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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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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 October 31, 2002 was 2,484, which are owned by Chandler
Insurance (Barbados), Ltd., a wholly owned subsidiary of Chandler Insurance
Company, Ltd.
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PAGE i
CHANDLER (U.S.A.), INC.
INDEX
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PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1.
- -------
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 .................................................... 1
Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001 ........................................ 2
Consolidated Statements of Operations for the nine months
ended September 30, 2002 and 2001 ........................................ 3
Consolidated Statements of Comprehensive Income for the three
months ended September 30, 2002 and 2001 ................................. 4
Consolidated Statements of Comprehensive Income for the nine
months ended September 30, 2002 and 2001 ................................. 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 ........................................ 6
Notes to Interim Consolidated Financial Statements ......................... 7
ITEM 2.
- -------
Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................12
ITEM 4.
- -------
Controls and Procedures ....................................................16
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)
September 30, December 31,
2002 2001
------------- ------------
ASSETS (Unaudited)
Investments
Fixed maturities available for sale, at fair value
Restricted (amortized cost $6,754 and $5,419 in 2002
and 2001, respectively) ........................................ $ 6,957 $ 5,501
Unrestricted (amortized cost $50,548 and $62,124 in 2002
and 2001, respectively) ........................................ 52,651 62,154
Fixed maturities held to maturity, at amortized cost
Restricted (fair value $394 and $385 in 2002
and 2001, respectively) ........................................ 369 353
Unrestricted (fair value $892 and $854 in 2002
and 2001, respectively) ........................................ 829 782
Equity securities available for sale, at fair value ................ 515 464
------------- ------------
Total investments ................................................ 61,321 69,254
Cash and cash equivalents ........................................... 11,135 4,124
Premiums receivable, less allowance for non-collection
of $325 and $298 at 2002 and 2001, respectively .................... 25,087 24,185
Reinsurance recoverable on paid losses, less allowance for
non-collection of $1,700 and $1,096 at 2002 and 2001, respectively.. 10,565 11,756
Reinsurance recoverable on paid losses from related parties ......... 52 292
Reinsurance recoverable on unpaid losses ............................ 49,185 42,545
Reinsurance recoverable on unpaid losses from related parties ....... 7,488 9,399
Prepaid reinsurance premiums ........................................ 22,414 26,890
Prepaid reinsurance premiums to related parties ..................... 10,116 8,103
Deferred policy acquisition costs ................................... 421 -
Property and equipment, net ......................................... 10,212 10,822
Amounts due from related parties .................................... 9,260 7,880
State insurance licenses, net ....................................... 3,745 3,745
Goodwill ............................................................ 2,350 2,350
Other assets ........................................................ 11,259 13,464
------------- ------------
Total assets ........................................................ $ 234,610 $ 234,809
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities
Unpaid losses and loss adjustment expenses ........................ $ 85,790 $ 84,756
Unearned premiums ................................................. 63,452 61,562
Policyholder deposits ............................................. 4,119 4,600
Accrued taxes and other payables .................................. 5,361 7,480
Premiums payable .................................................. 5,848 8,669
Debentures ........................................................ 24,000 24,000
------------- ------------
Total liabilities ............................................... 188,570 191,067
------------- ------------
Shareholder's equity
Common stock, $1.00 par value, 50,000 shares
authorized; 2,484 shares issued and outstanding ................. 2 2
Paid-in surplus ................................................... 60,584 60,584
Accumulated deficit ............................................... (16,408) (17,225)
Accumulated other comprehensive income:
Unrealized gain on investments available for sale,
net of deferred income taxes .................................. 1,862 381
------------- ------------
Total shareholder's equity ...................................... 46,040 43,742
------------- ------------
Total liabilities and shareholder's equity .......................... $ 234,610 $ 234,809
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 2
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Three months ended September 30,
--------------------------------
2002 2001
------------- ------------
Premiums and other revenues
Direct premiums written and assumed ......................... $ 42,956 $ 50,214
Reinsurance premiums ceded .................................. (16,709) (22,465)
Reinsurance premiums ceded to related parties ............... (6,172) (6,863)
------------- ------------
Net premiums written and assumed .......................... 20,075 20,886
Increase in unearned premiums ............................... (3,103) (3,480)
------------- ------------
Net premiums earned ....................................... 16,972 17,406
Interest income, net .......................................... 583 870
Interest income, net from related parties ..................... 99 -
Realized investment gains, net ................................ - 712
Commissions, fees and other income ............................ 561 605
------------- ------------
Total premiums and other revenues ......................... 18,215 19,593
------------- ------------
Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $4,015 and $4,763 in
2002 and 2001, respectively ............................... 11,738 12,389
Policy acquisition costs, net of ceding commissions
received from related parties of $2,094 and $2,317 in
2002 and 2001, respectively ............................... 1,982 2,621
General and administrative expenses ......................... 3,915 3,595
Interest expense ............................................ 558 558
Litigation expenses, net .................................... 5 16
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Total operating costs and expenses ........................ 18,198 19,179
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Income before income taxes .................................... 17 414
Federal income tax provision .................................. (43) (239)
------------- ------------
Net income (loss) ............................................. $ (26) $ 175
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 3
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands)
Nine months ended September 30,
-------------------------------
2002 2001
------------ ------------
Premiums and other revenues
Direct premiums written and assumed ........................ $ 114,145 $ 127,731
Reinsurance premiums ceded ................................. (39,713) (55,336)
Reinsurance premiums ceded to related parties .............. (19,756) (19,370)
------------- ------------
Net premiums written and assumed ......................... 54,676 53,025
Decrease (increase) in unearned premiums ................... (4,353) 1,324
------------- ------------
Net premiums earned ...................................... 50,323 54,349
Interest income, net ......................................... 1,953 2,935
Interest income, net from related parties .................... 260 -
Realized investment gains, net ............................... 404 1,594
Commissions, fees and other income ........................... 1,515 1,393
------------- ------------
Total premiums and other revenues ........................ 54,455 60,271
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Operating costs and expenses
Losses and loss adjustment expenses, net of amounts
ceded to related parties of $11,564 and $12,395 in
2002 and 2001, respectively .............................. 34,045 40,487
Policy acquisition costs, net of ceding commissions
received from related parties of $6,728 and $6,655
in 2002 and 2001, respectively ........................... 6,568 7,908
General and administrative expenses ........................ 10,642 10,178
Interest expense ........................................... 1,676 1,683
Litigation expenses, net ................................... 72 35
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Total operating costs and expenses ....................... 53,003 60,291
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Income (loss) before income taxes ............................ 1,452 (20)
Federal income tax provision ................................. (635) (269)
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Net income (loss) ............................................ $ 817 $ (289)
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 4
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Three months ended September 30,
--------------------------------
2002 2001
------------- ------------
Net income (loss) ............................................. $ (26) $ 175
------------- ------------
Other comprehensive income, before income tax:
Unrealized gains on securities:
Unrealized holding gains arising during period ............ 1,783 2,172
Less: Reclassification adjustment for gains included
in net income (loss) .................................... - (712)
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Other comprehensive income, before income tax ................. 1,783 1,460
Income tax provision related to items of other
comprehensive income ........................................ (606) (496)
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Other comprehensive income, net of income tax ................. 1,177 964
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Comprehensive income .......................................... $ 1,151 $ 1,139
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 5
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
Nine months ended September 30,
-------------------------------
2002 2001
------------- ------------
Net income (loss) ............................................. $ 817 $ (289)
------------- ------------
Other comprehensive income, before income tax:
Unrealized gains on securities:
Unrealized holding gains arising during period ............ 2,648 3,298
Less: Reclassification adjustment for gains
included in net income (loss) ........................... (404) (1,594)
------------- ------------
Other comprehensive income, before income tax ................. 2,244 1,704
Income tax provision related to items of other
comprehensive income ........................................ (763) (579)
------------- ------------
Other comprehensive income, net of income tax ................. 1,481 1,125
------------- ------------
Comprehensive income .......................................... $ 2,298 $ 836
============= ============
See accompanying Notes to Interim Consolidated Financial Statements.
PAGE 6
CHANDLER (U.S.A.), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine months ended September 30,
-------------------------------
2002 2001
------------- ------------
OPERATING ACTIVITIES
Net income (loss) ............................................. $ 817 $ (289)
Add (deduct):
Adjustments to reconcile net income (loss) to cash
applied to operating activities:
Realized investment gains, net ............................ (404) (1,594)
Net losses on sale of property and equipment .............. 35 22
Amortization and depreciation ............................. 1,216 1,580
Provision for non-collection of premiums .................. 246 153
Provision for non-collection of reinsurance recoverables .. 652 -
Net change in non-cash balances relating
to operating activities:
Premiums receivable ..................................... (1,148) 4,857
Reinsurance recoverable on paid losses .................. 512 (7,721)
Reinsurance recoverable on paid losses from
related parties ....................................... 240 117
Reinsurance recoverable on unpaid losses ................ (6,613) (11,484)
Reinsurance recoverable on unpaid losses from
related parties ....................................... 1,911 2,979
Prepaid reinsurance premiums ............................ 4,476 3,108
Prepaid reinsurance premiums to related parties ......... (2,013) 1,091
Deferred policy acquisition costs ....................... (421) -
Other assets ............................................ 1,358 2,395
Unpaid losses and loss adjustment expenses .............. 1,034 (1,515)
Unearned premiums ....................................... 1,890 (5,524)
Policyholder deposits ................................... (481) 69
Accrued taxes and other payables ........................ (2,119) (2,827)
Premiums payable ........................................ (2,821) (6,811)
------------- ------------
Cash applied to operating activities ...................... (1,633) (21,394)
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INVESTING ACTIVITIES
Unrestricted fixed maturities available for sale:
Purchases ................................................. (13,167) (28,810)
Sales ..................................................... 19,481 47,368
Maturities ................................................ 3,877 11,508
Cost of property and equipment purchased .................... (222) (1,302)
Proceeds from sale of property and equipment ................ 55 3,924
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Cash provided by investing activities ..................... 10,024 32,688
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FINANCING ACTIVITIES
Payments and loans from related parties ..................... 3,095 3,914
Payments and loans to related parties ....................... (4,475) (11,352)
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Cash applied to financing activities ...................... (1,380) (7,438)
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Increase in cash and cash equivalents during the period ....... 7,011 3,856
Cash and cash equivalents at beginning of period .............. 4,124 11,978
------------- ------------
Cash and cash equivalents at end of period .................... $ 11,135 $ 15,834
============= ============
See accompanying Notes to Consolidated Financial Statements.
PAGE 7
CHANDLER (U.S.A.), INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(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, 2001. 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 nine month periods ended September 30, 2002 are
not necessarily indicative of the results that may be expected for the year.
The consolidated financial statements include the accounts of Chandler
(U.S.A.), Inc. ("Chandler USA" or the "Company") and all subsidiaries. The
following represents the significant subsidiaries:
- National American Insurance Company ("NAICO").
- LaGere & Walkingstick Insurance Agency, Inc.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Chandler USA is wholly owned by Chandler Insurance (Barbados), Ltd.
("Chandler Barbados") which in turn is wholly owned by Chandler Insurance
Company, Ltd. ("Chandler Insurance"), a Cayman Islands company.
NOTE 2. LITIGATION
Chandler Insurance and certain of its subsidiaries and affiliates,
including Chandler USA, have been involved in various matters of litigation
with CenTra, Inc. ("CenTra") and certain of its affiliates, officers and
directors since 1992. Certain officers and directors of Chandler USA and
Chandler Insurance were named as defendants in this litigation. 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. 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 of $2,820,000 and $885,000 is included in other assets in Chandler
Barbados' and Chandler USA's balance sheets. Chandler Insurance and its
subsidiaries contend they are entitled to a total of $5 million under the
applicable insurance policy to the extent they have advanced reimbursable
expenses. The D&O Insurer contends that certain policy provisions exclude
coverage for these claims. On August 22, 2001, Chandler Insurance and its
subsidiaries, including Chandler USA, filed an action in the State District
Court in Oklahoma City, Oklahoma ("Oklahoma State Court") alleging that the
director and officer liability insurance policies should be rescinded and
seeking repayment of more than $5 million in premiums they previously paid.
Chandler Insurance and its subsidiaries are currently involved in litigation
with the insurer for payment of the policy balance or rescission and repayment
of premiums previously paid. The litigation is pending in the Oklahoma State
Court. The case is still in the early pleading stages and Chandler USA cannot
predict the date of resolution or the outcome of this case. Chandler
Insurance and its subsidiaries may or may not recover the remaining policy
limits or the previously paid premiums and could incur significant costs in
resolving this matter.
PAGE 8
Transamerica Occidental Life Insurance Company ("Transamerica") reinsured
NAICO for certain workers compensation risks during 1989, 1990 and 1991.
Beginning in 1996, Transamerica refused to pay NAICO for balances that it owed
under the reinsurance treaties. Transamerica owed NAICO approximately $1.5
million for reinsurance recoverables on paid losses and loss adjustment
expenses as of September 30, 2002. NAICO is currently engaged in arbitration
in order to enforce the terms of the reinsurance treaties.
The ultimate outcome of the litigation described above could have a
material adverse effect on Chandler USA and could negatively impact future
earnings and cash flows. 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. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. SFAS No. 142 supercedes Accounting Principles Board
("APB") Opinion No. 17, INTANGIBLE ASSETS, and primarily addresses accounting
for goodwill and intangible assets subsequent to acquisition. Under SFAS No.
142, goodwill and separately identified intangible assets with indefinite
lives will no longer be amortized but reviewed annually (or more frequently
if impairment indicators arise) for impairment. Separately identified
intangible assets not deemed to have indefinite lives will continue to be
amortized over their useful lives. Chandler USA adopted SFAS No. 142
effective January 1, 2002. Chandler USA has completed the required
impairment tests of its state insurance licenses and goodwill and concluded
that there has not been an impairment loss since the fair values of the
licenses and goodwill exceeded their respective carrying values. The fair
values were determined based on the present value of projected future net
cash flows. All of Chandler USA's goodwill pertains to the agency operating
segment.
A reconciliation of the reported net income (loss) to the adjusted net
income (loss) had SFAS No. 142 been applied as of January 1, 2001 follows:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
(In thousands) (In thousands)
Reported net income (loss) ... $ (26) $ 175 $ 817 $ (289)
Add back amortization:
Goodwill ................... - 154 - 460
State insurance licenses ... - 37 - 112
------------- ------------ ------------ ------------
Adjusted net income (loss) ... $ (26) $ 366 $ 817 $ 283
============= ============ ============ ============
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. SFAS No. 143 requires that entities record as a
liability obligations associated with the retirement of a tangible long-lived
asset when such obligations are incurred, and capitalize the cost by
increasing the carrying amount of the related long-lived asset. Chandler USA
adopted SFAS No. 143 effective January 1, 2002. The adoption of SFAS No. 143
did not have a material impact on Chandler USA's consolidated financial
condition, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supercedes SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, and APB Opinion No. 30, REPORTING THE RESULTS OF
OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS.
SFAS No. 144 establishes an accounting model based on SFAS No. 121 for
long-lived assets to be disposed of by sale, previously accounted for under
APB Opinion No. 30. Chandler USA adopted SFAS No. 144 effective January 1,
2002. The adoption of SFAS No. 144 did not have a material impact on Chandler
USA's consolidated financial condition, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND
TECHNICAL CORRECTIONS. SFAS No. 145 rescinds SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item. As a result, the criteria in
APB Opinion No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has
been rescinded. SFAS No. 44 was issued to establish accounting requirements
for the effects of transition to the provisions of the Motor Carrier Act of
1980. Because the transition has been completed, SFAS No. 44 is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. SFAS No. 145 also makes technical corrections to other
existing pronouncements. The provisions of SFAS No. 145 are generally
applicable for fiscal years beginning or transactions occurring after May
15, 2002. Chandler USA plans to adopt the provisions of SFAS No. 145 based
on the required effective dates and the impact is not believed to be material.
PAGE 9
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This standard requires entities
to recognize a liability, at its fair value, associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to
an exit or disposal plan. Chandler USA does not expect a material impact
from the adoption of SFAS No. 146 on its consolidated financial statements.
NOTE 4. SEGMENT INFORMATION
The following table presents a summary of the Company's operating
segments for the three and nine month periods ended September 30, 2002
and 2001:
Property
and All Intersegment Reported
Agency casualty other eliminations balances
---------- ---------- -------- ------------ ---------
(In thousands)
THREE MONTHS ENDED SEPTEMBER 30, 2002
Revenues from external customers (1)..... $ 541 $ 16,992 $ - $ - $ 17,533
Intersegment revenues ................... 279 12 - (291) -
Segment profit (loss) before
income taxes (2) ...................... 89 (67) (5) - 17
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers (1)..... $ 597 $ 17,414 $ - $ - $ 18,011
Intersegment revenues ................... 1,922 19 - (1,941) -
Segment profit (loss) before
income taxes (2) ...................... 171 412 (169) - 414
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues from external customers (1)..... $ 1,392 $ 50,446 $ - $ - $ 51,838
Intersegment revenues ................... 1,581 42 - (1,623) -
Segment profit (loss) before
income taxes (2) ...................... 457 1,067 (72) - 1,452
Segment assets .......................... 7,033 238,757 - (11,180) 234,610
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues from external customers (1)..... $ 1,382 $ 54,360 $ - $ - $ 55,742
Intersegment revenues ................... 4,923 52 - (4,975) -
Segment profit (loss) before
income taxes (2) ...................... 27 448 (495) - (20)
Segment assets .......................... 7,177 262,838 - (10,967) 259,048
- -----------------------------------------
(1) Consists of net premiums earned and commissions, fees and other income.
(2) Includes net realized investment gains.
PAGE 10
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands)
INSURANCE PROGRAM
- ----------------------------------------------
NET PREMIUMS EARNED
Standard property and casualty ............... $ 12,506 $ 12,920 $ 37,207 $ 41,274
Political subdivisions ....................... 3,597 3,319 10,392 9,236
Surety bonds ................................. 861 1,166 2,551 3,604
Other ........................................ 8 1 173 235
---------- ---------- ---------- ----------
$ 16,972 $ 17,406 $ 50,323 $ 54,349
========== ========== ========== ==========
LOSSES AND LOSS ADJUSTMENT EXPENSES
Standard property and casualty ............... $ 10,136 $ 8,165 $ 26,278 $ 29,054
Political subdivisions ....................... 1,439 3,489 6,460 9,179
Surety bonds ................................. 64 593 1,003 1,365
Other ........................................ 99 142 304 889
---------- ---------- ---------- ----------
$ 11,738 $ 12,389 $ 34,045 $ 40,487
========== ========== ========== ==========
NOTE 5. COMMITMENTS AND CONTINGENCIES
Reliance Insurance Company ("Reliance") reinsured NAICO for certain
workers compensation risks during 1998 and 1999. During the fourth quarter
of 1999, NAICO and Reliance rescinded two reinsurance treaties which had been
in effect since January 1, 1999. NAICO received a return of ceded premiums
and reassumed certain losses as a result of the rescission. The reinsurer
also paid NAICO a fee of $10 million as additional compensation for rescinding
the treaties. At September 30, 2002, NAICO had reinsurance recoverables from
Reliance for paid and unpaid losses relating to the 1998 treaties of
approximately $2.7 million. During October 2001, the Commonwealth of
Pennsylvania placed Reliance in liquidation. At this time, NAICO is unable to
determine the amount of its reinsurance recoverables from Reliance that will
ultimately be collected.
Reinsurance contracts do not relieve an insurer from its obligation to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to Chandler USA; consequently, adjustments to ceded losses and loss
adjustment expenses are made for amounts deemed uncollectible. NAICO incurred
charges of $479,000 and $652,000 in adjustments to ceded losses and loss
adjustment expenses for amounts deemed uncollectible in the third quarter and
first nine months of 2002 and has reduced the carrying value of such amounts
by approximately $1.7 million as of September 30, 2002. NAICO did not incur
any charges for uncollectible reinsurance recoverables from reinsurers in the
first nine months of 2001.
NAICO is subject to a variety of assessments related to insurance
activities, including those by state guaranty funds and workers compensation
second-injury funds. The amounts and timing of such assessments are beyond
the control of NAICO. NAICO provides for these charges on a current basis by
applying historical factors to premiums earned. Actual results may vary from
these values and adjustments therefrom are necessary to maintain an adequate
reserve for these assessments. The reserve for unpaid assessments was
approximately $430,000 and $921,000 at September 30, 2002 and December 31,
2001, respectively. In certain cases, NAICO is permitted to recover a
portion of its assessments generally as a reduction to premium taxes paid to
certain states. NAICO has recorded receivables in the amount that it expects
to recover of approximately $1,217,000 and $798,000 at September 30, 2002 and
December 31, 2001, respectively. NAICO may receive additional guaranty fund
assessments in the future related to Reliance or other insolvent insurance
companies. At this time, NAICO is unable to estimate the amount of such
assessments.
PAGE 11
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. Chandler USA agreed to
lease the equipment for three years with monthly rental installments equal to
the sum of (i) $22,167 plus (ii) interest on the unpaid lease balance at a
floating interest rate of 1% over Chase Manhattan Bank Prime, which was 4.75%
at September 30, 2002. The sale and leaseback transaction resulted in a
reduction of property and equipment of $1.9 million and a deferred gain of
$2.0 million which is included in accrued taxes and other payables. Chandler
USA has the option to repurchase the equipment at the end of the lease for
approximately $3.0 million, or may elect to have the lessor sell the
equipment. If the election to sell the equipment is made, Chandler USA would
retain any proceeds exceeding $3.0 million. If the proceeds were less than
approximately $2.4 million, Chandler USA would be required to pay the
difference between the proceeds and $2.4 million.
PAGE 12
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 and oral statements made by Chandler USA's
officials constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of Chandler
USA to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. Such
factors include, among other things, (i) general economic and business
conditions; (ii) interest rate changes; (iii) competition and regulatory
environment in which Chandler USA and its subsidiaries operate; (iv) claims
frequency; (v) claims severity; (vi) the number of new and renewal policy
applications submitted to National American Insurance Company ("NAICO") by
its agents; (vii) the ability of NAICO to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position;
(viii) the ability of NAICO to maintain favorable insurance company ratings;
and (ix) other factors including ongoing litigation matters.
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 nine month periods
ended September 30, 2002 and 2001:
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------- ---------------------
THREE MONTHS ENDED SEPTEMBER 30, 2002 2001 2002 2001
-------------------------------------------- ---------- ---------- ---------- ----------
(In thousands)
Standard property and casualty ............. $ 26,379 $ 31,564 $ 12,506 $ 12,920
Political subdivisions ..................... 9,001 8,633 3,597 3,319
Surety bonds ............................... 1,290 2,363 861 1,166
Other ...................................... 5 (42) 8 1
---------- ---------- ---------- ----------
TOTAL ...................................... $ 36,675 $ 42,518 $ 16,972 $ 17,406
========== ========== ========== ==========
GROSS PREMIUMS EARNED NET PREMIUMS EARNED
--------------------- ---------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002 2001 2002 2001
-------------------------------------------- ---------- ---------- ---------- ----------
(In thousands)
Standard property and casualty ............. $ 81,703 $ 100,111 $ 37,207 $ 41,274
Political subdivisions ..................... 26,433 25,754 10,392 9,236
Surety bonds ............................... 3,944 7,170 2,551 3,604
Other ...................................... 175 220 173 235
---------- ---------- ---------- ----------
TOTAL ...................................... $ 112,255 $ 133,255 $ 50,323 $ 54,349
========== ========== ========== ==========
Gross premiums earned decreased $5.8 million or 14% and $21.0 million or
16% in the third quarter and first nine months of 2002, respectively, compared
to the 2001 periods. The decreases are primarily the result of NAICO's
efforts to focus on improving underwriting profitability in its core programs
by re-underwriting and re-pricing the business and discontinuing certain
classes of business. Net premiums earned decreased $434,000 or 2% and $4.0
million or 7% for the third quarter and first nine months of 2002,
respectively. During 2001, NAICO had additional quota share reinsurance in
effect that reduced its net retention for its casualty and workers
compensation lines of business, and also reduced net premiums earned. This
quota share reinsurance expired effective January 1, 2002 and NAICO elected
not to renew it.
PAGE 13
Gross premiums earned in the standard property and casualty program
decreased $5.2 million or 16% and $18.4 million or 18% in the third quarter
and first nine months of 2002, respectively, compared to the 2001 periods.
The decreases were primarily due to discontinuing certain accounts and classes
of business where rates were not believed to be adequate. Gross premiums
earned in Texas decreased $2.9 million and $10.8 million in the third quarter
and first nine months of 2002, respectively, and gross premiums earned in
Oklahoma decreased $1.8 million and $6.4 million in the same periods. Net
premiums earned in this program decreased $414,000 or 3% and $4.1 million or
10% in the third quarter and first nine months of 2002, respectively.
Gross premiums earned in the political subdivisions program increased
$368,000 or 4% and $679,000 or 3% in the third quarter and first nine months
of 2002, respectively, compared to the 2001 periods. Gross premiums earned
in the school districts portion of the program increased $1.4 million and
$3.3 million in the third quarter and first nine months of 2002, respectively,
due primarily to increased premium rates in Oklahoma. This was largely offset
by a decrease in gross premiums earned for municipalities. Net premiums
earned in this program increased $278,000 or 8% and $1.2 million or 13% in the
third quarter and first nine months of 2002, respectively.
Gross premiums earned in the surety bond program decreased $1.1 million
or 45% and $3.2 million or 45% in the third quarter and first nine months of
2002, respectively, compared to the 2001 periods. The decreases are primarily
due to stricter underwriting policies and a reduction in the number of
appointed agents that produce this business as NAICO focuses on improving
underwriting profitability in this program. Net premiums earned in this
program decreased $305,000 or 26% and $1.1 million or 29% in the third quarter
and first nine months of 2002, respectively.
NET INTEREST INCOME AND NET REALIZED INVESTMENT GAINS
At September 30, 2002, Chandler USA's investment portfolio consisted
primarily of fixed income U.S. Government and high-quality corporate bonds,
with approximately 15% invested in cash and money market instruments. Income
generated from this portfolio is largely dependent upon prevailing levels of
interest rates. Chandler USA's portfolio contains no non-investment grade
bonds or real estate investments. Chandler USA also receives interest income
from Chandler Insurance (Barbados), Ltd. ("Chandler Barbados") on intercompany
loans.
Net interest income, excluding interest income from Chandler Barbados,
decreased $287,000 or 33% in the third quarter of 2002 compared to the third
quarter of 2001, and decreased $982,000 or 33% for the nine months ended
September 30, 2002. The decreases were due primarily to lower interest rates
in 2002 and a reduction in invested assets. Cash and invested assets were
$72.5 million at September 30, 2002 compared to $81.7 million at September
30, 2001. This decrease resulted primarily from the reduction in premiums
written during 2001 and 2002, the payment of claims for prior years and an
increase in intercompany loans to Chandler Barbados. Net interest income from
Chandler Barbados was $99,000 and $260,000 in the third quarter and first nine
months of 2002, respectively. Chandler USA did not have any interest income
from Chandler Barbados in the 2001 periods.
The Company had no net realized investment gains during the third quarter
of 2002 compared to $712,000 during the third quarter of 2001. Net realized
investment gains were $404,000 during the first nine months of 2002 compared
to $1,594,000 during the first nine months of 2001.
COMMISSIONS, FEES AND OTHER INCOME
Commissions, fees and other income decreased $44,000 or 7% in the third
quarter of 2002 compared to the third quarter of 2001, and increased $122,000
or 9% for the nine months ended September 30, 2002 compared to the 2001
period. The majority of Chandler USA's income from commissions, fees and
other income is from LaGere & Walkingstick Insurance Agency, Inc. ("L&W").
A large portion of the brokerage commissions and fees for L&W is incurred by
NAICO and thus eliminated in the consolidation of Chandler USA's subsidiaries.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Chandler USA estimates losses and loss adjustment expenses based on
historical experience and payment and reporting patterns for the type of risk
involved. These estimates are based on data available at the time of the
estimate and are periodically reviewed by independent professional actuaries.
Although such estimates are management's best estimates of the expected
values, the ultimate liability for unpaid claims may vary from these values.
PAGE 14
The percentage of losses and loss adjustment expenses to net premiums
earned ("loss ratio") was 69.2% and 67.7% for the third quarter and first
nine months of 2002, compared to 71.2% and 74.5% in the corresponding 2001
periods. The decrease in the 2002 loss ratios resulted primarily from
NAICO's efforts to re-underwrite and re-price its business during 2001 and
2002. These results were partially offset by adverse development of prior
accident year losses primarily in the standard property and casualty program
and are generally the result of ongoing analysis of recent loss development
trends. Weather-related losses from wind and hail totaled $274,000 and
$1,287,000 in the third quarter and first nine months of 2002 and increased
the respective loss ratios by 1.6 and 2.6 percentage points. Weather-related
losses totaled $761,000 and $1.8 million in the third quarter and first nine
months of 2001, and increased the respective 2001 loss ratios by 4.4 and 3.2
percentage points.
At this time, NAICO has not received any claims related to the September
11, 2001 terrorist attacks on the World Trade Center and does not believe
that it has any significant exposure to these and related losses. While
several of NAICO's reinsurers did experience significant losses related to
these attacks, it currently does not appear that these losses will impair the
reinsurers' ability to pay claims.
POLICY ACQUISITION COSTS
Policy acquisition costs consist of costs associated with the acquisition
of new and renewal business and generally include direct costs such as premium
taxes, commissions to agents and ceding companies and premium-related
assessments and indirect costs such as salaries and expenses of personnel who
perform and support underwriting activities. NAICO also receives ceding
commissions from the reinsurers who assume premiums from NAICO under certain
reinsurance contracts and the ceding commissions are accounted for as a
reduction of policy acquisition costs. Direct policy acquisition costs and
ceding commissions are deferred and amortized over the terms of the policies.
When the sum of anticipated losses, loss adjustment expenses and unamortized
policy acquisition costs exceeds the related unearned premiums, including
anticipated investment income, a provision for the indicated deficiency is
recorded.
The following table sets forth Chandler USA's policy acquisition costs
for each of the three and nine month periods ended September 30, 2002 and 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands)
Commissions expense ............................ $ 5,246 $ 4,714 $ 14,421 $ 13,551
Other premium related assessments .............. 385 310 1,151 640
Premium taxes .................................. 394 883 2,185 2,902
Excise taxes ................................... 62 69 197 194
Dividends to policyholders ..................... 2 36 40 138
Other expense .................................. 113 53 396 143
---------- ---------- ---------- ----------
Total direct expenses .......................... 6,202 6,065 18,390 17,568
Indirect underwriting expenses ................. 2,221 4,118 7,346 11,742
Commissions received from reinsurers ........... (6,822) (8,575) (18,291) (21,786)
Adjustment for deferred acquisition costs ...... 381 1,013 (877) 384
---------- ---------- ---------- ----------
Net policy acquisition costs ................... $ 1,982 $ 2,621 $ 6,568 $ 7,908
========== ========== ========== ==========
Total gross direct and indirect expenses as a percentage of direct
written and assumed premiums were 19.6% and 22.5% for the third quarter
and first nine months of 2002, respectively, compared to 20.3% and 22.9%
in the corresponding year ago periods. Commission expense as a percentage
of gross written and assumed premiums was 12.2% and 12.6% in the third quarter
and the first nine months of 2002, respectively, compared to 9.4% and 10.6% in
the corresponding 2001 periods. The increase in commission expense was
primarily due to an increase in contingent commissions to agents that resulted
from lower loss ratios than had been projected for these agents. Premium
taxes decreased $489,000 or 55% and $717,000 or 25% in the third quarter and
first nine months of 2002 respectively, compared to the 2001 periods. The
decrease is primarily the result of a decrease in written premiums and a
$179,000 premium tax refund in the third quarter of 2002 for premium taxes
paid in a prior year. In addition, a 2% tax on workers' compensation premiums
written in the state of Oklahoma was discontinued in 2002. However, an
increase in premium related assessments in Oklahoma offset this savings.
PAGE 15
Indirect underwriting expenses were 5.2% and 6.4% of total direct written
and assumed premiums in the third quarter and first nine months of 2002,
respectively, compared to 8.2% and 9.2% in the corresponding 2001 periods.
Indirect expenses include general overhead and administrative costs associated
with the acquisition of new and renewal business, some of which is relatively
fixed in nature, thus, the percentage of such expenses to direct written and
assumed premiums will vary depending on Chandler USA's overall premium volume.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were 10.5% and 9.4% of gross premiums
earned and commissions, fees and other income in the third quarter and first
nine months of 2002, respectively, compared to 8.3% and 7.6% for the
corresponding 2001 periods. General and administrative expenses included
$220,000 for a settlement of certain litigation with a former agent in the
first quarter of 2002, and $736,000 during the third quarter of 2002 for a
reserve for receivables related to certain derivative claims that resulted
from the litigation with CenTra, Inc. Amortization of Chandler USA's state
insurance licenses and goodwill was discontinued effective January 1, 2002
due to the implementation of Statement of Financial Accounting Standard No.
142. Amortization expense was $191,000 and $572,000 in the third quarter and
first nine months of 2001, respectively, for these items. 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 Chandler USA's overall premium volume.
INTEREST EXPENSE
Interest expense was $558,000 and $1.7 million in the third quarter and
first nine months of 2002, respectively, and decreased less than 1% from the
year-ago periods. Substantially all of Chandler USA's interest expense is
related to the $24 million of outstanding debentures.
LITIGATION AND LITIGATION EXPENSES
Litigation expenses reflect expenses related to the ongoing legal
proceedings involving CenTra, Inc. and certain of its affiliates ("CenTra")
and related litigation with the Company's director and officer liability
insurer. Litigation expenses decreased $11,000 in the third quarter of 2002
compared to the third quarter of 2001, and increased $37,000 for the nine
months ended September 30, 2002 compared to the 2001 period. Increased or
renewed activity could result in greater litigation expenses in the future.
See Note 2 to Interim Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2002, Chandler USA used $1.6 million in cash
from operations due primarily to an increase in reinsurance recoverables on
unpaid losses and a decrease in premiums payable less a decrease in prepaid
reinsurance premiums. These fluctuations generally resulted from an increase
in loss activity within the Company's reinsurance treaties and a reduction in
ceded premiums during 2002. In the first nine months of 2001, the Company
used $21.4 million in cash from operations due primarily to an increase in
reinsurance recoverables on paid and unpaid losses which resulted from the
purchase of additional reinsurance in October 2000 and increased loss activity
within the Company's other reinsurance treaties.
During 2001, Chandler USA and Chandler Barbados entered an Intercompany
Credit Agreement (the "Credit Agreement") covering intercompany loans between
the parties. The Credit Agreement requires interest to be paid at the prime
interest rate published in the Wall Street Journal each month, and balances
owed by either party are payable at any time upon demand. At September 30,
2002, Chandler Barbados owed approximately $9.3 million to Chandler USA
versus $7.9 million at December 31, 2001.
During March 2001, Chandler USA entered into a $3.8 million sale and
leaseback transaction for certain owned equipment. Chandler USA agreed to
lease the equipment for three years with monthly rental installments equal to
the sum of (i) $22,167 plus (ii) interest on the unpaid lease balance at a
floating interest rate of 1% over Chase Manhattan Bank Prime, which was 4.75%
at September 30, 2002. The sale and leaseback transaction resulted in a
reduction of property and equipment of $1.9 million and a deferred gain of
$2.0 million which is included in accrued taxes and other payables. Chandler
USA has the option to repurchase the equipment at the end of the lease for
approximately $3.0 million, or may elect to have the lessor sell the
equipment. If the election to sell the equipment is made, Chandler USA would
retain any proceeds exceeding $3.0 million. If the proceeds were less than
approximately $2.4 million, Chandler USA would be required to pay the
difference between the proceeds and $2.4 million.
PAGE 16
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a
date within 90 days prior to the filing date of this quarterly report. Based
on such evaluation, such officers have concluded that the Company's disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings under
the Exchange Act. There have not been any significant changes in the
Company's internal controls or in other factors that could significantly
affect such controls subsequent to the date of this evaluation.
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
--------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
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: November 12, 2002 CHANDLER (U.S.A.), INC.
By: /s/ W. Brent LaGere
-------------------------------
W. Brent LaGere
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark C. Hart
-------------------------------
Mark C. Hart
Vice President - Finance, Chief
Financial Officer and Treasurer
(Principal Accounting Officer)
CERTIFICATIONS
- --------------
I, W. Brent LaGere, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.),
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
PAGE 18
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ W. Brent LaGere
----------------------------------
W. Brent LaGere
Chairman of the Board and
Chief Executive Officer
I, Mark C. Hart, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chandler (U.S.A.),
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002
/s/ Mark C. Hart
----------------------------------
Mark C. Hart
Vice President - Finance,
Chief Financial Officer
and Treasurer