-----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, L483n05hSxGB9UQWXs82U0Vayo22cQkSqmOeb4JKMiwIER9Xv2vgcDBYUim75diU 92hXXPW2RVH2DtqyDxldJg== 0001083750-06-000019.txt : 20060814 0001083750-06-000019.hdr.sgml : 20060814 20060814143958 ACCESSION NUMBER: 0001083750-06-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060814 DATE AS OF CHANGE: 20060814 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: 1934 Act SEC FILE NUMBER: 001-15135 FILM NUMBER: 061029225 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 usa63006qedgar.txt CHANDLER (U.S.A.), INC. 6/30/06 10-Q ================================================================================ UNITED STATES 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, 2006 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, CHANDLER, OKLAHOMA 74834 (Address of principal executive offices and zip code) 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 --- --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.) Large accelerated filer Accelerated filer Non-accelerated filer X --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- The number of common shares, $1.00 par value, of the registrant outstanding on July 31, 2006 was 2,484, which are owned by Chandler Insurance Company, Ltd. ================================================================================ PAGE i CHANDLER (U.S.A.), INC. INDEX ----- PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS: - ------------------------------ Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005 ...... 1 Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 .......................................... 2 Consolidated Statements of Operations for the six months ended June 30, 2006 and 2005 .......................................... 3 Consolidated Statements of Comprehensive Income for the three months ended June 30, 2006 and 2005 ................................... 4 Consolidated Statements of Comprehensive Income for the six months ended June 30, 2006 and 2005 ................................... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 .......................................... 6 Notes to Interim Consolidated Financial Statements ......................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS .................................................. 10 --------------------- ITEM 4. CONTROLS AND PROCEDURES ........................................... 15 - -------------------------------- PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ................................................ 16 Item 1A. Risk Factors ..................................................... 16 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 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 ......................................................... 16 Signatures ................................................................. 17 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
June 30, December 31, 2006 2005 ----------- ------------ ASSETS (Unaudited) Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $13,055 and $11,789 in 2006 and 2005, respectively) ..... $ 12,310 $ 11,330 Unrestricted (amortized cost $58,774 and $61,954 in 2006 and 2005, respectively) ... 56,129 60,405 Equity securities at fair value (cost $4,067 and $8,558 in 2006 and 2005, respectively) ....................................................... 4,545 9,071 ----------- ------------ Total investments .................................................................. 72,984 80,806 Cash and cash equivalents ($268 and $209 restricted in 2006 and 2005, respectively) .. 14,571 5,510 Premiums receivable, less allowance for non-collection of $163 and $223 at 2006 and 2005, respectively .................................... 25,601 28,346 Reinsurance recoverable on paid losses, less allowance for non-collection of $238 at 2006 ...................................................... 3,048 2,875 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $158 and $174 at 2006 and 2005, respectively ...................... 48,600 54,708 Reinsurance recoverable on unpaid losses from related parties ........................ 14,651 14,284 Prepaid reinsurance premiums ......................................................... 7,775 9,763 Prepaid reinsurance premiums to related parties ...................................... 12,114 12,247 Deferred policy acquisition costs .................................................... 1,902 1,225 Property and equipment, net .......................................................... 8,548 8,640 Amounts due from related parties ..................................................... 8,973 9,360 State insurance licenses, net ........................................................ 3,745 3,745 Other assets ......................................................................... 14,225 13,550 ----------- ------------ Total assets ......................................................................... $ 236,737 $ 245,059 =========== ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses .......................................... $ 103,901 $ 109,541 Unearned premiums ................................................................... 51,174 55,034 Policyholder deposits ............................................................... 5,787 5,684 Accrued taxes and other payables .................................................... 5,898 5,221 Premiums payable .................................................................... 2,800 2,181 Premiums payable to related parties ................................................. 636 113 Senior debentures ................................................................... 6,979 6,979 Junior subordinated debentures issued to affiliated trusts .......................... 20,620 20,620 ----------- ------------ Total liabilities .................................................................. 197,795 $ 205,373 ----------- ------------ 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 ................................................................. (19,722) (19,913) Accumulated other comprehensive income (loss): Unrealized loss on investments available for sale, net of deferred income taxes ..... (1,922) (987) ----------- ------------ Total shareholder's equity ......................................................... 38,942 39,686 ----------- ------------ Total liabilities and shareholder's equity ........................................... $ 236,737 $ 245,059 =========== ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
Three months ended June 30, ----------------------------- 2006 2005 ------------ ------------ Premiums and other revenues Direct premiums written and assumed ....................... $ 25,199 $ 24,501 Reinsurance premiums ceded ................................ (3,477) (4,759) Reinsurance premiums ceded to related parties ............. (6,520) (5,371) ------------ ------------ Net premiums written and assumed ......................... 15,202 14,371 Decrease in unearned premiums ............................. 1,786 1,923 ------------ ------------ Net premiums earned ...................................... 16,988 16,294 Investment income, net ..................................... 779 683 Interest income, net from related parties .................. 191 162 Realized investment gains, net ............................. 133 3 Other income ............................................... 95 59 ------------ ------------ Total premiums and other revenues ........................ 18,186 17,201 ------------ ------------ Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $2,794 and $3,748 in 2006 and 2005, respectively .............................. 12,053 7,727 Policy acquisition costs, net of ceding commissions received from related parties of $2,483 and $2,046 in 2006 and 2005, respectively .............................. 2,753 2,838 General and administrative expenses ....................... 3,317 3,522 Interest expense .......................................... 667 629 ------------ ------------ Total operating costs and expenses ....................... 18,790 14,716 ------------ ------------ Income (loss) before income taxes .......................... (604) 2,485 Federal income tax benefit (provision) ..................... 211 (890) ------------ ------------ Net income (loss) ......................................... $ (393) $ 1,595 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands)
Six months ended June 30, ------------------------------- 2006 2005 ------------ ------------ Premiums and other revenues Direct premiums written and assumed ............................ $ 54,734 $ 56,162 Reinsurance premiums ceded ..................................... (9,848) (10,530) Reinsurance premiums ceded to related parties .................. (12,771) (13,285) ------------ ------------ Net premiums written and assumed .............................. 32,115 32,347 Decrease in unearned premiums .................................. 1,738 171 ------------ ------------ Net premiums earned ........................................... 33,853 32,518 Investment income, net .......................................... 1,496 1,352 Interest income, net from related parties ....................... 369 314 Realized investment gains, net .................................. 189 3 Other income .................................................... 142 123 ------------ ------------ Total premiums and other revenues ............................. 36,049 34,310 ------------ ------------ Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $6,393 and $7,334 in 2006 and 2005, respectively ................................... 22,168 15,627 Policy acquisition costs, net of ceding commissions received from related parties of $4,848 and $5,025 in 2006 and 2005, respectively ................................... 5,924 5,190 General and administrative expenses ............................ 6,308 6,393 Interest expense ............................................... 1,322 1,245 ------------ ------------ Total operating costs and expenses ............................ 35,722 28,455 ------------ ------------ Income before income taxes ...................................... 327 5,855 Federal income tax provision .................................... (136) (2,105) ------------ ------------ Net income ..................................................... $ 191 $ 3,750 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Three months ended June 30, ---------------------------- 2006 2005 ------------ ------------ Net income (loss) ............................................... $ (393) $ 1,595 ------------ ------------ Other comprehensive income (loss), before income tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period ....... (740) 1,368 Less: Reclassification adjustment for gains included in net income (loss) ......................................... (133) (3) ------------ ------------ Other comprehensive income (loss), before income tax ............ (873) 1,365 Income tax benefit (provision) related to items of other comprehensive income (loss) .................................... 297 (464) ------------ ------------ Other comprehensive income (loss), net of income tax ............ (576) 901 ------------ ------------ Comprehensive income (loss) ..................................... $ (969) $ 2,496 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Six months ended June 30, ---------------------------- 2006 2005 ------------ ------------ Net income ...................................................... $ 191 $ 3,750 ------------ ------------ Other comprehensive loss, before income tax: Unrealized losses on securities: Unrealized holding losses arising during period ............... (1,228) (44) Less: Reclassification adjustment for gains included in net income ....................................... (189) (3) ------------ ------------ Other comprehensive loss, before income tax ..................... (1,417) (47) Income tax benefit related to items of other comprehensive income ........................................... 482 16 ------------ ------------ Other comprehensive loss, net of income tax ..................... (935) (31) ------------ ------------ Comprehensive income (loss) ..................................... $ (744) $ 3,719 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Six months ended June 30, --------------------------- 2006 2005 ------------ ------------ OPERATING ACTIVITIES Net income .............................................................. $ 191 $ 3,750 Add (deduct): Adjustments to reconcile net income to cash provided by (applied to) operating activities: Realized investment gains, net ........................................ (189) (3) Net gains on sale of property and equipment ........................... (1) (5) Amortization and depreciation expense ................................. 680 737 Provision for non-collection of premiums .............................. 46 51 Provision for non-collection of reinsurance recoverables .............. 42 57 Net change in non-cash balances relating to operating activities: Premiums receivable .................................................. 2,699 (1,653) Reinsurance recoverable on paid losses ............................... (231) 343 Reinsurance recoverable on paid losses from related parties .......... - 83 Reinsurance recoverable on unpaid losses ............................. 6,124 9,189 Reinsurance recoverable on unpaid losses from related parties ........ (367) (965) Prepaid reinsurance premiums ......................................... 1,988 1,232 Prepaid reinsurance premiums to related parties ...................... 133 755 Deferred policy acquisition costs .................................... (677) (1,024) Other assets ......................................................... 280 3,042 Unpaid losses and loss adjustment expenses ........................... (5,640) (13,559) Unearned premiums .................................................... (3,860) (2,159) Policyholder deposits ................................................ 103 151 Accrued taxes and other payables ..................................... 177 64 Premiums payable ..................................................... 619 (1,612) Premiums payable to related parties .................................. 523 140 ------------ ------------ Cash provided by (applied to) operating activities .................... 2,640 (1,386) ------------ ------------ INVESTING ACTIVITIES Unrestricted fixed maturities available for sale: Purchases ............................................................. (995) (3,977) Sales ................................................................. - 2,091 Maturities ............................................................ 2,635 388 Equity securities available for sale: Purchases ............................................................. (3,178) (51) Sales ................................................................. 7,858 - Investment in limited partnership ...................................... (502) - Cost of property and equipment purchased ............................... (330) (258) Proceeds from sale of property and equipment ........................... 46 58 ------------ ------------ Cash provided by (applied to) investing activities .................... 5,534 (1,749) ------------ ------------ FINANCING ACTIVITIES Payments and loans from related parties ................................ 967 1,408 Payments and loans to related parties .................................. (580) (615) Bank loan proceeds ..................................................... 500 - ------------ ------------ Cash provided by financing activities ................................. 887 793 ------------ ------------ Increase (decrease) in cash and cash equivalents during the period ...... 9,061 (2,342) Cash and cash equivalents at beginning of period ........................ 5,510 6,870 ------------ ------------ Cash and cash equivalents at end of period .............................. $ 14,571 $ 4,528 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 7 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Chandler (U.S.A.), Inc. ("Chandler USA") 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 Chandler USA's Annual Report on Form 10-K for the year ended December 31, 2005. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year. The consolidated financial statements include the accounts of Chandler USA and all wholly owned subsidiaries that meet consolidation requirements including National American Insurance Company ("NAICO") and Chandler Insurance Managers, Inc. ("CIMI"). NOTE 2. SEGMENT INFORMATION Chandler USA has one reportable operating segment for property and casualty insurance. Net premiums earned and losses and loss adjustment expenses within the property and casualty segment can be identified to Chandler USA designated insurance programs. Chandler USA's chief operating decision makers review net premiums earned and losses and loss adjustment expenses in assessing the performance of an insurance program. In addition, Chandler USA's chief operating decision makers consider many other factors such as the lines of business offered within an insurance program and the states in which the insurance programs are offered. Certain discrete financial information is not readily available by insurance program, including assets, investment income, and investment gains or losses, allocated to each insurance program. Chandler USA does not consider its insurance programs to be reportable segments, however, 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 JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2006 2005 2006 2005 ------------ ------------ ---------- ------------ (In thousands) INSURANCE PROGRAM - ----------------------------------------- NET PREMIUMS EARNED Standard property and casualty .......... $ 13,467 $ 13,934 $ 26,626 $ 27,949 Political subdivisions .................. 1,443 1,700 2,917 3,477 Homeowners .............................. 1,822 449 3,891 449 Surety bonds ............................ 44 127 111 439 Other (1) ............................... 212 84 308 204 ------------ ------------ ---------- ------------ $ 16,988 $ 16,294 $ 33,853 $ 32,518 ============ ============ ========== ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard property and casualty .......... $ 7,368 $ 7,801 $ 15,398 $ 14,257 Political subdivisions .................. 880 1,302 1,489 2,159 Homeowners .............................. 1,308 325 2,013 325 Surety bonds ............................ 2,319 (1,313) 3,202 (823) Other (1) ............................... 178 (388) 66 (291) ------------ ------------ ---------- ------------ $ 12,053 $ 7,727 $ 22,168 $ 15,627 ============ ============ ========== ============ - ------------------------------------------------------ (1) This program is comprised primarily of the run-off of other discontinued programs and NAICO's participation in various mandatory workers compensation pools.
PAGE 8 NOTE 3. COMMITMENTS AND CONTINGENCIES During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $17,512 plus (ii) interest on the unpaid lease balance at a floating interest rate of 1% over JP Morgan Chase Bank prime, which was 9.25% at June 30, 2006. Chandler USA has exercised its option to repurchase the equipment at the end of the lease for approximately $2.4 million. Chandler USA has guaranteed the obligations of Chandler Capital Trust I and Chandler Capital Trust II (the "Capital Trusts"). The Capital Trusts are wholly owned non-consolidated subsidiaries of Chandler USA that have a total of $20.0 million of trust preferred securities outstanding. Chandler USA guarantees payment of distributions and the redemption price of the trust preferred securities until the securities are redeemed in full. NOTE 4. NEW ACCOUNTING STANDARDS In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140." SFAS 155 amends SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," and SFAS No. 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES." This Statement also resolves issues addressed in Statement No. 133 Implementation Issue No. D1, "APPLICATION OF STATEMENT 133 TO BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS." SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133. SFAS 140 is amended to eliminate the prohibition on a qualifying special- purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued during fiscal years beginning after September 15, 2006. Chandler USA does not expect this statement to have a material impact on its consolidated financial statements. In March 2006, the FASB isued SFAS No. 156, "ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS - AN AMENDMENT OF FASB STATEMENT NO. 140." SFAS No. 156 amends SFAS 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES." SFAS 156 requires an entity to separately recognize financial assets as servicing assets or servicing entities each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts. The entity must also initially measure all separately recognized servicing assets and servicing liabilities at fair value, if practicable. Servicing assets and servicing liabilities subsequently measured at fair value must be separately presented in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for Chandler USA's fiscal year beginning January 1, 2007. Chandler USA does not expect this statement to have a material impact on its consolidated financial statements. NOTE 5. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS During the second quarter of 2006, CIMI purchased two limited partnership units in Basin Drilling #2 LP for $2,000, and purchased 8% cumulative subordinated debentures in the amount of $500,000. The timing of payment of interest and principal on the debentures is subject to various restrictions contained in the cumulative subordinated debenture note. The purpose of the partnership is to own and operate an oil and gas drilling rig. CIMI financed the purchase with a $500,000 variable rate bank loan. Principal and interest payments are due on the bank loan in five quarterly installments beginning September 1, 2006. Interest is payable at 1% over New York Prime, which was 9.25% at June 30, 2006. The partnership is managed by Basin Management, LLC ("BMLLC") who is the General Partner. A director of NAICO and Chandler USA is the Manager for BMLLC, and is also a director of the bank and a significant shareholder of the bank holding company that provided the bank loan described above. PAGE 9 NOTE 6. SUBSEQUENT EVENTS In October 1999, NAICO provided surety bonds for Gulsby Engineering, Inc. ("Gulsby") in connection with contracts between Gulf Liquids New River Project, LLC ("Gulf Liquids") and Gulsby for the construction of two gas processing plants in Louisiana. During 2001, Gulsby became unable to pay various vendors resulting in payments to vendors by NAICO totaling $20,182,498.53. In August 2001, NAICO filed suit in federal court in Louisiana alleging that Gulf Liquids had breached its obligations under the bonds by materially altering certain contracts and that, as a result, NAICO was exonerated on the bonds and should recover the amounts paid to vendors. In the fall of 2001, Gulsby and Bay Limited, another contractor with whom Gulsby had entered into a joint venture for the construction of other gas processing plants for Gulf Liquids, filed lawsuits relating to those plants in Houston, Texas. Gulf Liquids filed original actions and counterclaims. NAICO intervened in the Texas lawsuits and, in addition, sued Williams Energy Marketing and Trading (which later became Williams Power Company, Inc.) ("Williams") alleging fraud, breach of contract, tortious interference with contractual relations, conspiracy and alter ego. These claims were asserted against both Gulf Liquids and Williams. Gulf Liquids asserted counterclaims alleging breach of contract against NAICO and requesting contractual and statutory damages ranging from $40 million to $80 million. The cases were consolidated for trial in the 215th Judicial District Court in Harris County, Texas. The trial in the Harris County cases began in late April 2006, and concluded August 1, 2006. The jury found in favor of NAICO and Gulsby, Bay Limited and the joint venture between Gulsby and Bay Limited (Gulsby-Bay Plant Partners) on all counts and fixed damages against Gulf Liquids and Williams totaling $402,568,089.53. The damages determined by the jury included a total of $325 million in punitive damages. Among other findings, the jury found: 1. Williams tortiously interfered with NAICO's contractual relationship with Gulsby and Gulf Liquids; and 2. Williams fraudulently induced NAICO to issue the surety bonds; and 3. Williams defrauded NAICO after the bonds were issued; and 4. Williams' actions were malicious; and 5. Gulf Liquids fraudulently induced NAICO to issue the surety bonds; and 6. Gulf Liquids breached its obligations to NAICO under the bonds; and 7. Williams is responsible for the claims against Gulf Liquids because Gulf Liquids is the alter ego of Williams; and 8. There were material alterations (cardinal changes) to the contracts NAICO bonded. The amounts the jury found owing to NAICO include $20,182,498.53 in actual damages, against both Gulf Liquids and Williams, $20 million in punitive damages against Gulf Liquids, and $50 million in punitive damages against Williams. The verdicts in favor of Gulsby included $20,941,436 in actual damages against both Gulf Liquids and Williams, $25 million in punitive damages against Gulf Liquids and $60 million in actual damages against Williams. NAICO is subrogated to any recovery by Gulsby to the extent of NAICO's losses on the bonds including loss adjustment expenses. A significant amount of NAICO's losses on the surety bonds were ceded to various reinsurers and NAICO will be required to reimburse these reinsurers in accordance with the agreements between NAICO and the reinsurers. Because the verdicts are recent and the final judgments are not yet defined, Chandler USA is unable to presently assess the ultimate outcome of these matters. Such amounts may be modified or vacated prior to or after entry of judgment. Accordingly, Chandler USA's consolidated financial statements as of June 30, 2006 do not include the results of the jury verdicts from the trial discussed above. 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") in periodic press releases and oral statements made by Chandler USA's officials 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 Chandler USA 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 Chandler USA and its subsidiaries operate, including the ability to implement price increases; (iv) claims frequency; (v) claims severity; (vi) catastrophic events of unanticipated frequency or severity; (vii) the number of new and renewal policy applications submitted to National American Insurance Company ("NAICO") by its agents; (viii) the ability of NAICO to obtain adequate reinsurance in amounts and at rates that will not adversely affect its competitive position; (ix) the ability of NAICO to collect reinsurance recoverables; (x) the ability of NAICO to maintain favorable insurance company ratings; and (xi) various other factors. RESULTS OF OPERATIONS PREMIUMS EARNED The following table sets forth premiums earned on a gross basis (before reductions for premiums ceded to reinsurers) and on a net basis (after such reductions) for each insurance program for the three and six month periods ended June 30, 2006 and 2005:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- THREE MONTHS ENDED JUNE 30, 2006 2005 2006 2005 ----------------------------------- ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty .... $ 22,503 $ 23,458 $ 13,467 $ 13,934 Political subdivisions ............ 3,880 4,819 1,443 1,700 Homeowners ........................ 2,691 518 1,822 449 Surety bonds ...................... 63 181 44 127 Other ............................. 213 84 212 84 ------------ ------------ ------------ ------------ TOTAL ............................. $ 29,350 $ 29,060 $ 16,988 $ 16,294 ============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- -------------------------- SIX MONTHS ENDED JUNE 30, 2006 2005 2006 2005 ----------------------------------- ------------ ------------ ------------ ------------ (In thousands) Standard property and casualty .... $ 44,769 $ 47,135 $ 26,626 $ 27,949 Political subdivisions ............ 7,870 9,836 2,917 3,477 Homeowners ........................ 5,486 518 3,891 449 Surety bonds ...................... 158 625 111 439 Other ............................. 310 206 308 204 ------------ ------------ ------------ ------------ TOTAL ............................. $ 58,593 $ 58,320 $ 33,853 $ 32,518 ============ ============ ============ ============
Gross premiums earned increased $290,000 or 1% and $273,000 or less than 1% in the second quarter and first six months of 2006, respectively, compared to the 2005 periods. Net premiums earned increased $694,000 or 4% and increased $1.3 million or 4% for the second quarter and first six months of 2006, respectively. Gross and net premiums earned in the homeowners program in the 2006 periods offset the decreases in premiums earned in the other programs. The homeowners program began in the second quarter of 2005. NAICO discontinued this program in the second quarter of 2006 due primarily to increased catastrophe exposure. PAGE 11 Gross premiums earned in the standard property and casualty program decreased $955,000 or 4% and $2.4 million or 5% in the second quarter and first six months of 2006, respectively, compared to the 2005 periods. Gross premiums earned in Texas decreased $2.1 million and $5.3 million in the second quarter and first six months of 2006, respectively, compared to the 2005 periods while gross premiums earned in Oklahoma increased $813,000 and $2.1 million in the respective periods compared to the 2005 periods. Net premiums earned in this program decreased $467,000 or 3% and $1.3 million or 5% in the second quarter and first six months of 2006, respectively, compared to the 2005 periods, due primarily to the decrease in gross premiums earned. Gross premiums earned in the political subdivisions program decreased $939,000 or 19% and $2.0 million or 20% in the second quarter and first six months of 2006, respectively, compared to the 2005 periods. The decrease in gross premiums earned is due primarily to increased competition in the school districts portion of the program in Oklahoma. Net premiums earned in this program decreased $257,000 or 15% and $560,000 or 16% in the second quarter and first six months of 2005, respectively. The decrease in net premiums earned was significantly less than the decrease in gross premiums earned because this program has a larger portion of property risks than other programs, and property risks have more reinsurance than other lines of business. In the second quarter of 2005, NAICO began writing homeowner and dwelling policies in the state of Texas through a managing general agent. NAICO discontinued this program during the second quarter of 2006 due primarily to increased catastrophe exposures. Gross premiums earned in the surety bond program decreased $118,000 or 65% and $467,000 or 75% in the second quarter and first six months of 2006, respectively, compared to the 2005 periods. Net premiums earned in the surety bond program decreased $83,000 or 65% and $328,000 or 75% in the second quarter and first six months of 2006, respectively. NAICO is no longer actively marketing its surety bond program. NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS At June 30, 2006, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Treasury and government agency bonds, high-quality corporate bonds, equity securities and mutual funds that invest in equity securities, with approximately 17% invested in cash and money market instruments. Income generated from this portfolio is largely dependent upon prevailing levels of interest rates. Chandler USA's portfolio contains no non-investment grade bonds or real estate investments. Chandler USA also receives interest income from related parties on intercompany loans. Net investment income, excluding interest income from related parties, increased $96,000 or 14% and $144,000 or 11% in the second quarter and first six months of 2006, respectively, due to an increase in invested assets and to higher interest rates in 2006. Cash and invested assets were $87.6 million at June 30, 2006 compared to $85.8 million at June 30, 2005. Net interest income from related parties increased $29,000 or 18% and $55,000 or 18% in the second quarter and first six months of 2006, respectively, due primarily to higher interest rates during 2006. Chandler USA had net realized investment gains of $133,000 during the second quarter of 2006 compared to $3,000 during the second quarter of 2005. Net realized investment gains were $189,000 during the first six months of 2006 compared to $3,000 during the first six months of 2005. The net realized gains in 2006 were from sales of equity securities. LOSSES AND LOSS ADJUSTMENT EXPENSES Chandler USA estimates losses and loss adjustment expenses based on historical experience and payment and reporting patterns for the type of risk involved. These estimates are based on data available at the time of the estimate and are periodically reviewed by independent professional actuaries. Although such estimates are management's best estimates of the expected values, the ultimate liability for unpaid claims may vary from these values. PAGE 12 The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 71.0% and 65.5% for the second quarter and first six months of 2006, compared to 47.4% and 48.1% in the corresponding 2005 periods. The increase in the 2006 loss ratios was due primarily to an increase in losses incurred related to prior accident years in the surety bond program, and to an increase in losses in the current accident year in the standard property and casualty program and the political subdivisions program. In the second quarter and first six months of 2006, losses and loss adjustment expenses incurred related to prior accident years were $2.7 million and $3.8 million, respectively, and increased the respective loss ratios by 15.8 and 11.2 percentage points. The adverse loss development during 2006 was due primarily to an increase in surety bond losses in the 2001 accident year which resulted from the settlement of an open bond claim and from a significant increase in legal expenses related to recovery efforts for another bond claim. NAICO ceased marketing its surety bond program in 2005. During 2005, adverse loss development totaling $876,000 and $1.8 million for the second quarter and first six months of 2005, respectively, increased the respective loss ratios by 5.4 and 5.6 percentage points. The adverse loss development in 2005 was due primarily to an increase in losses for prior accident years in the standard property and casualty program and the political subdivisions program. This was partially offset by a reduction in losses for prior accident years in the surety bond program. Weather-related losses from wind and hail totaled $446,000 and $559,000 in the second quarter and first six months of 2006 and increased the respective loss ratios by 2.6 and 1.7 percentage points. Weather-related losses totaled $48,000 and $110,000 in the second quarter and first six months of 2005, and increased the respective 2005 loss ratios by less than 1.0 percentage point. 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. When the sum of anticipated losses, loss adjustment expenses and unamortized policy acquisition costs exceeds the related unearned premiums, including anticipated investment income, a provision for the indicated deficiency is recorded. The following table sets forth Chandler USA's policy acquisition costs for each of the three and six month periods ended June 30, 2006 and 2005:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- (In thousands) Commissions expense ........................ $ 3,525 $ 3,709 $ 8,150 $ 7,593 Other premium related assessments .......... 221 223 502 444 Premium taxes .............................. 534 585 1,182 1,326 Excise taxes ............................... 65 54 128 133 Other expense .............................. 196 182 378 351 ---------- ---------- ---------- ---------- Total direct expenses ...................... 4,541 4,753 10,340 9,847 Indirect underwriting expenses ............. 1,496 1,621 2,999 3,342 Commissions received from reinsurers ....... (3,195) (2,895) (6,738) (6,975) Adjustment for deferred acquisition costs .. (89) (641) (677) (1,024) ---------- ---------- ---------- ---------- Net policy acquisition costs ............... $ 2,753 $ 2,838 $ 5,924 $ 5,190 ========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 24.0% and 24.4% for the second quarter and first six months of 2006, compared to 26.0% and 23.5% in the corresponding year ago periods. Commission expense as a percentage of gross written and assumed premiums was 14.0% and 14.9% in the second quarter and the first six months of 2006 compared to 15.1% and 13.5% in the corresponding 2005 periods. PAGE 13 Indirect underwriting expenses were 5.9% and 5.5% of total direct written and assumed premiums in the second quarter and first six months of 2006, respectively, compared to 6.6% and 6.0% in the corresponding 2005 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 Chandler USA's overall premium volume. Commissions received from reinsurers as a percent of ceded reinsurance premiums were 32.0% and 29.8% in the second quarter and first six months of 2006, respectively, compared to 28.6% and 29.3% in the corresponding 2005 periods. The percentage increase in the second quarter of 2006 is due primarily to an increase in premiums ceded during the second quarter of 2006 under a quota share reinsurance contract with Chandler Insurance Company, Ltd. ("Chandler Insurance"). Quota share reinsurance contracts typically have a ceding commission while excess of loss reinsurance contracts generally do not. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 11.3% and 10.8% of gross premiums earned in the second quarter and first six months of 2006, respectively, compared to 12.1% and 11.0% for the corresponding 2005 periods. General and administrative expenses have historically not varied in direct proportion to Chandler USA's revenues. A portion of such expenses is allocated to policy acquisition costs (indirect underwriting expenses) and loss and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on Chandler USA's overall premium volume. INTEREST EXPENSE Interest expense increased $38,000 and $77,000 in the second quarter and first six months of 2006, respectively, compared to the 2005 periods. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures. The increase in the 2006 periods was due primarily to the increase in interest rates during 2005 and 2006, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate. LIQUIDITY AND CAPITAL RESOURCES In the first six months of 2006, Chandler USA provided $2.6 million in cash from operations. Cash provided by operations included decreases in premiums receivable of $2.7 million and prepaid reinsurance premiums of $2.1 million, and an increase in premiums payable of $1.1 million. These were partially offset by a decrease in unearned premiums of $3.9 million. Unpaid losses and loss adjustment expenses decreased $5.6 million during the first six months of 2006. This was offset by a decrease in reinsurance recoverable on unpaid losses of $5.8 million. In the first six months of 2005, Chandler USA used $1.4 million in cash from operations. At June 30, 2006, Chandler Insurance owed approximately $9.0 million to Chandler USA versus $9.4 million at December 31, 2005 under an Intercompany Credit Agreement (the "Credit Agreement") covering intercompany loans between the parties. The Credit Agreement requires interest to be paid at the prime interest rate published in the Wall Street Journal each month, and balances owed by either party are payable at any time upon demand. During March 2001, Chandler USA entered into a $3.8 million sale and leaseback transaction for certain owned equipment for a three year term. During March 2004, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $17,512 plus (ii) interest on the unpaid lease balance at a floating interest rate of 1% over JP Morgan Chase Bank prime, which was 9.25% at June 30, 2006. Chandler USA has exercised its option to repurchase the equipment at the end of the lease for approximately $2.4 million. Chandler USA is a holding company receiving cash principally through borrowings, subsidiary dividends and other payments, subject to various regulatory restrictions. The capacity of insurance companies to write insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for Chandler USA's subsidiaries are funds generated from insurance premiums, investment income, capital contributions from Chandler USA and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses and commissions. PAGE 14 A significant portion of Chandler USA's consolidated assets represents assets of NAICO that may not be immediately transferable to Chandler USA in the form of shareholder dividends, loans, advances or other payments. Statutes and regulations governing NAICO and other insurance companies domiciled in Oklahoma regulate the payment of shareholder dividends and other payments by NAICO to Chandler USA. Under applicable Oklahoma statutes and regulations, NAICO is permitted to pay shareholder dividends only out of statutory earned surplus. To the extent NAICO has statutory earned surplus, NAICO may pay shareholder dividends only to the extent that such dividends are not defined as extraordinary dividends or distributions. If the dividends are, under applicable statutes and regulations, extraordinary dividends or distributions, regulatory approval must be obtained. Under the applicable Oklahoma statute, and subject to the availability of statutory earned surplus, the maximum shareholder dividend that may be declared (or cash or property distribution that may be made) by NAICO in any one calendar year without regulatory approval is the greater of (i) NAICO's statutory net income, excluding realized capital gains, for the preceding calendar year; or (ii) 10% of NAICO's statutory policyholders' surplus as of the preceding calendar year end, not to exceed NAICO's statutory earned surplus. As of December 31, 2005, NAICO had statutory earned surplus of $9.6 million. Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2006 without the approval of the Oklahoma Department of Insurance is $5.7 million. NAICO did not pay any shareholder dividends to Chandler USA in 2005 or the first six months of 2006. In addition to the statutory limits described above, the amount of shareholder dividends and other payments to affiliates can be further limited by contractual or regulatory restrictions or other agreements with regulatory authorities restricting dividends and other payments, including regulatory restrictions that are imposed as a matter of administrative policy. If insurance regulators determine that payment of a shareholder dividend or other payments to an affiliate (such as payments under a tax sharing agreement, payments for employee or other services, or payments pursuant to a surplus note) would be hazardous to such insurance company's policyholders or creditors, the regulators may block such payments that would otherwise be permitted without prior approval. Historically, NAICO has played a significant role in the servicing of debt and other obligations of Chandler USA through the payment of shareholder dividends. These obligations include $7.0 million of 8.75% senior debentures due in 2014, $13.4 million of 9.75% junior subordinated debentures due in 2033, $7.2 million of floating rate junior subordinated debentures due in 2034 and the obligations under the sale and leaseback transaction discussed previously. Management's expectation is that Chandler Insurance or other subsidiaries will be able to meet these obligations in the future. It is possible that dividends from NAICO may be necessary to service Chandler USA's debt obligations. To the extent that the restrictions discussed previously limit NAICO's ability to pay shareholder dividends or other payments to Chandler USA, Chandler USA's ability to satisfy the debt obligations may also be limited. A.M. BEST RATING Effective May 26, 2006, A.M. Best Company affirmed the financial strength rating of B+ (Very Good) and assigned an issuer credit rating (ICR) of "bbb-" to NAICO. Concurrently, A.M. Best has affirmed the ICR of "bb-" of NAICO's parent, Chandler USA, and the debt rating of "bb-" on Chandler USA's 8.75% senior unsecured debentures due 2014. A.M. Best's outlook for all ratings remains negative. As reported by A.M. Best, these rating actions reflect NAICO's capitalization and management's corrective actions in recent years, including significantly increasing rates, reducing exposures, improving risk selection and tightening policy terms and conditions. Offsetting the positive rating factors has been the occurrence of adverse loss reserve development between 2001 and 2005. Although the majority of the adverse development during this period impacted accident years 1997 through 2001, more recent accident years began to develop adversely in 2005. RECENT EVENTS See Note 6 of Notes to Interim Consolidated Financial Statements for a discussion of a favorable jury verdict in civil litigation regarding certain surety bond claims. PAGE 15 ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), Chandler USA's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness and design of Chandler USA's disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, Chandler USA's Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that Chandler USA's disclosure controls and procedures were effective in recording, processing, summarizing and reporting information required to be disclosed by Chandler USA, within the time periods specified in the Securities and Exchange Commission's rules and forms. CHANGES IN INTERNAL CONTROLS In addition and as of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting. PAGE 16 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings ----------------- Chandler USA and its subsidiaries are not parties to any material litigation other than as is routinely encountered in their respective business activities. While the outcome of these matters cannot be predicted with certainty, Chandler USA does not expect these matters to have a material adverse effect on its financial condition, results of operations or cash flows. See Note 6 of Notes to Interim Consolidated Financial Statements for a discussion of a favorable jury verdict in civil litigation regarding certain surety bond claims. Item 1A. Risk Factors ------------ There have been no material changes from risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- None. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Effective May 9, 2006, Chandler USA's sole shareholder, Chandler Insurance, re-elected the following individuals to serve on Chandler USA's Board of Directors: W. Brent LaGere W. Scott Martin Mark T. Paden Robert L. Rice R. Patrick Gilmore William Thomas Keele Richard L. Evans Item 5. Other Information ----------------- None. Item 6. Exhibits -------- 31.1 Rule 13a-14(a)/15d-14(a) Certifications. 32.1 Section 1350 Certifications. 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 3, 2006 CHANDLER (U.S.A.), INC. By: /s/ W. Brent LaGere ----------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark C. Hart ----------------------------------- Mark C. Hart Sr. Vice President - Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer) EX-31.1 2 exh31edgar63006.txt CHANDLER (U.S.A.), INC. 6/30/06 EXHIBIT 31.1 EXHIBIT 31.1 Certifications I, W. Brent LaGere, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.), Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2006 /s/ W. Brent LaGere ------------------------------------- W. Brent LaGere Chairman of the Board and Chief Executive Officer EXHIBIT 31.1 (continued) Certifications I, Mark C. Hart, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.), Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2006 /s/ Mark C. Hart ------------------------------------- Mark C. Hart Sr. Vice President - Finance, Chief Financial Officer and Treasurer EX-32.1 3 exh321edgar63006.txt CHANDLER (U.S.A.), INC. 6/30/06 EXHIBIT 32.1 EXHIBIT 32.1 SECTION 1350 CERTIFICATIONS In connection with the Quarterly Report of Chandler (U.S.A.), Inc. (the "Company") on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), W. Brent LaGere, as Chief Executive Officer of the Company, and Mark C. Hart, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ W. Brent LaGere -------------------------------------- W. Brent LaGere Chief Executive Officer August 3, 2006 /s/ Mark C. Hart -------------------------------------- Mark C. Hart Chief Financial Officer August 3, 2006 A signed original of this written statement required by Section 906 has been provided to Chandler (U.S.A.), Inc. and will be retained by Chandler (U.S.A.), Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----