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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 June 30, 1998
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: 0-15286
CHANDLER INSURANCE COMPANY, LTD.
(Exact name of registrant as specified in its charter)
CAYMAN ISLANDS NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5TH FLOOR ANDERSON SQUARE N/A
P.O. BOX 1854 (Zip Code)
GRAND CAYMAN, CAYMAN ISLANDS B.W.I.
(Address of principal
executive offices)
Registrant's telephone number, including area code: 345-949-8177
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, $1.67 par value, of the registrant outstanding
on July 31, 1998 was 6,941,708, which includes 564,475 common shares owned by a
subsidiary of the registrant which are eligible to vote, and 1,660,125 common
shares which were rescinded through litigation and are held by a court.
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<PAGE>
PAGE i
CHANDLER INSURANCE COMPANY, LTD.
INDEX
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997.............................................1
Consolidated Statements of Operations for the six months
ended June 30, 1998 and 1997.............................................2
Consolidated Statements of Comprehensive Income for the three
months ended June 30, 1998 and 1997......................................3
Consolidated Statements of Comprehensive Income for the six
months ended June 30, 1998 and 1997......................................4
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.........5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997.............................................6
Notes to Interim Consolidated Financial Statements............................7
ITEM 2
- ------
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................11
PART II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings..................................................16
Item 2 Changes in Securities..............................................16
Item 3 Defaults Upon Senior Securities....................................16
Item 4 Submission of Matters to a Vote of Security Holders................16
Item 5 Other Information..................................................16
Item 6 Exhibits and Reports on Form 8-K...................................16
Signatures...................................................................17
<PAGE>
PAGE 1
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the three months
ended June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed................$ 30,061 $ 28,756
Reinsurance premiums ceded......................... (12,478) (4,005)
---------- ----------
Net premiums written and assumed................ 17,583 24,751
Decrease (increase) in unearned premiums........... (108) 972
---------- ----------
Net premiums earned............................. 17,475 25,723
Net investment income................................. 2,012 1,808
Commissions, fees and other income.................... 366 620
---------- ----------
Total premiums and other revenues............... 19,853 28,151
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................ 14,103 15,549
Policy acquisition costs........................... 4,843 7,639
General and administrative expenses................ 3,209 3,267
Interest expense................................... 267 92
Litigation expenses, net........................... (3,512) 562
---------- ----------
Total operating costs and expenses.............. 18,910 27,109
---------- ----------
Income before income taxes............................ 943 1,042
Federal income tax benefit (provision) of
consolidated U.S. subsidiaries..................... 88 (504)
---------- ----------
Net income ...........................................$ 1,031 $ 538
========== ==========
Basic and diluted earnings per common share...........$ 0.16 $ 0.08
Basic weighted average common shares outstanding...... 6,423 6,708
Diluted weighted average common shares outstanding.... 6,437 6,708
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 2
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Premiums and other revenues
Direct premiums written and assumed................$ 59,461 $ 56,915
Reinsurance premiums ceded......................... (26,807) (7,712)
---------- ----------
Net premiums written and assumed................ 32,654 49,203
Decrease in unearned premiums...................... 960 193
---------- ----------
Net premiums earned............................. 33,614 49,396
Net investment income................................. 3,690 3,623
Commissions, fees and other income.................... 1,099 1,440
---------- ----------
Total premiums and other revenues............... 38,403 54,459
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses................ 23,717 31,136
Policy acquisition costs........................... 9,050 14,235
General and administrative expenses................ 6,586 6,796
Interest expense................................... 401 178
Litigation expenses, net........................... (3,356) 10,922
---------- ----------
Total operating costs and expenses.............. 36,398 63,267
---------- ----------
Income (loss) before income taxes..................... 2,005 (8,808)
Federal income tax provision of
consolidated U.S. subsidiaries..................... - (981)
---------- ----------
Net income (loss).....................................$ 2,005 $ (9,789)
========== ==========
Basic and diluted earnings (loss) per common share....$ 0.31 $ (1.43)
Basic weighted average common shares outstanding...... 6,441 6,824
Diluted weighted average common shares outstanding.... 6,450 6,824
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 3
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the three months
ended June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income ...........................................$ 1,031 $ 538
---------- ----------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period.. 375 1,978
Less: Reclassification adjustment for gains
included in net income .................. (268) (18)
---------- ----------
Other comprehensive income, before tax................ 107 1,960
Income tax expense related to items
of other comprehensive income...................... (10) (583)
---------- ----------
Other comprehensive income, net of tax................ 97 1,377
---------- ----------
Comprehensive income .................................$ 1,128 $ 1,915
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 4
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss).....................................$ 2,005 $ (9,789)
---------- ----------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period........................ 504 (406)
Less: Reclassification adjustment for gains
included in net income (loss)............ (277) (32)
---------- ----------
Other comprehensive income (loss), before tax......... 227 (438)
Income tax (expense) benefit related to items
of other comprehensive income...................... (45) 124
---------- ----------
Other comprehensive income (loss), net of tax......... 182 (314)
---------- ----------
Comprehensive income (loss)...........................$ 2,187 $ (10,103)
========== ==========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 5
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale,
at fair value................................$ 102,728 $ 111,718
Fixed maturities held to maturity, at
amortized cost (fair value $1,266 and
$1,330 in 1998 and 1997, respectively)....... 1,152 1,222
Equity securities available for sale,
at fair value................................ 191 124
------------ ------------
Total investments............................ 104,071 113,064
Cash and cash equivalents.......................... 21,480 11,999
Premiums receivable, less allowance
for non-collection of $170 and $115
at 1998 and 1997, respectively.................. 26,852 28,079
Reinsurance recoverable on paid losses,
less allowance for non-collection of
$275 at 1998 and 1997........................... 1,411 3,069
Reinsurance recoverable on unpaid losses,
less allowance for non-collection of $420
and $390 at 1998 and 1997, respectively......... 21,192 10,876
Prepaid reinsurance premiums....................... 8,878 9,662
Deferred policy acquisition costs.................. 5,809 5,312
Property and equipment, net........................ 7,880 5,907
Other assets....................................... 11,953 12,893
Licenses, net...................................... 4,269 4,344
Excess of cost over net assets acquired, net....... 4,928 5,252
Covenants not to compete, net...................... 133 333
------------ ------------
Total assets.......................................$ 218,856 $ 210,790
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses......$ 79,859 $ 74,929
Unearned premiums............................... 40,645 42,388
Policyholder deposits........................... 4,957 4,830
Notes payable................................... 10,378 2,796
Accrued taxes and other payables................ 5,766 6,340
Premiums payable................................ 4,134 4,554
Litigation liabilities.......................... 12,847 16,618
------------ ------------
Total liabilities.................................. 158,586 152,455
------------ ------------
Shareholders' equity
Common stock, $1.67 par value,
10,000,000 shares authorized,
6,941,708 shares issued...................... 11,593 11,593
Paid-in surplus................................. 34,964 34,942
Common stock to be issued (40,000 shares)....... 250 -
Capital redemption reserve...................... 947 947
Retained earnings............................... 26,891 24,886
Less: Stock held by subsidiary,
at cost (564,475 and 494,617 shares
in 1998 and 1997, respectively).............. (3,011) (2,487)
Less: Stock rescinded through
litigation (1,660,125 shares)................ (11,799) (11,799)
Accumulated other comprehensive income:
Unrealized gain on investments available
for sale, net of tax...................... 435 253
------------ ------------
Total shareholders' equity......................... 60,270 58,335
------------ ------------
Total liabilities and shareholders' equity.........$ 218,856 $ 210,790
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 6
CHANDLER INSURANCE COMPANY, LTD.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................................$ 2,005 $ (9,789)
Add (deduct):
Adjustments to reconcile net income (loss)
to cash applied to operations:
Net realized gains on sales of investments... (277) (32)
Net (gains) losses on sales of equipment..... (145) 9
Amortization and depreciation................ 1,217 1,068
Provision for non-collection of premiums..... 60 60
Provision for non-collection of
reinsurance recoverables.................. 201 300
Earned compensation - outside director stock
option and stock grant plan............... 272 -
Net change in non-cash balances relating
to operations:
Premiums receivable....................... 1,167 (108)
Reinsurance recoverable on paid losses.... 1,224 (101)
Reinsurance recoverable on unpaid losses.. (10,083) 1,283
Prepaid reinsurance premiums.............. 784 49
Deferred policy acquisition costs......... (497) (471)
Other assets.............................. 895 (3,318)
Unpaid losses and loss adjustment
expenses............................... 4,930 (613)
Unearned premiums......................... (1,743) (242)
Policyholder deposits..................... 127 932
Accrued taxes and other payables.......... (574) (4,162)
Premiums payable.......................... (420) 585
Litigation liabilities.................... (3,771) 11,701
------------ ------------
Cash applied to operations................... (4,628) (2,849)
------------ ------------
INVESTING ACTIVITIES:
Fixed maturities available for sale
Purchases.................................... (18,595) (10,357)
Sales........................................ 10,784 6,550
Maturities................................... 17,095 4,691
Fixed maturities held to maturity
Maturities................................... 100 -
Cost of property and equipment purchased........ (2,634) (565)
Proceeds from sale of property and equipment.... 300 9
------------ ------------
Cash provided by investing activities........ 7,050 328
------------ ------------
FINANCING ACTIVITIES:
Cost of stock purchased by subsidiary........... (524) -
Proceeds from notes payable..................... 8,548 -
Payments on notes payable....................... (965) (688)
------------ ------------
Cash provided by (applied to) financing
activities................................ 7,059 (688)
------------ ------------
Increase (decrease) in cash and cash equivalents
during the period............................... 9,481 (3,209)
Cash and cash equivalents at beginning of period... 11,999 7,889
------------ ------------
Cash and cash equivalents at end of period.........$ 21,480 $ 4,680
============ ============
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements.
<PAGE>
PAGE 7
CHANDLER INSURANCE COMPANY, LTD.
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 Annual Report on Form 10-K
for the year ended December 31, 1997. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and an unusual
significant litigation liability adjustment described in Note 2) considered
necessary for a fair presentation have been included. The results of
operations for the three and six month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year.
Certain reclassifications of prior years have been made to conform to the 1998
presentation.
The consolidated financial statements include the accounts of Chandler
Insurance Company, Ltd. ("Chandler" or the "Company") and subsidiaries
including:
- Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO
Indemnity (Cayman), Ltd. ("NAICO Indemnity"),wholly owned subsidiaries
of the Company.
- Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of
Chandler Barbados.
- National American Insurance Company ("NAICO"), LaGere & Walkingstick
Insurance Agency, Inc. and Network Administrators, Inc., wholly owned
subsidiaries of Chandler USA.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
NOTE 2 - LITIGATION
In the Company's Annual Report on Form 10-K for the year ended December
31, 1997 and Quarterly Report on Form 10-Q for the period ended March 31, 1998,
recent developments updating the CenTra, Inc. ("CenTra") litigation were
described. The following supplements that description.
CENTRA LITIGATION - OKLAHOMA
The Company has previously reported concerning the background and status
of litigation involving CenTra and certain of its affiliates, officers and
directors (the "CenTra Group") in the United States District Court for the
Western District of Oklahoma ("Oklahoma Federal Court").
As previously reported, the trial of that litigation concluded on April
22, 1997, when the Oklahoma Federal Court entered judgments on various jury
verdicts. One judgment against the Company requires the CenTra Group to return
stock it purchased in 1990 to the Company in return for payment of $5,099,133
from the Company. Another judgment was against both the Company 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 the Company
to adequately disclose the fact that ownership of the Company's stock may be
subject to regulation by the Nebraska Insurance Department under certain
circumstances. Judgment was also entered in favor of CenTra and against certain
officers and/or directors of the Company 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. 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 NAICO Indemnity on
counterclaims against CenTra for CenTra's failure to pay insurance premiums.
Judgment was for the amount of $788,625. The judgment was paid by funds held by
the Oklahoma Federal Court aggregating, with interest, $820,185. A CenTra
affiliate, DuraRock Reinsurance, Ltd. claims $725,000 is owed to them by NAICO
and NAICO Indemnity under certain reinsurance treaties. NAICO and NAICO
Indemnity dispute that claim. The Oklahoma Federal Court's judgment also
upheld a resolution adopted by the Chandler Board of Directors in August 1992
pursuant to Article XI of the Company's Articles of Association preventing
CenTra and its affiliates from voting their Chandler 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 common stock they own or control upon payment of the judgment by the
Company 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. The Company
recorded the Oklahoma Federal Court's judgment requiring the return of the
1,142,625 shares of the Company's stock as a decrease to shareholder's 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 subsequently appeal this decision. Accordingly, the Company reduced the
previous first quarter of 1997 net charge for litigation matters by $3.8
million during the second quarter of 1998.
On March 23, 1998 the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Federal Court. From papers filed with
both the Oklahoma Federal Court and the United States Court of Appeals for the
10th Circuit it appears that the CenTra Group's appeals will be 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 the Company'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. There may be other
issues on appeal which are not readily apparent to the Company at this time.
The Company 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 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 the Company'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 the Company's director and officer liability insurance
policy on a regular basis in conjunction with a similar committee composed of
Chandler USA directors. The Committee conducts its meetings outside the United
States, but participates in telephone briefings and discussions at least twice
monthly.
Because all shares of the Company's stock owned by the CenTra Group are
held by the U.S. District Court for the District of Nebraska ("Nebraska Federal
Court"), it is unclear when or if the CenTra Group will be able to comply with
the Oklahoma Federal Court's order. The Company believes that it is not
required to pay the judgments until the CenTra Group can deliver the shares to
the Company. 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 the Company and the
CenTra Group in the State of Nebraska. (See Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.) The Nebraska Federal Court ordered
CenTra, M.J. Moroun, and others to deliver into the registry of the Nebraska
Federal Court all shares of Chandler stock owned or controlled by them or their
affiliates and not previously delivered to the Court to await the outcome of
the CenTra Group's appeal of a divestiture order entered by the Nebraska
Federal Court on March 25, 1997. On February 9, 1998, CenTra deposited an
additional 1,691,750 shares of the Company's stock making the total number of
shares on deposit with the Nebraska Federal Court 3,133,450 shares. In his
March 25, 1997 order, the Honorable Warren K. Urbom, U.S. District Judge for
the Nebraska Federal Court, ordered the parties to submit divestiture plans.
The appeal of that order by CenTra has resulted in a delay of the deadlines for
submitting the proposals and no new submission date has been set at this time.
On July 29, 1998, the U.S. Circuit Court for the 8th Circuit affirmed
Judge Urbom'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 Insurance Department and
the CenTra Group. The method and timing of such divestiture are uncertain and
will be the subject of an order or orders which Judge Urbom will issue some
time after the July 29th ruling becomes final and the court has considered the
legal positions taken by the parties on those issues. The CenTra Group may
request the 8th Circuit Court of Appeals to reconsider its ruling and may also
request the U.S. Supreme Court to hear the case. All shares owned or
controlled by the CenTra Group remain in the Court's possession pending further
orders by Judge Urbom.
On March 27, 1998, NAICO notified the Nebraska Federal Court of the
Oklahoma Federal Court's March 10, 1998 order regarding CenTra's return of the
1,660,125 shares which were the subject of the two money judgments (see CenTra
Litigation - Oklahoma) and requested the Nebraska Federal Court to release
those shares to the Company and Chandler Barbados upon their tender of amounts
sufficient to satisfy the two judgments. The Company and Chandler Barbados then
requested the Oklahoma Federal Court to stay execution upon the two judgments
until such time as the Nebraska Federal Court rules on NAICO's request to
release the shares. On April 23, 1998, the Oklahoma Federal Court granted the
stay motion pending the Nebraska Federal Court's ruling on the request for
release of the shares. The Nebraska Federal Court denied that request on May
29, 1998 pending the outcome of CenTra's 8th Circuit appeal and further action
by the Nebraska Federal Court consistent with the 8th Circuit ruling.
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 Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, 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 Honorable Vicki Miles-LaGrange, 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.
At the present time, the Company is 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. NOTES PAYABLE
During 1996, Chandler USA 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 Wall Street Journal Prime, which was 8.5% at June 30, 1998. During March
1998, Chandler USA borrowed an additional $6.2 million on the note and the
proceeds were used to repay intercompany advances from Chandler Barbados. The
outstanding balance of the note was $8.1 million at June 30, 1998. The funds
received by Chandler Barbados may be used to discharge litigation judgments.
The bank note is collateralized by shares of NAICO stock owned by Chandler USA.
<PAGE>
PAGE 10
In February 1998, Chandler USA 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%. Monthly payments are $46,482 including principal and interest. The
loan is collateralized by certain equipment which was purchased with the
proceeds of the loan. The equipment had previously been leased by Chandler
USA.
NOTE 4. DIRECTORS' STOCK OPTION AND STOCK GRANT PLAN
During the second quarter of 1998 the Company's directors approved the
Directors' Stock Option and Stock Grant Plan (the "Plan") which is filed as a
part of this Quarterly Report on Form 10-Q as Exhibit 10.4. The Plan provides
that the non-employee directors of the Company, other than Norman Harned,
Ronald Lech and M.J. Moroun, are eligible for grants of stock options and stock
grants in accordance with the terms of the Plan. Options and stock grants may
not be granted under the Plan for more than 260,000 shares of common stock of
the Company, but this number may be adjusted to reflect, if deemed appropriate
by the board of directors, any stock dividend, stock split, share combination,
recapitalization or the like, of or by the Company. The exercise price of the
stock options shall generally be equal to the average closing price of common
stock of the Company for the 30 calendar days preceding the date the options
are granted. The option period begins on the effective date of the option
grant and terminates on the tenth anniversary of that date.
The aggregate number of shares of stock awarded to an eligible director as
a stock grant shall total 20,000 shares of common stock of the Company. The
award shall be divided into two equal installments. The first installment of
10,000 shares shall automatically be awarded as of the first regular board
meeting after an eligible director completes ten continuous years of service on
the board. The second installment of 10,000 shares shall automatically be
awarded as of the first anniversary of the initial stock grant, regardless of
whether the director is still a member of the board. As of June 30, 1998, a
total of 40,000 shares valued at $250,000 had been awarded to two directors,
and this amount is included in general and administrative expenses in the
Company's consolidated statements of operations.
Each eligible director shall automatically be granted options to purchase
1,500 shares of common stock of the Company as of the first regular board
meeting in each year the director serves on the board. Each eligible director
shall also automatically be granted options to purchase 30,000 shares of common
stock of the Company effective as of the first regular board meeting after the
director completes ten continuous years of service on the board. As of June
30, 1998, options for 66,000 shares had been awarded with an exercise price of
$5.92 per share, which resulted in approximately $22,000 of compensation
expense which is included in general and administrative expenses in the
Company's consolidated statements of operations.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share is computed based upon net income (loss) divided
by the weighted average number of common shares outstanding during each period.
Diluted earnings per common share is computed based upon net income (loss)
divided by the weighted average number of common shares outstanding during each
period adjusted for the effect of dilutive potential common shares calculated
using the treasury stock method. Weighted average shares include 1,660,125
shares rescinded through litigation but still outstanding, and exclude 564,475
shares held by a subsidiary of the Company. The numerator for basic and
diluted earnings per share for the three and six months ended June 30, 1998 and
1997 is equal to the net income (loss) for the respective period. As of June
30, 1998 and 1997, there were no antidilutive options to purchase common
shares.
The following table sets forth the computation of the denominator for
basic and diluted earnings per share:
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Denominator for basic
earnings per share -
Weighted average shares.......... 6,423 6,708 6,441 6,824
Effect of dilutive securities -
Stock options.................... 14 - 9 -
-------- -------- -------- --------
Denominator for dilutive
earnings per share -
Adjusted weighted average
shares and assumed conversions... 6,437 6,708 6,450 6,824
======== ======== ======== ========
<PAGE>
PAGE 11
NOTE 6. 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 the Company 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 shareholders' equity and display the accumulated balance of other
comprehensive income separately in the shareholders' equity section of the
consolidated balance sheets. The Company 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 financial position, results of
operations or liquidity of the Company.
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. The Company adopted SFAS
No. 131 on January 1, 1998 as required.
NOTE 7. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88 AND 106. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement of recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer considered
useful. SFAS No. 132 is effective for fiscal years beginning after December
15, 1998. The adoption is not expected to have a material impact on the
Company's consolidated financial position or results of operations. The
Company does not offer defined benefit plans or other postretirement benefit
plans to its employees; therefore, the adoption of SFAS No. 132 will not affect
the Company's financial statement disclosures.
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 refered to as
derivatives) and for hedging activities. It requires that the Company
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS No. 133 on January 1, 2000 as
required. Management of the Company believes that adoption of SFAS No. 133
will not have a material impact on the Company's consolidated financial
condition or results of operations.
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 Insurance Company, Ltd. (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; and (vii) other factors including the
ongoing litigation matters involving a significant concentration of ownership
of common stock.
<PAGE>
PAGE 12
RESULTS OF OPERATIONS
PURCHASE OF ADDITIONAL REINSURANCE
During the first quarter of 1998, National American Insurance Company
("NAICO") purchased additional reinsurance under its workers compensation and
casualty reinsurance programs that substantially reduced the combined net
retentions in these lines of business. The purchase of the additional
reinsurance coverages in 1998 substantially reduces the risk of loss for
NAICO's workers compensation and casualty insurance lines of business, but
results in significantly lower net premiums earned, losses and loss adjustment
expenses and policy acquisition costs.
PREMIUMS EARNED
The following tables set forth premiums earned on a gross basis (before
reductions for premiums ceded to unaffiliated reinsurers) and a net basis for
the three and six month periods ended June 30, 1998 and 1997:
Gross premiums Net premiums
Three months ended June 30, earned earned
- --------------------------------- -------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Standard property-casualty....... $ 18,424 $ 15,804 $ 10,413 $ 13,911
Political subdivisions........... 5,902 5,301 3,051 3,658
Surety bonds..................... 2,919 3,228 2,340 2,929
Nonstandard private-passenger
automobile.................. 1,956 3,783 137 3,783
Other............................ 1,956 1,892 1,534 1,442
-------- -------- -------- --------
TOTAL............................ $ 31,157 $ 30,008 $ 17,475 $ 25,723
======== ======== ======== ========
Gross premiums Net premiums
Six months ended June 30, earned earned
- --------------------------------- -------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Standard property-casualty....... $ 35,601 $ 29,213 $ 19,738 $ 25,727
Political subdivisions........... 11,712 10,366 6,131 7,193
Surety bonds..................... 5,593 6,231 4,484 5,842
Nonstandard private-passenger
automobile.................. 4,542 7,707 423 7,707
Other............................ 3,757 3,640 2,838 2,927
-------- -------- -------- --------
TOTAL............................ $ 61,205 $ 57,157 $ 33,614 $ 49,396
======== ======== ======== ========
Gross premiums earned, before reductions for premiums ceded to
unaffiliated reinsurers, increased $1.1 million or 4% in the quarter ended June
30, 1998 compared to the prior year, and increased $4.0 million or 7% for the
six months ended June 30, 1998 compared to the 1997 period. Net premiums
earned decreased $8.2 million or 32% in the 1998 quarter compared to the prior
year, and decreased $15.8 million or 32% for the six months ended June 30, 1998
compared to the 1997 period. The reduction in net premiums earned was due to
the purchase of additional reinsurance for NAICO's workers compensation and
casualty insurance programs described previously, and to a reinsurance
arrangement for a large portion of NAICO's nonstandard private-passenger
automobile program which was effective July 1, 1997.
Gross premiums earned in the standard property-casualty program increased
$2.6 million or 17% in the current quarter versus the prior year, and increased
$6.4 million or 22% for the six months ended June 30, 1998 compared to the 1997
period. This increase is primarily attributable to marketing activity in
Oklahoma and contiguous states, principally Texas. Net premiums earned
decreased $3.5 million or 25% in the current quarter versus the prior year, and
decreased $6.0 million or 23% in the six months ended June 30, 1998 compared to
the 1997 period due to the purchase of additional reinsurance described
previously.
Gross premiums earned in the political subdivisions program increased
$601,000 or 11% in the current quarter versus the prior year, and increased
$1.3 million or 13% for the six months ended June 30, 1998 compared to the 1997
period due primarily to expansion of the school districts program in Texas and
increased production in Oklahoma. Net premiums earned decreased $607,000 or
17% in the current quarter versus the prior year, and decreased $1.1 million or
15% for the six months ended June 30, 1998 compared to the 1997 period due to
the purchase of additional reinsurance described previously.
<PAGE>
PAGE 13
Net premiums earned in the surety bond program decreased $589,000 or 20%
in the current quarter versus the prior year, and decreased $1.4 million or 23%
for the six months ended June 30, 1998 compared to the 1997 period. Net
premiums earned from surety bonds produced by Midwest Indemnity Corp.
("Midwest") during the runoff portion of that program decreased by $356,000 or
151% in the current quarter versus the prior year, and decreased $950,000 or
164% for the six months ended June 30, 1998 compared to the 1997 period. NAICO
and Midwest agreed to terminate the underwriting and production contract
effective December 31, 1995. Net premiums earned from surety bonds produced by
LaGere & Walkingstick Insurance Agency, Inc. ("L&W") decreased $293,000 or 14%
in the current quarter versus the prior year, and decreased $521,000 or 13% for
the six months ended June 30, 1998 compared to the 1997 period. Increased
competition and higher reinsurance costs contributed to the decline in the 1998
periods.
During 1997, NAICO discontinued the Oklahoma and Arizona portions of the
nonstandard private-passenger automobile program. During the second quarter of
1997, management reviewed the underwriting performance of the California
portion of the program and concluded that it would be in the Company's best
interest to substantially reduce its underwriting risk. Effective July 1,
1997, NAICO entered into a 100% quota share reinsurance agreement to fully
reinsure the risk.
During 1996, NAICO began writing excess accident and health coverage for
small to medium sized employers generally in Oklahoma and Texas. Net premiums
earned in this program (included in Other in the preceding table) were $1.2
million in the second quarter of 1998 versus $451,000 in the 1997 quarter, and
$2.2 million in the first six months of 1998 versus $758,000 in the 1997
period.
NET INVESTMENT INCOME
Net investment income excluding capital gains was $1.7 million and $3.4
million in the three and six month periods ended June 30, 1998, respectively,
compared to $1.8 million and $3.6 million in the year ago periods. During the
fourth quarter of 1997, NAICO shifted a portion of its fixed maturities
portfolio from taxable to tax exempt bonds resulting in income from tax exempt
securities of $281,000 and $543,000 in the three and six month periods ended
June 30, 1998. NAICO had no tax exempt income in the corresponding 1997
periods.
Net realized capital gains were $268,000 and $277,000 in the second
quarter and first six months of 1998, respectively, compared to $18,000 and
$32,000 in the year ago periods. Net investment income including capital gains
was $2.0 million and $3.7 million in the three and six month periods ended June
30, 1998, respectively, compared to $1.8 million and $3.6 million in the year
ago periods.
COMMISSIONS, FEES AND OTHER INCOME
L&W's brokerage commissions and fees before intercompany eliminations were
$1.7 million and $3.6 million in the three and six months ended June 30, 1998,
respectively, compared to $2.0 million and $4.0 million in the year ago
periods. The decrease in L&W's brokerage commissions and fees in the 1998
periods is primarily a result of increased competition and general declines in
premium rates. 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.
Fees generated by Network Administrators, Inc. ("Network") were $146,000
and $359,000 in the second quarter and first six months of 1997. Network no
longer functions as a third-party administrator and did not generate any income
in the 1998 periods.
Chandler (U.S.A.), Inc. ("Chandler USA") disposed of certain equipment in
the first quarter of 1998 that resulted in a gain of $145,000 before provision
for federal income tax.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 80.7% and 70.6% for the quarter and six months ended
June 30, 1998 compared to 60.4% and 63.0% in the comparable year ago periods.
<PAGE>
PAGE 14
The increase in the 1998 loss ratio was primarily a result of additional
loss development from prior accident years recognized in the second quarter of
1998. The prior year loss development in the second quarter of 1998 totaled
$3.7 million and increased the loss ratio for the three and six months ended
June 30, 1998 by 21.0 and 10.9 percentage points. The prior year loss
development by program was as follows:
(In thousands)
Standard property-casualty program...........$ 1,731
Political subdivisions....................... 662
Accident & health............................ 796
Transportation............................... 427
All other.................................... 54
--------------
Total...................................$ 3,670
==============
Approximately 35% and 85% of the prior year loss development for the
standard property-casualty and political subdivisions programs, respectively,
was in the workers compensation portion of those programs. All of the prior
year loss development in the transportation program was in the workers
compensation sector of the program. The remainder of the prior year loss
development, with the exception of the accident & health program, was in the
casualty lines of coverage.
In addition, storm-related losses from wind and hail totaled approximately
$660,000 and $190,000 in the second quarter of 1998 and 1997, respectively.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the acquisition
of new and renewal business and generally include direct costs such as premium
taxes, commissions to agents and ceding companies, and premium-related
assessments, and indirect costs such as salaries and expenses of personnel who
perform and support underwriting activities. NAICO also receives ceding
commissions from reinsurers who assume premiums from NAICO under certain
reinsurance contracts and the ceding commissions are accounted for as a
reduction of policy acquisition costs. Direct policy acquisition costs and
ceding commissions are deferred and amortized over the terms of the policies.
Recoverability of such deferred costs is dependent on the related unearned
premiums on the policies being more than expected claim losses.
The following table sets forth the Company's policy acquisition costs for
each of the three and six month periods ended June 30, 1998 and 1997:
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
Commissions expense.................$ 3,937 $ 4,363 $ 7,517 $ 8,051
Other premium related assessments... 386 392 892 686
Premium taxes....................... 919 762 1,746 1,451
Excise taxes........................ 41 34 106 68
Dividends to policyholders.......... 75 48 150 98
Other expense....................... (8) (15) 60 60
-------- -------- -------- --------
Total direct expenses............... 5,350 5,584 10,471 10,414
Indirect underwriting expenses...... 3,154 3,120 6,143 6,033
Commissions received from
reinsurers..................... (3,444) (756) (7,068) (1,741)
Adjustment for deferred
acquisition costs.............. (217) (309) (496) (471)
-------- -------- -------- --------
Net policy acquisition costs........$ 4,843 $ 7,639 $ 9,050 $14,235
======== ======== ======== ========
<PAGE>
PAGE 15
Total gross direct and indirect expenses as a percentage of direct written
and assumed premiums were 28.3% and 27.9% in the second quarter and first six
months of 1998 compared to 30.3% and 28.9% in the corresponding year ago
periods. The average commission rates were 13.1% and 12.6% in the second
quarter and first half of 1998 versus 15.2% and 14.1% in the year ago periods.
Indirect expenses were 10.5% and 10.3% of total direct written and assumed
premiums in the second quarter and first six months of 1998, respectively,
compared to 10.8% and 10.6% in the corresponding year ago 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.
Commissions received from reinsurers increased $2.7 million or 356% in the
second quarter of 1998 compared to the 1997 quarter, and increased $5.3 million
or 306% in the first six months of 1998 compared to 1997, due to the purchase
of additional reinsurance discussed previously which increased premiums ceded
to reinsurers by 212% and 248% in the second quarter and first six months of
1998 over the 1997 periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 10.2% and 10.6% of gross premiums
earned and commissions, fees and other income for the quarter and six month
periods ended June 30, 1998, compared to 10.7% and 11.6% for the corresponding
periods in 1997. During the second quarter of 1998, the Company adopted a
stock option and stock grant plan (the "Plan") for certain non-employee
directors of the Company. See Note 4 - Directors' Stock Option and Stock Grant
Plan in Notes to Interim Consolidated Financial Statements for information
concerning the Plan. Compensation expense related to the Plan in the amount of
$272,000 is included in general and administrative expenses in the second
quarter of 1998.
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 and losses 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $4.6 million of cash for operations in the first six
months of 1998 compared to $2.8 million in the first six months of 1997. The
1998 use of cash was due primarily to the purchase of additional reinsurance
described previously. See Note 3 - Notes Payable in Notes to Interim
Consolidated Financial Statements for information concerning bank loans.
In April 1998, a subsidiary of the Company acquired 69,858 shares of the
Company's common stock from an agent for approximately $524,000. These shares
had previously been pledged to NAICO to secure certain obligations resulting
from insurance business produced by another agent.
LITIGATION AND LITIGATION EXPENSES
See Note 2 - Litigation in Notes to Interim Consolidated Financial
Statements for information concerning various litigation matters.
INCOME TAX PROVISION
The provision for or benefit from federal income taxes of the consolidated
U.S. subsidiaries varies with the level of income or loss before income taxes
of such subsidiaries. The provision or benefit relative to the consolidated
income before income taxes will also vary dependent on the contribution to
income before income taxes by the consolidated U.S. subsidiaries.
<PAGE>
PAGE 16
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
10.4 Chandler Insurance Company, Ltd.'s Directors' Stock Option and
Stock Grant Plan.
<PAGE>
PAGE 17
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: August 7, 1998 CHANDLER INSURANCE COMPANY, LTD.
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 & Treasurer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Chandler
Insurance Company, Ltd.'s June 30, 1998 Form 10-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 102,728
<DEBT-CARRYING-VALUE> 1,152
<DEBT-MARKET-VALUE> 1,266
<EQUITIES> 191
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 104,071
<CASH> 21,480
<RECOVER-REINSURE> 1,411
<DEFERRED-ACQUISITION> 5,809
<TOTAL-ASSETS> 218,856
<POLICY-LOSSES> 79,859
<UNEARNED-PREMIUMS> 40,645
<POLICY-OTHER> 4,957
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 10,378
0
0
<COMMON> 11,593
<OTHER-SE> 48,677
<TOTAL-LIABILITY-AND-EQUITY> 218,856
33,614
<INVESTMENT-INCOME> 3,690
<INVESTMENT-GAINS> 277
<OTHER-INCOME> 1,099
<BENEFITS> 23,717
<UNDERWRITING-AMORTIZATION> 9,050
<UNDERWRITING-OTHER> 3,631
<INCOME-PRETAX> 2,005
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,005
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
EXHIBIT 10.4
CHANDLER INSURANCE COMPANY, LTD.
DIRECTORS STOCK OPTION AND STOCK GRANT PLAN
INTRODUCTION
Chandler Insurance Company, Ltd. (the "Company") desires to establish a
program of granting stock options and stock grants to certain directors of the
Company, which intent is formalized effective March 4, 1998 by the following
Directors Stock Option and Stock Grant Plan:
1. PURPOSE. The purpose of the Plan is to provide certain directors of
the Company with a proprietary interest in the Company through the granting of
stock options and stock grants which will
(a) increase the interest of the directors in the Company's welfare;
(b) furnish an incentive to the directors to continue their services
for the Company; and
(c) provide a means through which the Company may attract able persons
to serve on the Board.
2. ADMINISTRATION. The Plan will be administered by the Board.
3. ELIGIBLE DIRECTORS. Certain directors of the Company are to be granted
options and stock grants under the Plan, and upon such grant will become
eligible directors in the Plan. The Board has determined by resolutions, and for
reasons stated therein, that the persons eligible for grants hereunder shall be
the non-employee directors of the Company other than Norman Harned, Ronald Lech,
and M.J. Moroun (an "Eligible Director" or, collectively, the "Eligible
Directors").
4. SHARES SUBJECT TO PLAN. Options and stock grants may not be granted
under the Plan for more than 260,000 shares of Common Stock of the Company, but
this number may be adjusted to reflect, if deemed appropriate by the Board, any
<PAGE>
PAGE 2
stock dividend, stock split, share combination, recapitalization or the like, of
or by the Company. Shares to be optioned and sold or granted as stock grants may
be made available from either authorized but unissued Common Stock or Common
Stock held by the Company in its treasury or otherwise acquired. Shares that by
reason of the expiration of an option or otherwise are no longer subject to
purchase pursuant to an option granted under the Plan may be reoffered under the
Plan.
5. ALLOTMENT OF OPTION SHARES. Except for grants to Eligible Directors in
the case of death or Disability, as contained in Section 9, as a result of a
transaction, as more clearly defined in Section 12, or as a result of the
discontinuance of the Plan pursuant to Section 15, grants of options under the
Plan shall be as described in this Section 5.
(a) Each Eligible Director, upon completion of ten continuous years of
service on the Board, shall automatically be granted an option, effective
as of the first regular Board meeting after an Eligible Director completes
ten continuous years of service on the Board, to purchase 30,000 shares of
Common Stock of the Company. Each Eligible Director who has completed ten
or more continuous years of service on the Board as of the effective date
of the Plan shall automatically be granted an option to purchase 30,000
shares of Common Stock of the Company as of the Plan's effective date. For
all purposes of determining years of service on the Board under the Plan,
an Eligible Director will be given credit for service on the board of
directors of a subsidiary of the Company provided such service is prior and
contiguous to the Eligible Director's service on the Board.
<PAGE>
PAGE 3
(b) Each Eligible Director of the Company shall also automatically be
granted an option to purchase 1,500 shares of Common Stock of the Company
as of the first regular Board meeting in each year the Eligible Director
serves on the Board. Each Eligible Director who is a member of the Board as
of the effective date of the Plan shall automatically be granted an option
to purchase 1,500 shares of Common Stock of the Company as of the Plan's
effective date.
(c) The grant of options shall be evidenced by stock option
agreements containing such terms and provisions as are approved by the
Board but not inconsistent with the Plan.
6. ALLOTMENT OF STOCK GRANTS. Except for the award of stock grants to an
Eligible Director in the case of death or Disability, as contained in Section 9,
as a result of a transaction, as more clearly defined in Section 12, or as a
result of the discontinuance of the Plan pursuant to Section 15, stock grants
under the Plan shall be as described in this Section 6. The aggregate number of
shares of stock awarded to an Eligible Director as a stock grant shall total
20,000 shares of Common Stock of the Company. The award shall be divided into
two equal installments. The first installment of 10,000 shares shall
automatically be awarded as of the first regular Board meeting after an Eligible
Director completes ten continuous years of service on the Board. The second
installment of 10,000 shares shall automatically be awarded as of the first
anniversary of the initial stock grant, regardless of whether the Eligible
Director is still a member of the Board. Each Eligible Director who has
completed ten or more continuous years of service on the Board as of the
effective date of the Plan shall automatically be awarded stock grants totaling
10,000 shares of Common Stock of the Company as of the Plan's effective date
with the remaining stock grant totaling 10,000 shares of Common Stock of the
<PAGE>
PAGE 4
Company to be automatically awarded as of the first anniversary of the initial
stock grant, regardless of whether the Eligible Director is still a member of
the Board.
7. EXERCISE PRICE OF STOCK OPTIONS. The price of the stock options shall
be equal to the average closing price of Common Stock of the Company for the 30
calendar days preceding (i) for options granted under Section 5(a), the date the
Eligible Director completes ten continuous years of service on the Board or
March 4, 1998, whichever is later, (ii) for options granted under Section 5(b),
the date of the first regular Board meeting of each year, (iii) for options
granted under Section 9, the date of the Eligible Director's death or
Disability, (iv) for options granted under Section 12, the date of the award of
stock options as a result of a transaction, as more clearly defined in Section
12 and (v) for options granted under Section 15, the date of the decision by the
Board to discontinue the Plan.
8. OPTION PERIOD. The Option Period will begin on the effective date of
the option grant and will terminate on the tenth anniversary of that date.
9. RIGHTS IN EVENT OF DEATH OR DISABILITY. If an Eligible Director dies
or suffers a Disability prior to completion of ten years of service on the Board
the Eligible Director or his estate will be granted 3,000 stock options and
2,000 stock grants for each year of the Eligible Director's continuous service
on the Board, including any partial year of service as of the date of death or
Disability. The options may be exercised at any time prior to the date of their
expiration under Section 8 by (i) the Eligible Director's estate or by the
person who acquired the right to exercise the option by bequest or inheritance
or by reason of the death of the Eligible Director in the event of the Eligible
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Director's death, or (ii) the Eligible Director or his personal representative
in the event of the Eligible Director's Disability, subject to the other terms
of the Plan and applicable laws, rules and regulations.
10. PAYMENT. Full payment for shares purchased upon exercising an option
shall be made in cash or by check at the time of exercise, or on such other
terms as are set forth in the applicable option agreement. No shares may be
issued until full payment of the purchase price therefor has been made, and an
Eligible Director will have none of the rights of a stockholder until shares are
issued to him.
11. VESTING.
(a) All stock options and stock grants awarded under this Plan shall
vest immediately as of the date of grant.
(b) In no event may an option be exercised or shares be issued
pursuant to an option or a stock grant if any requisite action, approval or
consent of any governmental authority of any kind having jurisdiction over
the exercise of options shall not have been taken or secured.
12. CAPITAL ADJUSTMENTS AND REORGANIZATIONS. The number of shares of
Common Stock covered by each outstanding option granted under the Plan and the
option price thereof, and the number of shares to be granted pursuant to
Sections 5(a), 5(b), 9, 12 and 15 and the option price thereof, may be adjusted
to reflect, as deemed appropriate by the Board, any stock dividend, stock split,
share combination, exchange of shares, recapitalization, merger, consolidation,
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separation, reorganization, liquidation or the like, of or by the Company. The
number of shares covered by any stock grant under Sections 6, 9, 12 and 15 may
also be adjusted to reflect, as deemed appropriate by the Board any stock
dividend, stock split, share combination, exchange of shares, recapitalization,
merger, consolidation, separation, reorganization, liquidation or the like, of
or by the Company.
In the event the Company shall be a party to any merger, consolidation or
corporate reorganization, as the result of which the Company shall be the
surviving corporation, the rights and duties of the Eligible Directors and the
Company under the Plan shall not be affected in any manner. In the event the
Company shall sell all or substantially all of its assets or shall be a party to
any merger, consolidation or corporate reorganization, as the result of which
the Company shall not be the surviving corporation, or in the event any other
person or entity may make a tender or exchange offer for stock of the Company
whereby such other person or entity would own more than 20% of the outstanding
Common Stock of the Company (the surviving corporation, purchaser, or tendering
corporation being collectively referred to as the "purchaser", and the
transaction being collectively referred to as the "transaction"), then
immediately preceding any such transaction each Eligible Director who has not
completed ten years of service will be granted 3,000 stock options and 2,000
stock grants for each year of continuous service on the Board, including any
partial year of service as of the date of the transaction. The Eligible Director
may exercise any portion of his then outstanding option(s) as he may desire and
deposit with the Company the requisite cash to purchase in full and not in
installments the Common Stock thereby exercised. The Company shall, prior to the
effective date of the transaction, issue all Common Stock which was subject to
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options which have been exercised or which was the subject of stock grants which
have vested. Common Stock thus issued shall be treated as issued stock for
purposes of the transaction.
13. NON-ASSIGNABILITY. Options and stock grants may not be transferred
other than by will or by the laws of descent and distribution. Except as
otherwise provided in the Plan, during an Eligible Director's lifetime, options
granted to an Eligible Director may be exercised only by the Eligible Director.
14. INTERPRETATION. The Board shall interpret the Plan and shall
prescribe such rules and regulations in connection with the operation of the
Plan as it determines to be advisable for the administration of the Plan. The
Board may rescind and amend its rules and regulations.
15. AMENDMENT OR DISCONTINUANCE.
(a) For purposes of the grant of stock options under Section 5(b),
the Plan may be amended at any time by the Board without approval of the
stockholders of the Company. For purposes of all other awards of stock
options and stock grants, the Plan may be amended at any time by the Board
without approval of the stockholders of the Company; however, any amendment
which would adversely affect the rights of any existing Eligible Director
shall not be applied to such Eligible Director but shall only be applied to
new Eligible Directors who become members of the Board subsequent to the
effective date of the amendment.
(b) The Plan may be discontinued at any time by the Board without
approval of the stockholders of the Company; provided, however, if the Plan
is discontinued, all Eligible Directors who have not completed ten years of
service as of the date the Plan is discontinued shall be granted 3,000
stock options and 2,000 stock grants for each year of the Eligible
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Director's continuous service on the Board including any partial year of
service as of the date of the discontinuance of the Plan.
16. EFFECT OF PLAN. Neither the adoption of the Plan nor any action of
the Board shall be deemed to give any director any right to be granted an option
to purchase Common Stock of the Company or any other rights except as may be
evidenced by the stock option agreement, or any amendment thereto or stock
certificate, duly authorized by the Board and executed on behalf of the Company,
and then only to the extent and on the terms and conditions expressly set forth
therein. The Company has no obligation to register any stock or options granted
hereunder pursuant to federal or state securities laws.
17. TERM. Unless sooner terminated or extended by action of the Board,
the Plan will terminate on March 4, 2013. There will be no further stock option
or stock grants issued under the Plan after that date, but grants before that
date will continue to be effective in accordance with their terms.
18. DEFINITIONS. For the purposes of the Plan, unless the context
requires otherwise, the following terms shall have the meanings indicated:
(a) "Plan" means this Directors Stock Option Plan, as amended from
time to time.
(b) "Board" means the board of directors of the Company or any
committee of the Board appointed by the Board to administer the Plan or any
portion of the Plan.
(c) "Common Stock" means the Common Stock which the Company is
currently authorized to issue or may in the future be authorized to issue
(as long as the common stock varies from that currently authorized, if at
all, only in amount of par value).
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(d) "Option Period" means the period during which an option may be
exercised.
(e) "Disability" means the physical or mental incapacity of an
Eligible Director which the Board considers will be of long and continued
duration and which will render the Eligible Director incapable of
performing services as a director on the Board.
