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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number: 1-15135
Chandler (U.S.A.), Inc.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1325906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1010 MANVEL AVENUE 74834
CHANDLER, OK (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 405-258-0804
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
The number of common shares, $1.00 par value, of the registrant
outstanding on October 29, 1999 was 2,484, which are owned by Chandler
Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance
Company, Ltd.
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<PAGE>
PAGE i
CHANDLER (U.S.A.), INC.
INDEX
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998......................................1
Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998......................................2
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 1999 and 1998...............................3
Consolidated Statements of Comprehensive Income for the nine
months ended September 30, 1999 and 1998...............................4
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998..5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998......................................6
Notes to Interim Consolidated Financial Statements..........................7
ITEM 2
- ------
Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................12
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings................................................17
Item 2 Changes in Securities............................................17
Item 3 Defaults Upon Senior Securities..................................17
Item 4 Submission of Matters to a Vote of Security Holders..............17
Item 5 Other Information................................................17
Item 6 Exhibits and Reports on Form 8-K.................................17
Signatures..................................................................18
<PAGE>
PAGE 1
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the three months
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed............................$ 50,203 $ 44,132
Reinsurance premiums ceded..................................... (19,382) (17,322)
Reinsurance premiums ceded to related parties.................. (6,951) (6,667)
---------- ----------
Net premiums written and assumed.......................... 23,870 20,143
Increase in unearned premiums.................................. (6,725) (6,779)
---------- ----------
Net premiums earned....................................... 17,145 13,364
Interest income, net................................................ 897 1,133
Realized investment gains, net...................................... 5 285
Commissions, fees and other income.................................. 450 396
---------- ----------
Total premiums and other revenues......................... 18,497 15,178
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts ceded to
related parties of $2,674 and $2,079 in 1999 and
1998, respectively........................................ 13,780 10,157
Policy acquisition costs, net of ceding commissions received
from related parties of $2,374 and $2,233 in 1999
and 1998, respectively.................................... 3,070 2,632
General and administrative expenses............................ 2,799 2,573
Interest expense............................................... 507 267
Litigation expenses, net....................................... 28 12
---------- ----------
Total operating costs and expenses........................ 20,184 15,641
---------- ----------
Loss before income taxes............................................ (1,687) (463)
Federal income tax benefit.......................................... 513 114
---------- ----------
Net loss............................................................$ (1,174) $ (349)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 2
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed............................$ 124,985 $ 103,593
Reinsurance premiums ceded..................................... (50,909) (44,129)
Reinsurance premiums ceded to related parties.................. (16,838) (17,483)
---------- ----------
Net premiums written and assumed.......................... 57,238 41,981
Increase in unearned premiums.................................. (8,042) (3,417)
---------- ----------
Net premiums earned....................................... 49,196 38,564
Interest income, net................................................ 2,928 3,806
Realized investment gains, net...................................... 57 578
Commissions, fees and other income.................................. 1,172 1,392
---------- ----------
Total premiums and other revenues......................... 53,353 44,340
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts ceded to
related parties of $8,219 and $8,712 in 1999 and
1998, respectively........................................ 36,348 27,273
Policy acquisition costs, net of ceding commissions received
from related parties of $5,932 and $6,264 in 1999
and 1998, respectively.................................... 10,914 8,452
General and administrative expenses............................ 8,098 8,451
Interest expense............................................... 927 651
Litigation expenses, net....................................... 73 288
---------- ----------
Total operating costs and expenses........................ 56,360 45,115
---------- ----------
Loss before income taxes............................................ (3,007) (775)
Federal income tax benefit.......................................... 830 114
---------- ----------
Net loss............................................................$ (2,177) $ (661)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 3
CHANDLER (U.S.A.), Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the three months
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net loss..............................................................$ (1,174) $ (349)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period..... (205) 1,783
Less: Reclassification adjustment for gains
included in net loss................................. (5) (285)
---------- ----------
Other comprehensive income (loss), before income tax.................. (210) 1,498
Income tax benefit (provision) related to items of other
comprehensive income (loss)...................................... 72 (509)
---------- ----------
Other comprehensive income (loss), net of income tax.................. (138) 989
---------- ----------
Comprehensive income (loss)...........................................$ (1,312) $ 640
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net loss..............................................................$ (2,177) $ (661)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period..... (2,751) 2,207
Less: Reclassification adjustment for gains
included in net loss................................. (57) (578)
---------- ----------
Other comprehensive income (loss), before income tax.................. (2,808) 1,629
Income tax benefit (provision) related to items of other
comprehensive income (loss)...................................... 955 (554)
---------- ----------
Other comprehensive income (loss), net of income tax.................. (1,853) 1,075
---------- ----------
Comprehensive income (loss)...........................................$ (4,030) $ 414
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER (U.S.A.), INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale, at fair value
Restricted.........................................................$ 7,604 $ 7,702
Unrestricted....................................................... 71,486 76,567
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $444 and $354 in 1999 and 1998,
respectively)................................................. 432 344
Unrestricted (fair value $865 and $978 in 1999 and 1998,
respectively)................................................. 800 839
Equity securities available for sale, at fair value..................... 276 191
------------- ------------
Total investments.................................................. 80,598 85,643
Cash and cash equivalents.................................................... 10,844 9,304
Premiums receivable, less allowance for non-collection
of $213 and $200 at 1999 and 1998, respectively......................... 36,776 28,468
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 1999 and 1998................................. 2,289 2,760
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $308 and $330 at 1999 and 1998, respectively.......... 49,678 28,867
Reinsurance recoverable on unpaid losses from related parties................ 9,651 11,913
Prepaid reinsurance premiums................................................. 27,179 22,448
Prepaid reinsurance premiums to related parties.............................. 9,196 7,168
Property and equipment, net.................................................. 9,016 8,071
Other assets................................................................. 13,719 9,911
Licenses, net................................................................ 4,082 4,194
Excess of cost over net assets acquired, net................................. 4,118 4,604
------------- ------------
Total assets.................................................................$ 257,146 $ 223,351
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses..............................$ 96,594 $ 80,701
Unearned premiums....................................................... 65,448 50,647
Policyholder deposits................................................... 5,692 4,936
Notes payable........................................................... - 9,410
Accrued taxes and other payables........................................ 4,011 3,755
Premiums payable........................................................ 15,459 10,960
Premiums payable to related parties..................................... 441 1,462
Amounts due to affiliate................................................ 271 12,219
Debentures.............................................................. 24,000 -
------------- ------------
Total liabilities.................................................. 211,916 174,090
------------- ------------
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares authorized;
2,484 shares issued................................................ 2 2
Paid-in surplus......................................................... 60,584 60,584
Accumulated deficit..................................................... (14,218) (12,040)
Accumulated other comprehensive income:
Unrealized gain (loss) on investments, available for sale, net of
income tax.................................................... (1,138) 715
------------- ------------
Total shareholder's equity......................................... 45,230 49,261
------------- ------------
Total liabilities and shareholder's equity...................................$ 257,146 $ 223,351
============= ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................................................$ (2,177) $ (661)
Add (deduct):
Adjustments to reconcile net loss to cash provided by (applied
to) operating activities:
Realized investment gains, net....................................... (57) (578)
Net losses (gains) on sale of property and equipment................. 1 (140)
Amortization and depreciation expense................................ 1,643 1,744
Provision for non-collection of premiums............................. 166 65
Provision for non-collection of reinsurance recoverables............. - 50
Net change in non-cash balances relating to operating activities:
Premiums receivable............................................. (8,474) (4,371)
Reinsurance recoverable on paid losses.......................... 351 556
Reinsurance recoverable on unpaid losses........................ (20,692) (16,370)
Reinsurance recoverable on unpaid losses from related parties... 2,262 (1,234)
Prepaid reinsurance premiums.................................... (4,731) (2,149)
Prepaid reinsurance premiums to related parties................. (2,028) (4,598)
Deferred policy acquisition costs............................... - 175
Other assets.................................................... (1,185) 265
Unpaid losses and loss adjustment expenses...................... 15,893 7,560
Unearned premiums............................................... 14,801 10,163
Policyholder deposits........................................... 756 (199)
Accrued taxes and other payables................................ 256 (1,710)
Premiums payable................................................ 4,499 1,166
Premiums payable to related parties............................. (1,021) (378)
---------- ----------
Cash provided by (applied to) operating activities................... 263 (10,644)
---------- ----------
INVESTING ACTIVITIES:
Unrestricted fixed maturities available for sale:
Purchases............................................................ (7,568) (28,253)
Sales................................................................ 4,159 20,500
Maturities........................................................... 4,477 20,258
Unrestricted fixed maturities held to maturity:
Maturities........................................................... 1,000 100
Restricted fixed maturities, net.......................................... - 300
Cost of property and equipment purchased.................................. (1,837) (2,913)
Proceeds from sale of property and equipment.............................. 96 316
---------- ----------
Cash provided by investing activities................................ 327 10,308
---------- ----------
FINANCING ACTIVITIES:
Proceeds from debentures and notes payable............................... 24,000 8,547
Payments on notes payable................................................. (9,410) (1,400)
Debt issue costs.......................................................... (1,692) -
Proceeds from borrowing from affiliate.................................... 3,432 6,732
Payments on borrowing from affiliate...................................... (15,380) (14,877)
---------- ----------
Cash provided by (applied to) financing activities................... 950 (998)
---------- ----------
Increase (decrease) in cash and cash equivalents during the period............. 1,540 (1,334)
Cash and cash equivalents at beginning of period............................... 9,304 10,783
---------- ----------
Cash and cash equivalents at end of period.....................................$ 10,844 $ 9,449
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 7
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there have been no material
changes in the information included in the Company's audited, consolidated
financial statements included in the Company's Registration Statement on Form
S-1 filed July 16, 1999. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the three and
nine month periods ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler
(U.S.A.), Inc. ("Chandler USA" or the "Company") and all subsidiaries. The
following represents the significant subsidiaries:
- National American Insurance Company ("NAICO")
- LaGere & Walkingstick Insurance Agency, Inc. ("L&W")
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Chandler USA is wholly owned by Chandler Insurance (Barbados), Ltd.
("Chandler Barbados") which, in turn, is wholly owned by Chandler Insurance
Company, Ltd. ("Chandler Cayman"), a Cayman Islands company.
NOTE 2. LITIGATION
In the Company's audited, consolidated financial statements included in
the Company's Registration Statement on Form S-1 filed July 16, 1999 and
Quarterly Report on Form 10-Q for the period ended June 30, 1999, recent
developments updating the CenTra, Inc. ("CenTra") litigation were described.
CENTRA LITIGATION - OKLAHOMA
The Company has previously reported concerning the background and status
of litigation involving CenTra and certain of its affiliates, officers and
directors (the "CenTra Group") in the United States District Court for the
Western District of Oklahoma ("Oklahoma Federal Court").
As previously reported, the trial of that litigation concluded on April
22, 1997, when the Oklahoma Federal Court entered judgments on various jury
verdicts. One judgment against Chandler Cayman requires the CenTra Group to
return stock it purchased in 1990 to Chandler Cayman in return for payment of
$5,099,133 from Chandler Cayman. Another judgment was against both Chandler
Cayman and its affiliate, Chandler Barbados, and in favor of CenTra and its
affiliate, Ammex, Inc. CenTra and Ammex were awarded $6,882,500 in connection
with a 1988 stock purchase agreement. Both judgments related to an alleged
failure by Chandler Cayman to adequately disclose the fact that ownership of
Chandler Cayman's stock may be subject to regulation by the Nebraska
Department of Insurance under certain circumstances. Judgment was also
entered in favor of CenTra and against certain officers and/or directors of
Chandler Cayman on securities claims relating to CenTra's 1990 purchases and
the failure to disclose the application of Nebraska insurance law, but the
judgments were $1 against each individual defendant on those claims. On ten
derivative claims brought by CenTra, the jury found in CenTra's favor on
three. Certain officers were directed to repay to Chandler USA 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.
<PAGE>
PAGE 8
Judgment was also entered in favor of NAICO and an affiliate of the
Company, NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity") on counterclaims
against CenTra for CenTra's failure to pay insurance premiums. Judgment was
for the amount of $788,625. During 1998, the judgment was paid by funds held
by the Oklahoma Federal Court aggregating, with interest, $820,185. DuraRock
Reinsurance, Ltd. ("DuraRock"), a CenTra affiliate, claims $725,000 is owed
to it by NAICO and NAICO Indemnity under certain reinsurance treaties. NAICO
and NAICO Indemnity dispute that claim. In November 1998, DuraRock demanded
arbitration and NAICO and NAICO Indemnity responded by appointing an
arbitrator. Preliminary and organizational hearings have been held, but no
decision is expected from the arbitration panel during 1999. The Oklahoma
Federal Court's judgment also upheld a resolution adopted by Chandler
Cayman's Board of Directors in August 1992 pursuant to Article XI of Chandler
Cayman's Articles of Association preventing CenTra and its affiliates from
voting their Chandler Cayman stock.
On March 10, 1998, the Oklahoma Federal Court modified the earlier
judgment for $6,882,500 to require the CenTra Group to deliver 1,142,625
shares of Chandler Cayman common stock they own or control upon payment of
the judgment by Chandler Cayman and Chandler Barbados. On that same date,
the Oklahoma Federal Court also entered an order denying the CenTra Group's
request for prejudgment interest on the judgments entered in favor of the
CenTra Group. Chandler Cayman recorded the Oklahoma Federal Court's judgment
requiring the return of the 1,142,625 shares of Chandler Cayman's stock as a
decrease to shareholders' equity as of December 31, 1997, and reduced the
previous first quarter of 1997 net charge for litigation matters by
$6,882,500, during the fourth quarter of 1997.
On March 16, 1998, the CenTra Group filed motions for an award of costs
and attorney fees totaling approximately $4.7 million. On April 21, 1998,
the Oklahoma Federal Court denied the CenTra Group's request. The CenTra
Group did not appeal this decision within the time permitted by applicable
law. Accordingly, Chandler Cayman reduced the previous first quarter of
1997 net charge for litigation matters by $3.8 million during the second
quarter of 1998. In subsequent papers filed with the appellate court, CenTra
asserts as error the Oklahoma Federal Court's denial of attorney fees.
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court and filed the initial
appellate brief on September 9, 1998. All briefing was completed on January
4, 1999 and the appeals are being considered by the U.S. Court of Appeals
for the 10th Circuit ("10th Circuit"). Oral argument is scheduled for
November 15, 1999. Chandler Cayman cannot predict when a decision on the
appeals will be made. The CenTra Group's appeals are based upon the
Oklahoma Federal Court's failure to award prejudgment interest, the Oklahoma
Federal Court's refusal to permit the CenTra Group to amend certain
pleadings to assert new claims, the Oklahoma Federal Court's modification of
the judgment for $6,882,500 to require CenTra to return shares of Chandler
Cayman's stock upon payment of the judgment, and the Oklahoma Federal Court's
entry of judgment in favor of NAICO and certain officers and directors on
CenTra's claim based upon cancellation of its insurance policies by NAICO in
1992. The CenTra Group is also attempting to appeal the Oklahoma Federal
Court's denial of attorney fees but not the denial of costs. Chandler Cayman
believes the appeal of this issue is untimely and therefore barred by law.
Chandler Cayman has elected not to appeal any of the judgments. The
individual officers and directors against whom judgments were entered as
described above have all filed appeals.
The judgments on the derivative claims described above were all entered
in favor of Chandler USA. Chandler USA is, therefore, the judgment creditor
in connection with those derivative claim judgments. Chandler USA appointed
three directors to comprise a Special Litigation Committee on April 25, 1997.
That Special Litigation Committee meets on a regular basis and has been
delegated the authority of the Chandler USA Board of Directors regarding all
issues related to the CenTra litigation in the Oklahoma Federal Court,
including the derivative claim judgments.
On April 28, 1997, Chandler Cayman's Board of Directors appointed a
Committee of the Board (the "Committee") to deal with all matters arising
from the Oklahoma litigation. The Committee was delegated all authority of
the Board on these issues. The members of the Committee are Messrs. Jacoby,
Maestri and Davis, all of whom are non-parties to the CenTra litigation. That
Committee has retained independent counsel. The individual members of the
Committee review issues relating to litigation strategy, officer and director
indemnification, and claims made under Chandler Cayman's director and officer
liability insurance policy on a regular basis in conjunction with a similar
committee composed of Chandler USA directors. The Committee meets quarterly
and participates in telephone briefings and discussions with its counsel and
members of the Chandler USA Special Litigation Committee.
Because all shares of Chandler Cayman's stock owned by the CenTra Group
are held by the U.S. District Court for the District of Nebraska ("Nebraska
Court"), it is unclear when or if the CenTra Group will be able to comply
with the Oklahoma Federal Court's order. Chandler Cayman believes that it is
not required to pay the judgments until the CenTra Group can deliver the
shares to Chandler Cayman. See CenTra Litigation - Nebraska.
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on the Company and could
negatively impact future earnings. The Company'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,
the Company may receive cash through equity sales, borrowings and dividends
from its subsidiaries. Chandler Barbados and NAICO are subject to various
regulations which restrict their ability to pay shareholder dividends. A
reduction in the amount of invested assets, or an increase in borrowings
resulting from potential payments of these judgments would reduce investment
earnings or increase operating expenses in future periods.
<PAGE>
PAGE 9
CENTRA LITIGATION - NEBRASKA
The Company has previously reported regarding administrative proceedings
and decisions and court actions and decisions involving Chandler Cayman and
the CenTra Group in the State of Nebraska. (See Form S-1 filed July 16,
1999.) The Nebraska Court ordered CenTra, M.J. Moroun, and others to deliver
into the registry of the Nebraska Court all shares of Chandler Cayman stock
owned or controlled by them or their affiliates and not previously delivered
to the Nebraska Court to await the outcome of the CenTra Group's appeal of a
divestiture order entered by the Nebraska Court on March 25, 1997. On
February 9, 1998, CenTra deposited an additional 1,691,750 shares of Chandler
Cayman's stock making the total number of shares on deposit with the Nebraska
Court 3,133,450 shares. In his March 25, 1997 order, the Honorable Warren K.
Urbom, U.S. District Judge for the Nebraska Court, ordered the parties to
submit divestiture plans. The appeal of that order by CenTra resulted in a
delay of the deadlines for submitting the proposals.
On July 29, 1998, the U.S. Court of Appeals for the 8th Circuit affirmed
the Nebraska Court's order that the CenTra Group will be divested of ownership
or control of its shares. This ruling allows Judge Urbom to consider
divestiture plans which may be submitted by NAICO, the Nebraska Department of
Insurance and the CenTra Group. All Chandler Cayman shares owned or
controlled by the CenTra Group remain in the Nebraska Court's possession
pending further orders by that court. On October 28, 1998, the CenTra Group
filed pleadings in the Nebraska Court requesting the appointment of a special
master to supervise the divestiture and an independent trustee to hold and
vote Chandler Cayman's shares owned by the CenTra Group in accordance with
specific instructions pending the final implementation of a divestiture plan.
NAICO objected to the CenTra proposal on November 25, 1998 and responded with
a divestiture plan of its own (the "NAICO Plan"). The Nebraska Court rejected
the CenTra proposal and CenTra responded to the NAICO Plan on December 28,
1998. NAICO's Plan includes a proposal whereby Chandler Cayman would acquire
and cancel the shares owned or acquired by the CenTra Group. The NAICO Plan
has been approved by Chandler Cayman's executive committee of the Board of
Directors and the Boards of Directors of Chandler USA and NAICO. The
Nebraska Department of Insurance generally supports the NAICO Plan.
On November 3, 1999, Judge Urbom of the Nebraska Court issued an order to
implement the divestiture of all Chandler Cayman shares owned or controlled by
CenTra. The Nebraska Court's order provides for a repurchase of those shares
by Chandler Cayman at an amount equivalent to the price originally paid by
CenTra for those shares. The order provides for the immediate repurchase of
517,500 Chandler Cayman shares at a cost to Chandler Cayman of $5,099,133
($9.85 per share). This amount was previously recorded as a decrease to
Chandler Cayman's shareholders' equity during the first quarter of 1997, based
on a judgment by the Oklahoma Federal Court on April 22, 1997. The Nebraska
Court will receive evidence to be submitted by the parties by November 24,
1999 regarding the price paid by CenTra for two other groups of Chandler
Cayman shares totaling 1,441,700 and 30,000 shares, respectively. The
Nebraska Court will then supplement its order to provide for the repurchase
of these shares at the price it determines was CenTra's actual cost. As to
the 1,441,700 shares, NAICO contends that CenTra's cost was $6.93 per share
and CenTra has stated it was $6.99 per share. As to the 30,000 shares, there
appears to be no dispute that the total was $177,313 for an average per share
cost of $5.91 per share. These two groups of shares were not a part of the
judgments by the Oklahoma Federal Court, and until the November 3, 1999 order
by the Nebraska Court, Chandler Cayman was unable to determine what actions
would be taken by the court with respect to these shares. The repurchase of
these two groups of shares will reduce Chandler Cayman's shareholders' equity
by approximately $10 million, and will reduce the number of outstanding shares
of Chandler Cayman by 1,471,700 shares. An additional 1,625 shares are owned
by an affiliate of CenTra and are not included with any of the other groups
of shares. The Nebraska Court has directed the parties to submit briefs
dealing with the treatment of these shares.
Another group of Chandler Cayman shares acquired by CenTra in 1987 and
1988 is also the subject of a separate court decision by the Oklahoma Federal
Court. That court ruled that in exchange for payment by Chandler Cayman of
CenTra's cost of $6,882,500, CenTra must redeliver and transfer to Chandler
Cayman 1,142,625 Chandler Cayman shares. This amount was previously recorded
as a decrease to Chandler Cayman's shareholders' equity as of December 31,
1997. CenTra has appealed that ruling and the appeal is now pending in the
10th Circuit. The Nebraska Court has directed the parties to submit their
plans for divestiture of those shares within 21 days of the ruling on that
appeal by the 10th Circuit.
CenTra may appeal the Nebraska Court's order. When the CenTra owned or
controlled shares are reacquired by Chandler Cayman they will be cancelled.
Chandler Cayman expects to finance the repurchase of these shares from its
existing cash and investments, including cash and investments owned by
certain of its subsidiaries. As a holding company, Chandler Cayman may
receive cash through equity sales, borrowings and dividends from its
subsidiaries.
<PAGE>
PAGE 10
CENTRA LITIGATION - OTHER
The Company has previously reported regarding two separate lawsuits filed
against NAICO, NAICO Indemnity and certain NAICO officers during 1997 in State
Court in Macomb County, Michigan. As stated in the Company's Form S-1 filed
July 16, 1999, NAICO, NAICO Indemnity and the other defendants contend that
the claims which are the basis of these suits are the same claims which were
prosecuted and concluded in NAICO's and NAICO Indemnity's favor by the
Oklahoma Federal Court in April 1997. On February 28, 1998, a Michigan Federal
Court ordered the lawsuits transferred to the Oklahoma Federal Court. They
have now been consolidated and have been assigned to the same judge who
presided over the action concluded in April 1997 (see CenTra Litigation -
Oklahoma). Dispositive motions filed by NAICO, NAICO Indemnity and the other
defendants are currently under consideration by the Oklahoma Federal Court.
Ruling on those motions has been stayed pending the ruling on CenTra's appeal
of the April 1, 1997 judgment on the same claims (see CenTra Litigation -
Oklahoma).
At the present time, Chandler USA and its affiliates are actively
participating in court proceedings, possible discovery actions and rights of
appeal concerning these various legal proceedings; therefore the Company is
unable to predict the outcome of such litigation with certainty or the effect
of such ongoing litigation on future operations.
OTHER LITIGATION
The Company and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective
business activities.
NOTE 3. DEBENTURE OFFERING
On July 16, 1999, Chandler USA completed a public offering of $24
million principal amount of senior debentures with a maturity date of July
16, 2014. The debentures were priced at $1,000 each with an interest rate
of 8.75% and are redeemable by Chandler USA on or after July 16, 2009
without penalty or premium. The debentures have been listed on the American
Stock Exchange. Standard & Poor's has assigned the debentures a rating of
"BBB." The proceeds to Chandler USA before expenses but after the
underwriter's discount were $23.16 million. The proceeds of the offering
were used to repay existing bank debt, to repay amounts owed by Chandler USA
to its parent, Chandler Barbados, and for general corporate purposes.
Chandler USA's subsidiaries and affiliates are not obligated by the debentures.
Accordingly, the debentures are effectively subordinated to all existing and
future liabilities and obligations of Chandler USA's existing and future
subsidiaries.
NOTE 4. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the statement
of financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS No. 133 when required. Management
of the Company believes that adoption of SFAS No. 133 will not have a
material impact on the Company's consolidated financial condition or results
of operations.
<PAGE>
PAGE 11
NOTE 5. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three and nine month periods ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
Property
and All Intersegment Reported
Agency casualty other eliminations balances
-------- ---------- --------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers (1)......$ 441 $ 17,154 $ - $ - $ 17,595
Intersegment revenues..................... 2,720 35 - (2,755) -
Segment profit (loss) before
income taxes (2)..................... 106 (1,603) (190) - (1,687)
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers (1)......$ 349 $ 13,411 $ - $ - $ 13,760
Intersegment revenues..................... 2,422 57 - (2,479) -
Segment profit (loss) before
income taxes (2)..................... 144 (333) (274) - (463)
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues from external customers (1)......$ 1,148 $ 49,220 $ - $ - $ 50,368
Intersegment revenues..................... 6,046 156 - (6,202) -
Segment profit (loss) before
income taxes (2)..................... 1 (2,449) (559) - (3,007)
Segment assets............................$ 6,127 $ 261,492 $ - $ (10,473) $ 257,146
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues from external customers (1)......$ 1,214 $ 38,742 $ - $ - $ 39,956
Intersegment revenues..................... 5,201 153 - (5,354) -
Segment profit (loss) before
income taxes (2)..................... 129 171 (1,075) - (775)
Segment assets............................$ 6,079 $ 217,413 $ - $ (4,687) $ 218,805
- ------------------------------------------
</TABLE>
(1) Consists of net premiums earned, and commissions, fees and other income.
(2) Includes net realized investment gains.
The following supplemental information pertaining to each insurance
program's net premiums earned and losses and loss adjustment expenses is
presented for the property and casualty segment.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Insurance program (In thousands)
<S> <C> <C> <C> <C>
NET PREMIUMS EARNED
Standard property and casualty...................$ 10,120 $ 7,509 $ 27,353 $ 21,289
Political subdivisions........................... 3,132 2,682 9,135 7,577
Surety bonds..................................... 1,828 2,068 6,148 5,365
Group accident and health........................ 2,040 1,286 6,620 3,482
Other............................................ 25 (181) (60) 851
---------- ---------- ---------- ----------
$ 17,145 $ 13,364 $ 49,196 $ 38,564
========== ========== ========== ==========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty...................$ 8,104 $ 7,091 $ 21,579 $ 16,999
Political subdivisions........................... 3,728 2,205 10,185 6,001
Surety bonds..................................... (6) 88 133 861
Group accident and health........................ 2,047 973 5,532 3,365
Other............................................ (93) (200) (1,081) 47
---------- ---------- ---------- ----------
$ 13,780 $ 10,157 $ 36,348 $ 27,273
========== ========== ========== ==========
</TABLE>
<PAGE>
PAGE 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as
statements made by Chandler (U.S.A.), Inc. ("Chandler USA" or the "Company")
in periodic press releases, oral statements made by the Company's officials
to analysts and shareholders in the course of presentations about the Company
and conference calls following earnings releases, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company 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, (i)
general economic and business conditions; (ii) interest rate changes; (iii)
competition and regulatory environment in which the Company operates; (iv)
claims frequency; (v) claims severity; (vi) the number of new and renewal
policy applications submitted by the Company's agents; (vii) the ability of
the Company to obtain adequate reinsurance in amounts and at rates that will
not adversely affect its competitive position; (viii) National American
Insurance Company's ("NAICO") ability to maintain favorable insurance company
ratings; (ix) the ability of the Company and its third party providers, agents
and reinsurers to adequately address year 2000 issues; and (x) other factors
including the ongoing litigation matters involving a significant concentration
of ownership of the Company's indirect parent's common stock.
RESULTS OF OPERATIONS
NET PREMIUMS EARNED
The following table sets forth net premiums earned for the three and
nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Standard property and casualty...................$ 10,120 $ 7,509 $ 27,353 $ 21,289
Political subdivisions........................... 3,132 2,682 9,135 7,577
Surety bonds..................................... 1,828 2,068 6,148 5,365
Group accident and health........................ 2,040 1,286 6,620 3,482
Other............................................ 25 (181) (60) 851
--------- ---------- ---------- ----------
TOTAL............................................$ 17,145 $ 13,364 $ 49,196 $ 38,564
========= ========== ========== ==========
</TABLE>
Net premiums earned in the third quarter of 1999 were $17.1 million, an
increase of $3.8 million or 28% compared to the third quarter of 1998. Net
premiums earned for the first nine months 1999 were $49.2 million, an increase
of $10.6 million or 28% compared to the 1998 period. The increases are
primarily attributable to increased written premium production in Texas and
Oklahoma.
Net premiums earned in the standard property and casualty program were
$10.1 million in the third quarter of 1999, an increase of $2.6 million or 35%
compared to the third quarter of 1998. Net premiums earned for the first nine
months of 1999 were $27.4 million, an increase of $6.1 million or 28% compared
to the 1998 period. The increases are primarily attributable to increased
written premium production in Texas.
Net premiums earned in the political subdivisions program were $3.1
million in the third quarter of 1999, an increase of $450,000 or 17% compared
to the third quarter of 1998. Net premiums earned for the first nine months
of 1999 were $9.1 million, an increase of $1.6 million or 21% compared to the
1998 period. The increases are primarily attributable to expansion of the
school districts program in Texas and Missouri and increased written premium
production in Oklahoma.
Net premiums earned in the surety bond program were $1.8 million in the
third quarter of 1999, a decrease of $240,000 or 12% compared to the third
quarter of 1998. Net premiums earned in the first nine months of 1999 were
$6.1 million, an increase of $783,000 or 15% compared to the 1998 period.
The increase in the nine month period was due primarily to increased written
premium production in California.
Net premiums earned in the group accident and health program were $2.0
million in the third quarter of 1999, an increase of $754,000 or 59% compared
to the third quarter of 1998. Net premiums earned in the first nine months
of 1999 were $6.6 million, an increase of $3.1 million or 90% compared to the
1998 period. The increases are due primarily to a new program covering
Oklahoma employers on a fully insured basis which was effective January 1,
1999. Net premiums earned for this program were $1.7 million and $4.3
million for the third quarter and first nine months of 1999, respectively.
NAICO discontinued writing new policies for the excess portion of its group
accident and health program effective April 1, 1999.
<PAGE>
PAGE 13
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At September 30, 1999, the Company's investment portfolio consisted
primarily of fixed income U.S. Government, high-quality corporate and tax
exempt bonds, with approximately 12% invested in cash and money market
instruments. The Company's portfolio contains no junk bonds or real estate
investments.
Net interest income decreased $236,000 or 21% in the third quarter of 1999
compared to the third quarter of 1998, and decreased $878,000 or 23% for the
nine months ended September 30, 1999 compared to the 1998 period, due
primarily to the purchase of additional reinsurance coverages in 1998. The
Company had net realized investment gains in the third quarter of 1999 of
$5,000 compared to $285,000 in the third quarter of 1998. Net realized
investment gains were $57,000 and $578,000 in the first nine months of 1999
and 1998, respectively.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income increased
$54,000 or 14% in the third quarter of 1999 compared to the third quarter of
1998, and decreased $220,000 or 16% for the nine months ended September 30,
1999 compared to the 1998 period. The majority of the Company's income from
commissions, fees and other income are from the Company's subsidiary LaGere
and Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $3.2 million and $7.2 million in the third quarter and first nine months
of 1999, respectively, compared to $2.8 million and $6.3 million in the year
ago periods. A large portion of the brokerage commissions and fees for L&W
is incurred by NAICO and thus eliminated in the consolidation of the
Company's subsidiaries.
Other income during the first nine months of 1998 included a gain of
approximately $145,000 that resulted from L&W's disposal of certain equipment.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 80.4% and 73.9% for the quarter and nine months
ended September 30, 1999, compared to 76.0% and 70.7% in the comparable 1998
periods. Weather-related losses (net of applicable reinsurance) from wind
and hail totaled $803,000 and $4.0 million for the third quarter and first
nine months of 1999,respectively, and increased the respective loss ratios by
4.7 and 8.2 percentage points. Weather-related losses totaled $558,000 and
$1.3 million for the third quarter and first nine months of 1998,
respectively, and increased the respective loss ratios by 4.2 and 3.5
percentage points. In addition, increased loss activity in the Company's
political subdivisions and group accident and health programs adversely
affected the loss ratio for the third quarter of 1999.
NAICO is a major insurer of property owned by businesses, cities, towns
and school districts in Oklahoma. As a result, NAICO incurs weather-related
losses. On May 3, 1999, tornadoes, hail and strong winds caused severe
damage to property owned or used by NAICO insureds. NAICO estimates total
insured damages from the storms at approximately $26.3 million. Giving
effect to NAICO's applicable reinsurance, all of which is with unaffiliated
reinsurers, NAICO estimates its net loss before income tax benefit resulting
from the May 3 storms at $1.8 million which was recorded in the second
quarter of 1999.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the
acquisition of new and renewal business and generally include direct costs
such as premium taxes, commissions to agents and ceding companies and
premium-related assessments and indirect costs such as salaries and
expenses of personnel who perform and support underwriting activities.
NAICO also receives ceding commissions from certain of the reinsurers who
assume premiums from NAICO under certain reinsurance contracts and the ceding
commissions are accounted for as a reduction of policy acquisition costs.
Direct policy acquisition costs and ceding commissions are deferred and
amortized over the terms of the policies. Recoverability of such deferred
costs is dependent on the related unearned premiums on the policies being more
than expected claim losses.
<PAGE>
PAGE 14
The following table sets forth the Company's policy acquisition costs for
each of the three and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Commissions expense..............................$ 4,804 $ 4,290 $ 14,940 $ 11,807
Other premium related assessments................ 378 499 1,065 1,391
Premium taxes.................................... 814 1,037 2,181 2,783
Excise taxes..................................... 70 69 169 175
Dividends to policyholders....................... 90 (43) 247 107
Other expense.................................... 70 5 155 65
---------- ---------- ---------- ----------
Total direct expenses............................ 6,226 5,857 18,757 16,328
Indirect underwriting expenses................... 4,582 4,145 12,377 10,088
Commissions received from reinsurers............. (7,702) (7,040) (20,162) (18,139)
Adjustment for deferred acquisition costs........ (36) (330) (58) 175
---------- ---------- ---------- ----------
Net policy acquisition costs.....................$ 3,070 $ 2,632 $ 10,914 $ 8,452
========== ========== ========== ==========
</TABLE>
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 21.5% and 24.9% for the third quarter and
first nine months of 1999, respectively, compared to 22.7% and 25.5% in the
corresponding year ago periods. Commission expense as a percentage of gross
written and assumed premiums was 9.6% and 12.0% in the third quarter and the
first nine months of 1999, respectively, compared to 9.7% and 11.4% in the
corresponding 1998 periods.
Indirect underwriting expenses were 9.1% and 9.9% of total direct
written and assumed premiums in the third quarter and first nine months of
1999, respectively, compared to 9.4% and 9.7% in the corresponding 1998
periods. Indirect expenses include general overhead and administrative costs
associated with the acquisition of new and renewal business, some of which is
relatively fixed in nature, thus, the percentage of such expenses to direct
written and assumed premiums will vary depending on the Company's overall
premium volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 7.3% of gross premiums earned
and commissions, fees and other income in both the third quarter and first
nine months of 1999, compared to 7.9% and 8.9% for the corresponding 1998
periods. General and administrative expenses have historically not varied
in direct proportion to the Company's revenues. A portion of such expenses
is allocated to policy acquisition costs (indirect underwriting expenses) and
loss and loss adjustment expenses based on various factors including
employee counts, salaries, occupancy and specific identification. Because
certain types of expenses are fixed in nature, the percentage of such
expenses to revenues will vary depending on the Company's overall premium
volume.
INTEREST EXPENSE
Interest expense increased $240,000 in the third quarter of 1999 compared
to the 1998 quarter, and increased $276,000 in the nine months ended September
30, 1999 compared to the 1998 period. The increase was primarily due to
interest expense on the debenture offering which was completed on July 16,
1999 by the Company. See LIQUIDITY AND CAPITAL RESOURCES.
LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra").
In April 1998, the Oklahoma Federal Court in which the CenTra litigation is
pending ordered all parties to pay their own costs and attorney's fees in
the case thus denying CenTra's request of approximately $4.7 million for
those expenses. CenTra did not initially appeal this decision. Accordingly,
Chandler Cayman reduced the previous first quarter 1997 net charge for
CenTra litigation matters by $3.8 million during the second quarter of 1998.
In later papers filed with the appellate court, CenTra has attempted to
appeal this decision. The Company believes CenTra's appeal of the decision
is barred. Increased or renewed activity could result in greater litigation
expenses in 1999 or future years.
See Note 2 to the Interim Consolidated Financial Statements for recent
developments.
<PAGE>
PAGE 15
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 1999, the Company provided $263,000 in cash
from operations compared to cash used in operations of $10.6 million during
the first nine months of 1998. The 1998 use of cash was due primarily to the
purchase of additional reinsurance during 1998.
On July 16, 1999, Chandler USA completed a public offering of $24 million
principal amount of senior debentures with a maturity date of July 16, 2014.
The debentures were priced at $1,000 each with an interest rate of 8.75% and
are redeemable by Chandler USA on or after July 16, 2009 without penalty or
premium. The debentures have been listed on the American Stock Exchange.
Standard & Poor's has assigned the debentures a rating of "BBB." The proceeds
to Chandler USA before expenses but after the underwriter's discount were
$23.16 million. The proceeds of the offering were used to repay existing bank
debt, to repay amounts owed by Chandler USA to its parent, Chandler Barbados,
and for general corporate purposes.
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
data recognition problems (the "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.
The Company is heavily dependent upon complex information technology
computer systems for its operations. The Company 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. The Company 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. The Company 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, the Company retained an independent
consultant to prepare a plan for testing its information technology systems.
In late 1998, the Company determined that the testing would be performed by
its employees, and this testing was completed during the first half of 1999.
During the fourth quarter of 1998, the Company incurred approximately
$150,000 in additional expenses to evaluate its information systems and in
preparation of plans to test its information systems.
The Company incurred additional costs of $125,000 to complete its testing
during the first six months of 1999. These costs included the use of internal
employees, cost of external software to enhance testing efforts and computer
rental costs. These costs were expensed during 1999 as incurred. The Company
could incur costs in the future if additional efforts are needed to perform
modifications to the Company's information technology systems. The Company
has established a contingency plan for all critical business operations. The
contingency plan includes possible manual operations and the implementation of
alternative processing procedures.
The Company 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, 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.
<PAGE>
PAGE 16
Any previously mentioned Year 2000 Problems could have a material adverse
effect on the Company, including the financial condition of the Company's
subsidiaries and their ability to pay dividends or other payments to the
Company and its subsidiaries.
It is possible that the credit or operating ability of agents, reinsurers
and others with whom the Company maintains commercial relationships may be
adversely affected by one or more unforeseen circumstances caused by Year 2000
Problems. However, the Company 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, the
Company is developing plans to attempt to minimize identified third-party
exposures. The Company has requested information from its major vendors and
service providers to assess their year 2000 readiness. The Company currently
is evaluating this information. The Company cannot predict the adverse
impact, if any, of Year 2000 Problems upon parties with whom it does business.
The Company 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. The
Company 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., an
insurance services company which provides regulatory research and filing
support to insurance companies. Use of these special endorsements is governed
by the law and regulatory policies of states in which NAICO is authorized to
do business.
It is possible that future court interpretations of policy language based
on specific facts, or legislation mandating coverage, could result in coverage
or losses attributable to Year 2000 Problems. Such decisions or legislation
could have a material adverse impact on the Company. It is also possible that
NAICO may incur expenses defending claims for which it is ultimately
determined there is no insurance coverage.
<PAGE>
PAGE 17
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
-----------------
In response to this item, the Company incorporates by reference to
Note 2. Litigation to its Interim Consolidated Financial Statements
contained elsewhere in this report.
Item 2. CHANGES IN SECURITIES
---------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
None
<PAGE>
PAGE 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 1999 CHANDLER (U.S.A.), Inc.
By: /s/ W. Brent LaGere
---------------------------
W. Brent LaGere
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
---------------------------
Mark C. Hart
Vice President - Finance & Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
(U.S.A.), Inc.'s September 30, 1999 Form 10-Q and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 79,090
<DEBT-CARRYING-VALUE> 1,232
<DEBT-MARKET-VALUE> 1,309
<EQUITIES> 276
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 80,598
<CASH> 10,844
<RECOVER-REINSURE> 2,289
<DEFERRED-ACQUISITION> (23)
<TOTAL-ASSETS> 257,146
<POLICY-LOSSES> 96,594
<UNEARNED-PREMIUMS> 65,448
<POLICY-OTHER> 5,692
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 24,000
0
0
<COMMON> 2
<OTHER-SE> 45,228
<TOTAL-LIABILITY-AND-EQUITY> 257,146
49,196
<INVESTMENT-INCOME> 2,928
<INVESTMENT-GAINS> 57
<OTHER-INCOME> 1,172
<BENEFITS> 36,348
<UNDERWRITING-AMORTIZATION> 10,914
<UNDERWRITING-OTHER> 9,098
<INCOME-PRETAX> (3,007)
<INCOME-TAX> 830
<INCOME-CONTINUING> (2,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,177)
<EPS-BASIC> (876.45)
<EPS-DILUTED> (876.45)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
