- 24,000

Shareholder's equity
Common stock.......................................................... 2 2
Paid-in surplus....................................................... 60,584 60,584
Accumulated deficit................................................... (12,040) (12,083)
Accumulated other comprehensive income................................ 715 715
---------- ----------
Total shareholder's equity........................................ 49,261 49,218
---------- ----------
Total capitalization.............................................. $ 70,890 $ 73,218
---------- ----------
---------- ----------
</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 CIC. 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA
Revenues
Net premiums earned.................................. $ 63,676 $ 68,584 $ 78,336 $ 80,702 $ 52,424
Interest income, net................................. 5,438 5,494 5,663 6,130 4,904
Realized investment gains, net....................... 7 262 157 790 1,036
Commissions, fees and other income................... 2,646 2,911 3,413 2,345 1,744
--------- --------- --------- --------- ---------
Total revenues......................................... 71,767 77,251 87,569 89,967 60,108
--------- --------- --------- --------- ---------
Operating expenses
Losses and loss adjustment expenses.................. 42,922 44,460 48,766 47,905 36,042
Policy acquisition costs............................. 17,541 22,000 27,910 23,346 10,735
General and administrative expenses.................. 11,532 11,706 13,074 12,065 11,235
Interest expense..................................... 2 52 146 442 887
Litigation expenses, net............................. 1,394 579 (230) 923 423
--------- --------- --------- --------- ---------
Total operating expenses............................... 73,391 78,797 89,666 84,681 59,322
--------- --------- --------- --------- ---------
Income (loss) before income taxes...................... (1,624) (1,546) (2,097) 5,286 786
Net income (loss) (1).................................. $ (1,467) $ (2,358) $ (1,780) $ 3,005 $ 433
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash provided by (applied to):
Operating activities................................. (7,725) (5,288) 1,784 8,074 (10,288)
Investing activities................................. 1,278 2,196 (7,554) (1,840) 9,894
Financing activities................................. 3,972 3,108 6,078 (2,643) (1,085)
OTHER DATA
Combined loss and underwriting expense ratio (2)..... 104% 106% 107% 98% 102%
EBITDA (3)........................................... $ 771 $ 613 $ 184 $ 7,832 $ 4,007
Ratio of earnings to fixed charges(4)................ -- -- -- 7.54 1.73
Pro forma ratio of earnings to fixed charges (5)..... --
Interest coverage ratio (6).......................... 385.5 11.8 1.3 17.7 4.5
BALANCE SHEET DATA
Cash and investments................................... $ 90,599 $ 93,697 $ 99,098 $ 107,957 $ 94,947
Total assets........................................... 250,747 230,265 198,972 202,787 223,351
Unpaid losses and loss adjustment expenses............. 143,437 116,149 78,114 73,721 80,701
Notes payable.......................................... -- 300 4,391 2,796 9,410
Amounts due to affiliate............................... 18,475 21,583 23,548 19,918 12,219
Total liabilities...................................... 204,731 182,702 154,445 154,351 174,090
Shareholder's equity................................... 46,016 47,563 44,527 48,436 49,261
</TABLE>

- ------------------------

(1) Net income (loss) excluding net litigation and similar expenses (net
expenses related to the CenTra, Inc. litigation, costs related to a
reinsurance arbitration, and costs related to the termination of relations
with NAICO's former surety bond underwriting manager) was $(503,000), $(1.8
million), $450,000, $3.6 million and $729,000 in 1994, 1995, 1996, 1997 and
1998, respectively.

16
<PAGE>
(2) 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.

(3) 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 years ended
December 31:

<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss).................................. $ (1,467) $ (2,358) $ (1,780) $ 3,005 $ 433
Federal income tax provision (benefit)............. (157) 812 (316) 2,281 353
Interest expense................................... 2 52 146 442 887
Depreciation and amortization...................... 2,393 2,107 2,134 2,104 2,334
--------- --------- --------- --------- ---------
EBITDA............................................. $ 771 $ 613 $ 184 $ 7,832 $ 4,007
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

(5) The pro forma ratio of earnings to fixed charges for 1998 is calculated in
the same manner as the ratio of earnings to fixed charges, as described in
(4) 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 CIB. See "Use of Proceeds." Earnings would have been
insufficient to cover fixed charges in 1998 by $253,000.

(6) 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.

17
<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.

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 CIC, 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 CIC 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. Management's discussion and analysis that follows is based in part on this
summary information.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING DATA
Revenues
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 revenues................................................................. 87,569 89,967 60,108
--------- --------- ---------

Operating expenses
Losses and loss adjustment expenses.......................................... 48,766 47,905 36,042
Policy acquisition costs..................................................... 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 expenses....................................................... 89,666 84,681 59,322
--------- --------- ---------

Income (loss) before income taxes.............................................. (2,097) 5,286 786
Net income (loss) (1).......................................................... $ (1,780) $ 3,005 $ 433
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ------------------------

(1) Net income (loss) excluding net litigation and similar expenses (net
expenses related to the CenTra, Inc. litigation, costs related to a
reinsurance arbitration, and costs related to the termination of relations
with NAICO's former surety bond underwriting manager) was $450,000, $3.6
million and $729,000 in 1996, 1997 and 1998, respectively.

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>
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 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

24
<PAGE>
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.

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.

25
<PAGE>
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
("loss ratio") 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
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.

26
<PAGE>
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.

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.

27
<PAGE>
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.

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. Excluding the effects of the litigation expenses related
to the legal proceedings involving the CenTra Group, net income would have been
$711,000 in 1998 compared to $3.6 million in 1997.

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.

Excluding the effects of the unusual charges and related expenses and the
estimated recovery, net income would have been approximately $450,000 for 1996.

28
<PAGE>
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.

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. 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.

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 December 31, 1998, the total amount of cash and investments restricted
for NAICO as a result of these arrangements was $8.2 million.

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.
During March 1998, CUSA borrowed an additional $6.2 million on the note and the
proceeds were used to repay amounts due to CIB. The outstanding balance of the
note was $7.4 million at December 31, 1998. The bank note is collateralized by
shares of NAICO stock owned by CUSA.

29
<PAGE>
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. The loan is collateralized by
certain equipment which was purchased with the proceeds of the loan. The
equipment had previously been leased by CUSA.

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 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.

30
<PAGE>
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 NOTES PAYABLE-
PAYABLE- FIXED VARIABLE RATE
MATURITY DATES RATE (2) (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.

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

31
<PAGE>
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 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;

- 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.

32
<PAGE>
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.

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.

33
<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.

CUSA is an Oklahoma corporation which is wholly owned by CIB, which, in
turn, is wholly owned by CIC, 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.

34
<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 CIB, 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.

35
<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

36
<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.

37
<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. CIB
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 to limit its retention for single
loss occurrences involving multiple policies and/or policyholders resulting from
perils 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.

38
<PAGE>
The following table sets forth certain information related to NAICO's four
largest unaffiliated reinsurers and CIB determined on the basis of net
reinsurance recoverables as of December 31, 1998.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------
NET
REINSURANCE CEDED A.M.
RECOVERABLE REINSURANCE BEST CO.
NAME OF REINSURER (1) PREMIUM RATING
- --------------------------------------------------------------------------- -------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CIB........................................................................ $ 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) CIB owns 100% of the common stock of CUSA, which in turn owns 100% of the
common stock of NAICO. Although CIB 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, CIB 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

39
<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

40
<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.

41
<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.

42
<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.

43
<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, CIC 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 CIC, 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

44
<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 CIC,
CIB 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

45
<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

46
<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 CIB. In
addition to the insurance arrangements, CenTra and its affiliates have been
significant shareholders in CIC, holding approximately 22.7% of CIC'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 CIC.

Beginning in 1992, the relationships between CIC 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 CIC subsidiary for a majority of the
outstanding CIC Stock. In an apparent attempt to block the tender offer and
seize control of CIC, 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 CIC'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
CIC. 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

47
<PAGE>
made an offer to Cactus Southwest Corp. to purchase its 169,858 common shares of
CIC. On July 7, 1992, the Nebraska Department of Insurance (the "Department")
ordered CenTra to cease and desist purchases of CIC'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 CIC 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 CIC'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 CIC, 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 CIC common shares. On July 12, 1992, M.J. Moroun contracted with Cactus
Southwest Corp. for the purchase of its common shares of CIC. 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 CIC 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 CIC 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 CIC shares. During the second quarter of 1997, ownership
of the 380,471 common shares of CIC 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 CIM
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 CIC shares.

Through the above transactions, CenTra and its affiliates acquired, or
contracted to acquire, an additional 26.5% of CIC'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 CIC, the other corporations
participating in the tender offer, and various individuals including certain
officers and employees of CIC and its subsidiaries and the remaining directors
of CIC, 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. CIC and the other defendants denied any breaches of
duty or violations of law and CIC 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 CIC through the
July 1992 stock purchases, and sought damages, costs and attorney fees. CIC 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.

48
<PAGE>
invalid and unenforceable a corporate resolution based on Article XI of CIC's
Articles of Association (prohibiting certain business combinations) that
prohibits Can-Am and its affiliates (including CenTra) from voting their shares
of CIC'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 CIC'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 CIC, 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 CIC 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 CIC 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 CIC 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.

49
<PAGE>
ownership of CIC'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 CIC 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 CIC's Board of Directors in August 1992 pursuant to Article XI of
CIC's Articles of Association preventing CenTra and its affiliates from voting
their CIC stock.

The jury found in favor of CenTra on CIC's claim against CenTra for breach
of a standstill agreement contained in a 1988 stock exchange agreement. The jury
denied CIC's claim against Messrs. Harned, Lech and Moroun based upon their
alleged breach of fiduciary duty as directors. The jury also denied CIC'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, CIC 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, CIC recorded the return of 517,500 shares of
CIC'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 CIB of $2.7
million from CIC's directors and officers liability insurer (the "D&O Insurer")
for costs associated with the defense and litigation of these matters. CIC 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 CIC 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 CIC and CIB to require CenTra
and its affiliates to deliver 1,142,625 shares of CIC common stock they own or
control upon payment of the $6,882,500 judgment which was entered in CenTra's
favor in April 1997. CIC recorded the return of 1,142,625 shares of CIC'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, CIC reduced the

50
<PAGE>
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. CIC 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 CIC'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. CIC
believes the appeal of this issue is untimely and therefore barred by law. CIC
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, CIC'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 CIC'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 CIC'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. CIC believes that it is not required to pay the judgments
until the CenTra Group can deliver the shares to CIC. See "--CenTra
Litigation--Nebraska."

The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on CIC and could negatively impact
CIC's future earnings. CIC'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, CIC may receive cash through
equity sales, borrowings and dividends from its subsidiaries. CIB 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

51
<PAGE>
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 CIC
(the "Shares") from Can-Am, an affiliate of three of CIC'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 CIC held by Can-Am and was extended to include the CenTra Group's claim to
rights to acquire stock of CIC. 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 CIC 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 CIC 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 CIC shares owned by them, regardless of when purchased. The CenTra
defendants own or control 3,133,450 CIC 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 CIC stock
owned or controlled by them or their

52
<PAGE>
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, CIC 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 CIC's common stock, or the effect on the market price of
CIC'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 CIC 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 CIC 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 CIC'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 CIC would acquire and
cancel the shares of CIC stock owned or acquired by the CenTra Group. The NAICO
Plan has been approved by CIC'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 CIC stock held as security by CIC 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 CIM 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,

53
<PAGE>
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 CIB concluded an arbitration proceeding
involving DuraRock and CIB recorded approximately $315,000 in litigation and
settlement expenses related to this matter. CIC also resolved various issues
resulting in settlement of litigation and arbitration proceedings among
subsidiaries of CIC 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 CIC and CIC's
directors other than Messrs. M.J. Moroun, Harned, Lech and Maestri were named as
defendants. In accordance with its Articles of Association, CIC 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.
CIB 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, CIB 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, CIB and CUSA recorded additional
estimated recoveries of $102,000 and $880,000, respectively. CIB 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,
CIB recorded an additional estimated recovery of $2.7 million from the D&O
Insurer. CIC 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 CIC is
negotiating with the D&O Insurer for payment of the policy balance. CIC 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 CIC 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.

54
<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 CIC and NAICO since
October 1988, was a Vice President of CIC for three years prior thereto, and has
been a director of CIC since September 1985. Since October 1988 she has served
in officer and director capacities for various subsidiaries of CIC 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.

55
<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 CIC and certain of its officers and directors to disclose the
applicability of the Nebraska Insurance Holding Company Act to purchasers of
stock of CIC in a public offering. The judgments are currently being appealed.

56
<PAGE>
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.

(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.

57
<PAGE>
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 CIC, 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 CIC 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.

58
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

CUSA is an indirect wholly owned subsidiary of CIC. The table below shows:
(1) the number and percentage of outstanding shares of each class of the capital
stock of CIC that, as of December 31, 1998, are beneficially owned by (a) each
director of CIC and CUSA, (b) each Named Executive, (c) each executive officer
of CIC and (d) all directors and executive officers of CUSA and CIC as a group
and (2) the combined percentage of all classes of the capital stock of CIC 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
CIC'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 CIC'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 CIC 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.

(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

59
<PAGE>
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 CIC
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 CIC 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 CIC 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 CIC'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 CIC 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 CIC'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 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

60
<PAGE>
Mr. Harned; 200 common shares held by Mr. Lech; and 1,625 common shares
owned by Agnes A. Moroun, M.J. Moroun's sister.

CIC 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 CIC.

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 CIC. On November 19, 1998, the Plan
acquired these and other CIC 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 CIC 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.

During 1996, CUSA transferred 567,350 shares of CIC stock to CIC. 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.

61
<PAGE>
During 1997, L&W acquired 494,617 shares of CIC'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 CIM an affiliate who, in turn assumed
debt of L&W to CIB in the amount of approximately $2.5 million, the fair value
of the shares.

In connection with an intercompany loan, CUSA has owed CIB 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 CIB
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 CIM
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 CIC, 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 CIB 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 CIB
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

You can find definitions of certain terms used in this description under the
subheading "Certain Definitions." In this description, the word "CUSA" refers
only to CUSA and not to any of its subsidiaries.

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 the cover page.

The following description is a summary of certain provisions of the
indenture and the debentures and does not purport to be complete. It does not
restate those agreements in their entirety. We urge you to read the indenture
because it, and not this description, defines your rights as holders of these
debentures.

BRIEF DESCRIPTION OF THE DEBENTURES

These debentures:

- are general unsecured obligations of CUSA;

- rank on a parity in right of payment with all other unsecured and
unsubordinated indebtedness of CUSA;

62
<PAGE>
- 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 any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
debentures, but CUSA may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection with any
of the above.

The debentures will mature on , 2014. Each debenture will bear
interest at a rate per annum 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 ,
respectively.

METHODS OF RECEIVING PAYMENTS ON THE NOTES

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

The debentures will not be redeemable at CUSA's option prior to ,
2009. The debentures will be redeemable at the option of CUSA, in whole or in
part, at any time or from time to time after , 2009, on at least 30 but
no 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.
Interest will 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 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 on a parity with
all other unsecured and unsubordinated indebtedness of CUSA. CUSA is a holding
company and the debentures will be effectively subordinated to all existing and
future liabilities, including indebtedness, of its subsidiaries. See "The
Chandler Organization" and "--Certain Covenants--Limitation on Subsidiary Debt."

CERTAIN COVENANTS

LIMITATION ON SUBSIDIARY DEBT

CUSA will not permit any Subsidiary of CUSA to Incur or suffer to exist 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;

63
<PAGE>
(2) Debt or Preferred Stock issued to and held by CUSA or a Wholly Owned
Subsidiary of CUSA, but only so long as held or owned by CUSA or a
Wholly Owned Subsidiary of CUSA;

(3) Debt Incurred or Preferred Stock issued by a Person prior to the time
(a) that Person became a Subsidiary of CUSA, (b) that Person merges into
or consolidates with a Subsidiary of CUSA, or another Subsidiary of CUSA
merges into or consolidates with that Person (in a transaction in which
that Person becomes 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 for the purpose of financing 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 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 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 pursuant to clauses (1) through (4) above 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 the 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 the 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;

(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 pursuant to 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 a
principal 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 pursuant to clauses (1)
through (6) above which, together with the sum of any of the outstanding
Debt Incurred pursuant to this clause (7), has an aggregate principal
amount not in excess of $2.0 million.

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 of 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

64
<PAGE>
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.

LIMITATION 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 without
making, or causing the Subsidiary to make, effective provision for securing 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) equally and
ratably with that Debt as to such property or assets for so long as that Debt
will be so secured or, in the event that the Debt is Debt of CUSA which is
subordinate in right of payment to the debentures, prior to 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 that Person becomes a
Subsidiary of CUSA, is merged into or consolidated with CUSA (or any
Subsidiary of CUSA) or any Subsidiary of CUSA merges into or
consolidates with that Person or when 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 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 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, 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 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 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;

65
<PAGE>
(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 foregoing
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);

(11) Liens securing Debt owed by CUSA to one or more Wholly Owned
Subsidiaries (but only if that Debt is held by that Wholly Owned
Subsidiary); 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 United States 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.

LIMITATION ON SALE AND LEASEBACK TRANSACTIONS

CUSA will not, and will not permit any Subsidiary of CUSA to, enter into any
Sale and Leaseback Transaction with respect to any property or assets (except
for a period not exceeding three years) unless:

(1) CUSA or the Subsidiary would be entitled to Incur a Lien on such
property or assets to secure Debt by reason of the provisions described
in clauses (1) through (12) of the second paragraph under the
"Limitation on Liens" covenant 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 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 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.

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 to each Holder
(without exhibits), without cost to that Holder, 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

66
<PAGE>
(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 Significant Subsidiary thereof (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 and 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

67
<PAGE>
(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 aggregate principal amount
of the debentures at the time outstanding (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 but unpaid interest on all the debentures to be due and payable. Upon
this declaration, the principal and accrued and unpaid 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 and unpaid 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 with
respect to the debentures and its consequences.

The Holders of not less than 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
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 that action.

AMENDMENTS AND WAIVERS

Subject to certain exceptions, the indenture may be amended with the written
consent of the Holders of a majority in principal amount of the debentures then
outstanding and any past default or compliance with any provisions may also be
waived with the 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 with
respect to that Holder's debentures; or

(7) make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions.

Without the consent of any Holder, CUSA and Trustee may amend the indenture:

(1) to cure any ambiguity, omission, defect or inconsistency;

68
<PAGE>
(2) to provide for the assumption by a successor corporation of the
obligations of CUSA under the indenture;

(3) to provide for uncertificated debentures in addition to or in place of
certificated debentures (provided 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 CUSA for the benefit of the debentureholders
or to surrender any right or power conferred upon CUSA;

(6) to make any change that does not adversely affect the rights of any
Holder in any material respect; and

(7) to comply with any requirement of the SEC in connection with the
qualification of the indenture under the TA.

The consent of the Holders of the debentures is not necessary under the
indenture to 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 debentureholder may transfer or exchange debentures in accordance with the
indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a debentureholder, among other things, to furnish appropriate
endorsements and transfer documents and CUSA may require a debentureholder 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 its obligations under the debentures and
the indenture ("legal defeasance"), except for certain obligations, including
those respecting 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 in respect of the
debentures. CUSA at any time may terminate its obligations under the covenants
described under "Certain Covenants," the operation of the cross acceleration
provision and the judgment default provision described under "Defaults" above
("covenant defeasance").

CUSA may exercise its legal defeasance option notwithstanding its prior
exercise of 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,

69
<PAGE>
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 Internal Revenue Service 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 with
regard to the debentures.

GOVERNING LAW

The indenture provides that it and the debentures will be governed by, and
construed in accordance with, 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.

CERTAIN DEFINITIONS

For purposes of the indenture, the following terms have meanings set forth
below.

"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 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 a
lease for any such period will be the aggregate 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 in accordance with GAAP.

"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 that 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 that Person in accordance with GAAP. The stated maturity of
such obligation will be the date of the last payment of rent or any other amount
due under that 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
that Person.

"Code" means the Internal Revenue Code of 1986, as amended, the Treasury
Regulations promulgated thereunder, and judicial and administrative
interpretations thereof.

"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of that Person, and whether or not
contingent,

(1) every obligation of that Person for money borrowed,

70
<PAGE>
(2) every obligation of that Person evidenced by 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 with respect to 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,
directly or indirectly, as obligor, guarantor or otherwise and
obligations secured by (or for which the holder of that 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 that Person, even though that Person has not assumed or become
liable for the payment of that obligation; PROVIDED that if the
obligation so secured has not been assumed in full by that Person or is
otherwise not that Person's legal liability in full, the amount of
that obligation for the purposes of this definition will be limited to
the lesser of the amount of that obligation secured by that Lien or the
fair market value of the assets or the property securing that Lien.

"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.

"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
that 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 that Person,

(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) that Debt or to purchase (or to advance or supply funds for
the purchase of) any security for the payment of that Debt,

(2) to purchase property, securities or services for the purpose of assuring
the holder of that Debt of the payment of that Debt, or

(3) 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 that Debt (and "Guaranteed" and "Guaranteeing" will have
meanings correlative to the foregoing); PROVIDED, HOWEVER, that the
Guarantee by a Person will not include endorsements by that Person for
collection or deposit in the ordinary course of business.

"Holder" means the Person in whose name a debenture is registered on the
registrar's books.

71
<PAGE>
"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 that Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any that Debt or
other obligation on the balance sheet of that Person (and "Incurrence,"
"Incurred," "Incurrable" and "Incurring" will have meanings correlative to the
foregoing); PROVIDED, HOWEVER, that a change in GAAP that results in an
obligation of that Person that exists at that time becoming Debt will not be
deemed an Incurrence of that Debt.

"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 the 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).

"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 CUSA or the Trustee.

"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 that 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 that
Person, to shares of Capital Stock of any other class of that Person.

"Redeemable Stock" of any Person means any equity security of that 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 that lender or investor is a party providing for
the leasing by that Person of any property or assets of that Person which has
been or is being sold or transferred by that Person more than one year after the
acquisition thereof or the completion of construction or commencement of
operation thereof to that lender or investor or to any Person to whom funds have
been or are to be advanced by that lender or investor on the security of the
property or asset. The Stated Maturity of that arrangement will be the date of
the last payment of rent or any other similar amount due under that arrangement
prior to the first date on which that arrangement may be terminated by the
lessee without payment of a penalty.

"Significant Subsidiary" means 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.

"Stated Maturity" means, with respect to any security, the date specified in
that security as the fixed date on which the final payment of principal of that
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of that
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless that 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 that Person, and any partnership, association, joint venture or other entity
in which that Person owns more than 50% of the equity interests or has the power

(1) to elect a majority of the board of directors or other governing body or

(2) to direct the policies, management or affairs thereof.

72
<PAGE>
"TA" means the Trust Indenture Act of 1939 (15 U.S.C.
SectionSection77aaa-77bbbb), as amended.

"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 that Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) will at the time be owned by that
Person or by one or more Wholly Owned Subsidiaries of that Person or by that
Person and one or more Wholly Owned Subsidiaries of that Person.

73
<PAGE>
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.

74
<PAGE>
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

75
<PAGE>
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.

76
<PAGE>
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, 1999, 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

77
<PAGE>
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, 1999, 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, 1999, 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.

78
<PAGE>
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).

79
<PAGE>
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, 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

80
<PAGE>
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).

81
<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 CIC and NAICO and the beneficial
owner of 27,000 shares of common stock of CIC.

EXPERTS

The consolidated financial statements included in this prospectus and the
related financial statement schedules included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein (which expresses an unqualified opinion

82
<PAGE>
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.

83
<PAGE>
CHANDLER (U.S.A.), INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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
</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.................... $ 95,828 $ 84,269
Fixed maturities held to maturity, at amortized cost (fair value
$1,330 and $1,332 in 1997 and 1998, respectively)................... 1,222 1,183
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........ 19,686 40,780
Prepaid reinsurance premiums............................................ 15,555 29,616
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...................................................... 4,986 12,422
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................................................. (25,425) (41,531) (87,671)
---------- ---------- ----------
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........................................ 48,766 47,905 36,042
Policy acquisition costs................................................... 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.......................... 33,394 4,196 (20,676)
Prepaid reinsurance premiums...................................... (431) (5,524) (14,061)
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.................................................. (631) 2,218 7,436
--------- --------- ---------
Cash provided by (applied to) operating activities.................. 1,784 8,074 (10,288)
--------- --------- ---------
INVESTING ACTIVITIES
Fixed maturities available for sale:
Purchases........................................................... (27,073) (32,518) (47,602)
Sales............................................................... 8,929 18,674 36,177
Maturities.......................................................... 8,780 10,004 24,331
Fixed maturities held to maturity:
Maturities.......................................................... 2,409 380 100
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. ("CIB") which,
in turn, is wholly owned by Chandler Insurance Company, Ltd. ("CIC"), 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.

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. The portion of premiums that will be earned in the future are
deferred and reported as unearned premiums. Amounts paid for ceded reinsurance
premiums are reported as prepaid reinsurance premiums and amortized over

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)
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>

Depreciation expense was approximately $844,000, $858,000 and $1,047,000 for
1996, 1997 and 1998, respectively.

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)
(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.

(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

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)
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
--------- --------- ---------
--------- --------- ---------
</TABLE>

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 CIC'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.
("CIM") an affiliate who, in turn assumed debt of L&W to CIB in the amount of
approximately $2.5 million, the fair value of the shares.

(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.

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)
(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 CIB. 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 CIB; 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, CIC 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 CIC 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 CIC'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

F-21
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
CIC Stock. In an apparent attempt to block the tender offer and seize control of
CIC, 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 CIC'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 CIC.
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 CIC. On July
7, 1992, the Nebraska Department of Insurance (the "Department") ordered CenTra
to cease and desist purchases of CIC'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 CIC 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 CIC'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 CIC, 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 CIC common
shares. On July 12, 1992, M.J. Moroun contracted with Cactus Southwest Corp. for
the purchase of its common shares of CIC. 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 CIC 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 CIC
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 CIC shares.
During the second quarter of 1997, ownership of the 380,471 common shares of CIC
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 CIM 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 CIC shares.

F-22
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
CENTRA LITIGATION--OKLAHOMA

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 CIC's Articles of
Association (prohibiting certain business combinations) that prohibits Can-Am
and its affiliates (including CenTra) from voting their shares of CIC'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 CIC'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 CIC, 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.

F-23
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
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.

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 CIC requires the CenTra Group to return stock it purchased in
1990 to CIC in return for a payment of $5,099,133 from CIC. Another judgment was
against both CIC and its affiliate, CIB, 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 CIC to adequately disclose the fact that ownership of CIC'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 CIC 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.

F-24
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
The jury found in favor of CenTra on CIC's claim against CenTra for breach
of a standstill agreement contained in a 1988 stock exchange agreement. The jury
denied CIC's claim against Messrs. Harned, Lech and Moroun based upon their
alleged breach of fiduciary duty as directors. The jury also denied CIC's claim
against Mr. Moroun individually for violation of Section 16(b) of the Securities
Exchange Act of 1934 regarding short swing profits.

F-25
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
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. CIC believes the appeal of this issue
is untimely and therefore barred by law. CIC 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.

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

F-26
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
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.

F-27
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
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 CIC 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, CIC 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 CIC's common stock, or the effect on the market price of CIC's stock.

CENTRA LITIGATION--OTHER

F-28
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)
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."

F-29
<PAGE>
CHANDLER (U.S.A.), INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1997 AND 1998

NOTE 10. LITIGATION (CONTINUED)

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. CIB 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-30
<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-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)
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)
CIB........................................................................ $ 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.

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)
At December 31, 1998, CIB 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 CIC 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-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)

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...................................................... $ 120 $ --
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-34
<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 CIC'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-35
<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-36
<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-37
<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-38
<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.................................................................. 34
Legal Proceedings......................................................... 47
Management................................................................ 55
Security Ownership of Certain Beneficial Owners and Management............ 59
Certain Relationships and Related Transactions............................ 61
Description of Debentures................................................. 62
Certain United States Federal Income Tax Considerations................... 74
Book-Entry; Delivery and Form............................................. 79
Underwriting.............................................................. 82
Legal Matters............................................................. 82
Experts................................................................... 82
Additional Information.................................................... 83
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..........................................................
NASD fee.........................................................................
American Stock Exchange listing fee..............................................
Accounting fees and expenses.....................................................
Printing expenses................................................................
Fees and expenses for qualification under state securities laws (including legal
fees)..........................................................................
Transfer agent's and registrar's fees and expenses...............................
Trustee's fees...................................................................
Miscellaneous....................................................................
----------
Total........................................................................
----------
----------
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 1031 of Title 18 of the Oklahoma Statutes allows indemnification of
corporate directors, officers, employees and agents by a corporation under
certain circumstances as therein specified against liabilities, expenses,
counsel fees and costs reasonably incurred in connection with or arising out of
any action, suit, proceeding or claim in which such person is made a party by
reason of such person being or having been such director, officer, employee or
agent.

CUSA's Certificate of Incorporation and Amended Bylaws contain provisions
under which, in certain circumstances, CUSA may indemnify directors, officers,
employees or agents from and against any and all of the expenses, liabilities or
other matters covered by said provisions.

There is in effect for CUSA an insurance policy providing directors and
officers with indemnification, subject to certain exclusions and to the extent
not otherwise indemnified by CUSA, against loss (including expenses incurred in
the defense of claims in connection therewith) arising from any negligent act,
error, omission, misstatement, misleading statement or breach of duty while
acting in their capacity as directors and officers of CUSA. The policy also
provides for the reimbursement of the Registrant for liability incurred in the
indemnification of its directors and officers.

The Underwriting Agreement, filed as Exhibit 1.1 to this Registration
Statement, contains reciprocal agreements of indemnity between CUSA and the
underwriters as to certain liabilities, including liabilities under the
Securities Act, and in certain circumstances provides for indemnification of
CUSA's directors and officers.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Not applicable.

II-1
<PAGE>
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>

* To be filed by amendment

(b) Financial Statement Schedules
See Index to Financial Statement Schedules on page S-1

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

II-2
<PAGE>
The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as a part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused 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 15th day of April, 1999.

<TABLE>
<S> <C> <C>
CHANDLER (U.S.A.), INC.

By: /s/ W. BRENT LAGERE
-----------------------------------------
W. Brent LaGere
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

POWER OF ATTORNEY

Each of the undersigned hereby appoints W. Brent LaGere and Mark T. Paden
and each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in the name, place and
stead of the undersigned, to sign and file with the Commission under the
Securities Act any and all amendments and exhibits to this Registration
Statement, any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and any
and all applications, instruments and other documents to be filed with the
Commission pertaining to the registration of the securities covered hereby or
thereby, with full power and authority to do and perform any and all acts and
things whatsoever requisite or desirable.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons and in the capacities
indicated on the 15th day of April, 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,
/s/ MARK T. PADEN Chief Financial Officer
- ------------------------------ and Director
Mark T. Paden (principal financial
officer)

Vice President--Finance,
/s/ MARK C. HART Treasurer
- ------------------------------ (principal accounting
Mark C. Hart officer)

/s/ RICHARD L. EVANS
- ------------------------------ Vice President and
Richard L. Evans Director

/s/ R. PATRICK GILMORE
- ------------------------------ Secretary, General Counsel
R. Patrick Gilmore and Director
</TABLE>

II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ ROBERT L. RICE
- ------------------------------ Director
Robert L. Rice

/s/ ROBERT A. ANDERSON
- ------------------------------ Director
Robert A. Anderson

/s/ W. TIMOTHY RUNYAN
- ------------------------------ Director
W. Timothy Runyan
</TABLE>

II-5
<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
----------- ----------- ----------- --------- ----------- --------- ----------- -------------
----------- ----------- ----------- --------- ----------- --------- ----------- -------------

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 3.1

CERTIFICATE OF INCORPORATION OF
CHANDLER (U.S.A.), INC.

1. The name of the corporation is: Chandler (U.S.A.), Inc.

2. The address of the registered office of the corporation is: 1006
Manvel, Chandler, OK 74834 and the name of its registered agent at such address
is: Mark T. Paden

3. The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the general corporation
law of the State of Oklahoma.

4. The duration of the corporation is: Perpetual

5. The name and mailing address of each incorporator is as follows:

NAME: ADDRESS:
----- --------

R. Patrick Gilmore P.O. Box 686
Stroud, OK 74079

6. The total number of shares of stock which the corporation shall have
authority to issue is: 50,000 shares, each of the shares having a par value of $
1.00, thereby resulting in the corporation having total authorized capital stock
in the amount of $ 50,000.00, all of which shall be common stock.

7. The board of directors of the corporation shall have full authority,
to the extent permitted by law, to increase, decrease, or otherwise adjust the
capital stock of the corporation, to designate the classes or series thereof and
to determine whether all or any part of such stock shall have voting powers,
full or limited, or no voting powers, and to determine such designations, and
such powers, preferences, relative, participating or optional, or other special
rights and the qualifications, limitations or restrictions thereof as the board
shall from time to time determine in duly adopted resolutions.

At any time and from time to time when authorized by resolution of the
board of directors and without any action by shareholders, the corporation may
issue or sell any shares of its capital stock of any class or series, whether
out of the unissued shares thereof authorized by the Certificate of
Incorporation of the corporation as originally filed or by an amendment thereof
or out of shares of its capital stock acquired by it after the issue thereof,
and whether or not the shares thereof so issued or sold shall confer upon the
holders thereof the right to exchange or convert such shares for or into other
shares of capital stock of the corporation of any class or classes or any series
thereof. When similarly authorized, but without any action by its shareholders,
the corporation may issue or grant rights, warrants or options, in bearer or
registered or such other form as the board of directors

<PAGE>

may determine, for the purchase of shares of the capital stock of any class or
series of the corporation within such period of time, or without limit as to
time, to such aggregate number of shares, and at such price per share, as the
board of directors may determine. Such rights, warrants, or options may be
issued or granted separately or in connection with the issue of any bonds,
debentures, notes, obligations or other evidences of indebtedness or shares of
the capital stock of any class or series of the corporation and for such
consideration and on such terms and conditions as the board of directors in its
sole discretion may determine. In each case, the consideration to be received by
the corporation for any such share so issued or sold shall be such as shall be
fixed from time to time by resolution of the board of directors.

8. In furtherance and not in limitation of the powers conferred by
statute, the board of directors is expressly authorized:

(a) To adopt, amend or repeal the by-laws of the corporation.

(b) To authorize and cause to be executed or granted
mortgages, security interests and liens upon the real and
personal property of the corporation.

(c) To set apart out of any of the funds of the corporation
available for dividends a reserve or reserves for any proper
purpose and to abolish any such reserve in the manner in which
it was created.

(d) By a majority of the whole board of directors, to
designate one or more committees, each committee to consist of
one (1) or more of the directors of the corporation. The board
may designate one (1) or more directors as alternate members
of any committee, who may replace any absent or disqualified
member at any meeting of the committee. Any such committee, to
the extent provided in the resolution or in the by-laws of the
corporation, shall have and may exercise the powers of the
board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it;
provided, however, the by-laws may provide that in the absence
or disqualification of any member of such committee or
committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another
member of the board of directors to act at the meeting in the
place of any such absent or disqualified member.

(e) When and as authorized by the affirmative vote of the
holders of a majority of the stock issued and outstanding
having voting power given at a shareholders' meeting duly
called upon such notice as is required by law, or when
authorized by the written consent of the holders of a majority
of the voting stock issued and outstanding, to sell, lease or
exchange all or substantially all of the property and assets
of the corporation, including its goodwill and its corporate
franchises, upon

<PAGE>

such terms and conditions and for such consideration, which
may consist in whole or in part of money or property including
shares of stock in, and/or other securities of, any other
corporation or corporations, as its board of directors shall
deem expedient and for the best interests of the corporation.

9. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its shareholders or any class of them, any Court of equitable
jurisdiction within the State of Oklahoma, on the application in a summary way
of this corporation or of any creditor or shareholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 1106 of Title 18 of the Oklahoma Statutes or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 1100 of Title 18 of the
Oklahoma Statutes order a meeting of the creditors or class of creditors, and/or
of the shareholders or class of shareholders of this corporation, as the case
may be, to be summoned in such manner as the Court directs. If a majority in
number representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the shareholders or class of shareholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the compromise or arrangement and the reorganization shall, if
sanctioned by the Court to which the application has been made, be binding on
all the creditors or class of creditors and/or on all the shareholders or class
of shareholders of this corporation, as the case may be, and also on this
corporation.

10. Meetings of shareholders may be held within or without the State of
Oklahoma, as the by-laws may provide. The books of the corporation may be kept
(subject to applicable law) inside or outside the State of Oklahoma at such
place or places as may be designated from time to time by the board of directors
of the corporation. Elections of directors need not be by written ballot unless
the by-laws of the corporation shall so provide.

11. To the extent permitted by law, no contract or transaction between
the corporation and one or more of its directors or officers, or between the
corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the directors or officers are present at or
participate in the meeting of the board or committee thereof which authorizes
the contract or transaction, or solely because the directors or officers or
their votes are counted for such purpose.

12. The board of directors is expressly authorized to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative, other than an action by or in the
right of the corporation, by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against

<PAGE>

expenses, including attorney's fees, judgments, fines and amounts paid in
settlement to the extent and in the manner permitted by the laws of the State of
Oklahoma.

13. In furtherance and not in limitation of the powers conferred by the
laws of the State of Oklahoma, the board of directors is expressly authorized to
adopt, amend or repeal the by-laws of the corporation.

14. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by law, and all rights conferred upon the
shareholders herein are granted subject to this reservation.

The Undersigned (whether one or more), being the incorporators)
hereinbefore named, for the purpose of forming a corporation pursuant to the
Oklahoma General Corporation Act, make(s) this Certificate, hereby declaring and
certifying that this is the act and deed of the undersigned and that the facts
herein stated are true, as of this 30th day June, 1988.

/s/ R. Patrick Gilmore
-------------------------------------

STATE OF OKLAHOMA )
) SS
COUNTY OF LINCOLN )

Before me a Notary Public in and for said County and State on this 30th
day of June, 1988, personally appeared R. Patrick Gilmore to me known to be the
identical person who executed the foregoing Articles of Incorporation and
acknowledge to me that he executed the same as his free and voluntary act and
deed for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and
year above written.

My Comm. Expires: /s/ Joyce Seitz
-------------------------------------
Notary Public
December 1, 1990
- ----------------------------
(SEAL)

<PAGE>

EXHIBIT 3.2

BY-LAWS
OF
CHANDLER (U.S.A.), INC.

ARTICLE I

OFFICES

Section 1. The registered office shall be in the City of CHANDLER
County of LINCOLN, State of Oklahoma.

Section 2. The corporation may also have offices at such other places
both within and without the State of Oklahoma as the Board of Directors may from
time to time determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF SHAREHOLDERS

Section 1. Meetings of shareholders for any purpose may be held at such
time and place, within or without the State of Oklahoma, as shall be stated in
the notice of the meeting or in a duly executed waiver of notice thereof.

Section 2. Annual meetings of the shareholders, commencing with the
year 1989, shall be held on the 31ST day of MAY, of each year, if not a legal
holiday and if a legal holiday, then on the next secular day following at
Chandler, Oklahoma, or at such other location as may be, from time to time,
designated by the Board of Directors, at which they shall elect by a plurality
vote by written ballot a board of directors, and transact such other business as
may be properly brought before the board.

Section 3. Written notice of the annual meeting, stating the place,
date and hour of such meeting, shall be given to each shareholder entitled to
vote there at not less than ten (10) days nor more than sixty (60) days before
the date of the meeting unless otherwise required by law.

Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every meeting
of shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the election, either at a place within the city where the meeting is to be held
and which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held, and the list shall be
produced and kept

<PAGE>

at the time and place of the meeting during the whole time thereof, and subject
to the inspection of any shareholder who may be present.

Section 5. Special meetings of the shareholders, for any purpose or
purposes, unless otherwise prescribed by law or by the Certificate of
Incorporation, may be called by the President and shall be called by the
President or Secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of shareholders owing a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.

Section 6. Written notice of a special meeting of shareholders, stating
the place, date, hour and the purpose or purposes thereof, shall be given to
each shareholder entitled to vote there at, not less than ten (10) days before
the date fixed for the meeting unless otherwise required by law.

Section 7. Business transacted at any special meeting of the
shareholders shall be limited to the purposes stated in the notice.

Section 8. The holders of a majority of the shares of stock issued and
outstanding and entitled to vote there at, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by law or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote there at, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented; provided, however,
that if the date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally noticed, or if a new record date
is fixed for the adjourned meeting, written notice of the place, date and hour
of the adjourned meeting shall be given in conformity herewith. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted at the meeting as originally notified.

Section 9. When a quorum is present at any meeting, the affirmative
vote of the holders of a majority of the shares of stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which, by express provision
of law or of the Certificate of Incorporation, a different vote is required, in
which case such express provision shall govern and control the decision of such
question.

Section 10. Each shareholder shall at every meeting of the shareholders
be entitled to one vote in person or by proxy for each share of the capital
stock having voting power held by such shareholders, but no proxy shall be voted
or acted upon after three (3) years from its date unless the proxy provides for
a longer period, and, except where the transfer books of the corporation have
been closed or a date has been fixed as a record date for the determination of
its shareholders entitled to

<PAGE>

vote, no share of stock shall be voted on at any election for directors which
has been transferred on the books of the corporation within twenty (20) days
preceding such election of directors.

Section 11. Any action required to or which may be taken at any annual
or special meeting of the shareholders, may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action by the
shareholders without a meeting by less than unanimous written consent shall be
given to those shareholders who have not consented in writing.

ARTICLE III

DIRECTORS

Section 1. The number of directors which shall constitute the whole
Board shall be two (2). As of the present date, the Board shall consist of two
(2) directors. Thereafter, within the limits above specified, the number of
directors shall be determined by resolution of the Board of Directors or by the
shareholders at the annual or a special meeting of the shareholders. Except for
the election held by the incorporators and except as provided in Section 2 and
in Section 14 of this Article III, the directors shall be elected at the annual
meeting of shareholders. Each director elected shall hold office until such
director's successor is elected and qualified, or until such director's earlier
resignation or removal. Directors need not be shareholders.

Section 2. Except as provided in Section 14 of this Article II,
vacancies and newly created directorships resulting from any increase in the
authorized numbers of directors by the directors may be filled by a majority of
the directors then in office, though less than a quorum, and any director so
chosen shall hold office until the next annual election and until such
director's successor is duly elected and shall qualify, unless such director
resigns or is removed.

Section 3. The business of the corporation shall be managed by its
Board of Directors which may exercise all such powers of the corporation and do
all such lawful acts and things as are not by law or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the shareholders.

Section 4. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Oklahoma.

Section 5. Regular meetings of the Board of Directors may be held at
such time and at such place as shall from time to time be determined by the
Board. Five (5) days' notice of all regular meetings shall be given, and such
notice shall state the place, date, hour and the business to be transacted at
and purpose of such meeting.

<PAGE>

Section 6. Special meetings of the Board may be called by the President
on three (3) days' notice to each director either personally or by mail or by
telegram. Special meetings shall be called by the President or Secretary in like
manner and on like notice on the written request of two (2) directors unless the
corporation has at that time less than three (3) directors, in which latter
event the request of only one (1) director shall be required. Notice of any
special meeting shall state the place, date, hour and the business to be
transacted at and the purpose of such meeting.

Section 7. At all meetings of the Board, a majority of the directors
shall constitute a quorum for the transaction of business, and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by law or by the Certificate of Incorporation. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present there at may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.

Section 8. The Board of Directors may, by resolution, passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one (1) or more of the directors of the corporation, which, to the
extent provided in the resolution, shall have and may exercise the powers of the
Board of Directors in the management of the business and affairs of the
corporation and may authorize the seal of the corporation to be affixed to all
papers which may require it. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
Board of Directors.

Section 9. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.

Section 10. Members of the Board of Directors, or of any committee
thereof, may participate in a meeting of such board or committee by means of
conference telephone or similar communications equipment that enables all
persons participating in the meeting to hear each other. Such participation
shall constitute presence in person at such meeting.

Section 11. Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the board or of such committee as the case may be, and such written consent
is filed with the minutes of proceedings of the board or committee.

Section 12. The directors may be paid their expenses, if any, of
attendance at such meeting of the Board of Directors and may be paid a fixed sum
for attendance at such meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

<PAGE>

Section 13. The Board of Directors at any time may, by affirmative vote
of a majority of the members of the Board then in office, remove any officer
elected or appointed by the Board of Directors for cause or without cause.

Section 14. Any director may be removed, for cause or without cause, by
a majority vote of the shareholders entitled to vote for the election of such
director at any annual or special meeting of the shareholders. Upon such removal
of a director, the shareholders (and not the remaining directors) shall elect a
director to replace such removed director at the same shareholders' meeting at
which such removal took place or at a subsequent shareholders' meeting.

ARTICLE IV

NOTICES

Section 1. Notices to directors and shareholders shall be in writing
and delivered personally or mailed to the directors or shareholders at their
addresses appearing on the books of the corporation. Notice by mail shall be
deemed to be given at the time when the same shall be deposited in the United
States mail, postage prepaid. Notice to directors may also be given by telegram.
Notice by telegram shall be deemed to be given when delivered to the sending
telegraph office.

Section 2. Whenever any notice is required to be given under the
provisions of law or of the Certificate of Incorporation or of these Bylaws, a
waiver thereof in writing, signed by the person entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.

ARTICLE V

OFFICERS

Section 1. The officers of the corporation shall be chosen by the Board
of Directors and shall, at a minimum, consist of a President and a Secretary.
The Board of Directors may also choose additional officers, including a Chairman
or Vice-Chairman of the Board of Directors, one or more Vice-Presidents who may
be classified by their specific function, a Secretary, a Treasurer and one or
more Assistant Secretaries and Assistant Treasurers. Two or more offices may be
held by the same person, except the offices of President and

Section 2. The board of Directors at its first meeting and after each
annual meeting of shareholders shall choose a President and a Secretary, and may
choose such other officers and agents as it shall deem necessary.

Section 3. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.

<PAGE>

Section 4. The officers of the corporation shall hold office until
their successors are chosen and qualify, until their earlier resignation or
removal. Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors.

Section 5. The Chairman, or, in the absence of the Chairman, a
Vice-Chairman of the Board of Directors, if chosen, shall preside at all
meetings of the Board of Directors, and shall perform such other duties and have
such other powers as the Board of Directors may from time to time prescribe.

Section 6. The President shall be the chief executive officer of the
corporation, shall preside at all meetings of the shareholders and, unless a
Chairman or Vice-Chairman of the board has been chosen, at all meetings of the
Board of Directors, and shall have general and active management of the business
of the corporation and shall see that all orders and resolutions of the Board of
Directors, are carried into effect.

Section 7. The President shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.

Section 8. The Vice-President, or if there shall be more than one, the
Vice-Presidents in the order determined by the Board of Directors, shall, in the
absence or disability of the President, perform the duties and exercise the
powers of the President and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.

Section 9. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the shareholders and record all the proceedings of
the meetings of the corporation and the Board of Directors in a book to be kept
for that purpose and shall perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the shareholders and regular and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision of the Secretary shall be.
Additionally, the Secretary shall have custody of the corporate seal of the
corporation, and the Secretary or an Assistant Secretary, shall have authority
to affix the same to any instrument requiring it, and when so affixed, it may be
attested by the Secretary's signature or by the signature of such Assistant
Secretary. The Board of Directors may give general authority to any such
Assistant Secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
the Secretary's signature.

Section 10. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors, shall,
in the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties and have such
other powers as the Board of Directors from time to time prescribe.

<PAGE>

Section 11. The Treasurer, if one is chosen or, if not, the Secretary,
shall have the custody of the corporation funds and securities and shall keep
full and accurate accounts of receipts and disbursements in books belonging to
the corporation and shall deposit all moneys and other valuable effects in the
name and to the credit of the corporation in such depositories as may be
designated by the Board of Directors.

Section 12. The Treasurer, if one is chosen or, if not, the Secretary,
shall disburse the funds of the corporation as may be ordered by the Board of
Directors taking proper vouchers for such disbursements, and shall render to the
President and the Board of Directors, at its regular meetings, or when the Board
of Directors so requires, an account of all transactions performed by the
Treasurer (or Secretary, as the case may be) and of the financial condition of
the corporation.

Section 13. If required by the Board of Directors, the Treasurer, if
one is chosen or, if not, the Secretary, shall give the corporation a bond which
shall be renewed every six (6) years in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of the office of a treasurer and for the restoration
to the corporation, in case of the Treasurer's (or Secretary's, as the case may
be) death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the possession or under
the control of the Treasurer (or Secretary, as the case may be) belonging to the
corporation.

Section 14. The Assistant Treasurer, or if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors,
shall, in the absence or disability of the Treasurer perform the duties and
exercise the powers of the Treasurer and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.

ARTICLE VI

CERTIFICATES OF STOCK, TRANSFERS OF STOCK
CLOSING OF TRANSFER BOOKS AND
REGISTERED SHAREHOLDERS

Section 1. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of, the corporation by the
Chairman or Vice-Chairman of the Board of Directors, or the President or a
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the corporation, certifying the number of shares
owned by the shareholder in the corporation.

Section 2. Any or all the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if the
person who signed the certificate was such officer, transfer agent or registrar
at the date of issue.

<PAGE>

Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost or stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or such
owner's legal representative, advertise the same in such manner as the
corporation shall require and/or to give the corporation a bond in such sum as
the corporation may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.

Section 4. Subject to transfer restrictions permitted by Section 1055
of Title 18 of the Oklahoma Statutes and to stop transfer orders directed in
good faith by the corporation to any transfer agent to prevent possible
violations of federal or state securities laws, rules or regulations, upon
surrender to the corporation or the transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

Section 5. The Board of Directors may fix a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of any
meeting of shareholders, nor more than sixty (60) days prior to the time for the
other action hereinafter described, as of which there shall be determined the
shareholders who are entitled: to notice of or to vote at any meeting of
shareholders or any adjournment thereof; to express consent to corporate action
in writing without a meeting; to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with respect
to any change, conversion or exchange of stock or with respect to any other
lawful action.

Section 6. The corporation shall be entitled to treat the person in
whose name any share of stock is registered on the books of the corporation as
the owner thereof for all purposes and shall not be bound to recognize any
equitable or other claim or other interest in such shares in the part of any
other person, whether or not the corporation shall have express or other notice
thereof.

ARTICLE VII

GENERAL PROVISIONS

Section 1. Dividends upon the capital stock of the corporation, subject
to the provisions of the Certificate of Incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property or in shares of the corporation's
capital stock.

<PAGE>

Section 2. There may be set apart out of any of the funds of the
corporation available for dividends such amounts as the Board of Directors deems
proper as a reserve or reserves for working capital depreciation, losses in
value, or for any other proper corporate purpose, and the Board of Directors may
increase, decrease or abolish any such reserve in the manner in which it was
created.

Section 3. The Board of Directors shall present at each annual meeting
and at any special meeting of the shareholders when called for by vote of the
shareholders, a full and clear statement of the business and condition of the
corporation.

Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.

Section 5. The fiscal year of the corporation shall be as fixed by the
Board of Directors.

Section 6. The Board of Directors may provide a suitable seal,
containing the name of the corporation, which seal shall be in charge of the
Secretary. If and when so directed by the Board of Directors or a committee
thereof, duplicates of the seal may be kept and used by the Treasurer or by the
Assistant Secretary or Assistant Treasurer. The seal may be used by causing it,
or a facsimile thereof, to be impressed or affixed or in any other manner
reproduced.

Section 7. The books of account and other records of the corporation
may be kept (subject to any provisions of Oklahoma law) at the principal place
of business and chief executive office of the corporation.

ARTICLE VIII

INDEMNIFICATION OF OFFICERS, DIRECTORS,
EMPLOYEES AND AGENTS

To the extent and in the manner permitted by the laws of the State of
Oklahoma and specifically as is permitted under Section 1031 of Title 18 of the
Oklahoma Statutes, the corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement.

<PAGE>

ARTICLE IX

AMENDMENTS

The Bylaws may be amended or repealed, or new bylaws may be adopted, by
the shareholders or by the Board of Directors at any regular meeting of the
shareholders or of the Board of Directors, or at any special meeting of the
shareholders or of the Board of Directors if notice of such amendment, repeal,
or adoption of new bylaws be contained in the notice of such special meeting.

APPROVED AND RATIFIED as of this 30th day of June, 1988, by the
undersigned, constituting all of the directors (whether one or more) of the
corporation.

/s/ Brent LaGere
-------------------------------------

/s/ Ben T. Walkingstick
-------------------------------------

<PAGE>

RESOLUTION BY UNANIMOUS CONSENT OF THE BOARD OF DIRECTORS
OF CHANDLER (U.S.A.), INC.
July 5, 1988

Pursuant to Section 1027 of the Oklahoma General Corporation Act, the
undersigned, being all of the Directors of Chandler (U.S.A.), Inc. an Oklahoma
corporation (the "Company"), hereby declare that the following resolutions
hereby are consented to, approved of and adopted to the same extent and to have
the force and effect as if adopted at a special meeting of the Board of
Directors duly called and held for the purpose of acting upon proposals to adopt
such resolutions:

WHEREAS, Article III, Section 1 of the by-laws of the Company provides
that the number of directors which shall constitute the whole board
shall be two (2); and

WHEREAS, the Board of Directors has determined that it would be in the
best interest of the Company to amend Article III, Section 1 of the
by-laws to provide that: "the number of directors which shall
constitute the whole board shall be three (3)."

NOW, THEREFORE, BE IT RESOLVED, that Article III, Section 1 of the
by-laws of the Company should be and is hereby amended so that the
first sentence thereof shall read as follows: "the number of directors
which shall constitute the whole board shall be three (3)".

IN WITNESS WHEREOF, the undersigned, being all of the directors of the
Company have executed this unanimous consent on the date first written above.

/s/ Brent LaGere
-------------------------------------
BRENT LAGERE

/s/ Ben T. Walkingstick, Jr.
-------------------------------------
BEN T. WALKINGSTICK, JR.

<PAGE>

MINUTES OF MEETING UPON UNANIMOUS CONSENT
OF THE BOARD OF DIRECTORS OF
CHANDLER (U.S.A.), INC.
MAY 31, 1990

Pursuant to the provisions of the Oklahoma General Corporation Act, the
undersigned, being all the Directors of Chandler (U.S.A.), Inc. an Oklahoma
Corporation (the "Company"), hereby declare that the following resolutions
hereby are consented to approved of and adopted to the same extent and to have
the same force and effect as if adopted at a special meeting of the Board of
Directors duly called and held for the purpose of acting upon proposals to adopt
such resolutions:

Whereas, Article III, Section 1 of the by-laws of the Company provides
that the number of Directors which shall constitute the whole Board
shall be two (2); and,

Whereas, by resolution dated July 5, 1988 said Article III, Section 1
was amended so as to increase the number of Directors which should
constitute the whole Board to three (3); and,

Whereas, the Board of Directors has unanimously determined that it
would be in the best interest of the Company to amend Article III,
Section 1 of the by-laws of the Company to provide that the number of
Directors constituting the whole Board should be five (5);

Now, therefore, be it resolved, that Article III, Section 1 of the
by-laws of the Company should be and is hereby amended so that the
first sentence thereof shall read as follows:

"The number of Directors which constitute the whole Board
shall be five (5)".

In witness whereof, the undersigned, being all the Directors of the Company have
executed this unanimous consent on the date first written above.

/s/ Brent LaGere
-------------------------------------
Brent LaGere

/s/ Ben T. Walkingstick, Jr.
-------------------------------------
Ben T. Walkingstick, Jr.

/s/ Mark T. Paden
-------------------------------------
Mark T. Paden

<PAGE>

RESOLUTION TO AMEND BYLAWS
JUNE 25, 1993

WHEREAS, Article III, Section 1 of the By-Laws of the COMPANY provides
for the number of directors which shall constitute the whole board; and

WHEREAS, by various resolutions, said Article III, Section 1 has been
amended so as to increase the number of directors which shall constitute the
whole board to five (5); and

WHEREAS, the Board of Directors has unanimously determined that it
would be in the best interest of the COMPANY to amend Article III, Section 1 of
the By-Laws of the COMPANY to provide that the number of directors constituting
the whole board should be seven (7);

NOW, THEREFORE, BE IT RESOLVED, that Article III, Section 1 of
the By-Laws of the COMPANY shall be and is hereby amended so
that the first sentence thereof shall read as follows:

The number of directors which constitute the whole board shall
be seven (7), at least two of which shall not be employees of
the COMPANY or any of its subsidiaries but shall be members of
the Board of Directors of Chandler Insurance Company, Ltd. or
of one of the COMPANY'S subsidiaries.

<PAGE>

RESOLUTION TO AMEND BYLAWS
APRIL 25, 1997

WHEREAS, Article III, Section 1 of the Bylaws of the Company, as
amended, provides that the number of directors which shall constitute the whole
board shall be seven, at least two of which shall not be employees of the
Company or any of its subsidiaries but shall be members of the Board of
Directors of Chandler Insurance Company, Ltd. or of one of the Company
subsidiaries; and

WHEREAS, the Board of Directors has unanimously determined that it
would be in the best interest of the Company to amend Article III, Section 1 of
the Bylaws of the Company;

NOW, THEREFORE, be it resolved that Article III, Section 1 of the
Bylaws of the Company shall be and is hereby amended so that the first
sentence thereof shall read as follows:

The number of directors which constitute the whole board shall be not
less than seven, nor more than eight, and at least two of such number
shall be members of the Board of Directors of Chandler Insurance
Company, Ltd. or one of the Company's subsidiaries, and shall not be
regularly employed by the Company or any of its subsidiaries.

<PAGE>

RESOLUTION TO AMEND BYLAWS
MAY 13, 1997

WHEREAS, Article VIII of the By-Laws of the Company relates to
indemnification of officers, directors, employees and agents of the Company; and

WHEREAS, the Board of Directors has unanimously determined that it
would be in the best interest of the Company to amend Article VIII of the
By-Laws of the Company;

NOW, THEREFORE, BE IT RESOLVED, that Article VIII of the
By-Laws of the Company shall be and is hereby amended in its
entirety so that it reads and provides as follows:

ARTICLE VIII

INDEMNIFICATION

Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that he is or was a director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
or conviction, or upon a plea of nolo contenders or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interest of the Corporation and, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his conduct was
unlawful.

Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending, or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement

<PAGE>

of such action or suit, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Corporation,
unless and only to

the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.

Section 3. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any
indemnification under Sections I or 2 of this Article VIII (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee, or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 1 or 2 of this Article VIII. Such determination
shall be made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit, or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable
if a quorum of disinterested directors so directs, by independent legal counsel
in a written opinion, or (iii) by the stockholders.

Section 4. RIGHT TO INDEMNIFICATION. Notwithstanding the other
provisions of this Article VIII, to the extent that a director, officer,
employee, or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding referred to in Sections
I or 2 of this Article VIII, or in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.

Section 5. PREPAID EXPENSES. Expenses incurred in defending a civil or
criminal action, suit, or proceeding may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding, as authorized in
the manner provided in Section 3 of this Article VIII upon receipt of an
undertaking by or on behalf of the director, officer, employee, or agent to
repay such amount unless it shall ultimately be determined that he is entitled
to be indemnified by the Corporation as authorized in this Article VIII.

Section 6. OTHER RIGHTS AND REMEDIES. The indemnification provided by
this Article VIII shall not be deemed exclusive of any other rights to which any
person seeking indemnification may be entitled under any By-Law, agreement, vote
of stockholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.

Section 7. INSURANCE. Upon resolution passed by the Board of Directors,
the Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a

<PAGE>

director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VIII.

Section 8. NOTICE OF INDEMNIFICATION. Any indemnification of a director
in accordance with this Article VIII, including any payment or reimbursement of
expenses, shall be reported in writing to the stockholders with the notice of
the next stockholders' meeting or prior to such meeting.

Section 9. MERGERS. For purpose of this Article VIII, references to
"the Corporation" shall include, in addition to the resulting or surviving
corporation, constituent corporations (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, or agents, so that any person who is or was a
director, officer, employee, or agent of such constituent corporation or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of such constituent corporation as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise shall stand in the same position under the provisions
of this Article VIII with respect to the resulting or surviving corporation as
he would have with respect to such constituent corporation if its separate
existence had continued.

<PAGE>

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT (this "Agreement") , dated as of October 28, 1988, is by
and between Chandler (U.S.A.), Inc., an Oklahoma corporation ("Employer"), and
W. Brent LaGere ("Employee"). Chandler Insurance Company, Ltd., a Cayman Islands
corporation ("Chandler"), hereby joins for the limited purposes specified
herein. For all purposes of this document, "affiliates" shall mean persons or
entities that directly, or indirectly through one or more intermediaries,
control or are controlled by, or are under common control with, Employer.

W I T N E S S E T H:

WHEREAS, Employee desires to enter into the employment of Employer, and
Employer desires to employ Employee provided that, in so doing, it can protect
its confidential information, business, accounts, patronage and good will;

NOW, THEREFORE, in consideration of the foregoing recital and of the
mutual covenants set forth below, the parties hereto agree as follows:

1. COMPENSATION AND EMPLOYMENT. Employee agrees to enter into the
employment of Employer, and Employer agrees to employ Employee, on the terms and
conditions set forth below.

(a) Employer shall pay to Employee, and Employee agrees to
accept as full consideration for his employment, not less than $250,000 per year
during the term of this Agreement, payable in equal monthly installments,
subject to all appropriate withholdings. All compensation payable to Employee
hereunder shall be payable by Employer or by any entity designated by Employer.
Employee's base salary shall be increased on or before March 31 of each year in
an amount proportionate to any increase from base year 1988 in the Consumer
Price Index All Items for All Urban Consumers, as determined by the United
States Department of Labor, Bureau of Labor Statistics, plus any additional
amount deemed appropriate by Employer's Board of Directors.

(b) in addition to the compensation above set forth, Employee
shall be entitled to reimbursement of his actual out-of-pocket expenses incurred
in the conduct of Employer's business, which shall be limited to ordinary and
necessary items and which shall be supported by voucher, receipts or similar
documentation to the extent practicable.

(c) Employee shall be entitled to paid vacations per year as
established by Employer from time to time under a policy based on seniority and
such other fringe benefits as the Board of Directors of Employer may, in its
sole discretion, determine, including the following:

<PAGE>

(1) Group Life, group hospitalization and group
accident and major medical benefits for Employee and
all members of Employee's immediate family providing
benefits comparable to those provided to other
employees of Employer. In any case, Employee will be
expected to make contributions toward the cost of
such plans at the same rate and in the same manner as
required by other employees of like status
participating therein.

(2) The use of a company-owned automobile,
appropriate for Employee's position, not more than
two years of age, together with all oil, gasoline,
repairs, insurance and maintenance required for the
use and operation of the same for business purposes.

(3) Employer shall use its best efforts to procure
long-term disability insurance covering Employee to
age 65, which together with corporate payments and
programs would provide Employee 60% of Employee's
base salary to age 65. Disability of Employee shall
be subject to such other definitions (including the
definition of disability in the insurance policy),
exclusions and exceptions are as normal to such
insurance. Employee will take such physical
examination, and execute such forms as may be
reasonably required to obtain such insurance if such
insurance can be obtained at a reasonable cost, and
Employer shall bear the full cost thereof during the
term of this Agreement.

(d) Employee agrees during the term of Employee's employment
to devote 100% of his full business time and Employee's best
efforts, skills and abilities to the performance of Employee's
duties as stated in this Agreement and to the furtherance of
Employer's business and any of its affiliates' businesses.

(e) Employer intends that it or its affiliates will establish
an executive incentive compensation plan, which shall be a
plan approved by the Board of Directors which establishes a
profit level at which officers and other key employees shall
begin to receive incentive awards under the terms of the plan.
However, the Board can set a different goal, by resolution,
when desired. It is deemed desirable that the Board approve a
plan by March of each year. In each case, no modifications of
the business plan shall occur for purposes of this Agreement
after approved by the Board in any year except that any such
plan shall be deemed automatically changed to take into
account the financial effects of federal or state tax or other
law changes adopted after final approval of such plan by the
Board. All awards payable hereunder shall be subject to
applicable deductions for Social Security and withholding
taxes.

(f) Employee's job title shall be Chairman of the Board and
Chief Executive Officer of LaGere & Walkingstick Insurance
Agency, Inc., a wholly owned subsidiary of Employer, and of
Chandler and such other titles for Employer or affiliates as
the Board of Directors of Employer may from time to time
prescribe, and

<PAGE>

Employee's duties shall consist of performing such services
for Employer as may be directed from time to time by the Board
of Directors of Employer or its affiliates.

(g) Employee shall also use Employee's best efforts to
preserve the business of Employer and the good will of all
employees, customers, suppliers and other persons having
business relations with Employer.

2. TERM.

(a) The employment of Employee shall begin on the date of this
Agreement and shall continue until the earliest of (i) the date Employer
terminates it for just cause (defined below) upon three days written notice,
specifying the reasons therefor and allowing Employee a reasonable opportunity
to respond, (ii) the death of Employee, or (iii) a termination date (defined
below).

(b) For purposes of this Agreement, "just cause" for
termination shall include:

(1) the failure or inability of Employee, for any
reason other than disability, to devote 100% of Employee's full business time to
Employer's business and its affiliates' businesses,

(2) absence from full-time duties for a period of at
least six months due to permanent or temporary disability, which shall mean any
physical or mental disability, including disability resulting from the use of
alcohol or drugs, rendering Employee unable to perform substantially all of
Employee's usual duties and responsibilities,

(3) the commission by Employee of any act involving
moral turpitude or the commission by Employee of any felony or any other act or
the suffering by Employee of any occurrence or state of facts, which renders
Employee incapable of performing Employee's duties under this Agreement, or
adversely affects or could reasonably be expected to affect adversely Employer's
business reputation,

(4) any material breach by Employee of any of the
terms of, or the failure to substantially perform any covenant contained in,
this Agreement,

(5) the violation by Employee of instructions or
policies established by Employer with respect to the operation of its business
and affairs or Employee's failure to carry out Employee's duties or the
reasonable instructions of the Board of Directors or Chief Executive Officer of
Employer, or

(6) the commission by Employee of any action or the
existence of any state of facts which would legally justify an employer in
terminating a contract of employment.

(1) Employee's attaining age 70 or

<PAGE>

(2) the 10th anniversary of the effective date
hereof, extended automatically by one year for each full year of employment with
Employer or its affiliates (as defined in Subsection 4(a) of this Agreement)
after the 5th anniversary hereof.

(d) In the event of the termination of this Agreement for just
cause, Employer shall pay Employee 90 days' termination pay, consisting of
Employee's base salary for 90 days and incentive compensation applicable to full
calendar years completed prior to Employer's notice of termination.

(e) Employee's employment hereunder may be terminated by
Employer, upon reasonable notice, without cause. In the event of the termination
of this Agreement without cause, pursuant to this subparagraph, Employee shall
be entitled to continue to receive Employee's base salary (but no incentive
compensation except as may be applicable to full calendar years already
completed, or any other fringe benefits), for the remainder of the term of this
Agreement, but in no event for more than 60 months. Unless relieved therefrom by
Employer, Employee, during the period that such payments are made, shall be
obligated to serve as a consultant to the Employer on a mutually agreed basis,
and to refrain from engaging in any business or activity which is directly or
indirectly in competition with any business of Employer or its affiliates and to
comply with the provisions of Sections 3, 4, and 5 hereof.

(f) Notwithstanding anything to the contrary in this
Agreement, the provisions of Sections 3, 4 and 5 shall survive any termination
of Employee's employment under this Agreement.

3. NONDISCLOSURE AGREEMENT. Employee, during the term of employment
under this Agreement, shall have access to and become familiar with various
trade secrets consisting of, but not limited to, computer programs, compilations
of information, records, sales procedures, customer requirements, pricing
techniques, customer lists, methods of doing business and other confidential
information (collectively referred to as the "Trade Secrets"), which are owned
by Employer and its affiliates and regularly used in the operation of their
businesses. Employee shall not use in any way or disclose any of the Trade
Secrets, directly or indirectly, either during the term of this Agreement or at
any time thereafter, except as required in the course of Employee's employment
under this Agreement. All files, records, documents, information, data and
similar items relating to the business of Employer and its affiliates, whether
prepared by Employee or otherwise coming into Employee's possession, shall
remain the exclusive property of Employer and its affiliates and shall not be
removed from their premises under any circumstances without the prior written
consent of the President of Employer (except in the ordinary course of business
during Employee's period of active employment under this Agreement), and in any
event shall be promptly delivered to Employer upon termination of this
Agreement.

4. NONCOMPETITION AGREEMENT.

<PAGE>

that of Employer or any of its affiliates or accept employment with or render
services to a competitor of Employer or any of its affiliates as a director,
officer, agent, employee or consultant, or solicit or attempt to solicit or
accept business that is competitive with any business being conducted by
Employee or any of its affiliates during Employee's employment under this
Agreement from any of the customers or prospective customers of Employer or any
of its affiliates, or take any action inconsistent with the fiduciary
relationship of an employee to his employer.

(b) Upon any termination or cessation of Employee's employment
with Employer and all of its affiliates for any reason whatsoever, Employee
shall not, prior to the date which would have been Employee's termination date,
directly or indirectly, either as an individual, a partner or a joint venturer,
or in any other capacity, (i) invest (other than investments in publicly-owned
companies) or engage in any business that is competitive, within any county,
whether or not in Oklahoma, in which Employer or any of its affiliates operates
at the time of such termination or cessation, with that of Employer or its
affiliates, (ii) accept employment with or render services to a competitor of
Employer or its affiliates, within any county, whether or not in Oklahoma, in
which Employer or any of its affiliates operates at the time of such termination
or cessation, as a director, officer, agent, employee or consultant, or (iii)
contact, solicit or attempt to solicit or accept business from any of the
customers of Employer or its affiliates, wherever located, as of the time of
Employee's termination or cessation of employment, whose insurance policies or
claims or other contracts or orders are processed or approved of in Lincoln
County, Oklahoma, or such other county or counties, whether or not in Oklahoma,
in which they may hereafter handle such processing or approval; provided,
however, that this subsection (b) shall not apply if Employee is terminated
without just cause and ceases to receive the compensation set forth in
subsection l(a) of this Agreement.

5. NONEMPLOYMENT AGREEMENT. For a period of five years after the
termination or cessation of his employment with Employer for any reason
whatsoever, unless there was no just cause, Employee shall not, on Employee's
own behalf or on behalf of any other person, partnership, association,
corporation or other entity, hire or solicit or in any manner attempt to
influence or induce any employee of Employer or its affiliates to leave the
employment of Employer or its affiliates, nor shall Employee use or disclose to
any person, partnership, association, corporation or other entity any
information obtained while an employee of Employer or its affiliates concerning
the names and addresses of Employer's or its affiliates' employees.

6. SEVERABILITY. Employee agrees that the noncompetition agreements,
nondisclosure agreements and nonemployment agreements set forth above each
constitute separate agreements independently supported by good and adequate
consideration and shall be severable from the other provisions of, and shall
survive, this Agreement. The existence of any claim or cause of action of
Employee against Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of the covenants
and agreements of Employee contained in the noncompetition, nondisclosure or
nonemployment agreements. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part of this Agreement; and the remaining provisions
of this Agreement shall remain in full force and effect and

<PAGE>

shall not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as part of this
Agreement, a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and enforceable.

7. INVENTIONS. Employee shall promptly disclose, grant and assign to
Employer for its sole use and benefit any and all inventions, improvements,
technical information and suggestions relating in any way to the products of
Employer or any of its affiliates or capable of beneficial use by Employer or
any of its affiliates, which Employee has in the past conceived, developed or
acquired, or may conceive, develop or acquire during the term hereof (whether or
not during usual working hours), together with all patent applications, letters
patent, copyrights and reissues thereof that may at any time be granted for or
upon any such invention, improvement or technical information. In connection
therewith, Employee shall promptly at all times during and after the term
hereof:

(a) Execute and deliver such applications, assignments,
descriptions and other instruments as may be necessary or proper in the opinion
of Employer to vest title to such inventions, improvements, technical
information, patent applications and patents or reissues thereof in Employer and
to enable it to obtain and maintain the entire right and title thereto
throughout the world.

(b) Render to Employer, at its expense, all such assistance as
it may require in the prosecution of applications for said patents or reissues
thereof, in the prosecution or defense of interferences which may be declared
involving any said application or patents, and in any litigation in which
Employer may be involved relating to any such patents, inventions, improvements
or technical information.

8. AFFILIATES. Employee will use Employee's best efforts to ensure that
no relative of Employee or corporation of which employee is an officer, director
or shareholder, or other affiliate of Employee, shall take any action that
Employee could not take without violating any provision of this Agreement.

9. STOCK OPTIONS. If Employee's employment hereunder is terminated
without just cause, then, in lieu of shares of Common Stock of Chandler issuable
upon exercise of options ("Options") granted to Employee under Chandler's stock
option plan, or any subsequently adopted option plan (which Options shall be
cancelled), Employee will receive an amount in cash equal to the aggregate
spread between the exercise prices of all Options held by Employee whether or
not then fully exercisable, and the higher of (i) the average between the
closing bid and asked prices of the Company's Common Stock as shown on NASDAQ on
the date notice of such termination is given or (ii) the highest price per share
of Chandler Common Stock actually paid in connection with any change in control
of Chandler which occurs on or before the 90th day after such notice of
termination.

10. REMEDIES. Employee recognizes and acknowledges that the
ascertainment of damages in the event of Employee's breach of any provision of
this Agreement would be difficult,

<PAGE>

and Employee agrees that Employer, in addition to all other remedies it may
have, shall have the right to injunctive relief if there is such a breach.

11. ACKNOWLEDGMENTS. Employee acknowledges and recognizes that the
enforcement of any of the noncompetition provisions in this Agreement by
Employer will not interfere with Employee's ability to pursue a proper
livelihood. Employee further represents that Employee is capable of pursuing a
career in other industries to earn a proper livelihood. Employee recognizes and
agrees that the enforcement of this Agreement is necessary to ensure the
preservation and continuity of the business and good will of Employer. Employee
agrees that due to the nature of Employee's business, the noncompetition
restrictions set forth in this Agreement are reasonable as to time and
geographic area.

12. NOTICES. Any notices, consents, demands, requests, approvals and
other communications to be given under this Agreement by either party to the
other shall be deemed to have been duly given if given in writing and personally
delivered or sent by mail, registered or certified, postage prepaid with return
receipt requested, as follows:

If to Employer: Chandler (U.S.A.), Inc.
1006 Manvel Avenue
Chandler, Oklahoma 74834

Attention: Mark T. Paden

If to Employee: W. Brent LaGere
1006 Manvel Avenue
Chandler, Oklahoma 74834

If to Chandler: Chandler Insurance Company, Ltd.
P. 0. Box 1289
Grand Cayman, Cayman Islands

Attention: Steve Butler

Notices delivered personally shall be deemed communicated as of actual receipt;
mailed notices shall be deemed communicated as of three days after mailing.

13. ENTIRE AGREEMENT. This Agreement supersedes any and all other
agreements, either oral or written, between the parties hereto with respect to
the subject matter hereof and contains all of the covenants and agreements
between the parties with respect thereto.

14. MODIFICATION. No change or modification of this Agreement shall be
valid or binding upon the parties hereto, nor shall any waiver of any term or
condition in the future be so binding, unless such change or modification or
waiver shall be in writing and signed by the parties hereto.

<PAGE>

15. GOVERNING LAW. This Agreement, and the rights and obligations of
the parties hereto, shall be governed by and construed in accordance with the
laws of the State of Oklahoma and shall be performable in Lincoln County,
Oklahoma.

16. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall constitute an original, but all of which shall constitute one and
the same document.

17. COSTS. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which he or it may be entitled.

18. ESTATE. If Employee dies prior to the expiration of the term of
employment, any monies that may be due Employee from Employer under this
Agreement as of the date of Employee's death shall be paid to Employee's estate.

19. ASSIGNMENT. Employer shall have the right to assign this Agreement
to its successors or assigns. The terms "successors and assigns shall include
any person, corporation, partnership or other entity that buys all or
substantially all of Employer's assets or all of its stock, or with which
Employer merges or consolidates. The rights, duties and benefits to Employee
hereunder are personal to Employee, and no such right or benefit, other than
benefits payable after Employee's death, may be assigned by Employee.

20. BINDING EFFECT. This Agreement shall be binding upon the parties
hereto, together with their respective executors, administrators, successors
personal representatives, heirs and assigns.

21. WAIVER OF BREACH. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.

22. GUARANTEE. Chandler hereby guarantees the full, complete and prompt
performance by Employer of all of Employer's obligations hereunder, to the same
extent as if they were obligations of Chandler.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

EMPLOYER: Chandler (U.S.A.), Inc.

By: /s/ W. Brent LaGere
------------------------------------------
W. Brent LaGere, Chairman of the Board

EMPLOYEE: /s/ W. Brent LaGere
------------------------------------
W. Brent LaGere

<PAGE>

CHANDLER INSURANCE COMPANY, LTD.

By: /s/ W. Brent LaGere
------------------------------------------
W. Brent LaGere, Chairman of the Board

<PAGE>

EXHIBIT 10.2

EMPLOYMENT AGREEMENT

THIS AGREEMENT (this "Agreement"), dated as of October 28, 1988, is by
and between Chandler (U.S.A.), Inc., an Oklahoma corporation ("Employer"), and
Brenda B. Pair ("Employee"). Chandler Insurance Company, Ltd., a Cayman Islands
corporation ("Chandler"), hereby joins for the limited purposes specified
herein. For all purposes of this document, "affiliates" shall mean persons or
entities that directly, or indirectly through one or more intermediaries,
control or are controlled by, or are under common control with, Employer.

W I T N E S S E T H:

NOW, THEREFORE, in consideration of the foregoing recital and of the
mutual covenants set forth below, the parties hereto agree as follows:

1. COMPENSATION AND EMPLOYMENT. Employee agrees to enter into the
employment of Employer, and Employer agrees to employ Employee, on the terms and
conditions set forth below.

(a) Employer shall pay to Employee, and Employee agrees to
accept as full consideration for his employment, not less than $125,000 per year
during the term of this Agreement, payable in equal monthly installments,
subject to all appropriate withholdings. All compensation payable to Employee
hereunder shall be payable by Employer or by any entity designated by Employer.
Employee's base salary shall be increased on or before March 31 of each year in
an amount proportionate to any increase from base year 1988 in the Consumer
Price Index - All Items for All Urban Consumers, as determined by the United
States Department of Labor, Bureau of Labor Statistics, plus any additional
amount deemed appropriate by Employer's Board of Directors.

(b) In addition to the compensation above set forth, Employee
shall be entitled to reimbursement of his actual out-of-pocket expenses incurred
in the conduct of Employer's business, which shall be limited to ordinary and
necessary items and which shall be supported by voucher, receipts or similar
documentation to the extent practicable.

<PAGE>

(d) Employee agrees during the term of Employee's employment
to devote 100% of his full business time and Employee's best efforts, skills and
abilities to the performance of Employee's duties as stated in this Agreement
and to the furtherance of Employer's business and any of its affiliates'
businesses.

(e) Employer intends that it or its affiliates will establish
an executive incentive compensation plan, which shall be a plan approved by the
Board of Directors which establishes a profit level at which officers and other
key employees shall begin to receive incentive awards under the terms of the
plan. However, the Board can set a different goal, by resolution, when desired.
It is deemed desirable that the Board approve a plan by March of each year. In
each case, no modifications of the business plan shall occur for purposes of
this Agreement after approved by the Board in any year except that any such plan
shall be deemed automatically changed to take into account the financial effects
of federal or state tax or other law changes adopted after final approval of
such plan by the Board. All awards payable hereunder shall be subject to
applicable deductions for Social Security and withholding taxes.

(f) Employee's job title shall be Executive Vice President of
LaGere & Walkingstick Insurance Agency, Inc., a wholly owned subsidiary of
Employee and of Chandler and such other titles for Employer or its affiliates as
the Board of Directors of Employer may from time

<PAGE>

to time prescribe, and Employee's duties shall consist of performing such
services for Employer as may be directed from time to time by the Board of
Directors of Employer or its affiliates.

(g) Employee shall also use Employee's best efforts to
preserve the business of Employer and the good will of all employees, customers,
suppliers and other persons having business relations with Employer.

2. TERM.

(b) For purposes of this Agreement, "just cause" for
termination shall include:

(1) the failure or inability of Employee, for any
reason other than disability, to devote 100% of Employee's full business time to
Employer's business and its affiliates' businesses,

(4) any material breach by Employee of any of the
terms of, or the failure to substantially perform any covenant contained in,
this Agreement,

(6) the commission by Employee of any action or the
existence of any state of facts which would legally justify an employer in
terminating a contract of employment.

<PAGE>

(1) Employee's attaining age 70 or

(f) Notwithstanding anything to the contrary in this
Agreement, the provisions of Sections 3, 4 and 5 shall survive any termination
of Employee's employment under this Agreement.

<PAGE>

4. NONCOMPETITION AGREEMENT.

(a) Without the prior written consent of Employer, Employee
shall not, during the period of employment with Employer, or any of its
affiliates, directly or indirectly, invest (other than investments in
publicly-owned companies) or engage in any business that is competitive with
that of Employer or any of its affiliates or accept employment with or render
services to a competitor of Employer or any of its affiliates as a director,
officer, agent, employee or consultant, or solicit or attempt to solicit or
accept business that is competitive with any business being conducted by
Employer or any of its affiliates during Employee's employment under this
Agreement from any of the customers or prospective customers of Employer or any
of its affiliates, or take any action inconsistent with the fiduciary
relationship of an employee to his employer.

(b) Upon any termination or cessation of Employee's employment
with Employer and all of its affiliates for any reason whatsoever, Employee
shall not, prior to the date which would have been Employee's termination date,
directly or indirectly, either as an individual, a partner or a joint venturer,
or in any other capacity, (i) invest (other than investments in publicly-owned
Companies) or engage in any business that is competitive, within any county,
whether or not in Oklahoma, in which Employer or any of its affiliates operates
at the time of such termination or cessation, with that of Employer or its
affiliates, (ii) accept employment with or render services to a competitor of
Employer or its affiliates, within any county, whether or not in Oklahoma, in
which Employer or any of its affiliates operates at the time of such termination
or cessation, as a director, officer, agent, employee or consultant, or (iii)
contact, solicit or attempt to solicit or accept business from any of the
customers of Employer or its affiliates, wherever located, as of the time of
Employee's termination or cessation of employment, whose insurance policies or
claims or other contracts or orders are processed or approved of in Lincoln
County, Oklahoma, or such other county or counties, whether or not in Oklahoma,
in which they may hereafter handle such processing or approval; provided,
however, that this subsection (b) shall not apply if Employee is terminated
without just cause and ceases to receive the compensation set forth in
subsection 1(a) of this Agreement.

<PAGE>

Employee against Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of the covenants
and agreements of Employee contained in the noncompetition, nondisclosure or
nonemployment agreements. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part of this Agreement; and the remaining provisions
of this Agreement shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement, a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.

(a) Execute and deliver such applications, assignments, descriptions
and other instruments as may be necessary or proper in the opinion of Employer
to vest title to such inventions, improvements, technical information, patent
applications and patents or reissues thereof in Employer and to enable it to
obtain and maintain the entire right and title thereto throughout the world.

(b) Render to Employer, at its expense, all such assistance as it may
require in the prosecution of applications for said patents or reissues thereof,
in the prosecution or defense of interferences which may be declared involving
any said application or patents, and in any litigation in which Employer may be
involved relating to any such patents, inventions, improvements or technical
information.

8. AFFILIATES. Employee will use Employee's best efforts to ensure that
no relative of Employee or corporation of which Employee is an officer, director
or shareholder, or other affiliate of Employee, shall take any action that
Employee could not take without violating any provision of this Agreement.

9. STOCK OPTION. If Employee's employment hereunder is terminated
without just cause, then, in lieu of shares of Common Stock of Chandler issuable
upon exercise of options ("Options") granted to Employee under Chandler's stock
option plan, or any subsequently adopted option plan (which Options shall be
cancelled), Employee will receive an amount in cash equal to the aggregate
spread between the exercise prices of all Options held by Employee whether or
not then fully

<PAGE>

exercisable, and the higher of (i) the average between the closing bid and asked
prices of the Company's Common Stock as shown on NASDAQ on the date notice of
such termination is given or (ii) the highest price per share of Chandler Common
Stock actually paid in connection with any change in control of Chandler which
occurs on or before the 90th day after such notice of termination.

10. REMEDIES. Employee recognizes and acknowledges that the
ascertainment of damages in the event of Employee's breach of any provision of
this Agreement would be difficult, and Employee agrees that Employer, in
addition to all other remedies it may have, shall have the right to injunctive
relief if there is such a breach.

11. ACKNOWLEDGMENTS. Employee acknowledges and recognizes that the
enforcement of any of the noncompetition provisions in this Agreement by
Employer will not interfere with Employee's ability to pursue a proper
livelihood. Employee further represents that Employee is capable of pursuing a
career in other industries to earn a proper livelihood. Employee recognizes and
agrees that the enforcement of this Agreement is necessary to ensure the
preservation and continuity of the business and good will of Employer. Employee
agrees that due to the nature of Employer's business, the noncompetition
restrictions set forth in this Agreement are reasonable as to time and
geographic area.

If to Employer: Chandler (U.S.A.), Inc.
1006 Manvel Avenue
Chandler, Oklahoma 74834

Attention: Mark T. Paden

If to Employee: Brenda B. Pair
1006 Manvel Avenue
Chandler, Oklahoma 74834

If to Chandler: Chandler Insurance Company, Ltd.
P. 0. Box 1289
Grand Cayman, Cayman Islands

Attention: Steve Butler

Notices delivered personally shall be deemed communicated as of actual receipt;
mailed notices shall be deemed communicated as of three days after mailing.

<PAGE>

16. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall constitute an original, but all of which shall constitute one and
the some document.

18. ESTATE. It Employee dies prior to the expiration of the term of
employment, any monies that may be due Employee from Employer under this
Agreement as of the date of Employee's death shall be paid to Employee's estate.

19. ASSIGNMENT. Employer shall have the right to assign this Agreement
to its successor or assigns. The terms "successors" and "assigns" shall include
any person, corporation, partnership or other entity that buys all or
substantially all of Employer's assets or all of its stock, or with which
Employer merges or consolidates. The rights, duties and benefits to Employee
hereunder are personal to Employee, and no such right or benefit, other than
benefits payable after Employee's death, may be assigned by Employee.

20. BINDING EFFECT. This Agreement shall be binding upon the parties
hereto, together with their respective executors, administrators, successors,
personal representatives, heirs and assigns.

21. WAIVER OF BREACH. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver of any subsequent breach by Employee.

22. GUARANTEE. Chandler hereby guarantees the full, complete and prompt
performance by Employer of all of Employer's obligations hereunder, to the same
extent as if they were obligations of Chandler.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

EMPLOYER: Chandler (U.S.A.), Inc.

By: /s/ W. Brent LaGere
--------------------------------------
W. Brent LaGere, Chairman of the Board

EMPLOYEE: /s/ Brenda B. Pair
--------------------------------
Brenda B. Pair

CHANDLER INSURANCE COMPANY, LTD.

By: /s/ W. Brent LaGere
--------------------------------------
W. Brent LaGere, Chairman of the Board

<PAGE>

EXHIBIT 10.3

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment is made and entered into as of January 1, 1999 by and between
Chandler (U.S.A.), Inc., an Oklahoma corporation ("Employer") and Brenda B.
Watson, formerly Brenda B. Pair ("Employee").

WHEREAS, a certain agreement (the "Agreement"), a true and correct copy of which
is attached hereto, was made and entered into between Employer and Employee as
of October 28, 1989; and

WHEREAS, Employer and Employee have agreed that Employee may receive additional
compensation from National American Insurance Company ("NAICO") in the form of
an incentive bonus; and

WHEREAS, Employee has agreed to modify the termination date of the Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:

1. Paragraph I (e) should be and is hereby amended so that a sentence is
added which reads and states as follows:

"Employee may participate in any incentive bonus plan specific to her
job performance and abilities properly and appropriately offered by
Employer and/or its subsidiaries."

2. Paragraph 2 (c) (2) should be and is hereby amended so that it states
in its entirety:

"December 31, 2003."

3. Except as expressly stated herein or as may be necessary to fully
effect and implement the intent of the foregoing amendments, the
Agreement shall, in each and every other respect remain unmodified.

Date 1/22/99 /s/ Brenda B. Watson
------------------------------------------
Brenda B. Watson (formerly Brenda B. Pair)

CHANDLER (U.S.A.), INC.

Date 1/22/99 By /s/ W. Brent LaGere
---------------------------------------
W. Brent LaGere, Chairman of the Board,
Chief Executive Officer and President

<PAGE>

Chandler Insurance Company, Ltd. ("CIC") hereby consents to the above and
foregoing modification of Employment Agreement.

Dated this 28th day of January, 1999, but effective as of January 1, 1999.

CHANDLER INSURANCE COMPANY, LTD.

By: /S Steven R. Butler
--------------------------------------------------
Steven R. Butler, Vice President-Administration

<PAGE>

NATIONAL
AMERICAN
INSURANCE
COMPANY

January 12, 1999

James L. Watson
Brenda B. Watson

Dear Brenda and Jim:

The purpose of this letter is to confirm NAICO's offer of, and your agreement to
participate in a bonus arrangement which is specific to each of you, separately,
despite the fact that you are currently married. In other words, as to the bonus
arrangement, each of you have a separate and distinct one-half interest in the
bonus arrangement. If either of you, at any time, cease to be willing or able to
perform your duties as employees of Chandler (U.S.A.) and/or NAICO, the bonus
shall be diminished by one-half. But the criteria for earning the bonus shall
not be reduced by one-half.

The bonus arrangement is for TEXAS PREMIUM PRODUCTION ONLY and is as
follows:

1. You shall earn a total of three-quarters of one percent on the first
additional $10 million of NAICO's gross written premium allocated to property
and casualty lines, including workers' compensation business (GWP) written
during 1999 and subsequent years if GWP during the calendar year for which the
bonus is calculated is greater than the prior calendar year's GWP. Surety and
accident and health business is excluded for the purpose of calculating GWP.
(See attached example - Exhibit A).

2. So long as the GWP for the calendar year exceeds the GWP for the
preceding calendar year by $10 million, you shall be entitled to a total bonus
(each of you, individually, will be entitled to one-half) of .875 of one percent
on the next $5 million. as to any GWP above $15 million, you would be entitled
to a combined total (each of you entitled to one-half individually) of one
percent of GWP.

3. In no event could your respective share of the bonus exceed 50% of
your respective salaries.

4. This bonus plan will be effective January 1, 1999 and shall continue
through the calendar year ending December 31, 2003, but may be extended upon
affirmative written election of NAICO expressly approved by its Board of
Directors.

5. Your respective bonuses shall be deemed earned if, at all, at the
end of each calendar year. Such bonuses shall be calculated and paid on or
before March 31, 1998 following the calendar year in which they are earned.

<PAGE>

Should you have questions please talk with me or Mark Paden. If you
have no questions and fully understand the terms of the bonus and wish to accept
these terms, please indicate that fact in the space provided below.

Sincerely,

/s/ W. Brent LaGere
---------------------------------
W. Brent LaGere

Understood and Approved:

/s/ Brenda B. Watson
- ----------------------------
Brenda B. Watson

/s/ James L. Watson
- ----------------------------
James L. Watson

<PAGE>

EXAMPLE ONLY
Bonus Calculation Exhibit A
Texas Premium Only

<TABLE>
<CAPTION>
GWP(1) Year Bonus(2)
<S> <C> <C>
$32,000,000 1998 N/A
$49,000,000 1999 $138,750
$62,000,000 2000 $101,250
$71,000,000 2001 $67,500
$70,500,000 2002 -0-
$75,500,000 2003 $37,500
</TABLE>

- --------
(1) Exclusive of surety and accident & health premium (business).

(2) Calendar year bonuses are capped at 50% of your existing salary.

<PAGE>

EXHIBIT 12.1

CHANDLER (U.S.A.), INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- -------- ------- ----------
(in thousands except for ratio)
<S> <C> <C> <C> <C> <C>
COMPUTATION OF EARNINGS:
Income (loss) before income taxes $ (1,624) $ (1,546) $(2,097) $ 5,286 $ 786
--------- --------- -------- ------- ----------
Fixed charges, net 321 371 554 808 1,070
Total earnings $ (1,303) $ (1,175) $(1,543) $ 6,094 $ 1,856
--------- --------- -------- ------- ----------
--------- --------- -------- ------- ----------
(in thousands except for ratio)

COMPUTATION OF FIXED CHARGES:
Interest Expense $ 2 $ 52 $ 146 $ 442 $ 887
Amortization of debt issuance expense -- -- 45 3 17
Interest factor in rental expense 319 319 363 363 166
--------- --------- -------- ------- ----------
Total fixed earnings $ 321 $ 371 $ 554 $ 808 $ 1,070
--------- --------- -------- ------- ----------
--------- --------- -------- ------- ----------
Ratio of earnings to fixed charges (4.06) (3.17) (2.78) 7.54 1.73
--------- --------- -------- ------- ----------
--------- --------- -------- ------- ----------
Proforma Ratio for Debt Refinancing:
Increase in interest expense relating to $ 1,838
proposed issuance of new debt
Decrease in interest expense on debt
presently outstanding that will be retired
with the proceeds of proposed offering
(799)
---------
Total adjustment to fixed charges $ 1,039
---------
---------
Adjusted earnings $ 1,856
Adjusted fixed charges $ 2,109
Proforma ratio 0.88
Historical ratio 1.73

</TABLE>

The ratio of earnings to fixed charges has been computed by dividing earnings
from operations available for fixed charges (income from operations before
income taxes adjusted for interest expense, amortization of debt issuance costs,
and one-third of rent expense) by fixed charges.

Fixed charges include interest costs (interest expense plus one-third of rent
expense) and amortization of debt issuance costs. The Company has assumed that
one-third of rent expense is representative of the interest factor.

<PAGE>
EXHIBIT 21.1

SUBSIDIARIES OF CHANDLER (U.S.A.), INC.

(1) National American Insurance Company, a Nebraska corporation

(2) LaGere & Walkingstick Insurance Agency, Inc., an Oklahoma corporation

(3) Network Administrators, Inc., a Texas corporation

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Chandler (U.S.A.), Inc.
and subsidiaries ("CUSA") on Form S-1 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

April 15, 1999

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 25.1

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------

FORM T-1

STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT
OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE

CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)
---------------

U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)

75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)

2001 Ross Ave, Suite 2700 75201
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)

Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Ave, Suite 2700
Dallas, Texas 75201
(214) 754-1200
(Name, address and telephone number of agent for service)
---------------
Chandler (U.S.A.), Inc.
(Exact name of obligor as specified in its charter)

Oklahoma 73-1325906
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

1010 Manvel Avenue
Chandler, Oklahoma 74834
(Address of principal executive offices) (Zip Code)

---------------
__% Senior Debentures due 2014
(Title of the indenture securities)

<PAGE>

- --------------------------------------------------------------------------------

GENERAL

1. GENERAL INFORMATION.

Furnish the following information as to the Trustee:

(a) Name and address of each examining or supervising authority to
which it is subject.

Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas

(b) Whether it is authorized to exercise corporate trust powers.

The Trustee is authorized to exercise corporate trust powers.

2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.

If the obligor or any underwriter for the obligor is an affiliate of
the Trustee, describe each such affiliation.

None.

3. VOTING SECURITIES OF THE TRUSTEE.

Furnish the following information as to each class of voting securities
of the Trustee:

As of April 12, 1999
- --------------------------------------------------------------------------------

Col A. Col B.
- --------------------------------------------------------------------------------

Title of Class Amount Outstanding
- --------------------------------------------------------------------------------

Capital Stock - par value $100 per share 5,000 shares

4. TRUSTEESHIPS UNDER OTHER INDENTURES.

Not Applicable

5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.

Not Applicable

<PAGE>

6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.

Not Applicable

7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.

Not Applicable

8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.

Not Applicable

9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.

Not Applicable

10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.

Not Applicable

11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.

Not Applicable

12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.

Not Applicable

13. DEFAULTS BY THE OBLIGOR.

Not Applicable

14. AFFILIATIONS WITH THE UNDERWRITERS.

Not Applicable

15. FOREIGN TRUSTEE.

Not Applicable

16. LIST OF EXHIBITS.

T-1.1 - A copy of the Articles of Association of U.S. Trust
Company of Texas, N.A.; incorporated herein by reference
to Exhibit T-1.1 filed with Form T-1 Statement,
Registration No. 22-21897.

<PAGE>

16. (con't.)

T-1.2 - A copy of the certificate of authority of the Trustee to
commence business; incorporated herein by reference to
Exhibit T-1.2 filed with Form T-1 Statement, Registration
No. 22-21897.

T-1.3 - A copy of the authorization of the Trustee to exercise
corporate trust powers; incorporated herein by reference
to Exhibit T-1.3 filed with Form T-1 Statement,
Registration No. 22-21897.

T-1.4 - A copy of the By-laws of the U.S. Trust Company of
Texas, N.A., as amended to date; incorporated herein by
reference to Exhibit T-1.4 filed with Form T-1 Statement,
Registration No. 22-21897.

T-1.6 - The consent of the Trustee required by Section 321(b) of
the Trust Indenture Act of 1939.

T-1.7 - A copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority.

NOTE

As of April 12, 1999, the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of April 12, 1999, U.S.
T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are
owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding
18,594,551 shares of $5 par value Common Stock as of April 12, 1999.

The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.

In as much as this Form T-1 is filed prior to the ascertainment by the Trustee
of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.

In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.

---------------

<PAGE>

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S
Trust Company of Texas, N.A., a national banking association organized under the
laws of the United States of America, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
12th day of April, 1999.

U.S. Trust Company
of Texas, N.A., Trustee

By: /s/ Melissa Scott
--------------------------------
Melissa Scott
Vice President

<PAGE>

Exhibit T-1.6

CONSENT OF TRUSTEE

Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Chandler (U.S.A.),
Inc., Senior Debentures, we hereby consent that reports of examination by
Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon request therefore.

U.S. Trust Company of Texas, N.A.

By: /s/ Melissa Scott
-------------------------------
Melissa Scott
Vice President

<PAGE>

Exhibit T-1.7

<TABLE>
<S> <C>
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-005
Office of the Comptroller of the Currency
Federal Financial Institutions Examination Council OMB Number: 1557-0081
Expires March 31, 2001

- ----------------------------------------------------------------------------------------------------------------

(1)
Please Refer to Page I,
(LOGO) Table of Contents, for
the required disclosure
of estimated burden.

- ----------------------------------------------------------------------------------------------------------------

CONSOLIDATED REPORTS OF CONDITION
AND INCOME FOR A BANK WITH DOMESTIC
OFFICES ONLY AND TOTAL ASSETS OF LESS
THAN $100 MILLION - - FFIEC 033

REPORT AT THE CLOSE OF BUSINESS SEPTEMBER 30, 1998 (19980630)
------------
(RCRI 9999)

This report is required by law: 12 U.S.C. Section 324
(State member banks); 12 U.S.C. Section 1817 (State
nonmember banks); and 12 U.S.C. Section 161 This report form is to be filed by banks with
(National banks). domestic offices only. Banks with branches and
consolidated subsidiaries in U.S. territories and
possessions, Edge or Agreement subsidiaries, foreign
branches, consolidated foreign subsidiaries, or
International Banking Facilities must file FFIEC 031.

- ----------------------------------------------------------------------------------------------------------------

NOTE: The Reports of Condition and Income must be The Reports of Condition and Income are to be
signed by an authorized officer and the Report of prepared in accordance with Federal regulatory
Condition must be attested to by not less than two authority instructions. NOTE: these instructions may
directors (trustees) for State nonmember banks and in some cases differ from generally accepted
three directors for State member and National Banks. accounting principles.

We, the undersigned directors (trustees), attest to
I, Alfred B. Childs, Svp & Cashier the correctness of this Report of Condition
--------------------------------- (including the supporting schedules) and declare
Name and Title of Officer Authorized to that it has been examined by us and to the best of
Sign Report our knowledge and belief has been prepared in
conformance with the instructions issued by the
appropriate Federal regulatory authority and is true
and correct.

of the named bank do hereby declare that these
Reports of Condition and Income (including the
supporting schedules) have been prepared in
conformance with the instructions issued by the
appropriate Federal regulatory authority and are
true to the best of my knowledge and belief. /s/ William Goodwin
------------------------------
Director (Trustee)

/s/ Alfred B. Childs /s/ Stuart M. Pearman
- ------------------------- ------------------------------
Signature of Officer Authorized to Sign Report Director (Trustee)

October 21, 1998 /s/ J. T. Moore, Jr.
- ------------------------- ------------------------------
Date of Signature Director (Trustee)
</TABLE>

<PAGE>

<TABLE>
<S> <C>
SUBMISSION OF REPORTS

Each bank must prepare its Reports of Condition and For electronic filing assistance, contact EDS Call
Income either: Report Services, 2150 North Prospect Avenue,
Milwaukee, WI 53202, telephone (800) 255-1571.
in electronic form and then file the computer data
file directly with the banking agencies'
collection agent, Electronic Data Systems To fulfill the signature and attestation requirement
Corporation (EDS), by modem or on computer for the Reports of Condition and Income for this
diskette; or report date, attach this signature page to the
in hard-copy (paper) form and arrange for another hard-copy record of the completed report that the
party to convert the paper report to electronic bank places in its files.
form. That party (if other than EDS) must
transmit the bank's computer data file to EDS.

- ----------------------------------------------------------------------------------------------------------------

FDIC Certificate Number 33217 Us Trust Company of Texas, National Association
----------- -----------------------------------------------
(RCRI 9050) Legal Title of Bank (TEXT 9010)

Dallas
-----------------------------------------------
City (TEXT 9130)

TX 75201
-----------------------------------------------
State Abbrev. (TEXT 9200) Zip Code. (TEXT 9220)
</TABLE>

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, FEDERAL DEPOSIT INSURANCE
CORPORATION, OFFICE OF THE COMPTROLLER OF THE CURRENCY

<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
Call Date: 09/30/98 State #: 48-6797 FFIEC 033
U.S. TRUST COMPANY OF TEXAS, N.A. Vendor ID: D Cert #: 33217 RC-1
2001 ROSS AVENUE, SUITE 2700 Transit #: 11101765
DALLAS, TX 75201
9
</TABLE>

CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR SEPTEMBER 30, 1998

All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.

SCHEDULE RC - BALANCE SHEET
C200

<TABLE>
<CAPTION>
DOLLAR AMOUNTS IN THOUSANDS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS

1. Cash and balances due from depository institutions: RCON
----
a. Noninterest-bearing balances and currency and coin (1,2) ............. 0081 956 1.a
------ ------ -------
b. Interest bearing balances (3) ........................................ 0071 1,375 1.b
------ ------ -------
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) ........... 1754 0 2.a
------ ------ -------
b. Available-for-sale securities (from Schedule RC-B, column D) ......... 1773 117,282 2.b
------ ------ -------
3. Federal funds sold (4) and securities purchased under agreements to resell: 1350 5,000 3
-------
4. Loans and lease financing receivables: RCON
----
a. Loans and leases, net of unearned income (from Schedule RC-C) ........ 2122 20,749 4.a
------
b. LESS: Allowance for loan and lease losses ........................... 3123 230 4.b
------
c. LESS: Allocated transfer risk reserve ............................... 3128 0 4.c
------

RCON 21,252
---- -------
d. Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b and 4.c) ........................................ 2125 4.d
------ ------ -------
5. Trading assets ........................................................... 3545 0 5.
------ ------ -------
6. Premises and fixed assets (including capitalized leases) ................. 2145 669 6.
------ ------ -------
7. Other real estate owned (from Schedule RC-M) ............................. 2150 0 7.
------ ------ -------
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) ..................................................... 2130 0 8.
------ ------ -------
9. Customers' liability to this bank on acceptances outstanding ............. 2155 0 9.
------ ------ -------
10. Intangible assets (from Schedule RC-M) ................................... 2143 0 10.
------ ------ -------
11. Other assets (from Schedule RC-F) ........................................ 2160 1,921 11.
------ ------ -------
12. Total assets (sum of items 1 through 11) ................................. 2170 148,455 12.
------ ------ -------
</TABLE>

(1) Includes cash items in process of collection and unposted debits.
(2) Included time certificates of deposit not held for trading.

<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
Call Date: 09/30/98 State #: 48-6797 FFIEC 033
U.S. TRUST COMPANY OF TEXAS, N.A. Vendor ID: D Cert #: 33217 RC-2
2001 ROSS AVENUE, SUITE 2700 Transit #: 11101765
DALLAS, TX 75201
10
</TABLE>

SCHEDULE RC - CONTINUED

13. Deposits:
RCON
----
a. In domestic offices (sum of totals of
columns A and C from Schedule RC-E) ................................. RCON 2200 119,853 13.a
---- -------
(1) Noninterest-bearing (1) ........................................ 6631 10,673 13.a.1
-------
(2) Interest-bearing ............................................... 6636 109,180 13.a.2
-------
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing ............................................
(2) Interest-bearing ...............................................
14. Federal funds purchased(2) and securities sold under agreements
to repurchase: RCON 0 14
---- -------
2800
15. a. Demand notes issued to the U.S. Treasury ............................. 2840 0 15.a
------ ------ -------
b. Trading liabilities .................................................. 3548 0 15.b
------ ------ -------
16. Other borrowed money:
a. With a remaining maturity of one year or less ........................ 2332 1,000 16.a
------ ------ -------
b. With a remaining maturity of more than one year through three
years .................................................................... A547 2,000 16.b
------ ------ -------
c. With a remaining maturity of more than three years .................... A548 1,000 16.c
------ ------ -------
17. Not applicable
18. Bank's liability on acceptances executed and outstanding ................. 2920 0 18.
------ ------ -------
19. Subordinated notes and debentures ........................................ 3200 0 19.
------ ------ -------
20. Other liabilities (from Schedule RC-G) ................................... 2930 2,493 20.
------ ------ -------
21. Total liabilities (sum of items 13 through 20) ........................... 2948 126,346 21.
------ ------ -------
22. Not applicable
EQUITY CAPITAL

RCON 7,000 23.
----
23. Perpetual preferred stock and related surplus ............................ 3838
------ ------ -------
24. Common stock ............................................................. 3230 500 24.
------ ------ -------
25. Surplus (exclude all surplus related to preferred stock) ................. 3839 8,384 25.
------ ------ -------
26. a. Undivided profits and capital reserves ............................... 3632 5,261 26.a
------ ------ -------
b. Net unrealized holding gains (losses) on available-for-sale
securities ............................................................... 8434 964 26.b
------ ------ -------
</TABLE>

<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
27. Cumulative foreign currency translation
adjustments ..............................................................

28. Total equity capital (sum of items 23 through 27) ........................ 3210 22,109 28.
------ ------ -------
29. Total liabilities and equity capital (sum of items 21 and 28) ............ 2257 148,455 29.
------ ------ -------
</TABLE>

<TABLE>
<CAPTION>
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION. NUMBER
<S> <C> <C>
1. Indicate in the box at the right the number of the statement below that best describes the most
comprehensive level of auditing work performed for the bank by independent external auditors as
of any date during 1997 6724 N/A M.1
-------
</TABLE>

<TABLE>
<S> <C>
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by
submits a report on the consolidated holding company (but external auditors
not on the bank separately) 7 = Other audit procedures (excluding tax preparation
3 = Directors' examination of the bank conducted in accordance work)
with generally accepted auditing standards by a certified 8 = No external audit work
public accounting firm (may be required by state chartering
authority)
</TABLE>

(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.

<PAGE>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of operations of
Chandler (U.S.A.) Inc. as of and for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 84,269
<DEBT-CARRYING-VALUE> 1,183
<DEBT-MARKET-VALUE> 1,332
<EQUITIES> 191
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 85,643
<CASH> 9,304
<RECOVER-REINSURE> 2,760
<DEFERRED-ACQUISITION> (80)
<TOTAL-ASSETS> 223,351
<POLICY-LOSSES> 80,701
<UNEARNED-PREMIUMS> 50,647
<POLICY-OTHER> 4,936
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,410
0
0
<COMMON> 2
<OTHER-SE> 49,259
<TOTAL-LIABILITY-AND-EQUITY> 223,351
52,424
<INVESTMENT-INCOME> 4,904
<INVESTMENT-GAINS> 1,036
<OTHER-INCOME> 1,744
<BENEFITS> 36,042
<UNDERWRITING-AMORTIZATION> 10,735
<UNDERWRITING-OTHER> 12,545
<INCOME-PRETAX> 786
<INCOME-TAX> 353
<INCOME-CONTINUING> 433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433
<EPS-PRIMARY> 174.10
<EPS-DILUTED> 174.10
<RESERVE-OPEN> 54,035
<PROVISION-CURRENT> 34,313
<PROVISION-PRIOR> 1,729
<PAYMENTS-CURRENT> 19,495
<PAYMENTS-PRIOR> 30,243
<RESERVE-CLOSE> 39,921
<CUMULATIVE-DEFICIENCY> 1,729

</TABLE>