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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
-------- --------
Commission File Number: 1-15135
CHANDLER (U.S.A.), INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1325906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1010 MANVEL AVENUE 74834
CHANDLER, OK (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 405-258-0804
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
The number of common shares, $1.00 par value, of the registrant
outstanding on July 31, 2000 was 2,484, which are owned by Chandler
Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance
Company, Ltd.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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PAGE i
CHANDLER (U.S.A.), INC.
INDEX
-----
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1
- ------
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999......1
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999..........................................2
Consolidated Statements of Operations for the six months
ended June 30, 2000 and 1999..........................................3
Consolidated Statements of Comprehensive Income for the three
months ended June 30, 2000 and 1999...................................4
Consolidated Statements of Comprehensive Income for the six
months ended June 30, 2000 and 1999...................................5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999..........................................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 (U.S.A.), INC.
Consolidated Balance Sheets
(Amounts in thousands except share amounts)
June 30, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value
Restricted ...................................................$ 5,656 $ 6,826
Unrestricted ................................................. 78,745 80,410
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $179 and $176 in 2000
and 1999, respectively) .................................... 171 169
Unrestricted (fair value $895 and $863 in 2000
and 1999, respectively) .................................... 849 815
Equity securities available for sale, at fair value............. 306 306
------------ ------------
Total investments ............................................ 85,727 88,526
Cash and cash equivalents ........................................ 4,027 5,140
Premiums receivable, less allowance for non-collection
of $409 and $263 at 2000 and 1999, respectively ................ 35,447 47,717
Reinsurance recoverable on paid losses, less allowance for
non-collection of $275 at 2000 and 1999 ........................ 7,170 3,281
Reinsurance recoverable on unpaid losses, less allowance for
non-collection of $355 and $302 at 2000 and 1999, respectively.. 40,273 37,540
Reinsurance recoverable on unpaid losses from related parties..... 12,257 9,542
Prepaid reinsurance premiums ..................................... 22,233 19,960
Prepaid reinsurance premiums to related parties .................. 12,757 9,604
Deferred policy acquisition costs ................................ 2,442 3,134
Property and equipment, net ...................................... 12,607 10,719
Licenses, net .................................................... 3,969 4,044
Excess of cost over net assets acquired, net ..................... 3,632 3,956
Other assets ..................................................... 15,833 13,673
------------ ------------
Total assets .....................................................$ 258,374 $ 256,836
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses .....................$ 102,077 $ 98,460
Unearned premiums .............................................. 68,994 67,769
Policyholder deposits .......................................... 5,307 5,135
Accrued taxes and other payables ............................... 6,519 6,544
Premiums payable ............................................... 6,942 7,313
Premiums payable to related parties ............................ 103 343
Amounts due to affiliate ....................................... 463 533
Debentures ..................................................... 24,000 24,000
------------ ------------
Total liabilities ............................................ 214,405 210,097
------------ ------------
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares
authorized; 2,484 shares issued and outstanding .............. 2 2
Paid-in surplus ................................................ 60,584 60,584
Accumulated deficit ............................................ (15,041) (12,127)
Accumulated other comprehensive loss:
Unrealized loss on investments available for sale,
net of deferred income taxes ............................... (1,576) (1,720)
------------ ------------
Total shareholder's equity ................................... 43,969 46,739
------------ ------------
Total liabilities and shareholder's equity .......................$ 258,374 $ 256,836
============ ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 2
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
For the three months
ended June 30,
------------------------
2000 1999
---------- ----------
Premiums and other revenues
Direct premiums written and assumed ....................$ 46,798 $ 39,684
Reinsurance premiums ceded ............................. (15,457) (17,474)
Reinsurance premiums ceded to related parties .......... (9,036) (5,324)
---------- ----------
Net premiums written and assumed ..................... 22,305 16,886
Increase in unearned premiums .......................... (915) (1,231)
---------- ----------
Net premiums earned .................................. 21,390 15,655
Interest income, net ..................................... 972 987
Commissions, fees and other income ....................... 315 357
---------- ----------
Total premiums and other revenues .................... 22,677 16,999
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $4,585 and $2,614 in
2000 and 1999, respectively .......................... 16,648 12,047
Policy acquisition costs, net of ceding commissions
received from related parties of $3,155 and $1,922 in
2000 and 1999, respectively .......................... 4,875 4,479
General and administrative expenses .................... 2,795 2,639
Interest expense ....................................... 562 204
Litigation expenses, net ............................... 17 (12)
---------- ----------
Total operating costs and expenses ................... 24,897 19,357
---------- ----------
Loss before income taxes ................................. (2,220) (2,358)
Federal income tax benefit ............................... 699 739
---------- ----------
Net loss .................................................$ (1,521) $ (1,619)
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
For the six months
ended June 30,
------------------------
2000 1999
---------- ----------
Premiums and other revenues
Direct premiums written and assumed ....................$ 91,919 $ 74,782
Reinsurance premiums ceded ............................. (33,771) (31,527)
Reinsurance premiums ceded to related parties .......... (20,044) (9,887)
---------- ----------
Net premiums written and assumed ..................... 38,104 33,368
Decrease (increase) in unearned premiums ............... 4,201 (1,317)
---------- ----------
Net premiums earned .................................. 42,305 32,051
Interest income, net ..................................... 2,092 2,031
Realized investment gains, net ........................... - 52
Commissions, fees and other income ....................... 665 722
---------- ----------
Total premiums and other revenues .................... 45,062 34,856
---------- ----------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $9,612 and $5,545 in
2000 and 1999, respectively .......................... 32,401 22,568
Policy acquisition costs, net of ceding commissions
received from related parties of $6,945 and $3,558 in
2000 and 1999, respectively .......................... 9,702 7,844
General and administrative expenses .................... 6,012 5,299
Interest expense ....................................... 1,124 420
Litigation expenses, net ............................... 25 45
---------- ----------
Total operating costs and expenses ................... 49,264 36,176
---------- ----------
Loss before income taxes ................................. (4,202) (1,320)
Federal income tax benefit ............................... 1,288 317
---------- ----------
Net loss .................................................$ (2,914) $ (1,003)
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
For the three months
ended June 30,
------------------------
2000 1999
---------- ----------
Net loss ......................................................$ (1,521) $ (1,619)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... 231 (1,376)
---------- ----------
Other comprehensive income (loss), before income tax .......... 231 (1,376)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (78) 468
---------- ----------
Other comprehensive income (loss), net of income tax .......... 153 (908)
---------- ----------
Comprehensive loss. ...........................................$ (1,368) $ (2,527)
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 5
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
For the six months
ended June 30,
------------------------
2000 1999
---------- ----------
Net loss ......................................................$ (2,914) $ (1,003)
---------- ----------
Other comprehensive income (loss), before income tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period ... 218 (2,546)
Less: reclassification adjustment for gains
included in net loss .................................... - (52)
---------- ----------
Other comprehensive income (loss), before income tax .......... 218 (2,598)
Income tax benefit (provision) related to items of other
comprehensive income (loss) ................................. (74) 883
---------- ----------
Other comprehensive income (loss), net of income tax .......... 144 (1,715)
---------- ----------
Comprehensive loss. ...........................................$ (2,770) $ (2,718)
========== ==========
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 6
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
For the six months
ended June 30,
------------------------
2000 1999
---------- ----------
OPERATING ACTIVITIES:
Net loss .............................................................$ (2,914) $ (1,003)
Add (deduct):
Adjustments to reconcile net loss to cash
applied to operating activities:
Realized investment gains, net ................................... - (52)
Net losses on sale of property and equipment ..................... 3 6
Amortization and depreciation .................................... 1,114 1,063
Provision for non-collection of premiums ......................... 75 96
Net change in non-cash balances relating to operating activities:
Premiums receivable ............................................ 12,195 (4,955)
Reinsurance recoverable on paid losses ......................... (3,882) 591
Reinsurance recoverable on unpaid losses ....................... (2,740) (18,095)
Reinsurance recoverable on unpaid losses from related parties .. (2,715) 1,356
Prepaid reinsurance premiums ................................... (2,273) (889)
Prepaid reinsurance premiums to related parties ................ (3,153) (282)
Deferred policy acquisition costs .............................. 692 -
Other assets ................................................... (2,290) (1,250)
Unpaid losses and loss adjustment expenses ..................... 3,617 14,511
Unearned premiums .............................................. 1,225 2,488
Policyholder deposits .......................................... 172 285
Accrued taxes and other payables ............................... (25) 383
Premiums payable ............................................... (371) 91
Premiums payable to related parties ............................ (240) (986)
---------- ----------
Cash applied to operating activities ............................. (1,510) (6,642)
---------- ----------
INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases ........................................................ (9,262) (4,044)
Sales ............................................................ - 3,048
Maturities ....................................................... 12,147 2,155
Cost of property and equipment purchased ........................... (2,436) (868)
Proceeds from sale of property and equipment ....................... 18 73
---------- ----------
Cash provided by investing activities ............................ 467 364
---------- ----------
FINANCING ACTIVITIES
Payments on notes payable .......................................... - (959)
Proceeds from borrowing from affiliate ............................. 714 3,280
Payments on borrowing from affiliate ............................... (784) (1,263)
---------- ----------
Cash provided by (applied to) financing activities ............... (70) 1,058
---------- ----------
Decrease in cash and cash equivalents during the period .............. (1,113) (5,220)
Cash and cash equivalents at beginning of period ..................... 5,140 9,304
---------- ----------
Cash and cash equivalents at end of period ...........................$ 4,027 $ 4,084
========== ==========
See accompanying Notes to Consolidated Financial Statements.
PAGE 7
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there have been no material
changes in the information included in the Company's annual report on Form
10-K for the year ended December 31, 1999. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of
operations for the three and six month periods ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler
(U.S.A.), Inc. ("Chandler USA" or the "Company") and all subsidiaries. The
following represents the significant subsidiaries:
- National American Insurance Company ("NAICO").
- LaGere & Walkingstick Insurance Agency, Inc.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Chandler USA is wholly owned by Chandler Insurance (Barbados), Ltd.
("Chandler Barbados") which in turn is wholly owned by Chandler Insurance
Company, Ltd. ("Chandler Insurance"), a Cayman Islands company.
NOTE 2. LITIGATION
CENTRA LITIGATION
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, have been involved in various matters of litigation
with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and
directors (the "CenTra Group") since 1992. The CenTra Group has been a
significant shareholder in Chandler Insurance owning 49.2% of Chandler
Insurance's stock in July 1992. Three present or former executive officers
of CenTra, Norman E. Harned, Ronald W. Lech and M. J. Moroun were directors
of Chandler Insurance until November 1999.
On March 25, 1997, the U.S. District Court for the District of Nebraska
("Nebraska Court") ordered CenTra and certain of its affiliates to divest all
Chandler Insurance shares owned by them. The CenTra defendants owned or
controlled 3,133,450 Chandler Insurance shares. The Nebraska Court approved
a divestiture plan submitted by NAICO (the "NAICO Plan") which called for
Chandler Insurance to acquire and cancel the shares of Chandler Insurance
stock owned by the CenTra Group. During December 1999, Chandler Insurance
acquired 1,989,200 shares of its stock in exchange for payment of
$15,204,758. These shares were canceled upon acquisition by Chandler
Insurance. The Nebraska Court continues to hold 1,142,625 shares pending
the outcome of CenTra's appeal of a judgment by the U.S. District Court in
Oklahoma City, Oklahoma ("Oklahoma Court") regarding these shares. Based on
the April 22, 1997 judgment and subsequent actions by the Oklahoma Court,
Chandler Insurance previously recorded the return of the 1,142,625 shares as
a decrease to shareholders' equity during 1997. Following the conclusion of
the appeal, the Nebraska Court will determine the method of divestiture of
these shares. Chandler Insurance cannot predict when the appellate court
will rule on the appeal.
PAGE 8
On March 23, 1998, the CenTra Group filed a formal notice of intent to
appeal certain orders of the Oklahoma Court, and filed the initial appellate
brief on September 9, 1998. The appeals are being considered by the U.S.
Court of Appeals for the 10th Circuit. The CenTra Group's appeals are based
upon the Oklahoma Court's failure to award prejudgment interest, the
Oklahoma Court's refusal to permit the CenTra Group to amend certain
pleadings to assert new claims, the Oklahoma Court's modification of the
judgment for $6,882,500 to require CenTra to return shares of Chandler
Insurance's stock upon payment of the judgment, and the Oklahoma Court's
denial of attorney fees. Chandler Insurance believes the appeal of this
last issue is untimely and therefore barred by law. Chandler Insurance
elected not to appeal any of the judgments. The individual officers and
directors against whom judgments were entered have all filed appeals.
In 1997, NAICO learned that several CenTra affiliates had filed two
lawsuits against NAICO, NAICO Indemnity (Cayman), Ltd. ("NAICO Indemnity"),
a wholly owned subsidiary of Chandler Insurance, and certain NAICO officers
asserting some of the same claims made and tried in the Oklahoma lawsuit
described previously. Those claims were purportedly prosecuted by CenTra on
its own behalf and on behalf of its subsidiaries and were based upon alleged
wrongful cancellation of their insurance policies by NAICO and NAICO
Indemnity. The Oklahoma Court entered a judgment against CenTra on these
claims. NAICO and NAICO Indemnity contend that the Oklahoma Court's
adjudication is conclusive as to all claims. The lawsuits have been
consolidated and have been assigned to the same judge who presided over the
action in the Oklahoma Court. Dispositive motions filed by NAICO, NAICO
Indemnity and the other defendants are currently under consideration by the
Oklahoma Court.
In the CenTra litigation, certain officers and directors of Chandler USA
and Chandler Insurance were named as defendants. In accordance with its
Articles of Association, Chandler Insurance and its subsidiaries have
advanced the litigation expenses of these persons in exchange for
undertakings to repay such expenses if those persons are later determined to
have breached the standard of conduct provided in the Articles of
Association. Chandler Barbados has paid expenses on behalf of these officers
and directors totaling approximately $2.3 million as of June 30, 2000. A
portion of these expenses relate to claims which have been dismissed or
which were decided in favor of the officers and directors. These expenses
together with certain other expenses may be recovered from Chandler
Insurance's director and officer liability insurance policy (the "D&O
Insurer"). As a result of various events in 1995, 1996 and 1997, Chandler
Barbados and Chandler USA recorded estimated recoveries of costs from its
D&O Insurer totaling $3,456,000 and $1,044,000, respectively, for
reimbursable amounts previously paid that relate to allowable defense and
litigation costs for such parties. Chandler Barbados and Chandler USA
received payment for a 1995 claim during 1996 in the amount of $636,000
and $159,000, respectively. The balance is included in other assets in
Chandler Barbados' and Chandler USA's balance sheets. Chandler Insurance
and its subsidiaries are entitled to a total of $5 million under the
applicable insurance policy to the extent they have advanced reimbursable
expenses. Chandler Insurance is negotiating with the insurer for payment of
the policy balance. Chandler Insurance and its subsidiaries could recover
the remaining policy limits or could compromise their claim, and could incur
significant costs in either case.
The ultimate outcome of the appeals of the various parties as described
above could have a material adverse effect on Chandler USA and Chandler
Insurance and could negatively impact future earnings. Chandler USA's
management believes that adequate financial resources are available to pay
the judgments as they currently exist or as they may be modified on appeal.
As a holding company, Chandler USA may receive cash through equity sales,
borrowings and dividends from its subsidiaries. Chandler Barbados and NAICO
are subject to various regulations which restrict their ability to pay
shareholder dividends. A reduction in the amount of invested assets, or an
increase in borrowings resulting from potential payments of these judgments
would reduce investment earnings or increase operating expenses in future
periods.
At the present time Chandler USA and its affiliates are actively
participating in court proceedings and rights of appeal concerning these
legal proceedings; therefore, Chandler USA and its affiliates are unable to
predict the outcome of such litigation with certainty or the effect of such
ongoing litigation on future operations. Chandler USA and its affiliates
are also unable to predict the effect of the remaining divestiture order on
the rights, limitations or other regulation of ownership of the stock of any
existing or prospective holders of Chandler Insurance's common stock, or the
effect on the market price of Chandler Insurance's stock.
PAGE 9
GOING PRIVATE LITIGATION
On June 1, 2000, Brent LaGere, Chairman and CEO of Chandler Insurance,
announced a plan led by senior company management and key stockholders of
Chandler Insurance which would result in Chandler Insurance becoming
privately held. At a regularly scheduled meeting of Chandler Insurance's
board of directors held on June 5, 2000, Robert L. Rice, James M. Jacoby
and Paul A. Maestri were appointed as a special committee of the board for
the purpose of considering the concept and fairness of the announced plan.
On June 30, 2000, the Company announced that three civil lawsuits were filed
against Chandler Insurance, Chandler USA and all of Chandler Insurance's
directors on June 5 and 6, 2000. The suits allege that the plans announced
on June 1, 2000 to take Chandler Insurance private are detrimental to the
public shareholders. The suits also request that they be certified as class
actions and that the court enter a temporary restraining order to prevent
completion of the announced plan. The suits also allege that all defendants
have breached and are breaching fiduciary duties owed to the plaintiffs and
other shareholders. Neither the Company nor Chandler Insurance have
responded to these lawsuits but plan to file timely responses denying the
allegations. On June 12, 2000, CenTra made similar allegations in an already
pending lawsuit in the Nebraska Court involving a court-ordered divestiture
of Chandler Insurance's shares owned by CenTra. CenTra requested that the
court enjoin and restrain Mr. LaGere and others from completing the announced
plans. On July 20, 2000, the Nebraska Court denied CenTra's request. On
June 27, 2000, CenTra filed a similar request in an already pending case in
the Oklahoma Court. Chandler Insurance has responded, but the Oklahoma Court
has not ruled.
OTHER LITIGATION
Chandler USA and its subsidiaries are not parties to any other material
litigation other than as is routinely encountered in their respective
business activities.
NOTE 3. ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that the Company recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. The Company will adopt SFAS No. 133 when required. Management
of the Company does not expect that adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial condition or results
of operations.
PAGE 10
NOTE 4. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three and six month periods ended June 30, 2000 and 1999:
Property
and All Intersegment Reported
Agency casualty Other eliminations balances
--------- ---------- --------- ------------ ----------
(In thousands)
THREE MONTHS ENDED JUNE 30, 2000
Revenues from external customers (1)...$ 298 $ 21,407 $ - $ - $ 21,705
Intersegment revenues.................. 1,616 73 - (1,689) -
Segment profit (loss) before
income taxes (2)..................... (77) (1,963) (180) - (2,220)
THREE MONTHS ENDED JUNE 30, 1999
Revenues from external customers (1)...$ 356 $ 15,656 $ - $ - $ 16,012
Intersegment revenues.................. 1,672 71 - (1,743) -
Segment profit (loss) before
income taxes (2)..................... 7 (2,215) (150) - (2,358)
SIX MONTHS ENDED JUNE 30, 2000
Revenues from external customers (1)...$ 612 $ 42,358 $ - $ - $ 42,970
Intersegment revenues.................. 3,408 110 - (3,518) -
Segment profit (loss) before
income taxes (2)..................... (333) (3,519) (350) - (4,202)
Segment assets......................... 5,439 262,826 - (9,891) 258,374
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers (1)...$ 707 $ 32,066 $ - $ - $ 32,773
Intersegment revenues.................. 3,325 121 - (3,446) -
Segment profit (loss) before
income taxes (2)..................... (105) (846) (369) - (1,320)
Segment assets......................... 5,045 241,911 - (8,493) 238,463
<FN>
- ---------------------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
PAGE 11
The following supplemental information pertaining to each insurance
program's net premiums earned and losses and loss adjustment expenses is
presented for the property and casualty segment.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(In thousands)
INSURANCE PROGRAM
- ------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ...........$ 15,612 $ 8,460 $ 30,309 $ 17,233
Political subdivisions ................... 3,187 2,962 6,524 6,004
Surety bonds ............................. 1,639 1,976 3,504 4,320
Group accident and health ................ 810 2,293 1,756 4,579
Other .................................... 142 (36) 212 (85)
------------ ------------ ------------ ------------
$ 21,390 $ 15,655 $ 42,305 $ 32,051
============ ============ ============ ============
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ...........$ 12,452 $ 6,595 $ 23,379 $ 13,476
Political subdivisions ................... 2,803 4,084 5,649 6,457
Surety bonds ............................. 379 (166) 806 139
Group accident and health ................ 1,140 1,929 2,822 3,485
Other .................................... (126) (395) (255) (989)
------------ ------------ ------------ ------------
$ 16,648 $ 12,047 $ 32,401 $ 22,568
============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Form 10-Q Report, as well as
statements made by Chandler (U.S.A.), Inc. ("Chandler USA" or the "Company")
in periodic press releases, oral statements made by the Company's officials
to analysts and shareholders in the course of presentations about the Company
and conference calls following earnings releases, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. Such factors include, among other things,
(i) general economic and business conditions; (ii) interest rate changes;
(iii) competition and regulatory environment in which the Company operates;
(iv) claims frequency; (v) claims severity; (vi) the number of new and
renewal policy applications submitted by the Company's agents; (vii) the
ability of the Company to obtain adequate reinsurance in amounts and at
rates that will not adversely affect its competitive position; (viii)
NAICO's ability to maintain favorable insurance company ratings; and
(ix) other factors including the ongoing litigation matters involving a
significant concentration of ownership of the Company's indirect parent's
common stock.
PAGE 12
RESULTS OF OPERATIONS
PREMIUMS EARNED
The following table sets forth premiums earned on a gross basis (before
reductions for premiums ceded to reinsurers) and on a net basis (after such
reductions) for each insurance program for the three and six month periods
ended June 30, 2000 and 1999:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
THREE MONTHS ENDED JUNE 30, 2000 1999 2000 1999
- ------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
Standard property and casualty ..... $ 33,887 $ 24,004 $ 15,612 $ 8,460
Political subdivisions ............. 8,527 7,314 3,187 2,962
Surety bonds ....................... 3,313 3,399 1,639 1,976
Group accident and health .......... 858 2,576 810 2,293
Other .............................. 154 28 142 (36)
------------ ------------ ------------ ------------
TOTAL .............................. $ 46,739 $ 37,321 $ 21,390 $ 15,655
============ ============ ============ ============
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------------- --------------------------
SIX MONTHS ENDED JUNE 30, 2000 1999 2000 1999
- ------------------------------------ ------------ ------------ ------------ ------------
(In thousands)
Standard property and casualty ..... $ 64,594 $ 45,639 $ 30,309 $ 17,233
Political subdivisions ............. 16,679 14,495 6,524 6,004
Surety bonds ....................... 7,322 6,953 3,504 4,320
Group accident and health .......... 1,860 5,171 1,756 4,579
Other .............................. 238 36 212 (85)
------------ ------------ ------------ ------------
TOTAL .............................. $ 90,693 $ 72,294 $ 42,305 $ 32,051
============ ============ ============ ============
Gross premiums earned, before reductions for premiums ceded to
reinsurers, increased $9.4 million or 25% in the second quarter of 2000
compared to the second quarter of 1999. Gross premiums earned for the first
six months of 2000 increased $18.4 million or 25% compared to the first six
months of 1999. The increases are primarily attributable to increased
written premium production in Texas and Oklahoma. Net premiums earned
increased $5.7 million or 37% in the second quarter of 2000 compared to the
second quarter of 1999, and increased $10.3 million or 32% for the six months
ended June 30, 2000 compared to the 1999 period. The increase in net
premiums earned was due to the increase in written premium production, and to
an increase in the amount of risk retained in the 2000 periods for the
Company's workers compensation line of business.
Gross premiums earned in the standard property and casualty program
increased $9.9 million or 41% in the second quarter of 2000 compared to the
second quarter of 1999, and increased $19.0 million or 42% for the six months
ended June 30, 2000 compared to the 1999 period. The increases are primarily
attributable to increased written premium production in Texas along with rate
increases. Net premiums earned in the standard property and casualty program
increased $7.2 million or 85% in the second quarter of 2000 compared to the
second quarter of 1999, and increased $13.1 million or 76% for the six months
ended June 30, 2000 compared to the 1999 period. The increase in net
premiums earned was due to the increase in written premium production, and to
the increase in the amount of risk retained for the workers compensation
portion of the program along with rate increases.
Gross premiums earned in the political subdivisions program increased
$1.2 million or 17% in the second quarter of 2000 compared to the second
quarter of 1999, and increased $2.2 million or 15% for the six months ended
June 30, 2000 compared to the 1999 period. The increases are primarily
attributable to increased written premium production resulting from new
business as well as rate increases in the school districts portion of the
program in Oklahoma. Net premiums earned in the political subdivisions
program increased $225,000 or 8% in the second quarter of 2000 compared to
the second quarter of 1999, and increased $520,000 or 9% for the six months
ended June 30, 2000 compared to the 1999 period.
PAGE 13
Gross premiums earned in the surety bond program decreased $86,000 or
2.5% in the second quarter of 2000 compared to the second quarter of 1999,
and increased $369,000 or 5.3% for the six months ended June 30, 2000
compared to the 1999 period. Approximately $140,000 and $769,000 of the
gross premiums earned in the second quarter and first six months of 2000,
respectively, relates to a new program that is 100% reinsured by an
unaffiliated reinsurer. Excluding this new program, gross premiums earned
decreased $226,000 and $400,000 in the second quarter and first six months of
2000, respectively, compared to the corresponding 1999 periods. Net premiums
earned in the surety bond program were $1.6 million and $2.0 million in the
second quarter of 2000 and 1999, respectively, and were $3.5 million and
$4.3 million for the six month periods ended June 30, 2000 and 1999,
respectively.
Gross premiums earned in the group accident and health program decreased
$1.7 million or 67% in the second quarter of 2000 compared to the second
quarter of 1999, and decreased $3.3 million or 64% for the six months ended
June 30, 2000 compared to the 1999 period. Net premiums earned in this
program decreased $1.5 million or 65% in the second quarter of 2000 compared
to the second quarter of 1999, and decreased $2.8 million or 62% for the six
months ended June 30, 2000 compared to the 1999 periods. NAICO discontinued
writing new policies for the excess portion of the group accident and health
program effective April 1, 1999. NAICO is continuing to monitor this program
and will increase rates and may discontinue the program.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At June 30, 2000, the Company's investment portfolio consisted primarily
of fixed income U.S. Government, high-quality corporate and tax exempt bonds,
with approximately 4% invested in cash and money market instruments. The
Company's portfolio contains no non-investment grade bonds or real estate
investments.
Net interest income decreased $15,000 or 2% in the second quarter of
2000 compared to the second quarter of 1999, and increased $61,000 or 3% for
the six months ended June 30, 2000. The Company had no net realized
investment gains or losses in the second quarter of 2000 and 1999, and had
no net realized investment gains in the first six months of 2000 compared to
$52,000 in the first six months of 1999.
COMMISSIONS, FEES AND OTHER INCOME
The Company's income from commissions, fees and other income decreased
$42,000 or 12% in the second quarter of 2000 compared to the second quarter
of 1999, and decreased $57,000 or 8% for the six months ended June 30, 2000
compared to the 1999 period. The majority of the Company's income from
commissions, fees and other income are from the Company's subsidiary LaGere
& Walkingstick Insurance Agency, Inc. ("L&W").
L&W's brokerage commissions and fees before intercompany eliminations
were $1.9 million and $4.0 million in the second quarter and first six months
of 2000, respectively, compared to $2.0 million and $4.0 million in the year
ago periods. A large portion of the brokerage commissions and fees for L&W
is incurred by NAICO and thus eliminated in the consolidation of the
Company's subsidiaries.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 77.8% and 76.6% for the quarter and six months
ended June 30, 2000, compared to 77.0% and 70.4% in the comparable 1999
periods. Weather-related losses from wind and hail totaled $1.2 million and
$1.8 million for the second quarter and first six months of 2000,
respectively, and increased the respective loss ratios by 5.6 and 4.2
percentage points. Weather-related losses totaled $2.8 million and
$3.2 million for the second quarter and first six months of 1999,
respectively, and increased the respective loss ratios by 17.7 and 10.0
percentage points. The 1999 periods included $1.9 million in weather-related
losses which resulted from the tornadoes, strong winds and hail that caused
significant damage in Oklahoma on May 3, 1999. The decrease in
weather-related losses in the 2000 periods was largely offset by the adverse
loss experience in the group accident and health program and higher than
normal losses in the Company's surety bond program.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the
acquisition of new and renewal business and generally include direct costs
such as premium taxes, commissions to agents and ceding companies and
premium-related assessments and indirect costs such as salaries and
expenses of personnel who perform and support underwriting activities. NAICO
also receives ceding commissions from the reinsurers who assume premiums
from NAICO under certain reinsurance contracts and the ceding commissions are
accounted for as a reduction of policy acquisition costs. Direct policy
acquisition costs and ceding commissions are deferred and amortized over the
terms of the policies. When the sum of anticipated losses, loss adjustment
expenses and unamortized policy acquisition costs exceeds the related
unearned premiums, including anticipated investment income, a provision for
the indicated deficiency is recorded.
PAGE 14
The following table sets forth the Company's policy acquisition costs
for each of the three and six month periods ended June 30, 2000 and 1999:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands)
Commissions expense ........................ $ 5,730 $ 5,700 $ 10,987 $ 10,136
Other premium related assessments .......... 410 288 813 688
Premium taxes .............................. 1,240 941 2,215 1,367
Excise taxes ............................... 90 53 200 99
Dividends to policyholders ................. 100 70 201 157
Other expense .............................. 30 55 72 85
---------- ---------- ---------- ----------
Total direct expenses ...................... 7,600 7,107 14,488 12,532
Indirect underwriting expenses ............. 3,975 3,970 8,053 7,794
Commissions received from reinsurers ....... (6,053) (6,609) (13,531) (12,461)
Adjustment for deferred acquisition costs .. (647) 11 692 (21)
---------- ---------- ---------- ----------
Net policy acquisition costs ............... $ 4,875 $ 4,479 $ 9,702 $ 7,844
========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 24.7% and 24.5% for the second quarter
and first six months of 2000, respectively, compared to 27.9% and 27.2% in
the corresponding year ago periods. Commission expense as a percentage of
gross written and assumed premiums was 12.2% and 12.0% in the second quarter
and the first six months of 2000, respectively, compared to 14.4% and 13.6%
in the corresponding 1999 periods. Premium taxes increased $299,000 and
$848,000 in the second quarter and six months ended June 30, 2000,
respectively, over the corresponding 1999 periods due to the increase in
written premiums and to a refund of $392,000 which was received in the first
quarter of 1999 for premium taxes paid in a prior year.
Indirect underwriting expenses were 8.5% and 8.8% of total direct
written and assumed premiums in the second quarter and first six months of
2000, respectively, compared to 10.0% and 10.4% in the corresponding 1999
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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 5.9% and 6.6% of gross premiums
earned and commissions, fees and other income in the second quarter and first
six months of 2000, respectively, compared to 7.0% and 7.3% for the
corresponding 1999 periods. General and administrative expenses have
historically not varied in direct proportion to the Company's revenues. A
portion of such expenses is allocated to policy acquisition costs (indirect
underwriting expenses) and loss and loss adjustment expenses based on various
factors including employee counts, salaries, occupancy and specific
identification. Because certain types of expenses are fixed in nature, the
percentage of such expenses to revenues will vary depending on the Company's
overall premium volume.
INTEREST EXPENSE
Interest expense increased $358,000 or 175% in the second quarter of
2000 compared to the second quarter of 1999, and increased $704,000 or 168%
for the first six months of 2000 compared to the 1999 period. The increase
was primarily due to interest expense on the $24 million debenture offering
which was completed on July 16, 1999 by Chandler USA.
LITIGATION AND LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra. Litigation expenses increased $29,000 or 242%
in the second quarter of 2000 compared to the second quarter of 1999, and
decreased $20,000 or 44% for the six months ended June 30, 2000 compared to
the 1999 period. Increased or renewed activity could result in greater
litigation expenses in 2000 or future years. See Note 2 to Interim
Consolidated Financial Statements.
PAGE 15
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 2000, the Company used $1.5 million in cash
from operations due primarily to the net loss in the first six months of 2000
and increases in reinsurance recoverables and prepaid reinsurance premiums
less a decrease in premium receivables which was due to the collection of
certain receivables totaling approximately $12.9 million in January of 2000
that were related to the rescission of two reinsurance treaties during the
fourth quarter of 1999. The Company used $6.6 million in cash from
operations during the first six months of 1999 due primarily to increases in
premiums receivable and reinsurance recoverables, less an increase in unpaid
losses, which generally resulted from the increase in written premiums in the
1999 period and to the purchase of additional reinsurance coverages in 1998.
REGULATION - NAICO REDOMESTICATION
Effective May 19, 2000, NAICO transferred its domicile from Nebraska to
Oklahoma. NAICO's executive and administrative offices have been located in
Chandler, Oklahoma since its acquisition by the Company in January 1987.
Approximately 48% and 42% of NAICO's written premiums during 1999 and the
first six months of 2000, respectively, were in the state of Oklahoma. As
an Oklahoma corporation, NAICO and any person controlling NAICO, directly or
indirectly, are subject to the insurance laws of Oklahoma including laws
concerning the change or acquisition of control and payment of shareholder
and policyholder dividends by NAICO, which are similar to the insurance laws
of Nebraska. See Regulation in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
YEAR 2000 READINESS DISCLOSURES
Through the first six months of the year 2000, the Company has not
experienced any significant problems or disruptions related to year 2000
problems. The Company is currently not aware of any significant disruptions
experienced by its customers, vendors and service providers that would
materially affect their ability to do business with the Company. While it is
possible that certain year 2000 problems may exist but have not yet
materialized, the Company does not currently expect any year 2000 problems to
be encountered in the future that would have a material adverse effect on the
operating results of the Company.
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
---------------------
Omitted
Item 3. Defaults Upon Senior Securities
-------------------------------
Omitted
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Omitted
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The Company filed one current report on Form 8-K dated June 30, 2000
responding to Item 5 of Form 8-K.
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 8, 2000 CHANDLER (U.S.A.), INC.
By: /s/ W. Brent LaGere
----------------------------------------
W. Brent LaGere
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
----------------------------------------
Mark C. Hart
Vice President - Finance & Treasurer
(Principal Accounting Officer)