-----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, UTynn8xrbj6r0STSuz9wFHuY/h+iHDxy/+X1Q4WzU2YqjE0c89l5MktKftn/6tS6 zC9G9OY79ryEAC1BH+g/nw== 0001083750-08-000009.txt : 20080513 0001083750-08-000009.hdr.sgml : 20080513 20080513145001 ACCESSION NUMBER: 0001083750-08-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080513 DATE AS OF CHANGE: 20080513 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: 08827129 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 mar08qtxt.txt MARCH 2008 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 MARCH 31, 2008 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, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer -- -- Non-accelerated filer X (Do not check if a smaller reporting company) -- Smaller reporting company -- 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 April 30, 2008 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 March 31, 2008 (unaudited) and December 31, 2007 ..................................................1 Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited) ..............................2 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2008 and 2007 (unaudited) .......................3 Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited) ..............................4 Notes to Interim Consolidated Financial Statements (unaudited) ...........5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -------------------------------------------------------------------------- RESULTS OF OPERATIONS .............................................8 --------------------- ITEM 4T. CONTROLS AND PROCEDURES ............................................14 - -------------------------------- PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ................................................14 Item 1A. Risk Factors .....................................................14 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......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 .........................................................14 Signatures ..................................................................15 PAGE 1 CHANDLER (U.S.A.), INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts)
March 31, December 31, 2008 2007 ------------- -------------- (Unaudited) ASSETS Investments Fixed maturities available for sale, at fair value Restricted (amortized cost $36,892 and $32,416 in 2008 and 2007, respectively) .... $ 37,863 $ 32,670 Unrestricted (amortized cost $33,129 and $30,484 in 2008 and 2007, respectively) .. 33,584 30,387 Equity securities available for sale, at fair value (cost $0 in 2008 and 2007) ..... 141 141 Short-term investments ............................................................. 950 1,045 ------------- -------------- Total investments ................................................................. 72,538 64,243 Cash and cash equivalents ($416 and $146 restricted in 2008 and 2007, respectively).. 29,293 32,956 Accrued investment income ........................................................... 831 874 Premiums receivable, less allowance for non-collection of $149 and $134 at 2008 and 2007, respectively .................................... 30,817 28,128 Reinsurance recoverable on paid losses .............................................. 1,028 1,100 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $284 and $239 at 2008 and 2007, respectively .................................... 37,550 36,036 Reinsurance recoverable on unpaid losses from related parties ....................... 19,657 18,688 Prepaid reinsurance premiums ........................................................ 3,426 3,105 Prepaid reinsurance premiums to related parties ..................................... 13,684 12,928 Deferred policy acquisition costs ................................................... 1,280 1,118 Property and equipment, net ......................................................... 8,138 8,255 Amounts due from related parties .................................................... 11,187 11,506 State insurance licenses, net ....................................................... 3,745 3,745 Other assets ........................................................................ 10,491 11,685 ------------- -------------- Total assets ........................................................................ $ 243,665 $ 234,367 ============= ============== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Unpaid losses and loss adjustment expenses ......................................... $ 105,731 $ 100,590 Unearned premiums .................................................................. 49,230 46,389 Policyholder deposits .............................................................. 7,127 7,947 Accrued taxes and other payables ................................................... 6,042 5,777 Premiums payable ................................................................... 2,078 2,263 Premiums payable to related parties ................................................ 801 198 Senior debentures .................................................................. 6,979 6,979 Junior subordinated debentures issued to affiliated trusts ......................... 20,620 20,620 ------------- -------------- Total liabilities ................................................................. 198,608 190,763 ------------- -------------- 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 ................................................................ (16,563) (17,179) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of deferred income taxes ... 1,034 197 ------------- -------------- Total shareholder's equity ........................................................ 45,057 43,604 ------------- -------------- Total liabilities and shareholder's equity .......................................... $ 243,665 $ 234,367 ============= ==============
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 March 31, -------------------------------- 2008 2007 ------------- ------------ Premiums and other revenues Direct premiums written and assumed ........................... $ 30,203 $ 27,333 Reinsurance premiums ceded .................................... (2,724) 498 Reinsurance premiums ceded to related parties ................. (8,205) (8,357) ------------- ------------ Net premiums written and assumed ............................. 19,274 19,474 Increase in unearned premiums ................................. (1,764) (2,454) ------------- ------------ Net premiums earned .......................................... 17,510 17,020 Investment income, net .......................................... 890 1,160 Interest income, net from related parties ....................... 188 212 Realized investment gains, net .................................. - 35 Other income .................................................... 412 827 ------------- ------------ Total premiums and other revenues ............................ 19,000 19,254 ------------- ------------ Operating costs and expenses Losses and loss adjustment expenses, net of amounts ceded to related parties of $4,055 and $4,242 in 2008 and 2007, respectively .................................. 10,936 10,667 Policy acquisition costs, net of ceding commissions received from related parties of $3,120 and $3,179 in 2008 and 2007, respectively .................................. 3,243 3,250 General and administrative expenses ........................... 3,160 3,215 Interest expense .............................................. 652 677 ------------- ------------ Total operating costs and expenses ........................... 17,991 17,809 ------------- ------------ Income before income taxes ...................................... 1,009 1,445 Federal income tax provision .................................... (393) (531) ------------- ------------ Net income .................................................... $ 616 $ 914 ============= ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Amounts in thousands)
Three months ended March 31, -------------------------------- 2008 2007 ------------- ------------ Net income ................................................. $ 616 $ 914 ------------- ------------ Other comprehensive income, before income tax: Unrealized gains on securities: Unrealized holding gains arising during period .......... 1,268 192 Less: Reclassification adjustment for gains included in net income .......................................... - (35) ------------- ------------ Other comprehensive income, before income tax .............. 1,268 157 Income tax provision related to items of other comprehensive income ..................................... (431) (54) ------------- ------------ Other comprehensive income, net of income tax .............. 837 103 ------------- ------------ Comprehensive income ....................................... $ 1,453 $ 1,017 ============= ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER (U.S.A.), INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Three months ended March 31, ------------------------------ 2008 2007 ------------ ------------ OPERATING ACTIVITIES Net income .................................................................. $ 616 $ 914 Add (deduct): Adjustments to reconcile net income to cash provided by (applied to) operating activities: Realized investment gains, net ............................................ - (35) Net gains on sale of property and equipment ............................... (2) (2) Amortization and depreciation ............................................. 364 355 Provision for non-collection of premiums .................................. 15 1 Provision for non-collection of reinsurance recoverables .................. 127 7 Net change in non-cash balances relating to operating activities: Accrued investment income ................................................ 43 (329) Premiums receivable ...................................................... (2,704) (3,040) Reinsurance recoverable on paid losses ................................... (10) (269) Reinsurance recoverable on unpaid losses ................................. (1,559) 576 Reinsurance recoverable on unpaid losses from related parties ............ (969) (697) Prepaid reinsurance premiums ............................................. (321) 3,697 Prepaid reinsurance premiums to related parties .......................... (756) (1,200) Deferred policy acquisition costs ........................................ (162) (778) Other assets ............................................................. 749 619 Unpaid losses and loss adjustment expenses ............................... 5,141 515 Unearned premiums ........................................................ 2,841 (43) Policyholder deposits .................................................... (820) (543) Accrued taxes and other payables ......................................... 265 685 Premiums payable ......................................................... (185) 292 Premiums payable to related parties ...................................... 603 (990) ------------ ------------ Cash provided by (applied to) operating activities ........................ 3,276 (265) ------------ ------------ INVESTING ACTIVITIES Short-term investments: Purchases ................................................................. (285) - Maturities ................................................................ 380 - Unrestricted fixed maturities available for sale: Purchases ................................................................. (8,507) (4,649) Maturities ................................................................ 1,250 2,083 Equity securities available for sale: Purchases ................................................................. - (4,517) Sales ..................................................................... - 6,139 Cost of property and equipment purchased ................................... (129) (195) Proceeds from sale of property and equipment ............................... 33 11 ------------ ------------ Cash applied to investing activities ...................................... (7,258) (1,128) ------------ ------------ FINANCING ACTIVITIES Payments and loans from related parties .................................... 493 263 Payments and loans to related parties ...................................... (174) (1,413) Payments on bank loan ...................................................... - (82) ------------ ------------ Cash provided by (applied to) financing activities ........................ 319 (1,232) ------------ ------------ Decrease in cash and cash equivalents during the period ..................... (3,663) (2,625) Cash and cash equivalents at beginning of period ............................ 32,956 21,403 ------------ ------------ Cash and cash equivalents at end of period .................................. $ 29,293 $ 18,778 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER (U.S.A.), INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (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 accounting principles generally accepted in the United States of America ("GAAP") 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 GAAP 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, 2007. 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-month period ended March 31, 2008 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 two reportable operating segments: property and casualty insurance and agency. The segments are managed separately due to the differences in the nature of the insurance products and services sold. The following table presents a summary of Chandler USA's operating segments for the three month periods ended March 31, 2008 and 2007:
Property and casualty Intersegment Reported insurance Agency eliminations balances ------------ ------------ ------------ ------------ (In thousands) THREE MONTHS ENDED MARCH 31, 2008 Revenues from external customers (1) ... $ 17,596 $ 326 $ - $ 17,922 Intersegment revenues .................. 11 996 (1,007) - Segment profit before income taxes (2).. 506 503 - 1,009 Segment assets ......................... 242,201 8,375 (6,911) 243,665 THREE MONTHS ENDED MARCH 31, 2007 Revenues from external customers (1) ... $ 17,093 $ 754 $ - $ 17,847 Intersegment revenues .................. 12 982 (994) - Segment profit before income taxes (2).. 488 957 - 1,445 Segment assets ......................... 222,052 6,117 (4,546) 223,623 - ------------------------------------------ (1) Consists of net premiums earned and other income. (2) Includes net realized investment gains.
Net premiums earned and losses and loss adjustment expenses within the property and casualty insurance 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, interest 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 insurance segment. PAGE 6
THREE MONTHS ENDED MARCH 31, -------------------------------- 2008 2007 ------------ ------------ (In thousands) INSURANCE PROGRAM - ----------------------------------------- NET PREMIUMS EARNED Standard lines .......................... $ 16,736 $ 15,505 Political subdivisions .................. 700 991 Homeowners .............................. - 294 Surety bonds ............................ 34 67 Other (1) ............................... 40 163 ------------ ------------ $ 17,510 $ 17,020 ============ ============ LOSSES AND LOSS ADJUSTMENT EXPENSES Standard lines .......................... $ 10,429 $ 9,227 Political subdivisions .................. 436 862 Homeowners .............................. (7) 102 Surety bonds ............................ 56 22 Other (1) ............................... 22 454 ------------ ------------ $ 10,936 $ 10,667 ============ ============ - ----------------------------------------- (1) This category is comprised primarily of the run-off of discontinued programs and NAICO's participation in various mandatory workers compensation pools.
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 three years. During March 2004, the lease was extended for three years and during March 2007, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $13,834 plus (ii) interest on the unpaid lease balance at 1% over JP Morgan Chase Bank prime which was 6.25% at March 31, 2008. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.9 million (the "Balloon Payment"), or may elect to have the lessor sell the equipment. If the election to sell the equipment is made, Chandler USA would retain any proceeds exceeding the Balloon Payment. If the proceeds were less than the Balloon Payment, Chandler USA would be required to pay the difference between the proceeds and the Balloon Payment, not to exceed approximately $1.5 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 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. LITIGATION 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 $20,182,499. 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. PAGE 7 The trial in the Harris County cases began in late April 2006, and concluded August 1, 2006. The jury found in favor of NAICO, 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 included $20,182,499 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 punitive 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 with interest from the date the losses and loss expenses were paid. 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. During the third quarter of 2006, NAICO increased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in a decrease in losses and loss adjustment expenses incurred of $4.7 million. Unpaid losses and loss adjustment expenses decreased $22.7 million, reinsurance recoverable on unpaid losses and loss adjustment expenses decreased $16.8 million, and reinsurance recoverable on paid losses and loss adjustment expenses decreased $1.2 million as of December 31, 2006 as a result of increasing the estimated recovery. NAICO also recorded $6.6 million of interest income for its estimate of prejudgment interest through December 31, 2006, including a recovery for a pre-verdict settlement with certain other parties. On January 28, 2008, the court entered a final judgment denying Gulf Liquid's claims against NAICO and Gulsby, denying all of NAICO's claims against Gulf Liquids and Williams, and entering judgment for Gulsby against Gulf Liquids for $15,651,927 plus interest at 7.25% compounded annually from January 28, 2008 until paid. The court also ordered Gulf Liquids to pay Gulsby's taxable court costs, estimated at $100,000. All parties may appeal all or any of these judgments. In the fourth quarter of 2007, as a result of this final judgment, NAICO decreased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in an increase in losses and loss adjustment expenses incurred of $1.8 million. Unpaid losses and loss adjustment expenses increased $12.7 million and reinsurance recoverable on unpaid losses and loss adjustment expenses increased $10.9 million as of December 31, 2007 as a result of decreasing the estimated recovery. NAICO also decreased accrued interest income by $4.5 million for its estimate of prejudgment interest income. NOTE 5. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. Chandler USA has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to Chandler USA. In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") SFAS No. 157, "Fair Value Measurements," which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. Chandler USA has adopted SFAS No. 157 as of January 1, 2008. The adoption of SFAS No. 157 did not have a material impact on its consolidated financial statements. PAGE 8 In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," applies to all entities with available for sale and trading securities. Chandler USA has adopted SFAS No. 159 as of January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on its consolidated financial statements. In March 2007, the FASB ratified Emerging Issues Task Force Issue ("EITF") No. 06-10, "Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements." EITF No. 06-10 provides guidance for determining a liability for the postretirement benefit obligation and for recognition and measurement of the associated asset based on the terms of the collateral assignment agreement. Chandler USA has adopted EITF No. 06-10 effective January 1, 2008. The adoption of EITF No. 06-10 did not have a material impact on its consolidated financial statements. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133." SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Chandler USA is currently evaluating the impact that SFAS No. 161 will have, if any, on its consolidated financial statements. 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 including ongoing litigation matters. PAGE 9 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 month periods ended March 31, 2008 and 2007:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED --------------------------- --------------------------- THREE MONTHS ENDED MARCH 31, 2008 2007 2008 2007 ---------------------------------- ------------ ------------ ------------ ------------ (In thousands) Standard lines ................... $ 26,208 $ 25,128 $ 16,736 $ 15,505 Political subdivisions ........... 1,066 1,512 700 991 Homeowners ....................... - 475 - 294 Surety bonds ..................... 48 95 34 67 Other ............................ 40 166 40 163 ------------ ------------ ------------ ------------ TOTAL ............................ $ 27,362 $ 27,376 $ 17,510 $ 17,020 ============ ============ ============ ============
Gross premiums earned in the first quarter of 2008 were essentially unchanged compared to the first quarter of 2007. An increase in gross premiums earned in the standard lines program was offset by a decrease in gross premiums earned in the homeowners program which was discontinued during 2006, and by a decrease in gross premiums earned in the political subdivisions program. Net premiums earned increased $490,000 or 3% in the first quarter of 2008 compared to the first quarter of 2007. Gross premiums earned in the standard lines program increased $1.1 million or 4% in the first quarter of 2008 compared to the first quarter of 2007. The increase was primarily due to increases in workers compensation and automobile liability premiums. Net premiums earned increased $1.2 million or 8% in the first quarter of 2008 versus the first quarter of 2007, due to the increase in gross earned premiums. Gross premiums earned in the political subdivisions program decreased $446,000 or 29% in the first quarter of 2008 compared to the first quarter of 2007 due primarily to increased competition related to Oklahoma school districts. Net premiums earned in the political subdivisions program decreased $291,000 or 29% in the first quarter of 2008 versus the first quarter of 2007. Gross and net premiums earned in the surety bond program decreased $47,000 and $33,000, respectively, from the first quarter of 2007. NAICO no longer actively markets its surety bond program. NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS At March 31, 2008, Chandler USA's investment portfolio consisted primarily of fixed income U.S. Treasury and government agency bonds, high-quality corporate bonds and certificates of deposit insured by the FDIC, with approximately 29% 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 included $317,000 in the first quarter of 2007 for the accrual of prejudgment interest on a favorable jury verdict in civil litigation in 2006 regarding certain surety bond claims. See "Litigation" and Note 4 of Notes to Interim Consolidated Financial Statements. Net investment income, excluding interest income from related parties and the prejudgment interest accrual, increased $47,000 or 6% in the first quarter of 2008 versus the first quarter of 2007 due primarily to an increase in cash and invested assets. Cash and invested assets were $101.8 million at March 31, 2008 compared to $88.1 million at March 31, 2007. Net interest income from related parties was $188,000 in the first quarter of 2008 compared to $212,000 in the first quarter of 2007. The decrease in the 2008 quarter was due to lower interest rates. There were no net realized investment gains in the first quarter of 2008. Net realized investment gains were $35,000 in the first quarter of 2007. PAGE 10 OTHER INCOME Other income was $412,000 in the first quarter of 2008 compared to $827,000 in the first quarter of 2007. The decrease was primarily attributable to commission income received by CIMI during the first quarter of 2007 for the transfer of NAICO's existing property and inland marine business in the standard lines and political subdivisions programs. Effective January 1, 2007, the property and inland marine lines of insurance that were previously written by NAICO in these programs are being written by Praetorian Insurance Company ("Praetorian") through an arrangement between Praetorian and CIMI. CIMI receives commission income for the business it produces for Praetorian. 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. The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 62.5% for the first quarter of 2008 versus 62.7% in the first quarter of 2007. During the first quarter of 2008, NAICO experienced adverse loss development totaling $181,000 which increased the 2008 loss ratio by 1.0 percentage point. During 2007, loss development was redundant by $458,000 which decreased the 2007 loss ratio by 2.7 percentage points. Weather-related losses from wind and hail were not significant in the first quarter of 2008 or 2007. 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 the 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 month periods ended March 31, 2008 and 2007:
THREE MONTHS ENDED MARCH 31, ---------------------------- 2008 2007 ------------ ------------ (In thousands) Commissions expense ......................... $ 4,325 $ 3,906 Other premium related assessments ........... 308 258 Premium taxes ............................... 577 571 Excise taxes ................................ 82 83 Other expense ............................... 148 239 ------------ ------------ Total direct expenses ....................... 5,440 5,057 Indirect underwriting expenses .............. 1,575 1,463 Commissions received from reinsurers ........ (3,610) (2,493) Adjustment for deferred acquisition costs ... (162) (777) ------------ ------------ Net policy acquisition costs ................ $ 3,243 $ 3,250 ============ ============
Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 23.2% for the first quarter of 2008 versus 23.9% for the first quarter of 2007. Commissions expense as a percentage of gross written and assumed premiums was 14.3% for the first quarter of 2008 and 2007. PAGE 11 Indirect underwriting expenses were 5.2% and 5.4% of total direct written and assumed premiums in the three month periods ended March 31, 2008 and 2007, 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 Chandler USA's overall premium volume. Commissions received from reinsurers increased $1.1 million in the first quarter of 2008 compared to the year-ago quarter due primarily to the transfer of NAICO's property and inland marine business in the standard lines and political subdivisions programs to Praetorian in the first quarter of 2007. The transfer resulted in the cancellation of certain quota share reinsurance arrangements that covered these lines of business. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 11.4% of gross premiums earned and other income in the first quarter of 2008 and 2007. General and administrative expenses decreased $55,000 or 2% in the first quarter of 2008 compared to the 2007 quarter. 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 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 was $652,000 in the first quarter of 2008 compared to $677,000 in the year-ago quarter. Substantially all of Chandler USA's interest expense is related to its outstanding senior debentures and junior subordinated debentures. The decrease in the 2008 period was due primarily to lower interest rates during 2008, as a portion of Chandler USA's junior subordinated debentures were issued with a floating interest rate. LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 2008, Chandler USA provided $3.3 million in cash from operations. Unpaid losses and loss adjustment expenses increased $5.1 million and unearned premiums increased $2.8 million during the first quarter of 2008, but these increases were partially offset by increases in premiums receivable of $2.7 million, reinsurance recoverable on unpaid losses of $2.5 million and prepaid reinsurance premiums of $1.1 million. In the first quarter of 2007, Chandler USA used $265,000 in cash from operations. Prepaid reinsurance premiums decreased $2.5 million during the first quarter of 2007, but this was partially offset by an increase in premiums receivable of $3.0 million. NAICO is required to deposit cash and securities with regulatory agencies in which it is licensed as a condition of conducting operations in the state. In addition, NAICO has deposited cash and securities into a trust account as collateral for a reinsurance agreement in which NAICO is the assuming reinsurer. At March 31, 2008, the total amount of cash and securities restricted as a result of these arrangements was $38.3 million which was an increase of $5.5 million from December 31, 2007. This increase was due to an increase in the amount of reinsurance that NAICO assumed during 2008. At March 31, 2008, Chandler USA's parent company, Chandler Insurance Company, Ltd., owed approximately $11.2 million to Chandler USA versus $11.5 million at December 31, 2007 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 three years. During March 2004, the lease was extended for three years and during March 2007, the lease was extended for an additional three years with monthly rental installments equal to the sum of (i) $13,834 plus (ii) interest on the unpaid lease balance at 1% over JP Morgan Chase Bank prime which was 6.25% at March 31, 2008. Chandler USA has the option to repurchase the equipment at the end of the lease for approximately $1.9 million (the "Balloon Payment"), or may elect to have the lessor sell the equipment. If the election to sell the equipment is made, Chandler USA would retain any proceeds exceeding the Balloon Payment. If the proceeds were less than the Balloon Payment, Chandler USA would be required to pay the difference between the proceeds and the Balloon Payment, not to exceed approximately $1.5 million. PAGE 12 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. 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, 2007, NAICO had statutory earned surplus of $12.5 million. Applying the Oklahoma statutory limits described above, the maximum shareholder dividend NAICO may pay in 2008 without the approval of the Oklahoma Department of Insurance is $5.0 million. NAICO did not pay any shareholder dividends during the first quarter of 2008. NAICO paid cash shareholder dividends to Chandler USA totaling $1.6 million in the second quarter of 2007. 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. PAGE 13 LITIGATION 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 $20,182,499. 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. On August 1, 2006, the jury trial concluded in Harris County, Texas, related to the construction of two gas processing plants in Louisiana. The amounts the jury found owing to NAICO included approximately $20.2 million in actual damages and $70.0 million in punitive damages. See Note 4 of Notes to Consolidated Financial Statements for a discussion of this jury verdict. During the third quarter of 2006, NAICO increased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in a decrease in losses and loss adjustment expenses incurred of $4.7 million. In addition, unpaid losses and loss adjustment expenses decreased $22.7 million, reinsurance recoverable on unpaid losses and loss adjustment expenses decreased $16.8 million, and reinsurance recoverable on paid losses and loss adjustment expenses decreased $1.2 million. NAICO also recorded $6.6 million of interest income for its estimate of prejudgment interest through December 31, 2006 and recorded an additional $317,000 of prejudgment interest during the first quarter of 2007 including a recovery for a pre-verdict settlement with certain other parties. On January 28, 2008, the court entered a final judgment denying Gulf Liquid's claims against NAICO and Gulsby, denying all of NAICO's claims against Gulf Liquids and Williams, and entering judgment for Gulsby against Gulf Liquids for $15,651,927 plus interest at 7.25% compounded annually from January 28, 2008 until paid. The court also ordered Gulf Liquids to pay Gulsby's taxable court costs, estimated at $100,000. All parties may appeal all or any of these judgments. In the fourth quarter of 2007, as a result of this final judgment, NAICO decreased the estimated recovery on the surety bond claims related to the construction of the two gas processing plants which resulted in an increase in losses and loss adjustment expenses incurred of $1.8 million. Unpaid losses and loss adjustment expenses increased $12.7 million and reinsurance recoverable on unpaid losses and loss adjustment expenses increased $10.9 million as of December 31, 2007 as a result of decreasing the estimated recovery. NAICO also decreased accrued interest income by $4.5 million for its estimate of prejudgment interest income. ITEM 4T. 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 CONTROL OVER FINANCIAL REPORTING 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 14 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 4 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, 2007. 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 13, 2008, 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 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 13, 2008 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 Senior Vice President - Finance, Chief Financial Officer and Treasurer (Principal Accounting Officer) EX-31.1 2 exh31mar08txt.txt MARCH 2008 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: May 13, 2008 /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.; 1. 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; 2. 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; 3. 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 (the registrant's fourth fiscal quarter in the case of an annual report) 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: May 13, 2008 /s/ Mark C. Hart -------------------------------- Mark C. Hart Senior Vice President - Finance, Chief Financial Officer and Treasurer EX-32.1 3 exh32110q308txt.txt MARCH 2008 EXHIBIT 31.1 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 March 31, 2008 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 May 13, 2008 /s/ Mark C. Hart -------------------------------- Mark C. Hart Chief Financial Officer May 13, 2008 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-----