-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A5UL+I8IJm1UziEK22JmgfVOd0DCfJ6P1Aw0SwnUfxj+Ziyb/oRwa5rxgKlI+15i V3eyBmp2B2IR6ta9Lb2Ogg== 0001083750-00-000004.txt : 20000515 0001083750-00-000004.hdr.sgml : 20000515 ACCESSION NUMBER: 0001083750-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANDLER USA INC CENTRAL INDEX KEY: 0001083750 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 731325906 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15135 FILM NUMBER: 627809 BUSINESS ADDRESS: STREET 1: 1010 MANVEL AVE CITY: CHANDLER STATE: OK ZIP: 74834 BUSINESS PHONE: 4052580804 MAIL ADDRESS: STREET 1: 1010 MANVEL AVE CITY: CHANDLER STATE: OK ZIP: 74834 10-Q 1 =============================================================================== 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 March 31, 2000 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 April 30, 2000 was 2,484, which are owned by Chandler Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance Company, Ltd. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT. =============================================================================== PAGE i CHANDLER (U.S.A.), INC. INDEX ----- PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - ------ Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.......1 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999...........................................2 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2000 and 1999....................................3 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999...........................................4 Notes to Interim Consolidated Financial Statements...........................5 ITEM 2 - ------ Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................10 PART II - OTHER INFORMATION - --------------------------- Item 1 Legal Proceedings................................................14 Item 2 Changes in Securities............................................14 Item 3 Defaults Upon Senior Securities..................................14 Item 4 Submission of Matters to a Vote of Security Holders..............14 Item 5 Other Information................................................14 Item 6 Exhibits and Reports on Form 8-K.................................14 Signatures..................................................................15 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
March 31, December 31, 2000 1999 ------------- -------------- ASSETS (Unaudited) Investments Fixed maturities available for sale, at fair value Restricted............................................................... $ 6,821 $ 6,826 Unrestricted............................................................. 85,471 80,410 Fixed maturities held to maturity, at amortized cost Restricted (fair value $177 and $176 in 2000 and 1999, respectively)..... 170 169 Unrestricted (fair value $875 and $863 in 2000 and 1999, respectively)... 832 815 Equity securities available for sale, at fair value........................ 306 306 ------------- -------------- Total investments........................................................ 93,600 88,526 Cash and cash equivalents.................................................... 4,156 5,140 Premiums receivable, less allowance for non-collection of $310 and $263 at 2000 and 1999, respectively............................ 36,249 47,717 Reinsurance recoverable on paid losses, less allowance for non-collection of $275 at 2000 and 1999.................................... 3,989 3,281 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $322 and $302 at 2000 and 1999, respectively............. 38,035 37,540 Reinsurance recoverable on unpaid losses from related parties................ 11,511 9,542 Prepaid reinsurance premiums................................................. 23,387 19,960 Prepaid reinsurance premiums to related parties.............................. 12,460 9,604 Deferred policy acquisition costs............................................ 1,795 3,134 Property and equipment, net.................................................. 11,592 10,719 Licenses, net................................................................ 4,007 4,044 Excess of cost over net assets acquired, net................................. 3,794 3,956 Other assets................................................................. 14,688 13,673 ------------- -------------- Total assets................................................................. $ 259,263 $ 256,836 ============= ============== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses................................. $ 99,870 $ 98,460 Unearned premiums.......................................................... 68,935 67,769 Policyholder deposits...................................................... 5,215 5,135 Accrued taxes and other payables........................................... 4,230 6,544 Premiums payable........................................................... 10,883 7,313 Premiums payable to related parties........................................ 793 343 Amounts due to affiliate................................................... - 533 Debentures................................................................. 24,000 24,000 ------------- -------------- Total liabilities........................................................ 213,926 210,097 ------------- -------------- Shareholder's equity Common stock, $1.00 par value, 50,000 shares authorized; 2,484 shares issued and outstanding...................................... 2 2 Paid-in surplus............................................................ 60,584 60,584 Accumulated deficit........................................................ (13,520) (12,127) Accumulated other comprehensive loss: Unrealized loss on investments, available for sale, net of deferred income taxes........................................... (1,729) (1,720) ------------- -------------- Total shareholder's equity............................................... 45,337 46,739 ------------- -------------- Total liabilities and shareholder's equity................................... $ 259,263 $ 256,836 ============= ==============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
For the three months Ended March 31, ------------ ------------ 2000 1999 ------------ ------------ Premiums and other revenues Direct premiums written and assumed................................. $ 45,121 $ 35,098 Reinsurance premiums ceded.......................................... (18,314) (14,053) Reinsurance premiums ceded to related parties....................... (11,008) (4,563) ------------ ------------ Net premiums written and assumed.................................. 15,799 16,482 Decrease (increase) in unearned premiums............................ 5,116 (86) ------------ ------------ Net premiums earned............................................... 20,915 16,396 Interest income, net.................................................. 1,120 1,044 Realized investment gains, net........................................ - 52 Commissions, fees and other income.................................... 350 365 ------------ ------------ Total premiums and other revenues................................. 22,385 17,857 ------------ ------------ Operating costs and expenses Losses and loss adjustment expenses net of amounts ceded to related parties of $5,027 and $2,931 in 2000 and 1999, respectively.............................................. 15,753 10,521 Policy acquisition costs, net of ceding commissions received from related parties of $3,790 and $1,636 in 2000 and 1999, respectively............................................ 4,827 3,365 General and administrative expenses................................. 3,217 2,660 Interest expense.................................................... 562 216 Litigation expenses, net............................................ 8 57 ------------ ------------ Total operating costs and expenses................................ 24,367 16,819 ------------ ------------ Income (loss) before income taxes..................................... (1,982) 1,038 Federal income tax benefit (provision)................................ 589 (422) ------------ ------------ Net income (loss)..................................................... $ (1,393) $ 616 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
For the three months Ended March 31, ------------ ------------ 2000 1999 ------------ ------------ Net income (loss)..................................................... $ (1,393) $ 616 ------------ ------------ Other comprehensive loss, before income tax: Unrealized losses on securities: Unrealized holding losses arising during period................... (13) (1,170) Less: Reclassification adjustment for gains included in net income (loss)............................................... - (52) ------------ ------------ Other comprehensive loss, before income tax........................... (13) (1,222) Income tax benefit related to items of other comprehensive loss.................................................. 4 415 ------------ ------------ Other comprehensive loss, net of income tax........................... (9) (807) ------------ ------------ Comprehensive loss.................................................... $ (1,402) $ (191) ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
For the three months Ended March 31, ------------ ------------ 2000 1999 ------------ ------------ OPERATING ACTIVITIES Net income (loss)..................................................... $ (1,393) $ 616 Add (deduct): Adjustments to reconcile net income (loss) to cash provided by (applied to) operating activities: Realized investment gains, net.................................... - (52) Net (gains) losses on sale of equipment........................... 3 (8) Amortization and depreciation..................................... 545 517 Provision for non-collection of premiums.......................... 42 30 Net change in non-cash balances relating to operating activities: Premiums receivable............................................. 11,425 (2,634) Reinsurance recoverable on paid losses.......................... (725) 775 Reinsurance recoverable on unpaid losses........................ (478) (4,171) Reinsurance recoverable on unpaid losses from related parties... (1,969) 876 Prepaid reinsurance premiums.................................... (3,427) (105) Prepaid reinsurance premiums to related parties................. (2,856) 67 Deferred policy acquisition costs............................... 1,339 - Other assets.................................................... (1,006) (84) Unpaid losses and loss adjustment expenses...................... 1,410 2,281 Unearned premiums............................................... 1,166 125 Policyholder deposits........................................... 80 77 Accrued taxes and other payables................................ (2,314) (1,003) Premiums payable................................................ 3,570 (841) Premiums payable to related parties............................. 450 (1,202) ------------ ------------ Cash provided by (applied to) operating activities................ 5,862 (4,736) ------------ ------------ INVESTING ACTIVITIES Unrestricted fixed maturities available for sale: Purchases......................................................... (6,590) (4,044) Sales............................................................. - 3,048 Maturities........................................................ 1,432 2,124 Cost of property and equipment purchased............................ (1,140) (257) Proceeds from sale of property and equipment........................ 18 46 ------------ ------------ Cash provided by (applied to) investing activities................ (6,280) 917 ------------ ------------ FINANCING ACTIVITIES Payments on notes payable........................................... - (476) Proceeds from borrowing from affiliate.............................. 100 1,568 Payments on borrowing from affiliate................................ (666) (638) ------------ ------------ Cash provided by (applied to) financing activities................ (566) 454 ------------ ------------ Decrease in cash and cash equivalents during the period............... (984) (3,365) Cash and cash equivalents at beginning of period...................... 5,140 9,304 ------------ ------------ Cash and cash equivalents at end of period............................ $ 4,156 $ 5,939 ============ ============
See accompanying Notes to Consolidated Financial Statements. PAGE 5 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 Annual Report on Form 10-K for the year ended December 31, 1999. 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-month period ended March 31, 2000 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. 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 Insurance"), a Cayman Islands company. NOTE 2. LITIGATION Chandler Insurance and certain of its subsidiaries and affiliates, including Chandler USA, have been involved in various matters of litigation with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and directors (the "CenTra Group") since 1992. The CenTra Group has been a significant shareholder in Chandler Insurance owning 49.2% of Chandler Insurance's stock in July 1992. Three present or former executive officers of CenTra, Norman E. Harned, Ronald W. Lech and M. J. Moroun were directors of Chandler Insurance until November 1999. On March 25, 1997, the U.S. District Court for the District of Nebraska ("Nebraska Court") ordered CenTra and certain of its affiliates to divest all Chandler Insurance shares owned by them. The CenTra defendants owned or controlled 3,133,450 Chandler Insurance shares. The Nebraska Court approved a divestiture plan submitted by NAICO (the "NAICO Plan") which called for Chandler Insurance to acquire and cancel the shares of Chandler Insurance stock owned by the CenTra Group. During December 1999, Chandler Insurance acquired 1,989,200 shares of its stock in exchange for payment of $15,204,758. These shares were canceled upon acquisition by Chandler Insurance. The Nebraska Court continues to hold 1,142,625 shares pending the outcome of CenTra's appeal of a judgment by the U.S. District Court in Oklahoma City, Oklahoma ("Oklahoma Court") regarding these shares. Following the conclusion of the appeal, the Nebraska Court will determine the method of divestiture of these shares. Chandler Insurance cannot predict when the appellate court will rule on the appeal. PAGE 6 On April 1, 1997, the Oklahoma Court entered judgment in favor of NAICO on CenTra's claims for alleged wrongful cancellation of CenTra's insurance with NAICO and its affiliate NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity") in 1992. The remaining issues were submitted to a jury. On April 22, 1997, the Oklahoma Court entered judgments on the jury verdicts. One judgment against Chandler Insurance required the CenTra Group to return stock it purchased in 1990 to Chandler Insurance in return for a payment of $5,099,133 from Chandler Insurance. Payment was made and the stock was returned to Chandler Insurance and canceled in December 1999 as a part of the acquisition of shares described previously. Another judgment was against both Chandler Insurance and Chandler Barbados. CenTra and an affiliate, Ammex, Inc., were awarded $6,882,500 in connection with a 1988 stock purchase agreement. On March 10, 1998, the Oklahoma Court modified its judgment to require CenTra and its affiliates to deliver 1,142,625 shares of Chandler Insurance stock they owned upon payment of the $6,882,500 judgment which was entered in April 1997. Both of these judgments related to an alleged failure by Chandler Insurance to adequately disclose the fact that ownership of Chandler Insurance'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 Insurance on the securities claims relating to CenTra's 1990 stock 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. Judgment was also entered in favor of NAICO and NAICO Indemnity on counterclaims against CenTra for CenTra's failure to pay insurance premiums. Judgment was for the amount of $788,625. During 1998, the judgment was paid by funds held by the Oklahoma Court aggregating, with interest, $820,185. DuraRock Underwriters, Ltd. ("DuraRock"), an affiliate of CenTra, claimed $725,000 was owed to it under certain reinsurance treaties. That claim was settled in January 2000 with NAICO paying $52,617 and NAICO Indemnity paying $84,883 to DuraRock. The settlement was accrued for by NAICO and NAICO Indemnity in 1999. The Oklahoma Court's judgment also upheld a resolution adopted by Chandler Insurance's Board of Directors in August 1992 pursuant to Article XI of Chandler Insurance's Articles of Association preventing CenTra and its affiliates from voting their Chandler Insurance stock. As a result of the Oklahoma Court judgments and subsequent decisions, Chandler Insurance recorded a net charge for the litigation matters during 1997 totaling approximately $1.4 million ($1.6 million including provision for federal income tax). Chandler Insurance recorded the return of 1,660,125 shares of Chandler Insurance's stock in connection with the rescission judgments as a decrease to shareholders' equity in the amount of approximately $12.0 million. On April 21, 1998, the Oklahoma Court denied the CenTra Group's request for costs and attorney fees. The CenTra Group did not appeal this decision within the time permitted by applicable law. Accordingly, Chandler Insurance reduced the previous 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 Court, and filed the initial appellate brief on September 9, 1998. The appeals are being considered by the U.S. Court of Appeals for the 10th Circuit. The CenTra Group's appeals are based upon the Oklahoma Court's failure to award prejudgment interest, the Oklahoma Court's refusal to permit the CenTra Group to amend certain pleadings to assert new claims, the Oklahoma Court's modification of the judgment for $6,882,500 to require CenTra to return shares of Chandler Insurance's stock upon payment of the judgment, and the Oklahoma Court's denial of attorney fees. Chandler Insurance believes the appeal of this last issue is untimely and therefore barred by law. Chandler Insurance elected not to appeal any of the judgments. The individual officers and directors against whom judgments were entered have all filed appeals. PAGE 7 Chandler Insurance's board of directors appointed a committee of the board (the "Committee") to deal with all matters arising from the Oklahoma litigation. The members of the Committee are Messrs. Jacoby, Maestri and Davis, all of whom are non-parties to the CenTra litigation. The Committee is empowered by the board to make decisions on behalf of Chandler Insurance regarding issues relating to litigation strategy, officer and director indemnification and claims made under Chandler Insurance's director and officer liability insurance policy (the "D&O Insurer"). A similar committee composed of Chandler USA directors is authorized to deal with those same issues regarding Chandler USA. In 1997, NAICO learned that several CenTra affiliates had filed two lawsuits against NAICO, NAICO Indemnity and certain NAICO officers asserting some of the same claims made and tried in the Oklahoma lawsuit described previously. Those claims were purportedly prosecuted by CenTra on its own behalf and on behalf of its subsidiaries and were based upon alleged wrongful cancellation of their insurance policies by NAICO and NAICO Indemnity. The Oklahoma Court entered a judgment against CenTra on these claims. NAICO and NAICO Indemnity contend that the Oklahoma Court's adjudication is conclusive as to all claims. The lawsuits have been consolidated and have been assigned to the same judge who presided over the action in the Oklahoma Court. Dispositive motions filed by NAICO, NAICO Indemnity and the other defendants are currently under consideration by the Oklahoma Court. In the CenTra litigation, certain officers and directors of Chandler USA and Chandler Insurance were named as defendants. In accordance with its Articles of Association, Chandler Insurance and its subsidiaries have advanced the litigation expenses of these persons in exchange for undertakings to repay such expenses if those persons are later determined to have breached the standard of conduct provided in the Articles of Association. Chandler Barbados has paid expenses on behalf of these officers and directors totaling approximately $2.3 million as of March 31, 2000. A portion of these expenses relate to claims which have been dismissed or which were decided in favor of the officers and directors. These expenses together with certain other expenses may be recovered from the D&O Insurer. As a result of various events in 1995, 1996 and 1997, Chandler Barbados and Chandler USA recorded estimated recoveries of costs from its D&O Insurer totaling $3,456,000 and $1,044,000, respectively, for reimbursable amounts previously paid that relate to allowable defense and litigation costs for such parties. Chandler Barbados and Chandler USA received payment for a 1995 claim during 1996 in the amount of $636,000 and $159,000, respectively. The balance is included in other assets in Chandler Barbados' and Chandler USA's balance sheets. Chandler Insurance and its subsidiaries are entitled to a total of $5 million under the applicable insurance policy to the extent they have advanced reimbursable expenses. Chandler Insurance is negotiating with the insurer for payment of the policy balance. Chandler Insurance and its subsidiaries could recover the remaining policy limits or could compromise their claim, and could incur significant costs in either case. The ultimate outcome of the appeals of the various parties as described above could have a material adverse effect on Chandler USA and Chandler Insurance and could negatively impact future earnings. Chandler USA'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, Chandler USA 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. At the present time Chandler USA and its affiliates are actively participating in court proceedings and rights of appeal concerning these legal proceedings; therefore, Chandler USA and its affiliates are unable to predict the outcome of such litigation with certainty or the effect of such ongoing litigation on future operations. Chandler USA and its affiliates are also unable to predict the effect of the remaining divestiture order on the rights, limitations or other regulation of ownership of the stock of any existing or prospective holders of Chandler Insurance's common stock, or the effect on the market price of Chandler Insurance's stock. PAGE 8 OTHER LITIGATION Chandler USA and its subsidiaries are not parties to any other material litigation other than as is routinely encountered in their respective business activities. NOTE 3. 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, 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 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 does not expect that adoption of SFAS No. 133 will have a material impact on the Company's consolidated financial condition or results of operations. NOTE 4. SEGMENT INFORMATION The following table presents a summary of the Company's operating segments for the three-month periods ended March 31, 2000 and 1999:
Property and All Intersegment Reported Agency casualty Other eliminations balances --------- ---------- --------- ------------ ---------- (In thousands) THREE MONTHS ENDED MARCH 31, 2000 Revenues from external customers (1).. $ 314 $ 20,951 $ - $ - $ 21,265 Intersegment revenues................. 1,792 37 - (1,829) - Segment profit (loss) before income taxes (2).................... (256) (1,556) (170) - (1,982) Segment assets........................ $ 5,121 $ 263,504 $ - $ (9,362) $ 259,263 THREE MONTHS ENDED MARCH 31, 1999 Revenues from external customers (1).. $ 350 $ 16,411 $ - $ - $ 16,761 Intersegment revenues................. 1,653 54 - (1,707) - Segment profit (loss) before income taxes (2).................... (113) 1,369 (218) - 1,038 Segment assets........................ $ 5,069 $ 227,602 $ - $ (9,620) $ 223,051 - -------------------------------------- (1) Consists of net premiums earned and commissions, fees and other income. (2) Includes net realized investment gains.
PAGE 9 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.
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------ (In thousands) INSURANCE PROGRAM - ----------------- NET PREMIUMS EARNED Standard property and casualty........................... $ 14,697 $ 8,774 Political subdivisions................................... 3,337 3,042 Surety bonds............................................. 1,865 2,344 Group accident and health................................ 946 2,286 Other.................................................... 70 (50) ------------ ------------ $ 20,915 $ 16,396 ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty........................... $ 10,928 $ 6,881 Political subdivisions................................... 2,846 2,373 Surety bonds............................................. 427 305 Group accident and health................................ 1,682 1,556 Other.................................................... (130) (594) ------------ ------------ $ 15,753 $ 10,521 ============ ============
PAGE 10 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) the ability of National American Insurance Company ("NAICO") 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; (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 month periods ended March 31, 2000 and 1999:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------- --------------------- THREE MONTHS ENDED MARCH 31, 2000 1999 2000 1999 ---------------------------- ---------- ---------- ---------- ---------- (In thousands) Standard property and casualty........ $ 30,707 $ 21,635 $ 14,697 $ 8,774 Political subdivisions................ 8,152 7,181 3,337 3,042 Surety bonds.......................... 4,009 3,555 1,865 2,344 Group accident and health............. 1,002 2,596 946 2,286 Other................................. 84 6 70 (50) ---------- ---------- ---------- ---------- TOTAL................................. $ 43,954 $ 34,973 $ 20,915 $ 16,396 ========== ========== ========== ==========
Gross premiums earned, before reductions for premiums ceded to reinsurers, increased $9.0 million or 26% in the first quarter of 2000 compared to the first quarter of 1999. The increase is primarily attributable to increased written premium production in Texas and Oklahoma, as NAICO continues to expand its programs in these states. Net premiums earned, after such reductions, increased $4.5 million or 28% in the first quarter of 2000 compared to the first quarter of 1999 due to the increase in written premium production, and to an increase in the amount of risk retained in the 2000 quarter for the Company's workers compensation line of business. Gross premiums earned in the standard property and casualty program increased $9.1 million or 42% in the first quarter of 2000 compared to the first quarter of 1999. The increase is primarily attributable to increased written premium production in Texas. Net premiums earned increased $5.9 million or 68% in the first quarter of 2000 versus the first quarter of 1999 due to the increase in written premium production, and to the increase in the amount of risk retained for the workers compensation portion of the program. Gross premiums earned in the political subdivisions program increased $971,000 or 14% in the first quarter of 2000 compared to the first quarter of 1999. The increase is primarily attributable to increased written premium production in the school districts portion of the program in Oklahoma. Net premiums earned in the political subdivisions program increased $295,000 or 10% in the first quarter of 2000 versus the first quarter of 1999. PAGE 11 Gross premiums earned in the surety bond program increased $454,000 or 13% in the first quarter of 2000 compared to the first quarter of 1999. Approximately $629,000 of the gross premiums earned in the first quarter of 2000 relates to a new program that is 100% reinsured by an unaffiliated reinsurer. Excluding this new program, gross premiums earned decreased $175,000 or 5% from the 1999 quarter. Net premiums earned in the surety bond program decreased $479,000 or 20% in the first quarter of 2000 versus the first quarter of 1999. Gross premiums earned in the group accident and health program decreased $1.6 million or 61% in the first quarter of 2000 versus the first quarter of 1999. Net premiums earned for this program decreased $1.3 million or 59% in the first quarter of 2000 versus the first quarter of 1999. NAICO discontinued writing new policies for the excess portion of the group accident and health program effective April 1, 1999. NAICO is currently evaluating the fully insured portion of the program and may modify or discontinue it during 2000. NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS At March 31, 2000, the Company's investment portfolio consisted primarily of fixed income U.S. Government, high-quality corporate and tax exempt bonds, with approximately 4% invested in cash and money market instruments. The Company's portfolio contains no junk bonds or real estate investments. Net interest income increased $76,000 or 7% in the first quarter of 2000 versus the first quarter of 1999 due primarily to an increase in invested assets. Invested assets increased from $89.2 million at March 31, 1999 to $97.8 million at March 31, 2000 due primarily to the collection of $12.9 million in January 2000 related to two reinsurance treaties which were rescinded in the fourth quarter of 1999. The Company had no net realized investment gains or losses during the first quarter of 2000, compared to a net realized gain of $52,000 in the first quarter of 1999. COMMISSIONS, FEES AND OTHER INCOME The Company's income from commissions, fees and other income decreased $15,000 or 4% in the first quarter of 2000 versus the first quarter of 1999. The majority of the Company's income from commissions, fees and other income are from LaGere and Walkingstick Insurance Agency, Inc. ("L&W"). L&W's brokerage commissions and fees before intercompany eliminations were $2.1 million in the first quarter of 2000 versus $2.0 million in the first quarter of 1999. 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. LOSSES AND LOSS ADJUSTMENT EXPENSES The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 75.3% for the first quarter of 2000 versus 64.2% in the first quarter of 1998. The increase in the 2000 loss ratio was primarily the result of adverse loss experience in the group accident and health program. Excluding the underwriting results of the group accident program, the loss ratio for the first quarter of 2000 was 70.5% versus 63.5% in the year ago quarter. In addition, a lower proportion of net premiums earned in the surety bond program resulted in a higher loss ratio in the 2000 quarter. Surety bonds have historically had a lower loss ratio than the Company's other lines of business, which is normal for the industry. Weather-related losses from wind and hail totaled $594,000 in the first quarter of 2000 and increased the loss ratio by 2.8 percentage points. Weather-related losses totaled $441,000 in the first quarter of 1999, and increased the 1999 loss ratio by 2.7 percentage points. POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies and premium-related assessments and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from 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 12 The following table sets forth the Company's policy acquisition costs for each of the three month periods ended March 31, 2000 and 1999:
THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ------------ ------------ (In thousands) Commissions expense............................... $ 5,258 $ 4,436 Other premium related assessments................. 403 400 Premium taxes..................................... 975 426 Excise taxes...................................... 110 46 Dividends to policyholders........................ 101 87 Other expense..................................... 42 30 ------------ ------------ Total direct expenses............................. 6,889 5,425 Indirect underwriting expenses.................... 4,078 3,824 Commission received from reinsurers............... (7,479) (5,852) Adjustment for deferred acquisition costs......... 1,339 (32) ------------ ------------ Net policy acquisition costs...................... $ 4,827 $ 3,365 ============ ============
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 24.3% for the first quarter of 2000 versus 26.4% for the first quarter of 1999. Commission expense as a percentage of gross written and assumed premiums was 11.7% for the first quarter of 2000 versus 12.6% for the 1999 quarter. Premium taxes increased $549,000 or 129% in the first quarter of 2000 compared to the 1999 quarter due to the increase in written premiums and to a refund of $392,000 which was received in the 1999 quarter for premium taxes paid in a prior year. Indirect underwriting expenses were 9.0% and 10.9% of total direct written and assumed premiums in the three month periods ended March 31, 2000 and 1999, respectively. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on the Company's overall premium volume. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 7.3% and 7.5% of gross premiums earned and commissions, fees and other income in the first quarter of 2000 and 1999, respectively. General and administrative expenses have historically not varied in direct proportion to the Company's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss 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 $346,000 or 160% in the first quarter of 2000 versus the first quarter of 1999. The increase was primarily due to interest expense on the $24 million debenture offering which was completed on July 16, 1999 by the Company. LITIGATION EXPENSES Litigation expenses reflect expenses related to the on-going legal proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra"). Litigation expenses decreased $49,000 or 86% in the first quarter of 2000 compared to the first quarter of 1999. Increased or renewed activity could result in greater litigation expenses in 2000 or future years. See Note 2 to Interim Consolidated Financial Statements. PAGE 13 LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2000, the Company provided $5.9 million in cash from operations due primarily to the collection of certain receivables totaling approximately $12.9 million in the 2000 quarter that were related to the rescission of two reinsurance treaties during the fourth quarter of 1999. The cash flow from the collection of premiums receivable was partially offset by increases to reinsurance recoverables and prepaid reinsurance premiums, net of premiums payable to reinsurers, and by a reduction in accrued taxes and other payables. The increase in the respective reinsurance balances is due primarily to the increase in ceded written premiums in the first quarter of 2000 in comparison to the fourth quarter of 1999. In the first quarter of 1999, the Company used $4.7 million in cash from operations due primarily to increases in premiums receivable and reinsurance recoverables, less an increase in unpaid losses and loss adjustment expenses, which generally correspond to the increase in written premiums in the 1999 quarter and to the purchase of additional reinsurance coverages in 1998. YEAR 2000 READINESS DISCLOSURES 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 was completed prior to the end of 1999. Through the first four months of the year 2000, the Company had not experienced any significant problems or disruptions related to year 2000 problems. The Company is currently not aware of any significant disruptions experienced by its customers, vendors and service providers that would materially affect their ability to do business with the Company. While it is possible that certain year 2000 problems may exist but have not yet materialized, the Company does not currently expect any year 2000 problems to be encountered in the future that would have a material adverse effect on the operating results of the Company. 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. No claims for year 2000 problems have been reported to NAICO and NAICO has made no provisions for loss reserves based on potential year 2000 problems. It is possible that future court interpretations of policy language based on specific facts, or legislation mandating coverage, could result in coverage for losses attributable to year 2000 problems. Such decisions or legislation could have a material adverse impact on 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 14 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 --------------------- Omitted Item 3. Defaults Upon Senior Securities ------------------------------- Omitted Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Omitted Item 5. Other Information ----------------- At its March 7, 2000 board meeting, the Company's board of directors voted to increase its total membership from 7 to 8 and appointed W. Scott Martin to serve as a director. Item 6. Exhibits and Reports on Form 8-K -------------------------------- None PAGE 15 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: May 9, 2000 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) EX-27 2
7 This schedule contains summary financial information extracted from Chandler (U.S.A.), Inc.'s March 31, 2000 Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-2000 MAR-31-2000 92,292 1,002 1,052 306 0 0 93,600 4,156 3,989 1,795 259,263 99,870 68,935 5,215 0 24,000 0 0 2 45,335 259,263 20,915 1,120 0 350 15,753 4,827 3,787 (1,982) (589) (1,393) 0 0 0 (1,393) (560.89) (560.89) 0 0 0 0 0 0 0
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