-----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, WSTCFtcLqCK4T3GIaQn7mHhyIPYt3M3i/xXrMyLsCFdLvHzdYvBjmnp9imVcRReS gflFRIhzGaffrh4gnaippA== 0000792854-98-000008.txt : 19980810 0000792854-98-000008.hdr.sgml : 19980810 ACCESSION NUMBER: 0000792854-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHANDLER INSURANCE CO LTD CENTRAL INDEX KEY: 0000792854 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15286 FILM NUMBER: 98678953 BUSINESS ADDRESS: STREET 1: 5TH FLR ANDERSON SQUARE STREET 2: PO BOX 1854 CITY: GRAND CAYMAN CAYMAN STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459498177 MAIL ADDRESS: STREET 1: 5TH FLOOR ANDERSON SQUARE STREET 2: P O BOX 1854 CITY: GRAND CAYMAN STATE: E9 10-Q 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________ to ________ Commission File Number: 0-15286 CHANDLER INSURANCE COMPANY, LTD. (Exact name of registrant as specified in its charter) CAYMAN ISLANDS NONE (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5TH FLOOR ANDERSON SQUARE N/A P.O. BOX 1854 (Zip Code) GRAND CAYMAN, CAYMAN ISLANDS B.W.I. (Address of principal executive offices) Registrant's telephone number, including area code: 345-949-8177 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The number of common shares, $1.67 par value, of the registrant outstanding on July 31, 1998 was 6,941,708, which includes 564,475 common shares owned by a subsidiary of the registrant which are eligible to vote, and 1,660,125 common shares which were rescinded through litigation and are held by a court. =============================================================================== PAGE i CHANDLER INSURANCE COMPANY, LTD. INDEX --------- PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1 - ------ Consolidated Statements of Operations for the three months ended June 30, 1998 and 1997.............................................1 Consolidated Statements of Operations for the six months ended June 30, 1998 and 1997.............................................2 Consolidated Statements of Comprehensive Income for the three months ended June 30, 1998 and 1997......................................3 Consolidated Statements of Comprehensive Income for the six months ended June 30, 1998 and 1997......................................4 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.........5 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997.............................................6 Notes to Interim Consolidated Financial Statements............................7 ITEM 2 - ------ Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................11 PART II - OTHER INFORMATION - --------------------------- Item 1 Legal Proceedings..................................................16 Item 2 Changes in Securities..............................................16 Item 3 Defaults Upon Senior Securities....................................16 Item 4 Submission of Matters to a Vote of Security Holders................16 Item 5 Other Information..................................................16 Item 6 Exhibits and Reports on Form 8-K...................................16 Signatures...................................................................17 PAGE 1 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the three months ended June 30, ------------------------- 1998 1997 ---------- ---------- Premiums and other revenues Direct premiums written and assumed................$ 30,061 $ 28,756 Reinsurance premiums ceded......................... (12,478) (4,005) ---------- ---------- Net premiums written and assumed................ 17,583 24,751 Decrease (increase) in unearned premiums........... (108) 972 ---------- ---------- Net premiums earned............................. 17,475 25,723 Net investment income................................. 2,012 1,808 Commissions, fees and other income.................... 366 620 ---------- ---------- Total premiums and other revenues............... 19,853 28,151 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses................ 14,103 15,549 Policy acquisition costs........................... 4,843 7,639 General and administrative expenses................ 3,209 3,267 Interest expense................................... 267 92 Litigation expenses, net........................... (3,512) 562 ---------- ---------- Total operating costs and expenses.............. 18,910 27,109 ---------- ---------- Income before income taxes............................ 943 1,042 Federal income tax benefit (provision) of consolidated U.S. subsidiaries..................... 88 (504) ---------- ---------- Net income ...........................................$ 1,031 $ 538 ========== ========== Basic and diluted earnings per common share...........$ 0.16 $ 0.08 Basic weighted average common shares outstanding...... 6,423 6,708 Diluted weighted average common shares outstanding.... 6,437 6,708
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 2 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the six months ended June 30, ------------------------- 1998 1997 ---------- ---------- Premiums and other revenues Direct premiums written and assumed................$ 59,461 $ 56,915 Reinsurance premiums ceded......................... (26,807) (7,712) ---------- ---------- Net premiums written and assumed................ 32,654 49,203 Decrease in unearned premiums...................... 960 193 ---------- ---------- Net premiums earned............................. 33,614 49,396 Net investment income................................. 3,690 3,623 Commissions, fees and other income.................... 1,099 1,440 ---------- ---------- Total premiums and other revenues............... 38,403 54,459 ---------- ---------- Operating costs and expenses Losses and loss adjustment expenses................ 23,717 31,136 Policy acquisition costs........................... 9,050 14,235 General and administrative expenses................ 6,586 6,796 Interest expense................................... 401 178 Litigation expenses, net........................... (3,356) 10,922 ---------- ---------- Total operating costs and expenses.............. 36,398 63,267 ---------- ---------- Income (loss) before income taxes..................... 2,005 (8,808) Federal income tax provision of consolidated U.S. subsidiaries..................... - (981) ---------- ---------- Net income (loss).....................................$ 2,005 $ (9,789) ========== ========== Basic and diluted earnings (loss) per common share....$ 0.31 $ (1.43) Basic weighted average common shares outstanding...... 6,441 6,824 Diluted weighted average common shares outstanding.... 6,450 6,824
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 3 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Comprehensive Income (Unaudited) (Amounts in thousands)
For the three months ended June 30, ------------------------- 1998 1997 ---------- ---------- Net income ...........................................$ 1,031 $ 538 ---------- ---------- Other comprehensive income, before tax: Unrealized gains on securities: Unrealized holding gains arising during period.. 375 1,978 Less: Reclassification adjustment for gains included in net income .................. (268) (18) ---------- ---------- Other comprehensive income, before tax................ 107 1,960 Income tax expense related to items of other comprehensive income...................... (10) (583) ---------- ---------- Other comprehensive income, net of tax................ 97 1,377 ---------- ---------- Comprehensive income .................................$ 1,128 $ 1,915 ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 4 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Comprehensive Income (Unaudited) (Amounts in thousands)
For the six months ended June 30, ------------------------- 1998 1997 ---------- ---------- Net income (loss).....................................$ 2,005 $ (9,789) ---------- ---------- Other comprehensive income (loss), before tax: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period........................ 504 (406) Less: Reclassification adjustment for gains included in net income (loss)............ (277) (32) ---------- ---------- Other comprehensive income (loss), before tax......... 227 (438) Income tax (expense) benefit related to items of other comprehensive income...................... (45) 124 ---------- ---------- Other comprehensive income (loss), net of tax......... 182 (314) ---------- ---------- Comprehensive income (loss)...........................$ 2,187 $ (10,103) ========== ==========
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 5 CHANDLER INSURANCE COMPANY, LTD. Consolidated Balance Sheets (Unaudited) (Amounts in thousands except per share amounts)
June 30, December 31, 1998 1997 ------------ ------------ ASSETS Investments Fixed maturities available for sale, at fair value................................$ 102,728 $ 111,718 Fixed maturities held to maturity, at amortized cost (fair value $1,266 and $1,330 in 1998 and 1997, respectively)....... 1,152 1,222 Equity securities available for sale, at fair value................................ 191 124 ------------ ------------ Total investments............................ 104,071 113,064 Cash and cash equivalents.......................... 21,480 11,999 Premiums receivable, less allowance for non-collection of $170 and $115 at 1998 and 1997, respectively.................. 26,852 28,079 Reinsurance recoverable on paid losses, less allowance for non-collection of $275 at 1998 and 1997........................... 1,411 3,069 Reinsurance recoverable on unpaid losses, less allowance for non-collection of $420 and $390 at 1998 and 1997, respectively......... 21,192 10,876 Prepaid reinsurance premiums....................... 8,878 9,662 Deferred policy acquisition costs.................. 5,809 5,312 Property and equipment, net........................ 7,880 5,907 Other assets....................................... 11,953 12,893 Licenses, net...................................... 4,269 4,344 Excess of cost over net assets acquired, net....... 4,928 5,252 Covenants not to compete, net...................... 133 333 ------------ ------------ Total assets.......................................$ 218,856 $ 210,790 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Unpaid losses and loss adjustment expenses......$ 79,859 $ 74,929 Unearned premiums............................... 40,645 42,388 Policyholder deposits........................... 4,957 4,830 Notes payable................................... 10,378 2,796 Accrued taxes and other payables................ 5,766 6,340 Premiums payable................................ 4,134 4,554 Litigation liabilities.......................... 12,847 16,618 ------------ ------------ Total liabilities.................................. 158,586 152,455 ------------ ------------ Shareholders' equity Common stock, $1.67 par value, 10,000,000 shares authorized, 6,941,708 shares issued...................... 11,593 11,593 Paid-in surplus................................. 34,964 34,942 Common stock to be issued (40,000 shares)....... 250 - Capital redemption reserve...................... 947 947 Retained earnings............................... 26,891 24,886 Less: Stock held by subsidiary, at cost (564,475 and 494,617 shares in 1998 and 1997, respectively).............. (3,011) (2,487) Less: Stock rescinded through litigation (1,660,125 shares)................ (11,799) (11,799) Accumulated other comprehensive income: Unrealized gain on investments available for sale, net of tax...................... 435 253 ------------ ------------ Total shareholders' equity......................... 60,270 58,335 ------------ ------------ Total liabilities and shareholders' equity.........$ 218,856 $ 210,790 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 6 CHANDLER INSURANCE COMPANY, LTD. Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
For the six months ended June 30, ---------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES: Net income (loss)..................................$ 2,005 $ (9,789) Add (deduct): Adjustments to reconcile net income (loss) to cash applied to operations: Net realized gains on sales of investments... (277) (32) Net (gains) losses on sales of equipment..... (145) 9 Amortization and depreciation................ 1,217 1,068 Provision for non-collection of premiums..... 60 60 Provision for non-collection of reinsurance recoverables.................. 201 300 Earned compensation - outside director stock option and stock grant plan............... 272 - Net change in non-cash balances relating to operations: Premiums receivable....................... 1,167 (108) Reinsurance recoverable on paid losses.... 1,224 (101) Reinsurance recoverable on unpaid losses.. (10,083) 1,283 Prepaid reinsurance premiums.............. 784 49 Deferred policy acquisition costs......... (497) (471) Other assets.............................. 895 (3,318) Unpaid losses and loss adjustment expenses............................... 4,930 (613) Unearned premiums......................... (1,743) (242) Policyholder deposits..................... 127 932 Accrued taxes and other payables.......... (574) (4,162) Premiums payable.......................... (420) 585 Litigation liabilities.................... (3,771) 11,701 ------------ ------------ Cash applied to operations................... (4,628) (2,849) ------------ ------------ INVESTING ACTIVITIES: Fixed maturities available for sale Purchases.................................... (18,595) (10,357) Sales........................................ 10,784 6,550 Maturities................................... 17,095 4,691 Fixed maturities held to maturity Maturities................................... 100 - Cost of property and equipment purchased........ (2,634) (565) Proceeds from sale of property and equipment.... 300 9 ------------ ------------ Cash provided by investing activities........ 7,050 328 ------------ ------------ FINANCING ACTIVITIES: Cost of stock purchased by subsidiary........... (524) - Proceeds from notes payable..................... 8,548 - Payments on notes payable....................... (965) (688) ------------ ------------ Cash provided by (applied to) financing activities................................ 7,059 (688) ------------ ------------ Increase (decrease) in cash and cash equivalents during the period............................... 9,481 (3,209) Cash and cash equivalents at beginning of period... 11,999 7,889 ------------ ------------ Cash and cash equivalents at end of period.........$ 21,480 $ 4,680 ============ ============
See accompanying Notes to Interim Consolidated Financial Statements. PAGE 7 CHANDLER INSURANCE COMPANY, LTD. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there have been no material changes in the information included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. In the opinion of management, all adjustments (consisting of normal recurring adjustments and an unusual significant litigation liability adjustment described in Note 2) considered necessary for a fair presentation have been included. The results of operations for the three and six month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year. Certain reclassifications of prior years have been made to conform to the 1998 presentation. The consolidated financial statements include the accounts of Chandler Insurance Company, Ltd. ("Chandler" or the "Company") and subsidiaries including: - Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") and NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"),wholly owned subsidiaries of the Company. - Chandler (U.S.A.), Inc. ("Chandler USA"), a wholly owned subsidiary of Chandler Barbados. - National American Insurance Company ("NAICO"), LaGere & Walkingstick Insurance Agency, Inc. and Network Administrators, Inc., wholly owned subsidiaries of Chandler USA. All significant intercompany accounts and transactions have been eliminated in consolidation. NOTE 2 - LITIGATION In the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and Quarterly Report on Form 10-Q for the period ended March 31, 1998, recent developments updating the CenTra, Inc. ("CenTra") litigation were described. The following supplements that description. CENTRA LITIGATION - OKLAHOMA The Company has previously reported concerning the background and status of litigation involving CenTra and certain of its affiliates, officers and directors (the "CenTra Group") in the United States District Court for the Western District of Oklahoma ("Oklahoma Federal Court"). As previously reported, the trial of that litigation concluded on April 22, 1997, when the Oklahoma Federal Court entered judgments on various jury verdicts. One judgment against the Company requires the CenTra Group to return stock it purchased in 1990 to the Company in return for payment of $5,099,133 from the Company. Another judgment was against both the Company and its affiliate, Chandler Barbados, and in favor of CenTra and its affiliate, Ammex, Inc. CenTra and Ammex were awarded $6,882,500 in connection with a 1988 Stock Purchase Agreement. Both judgments related to an alleged failure by the Company to adequately disclose the fact that ownership of the Company's stock may be subject to regulation by the Nebraska Insurance Department under certain circumstances. Judgment was also entered in favor of CenTra and against certain officers and/or directors of the Company on securities claims relating to CenTra's 1990 purchases and the failure to disclose the application of Nebraska insurance law, but the judgments were $1 against each individual defendant on those claims. On ten derivative claims brought by CenTra, the jury found in CenTra's favor on three. Certain officers were directed to repay to Chandler USA bonuses received for the years 1988 and 1989 totaling $711,629 and a total of $25,000 for personal use of corporate aircraft. On the remaining claim relating to the acquisition of certain insurance agencies in 1988, the jury awarded $1 each against six officers and/or directors. PAGE 8 Judgment was also entered in favor of NAICO and NAICO Indemnity on counterclaims against CenTra for CenTra's failure to pay insurance premiums. Judgment was for the amount of $788,625. The judgment was paid by funds held by the Oklahoma Federal Court aggregating, with interest, $820,185. A CenTra affiliate, DuraRock Reinsurance, Ltd. claims $725,000 is owed to them by NAICO and NAICO Indemnity under certain reinsurance treaties. NAICO and NAICO Indemnity dispute that claim. The Oklahoma Federal Court's judgment also upheld a resolution adopted by the Chandler Board of Directors in August 1992 pursuant to Article XI of the Company's Articles of Association preventing CenTra and its affiliates from voting their Chandler stock. On March 10, 1998 the Oklahoma Federal Court modified the earlier judgment for $6,882,500 to require the CenTra Group to deliver 1,142,625 shares of Chandler common stock they own or control upon payment of the judgment by the Company and Chandler Barbados. On that same date, the Oklahoma Federal Court also entered an order denying the CenTra Group's request for prejudgment interest on the judgments entered in favor of the CenTra Group. The Company recorded the Oklahoma Federal Court's judgment requiring the return of the 1,142,625 shares of the Company's stock as a decrease to shareholder's equity as of December 31, 1997, and reduced the previous first quarter of 1997 net charge for litigation matters by $6,882,500, during the fourth quarter of 1997. On March 16, 1998 the CenTra Group filed motions for an award of costs and attorney fees totaling approximately $4.7 million. On April 21, 1998, the Oklahoma Federal Court denied the CenTra Group's request. The CenTra Group did not subsequently appeal this decision. Accordingly, the Company reduced the previous first quarter of 1997 net charge for litigation matters by $3.8 million during the second quarter of 1998. On March 23, 1998 the CenTra Group filed a formal notice of intent to appeal certain orders of the Oklahoma Federal Court. From papers filed with both the Oklahoma Federal Court and the United States Court of Appeals for the 10th Circuit it appears that the CenTra Group's appeals will be based upon the Oklahoma Federal Court's failure to award prejudgment interest, the Oklahoma Federal Court's refusal to permit the CenTra Group to amend certain pleadings to assert new claims, the Oklahoma Federal Court's modification of the judgment for $6,882,500 to require CenTra to return shares of the Company's stock upon payment of the judgment, and the Oklahoma Federal Court's entry of judgment in favor of NAICO and certain officers and directors on CenTra's claim based upon cancellation of its insurance policies by NAICO in 1992. There may be other issues on appeal which are not readily apparent to the Company at this time. The Company has elected not to appeal any of the judgments. The individual officers and directors against whom judgments were entered as described above have all filed appeals. The judgments on the derivative claims described above were all entered in favor of Chandler USA. Chandler USA is, therefore, the judgment creditor in connection with those derivative claim judgments. Chandler USA appointed a Special Litigation Committee on April 25, 1997. That Special Litigation Committee meets on a regular basis and has been delegated the authority of the Chandler USA Board of Directors regarding all issues related to the CenTra litigation in the Oklahoma Federal Court, including the derivative claim judgments. On April 28, 1997 the Company's Board of Directors appointed a Committee of the Board (the "Committee") to deal with all matters arising from the Oklahoma litigation. The Committee was delegated all authority of the Board on these issues. The members of the Committee are Messrs. Jacoby, Maestri and Davis, all of whom are non-parties to the CenTra litigation. That Committee has retained independent counsel. The individual members of the Committee review issues relating to litigation strategy, officer and director indemnification, and claims made under the Company's director and officer liability insurance policy on a regular basis in conjunction with a similar committee composed of Chandler USA directors. The Committee conducts its meetings outside the United States, but participates in telephone briefings and discussions at least twice monthly. Because all shares of the Company's stock owned by the CenTra Group are held by the U.S. District Court for the District of Nebraska ("Nebraska Federal Court"), it is unclear when or if the CenTra Group will be able to comply with the Oklahoma Federal Court's order. The Company believes that it is not required to pay the judgments until the CenTra Group can deliver the shares to the Company. See CenTra Litigation - Nebraska. The ultimate outcome of the appeals of the various parties as described above could have a material adverse effect on the Company and could negatively impact future earnings. The Company's management believes that adequate financial resources are available to pay the judgments as they currently exist or as they may be modified on appeal. As a holding company, the Company may receive cash through equity sales, borrowings and dividends from its subsidiaries. Chandler Barbados and NAICO are subject to various regulations which restrict their ability to pay shareholder dividends. A reduction in the amount of invested assets, or an increase in borrowings resulting from potential payments of these judgments would reduce investment earnings or increase operating expenses in future periods. PAGE 9 CENTRA LITIGATION - NEBRASKA The Company has previously reported regarding administrative proceedings and decisions and court actions and decisions involving the Company and the CenTra Group in the State of Nebraska. (See Annual Report on Form 10-K for the fiscal year ended December 31, 1997.) The Nebraska Federal Court ordered CenTra, M.J. Moroun, and others to deliver into the registry of the Nebraska Federal Court all shares of Chandler stock owned or controlled by them or their affiliates and not previously delivered to the Court to await the outcome of the CenTra Group's appeal of a divestiture order entered by the Nebraska Federal Court on March 25, 1997. On February 9, 1998, CenTra deposited an additional 1,691,750 shares of the Company's stock making the total number of shares on deposit with the Nebraska Federal Court 3,133,450 shares. In his March 25, 1997 order, the Honorable Warren K. Urbom, U.S. District Judge for the Nebraska Federal Court, ordered the parties to submit divestiture plans. The appeal of that order by CenTra has resulted in a delay of the deadlines for submitting the proposals and no new submission date has been set at this time. On July 29, 1998, the U.S. Circuit Court for the 8th Circuit affirmed Judge Urbom's order that the CenTra Group will be divested of ownership or control of its shares. This ruling allows Judge Urbom to consider divestiture plans which may be submitted by NAICO, the Nebraska Insurance Department and the CenTra Group. The method and timing of such divestiture are uncertain and will be the subject of an order or orders which Judge Urbom will issue some time after the July 29th ruling becomes final and the court has considered the legal positions taken by the parties on those issues. The CenTra Group may request the 8th Circuit Court of Appeals to reconsider its ruling and may also request the U.S. Supreme Court to hear the case. All shares owned or controlled by the CenTra Group remain in the Court's possession pending further orders by Judge Urbom. On March 27, 1998, NAICO notified the Nebraska Federal Court of the Oklahoma Federal Court's March 10, 1998 order regarding CenTra's return of the 1,660,125 shares which were the subject of the two money judgments (see CenTra Litigation - Oklahoma) and requested the Nebraska Federal Court to release those shares to the Company and Chandler Barbados upon their tender of amounts sufficient to satisfy the two judgments. The Company and Chandler Barbados then requested the Oklahoma Federal Court to stay execution upon the two judgments until such time as the Nebraska Federal Court rules on NAICO's request to release the shares. On April 23, 1998, the Oklahoma Federal Court granted the stay motion pending the Nebraska Federal Court's ruling on the request for release of the shares. The Nebraska Federal Court denied that request on May 29, 1998 pending the outcome of CenTra's 8th Circuit appeal and further action by the Nebraska Federal Court consistent with the 8th Circuit ruling. CENTRA LITIGATION - OTHER The Company has previously reported regarding two separate lawsuits filed against NAICO, NAICO Indemnity and certain NAICO officers during 1997 in State Court in Macomb County, Michigan. As stated in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, NAICO, NAICO Indemnity and the other defendants contend that the claims which are the basis of these suits are the same claims which were prosecuted and concluded in NAICO's and NAICO Indemnity's favor by the Oklahoma Federal Court in April, 1997. On February 28, 1998, a Michigan Federal Court ordered the lawsuits transferred to the Oklahoma Federal Court. They have now been consolidated and have been assigned to the Honorable Vicki Miles-LaGrange, the same judge who presided over the action concluded in April 1997 (see CenTra Litigation - Oklahoma). Dispositive motions filed by NAICO, NAICO Indemnity and the other defendants are currently under consideration by the Oklahoma Federal Court. At the present time, the Company is actively participating in court proceedings, possible discovery actions and rights of appeal concerning these various legal proceedings; therefore the Company is unable to predict the outcome of such litigation with certainty or the effect of such ongoing litigation on future operations. OTHER LITIGATION The Company and its subsidiaries are not parties to any other material litigation other than as is routinely encountered in their respective business activities. NOTE 3. NOTES PAYABLE During 1996, Chandler USA borrowed $4.5 million from a bank for a three year term. During the fourth quarter of 1997, the related loan agreement was amended to provide for additional borrowings up to $8.5 million and to revise the term to five years with interest payable at a floating rate equal to 1% over Wall Street Journal Prime, which was 8.5% at June 30, 1998. During March 1998, Chandler USA borrowed an additional $6.2 million on the note and the proceeds were used to repay intercompany advances from Chandler Barbados. The outstanding balance of the note was $8.1 million at June 30, 1998. The funds received by Chandler Barbados may be used to discharge litigation judgments. The bank note is collateralized by shares of NAICO stock owned by Chandler USA. PAGE 10 In February 1998, Chandler USA entered into a five year loan agreement with a bank having a principal amount of $2.3 million and an interest rate of 7.75%. Monthly payments are $46,482 including principal and interest. The loan is collateralized by certain equipment which was purchased with the proceeds of the loan. The equipment had previously been leased by Chandler USA. NOTE 4. DIRECTORS' STOCK OPTION AND STOCK GRANT PLAN During the second quarter of 1998 the Company's directors approved the Directors' Stock Option and Stock Grant Plan (the "Plan") which is filed as a part of this Quarterly Report on Form 10-Q as Exhibit 10.4. The Plan provides that the non-employee directors of the Company, other than Norman Harned, Ronald Lech and M.J. Moroun, are eligible for grants of stock options and stock grants in accordance with the terms of the Plan. Options and stock grants may not be granted under the Plan for more than 260,000 shares of common stock of the Company, but this number may be adjusted to reflect, if deemed appropriate by the board of directors, any stock dividend, stock split, share combination, recapitalization or the like, of or by the Company. The exercise price of the stock options shall generally be equal to the average closing price of common stock of the Company for the 30 calendar days preceding the date the options are granted. The option period begins on the effective date of the option grant and terminates on the tenth anniversary of that date. The aggregate number of shares of stock awarded to an eligible director as a stock grant shall total 20,000 shares of common stock of the Company. The award shall be divided into two equal installments. The first installment of 10,000 shares shall automatically be awarded as of the first regular board meeting after an eligible director completes ten continuous years of service on the board. The second installment of 10,000 shares shall automatically be awarded as of the first anniversary of the initial stock grant, regardless of whether the director is still a member of the board. As of June 30, 1998, a total of 40,000 shares valued at $250,000 had been awarded to two directors, and this amount is included in general and administrative expenses in the Company's consolidated statements of operations. Each eligible director shall automatically be granted options to purchase 1,500 shares of common stock of the Company as of the first regular board meeting in each year the director serves on the board. Each eligible director shall also automatically be granted options to purchase 30,000 shares of common stock of the Company effective as of the first regular board meeting after the director completes ten continuous years of service on the board. As of June 30, 1998, options for 66,000 shares had been awarded with an exercise price of $5.92 per share, which resulted in approximately $22,000 of compensation expense which is included in general and administrative expenses in the Company's consolidated statements of operations. NOTE 5. EARNINGS PER SHARE Basic earnings per share is computed based upon net income (loss) divided by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed based upon net income (loss) divided by the weighted average number of common shares outstanding during each period adjusted for the effect of dilutive potential common shares calculated using the treasury stock method. Weighted average shares include 1,660,125 shares rescinded through litigation but still outstanding, and exclude 564,475 shares held by a subsidiary of the Company. The numerator for basic and diluted earnings per share for the three and six months ended June 30, 1998 and 1997 is equal to the net income (loss) for the respective period. As of June 30, 1998 and 1997, there were no antidilutive options to purchase common shares. The following table sets forth the computation of the denominator for basic and diluted earnings per share: Three months Six months ended June 30, ended June 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) Denominator for basic earnings per share - Weighted average shares.......... 6,423 6,708 6,441 6,824 Effect of dilutive securities - Stock options.................... 14 - 9 - -------- -------- -------- -------- Denominator for dilutive earnings per share - Adjusted weighted average shares and assumed conversions... 6,437 6,708 6,450 6,824 ======== ======== ======== ======== PAGE 11 NOTE 6. RECENTLY ADOPTED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in financial statements. In addition, SFAS No. 130 requires the Company to classify items of other comprehensive income by their nature in a separate financial statement or as a component of the statement of operations or the statement of shareholders' equity and display the accumulated balance of other comprehensive income separately in the shareholders' equity section of the consolidated balance sheets. The Company adopted SFAS No. 130 on January 1, 1998 as required. The adoption of SFAS No. 130 resulted in revised and additional disclosures but had no effect on the financial position, results of operations or liquidity of the Company. Also in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes reporting standards for public companies concerning annual and interim financial statements of their operating segments and related information. Operating segments are components of a company about which separate financial information is available that is regularly evaluated by the chief operating decision maker(s) in deciding how to allocate resources and assess performance. The Standard sets criteria for reporting disclosures about a company's products and services, geographic areas and major customers. The Company adopted SFAS No. 131 on January 1, 1998 as required. NOTE 7. ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTS NO. 87, 88 AND 106. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement of recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer considered useful. SFAS No. 132 is effective for fiscal years beginning after December 15, 1998. The adoption is not expected to have a material impact on the Company's consolidated financial position or results of operations. The Company does not offer defined benefit plans or other postretirement benefit plans to its employees; therefore, the adoption of SFAS No. 132 will not affect the Company's financial statement disclosures. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively refered to as derivatives) and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company will adopt SFAS No. 133 on January 1, 2000 as required. Management of the Company believes that adoption of SFAS No. 133 will not have a material impact on the Company's consolidated financial condition or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Some of the statements made in this Form 10-Q Report, as well as statements made by Chandler Insurance Company, Ltd. (the "Company") in periodic press releases, oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company and conference calls following earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which the Company operates; (iv) claims frequency; (v) claims severity; (vi) the number of new and renewal policy applications submitted by the Company's agents; and (vii) other factors including the ongoing litigation matters involving a significant concentration of ownership of common stock. PAGE 12 RESULTS OF OPERATIONS PURCHASE OF ADDITIONAL REINSURANCE During the first quarter of 1998, National American Insurance Company ("NAICO") purchased additional reinsurance under its workers compensation and casualty reinsurance programs that substantially reduced the combined net retentions in these lines of business. The purchase of the additional reinsurance coverages in 1998 substantially reduces the risk of loss for NAICO's workers compensation and casualty insurance lines of business, but results in significantly lower net premiums earned, losses and loss adjustment expenses and policy acquisition costs. PREMIUMS EARNED The following tables set forth premiums earned on a gross basis (before reductions for premiums ceded to unaffiliated reinsurers) and a net basis for the three and six month periods ended June 30, 1998 and 1997: Gross premiums Net premiums Three months ended June 30, earned earned - --------------------------------- -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) Standard property-casualty....... $ 18,424 $ 15,804 $ 10,413 $ 13,911 Political subdivisions........... 5,902 5,301 3,051 3,658 Surety bonds..................... 2,919 3,228 2,340 2,929 Nonstandard private-passenger automobile.................. 1,956 3,783 137 3,783 Other............................ 1,956 1,892 1,534 1,442 -------- -------- -------- -------- TOTAL............................ $ 31,157 $ 30,008 $ 17,475 $ 25,723 ======== ======== ======== ======== Gross premiums Net premiums Six months ended June 30, earned earned - --------------------------------- -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) Standard property-casualty....... $ 35,601 $ 29,213 $ 19,738 $ 25,727 Political subdivisions........... 11,712 10,366 6,131 7,193 Surety bonds..................... 5,593 6,231 4,484 5,842 Nonstandard private-passenger automobile.................. 4,542 7,707 423 7,707 Other............................ 3,757 3,640 2,838 2,927 -------- -------- -------- -------- TOTAL............................ $ 61,205 $ 57,157 $ 33,614 $ 49,396 ======== ======== ======== ======== Gross premiums earned, before reductions for premiums ceded to unaffiliated reinsurers, increased $1.1 million or 4% in the quarter ended June 30, 1998 compared to the prior year, and increased $4.0 million or 7% for the six months ended June 30, 1998 compared to the 1997 period. Net premiums earned decreased $8.2 million or 32% in the 1998 quarter compared to the prior year, and decreased $15.8 million or 32% for the six months ended June 30, 1998 compared to the 1997 period. The reduction in net premiums earned was due to the purchase of additional reinsurance for NAICO's workers compensation and casualty insurance programs described previously, and to a reinsurance arrangement for a large portion of NAICO's nonstandard private-passenger automobile program which was effective July 1, 1997. Gross premiums earned in the standard property-casualty program increased $2.6 million or 17% in the current quarter versus the prior year, and increased $6.4 million or 22% for the six months ended June 30, 1998 compared to the 1997 period. This increase is primarily attributable to marketing activity in Oklahoma and contiguous states, principally Texas. Net premiums earned decreased $3.5 million or 25% in the current quarter versus the prior year, and decreased $6.0 million or 23% in the six months ended June 30, 1998 compared to the 1997 period due to the purchase of additional reinsurance described previously. Gross premiums earned in the political subdivisions program increased $601,000 or 11% in the current quarter versus the prior year, and increased $1.3 million or 13% for the six months ended June 30, 1998 compared to the 1997 period due primarily to expansion of the school districts program in Texas and increased production in Oklahoma. Net premiums earned decreased $607,000 or 17% in the current quarter versus the prior year, and decreased $1.1 million or 15% for the six months ended June 30, 1998 compared to the 1997 period due to the purchase of additional reinsurance described previously. PAGE 13 Net premiums earned in the surety bond program decreased $589,000 or 20% in the current quarter versus the prior year, and decreased $1.4 million or 23% for the six months ended June 30, 1998 compared to the 1997 period. Net premiums earned from surety bonds produced by Midwest Indemnity Corp. ("Midwest") during the runoff portion of that program decreased by $356,000 or 151% in the current quarter versus the prior year, and decreased $950,000 or 164% for the six months ended June 30, 1998 compared to the 1997 period. NAICO and Midwest agreed to terminate the underwriting and production contract effective December 31, 1995. Net premiums earned from surety bonds produced by LaGere & Walkingstick Insurance Agency, Inc. ("L&W") decreased $293,000 or 14% in the current quarter versus the prior year, and decreased $521,000 or 13% for the six months ended June 30, 1998 compared to the 1997 period. Increased competition and higher reinsurance costs contributed to the decline in the 1998 periods. During 1997, NAICO discontinued the Oklahoma and Arizona portions of the nonstandard private-passenger automobile program. During the second quarter of 1997, management reviewed the underwriting performance of the California portion of the program and concluded that it would be in the Company's best interest to substantially reduce its underwriting risk. Effective July 1, 1997, NAICO entered into a 100% quota share reinsurance agreement to fully reinsure the risk. During 1996, NAICO began writing excess accident and health coverage for small to medium sized employers generally in Oklahoma and Texas. Net premiums earned in this program (included in Other in the preceding table) were $1.2 million in the second quarter of 1998 versus $451,000 in the 1997 quarter, and $2.2 million in the first six months of 1998 versus $758,000 in the 1997 period. NET INVESTMENT INCOME Net investment income excluding capital gains was $1.7 million and $3.4 million in the three and six month periods ended June 30, 1998, respectively, compared to $1.8 million and $3.6 million in the year ago periods. During the fourth quarter of 1997, NAICO shifted a portion of its fixed maturities portfolio from taxable to tax exempt bonds resulting in income from tax exempt securities of $281,000 and $543,000 in the three and six month periods ended June 30, 1998. NAICO had no tax exempt income in the corresponding 1997 periods. Net realized capital gains were $268,000 and $277,000 in the second quarter and first six months of 1998, respectively, compared to $18,000 and $32,000 in the year ago periods. Net investment income including capital gains was $2.0 million and $3.7 million in the three and six month periods ended June 30, 1998, respectively, compared to $1.8 million and $3.6 million in the year ago periods. COMMISSIONS, FEES AND OTHER INCOME L&W's brokerage commissions and fees before intercompany eliminations were $1.7 million and $3.6 million in the three and six months ended June 30, 1998, respectively, compared to $2.0 million and $4.0 million in the year ago periods. The decrease in L&W's brokerage commissions and fees in the 1998 periods is primarily a result of increased competition and general declines in premium rates. A large portion of the brokerage commissions and fees for L&W is incurred by NAICO and thus eliminated in the consolidation of the Company's subsidiaries. Fees generated by Network Administrators, Inc. ("Network") were $146,000 and $359,000 in the second quarter and first six months of 1997. Network no longer functions as a third-party administrator and did not generate any income in the 1998 periods. Chandler (U.S.A.), Inc. ("Chandler USA") disposed of certain equipment in the first quarter of 1998 that resulted in a gain of $145,000 before provision for federal income tax. LOSSES AND LOSS ADJUSTMENT EXPENSES The percentage of losses and loss adjustment expenses to net premiums earned ("loss ratio") was 80.7% and 70.6% for the quarter and six months ended June 30, 1998 compared to 60.4% and 63.0% in the comparable year ago periods. PAGE 14 The increase in the 1998 loss ratio was primarily a result of additional loss development from prior accident years recognized in the second quarter of 1998. The prior year loss development in the second quarter of 1998 totaled $3.7 million and increased the loss ratio for the three and six months ended June 30, 1998 by 21.0 and 10.9 percentage points. The prior year loss development by program was as follows: (In thousands) Standard property-casualty program...........$ 1,731 Political subdivisions....................... 662 Accident & health............................ 796 Transportation............................... 427 All other.................................... 54 -------------- Total...................................$ 3,670 ============== Approximately 35% and 85% of the prior year loss development for the standard property-casualty and political subdivisions programs, respectively, was in the workers compensation portion of those programs. All of the prior year loss development in the transportation program was in the workers compensation sector of the program. The remainder of the prior year loss development, with the exception of the accident & health program, was in the casualty lines of coverage. In addition, storm-related losses from wind and hail totaled approximately $660,000 and $190,000 in the second quarter of 1998 and 1997, respectively. POLICY ACQUISITION COSTS Policy acquisition costs consist of costs associated with the acquisition of new and renewal business and generally include direct costs such as premium taxes, commissions to agents and ceding companies, and premium-related assessments, and indirect costs such as salaries and expenses of personnel who perform and support underwriting activities. NAICO also receives ceding commissions from reinsurers who assume premiums from NAICO under certain reinsurance contracts and the ceding commissions are accounted for as a reduction of policy acquisition costs. Direct policy acquisition costs and ceding commissions are deferred and amortized over the terms of the policies. Recoverability of such deferred costs is dependent on the related unearned premiums on the policies being more than expected claim losses. The following table sets forth the Company's policy acquisition costs for each of the three and six month periods ended June 30, 1998 and 1997: Three months Six months ended June 30, ended June 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) Commissions expense.................$ 3,937 $ 4,363 $ 7,517 $ 8,051 Other premium related assessments... 386 392 892 686 Premium taxes....................... 919 762 1,746 1,451 Excise taxes........................ 41 34 106 68 Dividends to policyholders.......... 75 48 150 98 Other expense....................... (8) (15) 60 60 -------- -------- -------- -------- Total direct expenses............... 5,350 5,584 10,471 10,414 Indirect underwriting expenses...... 3,154 3,120 6,143 6,033 Commissions received from reinsurers..................... (3,444) (756) (7,068) (1,741) Adjustment for deferred acquisition costs.............. (217) (309) (496) (471) -------- -------- -------- -------- Net policy acquisition costs........$ 4,843 $ 7,639 $ 9,050 $14,235 ======== ======== ======== ======== PAGE 15 Total gross direct and indirect expenses as a percentage of direct written and assumed premiums were 28.3% and 27.9% in the second quarter and first six months of 1998 compared to 30.3% and 28.9% in the corresponding year ago periods. The average commission rates were 13.1% and 12.6% in the second quarter and first half of 1998 versus 15.2% and 14.1% in the year ago periods. Indirect expenses were 10.5% and 10.3% of total direct written and assumed premiums in the second quarter and first six months of 1998, respectively, compared to 10.8% and 10.6% in the corresponding year ago periods. Indirect expenses include general overhead and administrative costs associated with the acquisition of new and renewal business, some of which is relatively fixed in nature, thus, the percentage of such expenses to direct written and assumed premiums will vary depending on the Company's overall premium volume. Commissions received from reinsurers increased $2.7 million or 356% in the second quarter of 1998 compared to the 1997 quarter, and increased $5.3 million or 306% in the first six months of 1998 compared to 1997, due to the purchase of additional reinsurance discussed previously which increased premiums ceded to reinsurers by 212% and 248% in the second quarter and first six months of 1998 over the 1997 periods. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were 10.2% and 10.6% of gross premiums earned and commissions, fees and other income for the quarter and six month periods ended June 30, 1998, compared to 10.7% and 11.6% for the corresponding periods in 1997. During the second quarter of 1998, the Company adopted a stock option and stock grant plan (the "Plan") for certain non-employee directors of the Company. See Note 4 - Directors' Stock Option and Stock Grant Plan in Notes to Interim Consolidated Financial Statements for information concerning the Plan. Compensation expense related to the Plan in the amount of $272,000 is included in general and administrative expenses in the second quarter of 1998. General and administrative expenses have historically not varied in direct proportion to the Company's revenues. A portion of such expenses is allocated to policy acquisition costs and losses and loss adjustment expenses based on various factors including employee counts, salaries, occupancy and specific identification. Because certain types of expenses are fixed in nature, the percentage of such expenses to revenues will vary depending on the Company's overall premium volume. LIQUIDITY AND CAPITAL RESOURCES The Company used $4.6 million of cash for operations in the first six months of 1998 compared to $2.8 million in the first six months of 1997. The 1998 use of cash was due primarily to the purchase of additional reinsurance described previously. See Note 3 - Notes Payable in Notes to Interim Consolidated Financial Statements for information concerning bank loans. In April 1998, a subsidiary of the Company acquired 69,858 shares of the Company's common stock from an agent for approximately $524,000. These shares had previously been pledged to NAICO to secure certain obligations resulting from insurance business produced by another agent. LITIGATION AND LITIGATION EXPENSES See Note 2 - Litigation in Notes to Interim Consolidated Financial Statements for information concerning various litigation matters. INCOME TAX PROVISION The provision for or benefit from federal income taxes of the consolidated U.S. subsidiaries varies with the level of income or loss before income taxes of such subsidiaries. The provision or benefit relative to the consolidated income before income taxes will also vary dependent on the contribution to income before income taxes by the consolidated U.S. subsidiaries. PAGE 16 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In response to this item, the Company incorporates by reference to Note 2 - Litigation - to its Interim Consolidated Financial Statements contained elsewhere in this report. Item 2. CHANGES IN SECURITIES None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K 10.4 Chandler Insurance Company, Ltd.'s Directors' Stock Option and Stock Grant Plan. PAGE 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 7, 1998 CHANDLER INSURANCE COMPANY, LTD. By:/s/ W. Brent LaGere ---------------------------------------- W. Brent LaGere Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By:/s/ Mark C. Hart ---------------------------------------- Mark C. Hart Vice President & Treasurer (Principal Accounting Officer) EX-27 2
7 This schedule contains summary financial information extracted from Chandler Insurance Company, Ltd.'s June 30, 1998 Form 10-Q and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 102,728 1,152 1,266 191 0 0 104,071 21,480 1,411 5,809 218,856 79,859 40,645 4,957 0 10,378 0 0 11,593 48,677 218,856 33,614 3,690 277 1,099 23,717 9,050 3,631 2,005 0 2,005 0 0 0 2,005 0.31 0.31 0 0 0 0 0 0 0
EX-10 3 EXHIBIT 10.4 CHANDLER INSURANCE COMPANY, LTD. DIRECTORS STOCK OPTION AND STOCK GRANT PLAN INTRODUCTION Chandler Insurance Company, Ltd. (the "Company") desires to establish a program of granting stock options and stock grants to certain directors of the Company, which intent is formalized effective March 4, 1998 by the following Directors Stock Option and Stock Grant Plan: 1. PURPOSE. The purpose of the Plan is to provide certain directors of the Company with a proprietary interest in the Company through the granting of stock options and stock grants which will (a) increase the interest of the directors in the Company's welfare; (b) furnish an incentive to the directors to continue their services for the Company; and (c) provide a means through which the Company may attract able persons to serve on the Board. 2. ADMINISTRATION. The Plan will be administered by the Board. 3. ELIGIBLE DIRECTORS. Certain directors of the Company are to be granted options and stock grants under the Plan, and upon such grant will become eligible directors in the Plan. The Board has determined by resolutions, and for reasons stated therein, that the persons eligible for grants hereunder shall be the non-employee directors of the Company other than Norman Harned, Ronald Lech, and M.J. Moroun (an "Eligible Director" or, collectively, the "Eligible Directors"). 4. SHARES SUBJECT TO PLAN. Options and stock grants may not be granted under the Plan for more than 260,000 shares of Common Stock of the Company, but this number may be adjusted to reflect, if deemed appropriate by the Board, any PAGE 2 stock dividend, stock split, share combination, recapitalization or the like, of or by the Company. Shares to be optioned and sold or granted as stock grants may be made available from either authorized but unissued Common Stock or Common Stock held by the Company in its treasury or otherwise acquired. Shares that by reason of the expiration of an option or otherwise are no longer subject to purchase pursuant to an option granted under the Plan may be reoffered under the Plan. 5. ALLOTMENT OF OPTION SHARES. Except for grants to Eligible Directors in the case of death or Disability, as contained in Section 9, as a result of a transaction, as more clearly defined in Section 12, or as a result of the discontinuance of the Plan pursuant to Section 15, grants of options under the Plan shall be as described in this Section 5. (a) Each Eligible Director, upon completion of ten continuous years of service on the Board, shall automatically be granted an option, effective as of the first regular Board meeting after an Eligible Director completes ten continuous years of service on the Board, to purchase 30,000 shares of Common Stock of the Company. Each Eligible Director who has completed ten or more continuous years of service on the Board as of the effective date of the Plan shall automatically be granted an option to purchase 30,000 shares of Common Stock of the Company as of the Plan's effective date. For all purposes of determining years of service on the Board under the Plan, an Eligible Director will be given credit for service on the board of directors of a subsidiary of the Company provided such service is prior and contiguous to the Eligible Director's service on the Board. PAGE 3 (b) Each Eligible Director of the Company shall also automatically be granted an option to purchase 1,500 shares of Common Stock of the Company as of the first regular Board meeting in each year the Eligible Director serves on the Board. Each Eligible Director who is a member of the Board as of the effective date of the Plan shall automatically be granted an option to purchase 1,500 shares of Common Stock of the Company as of the Plan's effective date. (c) The grant of options shall be evidenced by stock option agreements containing such terms and provisions as are approved by the Board but not inconsistent with the Plan. 6. ALLOTMENT OF STOCK GRANTS. Except for the award of stock grants to an Eligible Director in the case of death or Disability, as contained in Section 9, as a result of a transaction, as more clearly defined in Section 12, or as a result of the discontinuance of the Plan pursuant to Section 15, stock grants under the Plan shall be as described in this Section 6. The aggregate number of shares of stock awarded to an Eligible Director as a stock grant shall total 20,000 shares of Common Stock of the Company. The award shall be divided into two equal installments. The first installment of 10,000 shares shall automatically be awarded as of the first regular Board meeting after an Eligible Director completes ten continuous years of service on the Board. The second installment of 10,000 shares shall automatically be awarded as of the first anniversary of the initial stock grant, regardless of whether the Eligible Director is still a member of the Board. Each Eligible Director who has completed ten or more continuous years of service on the Board as of the effective date of the Plan shall automatically be awarded stock grants totaling 10,000 shares of Common Stock of the Company as of the Plan's effective date with the remaining stock grant totaling 10,000 shares of Common Stock of the PAGE 4 Company to be automatically awarded as of the first anniversary of the initial stock grant, regardless of whether the Eligible Director is still a member of the Board. 7. EXERCISE PRICE OF STOCK OPTIONS. The price of the stock options shall be equal to the average closing price of Common Stock of the Company for the 30 calendar days preceding (i) for options granted under Section 5(a), the date the Eligible Director completes ten continuous years of service on the Board or March 4, 1998, whichever is later, (ii) for options granted under Section 5(b), the date of the first regular Board meeting of each year, (iii) for options granted under Section 9, the date of the Eligible Director's death or Disability, (iv) for options granted under Section 12, the date of the award of stock options as a result of a transaction, as more clearly defined in Section 12 and (v) for options granted under Section 15, the date of the decision by the Board to discontinue the Plan. 8. OPTION PERIOD. The Option Period will begin on the effective date of the option grant and will terminate on the tenth anniversary of that date. 9. RIGHTS IN EVENT OF DEATH OR DISABILITY. If an Eligible Director dies or suffers a Disability prior to completion of ten years of service on the Board the Eligible Director or his estate will be granted 3,000 stock options and 2,000 stock grants for each year of the Eligible Director's continuous service on the Board, including any partial year of service as of the date of death or Disability. The options may be exercised at any time prior to the date of their expiration under Section 8 by (i) the Eligible Director's estate or by the person who acquired the right to exercise the option by bequest or inheritance or by reason of the death of the Eligible Director in the event of the Eligible PAGE 5 Director's death, or (ii) the Eligible Director or his personal representative in the event of the Eligible Director's Disability, subject to the other terms of the Plan and applicable laws, rules and regulations. 10. PAYMENT. Full payment for shares purchased upon exercising an option shall be made in cash or by check at the time of exercise, or on such other terms as are set forth in the applicable option agreement. No shares may be issued until full payment of the purchase price therefor has been made, and an Eligible Director will have none of the rights of a stockholder until shares are issued to him. 11. VESTING. (a) All stock options and stock grants awarded under this Plan shall vest immediately as of the date of grant. (b) In no event may an option be exercised or shares be issued pursuant to an option or a stock grant if any requisite action, approval or consent of any governmental authority of any kind having jurisdiction over the exercise of options shall not have been taken or secured. 12. CAPITAL ADJUSTMENTS AND REORGANIZATIONS. The number of shares of Common Stock covered by each outstanding option granted under the Plan and the option price thereof, and the number of shares to be granted pursuant to Sections 5(a), 5(b), 9, 12 and 15 and the option price thereof, may be adjusted to reflect, as deemed appropriate by the Board, any stock dividend, stock split, share combination, exchange of shares, recapitalization, merger, consolidation, PAGE 6 separation, reorganization, liquidation or the like, of or by the Company. The number of shares covered by any stock grant under Sections 6, 9, 12 and 15 may also be adjusted to reflect, as deemed appropriate by the Board any stock dividend, stock split, share combination, exchange of shares, recapitalization, merger, consolidation, separation, reorganization, liquidation or the like, of or by the Company. In the event the Company shall be a party to any merger, consolidation or corporate reorganization, as the result of which the Company shall be the surviving corporation, the rights and duties of the Eligible Directors and the Company under the Plan shall not be affected in any manner. In the event the Company shall sell all or substantially all of its assets or shall be a party to any merger, consolidation or corporate reorganization, as the result of which the Company shall not be the surviving corporation, or in the event any other person or entity may make a tender or exchange offer for stock of the Company whereby such other person or entity would own more than 20% of the outstanding Common Stock of the Company (the surviving corporation, purchaser, or tendering corporation being collectively referred to as the "purchaser", and the transaction being collectively referred to as the "transaction"), then immediately preceding any such transaction each Eligible Director who has not completed ten years of service will be granted 3,000 stock options and 2,000 stock grants for each year of continuous service on the Board, including any partial year of service as of the date of the transaction. The Eligible Director may exercise any portion of his then outstanding option(s) as he may desire and deposit with the Company the requisite cash to purchase in full and not in installments the Common Stock thereby exercised. The Company shall, prior to the effective date of the transaction, issue all Common Stock which was subject to PAGE 7 options which have been exercised or which was the subject of stock grants which have vested. Common Stock thus issued shall be treated as issued stock for purposes of the transaction. 13. NON-ASSIGNABILITY. Options and stock grants may not be transferred other than by will or by the laws of descent and distribution. Except as otherwise provided in the Plan, during an Eligible Director's lifetime, options granted to an Eligible Director may be exercised only by the Eligible Director. 14. INTERPRETATION. The Board shall interpret the Plan and shall prescribe such rules and regulations in connection with the operation of the Plan as it determines to be advisable for the administration of the Plan. The Board may rescind and amend its rules and regulations. 15. AMENDMENT OR DISCONTINUANCE. (a) For purposes of the grant of stock options under Section 5(b), the Plan may be amended at any time by the Board without approval of the stockholders of the Company. For purposes of all other awards of stock options and stock grants, the Plan may be amended at any time by the Board without approval of the stockholders of the Company; however, any amendment which would adversely affect the rights of any existing Eligible Director shall not be applied to such Eligible Director but shall only be applied to new Eligible Directors who become members of the Board subsequent to the effective date of the amendment. (b) The Plan may be discontinued at any time by the Board without approval of the stockholders of the Company; provided, however, if the Plan is discontinued, all Eligible Directors who have not completed ten years of service as of the date the Plan is discontinued shall be granted 3,000 stock options and 2,000 stock grants for each year of the Eligible PAGE 8 Director's continuous service on the Board including any partial year of service as of the date of the discontinuance of the Plan. 16. EFFECT OF PLAN. Neither the adoption of the Plan nor any action of the Board shall be deemed to give any director any right to be granted an option to purchase Common Stock of the Company or any other rights except as may be evidenced by the stock option agreement, or any amendment thereto or stock certificate, duly authorized by the Board and executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Company has no obligation to register any stock or options granted hereunder pursuant to federal or state securities laws. 17. TERM. Unless sooner terminated or extended by action of the Board, the Plan will terminate on March 4, 2013. There will be no further stock option or stock grants issued under the Plan after that date, but grants before that date will continue to be effective in accordance with their terms. 18. DEFINITIONS. For the purposes of the Plan, unless the context requires otherwise, the following terms shall have the meanings indicated: (a) "Plan" means this Directors Stock Option Plan, as amended from time to time. (b) "Board" means the board of directors of the Company or any committee of the Board appointed by the Board to administer the Plan or any portion of the Plan. (c) "Common Stock" means the Common Stock which the Company is currently authorized to issue or may in the future be authorized to issue (as long as the common stock varies from that currently authorized, if at all, only in amount of par value). PAGE 9 (d) "Option Period" means the period during which an option may be exercised. (e) "Disability" means the physical or mental incapacity of an Eligible Director which the Board considers will be of long and continued duration and which will render the Eligible Director incapable of performing services as a director on the Board. -----END PRIVACY-ENHANCED MESSAGE-----