-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lz/NBuxl2/L/0XtHsnBhEP/s4KfPSsISSwAJHphwHpPVFsn+h3MxS3qYwFRzDSO6 UvOZ1/pTbwZNYsKQp/Y9gw== 0000950134-00-002623.txt : 20000411 0000950134-00-002623.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950134-00-002623 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAINSCO INC CENTRAL INDEX KEY: 0000786344 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 751617013 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09828 FILM NUMBER: 583011 BUSINESS ADDRESS: STREET 1: 500 COMMERCE ST CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173362500 MAIL ADDRESS: STREET 2: P O BOX 2933 CITY: FORTH WORTH STATE: TX ZIP: 76113-2933 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15 (d) of The Securities Exchange Act of 1934 For the fiscal year ended Commission file number 1-9828 December 31, 1999 GAINSCO, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1617013 (State of Incorporation) (IRS Employer Identification No.) 500 Commerce Street Fort Worth, Texas 76102 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (817) 336-2500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($.10 par value) The New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No -------- -------- The aggregate market value of registrant's Common Stock ($.10) par value), registrant's only class of voting or non-voting common equity stock, held by non-affiliates of the registrant (19,136,399 shares) as of the close of the business on March 23, 2000 was $114,818,394 (based on the closing sale price of $6.00 per share on that date on the New York Stock Exchange). As of March 23, 2000, there were 20,919,833 shares of the registrant's Common Stock ($.10 par value) outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 2 PART I ITEM 1. BUSINESS GENERAL DESCRIPTION GAINSCO, INC. ("GNA") is a holding company that provides administrative and financial services for its wholly owned subsidiaries. The term "Company" as used in this document includes GNA and its subsidiaries unless the context otherwise requires. GNA was incorporated in Texas on October 11, 1978. It completed its initial public offering on November 14, 1986. The Company is a property and casualty insurance company concentrating its efforts on three major nonstandard markets: commercial lines, personal lines and specialty lines. The commercial lines division includes commercial auto, garage, general liability and commercial property products. The personal lines division includes personal auto, umbrella and personal property products. The specialty lines division is focused on developing growth in professional liability products. The Company's insurance operations are conducted through four insurance companies: General Agents Insurance Company of America, Inc. ("General Agents"), an Oklahoma corporation; MGA Insurance Company, Inc.("MGAI"), a Texas corporation; GAINSCO County Mutual Insurance Company ("GCM"), a Texas chartered company: and Midwest Casualty Insurance Company ("MCIC"), a North Dakota insurance corporation acquired January 7, 2000. See "Recent Developments". The Company is approved to write insurance in 48 states and the District of Columbia on a non-admitted basis and in 44 states and the District of Columbia on an admitted basis. The Company markets its commercial lines of insurance through 161 non-affiliated general agency offices and its personal line of insurance through approximately 1,120 non-affiliated retail agencies. Approximately 75% of the Company's gross premiums written during 1999 resulted from risks located in California, Florida, Georgia, Pennsylvania, Tennessee and Texas. The Company's lines of insurance are written on certain classes and types of risks which are not generally insured by many of the standard companies, although such companies have been competing in this market more frequently in recent years. The strategy of the Company is to identify various types of risks where it can price its coverages profitably and competitively. This strategy results in changes in product mix and product design from time to time. For a description of the product lines presently written by the Company, see "Product Lines." The Company sets its policy premiums by applying its own judgment after consideration of the risks involved and the competition. Part of its analysis includes the review of historical premium rate and loss cost information as compiled and reported by independent rating bureaus. Through GCM, the Company has fronting agreements with two non-affiliated insurance companies. The business written under these agreements is ceded 100% to reinsurers rated "A- (Excellent)" or better by A.M. Best Company ("Best's"), and 100% of the liabilities are fully collateralized with pledged investment grade securities or letters of credit. 2 3 RECENT DEVELOPMENTS Goff Moore Strategic Partners, L.P. Transaction. On October 4, 1999 GNA sold to Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP") for an aggregate purchase price of $31,620,000 (i) 31,620 shares of GNA's Series A Convertible Preferred Stock (the "Series A Preferred Stock"), which are convertible into 6,200,000 shares of GNA's Common Stock, par value $0.10 per share ("Common Stock"), at a conversion price of $5.10 per share, (ii) a five year warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $6.375 per share and (iii) a seven year Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise of $8.50 per share. At closing GNA and its insurance company subsidiaries entered into Investment Management Agreements with GMSP, pursuant to which GMSP manages their respective investment portfolios. See "Investments" and "Item 13. Certain Relationships and Related Transactions - Transaction with Goff Moore Strategic Partners, L.P." Completion of these transactions (collectively, the "GMSP Transaction") concluded the strategic alternatives review process that the Company initiated in 1998. Proceeds from the GMSP Transaction are available for acquisitions, investments and other corporate purposes. Tri-State Acquisition. On January 7, 2000, the Company acquired Tri-State, Ltd.("Tri-State"), an insurance operation specializing in underwriting, servicing and claims handling of nonstandard personal auto insurance in Minnesota, North Dakota and South Dakota. Tri-State owns and operates a managing general agency, a motor vehicle driving records service company and an insurance subsidiary, MCIC. Tri-State was incorporated in 1980 and currently markets nonstandard personal auto insurance through over 320 retail agencies in its three key states and commercial automobile insurance in four states. The Company plans for Tri-State to continue to operate at its current locations to develop personal and commercial lines of business. The purchase price consideration consisted of $6,000,000 in cash at closing, plus additional payments of up to $5,500,000 in cash over the next several years, contingent on conversion of business to the Company, meeting specific profitability targets and Tri-State's 1999 year-end book value. Tri-State's insurance subsidiary, MCIC, had approximately $3,000,000 of policyholders' surplus at December 31,1999. PRODUCT LINES The Company's principal products serve certain nonstandard markets within the commercial lines and personal lines. The following table sets forth, for each product line, gross premiums written (before ceding any amounts to reinsurers), percentage of gross premiums written for the periods indicated and the number of policies in force at the end of each period.
Years ended December 31 ---------------------------------------------------------------- 1999 1998 1997 ----------------- --------------- ---------------- (Dollar amounts in thousands) Gross Premiums Written: Commercial Lines $ 97,139 73% $88,188 97% $99,776 100% Personal Lines 36,759 27 2,974 3 -- -- -------- --- ------- -- ------- --- $133,898 100% $91,162 100% $99,776 100% ======== === ======= === ======= === Policies in Force (End of Period) 68,943 38,939 35,962
3 4 Commercial Lines The commercial lines of insurance written by the Company include: Commercial Auto The commercial auto coverage underwritten by the Company includes risks associated with local haulers of specialized freight, tradespersons' vehicles and trucking companies. Garage The Company's garage product line includes garage liability, garage keepers' legal liability and dealers' open lot coverages. The Company targets its coverage to used car dealers, recreational vehicle dealers, automobile repair shops and wrecker/towing risks. General Liability The Company underwrites general liability insurance for businesses such as car washes, janitorial services, small contractors, apartment buildings, rental dwellings and retail stores. Property The Company underwrites commercial property coverages that include fire, extended coverage and vandalism on commercial establishments packaged with its liability product or on a monoline basis Personal Lines The personal lines of insurance written by the Company include: Personal Auto The Company's personal auto product line is in the nonstandard personal auto market and is primarily written with minimum liability limits. Umbrella The Company writes personal umbrella risks which do not have access to the preferred markets. Property The Company writes nonstandard dwelling fire risks and is expanding into nonstandard homeowners coverages. Specialty Lines The Company underwrites and manages programs in professional liability for lawyers, real estate agents, educators and other general professions, as well as directors and officers liability. REINSURANCE The Company purchases reinsurance in order to reduce its liability on individual risks and to protect against catastrophe claims. A reinsurance transaction takes place when an insurance company transfers, or "cedes", to another insurer a portion or all of its exposure. The reinsurer assumes the exposure in return for a portion or the entire premium. The ceding of insurance does not legally discharge the insurer from its primary liability for the full amount of the policies, and the ceding company is required to pay the claim if the reinsurer fails to meet its obligations under the reinsurance agreement. Commercial Lines Prior to 1999, the Company wrote commercial casualty policy limits of $1,000,000. For policies with an effective date occurring from 1995 through 1998, the company has first excess casualty reinsurance for 100% of casualty claims exceeding $500,000 up to the $1,000,000 policy limits, resulting in a maximum net claim retention per risk of $500,000 for such policies. Beginning in 1999, the Company began writing commercial casualty policy limits of $5,000,000. The Company has first excess casualty reinsurance for 100% of casualty claims exceeding $500,000 up to $1,000,000 and second excess casualty reinsurance for 100% of casualty claims exceeding $1,000,000 up to the $5,000,000 policy limits, resulting in a maximum net claim retention per risk of $500,000. The Company uses facultative reinsurance for policy limits written in excess of $5,000,000. 4 5 The Company also has excess casualty clash reinsurance for $5,000,000 in ultimate net losses on any one accident in excess of $1,000,000 in ultimate net losses arising out of each accident. Personal Lines For its umbrella coverages, the Company has excess casualty reinsurance for 100% of umbrella claims exceeding $1,000,000 up to $10,000,000 policy limits. The Company also has quota share reinsurance for 75% of the first $1,000,000 of umbrella claims resulting in a maximum net claim retention per risk of $250,000. For its personal auto coverages, the Company has excess casualty clash reinsurance for $5,000,000 in ultimate net losses on any one accident in excess of $1,000,000 in ultimate net losses arising out of each accident. Specialty Lines For its lawyers professional liability coverages, the Company has quota share reinsurance for 50% of the first $1,000,000 of professional liability claims and excess casualty reinsurance for 100% of professional liability claims exceeding $1,000,000 up to $5,000,000 policy limits resulting in a maximum net claim retention per risk of $500,000. For its real estate agents professional liability coverages, the Company has quota share reinsurance for 25% of the first $1,000,000 of professional liability claims resulting in a maximum net claim retention per risk of $750,000. For its educators professional liability coverages, the Company has quota share reinsurance for 60% of the first $1,000,000 of professional liability claims and excess casualty reinsurance for 100% of professional liability claims exceeding $1,000,000 up to $5,000,000 policy limits resulting in a maximum net claim retention per risk of $400,000. For its directors and officers liability coverages, the Company has quota share reinsurance for 90% of the first $5,000,000 of professional liability claims resulting in a maximum net claim retention per risk of $500,000. Excess casualty reinsurance carried by the Company includes "extra-contractual obligations" coverage. This coverage protects the Company against claims arising out of certain legal liability theories not directly based on the terms and conditions of the Company's policies of insurance. Extra-contractual obligation claims are covered 90% under the excess casualty reinsurance treaty up to its respective limits. The Company is operating under excess casualty reinsurance treaties with six reinsurance companies for its commercial lines business, each of which reinsures a given percentage of ceded risks. The Company's excess reinsurance is provided in varying amounts by these reinsurers who are rated "A (Excellent)" or better by Best's. See "Rating." The following table identifies each such reinsurer and sets forth the percentage of the coverage assumed by each of them: 5 6
Percentage of Risk Reinsured ------------------------------------------------------------ 2000 1999 1998 ---------------------- ---------------------- ---------- 1st Excess 2nd Excess 1st Excess 2nd Excess 1st Excess Excess Reinsurer : ---------- ---------- ---------- ---------- ---------- ---------------- American Re-insurance Company 35% 40% --% 40% --% Dorinco Reinsurance Company -- -- 35 -- 35 First Excess and Reinsurance Corporation -- 40 35 40 -- Folksamerica Reinsurance Company 15 -- -- -- -- GE Reinsurance Corporation 20 -- -- -- -- Liberty Mutual Insurance Company 20 20 20 20 20 PMA Reinsurance Corporation -- -- -- -- 35 Republic Western Insurance Company 10 -- 10 -- 10 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
The Company carries catastrophe property reinsurance to protect it against catastrophe occurrences for 95% of the property claims that exceed $500,000 but do not exceed $12,500,000 for a single catastrophe. The Company also carries property excess per risk reinsurance that covers property claims exceeding $300,000 up to $5,000,000 net loss each risk. The Company uses facultative reinsurance for limits written on individual risks in excess of $5,000,000. Since 1995, the Company has had reinsurance fronting arrangements with non-affiliated insurance companies. The Company retains no portion of the business written under these agreements as it is 100% ceded to non-affiliated reinsurers. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by Best's, the agreements require that collateral (in the form of trust agreements and/or letters of credit) be maintained to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to the risks insured under these fronting arrangements. Sec Note (5) of Notes to Consolidated Financial Statements. The Company has signed contracts in force for its reinsurance treaties for all years through 1999. The Company has written confirmations from reinsurers for 2000 regarding the basic terms and provisions under which they will assume the Company's risks, but, as of the date hereof, formal reinsurance treaty contracts with these reinsurers have not been executed. It is customary in the industry for insurance companies and reinsurers to operate under such commitments pending the execution of formal reinsurance treaties. No assurance can be given that such reinsurance treaties will be executed or, if executed, that the terms and provisions thereof will not be modified. MARKETING AND DISTRIBUTION The Company markets its commercial lines insurance products through 161 non-affiliated general agency offices, commonly referred to as wholesale agents. These general agents each represent several insurance companies, some of which may compete with the Company. The general agents solicit business from independent local agents or brokers, commonly referred to as retail agents, who are in direct contact with insurance buyers. The Company has elected to utilize general agents to market its insurance products in order to avoid the fixed costs of a branch office system. These general agents have experience in the specialty lines of coverages in which the Company concentrates and, in many instances, a long business history with members of the Company's management. The Company requires that its general agents have a specified level of errors and 6 7 omissions insurance coverage, which indirectly protects the Company against certain negligence on the part of general agents. The Company reviews its appointed agencies for financial solvency and liquidity levels. The Company has errors and omissions insurance coverage to protect against negligence on the part of its employees. The Company has developed underwriting manuals to be used by its general agents. The general agents are authorized to bind the Company to provide insurance if the risks and terms involved in the particular coverage are within the underwriting guidelines set forth in the Company's underwriting manuals. The manuals stipulate minimum rates to be charged for the various classes of coverage offered. The general agents are compensated on a commission basis that varies by line of business. In addition, the general agency contracts between the Company and its general agents contain profit contingency inducements designed to reward those general agents with superior claim ratios who write certain minimum levels of premium with the Company. The general agents also retain a portion of the payment made by the insured as policy fee in connection with the issuance of some of the Company's non-admitted policies. Certain coverages, such as auto liability, may only be written in some states by companies with the authority to write insurance on an admitted basis in such states. The Company currently is approved to write insurance on an admitted basis in 44 states and the District of Columbia. Nonstandard personal auto is marketed through approximately 1,120 non-affiliated retail agencies that are compensated on a commission basis. The retail agents may represent several insurance companies and they are in direct contact with the insurance buyer. This business is written on an admitted basis. UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES The Company maintains reserves for the payment of claims and claim adjustment expenses for both reported and unreported claims. Claim reserves are estimates, at a given point in time, of amounts that the Company expects to pay on incurred claims based on facts and circumstances then known. The amount of claim reserves for reported claims is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding the claim, and the policy provisions relating to the type of claim. The amount of claim reserves for unreported claims and case reserve development is determined on the basis of historical information and anticipated future conditions by lines of insurance and actuarial review. Reserves for claim adjustment expenses are intended to cover the ultimate costs of settling claims, including investigation and defense of lawsuits resulting from such claims. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results. The process of establishing claim reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured claim and the settlement of the claim. Some judicial decisions and legislative actions, even after coverage is written and reserves are initially set, broaden liability and policy definitions and increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult claim reserving process. Ultimate liability may be greater or lower than current reserves. Reserves are monitored by the Company using new information on reported claims and a variety of statistical techniques. The reserves are reviewed annually by an independent actuarial firm. The Company does not discount to present value that portion of its claim reserves expected to be paid in future periods. 7 8 The following table sets forth the changes in unpaid claims and claim adjustment expenses, net of reinsurance cessions, as shown in the Company's consolidated financial statements for the periods indicated:
As of and for the years ended December 31 ----------------------------------------- 1999 1998 1997 -------- -------- -------- (Amounts in thousands) Unpaid claims and claim adjustment expenses, beginning of period $136,798 113,227 105,691 Less: Ceded unpaid claims and claim adjustment expenses, beginning of period 35,030 29,524 26,713 -------- -------- -------- Net unpaid claims and claim adjustment expenses, beginning of 101,768 83,703 78,978 -------- -------- -------- period Net claims and claim adjustment expense incurred related to: Current period 75,976 59,635 53,969 Prior periods 373 26,718 8,117 -------- -------- -------- Total net claim and claim adjustment expenses incurred 76,349 86,353 62,086 -------- -------- -------- Net claims and claim adjustment expenses paid related to: Current period 32,651 19,693 17,807 Prior periods 49,951 48,595 39,554 -------- -------- -------- Total net claim and claim adjustment expenses paid 82,602 68,288 57,361 -------- -------- -------- Net unpaid claims and claim adjustment expenses, end of period 95,515 101,768 83,703 Plus: Ceded unpaid claims and claim adjustment expenses, end of 37,299 35,030 29,524 -------- -------- -------- period Unpaid claims and claim adjustment expenses, end of period $132,814 136,798 113,227 ======== ======== ========
For 1998 the development in claims and claim adjustment expenses incurred was primarily the result of unanticipated development for commercial auto claims for the 1997, 1996 and 1995 accident years. For 1997 the development in claims and claim adjustment expenses incurred was largely a result of claim reserve increases recorded for commercial auto claims in Kentucky for the 1996 and 1995 accident years and development in claim adjustment expense reserves for commercial auto in the 1996, 1995 and 1994 accident years. The following table sets forth, as of December 31, 1999, 1998, and 1997, differences between the amount of net unpaid claims and claim adjustment expenses reported in the Company's statements, prepared in accordance with statutory accounting principles ("SAP"), and filed with the various state insurance departments, and those reported in the consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP"):
As of December 31 ------------------------------------ 1999 1998 1997 -------- -------- -------- (Amounts in thousands) Net unpaid claims and claim adjustment expenses reported on a SAP basis $ 96,472 102,404 84,406 Adjustments: Estimated recovery for salvage and subrogation (957) (636) (703) -------- -------- -------- Net unpaid claims and claim adjustment expenses reported on a GAAP $ 95,515 101,768 83,703 basis ======== ======== ========
8 9 The following table represents the development of GAAP balance sheet reserves for the years ended December 31, 1989 through 1999. The top line of the table shows the reserves for unpaid claims and claim adjustment expenses for the current and all prior years as recorded at the balance sheet date for each of the indicated years. The reserves represent the estimated amount of claims and claim adjustment expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including claims that have been incurred but not yet reported to the Company. The second portion of the following table shows the net cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The third portion of the table shows the reestimated amount of the previously recorded net unpaid claims and claim adjustment expenses based on experience as of the end of each succeeding year, including net cumulative payments made since the end of the respective year. For example, the 1994 liability for net claims and claim adjustment expenses reestimated five years later (as of December 31, 1999) was $67,607,000 of which $66,573,000 has been paid, leaving a net reserve of $1,034,000 for claims and claim adjustment expenses in 1994 and prior years remaining unpaid as of December 31, 1999. "Net cumulative deficiency" represents the change in the estimate from the original balance sheet date to the date of the current estimate. For example, the 1994 net unpaid claims and claim adjustment expenses indicates a $6,850,000 net deficiency from December 31, 1994 to December 31, 1999 (five years later). Conditions and trends that have affected development of liability in the past may or may not necessarily occur in the future. Accordingly, it may or may not be appropriate to extrapolate future redundancies or deficiencies based on this table. 9 10
As of and for the years ended December 31 ---------------------------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (Amounts in thousands) Unpaid claims & claim adjustment expenses: Gross 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691 113,227 136,798 132,814 Ceded 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713 29,524 35,030 37,299 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- Net 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978 83,703 101,768 95,515 Net cumulative paid as of: One year later 7,545 10,251 15,037 22,470 24,090 24,730 32,584 39,654 48,595 49,951 Two years later 12,340 18,145 26,819 37,032 39,182 41,874 56,605 70,185 82,950 Three years later 16,413 23,255 33,879 45,884 46,688 55,338 73,349 90,417 Four years later 19,085 26,171 37,292 51,082 54,428 62,389 82,667 Five years later 20,633 26,970 39,999 54,092 57,628 66,573 Six years later 21,020 28,399 41,143 55,828 58,191 Seven years later 21,700 28,734 42,020 56,754 Eight years later 21,871 28,806 42,464 Nine years later 21,830 29,109 Ten years later 22,120 Net unpaid claims and claim adjustment expenses reestimated as of: One year later 20,060 28,354 38,528 54,150 59,573 61,157 75,703 87,095 110,421 102,141 Two years later 20,566 28,479 42,235 57,223 59,922 62,296 80,356 104,588 111,981 Three years later 21,214 30,035 43,217 57,459 59,247 63,871 88,867 105,386 Four years later 22,431 30,129 42,493 56,832 58,414 67,442 89,030 Five years later 22,332 29,022 42,191 56,337 59,735 67,607 Six years later 22,034 29,073 41,984 56,721 59,695 Seven years later 21,965 28,908 42,356 56,938 Eight years later 21,950 28,828 42,527 Nine years later 21,872 29,037 Ten years later 22,111 Net cumulative (2,062) (131) (4,484) (7,015) (3,740) (6,850) (18,669) (26,408) (28,278) (373) deficiency
Net unpaid claims and claim adjustment expenses at December 31, 1999 were approximately $95,515,000, which the Company believes is adequate. INSURANCE RATIOS CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are traditionally used to interpret the underwriting experience of property and casualty insurance companies. Statutory Accounting Principles (SAP) Basis - Claims and claim adjustment expenses are stated as a percentage of premiums earned because claims may occur over the life of a particular insurance policy. Underwriting expenses on a SAP basis are stated as a percentage of net premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. Underwriting profit margin is achieved when the combined ratio is less than 100%. The Company's claims, expense and combined ratios and the property and casualty industry's claims, expense and combined ratios, both on a SAP basis, are shown in the following table: 10 11
Years ended December 31 ----------------------------------------------------- 1999 1998 1997 1996 1995 ----- ----- ---- ----- ----- COMPANY RATIOS Claims Ratio 67.9% 95.9% 60.0% 54.3% 48.7% Expense Ratio 30.7 37.9 34.4 34.5 34.2 ----- ----- ---- ----- ----- Combined Ratio 98.6% 133.8% 94.4% 88.8% 82.9% ===== ===== ==== ===== ===== INDUSTRY RATIOS (1) Claims Ratio 78.3% 76.2% 72.8% 78.4% 78.9% Expense Ratio 28.1 27.3 27.1 26.3 26.1 ----- ----- ---- ----- ----- Combined Ratio 106.4% 103.5% 99.9% 104.7% 105.0% ===== ===== ==== ===== =====
- --------------------- (1) The property and casualty industry as a whole, not companies with comparable lines of coverage, was used in the calculation of these ratios by A.M. Best. Ratios for 1999 are A.M. Best estimates. The favorable variance to the industry for 1999 with regard to the claims ratio is primarily the result of closely monitoring and adjusting pricing, when needed, and writing shorter duration business than the industry as a whole. The unfavorable variance to the industry with regard to the claims ratio in 1998 is largely related to unanticipated unfavorable claim development recorded in 1998 on the 1997, 1996 and 1995 accident years for the commercial auto liability line. For 1998, the increase in the unfavorable variance to the industry with regard to the expense ratio is largely because of downward adjustments in reinsurance commission income as a result of the unanticipated unfavorable claim development in 1998. For 1999 and prior years, the unfavorable variance to the industry with regard to the expense ratios is a function of the specific lines that the Company writes. The Company ratios in the table above relate only to insurance operations. GNA as a holding company provides administrative and financial services for its wholly owned subsidiaries. The allocation of GNA's expenses solely to its insurance companies would have an impact on their results of operations and would also affect the ratios presented. As such, expenses related to GNA's strategic alternatives review process conducted in 1999 and 1998 are not included in these ratios. Generally Accepted Accounting Principles (GAAP) Basis - Claims and claim adjustment expenses are stated as a percentage of premiums earned as they are on a SAP basis. However, earned premiums include net policy fees earned whereas on a SAP basis policy fees earned are recorded on a gross basis. The GAAP expense ratio is based on premiums earned and includes the change in policy acquisition costs and underwriting expenses. Other differences include the treatment of the allowance for doubtful accounts. The following table presents the Company's claims, expense and combined ratios on a GAAP basis:
Years ended December 31 ---------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Claims Ratio 67.4% 93.7% 60.7% 54.7% 49.8% Expense Ratio 32.0 39.0 33.7 33.8 33.1 ---- ---- ---- ---- ---- Combined Ratio 99.4% 132.7% 94.4% 88.5% 82.9% ==== ===== ==== ==== ====
The Company ratios in the table above relate only to insurance operations. The holding company provides administrative and financial services for its wholly owned subsidiaries. The allocation of the holding company's expenses solely to its insurance companies would have an impact on their results of operations and would also affect the ratios presented. 11 12 PREMIUM TO SURPLUS RATIO: The following table shows, for the periods indicated, the Company's statutory ratios of statutory net premiums written to statutory policyholders' surplus. While there is no statutory requirement which establishes a permissible net premiums written to surplus ratio, guidelines established by the National Association of Insurance Commissioners ("NAIC") provide that this ratio should not be greater than 3 to 1.
As of and for the years ended December 31 ---------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (Dollar amounts in thousands) Net premiums written $ 130,105 87,040 98,858 109,227 108,689 Policyholders' surplus $ 69,155 71,826 78,496 59,012 50,140 Ratio 1.88 to 1 1.21 to 1 1.26 to 1 1.85 to 1 2.17 to 1
INVESTMENT PORTFOLIO HISTORICAL RESULTS AND COMPOSITION The following table sets forth, for the periods indicated, the Company's investment results before income tax effects:
As of and for the years ending December 31 ------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- ------- ------- ------- ------- (Dollar amounts in thousands) Average investments (1) $ 228,945 212,215 209,121 192,221 170,881 Investment income $ 9,722 9,803 9,731 9,161 8,157 Return on average investments (2) 4.3% 4.6% 4.7% 4.8% 4.8% Taxable equivalent return on average investments 5.7% 6.2% 6.5% 6.6% 6.6% Net realized gains $ 606 693 327 472 108 Net unrealized gains (losses) (3) $ (3,456) 2,922 2,422 1,559 2,772
- ---------------------------- (1) Average investments is the average of beginning and ending investments at amortized cost, computed on an annual basis. (2) Includes taxable and tax-exempt securities. (3) Includes net unrealized gains (losses) for total investments. The following table sets forth the composition of the investment portfolio of the Company. 12 13
As of December 31 --------------------------------------------------------------------- 1999 1998 1997 --------------------- ------------------ ------------------- (Dollar amounts in thousands) Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value -------- ------- --------- ----- --------- ----- Type of Investment Fixed Maturities: Bonds held to maturity: U.S. Government securities $ -- -- 5,668 5,887 5,404 5,476 Tax-exempt state and municipal bonds 54,120 55,091 84,330 85,052 Bonds available for sale: U.S. Government securities 24,365 24,029 13,734 13,969 27,322 27,404 Tax-exempt state and municipal bonds 148,983 146,204 130,072 131,619 94,700 96,246 Corporate bonds 27,067 26,844 -- -- -- -- Certificates of deposit 455 455 595 595 595 595 Equity investments 916 916 -- -- -- -- Marketable securities 372 254 318 269 -- -- -------- ------- ------- ------- ------- ------- 202,158 198,702 204,507 207,430 212,351 214,773 -------- ------- ------- ------- ------- ------- Short-term investments 46,478(1) 46,478(1) 4,749 4,749 2,823 2,823 -------- ------- ------- ------- ------- ------- Total investments $248,636 245,180 209,256 212,179 215,174 217,596 ======== ======== ======= ======= ======= =======
- -------------------------------- (1) Includes proceeds from GMSP Transaction and funds accumulated pending assumption of investment management of portfolio by GMSP. As these funds are invested by GMSP in longer term investments, the proportion of the portfolios invested in short- term investments is expected to return closer to historical levels. > The maturity distribution of the Company's investments in fixed maturities is as follows:
As of December 31 ----------------------------------------------------- 1999 1998 ---------------------- ------------------------- (Dollar amounts in thousands) Amortized Amortized Cost Percent Cost Percent --------- ----- --------- -------- Within 1 year $ 42,770 21.3% $ 31,335 15.3% Beyond 1 year but within 5 years 113,979 56.7 123,550 60.5 Beyond 5 years but within 10 years 35,123 17.5 46,692 22.9 Beyond 10 years but within 20 years 5,622 2.8 2,612 1.3 Beyond 20 years 3,376 1.7 -- -- --------- ----- --------- ----- $ 200,870 100.0% $ 204,189 100.0% ========= ===== ========= ===== Average duration 2.6 yrs 3.0 yrs
As of December 31, 1999 and 1998, the Company did not have any non-performing fixed maturity securities. In the quarter ended December 31, 1999 all bonds classified as held to maturity were transferred to the available for sale classification and adjusted to fair value. The amortized cost at the date of transfer for 13 14 these bonds was $41,069,988 and the fair value was $41,036,014, resulting in an unrealized loss before Federal income taxes of $33,794. The Company made this change since it no longer invests in bonds with the intent of holding them to maturity. See Note (1) of Notes to Consolidated Financial Statements. INVESTMENT STRATEGY Prior to the GMSP Transaction, GNA had limited investments at the holding company level. The investment portfolios of the insurance companies until recently consisted primarily of fixed maturity tax-exempt municipal bonds and United States Government securities. See Note (2) of Notes to Consolidated Financial Statements. One of the objectives of the GMSP Transaction is to increase the returns on the Company's investment portfolios by utilizing the investment management skills of GMSP, whose interests are closely aligned with the Company's by virtue of its significant investment in the Company. Commencing with the closing of the GMSP Transaction on October 4, 1999, the investment portfolios of GNA and its insurance company subsidiaries are managed by GMSP pursuant to its Investment Management Agreements with the respective companies. See "Item 13. Certain Relationships and Related Transactions - Transactions with Goff Moore Strategic Partners, L.P." The investment policies are subject to the oversight and direction of the Investment Committees of the Boards of Directors of the respective companies. The respective Investment Committees consist entirely of directors not affiliated with GMSP. The investment policies of the insurance subsidiaries, which are also subject to the respective insurance company legal investment laws of the states in which they are organized, are to maximize after-tax yield while maintaining safety of capital together with adequate liquidity for insurance operations. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." The insurance company portfolios may also be invested in equity securities within limits prescribed by applicable legal investment laws. Approximately 50% of the bond securities held in the insurance company subsidiaries are to be redeployed during the year 2000 in an attempt to increase the taxable equivalent yield. This repositioning would involve selling both taxable and tax-exempt bonds with a lower effective taxable equivalent interest yields and reinvesting the proceeds in corporate debt with a higher effective taxable equivalent interest yield. This strategy is expected to result in net realized after tax investment losses in 2000. The impact on book value is anticipated to be significantly less than the impact on earnings because the securities have been recorded on the balance sheet at fair value at December 31, 1999. The unrealized loss associated with the investment portfolio was $2,246,575 (net of tax effects) at December 31, 1999. See Note (3) of Notes to Consolidated Financial Statements. The scope and results of the investment redeployment program will depend upon interest rates and the timing of specific transactions. GNA's portfolio is not restricted by state insurance company legal investment laws and will be invested more aggressively. Equities and alternate investments, including securities which offer the opportunity of significant gains and a high degree of risk, are expected to be included in the holding company portfolio. RATING Best's insurance reports, property-casualty, has currently assigned an "A (Excellent)" pooled rating to the Company. Best's ratings are based on an analysis of the financial condition and operation of an insurance company as they relate to the industry in general. 14 15 GOVERNMENT REGULATION The Company's insurance companies are subject to varied governmental regulation in the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the Company's business and is concerned primarily with the protection of policyholders rather than shareholders. The Company is also subject to statutes governing insurance holding company systems in the states of Oklahoma, Texas and, beginning in 2000, North Dakota. These statutes require the Company to file periodic information with the state regulatory authorities, including information concerning its capital structure, ownership, financial condition and general business operation. These statutes also limit certain transactions between the Company and its insurance companies, including the amount of dividends which may be declared and paid by the insurance companies. See Note (7) of Notes to Consolidated Financial Statements. Additionally, the Oklahoma, Texas and North Dakota statutes restrict the ability of any one person to acquire 10% or more of the Company's voting securities without prior regulatory approval. COMPETITION The property and casualty insurance industry is highly competitive. The Company underwrites lines of insurance on risks not generally insured by many of the large standard property and casualty insurers. However, few barriers exist to prevent property and casualty insurance companies from entering into the Company's segments of the industry. To the extent this occurs, the Company can be at a competitive disadvantage because many of these companies have substantially greater financial and other resources and can offer a broader variety of specialty risk coverages. The Company believes that its principal competitive advantages are; 1) expertise in its product lines which facilitates underwriting selection and pricing and 2) service in underwriting and claims handling which provides its agents with a competitive advantage and a stable market. EMPLOYEES As of December 31, 1999, the Company employed 282 persons, of whom 19 were officers, 255 were staff and administrative personnel, and 8 were part-time employees. The Company is not a party to any collective bargaining agreement. The Company believes that its relations with its employees are good. 15 16 EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers of the Company as of March 23, 2000 is set forth below:
Name Age Position with the Company ---- --- ------------------------- Glenn W. Anderson 47 President, Chief Executive Officer and Director Richard M. Buxton 51 Senior Vice President Daniel J. Coots 48 Senior Vice President, Chief Financial Officer and Director Carlos de la Torre 51 President, DLT Insurance Adjusters, Inc. J. Landis Graham 45 Senior Vice President McRae B. Johnston 49 President, National Specialty Lines, Inc. Richard A. Laabs 44 Senior Vice President Joseph W. Pitts 36 Senior Vice President Stephen L. Porcelli 37 Senior Vice President Carolyn E. Ray 47 Senior Vice President Sam Rosen 64 Secretary and Director
Glenn W. Anderson has served as President, Chief Executive Officer and Director of the Company since April 1998. From 1996 to April 1998, Mr. Anderson served as Executive Vice President of USF&G. From 1993 to 1996, Mr. Anderson held the position of Senior Vice President with USF&G. Mr. Anderson has been engaged in the property and casualty insurance business since 1975. Richard M. Buxton has served as Vice President of the Company since December of 1996. In 1999, Mr. Buxton was promoted to Senior Vice President. From 1986 to 1996 Mr. Buxton was with KN Energy, Inc. in the position of Vice President of Strategic Planning and Financial Services. Daniel J. Coots has served as Vice President and Chief Financial Officer of the Company since 1987. In 1991 Mr. Coots was promoted to Senior Vice President. Mr. Coots has been engaged in the property and casualty insurance business since 1983. Carlos de la Torre joined the Company in October 1998 when the Company acquired Lalande Group and since that time has served as President of DLT Insurance Adjusters, Inc., a subsidiary of the Company. See "Item 13. Certain Relationships and Related Transactions - Lalande Acquisition". Mr. de la Torre is the founder of DLT Insurance Adjusters, Inc. and has served as President since 1979. Mr. de la Torre has been engaged in the property and casualty insurance business since 1970. 16 17 J. Landis Graham has served as Senior Vice President of the Company since 1998. From 1993 to 1998, Mr. Graham served as Vice President of the Company. From 1988 to 1993, Mr. Graham was with Maryland Casualty Company in the position of Claim Manager. Mr. Graham has been engaged in the property and casualty insurance business since 1976. McRae B. Johnston joined the Company in October 1998 when the Company acquired Lalande Group and since that time has served as President of National Speciality Lines, Inc., a subsidiary of the Company. See "Item 13. Certain Relationships and Related Transactions - Lalande Acquisition". Mr. Johnston is co-founder of National Specialty Lines, Inc. and has served as President since 1989. Mr. Johnston has been engaged in the property and casualty insurance business since 1976. Richard A. Laabs has served as Vice President of the Company since June of 1996. Mr. Laabs was promoted to Senior Vice President in 1999. From August of 1995 to May of 1996, Mr. Laabs served as Assistant Vice President of the Company. From 1990 to 1995, Mr. Laabs was with Scottsdale Insurance Company in the position of Senior Information Systems Services Director. Mr. Laabs has been engaged in the property and casualty insurance business since 1978. Joseph W. Pitts has served as Vice President of the Company since August of 1997. Mr. Pitts was promoted to Senior Vice President in 1999. From 1992 to 1997, Mr. Pitts was with USAA in the position of Actuary and Manager. Mr. Pitts has been engaged in the property and casualty insurance business since 1988. Stephen L. Porcelli has served as Senior Vice President of the Company since 1999. From 1994 to 1999 Mr. Porcelli was with TIG Insurance Company in the position of Senior Vice President. Mr. Porcelli has been engaged in the property and casualty insurance business since 1989. Carolyn E. Ray has served as Senior Vice President of the Company since 1998. From 1986 to 1998, Ms. Ray served as Vice President of the Company. From 1984 to 1985, Ms. Ray served as Assistant Vice President of the Company. Ms. Ray has been engaged in the property and casualty insurance business since 1976. Sam Rosen has served as the Secretary and a Director of the Company since 1983. Mr. Rosen is a partner with the law firm of Shannon, Gracey, Ratliff & Miller, L.L.P. He has been a partner in that firm or its predecessors since 1966. That firm, or its predecessors, has provided significant legal services for the Company since 1979. ITEM 2. PROPERTIES The Company owns its corporate offices which provide approximately 35,000 square feet of office space and additional parking. Future expansion will be possible by converting the parking area into office space. The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all improvements located thereon, including a 10,000 square foot office building. The Company currently has this property under lease to an unaffiliated third party. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in the proceedings styled William Steiner v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC., filed in the United States District Court for the Northern District of Texas, Fort Worth Division. In that case, the plaintiff asserts claims on behalf of a putative class of persons who purchased the Company's common stock between August 6, 1997 and July 16, 1998, inclusive. 17 18 The plaintiff asserts claims under section 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the Company's financial results did not reflect the Company's true financial position and results of operations in accordance with generally accepted accounting principles in that they understated reserves for claims and claim adjustment expenses. The Company believes that it has meritorious defenses to plaintiff's claims and intends to vigorously defend the action. In the normal course of its operations, the Company has been named as defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. In the opinion of the Company's management the ultimate liability, if any, resulting from the disposition of these claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company's management believes that unpaid claims and claim adjustment expenses are adequate to cover liabilities from claims that arise in the normal course of its insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS An Annual Meeting of Shareholders of GNA was held on December 9, 1999, in Fort Worth, Texas. At the Annual Meeting, shareholders elected directors for the ensuing year and until their successors are duly elected and qualified, and ratified the selection by the Board of Directors of KPMG LLP as the Company's independent auditors for the year ending December 31, 1999. The results of the voting were as follows:
Election of Directors For Withheld - --------------------- ---------- ---------- Glenn W. Anderson 22,768,838 1,517,623 J. Randall Chappel 22,768,086 1,518,375 Daniel J. Coots 24,127,912 158,549 John C. Goff 22,758,648 1,527,813 Robert J. McGee, Jr. 22,415,374 1,871,087 Joel C. Puckett 22,569,224 1,717,237 Sam Rosen 22,565,509 1,720,952 Harden H. Wiedemann 22,733,062 1,553,399 John H. Williams 22,759,552 1,526,909
Ratification of appointment of independent auditors:
Abstentions and Brokers ----------------------- For Against Non-Votes ---------- --------- --------- 22,845,246 1,383,014 58,201
18 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. GNA's Common Stock is listed on the New York Stock Exchange (Symbol: GNA). The following table sets forth for the fiscal periods indicated the high and low closing sales prices per share of the Common Stock as reported by the New York Stock Exchange. The prices reported reflect actual sales transactions.
HIGH LOW 1997 First Quarter 9 7/8 8 7/8 1997 Second Quarter 9 3/8 8 1/8 1997 Third Quarter 9 7/8 8 7/8 1997 Fourth Quarter 10 1/16 8 1/8 1998 First Quarter 8 11/16 7 7/8 1998 Second Quarter 9 7/8 6 1998 Third Quarter 7 15/16 5 15/16 1998 Fourth Quarter 7 1/8 5 15/16 1999 First Quarter 6 7/16 4 13/16 1999 Second Quarter 5 7/8 3 15/16 1999 Third Quarter 6 13/16 5 3/16 1999 Fourth Quarter 6 5/16 5 3/8
Cash dividends of $.015 per share were paid to shareholders of record on March 31, June 30 and September 30, 1997. Cash dividends of $.0175 per share were paid to shareholders of record on December 31, 1997, March 31, June 30, September 30 and December 31,1998 and March 31, June 30, September 30 and December 31, 1999. On February 25, 2000, the Company declared a $.0175 per share cash dividend payable to shareholders of record on March 31, 2000. The Company depends on cash flow from cash dividends paid by its subsidiaries for dividend payments on its Common Stock. The Company purchased 243,932 shares of its Common Stock during 1997. Additionally, a total of 17,200 shares were purchased in January and February of 1998. The Company has not purchased shares of its stock since February 1998 and has no current plans to purchase additional shares. As of March 23, 2000, there were 312 shareholders of record of GNA's Common Stock. 19 20 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of each of the years ended December 31, have been derived from the consolidated financial statements of the Company which have been audited by KPMG LLP, independent certified public accountants. The consolidated balance sheets as of December 31, 1999 and 1998, and the consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999, and the independent auditors report thereon are included elsewhere in this document. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," consolidated financial statements and the notes thereto, and the other financial information included herein.
Years ended December 31 ------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- ------- -------- ------- ------- (Dollar amounts in thousands, except per share data) Income Data: Gross premiums written (1) $ 133,898 91,162 99,776 110,000 108,072 Ceded premiums written 2,761 2,603 1,637 1,749 1,968 --------- ------- -------- ------- ------- Net premiums written 131,137 88,559 98,139 108,251 106,104 Decrease (increase) in unearned (17,857) 3,644 4,117 (1,458) (8,849) --------- ------- -------- ------- ------- premiums Net premiums earned 113,280 92,203 102,256 106,793 97,255 Net investment income 9,722 9,803 9,731 9,161 8,157 Net realized gains 606 693 327 472 108 Insurance services 1,849 2,927 2,631 2,379 2,183 --------- ------- -------- ------- ------- Total revenues 125,457 105,626 114,945 118,805 107,703 --------- ------- -------- ------- ------- Claims and claim adjustment expenses 76,349 86,353 62,086 58,379 48,465 Policy acquisition costs 24,288 23,619 22,552 23,828 19,679 Underwriting and operating expense 16,479 16,934 15,545 15,499 15,579 --------- ------- -------- ------- ------- Total expenses 117,116 126,906 100,183 97,706 83,723 --------- ------- -------- ------- ------- Income (loss) before taxes 8,341 (21,280) 14,762 21,099 23,980 Income tax expense (benefit) 1,214 (9,617) 2,838 5,079 6,352 --------- ------- -------- ------- ------- Net income (loss) (2) $ 7,127 (11,663) 11,924 16,020 17,628 ========= ======= ======== ======= ======= Earnings (loss) per share: Basic $ .34 (.56) .57 .75 .82 ========= ======= ======== ======= ======= Diluted $ .32 (.56) .56 .74 .81 ========= ======= ======== ======= ======= GAAP insurance ratios: Claims ratio 67.4% 93.7% 60.7% 54.7% 49.8% Expense ratio 32.0 39.0 33.7 33.8 33.1 --------- ------- -------- ------- ------- Combined ratio 99.4% 132.7% 94.4% 88.5% 82.9% ========= ======= ======== ======= =======
20 21
As of December 31 ---------------------------------------------------------- 1999 1998 1997 1996 1995 --------- ------- ------- ------- ------- (Dollar amounts in thousands, except per share data)) Balance Sheet Data: ------------------ Investments $ 245,180 210,989 216,802 203,831 183,027 Premiums receivable $ 25,432 14,885 14,250 15,825 15,914 Ceded unpaid claims and claim adjustment expense $ 37,299 35,030 29,524 26,713 24,650 Ceded unearned premiums $ 23,149 22,388 19,146 16,280 6,008 Deferred policy acquisition costs $ 14,928 11,320 11,618 12,634 12,115 Property and equipment $ 6,855 6,717 6,941 6,981 6,562 Goodwill $ 18,351 17,058 -- -- -- Total assets $ 395,648 345,590 313,685 296,846 264,156 Unpaid claims and claim adjustment expenses $ 132,814 136,798 113,227 105,692 95,011 Unearned premiums $ 82,220 63,602 64,005 65,255 53,525 Note payable $ 18,000 18,000 - - 1,750 Total liabilities $ 257,949 240,106 195,123 187,493 164,714 Shareholders' equity $ 137,699 105,484 118,562 109,353 99,442 Shareholders' equity per share (3) $ 5.08 5.05 5.68 5.19 4.62
----------------------------------------- (1) Excludes premiums of $58,137,000 in 1999, $47,588,000 in 1998, $40,136,000 in 1997, $31,603,000 in 1996, and $8,893,000 in 1995 from the Company's fronting arrangements, the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company was a servicing carrier and the reinsurance arrangement in Florida whereby MGAI premiums are ceded to a non-affiliated reinsurer and assumed by General Agents. (2) Includes after tax net realized gains of $400,000, $457,000, $212,000, $307,000, and $70,000 for 1999, 1998,1997, 1996, and 1995, respectively. (3) Based on shares of Common Stock outstanding of 27,119,833, 20,896,563, 20,874,224, 21,087,407 and 21,525,221 at the end of 1999, 1998, 1997, 1996 and 1995, respectively. Common Stock outstanding at December 31, 1999 assumes conversion of the Series A Convertible Preferred stock that was issued in conjunction with the GMSP transaction. 21 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OPERATIONS The Company recorded net income of $7,127,137, or $.32 per share (diluted) in 1999, compared to a net loss in 1998 of $11,662,564, or $.56 per share (basic), and net income for 1997 of $11,923,526, or $.56 per share (diluted) for 1997. The Company recorded GAAP combined ratios of 99.4% in 1999 and 132.7% in 1998. On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National Specialty Lines, Inc. ("NSL") and DLT Insurance Adjusters, Inc. ("DLT"). NSL is a managing general agency that markets nonstandard personal auto insurance through approximately 800 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was for $18,000,000 in cash paid at closing plus up to an additional $22,000,000 in cash to be paid over approximately five years contingent upon the operating performance of the Lalande Group. The Company will pay $2,000,000 of the operating performance contingency in the second quarter of 2000. In April 1999, the Company completed the sale of the assets of Agents Processing Systems, Inc. ("APS"), which marketed a computer software package related to general agency operations. The purchaser acquired all rights to the APS software products, assignment of the APS customer contracts and other miscellaneous assets for a nominal amount of cash, assumption of contract obligations, a fixed number of software use licenses and development work on an electronic data interchange project. The Company recorded a small write-off as a result of this transaction. On October 4, 1999 the Company sold to Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP") for an aggregate purchase price of $31,620,000 (a) 31,620 shares of the Company's Series A Convertible Preferred Stock, which are convertible into shares of the Company's Common Stock, par value $.10 per share ("Common Stock"), at a conversion price of $5.10 per share, (b) a five year Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $6.375 per share and (c) a seven year Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $8.50 per share. The Company and its insurance company subsidiaries entered into Investment Management Agreements with GMSP, pursuant to which GMSP will manage their respective investment portfolios. Proceeds from the GMSP Transaction are available for acquisitions, investments and other corporate purposes. On January 7, 2000 the Company completed the acquisition of Tri-State, Ltd., an insurance operation specializing primarily in underwriting, servicing and claims handling of nonstandard personal auto insurance in Minnesota, North Dakota and South Dakota. The purchase price was for $6,000,000 with additional payments of up to approximately $5,500,000 in cash over the next several years based on conversion of business, specific profitability targets and Tri-State, Ltd.'s December 31, 1999 book value. The discussion below primarily relates to the Company's insurance operations, although the selected consolidated financial data appearing elsewhere is on a consolidated basis. The expense item "Underwriting and operating expenses" includes the operating expenses of the computer software, plan servicing and premium finance operations. 22 23 RESULTS OF OPERATIONS Gross premiums written in 1999 of $133,898,001 were 47% above the $91,162,086 recorded in 1998 largely because of the nonstandard personal auto business written in Florida beginning in late 1998. The 9% decrease recorded in 1998 from 1997 was largely due to the run-off of discontinued classes and continued pricing pressure from competition. The following table compares the major product lines between the years for gross premiums written:
Years ended December 31 ---------------------------------------------------------------- 1999 1998 1997 ------------------ --------------- -------------- (Dollar amounts in thousands) Gross Premiums Written: Commercial Lines $ 97,139 73% $88,188 97% $99,776 100% Personal Lines 36,759 27 2,974 3 -- -- -------- ---- ------- ---- ------ --- $133,898 100% $91,162 100% $99,776 100% ======== ==== ======= ==== ======= === Policies in Force (End of Period) 68,943 38,939 35,962
COMMERCIAL LINES grew 10% in 1999 following a 12% decrease in 1998. Commercial auto contributed 7 points to the increase in 1999 with Texas, Florida and Georgia accounting for the majority. In 1998 Kentucky commercial auto as well as the decision to exit certain other unprofitable commercial auto classes contributed 6 points to the decrease. The garage product decreased in both years accounting for 3 points in 1999 and in 1998. Continued pricing pressure and new entrants to the garage market in both years are the primary reasons. The general liability line contributed 3 points to the increase in 1999 primarily as a result of growth in Texas. In 1998 general liability recorded small decrease as a result of continued pricing pressure and competitors entering the market. PERSONAL LINES increased in 1999 as a result of the Florida nonstandard personal auto business the Company began writing in late 1998. For 1999 gross premiums written percentages by significant product line are as follows: commercial auto (41%), personal auto (26%), general liability (13%) and garage (13%), with no other product line comprising 5% or more. Premiums earned increased 23% in 1999 but decreased 10% in 1998 as a direct result of the level of premiums written. Net investment income decreased 1% in 1999 from 1998 after a 1% increase in 1998 over 1997. The decrease in 1999 was the result of reinvesting maturities through the first nine months in shorter durations that had lower yields. In the fourth quarter GMSP invested approximately $30 million in the Company and took over management of the Company's investments. Investment income in the fourth quarter of 1999 increased over the comparable 1998 period and offset a large portion of the decrease in investment income recorded during the first nine months of 1999 when compared to the first nine months of 1998. At December 31, 1999, 98% of the Company's investments were investment grade with an average duration of approximately 2.6 years. On a taxable equivalent basis the return on average investments was 5.7% in 1999, 6.2% in 1998 and 6.5% in 1997. The Company classifies its bond securities as available for sale. The Company does not have any non-performing fixed maturity securities. The Company anticipates redeploying up to approximately 50% of its bond securities during the year 2000 in an attempt to increase the taxable equivalent yield. This strategy is expected to result in net realized after tax losses in 2000. The impact on book value is anticipated to be significantly less than the impact on earnings because the securities have been recorded on the balance sheet at fair value at December 31, 1999. The unrealized loss associated with the investment portfolio was $2,246,575 (net of tax effects) at December 31, 1999. The scope and results of the investment redeployment program will depend upon interest rates and the timing of specific transactions. The Company recorded net realized capital gains of $605,606 in 1999 versus $692,510 in 1998 and $326,905 in 1997. All of these gains were generated from the bonds available for sale category of the fixed maturity portfolio. 23 24 Insurance service revenues decreased $1,078,997 in 1999 from 1998 primarily as a result of the run-off of the plan servicing business and the sale of the computer software operation. These decreases were offset to some extent by revenues from the claim adjusting operation. Claims and claim adjustment expenses ("C & CAE") decreased $10,003,936 in 1999 from 1998 but increased $24,267,337 in 1998 over 1997. The C & CAE ratio was 67.4% in 1999, 93.7% in 1998 and 60.7% in 1997. The ratio in 1998 is above the 1999 and 1997 levels because of significant unfavorable development from prior accident years that was recorded in 1998. The 1998 C & CAE ratio included 33 percentage points of unanticipated unfavorable development in C & CAE incurred from the 1997, 1996 and 1995 accident years for commercial auto liability. The Company writes in areas where catastrophes have recently occurred. The net claims incurred from these events were approximately $900,000 in 1999. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. The Company's premium writings for product liability coverages are immaterial. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results. The ratio of commissions to gross premiums written was 21% in 1999, 26% in 1998 and 22% in 1997. The ratio in 1998 is above 1999 and 1997 primarily due to a reduction in reinsurance commission income of approximately $3,318,000 that was recorded in 1998. This was a result of unfavorable development in C & CAE incurred in 1998, mentioned previously. The ratio of commissions to premiums earned was 25% for 1999 and 1998 versus 21% for 1997. The 1999 ratio is above 1997 primarily due to the increase in the growth rate of gross premiums written in 1999. The increase in the ratio in 1998 is a result of the reduction in reinsurance commission income in 1998. The change in deferred policy acquisition costs and deferred ceding commission income ("DAC") resulted in a net increase to income of $3,607,531 in 1999 and a net decrease to income of $297,994 and $1,015,802 for 1998 and 1997, respectively. The change in the amount of the increase or decrease in DAC between the comparable periods is primarily related to the rate at which unearned premiums are growing or declining as a result of premium writings. Since DAC (asset) is a function of unearned premiums (liability), an increase in the growth rate of net unearned premiums would correspondingly result in an increase in the growth rate of DAC and vice versa. Interest expense from the note payable and amortization expense related to the goodwill on the Lalande acquisition increased primarily as a result of recording a full year of expenses in 1999 versus approximately three months of expenses in 1998. Underwriting and operating expenses were down 13% in 1999 from 1998, but were up 9% in 1998 over 1997. The decrease for 1999 and the increase for 1998 were primarily due to approximately $2 million in non-recurring expenses associated with a reduction in the number of employees, legal fees and consulting fees that were incurred in 1998. The effective tax rates of 15% for 1999 and 19% for 1997 are primarily the result of tax-exempt income comprising a major portion of income before taxes. For 1998 the Company generated a current tax benefit as a result of the loss from operations. The large increase in the deferred tax benefit in 1998 is primarily the result of the large increase recorded to C & CAE reserves in 1998. The effective tax benefit rate for 1998 of 45% is above the Federal statutory rate largely because of tax-exempt interest income. For the Company, the fresh start adjustment (tax benefit) was immaterial for all years presented. A reconciliation between income taxes computed at the Federal statutory rates and the provision for income taxes is included in Note 6 of Notes to Consolidated Financial Statements. 24 25 LIQUIDITY AND CAPITAL RESOURCES The primary sources of the Company's liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 1999, the Company held short-term investments and cash that the Company believes is adequate liquidity for the payment of claims and other short-term commitments. This amount is larger than normal because the funds received from GMSP in October 1999 had not been fully invested in bonds, stocks and alternative investments at December 31, 1999. With regard to long term liquidity, the average duration of the investment portfolio is approximately 2.6 years. The fair value of the fixed maturity portfolio at December 31, 1999 was $3,338,143 below amortized cost. With regard to the availability of funds to the holding company, see Note 7 of Notes to Consolidated Financial Statements for restrictions on the payment of dividends by the insurance companies. Various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1999 and 1998, the balance on deposit for the benefit of such policyholders totaled $14,832,735 and $14,699,727, respectively. The increase in investments is primarily attributable to the capital received in the GMSP transaction described previously. In the fourth quarter of 1999 all bonds classified as held to maturity were transferred to the available for sale classification and adjusted to fair value. The amortized cost at the date of transfer for these bonds $41,069,988 and the fair value was $41,036,014 resulting in an unrealized loss before Federal income taxes of $33,974. The company made this change since it no longer invests in bonds with the intent of holding them to maturity. Premiums receivable and ceded unpaid claims and claim adjustment expenses increased primarily as a result of the personal lines business written in 1999. Deferred policy acquisition costs (DAC) increased primarily because of the increase in unearned premiums. Current Federal income taxes recoverable decreased primarily due to the receipt of the refund for the 1998 year. The increase in other assets is primarily related to an increase in funds on deposit with reinsurers for 1999. Unpaid claims and claim adjustment expenses decreased primarily due to commercial lines CAE reserves decreasing as a result of the large number of prior accident year claims closed in 1999, as well as material decreases in plan servicing and fronting reserves. Unearned premiums increased because of the increase in premiums written mentioned previously. Commissions payable decreased primarily because of balances settled in 1999 on commercial reinsurance treaties. Reinsurance balances payable increased primarily because of the increased activity in personal lines. The increase in preferred stock, common stock warrants and additional paid-in capital is primarily related to the GMSP transaction described previously. An accumulated other comprehensive loss of $2,246,575 was recorded at December 31, 1999 as a result of the unrealized losses on bonds available for sale. This was primarily attributable to the general increase in interest rates. The Company is not aware of any current recommendations by regulatory authorities, which if implemented, would have a material effect on the Company's liquidity, capital resources or results of operations. The Company's statutory capital exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies. YEAR 2000 READINESS There has been concern that there would be worldwide computer problems in early 2000 due to their failure to properly recognize a year that begins with "20" instead of the familiar "19" and because the Year 2000 is 25 26 a leap year. To address these and related concerns, the Company appointed a Year 2000 team involving personnel from all business units to assess the Year 2000 readiness of the Company and those with whom it does business, and then address any problems found. The Company contracted with a major consulting vendor to perform due diligence assessment and testing of its Year 2000 project. While assessing the Company's readiness, the vendor identified some programs that required additional remediation and re-testing. The Company believes that all identified non-conforming programs have been corrected and that it has not experienced any material Year 2000 related system failures or disruptions. The Company, however, plans to continue to monitor its systems and operations and to address any date-related problems that may arise. The Company reviewed the insurance policies written by it and its underwriting guides to determine Year 2000 exposure. The Company made a decision to exclude Year 2000 exposures from all insurance policies written by it and began adding exclusions in November 1997. The Company believes Year 2000 liabilities are not fortuitous in nature and would not be covered under its insurance policies. The Company believes that its coverage exposure with respect to Year 2000 losses will not be material. However, changes in social and legal trends may establish coverage unintended for Year 2000 exposures by re-interpreting insurance contracts and exclusions. Litigation with respect to Year 2000 claims and the attendant costs are to be expected. It is impossible to predict what exposure insurance companies may bear for Year 2000 losses. The Company estimates that its costs in 1998 and 1999 of addressing the Year 2000 problem aggregated approximately $920,000, including modifying or replacing software and other systems, hiring Year 2000 solution providers and internal assessment, remediation and testing. These costs were funded by internally generated funds. No material additional Year 2000 costs are anticipated. FORWARD LOOKING STATEMENTS Statements made in this report that are not strictly historical may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that important factors, representing certain risks and uncertainties, could cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, (a) heightened competition from existing competitors and new competitor entrants into the Company's markets, (b) contraction of the markets for the Company's various lines of business, (c) development and performance of new specialty programs, (d) the ongoing level of claims and claims-related expenses, (e) adequacy of claim reserves, (f) the ability to complete value-adding acquisitions and fully integrate newly acquired companies and their customers and managers into the Company, as well as, the ability to implement growth strategies which can achieve incremental value, (g) the effectiveness of the redeployment of the Company's bond portfolio and other investment strategies implemented by the Company's investment manager, and (h) general economic conditions including fluctuations in interest rates. A forward-looking statement is relevant as of the date the statement is made. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which the statements are made. 26 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. The Company's consolidated balance sheets include assets whose estimated fair values are subject to market risk. The primary market risk to the Company is interest rate risk associated with investments in fixed maturities. The Company has no foreign exchange or commodity risk, and its exposure to equity risk is immaterial. INTEREST RATE RISK The Company's fixed maturity investments are subject to interest rate risk. Increases and decreases in interest rates typically result in decreases and increases in the fair value of these investments. Most of the Company's investable assets are in the portfolios of the insurance company subsidiaries and come from premiums paid by policyholders. These funds are invested predominately in high quality bonds with relatively short durations. The fixed maturity portfolio had an average duration of 2.6 years at December 31, 1999. The fixed maturity portfolio is exposed to interest rate fluctuations; as interest rates rise, fair values decline and as interest rates fall, fair values rise. The changes in the fair value of the fixed maturity portfolio are presented as a component of shareholders' equity in accumulated other comprehensive income, net of taxes. The effective duration of the fixed maturity portfolio is managed with consideration given to the estimated duration of the Company's liabilities. The Company has investment policies that limit the maximum duration and maturity of the fixed maturity portfolio. The Company utilizes the modified duration method to estimate the effect of interest rate risk on the fair values of its fixed maturity portfolio. The usefulness of this method is to a degree limited, as it is unable to accurately incorporate the full complexity of market interactions. 27 28 The table below summarizes the Company's interest rate risk and shows the effect of a hypothetical change in interest rates as of December 31, 1999. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios (dollars in thousands):
Estimated Estimated Hypothetical Estimated Fair Change in Fair Value After Percentage Increase Value at Interest Rates Hypothetical Change (Decrease) in December 31, 1999 (BP=basis points) in Interest Rates Shareholders' Equity ----------------- ---------------- ------------------- -------------------- U.S. Treasury securities $ 70,507 200 BP Decrease $ 71,315 .4 (including short-term 100 BP Decrease $ 70,911 .2 Investments) 100 BP Increase $ 70,103 (.2) 200 BP Increase $ 69,699 (.4) Obligation of states, $ 146,204 200 BP Decrease $ 153,998 3.7 municipalities and 100 BP Decrease $ 150,101 1.8 political subdivisions 100 BP Increase $ 142,307 (1.8) 200 BP Increase $ 138,410 (3.7) Corporate bonds and $ 27,299 200 BP Decrease $ 29,535 1.1 Certificates of Deposit 100 BP Decrease $ 28,417 .5 100 BP Increase $ 26,181 (.5) 200 BP Increase $ 25,063 (1.1) Total fixed maturity investments $ 244,010 200 BP Decrease $ 254,848 5.1 (included short-term 100 BP Decrease $ 249,429 2.6 Investments) 100 BP Increase $ 238,591 (2.6) 200 BP Increase $ 233,172 (5.1)
28 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated Financial Statements are on pages 41 through 71:
Page ---- Report of Management 41 Independent Auditors' Report 42 Consolidated Balance Sheets as of December 31, 1999 and 1998 43-44 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998, and 1997 45 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998, and 1997 46-47 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997 48-49 Notes to Consolidated Financial Statements December 31, 1999, 1998, and 1997 50-71 The following Consolidated Financial Statements Schedules are on pages 72 through 83: Schedule Page ---- Independent Auditors' Report on Supplementary Information 72 I Summary of Investments 73 II Condensed Financial Information of the Registrant 74-80 III Supplementary Insurance Information 81 IV Reinsurance 82 VI Supplemental Information 83
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 29 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with regard to Executive Officers is included in Part 1 of this report under the heading "Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be supplied by a Schedule 14A filing or an amendment to this Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 23, 2000, the number of shares of Common Stock beneficially owned (as defined by the rules of the Securities and Exchange Commission (the "SEC")) by (i) each person who is known to the Company to be the beneficial owner of more than five percent of the outstanding Common Stock, (ii) Goff Moore Strategic Partners, L.P. ("GMSP"), (iii) each director of the Company, (iv) the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company for the year ended December 31, 1999, and (v) all of the executive officers of the Company as a group.
Amount and Nature of Beneficial Ownership(1) ----------------------------------------- Number Percent of Name of Beneficial Owner of Shares(2) Voting Stock (3) - ------------------------------------------------ ----------- ------------ Goff Moore Strategic Partners, L.P., John C. Goff and J. Randall Chappel 10,406,000 (4) 32.9% I.G. Investment Management, Ltd. 1,924,800 (5) 6.1% The Millers Mutual Fire Insurance Company 1,559,900 (6) 4.9% Dimensional Fund Advisors, Inc. 1,381,842 (7) 4.4% Joseph D. Macchia 1,361,988 (8) 4.3% Glenn W. Anderson 692,110 (9) 2.2% Joel C. Puckett 496,821 (10) 1.6% Sam Rosen 243,172 (11) * Carolyn E. Ray 135,685 (12) * Daniel J. Coots 123,358 (13) * John H. Williams 62,562 (14) * Harden H. Wiedemann 54,265 (15) * Richard M. Buxton 44,221 (16) * J. Landis Graham 35,723 (17) * Robert J. McGee 33,600 (18) * Directors and executive officers as a group (17 persons) 12,392,661 (19) 39.3%
- ------------------------------- * Less than 1% 30 31 (1) Each person named below has the sole investment and voting power with respect to all shares of Common Stock shown as beneficially owned by the person, except (a) with respect to shares shown as held for a person's account in the Company's Profit Sharing Plan, the person has sole investment power but no voting power and (b) as otherwise indicated below. (2) Under applicable SEC rules, a person is deemed the "beneficial owner" of a security with regard to which the person, directly or indirectly, has or shares (a) the voting power, which includes the power to vote or direct the voting of the security, or (b) the investment power, which includes the power to dispose, or direct the disposition of the security, in each case irrespective of the persons' economic interest in the security. Under these SEC rules, a person is deemed to beneficially own securities which the person has the right to acquire within sixty days (x) through the exercise of any option or warrant or (y) through the conversion of another security. (3) In determining the Percent of Voting Stock owned by a person, (a) the numerator is the number of shares of Common Stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within sixty days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the sum of (i) the combined number of shares of Common Stock outstanding and those then issuable upon conversion of the Series A Preferred Stock and (ii) any shares of Common Stock which the person has the right to acquire within sixty days upon the exercise of options or warrants. The denominator does not include shares which may be issued upon the exercise of any other options or warrants. (4) Includes (a) 6,200,000 shares of Common Stock which GMSP may acquire upon conversion of 31,620 shares of the Series A Preferred Stock, (b) 3,100,000 shares of Common Stock issuable upon exercise of presently exercisable warrants to purchase shares of Common Stock, (c) 1,064,000 shares of Common Stock beneficially owned by GMSP, (d) 33,600 shares of Common Stock that Mr. Goff has the right to acquire within 60 days through exercise of options granted under the 1995 Stock Option Plan, and (e) 8,400 shares of Common Stock that Mr. Chappel has the right to acquire within 60 days through exercise of options granted under the 1995 Stock Option Plan. See "Item 13 - Certain Relationships and Related Transactions-Transactions with Goff Moore Strategic Partners, L.P." for information regarding GMSP and the relationship of Messrs. Goff and Chappel to GMSP. (5) Based on information set forth in a Schedule 13G/A, dated November 2, 1999, these shares were reported, as of June 4, 1999, to be beneficially owned by I.G. Investment Management, Ltd., Investors Group Inc., Investors Group Trustco Inc., Investors Group Trust Co. Ltd. and Investors U.S. Opportunities Fund (the "IGIM Reporting Persons"). All of the IGIM Reporting Persons have their principal place of business at One Canada Centre, 447 Portage Avenue, Winnipeg, Manitoba R3C 3B6. All of the IGIM Reporting Persons reported beneficial ownership of these shares with shared voting and dispositive power. (6) Based on information set forth in a Schedule 13D, dated May 6, 1998, these shares were reported, as of April 27, 1998, to be beneficially owned by The Millers Mutual Fire Insurance Company, 300 Burnett Street, Fort Worth, Texas 76102. The Millers Mutual Fire Insurance Company reported beneficial ownership of these shares with sole voting and dispositive power. (7) Based on information set forth in a Schedule 13G, dated February 11, 1999, these shares were reported, as of December 31, 1998, to be beneficially owned by Dimensional Fund Advisors Inc., 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. Dimensional Fund Advisors Inc. reported beneficial ownership of these shares with sole voting and dispositive power. (8) Based on information set forth in a Schedule 13D/A, dated September 13, 1999, these shares were reported, as of September 10, 1999, to be beneficially owned by Joseph D. Macchia, 1409 Indian Creek Drive, Fort Worth, Texas 76107-3520. Mr. Macchia reported beneficial ownership of these shares with sole voting and dispositive power. (9) Includes 579,710 shares of Common Stock that Mr. Anderson has the right to acquire within 60 days through the exercise of options granted pursuant to his Employment Agreement with the Company and 900 shares of Common Stock held by the Profit Sharing Plan of the Company for the account of Mr. Anderson as beneficiary. (10) Includes 51,927 shares of Common Stock held by the Joel Puckett Self-Employed Retirement Trust and 193,701 shares of Common Stock that Mr. Puckett has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (11) Includes 3,163 shares of an IRA of Mr. Rosen's wife. Mr. Rosen disclaims beneficial ownership of those shares. Also includes 35,065 shares held for the benefit of Mr. Rosen by the Shannon, Gracey, Ratliff & Miller, L.L.P. Profit Sharing Plan, 3,163 shares of Common Stock held by Mr. Rosen's IRA and 124,064 shares of Common Stock that Mr. Rosen has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. 31 32 Mr. Rosen is a partner in the law firm of Shannon, Gracey, Ratliff & Miller, L.L.P. (12) Includes 11,695 shares of Common Stock held by the Profit Sharing Plan of the Company for the account of Ms. Ray as beneficiary and 73,250 shares of Common Stock that Ms. Ray has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (13) Includes 40,567 shares of Common Stock held by the Profit Sharing Plan of the Company for the account of Mr. Coots as beneficiary and 76,270 shares of Common Stock that Mr. Coots has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (14) Includes 42,000 shares of Common Stock that Mr. Williams has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (15) Includes 50,400 shares of Common Stock that Mr. Wiedemann has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (16) Includes 1,889 shares of Common Stock held by the Profit Sharing Plan of the Company for the account of Mr. Buxton as beneficiary and 27,332 shares of Common Stock that Mr. Buxton has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (17) Includes 7,545 shares of Common Stock held by the Profit Sharing Plan of the Company for the account of Mr. Graham as beneficiary and 27,876 shares of Common Stock that Mr. Graham has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (18) Includes 33,600 shares of Common Stock that Mr. McGee has the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan. (19) Includes (a) 63,360 shares of Common Stock held by the Profit Sharing Plan of the Company for the account of executive officers, (b) 1,309,227 shares of Common Stock that directors and executive officers of the Company have the right to acquire within 60 days through the exercise of options granted under the 1990 Stock Option Plan and 1995 Stock Option Plan and pursuant to Mr. Anderson's Employment Agreement with the Company, (c) 6,2000,000 shares of Common Stock which GMSP may acquire upon conversion of 31,620 shares of the Series A Preferred Stock, (d) 3,100,000 shares of Common Stock issuable upon exercise of presently exercisable warrants to purchase Common Stock held by GMSP, and (e) 1,064,000 shares of Common Stock that GMSP has advised the Company are beneficially owned by GMSP, of which Mr. Goff and Mr. Chappel are principals. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of the Common Stock to file with the SEC and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Stock. Officers, directors and greater than ten-percent beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of the Section 16(a) reports to finished to it, the Company believes the persons who were required to file Section 16(a) reports in respect of their Section 16(a) ownership of Common Stock have filed on a timely basis all Section 16(a) reports required to be filed by them, except that J. Randall Chappel failed to file a Form 4 with respect to options granted to him by the Company in October 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS GLENN W. ANDERSON EMPLOYMENT AGREEMENT. On April 17, 1998 Mr. Anderson assumed the position of President and Chief Executive Officer of the Company under an employment agreement (the "Anderson Employment Agreement") negotiated between Mr. Anderson and the outside directors prior to his agreeing to join the Company. The Anderson Employment Agreement provided that Mr. Anderson was to receive an annual base salary of $340,000 (of which $238,436 was accrued and paid in 1998), a guaranteed first year bonus of $260,000 (of which $195,000 was accrued in 1998 and paid in 1999), payment of relocation expenses and various other benefits aggregating $155,397 in 1998, and a non-qualified stock option to purchase 579,710 shares of Common Stock at an exercise price initially fixed at $8.625 per share. In 1999 pursuant to the Anderson Employment Agreement Mr. Anderson earned $340,000 and $175,000 in bonus. The Anderson Employment Agreement provided that, if on any trading day within five business days after the public announcement of the Company's results of operations for the quarter ended June 30, 1998 the last reported sales price for the Common Stock on the New York Stock Exchange was below the initial price, Mr. Anderson's option was to be canceled and replaced with a new option for the same number of shares and with an exercise price equal to the lowest closing price during that five day period. In accordance with those 32 33 provisions, on July 24, 1998 Mr. Anderson was issued a replacement non-qualified stock option to purchase 579,710 shares of Common Stock for $5.75, subject to typical anti-dilution provisions. The options were fully vested and exercisable upon grant and had a term of five years. The Anderson Employment Agreement provided for an initial four year term. On each anniversary of its making, the Anderson Employment Agreement automatically extends for an additional one year period, unless either the Company or Mr. Anderson delivers written notice to the other at least thirty days prior to the anniversary. The Anderson Employment Agreement permits termination of Mr. Anderson for cause with payment of salary accrued to the date of termination. If Mr. Anderson's employment is terminated without cause, he will be entitled to an amount equal to thirty-six times 150% of his then current monthly rate of base salary. The Company also entered into a change in control agreement with Mr. Anderson in substantially the same form as those entered into with other executive officers of the Company. If Mr. Anderson is terminated without cause, he will be entitled to the greater of (i) the amount he would be entitled to upon such termination under the Anderson Employment Agreement in the absence of a change in control or (ii) the amount called for by his change in control agreement. TRANSACTIONS WITH GOFF MOORE STRATEGIC PARTNERS, L.P. On October 4, 1999, the Company consummated the sale of shares of Series A Preferred Stock and warrants to purchase Common Stock to GMSP pursuant to a Securities Purchase Agreement ("Purchase Agreement") between the Company and GMSP dated effective June 29, 1999 (the "GMSP Transaction"). At the closing, the Company sold to GMSP for cash consideration of $31,620,000 (i) 31,620 shares of the Series A Preferred Stock, which are convertible into shares of the Common Stock at a conversion price of $5.10 per share (subject to adjustment), currently for a total of 6,200,000 shares of Common Stock, (ii) a five year Warrant (the "Series A Warrant") to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $6.375 per share (subject to adjustment), and (iii) a seven year Warrant (the "Series B Warrant") to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $8.50 per share (subject to adjustment). At the closing, the Company and certain of the Company's subsidiaries entered into Investment Management Agreements with GMSP, pursuant to which GMSP will manage the consolidated investment portfolios of the Company and its insurance company subsidiaries. The Series A Preferred Stock issued to GMSP is presently convertible into, and the Series A Warrant and Series B Warrant are presently exercisable for, shares of Common Stock at the option of the holder. Assuming the Series A Preferred Stock is fully converted and the Series A Warrant and Series B Warrant are fully exercised on the Record Date, GMSP would own directly and have the power to vote 10,164,000 shares of Common Stock (approximately 33.7% of the then outstanding Common Stock). Each share of Series A Preferred Stock is entitled to vote with the Common Stock as a single class on all matters for which the Common Stock may vote on the basis of one vote per share of Common Stock into which it is convertible. The shares underlying the Series A Warrant and the Series B Warrant are not currently outstanding and do not have voting rights. The Purchase Agreement generally prohibits GMSP, its affiliates, associates, and employees from beneficially owning in the aggregate more than 35% of the fully-diluted Common Stock, other than as a result of repurchases of stock by the Company or pursuant to the acquisition of additional shares of Common Stock pursuant to the Company's 1990 Stock Option Plan, 1995 Stock Option Plan, or 1998 Long-Term Incentive Plan. GMSP was formed in February 1998, to serve as the primary investment vehicle for its principals, as well as Richard E. Rainwater and his family who are limited partners. GMSP is principally a long-term investor in companies that it deems to have superior management and attractive growth prospects. The partnership's Managing Principals are John C. Goff, a partner of Mr. Rainwater's for over 12 years, and Darla 33 34 D. Moore, who is Mr. Rainwater's wife and a former Managing Director of the Chase Manhattan Bank. J. Randall Chappel is a principal of GMSP and has been associated with Mr. Rainwater and his affiliated companies for 12 years. Mr. Goff owns approximately 44.9% of the limited partnership interests of GMSP Operating Partners, L.P., the general partner of GMSP. GMSP Operating Partners, L.P. owns approximately 14.3% of the partnership interests of GMSP. Mr. Goff also owns 50% of the membership interests of GMSP, L.L.C., the general partner of GMSP Operating Partners, L.P. GMSP, L.L.C. owns 1% of the partnership interests and is the general partner of GMSP Operating Partners, L.P. The Purchase Agreement provides that GMSP is entitled to designate two directors as long as GMSP and its affiliates, associates and employees maintain ownership of 75% of its current security holdings in the Company or 20% of the fully diluted Common Stock, and one director by maintaining ownership of 50% of its current security holdings or 5% of the fully diluted Common Stock. GMSP has designated Messrs. Goff and Chappel as its representatives on the Board. Any substitute for Messrs. Goff or Chappel must be acceptable to the members of the Board not affiliated with GMSP, its affiliates, associates or employees. Pursuant to the Purchase Agreement, the Company and each of its insurance company subsidiaries entered into Investment Management Agreements with GMSP which provide GMSP will manage the investments of the holding and insurance company funds of the type listed under the categories "Investments" on the Company's reports filed with the SEC. Under the Investment Management Agreements, GMSP is to receive investment management fees equal on an annual basis to (i) 30 basis points multiplied by the fair market value with respect to any portion of the portfolio invested in short term debt or investment grade debt obligations at the end of a given calendar month or during a majority of the days in the given calendar month and (ii) 100 basis points multiplied by the fair market value with respect to any portion of the portfolio invested in equity securities or other alternative investments in securities which are not investment grade debt obligations. No fees are payable with respect to the portions of the portfolio held in cash. Accrued fees will be paid monthly, based on the fair value of the investments at the end of each calendar month and subject to a minimum monthly fee of $75,000 in the aggregate under all the Investment Management Agreements. Pursuant to these Investment Management Agreements and with the specific approval of the Investment Committee (which is comprised of four directors who are not affiliated with GMSP), the Company has, and may in the future, invest in entities in which GMSP or its principals are affiliates or co-investors. On November 30, 1999, GNA agreed to invest $2,000,000 in GNA Investments I, L.P., a Texas limited partnership, in which GMSP has 1% general partner interest and GNA has 99% limited partner interest, to serve as a conduit for co-investing with GMSP in private transactions with early stage technology companies whose securities are speculative and involve a high degree of risk. In February and March 2000, the Company purchased in open market transactions common stock of Crescent Real Estate Equities, Inc. ("CEI") at an aggregate cost of approximately $2,523,000, and debt securities of CEI at an aggregate cost of approximately $2,443,000. John C. Goff, a principal of GMSP and a director of GNA, is President, Chief Executive Officer and a director of CEI. LALANDE GROUP ACQUISITION. On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National Specialty Lines, Inc. ("NSL") and DLT Insurance Adjusters, Inc. ("DLT"). NSL is a managing general agency that markets nonstandard personal auto insurance through approximately 800 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was for $18,000,000 in cash paid at closing plus up to an additional $22,000,000 in cash to be paid over approximately five years contingent upon the operating performance of the Lalande Group. The Company will pay $2,000,000 of the operating performance contingency in the second quarter of 2000. 34 35 Carlos de la Torre and McRae B. Johnston entered into employment contracts with the Company upon consummation of the Company's acquisition of the Lalande Group. They shared the major part of the consideration paid for the Lalande Group. AGREEMENT WITH CLIENTSOFT. Beginning in July, 1999 and as part of the Company's initiative for linking its agents through a new Internet system, the Company entered into arrangements with ClientSoft, Inc. for the development of software for an Internet-based point of sale system to facilitate the Company's independent agents' performance of functions such as quoting, rating, application completion, policy underwriting and requesting reports. In 1999 the Company paid approximately $193,000 to ClientSoft under these arrangements and has budgeted spending an additional $1,000,000 for ClientSoft services in 2000. Glenn W. Anderson, President, Chief Executive Officer and a director of the Company, was a director of ClientSoft from December 13, 1999 to February 22, 2000. 35 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 8-K (a) Documents filed as part of the report: 1. The following financial statements filed under Part II, Item 8: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements, December 31, 1999, 1998 and 1997 2. The following Consolidated Financial Statement Schedules are filed under Part II, Item 8: Schedule Description -------- ----------- I Summary of Investments II Condensed Financial Information of the Registrant III Supplementary Insurance Information IV Reinsurance VI Supplemental Information 3. The following Exhibits: Exhibit No. *3.1 Restated Articles of Incorporation of Registrant as filed with the Secretary of State of Texas on July 24, 1986 [Exhibit 3.1, filed in Registration Statement No. 33-7846 on Form S-1, effective November 6, 1986]. 36 37 *3.2 Articles of Amendment to the Articles of Incorporation as filed with the Secretary of State of Texas on June 10, 1988 [Exhibit 3.2, filed in Registration Statement No. 33-25226 on Form S-1, effective November 14, 1988]. *3.3 Articles of Amendment to Articles of Incorporation as filed with the Secretary of State of Texas on August 13, 1993 [Exhibit 3.6, Form 10-K dated March 25, 1994]. *3.4 Statement of Resolution Establishing and Designating Series A Convertible Preferred Stock of Registrant as filed with the Secretary of State of the State of Texas on October 1, 1999 [Exhibit 99.18, Form 8-K dated June 29, 1999]. +3.5 Bylaws of Registrant as amended through February 24, 2000. *4.1 Rights Agreement, dated as of March 3, 1988, between the Registrant and Team Bank/Fort Worth, N.A. [Exhibit 1, Form 8-K dated March 14, 1988]. *4.2 Amendment No. 1 dated as of March 5, 1990 to Rights Agreement dated as of March 3, 1988 between Registrant and Team Bank as Rights Agent [Exhibit 4.2, Form 10-K dated March 27, 1992]. *4.3 Amendment No. 2 dated as of May 25, 1993 to Rights Agreement between Registrant and Society National Bank (successor to Team Bank (formerly Texas American Bank/Fort Worth, N.A.)), as Rights Agent [Exhibit 4.4, Form 10-K dated March 25, 1994]. *4.4 Amendment No. 3 to Rights Agreement and appointment of Continental Stock Transfer & Trust Company as Successor Rights Agent, dated September 30, 1994 [Exhibit 10.29, Form 10-K dated March 30, 1995]. *4.5 Amendment No. 4 dated June 29, 1999 to Rights Agreement between Registrant and Continental Stock Transfer & Trust Company [Exhibit 99.21, Form 8-K dated June 29, 1999]. *4.6 Form of Common Stock Certificate [Exhibit 4.6, Form 10-K dated March 28, 1997]. *4.7 Agreement dated August 26, 1994 appointing Continental Stock Transfer & Trust Company transfer agent and registrar [Exhibit 10.28, Form 10-K dated March 30, 1995]. *10.1 1990 Stock Option Plan of the Registrant [Exhibit 10.16, Form 10-K dated March 22, 1991]. *10.2 1995 Stock Option Plan of the Registrant [Exhibit 10.31, Form 10-K dated March 28, 1996]. *10.3 1998 Long Term Incentive Plan of the Registrant [Exhibit 99.8, Form 10-Q Report dated August 10, 1998]. 37 38 *10.4 Forms of Change of Control Agreements [Exhibit 10.36, Form 10-K dated March 29, 1993; Exhibit 10.36 Form 10-K dated March 30, 1998]. *10.5 Employment Agreement dated April 25, 1998 between Glenn W. Anderson and the Registrant [Exhibit 99.5, Form 10-Q/A dated June 16, 1998]. *10.6 Change of Control Agreement for Glenn W. Anderson [Exhibit 99.7, Form 10-Q/A dated June 16, 1998]. *10.7 Replacement Non-Qualified Stock Option Agreement dated July 24, 1998 between Glenn W. Anderson and the Registrant [Exhibit 99.6, Form 10-Q Report dated August 10, 1998]. *10.8 Management Contract between GAINSCO County Mutual Insurance Company and GAINSCO Service Corp. and related Surplus Debenture, Amendment to Surplus Debenture, Certificate of Authority and accompanying Commissioner's Order granting Certificate Authority, allowing for charter amendments and extension of charter [Exhibits 10.23, 10.24 and 10.25, Form 10-K dated March 29, 1993; Exhibit 10.27, Form 10-K dated March 25, 1994]. *10.9 Revolving Credit Agreement dated November 13, 1998 among Registrant, GAINSCO Service Corp. and Bank One, Texas, N.A., First Amendment thereto dated October 4, 1999 and related Promissory Note, Security Agreement and Pledge Agreement [Exhibits 10.50 to 10.53, Form 10-K/A dated March 30, 1999; Exhibit 99.22, Form 8-K dated October 4, 1999]. *10.10 Securities Purchase Agreement dated as of June 29, 1999 between Registrant and Goff Moore Strategic Partners, L.P. ("GMSP") and related Series A Common Stock Purchase Warrant and Series B Common Stock Purchase Warrant [Exhibit 2.1, Form 8-K dated June 29, 1999; Exhibits 99.19 and 99.20, Form 8-K dated October 4, 1999]. +10.11 Investment Management Agreements dated October 4, 1999 between GMSP and each of Registrant, General Agents Insurance Company of America, Inc., MGA Insurance Company, Inc. and Gainsco County Mutual Insurance Company; and Investment Management Agreement dated January 6, 2000 between GMSP and Midwest Casualty Insurance Company. *10.12 Stock Purchase Agreements dated August 17, 1998 with Carlos de la Torre, McRae B. Johnston, Michael S. Johnston and Ralph Mayoral relating to acquisition by Registrant of Lalande Group and related employment agreements with them [Exhibits 99.6 to 99.13, Form 8-K dated August 26, 1998]. *10.13 Asset Purchase Agreement dated March 9, 1999 between the Registrant, Agents Processing Systems, Inc. and Insurance Business Solutions Incorporated [Exhibit 10.49, Form 10-K dated March 30, 1999]. 38 39 +10.14 Stock Purchase Agreement dated as of November 17, 1999 among Registrant, Tri-State, Ltd., Herbert A. Hill and Alan E. Heidt and related Pledge Agreement dated as of January 7, 2000 executed by the Registrant in favor of Bank One, NA and Unlimited Guaranty dated as of January 7, 2000 executed by Tri-State, Ltd. in favor of Bank One, NA. +10.15 Agreement of Limited Partnership of GNA Investments I, L.P. dated as of November 30, 1999 between Registrant and Goff Moore Strategic Partners, L.P. +10.16 Professional Service Agreement dated as of October 22, 1999 between Registrant and ClientSoft, Inc. 11 Statement regarding Computation of Per Share Earnings (the required information is included in Note 1(m) of Notes to Consolidated Financial Statements included in this Report and no separate statement is, or is required to be, filed as an exhibit) +21 Subsidiaries of Registrant. +23 Consent of KPMG LLP to incorporation by reference. +24 Powers of Attorney. +27 Financial Data Schedule. - ----------------- * Exhibit has previously been filed with the Commission as an exhibit in the filing designated in brackets and is incorporated herein by this reference. Registrant's file number for reports filed under the Securities Exchange Act of 1934 is 1-9828. + Filed herewith (see Exhibit Index). - ----------------- (b) Reports on Form 8-K During the quarter ended December 31, 1999, the Registrant filed a Form 8-K Report on October 7, 1999 disclosing under Item 5 the GMSP transactions described elsewhere in this Report. No financial statements were filed with that Form 8-K Report. (c) Exhibits required by Item 601 of Regulation S-K. The exhibits listed in Item 14(a) 3 of this Report, and not incorporated by reference to a separate file, are filed herewith. 39 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. GAINSCO, INC. (Registrant) /s/ Glenn W. Anderson - -------------------------------- By: Glenn W. Anderson, President Date: 03/29/00 -------- Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- Joel C. Puckett* Chairman of the Board 3/29/00 - ---------------------------- ------- Joel C. Puckett /s/ Glenn W. Anderson President and Chief 3/29/00 - ---------------------------- Executive Officer ------- Glenn W. Anderson /s/ Daniel J. Coots Senior Vice President and 3/29/00 - ---------------------------- Chief Financial Officer ------- Daniel J. Coots Sam Rosen* Secretary and Director 3/29/00 - ---------------------------- ------- Sam Rosen J. Randall Chappel* Director 3/29/00 - ---------------------------- ------- J. Randall Chappel John C. Goff* Director 3/29/00 - ---------------------------- ------- John C. Goff Robert J. McGee, Jr.* Director 3/29/00 - ---------------------------- ------- Robert J. McGee Harden H. Wiedemann* Director 3/29/00 - ---------------------------- ------- Harden H. Wiedemann John H. Williams* Director 3/29/00 - ---------------------------- ------- John H. Williams
*By: /s/ Glenn W. Anderson ----------------------- Glenn W. Anderson, Attorney in-fact under Power of Attorney 40 41 REPORT OF MANAGEMENT The accompanying consolidated financial statements were prepared by the Company, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include some amounts that are based upon the Company's best estimates and judgement. Financial information presented elsewhere in this report is consistent with the accompanying consolidated financial statements. The accounting systems and controls of the Company are designed to provide reasonable assurance that transactions are executed in accordance with management's criteria, that the financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against claims from unauthorized use or disposition. The Company's consolidated financial statements have been audited by KPMG LLP, independent auditors. The auditors have full access to each member of management in conducting their audits. The Audit Committee of the Board of Directors, comprised solely of directors from outside of the Company, meets regularly with management and the independent auditors to review the work and procedures of each. The auditors have free access to the Audit Committee, without management being present, to discuss the results of their work as well as the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon recommendation of the Audit Committee, appoints the independent auditors, subject to shareholder approval. /s/ GLENN W. ANDERSON ---------------------------------------------------- Glenn W. Anderson President and Chief Executive Officer /s/ DANIEL J. COOTS ---------------------------------------------------- Daniel J. Coots Senior Vice President and Chief Financial Officer 41 42 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders GAINSCO, INC.: We have audited the accompanying consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GAINSCO, INC. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1997, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1996 and 1995, and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the selected consolidated financial data for each of the years in the five-year period ended December 31, 1999, appearing on pages 19 and 20, is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived. KPMG LLP Dallas, Texas February 25, 2000 42 43 GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998
Assets 1999 1998 ------------ ------------ ------------ Investments (note 2): Fixed maturities: Bonds held to maturity, at amortized cost (fair value: $60,978,145 - 1998) $ -- 59,788,233 Bonds available for sale, at fair value (amortized cost: $200,415,218 - 1999, $143,806,030 - 1998) 197,077,075 145,588,002 Certificates of deposit, at cost (which approximates fair value) 455,000 595,000 Equity investments, at cost (which approximates fair value) 916,278 -- Marketable securities, at fair value (cost: $372,179 - 1999, $318,436 - 1998) 254,051 268,585 Short-term investments, at cost (which approximates fair value) 46,477,728 4,749,139 ------------ ------------ Total investments 245,180,132 210,988,959 Cash 1,205,364 3,982,059 Accrued investment income 3,797,286 4,224,230 Premiums receivable (net of allowance for doubtful accounts: $42,000 - 1999, $81,000 - 1998) (note 1) 25,431,714 14,885,063 Reinsurance balances receivable 3,254,930 2,392,576 Ceded unpaid claims and claim adjustment expenses (notes 1 and 5) 37,299,327 35,030,001 Ceded unearned premiums (note 5) 23,148,581 22,387,599 Deferred policy acquisition costs (note 1) 14,927,673 11,320,142 Property and equipment (net of accumulated depreciation and amortization: $8,605,454 - 1999, $8,175,798 - 1998) (note 1) 6,855,250 6,716,636 Current Federal income taxes (note 1) 144,628 5,031,950 Deferred Federal income taxes (notes 1 and 6) 8,401,714 6,669,093 Management contract 1,637,571 1,687,571 Other assets 6,012,424 3,216,611 Goodwill (note 1) 18,351,117 17,057,772 ------------ ------------ Total assets $395,647,711 345,590,262 ============ ============
See accompanying notes to consolidated financial statements. 43 44 GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1999 and 1998
Liabilities and Shareholders' Equity 1999 1998 ------------------------------------ ------------- ------------- Liabilities: Unpaid claims and claim adjustment expenses (notes 1 and 5) $ 132,813,583 136,798,149 Unearned premiums (notes 1 and 5) 82,219,785 63,601,677 Commissions payable 1,629,787 4,279,431 Accounts payable 9,198,827 7,311,920 Reinsurance balances payable 7,899,550 1,327,997 Deferred revenue 1,227,863 1,935,290 Drafts payable 4,206,314 5,834,846 Note payable (note 4) 18,000,000 18,000,000 Dividends payable (note 7) 474,598 365,690 Other liabilities 278,829 651,364 ------------- ------------- Total liabilities 257,949,136 240,106,364 ------------- ------------- Shareholders' Equity (notes 7 and 8): Preferred stock ($100 par value, 10,000,000 shares authorized, 31,620 issued at December 31, 1999) 3,162,000 -- Common stock ($.10 par value, 250,000,000 shares authorized, 21,763,927 issued at December 31, 1999 and 21,740,657 issued at December 31, 1998) 2,176,393 2,174,066 Common stock warrants 2,040,000 -- Additional paid-in capital 112,674,842 87,778,548 Accumulated other comprehensive income (loss) (notes 2 and 3) (2,246,575) 1,138,941 Retained earnings 27,586,440 22,086,868 Treasury stock, at cost (844,094 shares at December 31.1999 and December 31, 1998) (note 1) (7,694,525) (7,694,525) ------------- ------------- Total shareholders' equity 137,698,575 105,483,898 ------------- ------------- Commitments and contingencies (notes 5, 8, 9 and 11) Total liabilities and shareholders' equity $ 395,647,711 345,590,262 ============= =============
See accompanying notes to consolidated financial statements. 44 45 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 -------------- -------------- -------------- Revenues: Net premiums earned (note 5) $ 113,280,292 92,203,393 102,255,979 Net investment income (note 2) 9,722,213 9,802,702 9,731,132 Net realized gains (note 1) 605,606 692,510 326,905 Insurance services 1,848,590 2,927,587 2,631,319 -------------- -------------- -------------- 125,456,701 105,626,192 114,945,335 -------------- -------------- -------------- Expenses: Claims and claims adjustment expenses (notes 1 and 5) 76,349,044 86,352,980 62,085,643 Commissions 27,895,646 23,321,414 21,536,034 Change in deferred policy acquisitions and deferred ceding commission income (note 1) (3,607,531) 297,994 1,015,802 Interest expense 1,265,529 101,763 -- Amortization of goodwill 688,645 171,502 -- Underwriting and operating expenses 14,524,068 16,660,628 15,546,068 -------------- -------------- -------------- 117,115,401 126,906,281 100,183,547 -------------- -------------- -------------- Income (loss) before Federal income taxes 8,341,300 (21,280,089) 14,761,788 Federal income taxes (note 6): Current expense (benefit) 1,113,399 (5,571,134) 2,860,704 Deferred expense (benefit) 100,764 (4,046,391) (22,442) -------------- -------------- -------------- 1,214,163 (9,617,525) 2,838,262 -------------- -------------- -------------- Net income (loss) $ 7,127,137 (11,662,564) 11,923,526 ============== ============== ============== Earnings (loss) per share (notes 1 and 7): Basic $ .34 (.56) .57 ============== ============== ============== Diluted $ .32 (.56) .56 ============== ============== ==============
See accompanying notes to consolidated financial statements. 45 46 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1999, 1998, and 1997
1999 1998 1997 ------------ ------------ ------------ Preferred stock: Balance at beginning of year $ -- -- -- Issuance of shares (31,620 in 1999) 3,162,000 -- -- ------------ ------------ ------------ Balance at end of year 3,162,000 -- -- ------------ ------------ ------------ Common stock: Balance at beginning of year 2,174,066 2,170,112 2,167,037 Exercise of options to purchase shares (23,270 in 1999, 39,539 in 1998 and 30,749 in 1997) 2,327 3,954 3,075 ------------ ------------ ------------ Balance at end of year 2,176,393 2,174,066 2,170,112 ------------ ------------ ------------ Common stock warrants: Balance at beginning of year -- -- -- Issuance of warrants in connection with preferred stock 2,040,000 -- -- ------------ ------------ ------------ Balance at end of year 2,040,000 -- -- ------------ ------------ ------------ Additional paid-in capital Balance at beginning of year 87,778,548 87,697,754 87,610,379 Exercise of options to purchase shares (23,270 in 1999, 39,539 in 1998 and 30,749 in 1997) 47,551 80,794 87,375 Issuance of preferred shares (31,620 in 1999) 24,762,929 -- -- Accretion of discount on preferred shares 85,814 -- -- ------------ ------------ ------------ Balance at end of year $112,674,842 87,778,548 87,697,754 ------------ ------------ ------------
(continued) 46 47 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1999, 1998, and 1997
1999 1998 1997 ------------------------ ------------------------ ----------------------- Retained earnings: Balance at beginning of year $ 22,086,868 35,188,460 24,517,265 Net income (loss) for year 7,127,137 7,127,137 (11,662,564) (11,662,564) 11,923,526 11,923,526 Cash dividend - common (note 7) (1,463,227) (1,462,070) (1,310,518) Cash dividend - preferred (note 7) (108,500) -- -- Accretion of discount on preferred shares (85,814) -- -- Tax benefit on non-qualified stock options exercised 29,976 23,042 58,187 ------------ ----------- Balance at end of year 27,586,440 22,086,868 35,188,460 ------------ ----------- ----------- Accumulated other comprehensive income (loss): Balance at beginning of year 1,138,941 1,058,268 496,675 Unrealized gains (losses) on securities, net of reclassification adjustment, net of tax (note 3) (3,385,516) (3,385,516) 80,673 80,673 561,593 561,593 ------------ ---------- ----------- ----------- ----------- ---------- Comprehensive income (loss) 3,741,621 (11,581,891) 12,485,119 ========== =========== ========== Balance at end of year (2,246,575) 1,138,941 1,058,268 ------------ ----------- ----------- Treasury stock: Balance at beginning of year (7,694,525) (7,552,334) (5,438,774) Purchases during year -- (142,191) (2,113,560) ------------ ----------- ----------- Balance at end of year (7,694,525) (7,694,525) (7,552,334) ------------ ----------- ----------- Total shareholders' equity at end of year $137,698,575 105,483,898 118,562,260 ============ =========== ===========
See accompanying notes to consolidated financial statements. 47 48 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 7,127,137 (11,662,564) 11,923,526 Adjustments to reconcile net income (loss) to cash provided by/(used for) operating activities: Depreciation and amortization 4,312,400 4,794,084 4,806,982 Change in deferred Federal income taxes 100,764 (4,046,391) (22,442) Change in accrued investment income 426,944 490,598 (406,643) Change in premiums receivable (10,546,651) 187,021 1,574,653 Change in reinsurance balances receivable (862,354) 211,935 (448,185) Change in ceded unpaid claims and claim adjustment expenses (2,269,326) (5,505,975) (2,810,872) Change in ceded unearned premiums (760,982) (3,241,327) (2,866,259) Change in deferred policy acquisition costs and deferred ceding commission income (3,607,531) 297,994 1,015,802 Change in other assets (2,795,813) (440,620) (272,994) Change in unpaid claims and claim adjustment expenses (3,984,566) 23,571,140 7,535,421 Change in unearned premiums 18,618,108 (402,830) (1,250,646) Change in commissions payable (2,649,644) 2,072,010 (481,916) Change in accounts payable 1,886,907 (2,140,412) (1,128,872) Change in reinsurance balances payable 6,571,553 582,192 (312,118) Change in deferred revenue (707,427) (369,872) 42,507 Change in drafts payable (1,628,532) (3,558,529) 3,174,331 Change in other liabilities (372,535) (371,359) 2,157 Change in current Federal income taxes 4,917,298 (4,212,277) (314,296) ------------ ------------ ------------ Net cash provided by/(used for) operating activities $ 13,775,750 (3,745,182) 19,760,136 ------------ ------------ ------------
(continued) 48 49 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Cash flows from investing activities: Bonds held to maturity: Matured $ 17,833,400 30,636,243 16,594,930 Purchased -- (2,253,813) (3,434,618) Bonds available for sale: Sold 32,934,481 46,326,098 37,694,342 Matured 11,177,942 1,520,000 7,544,426 Purchased (61,910,875) (71,425,415) (92,169,999) Equity investments purchased (916,278) -- -- Marketable securities sold 3,148 28,191 -- Marketable securities purchased (56,891) -- -- Certificates of deposit matured 510,000 595,000 420,000 Certificates of deposit purchased (370,000) (595,000) (420,000) Net change in short-term investments (41,728,589) (1,312,442) 17,838,889 Property and equipment purchased (568,270) (504,229) (891,693) Net assets acquired through purchase of subsidiary (1998 net of cash acquired of $ 5,865,515) (2,012,500) (12,464,783) -- ------------ ------------ ------------ Net cash used for investing activities (45,104,432) (9,450,150) (16,823,723) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from note payable -- 18,000,000 -- Cash dividends paid (1,462,820) (1,461,679) (1,261,530) Preferred stock and warrants issued (net of transaction fees) 29,964,929 -- -- Proceeds from exercise of common stock options 49,878 84,748 90,450 Treasury stock acquired -- (142,191) (2,113,560) ------------ ------------ ------------ Net cash provided by/(used for) financing activities 28,551,987 16,480,878 (3,284,640) ------------ ------------ ------------ Net increase (decrease) in cash (2,776,695) 3,285,546 (348,227) Cash at beginning of year 3,982,059 696,513 1,044,740 ------------ ------------ ------------ Cash at end of year $ 1,205,364 3,982,059 696,513 ============ ============ ============
See accompanying notes to consolidated financial statements. 49 50 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (1) SUMMARY OF ACCOUNTING POLICIES (a) Basis of Consolidation The accompanying consolidated financial statements include the accounts of GAINSCO, INC. (the Company) and its wholly-owned subsidiaries, General Agents Insurance Company of America, Inc. (General Agents), General Agents Premium Finance Company (GAPFCO), Agents Processing Systems, Inc., Risk Retention Administrators, Inc., GAINSCO Service Corp. (GSC), Lalande Financial Group, Inc. (Lalande Group), National Specialty Lines, Inc. (NSL) and DLT Insurance Adjusters, Inc. (DLT). General Agents has one wholly owned subsidiary, MGA Insurance Company, Inc. (MGAI) which, in turn, owns 100% of MGA Agency, Inc. GSC has one wholly owned subsidiary, MGA Premium Finance Company. GSC controls the management contract and charter of GAINSCO County Mutual Insurance Company (GCM) and its accounts have been included in the accompanying consolidated financial statements. All significant intercompany accounts have been eliminated in consolidation. The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Nature of Operations The Company is predominantly a property and casualty insurance company concentrating its efforts on nonstandard markets within the commercial, personal and specialty insurance lines. The Company is approved to write insurance in 48 states and the District of Columbia on a non-admitted basis and in 44 states and the District of Columbia on an admitted basis. The Company markets its commercial lines of insurance through 161 non-affiliated general agents' offices and its nonstandard personal auto line is marketed through approximately 800 non-affiliated retail agencies. Approximately 75% of the Company's gross premiums written during 1999 resulted from risks located in California, Florida, Georgia, Pennsylvania, Tennessee and Texas. 50 51 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (c) Investments Bonds held to maturity were stated at amortized cost. Bonds available for sale and marketable securities are stated at fair value with changes in fair value recorded as a component of comprehensive income. Equity investments and short-term investments are stated at cost. The equity investments, acquired in late 1999, are predominately private equity investments that are not traded in public markets and cost is considered to approximate fair value. In the fourth quarter of 1999 all bonds classified as held to maturity were transferred to the available for sale classification and adjusted to fair value. The amortized cost at the date of transfer for these bonds $41,069,988 and the fair value was $41,036,014 resulting in an unrealized loss before Federal income taxes of $33,974. The company made this change since it no longer invests in bonds with the intent of holding them to maturity. The "specific identification" method is used to determine costs of investments sold. Provisions for possible losses are recorded only when the values have experienced impairment considered "other than temporary" by a charge to realized losses resulting in a new cost basis of the investment. Proceeds from the sale of bond securities totaled $32,934,481, $46,326,098, and $37,694,342 in 1999, 1998 and 1997, respectively. The realized gains were $684,029, $721,404, and $384,184 in 1999, 1998 and 1997, respectively. The realized losses were $78,423, $28,894, and $57,279 in 1999, 1998 and 1997, respectively. (d) Financial Instruments For premiums receivable, which include premium finance notes receivable, and all other accounts (except investments) defined as financial instruments in Financial Accounting Standards Board (FASB) Statement 107, "Disclosures About Fair Values of Financial Instruments," the carrying amount approximates fair value due to the short-term nature of these instruments. The carrying amount of notes payable approximates fair value due to the variable interest rate on the note. These balances are disclosed on the face of the balance sheets. Fair values for investments, disclosed in note 2, were obtained from independent brokers and published valuation guides. (e) Deferred Policy Acquisition Costs and Deferred Ceding Commission Income Policy acquisition costs, principally commissions, premium taxes and marketing and underwriting expenses, are deferred and charged to operations over periods in which the related premiums are earned. Ceding commission income, which is realized on a written basis, is deferred and recognized over periods in which the related premiums are earned. Deferred ceding commission income is netted against deferred policy acquisition costs. The 51 52 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 marketing expenses are predominately salaries, salary related expenses and travel expenses of the Company's marketing representatives who actively solicit business from the independent general agents. The Company utilizes investment income when assessing recoverability of deferred policy acquisition costs. The change in the resulting deferred asset is charged (credited) to operations. Information relating to these net deferred amounts, as of and for the years ended December 31, 1999, 1998 and 1997 is summarized as follows:
1999 1998 1997 ------------ ------------ ------------ Asset balance, beginning of period $ 11,320,142 11,618,136 12,633,938 ------------ ------------ ------------ Deferred commissions 27,149,110 19,709,462 19,912,479 Deferred premium taxes, boards & bureaus and fees 3,129,942 1,552,028 1,837,188 Deferred marketing and underwriting expenses 3,078,115 3,199,524 3,498,668 Deferred ceding commission income (212,127) (373,435) (85,152) Amortization (29,537,509) (24,385,573) (26,178,985) ------------ ------------ ------------ Net change 3,607,531 (297,994) (1,015,802) ------------ ------------ ------------ Asset balance, end of period $ 14,927,673 11,320,142 11,618,136 ============ ============ ============
(f) Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets (30 years for buildings and primarily 5 years for furniture, equipment and software). The following schedule summarizes the components of property and equipment:
As of December 31 ---------------------------- 1999 1998 ------------ ------------ Land $ 865,383 865,383 Buildings 6,295,850 6,289,065 Furniture and equipment 5,196,044 5,232,279 Software 3,103,427 2,505,707 Accumulated depreciation and amortization (8,605,454) (8,175,798) ------------ ------------ $ 6,855,250 6,716,636 ============ ============
(g) Software Costs The Company capitalizes certain costs of developing computer software intended for resale. Costs relating to programs for internal use are recorded in property and equipment and are 52 53 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 amortized using the straight-line method over five years or the estimated useful life, whichever is shorter. The deferred cost is also reduced by incidental sales of programs developed for internal use. (h) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 25 years which is the expected period to be benefited. The Company will periodically review the recoverability of goodwill based on an assessment of undiscounted cash flows of future operations to ensure it is appropriately valued. (i) Treasury Stock The Company records treasury stock in accordance with the "cost method" described in Accounting Principles Board Opinion (APB) 6. The Company held 844,094 shares as treasury stock at December 31, 1999 and 1998 with a cost basis of $9.12 per share. (j) Premium Revenues Premiums are recognized as earned on a pro rata basis over the period the Company is at risk under the related policy. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of policies in force. (k) Claims and Claim Adjustment Expenses Claims and claim adjustment expenses, less related reinsurance, are provided for as claims are incurred. The provision for unpaid claims and claim adjustment expenses includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on past experience modified for current trends; and (3) estimates of expenses for investigating and adjusting claims based on past experience. Liabilities for unpaid claims and claim adjustment expenses are based on estimates of the ultimate cost of settlement. Changes in claim estimates resulting from the review process and differences between estimates and ultimate payments are reflected in expense for the year in which the revision of these estimates first become known. The process of establishing claim reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured claim and the settlement of the claim. Some judicial decisions and legislative actions, even after coverage is written and reserves are initially set, broaden liability and policy definitions and increase the severity of claim payments. As a result of this and other societal and economic developments, the 53 54 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult claim reserving process. Ultimate liability may be greater or lower than current reserves. Reserves are monitored by the Company using new information on reported claims and a variety of statistical techniques. The reserves are reviewed annually by an independent actuarial firm. The Company does not discount to present value that portion of its claim reserves expected to be paid in future periods. The following table sets forth the changes in unpaid claims and claim adjustment expenses, net of reinsurance cessions, as shown in the Company's consolidated financial statements for the periods indicated:
As of and for the years ended December 31 ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ (Amounts in thousands) Unpaid claims and claim adjustment expenses, beginning of period $ 136,798 113,227 105,691 Less: Ceded unpaid claims and claim adjustment expenses, beginning of period 35,030 29,524 26,713 ------------ ------------ ------------ Net unpaid claims and claim adjustment expenses, beginning of period 101,768 83,703 78,978 ------------ ------------ ------------ Net claims and claim adjustment expense incurred related to: Current period 75,976 59,635 53,969 Prior periods 373 26,718 8,117 ------------ ------------ ------------ Total net claim and claim adjustment expenses incurred 76,349 86,353 62,086 ------------ ------------ ------------ Net claims and claim adjustment expenses paid related to: Current period 32,651 19,693 17,807 Prior periods 49,951 48,595 39,554 ------------ ------------ ------------ Total net claim and claim adjustment expenses paid 82,602 68,288 57,361 ------------ ------------ ------------ Net unpaid claims and claim adjustment expenses, end of period 95,515 101,768 83,703 Plus: Ceded unpaid claims and claim adjustment expenses, end of period 37,299 35,030 29,524 ------------ ------------ ------------ Unpaid claims and claim adjustment expenses, end of period $ 132,814 136,798 113,227 ============ ============ ============
54 55 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 For 1998 the unfavorable development in claims and claim adjustment expenses incurred was primarily the result of unanticipated unfavorable development for commercial auto liability for the 1997, 1996 and 1995 accident years. For 1997, the development in claims and claim adjustment expenses incurred was largely a result of claim reserve increases recorded for commercial auto claims in Kentucky for the 1996 and 1995 accident years and adverse development in claim adjustment expense reserves for commercial auto in the 1996, 1995 and 1994 accident years. (l) Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income tax items are accounted for under the asset and liability method which provides for temporary differences between the reporting of earnings for financial statement purposes and for tax purposes, primarily deferred policy acquisition costs, the discount on unpaid claims and claim adjustment expenses and the nondeductible portion of the change in unearned premiums. The Company paid income taxes of $1,340,161, $0, and $3,175,000 during 1999, 1998 and 1997, respectively. The Company received Federal income tax refunds totaling $5,144,060 during 1999. (m) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Years ended December 31 ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Basic earnings (loss) per share: Numerator: Net income (loss) $ 7,127,137 (11,662,564) 11,923,526 Less: Preferred stock dividends 108,500 -- -- ------------ ------------ ------------ Net income (loss) available to common $ 7,018,637 (11,662,564) 11,923,526 ------------ ------------ ------------ shareholders Denominator: Weighted average shares outstanding 20,903,723 20,881,357 20,996,386 ------------ ------------ ------------ Basic earnings (loss) per share $ .34 (.56) .57 ============ ============ ============ Diluted earnings (loss) per share: Numerator: Net income (loss) $ 7,127,137 (11,662,564) 11,923,526 ------------ ------------ ------------ Denominator: Weighted average shares outstanding 20,903,723 20,881,357 20,996,386 Effect of dilutive securities: Employee stock options 157,536 355,329 248,863 Convertible preferred stock 1,430,769 -- -- ------------ ------------ ------------ Weighted average shares and assumed conversions 22,492,028 21,236,686 21,245,249 ------------ ------------ ------------ Diluted earnings (loss) per share $ .32 (.56) .56 ============ ============ ============
55 56 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (n) Stock-Based Compensation In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123). Statement 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. Under Statement 123, the Company elects to measure compensation costs using the intrinsic value based method of accounting prescribed by APB 25. (o) Accounting Pronouncements Effective January 1, 1998, the Company adopted FASB Statement 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholders' equity and comprehensive income. Statement 130 requires only additional disclosures in the consolidated financial statements. It does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Effective January 1, 1998, the Company adopted FASB Statement 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131) which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company makes operating decisions and assesses performance for the commercial lines segment and the personal lines segment. Statement 131 requires only additional disclosures in the consolidated financial statements. It does not affect the Company's financial position or results of operations. In February 1998, the FASB issued Statement 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (Statement 132). Statement 132 was effective for fiscal years beginning after December 15, 1997. The Company has no benefit plans falling within the scope of Statement 132. 56 57 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (2) INVESTMENTS The following schedule summarizes the components of net investment income:
Years ended December 31 -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Investment income on: Fixed maturities $ 9,086,506 9,109,856 9,218,089 Short-term investments 1,019,238 896,940 782,051 ------------ ------------ ------------ 10,105,744 10,006,796 10,000,140 Investment expenses (383,531) (204,094) (269,008) ------------ ------------ ------------ Net investment income $ 9,722,213 9,802,702 9,731,132 ============ ============ ============
The following schedule summarizes the amortized cost and estimated fair values of investments in debt securities:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- (Amounts in thousands) Fixed maturities: Bonds held to maturity: U.S. Government securities - 1999 $ -- -- -- -- U.S. Government securities - 1998 5,668 235 (16) 5,887 Tax-exempt state & municipal bonds - 1999 -- -- -- -- Tax-exempt state & municipal bonds - 1998 54,120 972 (1) 55,091 Bonds available for sale: U.S. Government securities - 1999 24,365 -- (336) 24,029 U.S. Government securities - 1998 13,734 235 -- 13,969 Tax-exempt state & municipal bonds - 1999 148,983 178 (2,957) 146,204 Tax-exempt state & municipal bonds - 1998 130,072 1,787 (240) 131,619 Corporate bonds - 1999 27,067 22 (245) 26,844 Corporate bonds - 1998 -- -- -- -- Certificates of deposit - 1999 455 -- -- 455 Certificates of deposit - 1998 595 -- -- 595 Total Fixed maturities - 1999 200,870 200 (3,538) 197,532 Total Fixed maturities - 1998 $ 204,189 3,229 (257) 207,161
57 58 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 The amortized cost and estimated fair value of debt securities at December 31, 1999 and 1998, by maturity, are shown below.
1999 1998 ----------------------- ----------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ---------- ---------- (Amounts in thousands) Due in one year or less $ 42,770 42,821 31,335 31,489 Due after one year but within five years 113,979 112,151 123,550 125,323 Due after five years but within ten years 35,123 33,755 46,692 47,734 Due after ten years but within twenty years 5,622 5,432 2,612 2,615 Due beyond twenty years 3,376 3,373 -- -- ---------- ---------- ---------- ---------- $ 200,870 197,532 204,189 207,161 ========== ========== ========== ==========
Investments of $14,832,735 and $14,699,727, at December 31, 1999 and 1998, respectively, were on deposit with various regulatory bodies as required by law. (3) ACCUMULATED OTHER COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 requires that a company include in accumulated comprehensive income certain amounts which were previously recorded directly to shareholders' equity. The following schedule presents the components of other comprehensive income:
Years ended December 31 ------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Unrealized gains (losses) on securities: Unrealized holding gains (losses) during period $ (4,613,296) 839,389 1,205,829 Reclassification adjustment for amounts included in net income 605,606 704,863 341,839 ------------ ------------ ------------ Other comprehensive income (loss) before Federal income taxes (5,218,902) 134,526 863,990 Federal income tax expense (benefit) (1,833,386) 53,853 302,397 ------------ ------------ ------------ Other comprehensive income (loss) $ (3,385,516) 80,673 561,593 ============ ============ ============
58 59 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (4) NOTE PAYABLE In December of 1998, the Company entered into a note payable for $18,000,000 with a commercial bank. Interest is due monthly at an interest rate that approximates the 30-day London Interbank Offered Rate (LIBOR) plus 175 basis points (7.34375% at December 31, 1999). Principal payments of $500,000 are to be paid each quarter beginning in January 2000 with the balance of $10,500,000 due at maturity of the note on October 1, 2003. The Company recorded interest expense of $1,265,529 and $101,763 during 1999 and 1998, respectively. The Company paid interest of $1,367,292 and $0 during 1999 and 1998, respectively. The Company made a principal payment of $500,000 in January 2000. (5) REINSURANCE Ceded COMMERCIAL LINES Prior to 1999, the Company wrote commercial casualty policy limits of $1,000,000. For policies with an effective date occurring from 1995 through 1998, the company has first excess casualty reinsurance for 100% of casualty claims exceeding $500,000 up to the $1,000,000 limits, resulting in a maximum net claim retention per risk of $500,000 for such policies. Beginning in 1999, the Company began writing commercial casualty policy limits of $5,000,000. The Company has first excess casualty reinsurance for 100% of casualty claims exceeding $500,000 up to $1,000,000 an second excess casualty reinsurance for 100% of casualty claims exceeding $1,000,000 up to the $5,000,000 limits, resulting in a maximum net claim retention per risk of $500,000. The Company uses facultative reinsurance for policy limits written in excess of $5,000,000. The Company also has excess casualty clash reinsurance for $5,000,000 in ultimate net losses on any one accident in excess of $1,000,000 in ultimate net losses arising out of each accident. PERSONAL LINES For its umbrella coverages, the Company has excess casualty reinsurance for 100% of umbrella claims exceeding $1,000,000 up to $10,000,000 policy limits. The Company also has quota share reinsurance for 75% of the first $1,000,000 of umbrella claims resulting in a maximum net claim retention per risk of $250,000. For its personal auto coverages, the Company has excess casualty clash reinsurance for $5,000,000 in ultimate net losses on any one accident in excess of $1,000,000 in ultimate net losses arising out of each accident. SPECIALTY LINES For its lawyers professional liability coverages, the Company has quota share reinsurance for 50% of the first $1,000,000 of professional liability claims and excess casualty reinsurance for 100% of professional liability claims exceeding $1,000,000 up to $5,000,000 policy limits resulting in a maximum net claim retention per risk of $500,000. For its real estate agents professional liability coverages, the Company has quota share reinsurance for 25% of the first $1,000,000 of professional liability claims resulting in a maximum net claim retention per risk of $750,000. For its educators professional liability coverages, the Company has quota share reinsurance for 60% of the first $1,000,000 of professional liability claims and excess casualty reinsurance for 100% of professional liability claims exceeding $1,000,000 up to $5,000,000 policy limits resulting in a maximum net claim retention per risk of $40,000. For its directors and officers liability coverages, the Company has quota share reinsurance for 90% of the first $5,000,000 of professional liability claims resulting in a maximum net claim retention per risk of $500,000. The Insurers carry catastrophe property reinsurance to protect against catastrophe occurrences for 95% of the property claims that exceed $500,000 but do not exceed $12,500,000 for a single catastrophe. The Insurers also carry property excess per risk reinsurance which covers property claims exceeding $300,000 up to $5,000,000 net loss each risk. From time to time the Insurers make use of facultative reinsurance to cede unusual risks on a negotiated basis. MGAI utilizes a reinsurance arrangement in Florida whereby premiums are ceded to a non-affiliated authorized reinsurer and the reinsurer cedes the premiums to General Agents. This is necessary because General Agents is not an authorized reinsurer in Florida. GCM has entered into fronting arrangements with non-affiliated insurance companies. GCM retains no portion as the business written under these agreements is 100% ceded. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by Best's, the agreements require that collateral (in the form of trust agreements and/or letters of credit) be maintained to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to the risks insured under these fronting arrangements. The balances in such accounts as of December 31, 1999 and 1998 total $30,687,000, and $33,707,000, respectively. The amounts deducted in the consolidated financial statements for reinsurance ceded as of and for the years ended December 31, 1999, 1998, and 1997 respectively, are set forth in the following table. 59 60 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 Premiums and claims ceded to the commercial automobile plans of Arkansas, California, Louisiana, Mississippi and Pennsylvania are designated as "plan servicing".
1999 1998 1997 ------------ ------------ ------------ Premiums earned $ 2,745,843 1,982,459 1,709,053 Premiums earned - Florida business $ 9,360,816 38,937 -- Premiums earned - plan servicing $ 977,684 3,767,180 4,090,774 Premiums earned - fronting arrangements $ 47,415,305 41,199,644 33,106,441 Claims and claim adjustment expenses $ 5,867,896 5,332,551 2,200,182 Claims and claim adjustment expenses - Florida business $ 6,998,999 26,267 -- Claims and claim adjustment expenses - plan servicing $ 3,456,779 4,429,624 4,569,993 Claims and claims adjustment expenses - fronting arrangements $ 35,075,008 34,992,635 24,616,491
The amounts included in the Consolidated Balance Sheets for reinsurance ceded under fronting arrangements and reinsurance ceded to the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania were as follows:
1999 1998 1997 ------------ ------------ ------------ Unearned premiums - Florida business $ 7,817,052 362,402 -- Unearned premiums - plan servicing $ -- 1,139,560 1,552,654 Unearned premiums - fronting arrangements $ 14,263,564 20,194,814 17,160,782 Unpaid claims and claim adjustment expenses - Florida business $ 2,651,273 24,386 Unpaid claims and claim adjustment expenses - plan servicing $ 8,094,763 9,380,484 9,431,814 Unpaid claims and claim adjustment expenses fronting arrangements 13,575,089 13,927,694 8,623,890
The Insurers remain directly liable to their policyholders for all policy obligations and the reinsuring companies are obligated to the Insurers to the extent of the reinsured portion of the risks. Assumed The Insurers, from time to time, utilize reinsurance arrangements with various non-affiliated admitted insurance companies, whereby the Insurers underwrite the coverage and assume the policies 100% from the companies. These arrangements require that the Insurers maintain escrow accounts to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to risks 60 61 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 insured through such arrangements and assumed by the Insurers. As of December 31, 1999, 1998 and 1997, the balance in such escrow accounts totaled $13,200,000, $0, and $0, respectively. For 1999 and 1998 the premiums earned by assumption were $5,396,727 and $1,883,349, respectively. There were no premiums earned by assumption during 1997. The assumed unpaid claims and claim adjustment expenses were $3,148,901, $603,833 and $810,000, respectively. (6) FEDERAL INCOME TAXES In the accompanying consolidated statements of operations, the provisions for Federal income tax as a percent of related pretax income differ from the Federal statutory income tax rate. A reconciliation of income tax expense using the Federal statutory rates to actual income tax expense follows:
1999 1998 1997 ------------ ------------ ------------ Income tax expense (benefit) at 35% $ 2,919,455 (7,448,031) 5,166,625 Tax-exempt interest income (2,137,175) (2,182,650) (2,486,582) Amortization of goodwill 241,026 -- -- Other, net 190,857 13,156 158,219 ------------ ------------ ------------ Income tax expense (benefit) $ 1,214,163 (9,617,525) 2,838,262 ============ ============ ============
Under FASB Statement 109 "Accounting for Income Taxes" the primary objective is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. As a consequence, the portion of the tax expense which is a result of the change in the deferred tax asset or liability may not always be consistent with the income reported on the statement of operations. 61 62 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 The following table represents the tax effect of temporary differences giving rise to the net deferred tax asset established under Statement 109.
As of December 31 --------------------------- 1999 1998 ------------ ------------ Deferred tax assets: Unpaid claims and claims adjustment expenses $ 4,580,133 4,987,915 Unearned premiums 4,135,577 2,936,508 Deferred service fee income 126,467 226,703 Unrealized losses on investments 1,209,695 -- Alternative minimum tax credit 3,821,354 2,478,259 Net operating loss 378,200 1,083,983 Other 21,910 36,045 ------------ ------------ Total deferred tax assets 14,273,336 11,749,413 ------------ ------------ Deferred tax liabilities: Deferred policy acquisition costs and deferred ceding commission income 5,224,686 3,968,311 Unrealized gains on investments -- 623,690 Depreciation and amortization 637,924 402,565 Capitalized software -- 84,160 Other 9,012 1,594 ------------ ------------ Total deferred tax liabilities 5,871,622 5,080,320 ------------ ------------ Net deferred tax assets $ 8,401,714 6,669,093 ============ ============
In assessing the realization of its deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon management's consideration of expected reversal of deferred tax liabilities and projected future taxable income, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets. As of December 31, 1999, the Company has net operating loss carry forwards of approximately $1,080,571 for tax return purposes which, if not utilized, will expire in 2018. (7) SHAREHOLDERS' EQUITY The Company has 250,000,000 shares of authorized $.10 par value common stock. Of the authorized shares, 21,763,927 and 21,740,657 were issued as of December 31, 1999 and 1998, respectively and 20,919,833 and 20,896,563 were outstanding as of December 31, 1999 and 1998, respectively. The Company also has 10,000,000 shares of preferred stock with $100 par value authorized of which 31,620 shares were issued and outstanding as of December 31, 1999. There was no preferred stock outstanding at December 31, 1998. The preferred stock was issued at a discount which is being amortized over a five year period using 62 63 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 the effective interest method. The preferred stock is convertible to 6,200,000 shares of common stock at a conversion price of $5.10 per share. On or after June 30, 2005, the preferred stock is redeemable, in whole or in part, at the option of the Company at a redemption price equal to $1,000 per preferred stock share plus any declared but unpaid dividends and distributions on the preferred stock. The Company also has outstanding a five year warrant to purchase an aggregate of 1,550,000 shares of common stock at an exercise price of $6.375 per share and a seven year warrant to purchase an aggregate of 1,550,000 shares of common stock at an exercise price of $8.50 per share. Proceeds were allocated based upon the relative fair values of the preferred stock and the warrants, the warrants are anti-dilutive. In 1991, the Company adopted a policy to pay a quarterly cash dividend of $.01 per share on its common stock every quarter until further action by the Board of Directors. The Board of Directors increased the cash dividend to: $.0125 per share in November 1995, $.015 per share in August 1996, and $.0175 per share in November 1997. The amount of consolidated statutory shareholder's equity or policyholders' surplus of General Agents and MGAI was $67,155,036, $69,825,964, and $76,495,883 at December 31, 1999, 1998 and 1997, respectively, and the amount of consolidated statutory net income (loss) was $5,703,199, $(13,682,598), and $14,155,450 for the years ended 1999, 1998, and 1997, respectively. The amount of policyholders' surplus of GCM was $2,000,000 at December 31, 1999, 1998 and 1997, respectively, and the amount of statutory net income (loss) was $(186,918), $(340,460), and $44,569 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company's statutory capital significantly exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies. Statutes in Texas and Oklahoma restrict the payment of dividends by the insurance company subsidiaries to the available surplus funds derived from their realized net profits. The maximum amount of cash dividends that each subsidiary may declare without regulatory approval in any 12-month period is the greater of net income for the 12-month period ended the previous December 31 or ten percent (10%) of policyholders' surplus as of the previous December 31. In 2000 General Agents (the Oklahoma subsidiary) can pay dividends to GNA of up to $6,715,504 without regulatory approval and MGAI (the Texas subsidiary) can pay dividends to General Agents of up to $2,086,247 without regulatory approval. In 1988, the Board of Directors declared, pursuant to a Rights Plan, a dividend distribution of one common share purchase right on each outstanding share of $.10 par value common stock. The dividend distribution was made on March 18, 1988, payable to shareholders of record on that date. In 1993, the Board of Directors amended the Rights Plan and extended the expiration date of these rights from March 18, 1998 to May 25, 2003. Each right, as amended during 1993, has an exercise price of $70. The rights are not exercisable until the Distribution Date (as defined in the Rights Plan). The Rights Plan provides, among other things, that if any person or group (other than the Company, one of its subsidiaries or an employee benefit plan of the Company or a subsidiary) acquires 20% or more of the Company's common stock (except pursuant to an offer for all outstanding common stock which the Continuing Directors (as defined in the Rights Plan) have determined to be in the best interests of the Company and its shareholders), if a 20% holder engages in certain self-dealing transactions or if a holder of 15% or more of the Company's common stock is declared an Adverse Person (as defined in the Rights Plan) by the Board of Directors, each holder of a right (other than the 20% holder or the Adverse Person, whose rights would become null and void) would have the right 63 64 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 to receive, upon exercise of the right, common stock having a market value of two times the exercise price of the right. The Company is able to redeem rights under certain conditions set forth in the Rights Plan. If, following a public announcement that a person has acquired 20% or more of the common stock, the Company is acquired in a merger (other than a merger which follows an offer approved by the Continuing Directors as defined in the Rights Plan) or other business combination transaction or if 50% of the assets or earning power of the Company is sold, each right (except rights which have previously become null and void as described above), will entitle its holder to purchase, at the right's then-current exercise price, shares of the acquiring Company's common stock having a market value of two times the exercise price of the right. (8) BUSINESS TRANSACTIONS On October 4, 1999, the Company closed the transactions contemplated by the Securities Purchase Agreement dated as of June 29, 1999 between the Company and Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"). At the closing, the Company sold to GMSP for an aggregate purchase price of $31,620,000 (i) 31,620 shares of GNA's Series A Convertible Preferred Stock, which are convertible into 6,200,000 shares of GNA's Common Stock, par value $0.10 per share ("Common Stock"), at a conversion price of $5.10 per share, (ii) a five year Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $6.375 per share and (iii) a seven year Warrant to purchase an aggregate of 1,550,000 shares of Common Stock at an exercise price of $8.50 per share. The Company and its insurance company subsidiaries entered into Investment Management Agreements with GMSP, pursuant to which GMSP will manage their respective investment portfolios. Completion of these transactions concluded the strategic alternatives review process that the Company initiated in 1998. Proceeds from the GMSP transactions will be available for acquisitions, investments, and other corporate purposes. In April 1999, the Company completed the sale of the assets of Agents Processing Systems, Inc. ("APS"), which marketed a computer software package related to general agency operations. The purchaser acquired all rights to the APS software products, assignment of the APS customer contracts and other miscellaneous assets for a nominal amount of cash, assumption of contract obligations, a fixed number of software use licenses and development work on an electronic data interchange project. The Company recorded a small write-off as a result of this transaction. On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National Specialty Lines, Inc. ("NSL") and DLT Insurance Adjusters, Inc. ("DLT"). NSL is a managing general agency that markets nonstandard personal auto insurance through approximately 800 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was for $18 million in cash paid at closing plus up to an additional $22 million in cash to be paid over approximately five years contingent upon the operating performance of the Lalande Group. The purchase was financed with a commercial bank borrowing of $18 million (note 4). The transaction resulted in goodwill of approximately $17.2 million which is being amortized on a straight line basis over 25 years. The acquisition was accounted for as a purchase and the results of operations since the acquisition date have been consolidated. The Company will pay $2 million of the operating performance contingency in the second quarter of 2000. 64 65 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 The pro forma unaudited results of operations for the years ended December 31, 1998 and 1997, assuming the purchase of the Lalande Group had consummated on January 1, 1997, are presented below.
1998 1997 ---- ---- (Amounts in thousands, except per share data) Revenues $ 112.039 122,724 Net income (loss) $ (12.285) 10,857 Basic earnings (loss) per share $ (0.59) 0.52 Diluted earnings (loss) per share $ (0.59) 0.51
(9) BENEFIT PLANS At December 31, 1999, the Company had three plans under which options could be granted: the 1990 Stock Option Plan (90 Plan), the 1995 Stock Option Plan (95 Plan) and the 1998 Long-Term Incentive Plan (98 Plan). Under the 90 Plan, all options available have been granted and are fully vested. Any unexercised options will expire in the year 2000. The 95 Plan was approved by the shareholders on May 10, 1996 and 1,071,000 shares are reserved for issuance under this plan. Options granted under the 95 Plan have a maximum ten year term and are exercisable at the rate of 20% immediately upon grant and 20% on each of the first four anniversaries of the grant date. The 98 Plan was approved by the shareholders on July 17, 1998, and the aggregate number of shares of common stock that may be issued under the 98 Plan is limited to 1,000,000. Under the 98 Plan, stock options (including incentive stock options and non-qualified stock options), stock appreciation rights and restricted stock awards may be made. No awards were outstanding under the 98 Plan at December 31, 1999. In 1998 options for 579,710 shares were granted to Glenn W. Anderson under an employment agreement at an exercise price of $5.75 per share. The exercise price of each outstanding option equals the market price of the Company's stock on the date of grant. A summary of the status of the Company's outstanding options as of December 31, 1999 and 1997, and changes during the years ended December 31, 1999 and 1998 is presented below:
1999 1998 --------------------------- --------------------------- Weighted Average Weighted Average Underlying Exercise Underlying Exercise Shares Price Shares Price ---------- ------------- ---------- ------------- Options outstanding, beginning of 1,540,640 $ 6.42 1,352,713 $ 8.32 period: Options granted 67,000 $ 5.78 835,814 $ 5.93 Options exercised (23,270) $ 2.14 (39,539) $ 2.14 Options forfeited (19,223) $ 6.34 (608,348) $ 10.36 ---------- ---------- Options outstanding, end of period 1,565,147 $ 6.49 1,540,640 $ 6.42 ========== ========== Options exercisable at end of period 1,353,775 1,238,104 Weighted average fair value of options granted during period 2.66 1.96
65 66 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 The following table summarizes information for the stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------- ---------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price --------------- ------------- ---------------- -------------- ----------- -------------- $ 2 to 5 286,507 1.20 years $ 2.77 274,507 $ 2.68 $ 5 to 8 926,801 4.81 years $ 6.06 797,797 $ 5.97 $ 8 to 11 351,839 6.36 years $ 10.63 281,471 $ 10.63 ------------- ----------- $ 2 to 11 1,565,147 4.50 years $ 6.49 1,353,775 $ 6.27 ============= ===========
During 1998 options previously granted to officers under the 95 Plan were exchanged for options of a lesser amount with an exercise price equal to the market price of the Company's stock on the date of exchange. The Company applies APB 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined consistent with Statement 123 for the options granted, the Company's net income and earnings per share would have been the pro forma amounts indicated below:
Years ended December 31 ------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------- ------------------------------ ----------------------------- As reported Pro forma As reported Pro forma As reported Pro forma ----------- ----------- ------------- ------------- ------------- ------------- Net income (loss) $ 7,127,137 6,615,014 (11,662,564) (12,139,335) 11,923,526 11,368,790 Less: Preferred stock dividends 108,500 108,500 -- -- -- -- ----------- ----------- ------------- ------------- ------------- ------------- Net income available to common shareholders $ 7,018,637 6,506,514 (11,662,564) (12,139,335) 11,923,526 11,368,790 =========== =========== ============= ============= ============= ============= Basic earnings (loss) per share $ .34 .31 (.56) (.58) .57 .54 Diluted earnings (loss) per share $ .32 .29 (.56) (.58) .56 .54
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 25.3 to 28.4% for 1999, 32.6% for 1998 and 33.6% for 1997, risk free interest rates of 6.58% for 1999, 5.04% for 1998 and 5.88% for 1997, expected dividend yields of 1.2% for 1999 and 1998 and .74% for 1997, and an expected life of 7.5 years for all periods presented. 66 67 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 The Company has a profit sharing and trust plan for the benefit of its eligible employees. The annual contributions amounted to $0, $0, and $396,838 for 1999, 1998 and 1997, respectively. In 1998, the Company implemented an incentive compensation plan under which all full time employees with at least six months of service participate. Factors applicable to the incentive compensation plan are: Company's net income level, individual performance, employee's salary and position with the Company. The amounts expensed for 1999 and 1998 were $934,659 and $540,666, respectively. (10) SEGMENT REPORTING The Company makes operating decisions and assesses performance for the commercial lines segment and the personal lines segment. The commercial lines segment writes primarily commercial auto, garage, general liability and property. The personal lines segment writes primarily nonstandard personal auto coverages. The Company considers many factors including the nature of the insurance product and distribution strategies in determining how to aggregate operating segments. The following tables represent a summary of segment data as of and for the years ended December 31, 1999, 1998 and 1997:
1999 ------------------------------------------------------- Commercial Personal Lines Lines Other Total ---------- ---------- ---------- ---------- (Dollar amounts in thousands) Gross premiums written $ 97,139 36,759 -- 133,898 ========== ========== ========== ========== Premiums earned 91,928 21,352 -- 113,280 Net investment income 7,607 2,115 -- 9,722 Insurance services -- 992 857 1,849 Expenses (91,091) (21,537) (2,533) (115,161) ---------- ---------- ---------- ---------- Operating income (loss) 8,444 2,922 (1,676) 9,690 Net realized gains -- -- 606 606 Interest expense -- (1,266) -- (1,266) Amortization expense -- (689) -- (689) Income (loss) before Federal income taxes $ 8,444 967 (1,070) 8,341 ========== ========== ========== ========== Combined ratio (GAAP) basis 99.1% 100.9% 99.4% ========== ========== ========== Total Assets $ 253,576 73,786 68,286 395,648 ========== ========== ========== ==========
67 68 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997
1998 ------------------------------------------------------- Commercial Personal Lines Lines Other Total ---------- ---------- ---------- ---------- (Dollar amounts in thousands) Gross premiums written $ 88,188 2,974 -- 91,162 ========== ========== ========== ========== Premiums earned 91,697 506 -- 92,203 Net investment income 9,648 155 -- 9,803 Insurance services -- 460 2,468 2,928 Expenses (121,491) (553) (4,589) (126,633) ---------- ---------- ---------- ---------- Operating income (loss) (20,146) 568 (2,121) (21,699) Net realized gains -- -- 693 693 Interest expense -- (102) -- (102) Amortization expense -- (172) -- (172) Income (loss) before Federal income taxes $ (20,146) 294 (1,428) (21,280) ========== ========== ========== ========== Combined ratio (GAAP) basis 132.5% 109.3% 132.7% ========== ========== ========== Total Assets $ 295,699 12,194 37,697 345,590 ========== ========== ========== ==========
1997 ------------------------------------------------------- Commercial Personal Lines Lines Other Total ---------- ---------- ---------- ---------- (Dollar amounts in thousands) Gross premiums written $ 99,776 -- -- 99,776 =========== =========== =========== =========== Premiums earned 102,256 -- -- 102,256 Net investment income 9,731 -- -- 9,731 Insurance services -- -- 2,631 2,631 Expenses (96,538) -- (3,645) (100,183) ----------- ----------- ----------- ----------- Operating income (loss) 15,449 -- (1,014) 14,435 Net realized gains -- -- 327 327 Interest expense -- -- -- -- Amortization expense -- -- -- -- ----------- ----------- ----------- ----------- Income (loss) before Federal income taxes $ 15,449 -- (687) 14,762 =========== =========== =========== =========== Combined ratio (GAAP) basis 94.4% -- % 94.4% =========== =========== =========== Total Assets $ 300,603 -- 13,082 313,685 =========== =========== =========== ===========
(11) CONTINGENCIES The Company is a defendant in the proceedings styled William Steiner v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC., filed in the United States District Court for the Northern District of Texas, Fort Worth Division. In that case, the plaintiff asserts claims on behalf of a putative class of persons who purchased the Company's common stock between August 6, 1997 and July 16, 1998, inclusive. The plaintiff asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the Company's financial results did not reflect the 68 69 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 Company's true financial position and results of operations in accordance with generally accepted accounting principles in that they understated reserves for claims and claim adjustment expenses. The Company believes that it has meritorious defenses to plaintiff's claims and intends to vigorously defend the action. In the normal course of its operations, the Company has been named as defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. The Company's management believes that unpaid claims and claim adjustment expenses are adequate to cover possible liability from lawsuits which arise in the normal course of its insurance business. In the opinion of the Company's management the ultimate liability, if any, resulting from the disposition of all claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company does not have any financial instruments where there is off-balance-sheet-risk of accounting loss due to credit or market risk. There is credit risk in the premiums receivable and reinsurance balances receivable of the Company. At December 31, 1999 and 1998 the Company did not have a premiums receivable balance nor a reinsurance balance receivable from any one entity that was material with regard to shareholders' equity. (12) SUBSEQUENT EVENT On January 7, 2000, the Company acquired Tri-State, Ltd. ("Tri-State), an insurance operation specializing primarily in underwriting, servicing and claims handling of nonstandard personal auto insurance in Minnesota, North Dakota and South Dakota. Tri-State operates a managing general agency, a motor vehicle driving records service company and an insurance subsidiary, Midwest Casualty Insurance Company (MCIC). Tri-State was incorporated in 1980 and currently markets nonstandard personal auto insurance through over 320 retail agencies in its three key states and commercial automobile insurance in four states. Tri-State will continue to operate at its current locations to develop personal and commercial lines of business. The purchase price consideration consisted of $6,000,000 in cash at closing, plus additional payments of up to $5,500,000 in cash over the next several years, based on conversion of business to the Company, meeting specific profitability targets and Tri-State's 1999 year-end book value. Tri-State's insurance subsidiary, MCIC, had approximately $3,000,000 of policyholders' surplus at December 31,1999 (unaudited). In February and March 2000, the Company purchased in open market transactions common stock of Crescent Real Estate Equities, Inc. ("CEI") at an aggregate cost of approximately $2,523,000 and debt securities of CEI at an aggregate cost of approximately $2,443,000. John C. Goff, a principal of GMSP and a director of the Company, is President, Chief Executive Officer and a director of CEI. 69 70 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1999, 1998 and 1997 (13) QUARTERLY FINANCIAL DATA (UNAUDITED) The following table contains selected unaudited consolidated financial data for each quarter (in thousands, except per share data):
1999 Quarter 1998 Quarter ----------------------------------------- ------------------------------------------ Fourth Third Second First Fourth Third Second First -------- -------- -------- -------- -------- -------- -------- -------- Gross premiums written $ 35,530 35,400 35,850 27,119 26,144 22,722 22,224 20,072 Total revenues $ 36,803 33,097 29,231 26,327 25,979 26,373 26,532 26,742 Total expenses $ 34,673 31,664 26,886 23,895 26,763 25,012 32,702 42,429 Net income (loss) $ 1,751 1,411 1,828 2,137 69 1,397 (3,770) (9,359) Earnings (loss) per share: Basic $ .08 .07 .09 .10 .00 .07 (.18) (.45) Diluted $ .07 .07 .09 .10 .00 .07 (.18) (.45) Common share prices (a) High 6 1/2 6 15/16 6 3/8 6 9/16 7 5/16 8 1/16 9 7/8 8 13/16 Low 5 1/4 5 3 15/16 43/4 5 7/8 53/4 6 7 7/8
(a) As reported by the New York Stock Exchange 70 71 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION The Board of Directors and Shareholders GAINSCO, INC: Under date of February 25, 2000, we reported on the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas February 25, 2000 71 72 Schedule I GAINSCO, INC. AND SUBSIDIARIES Summary of Investments - Other Than Investments in Related Parties (Amounts in thousands)
As of December 31 ------------------------------------------------- 1999 1998 ----------------------- ----------------------- (Amounts in thousands) Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- ---------- ---------- Type of Investment Fixed Maturities: Bonds held to maturity: U.S. Government securities $ -- -- 5,668 5,887 Tax-exempt state and municipal bonds -- -- 54,120 55,091 Bonds available for sale: U.S. Government securities 24,365 24,029 13,734 13,969 Tax-exempt state and municipal bonds 148,983 146,204 130,072 131,619 Corporate bonds 27,067 26,844 -- -- Certificates of deposit 455 455 595 595 Equity investments 916 916 -- -- Marketable securities 372 254 318 269 ---------- ---------- ---------- ---------- 202,158 198,702 204,507 207,430 ---------- ---------- ---------- ---------- Short-term investments 46,478 46,478 4,749 4,749 ---------- ---------- ---------- ---------- Total investments $ 248,636 245,180 209,256 212,179 ========== ========== ========== ==========
See accompanying independent auditors' report on supplementary information. 72 73 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Balance Sheets December 31, 1999 and 1998
1999 1998 ------------- ------------- Assets Investments in subsidiaries $ 103,732,992 104,547,799 Equity Investments 916,278 -- Short term investments 31,034,925 43,538 Cash 501,725 1,178 Accrued investment income 75,392 -- Net receivables from subsidiaries 3,446,779 2,121,291 Other assets 142,178 125,218 Goodwill 18,351,117 17,057,772 ------------- ------------- Total assets $ 158,201,386 123,896,796 ============= ============= Liabilities and Shareholders' Equity Liabilities: Accounts payable $ 2,028,213 47,208 Note payable 18,000,000 18,000,000 Dividends payable 474,598 365,690 ------------- ------------- Total liabilities 20,502,811 18,412,898 ------------- ------------- Shareholders' equity: Preferred stock ($100 par value, 10,000,000 shares authorized, 31,620 issued at December 31, 1999) 3,162,000 -- Common stock ($.10 par value, 250,000,000 shares authorized, 21,763,927 issued at December 31, 1999 and 21,740,657 issued at December 31, 1998.) 2,176,393 2,174,066 Common stock warrants 2,040,000 -- Additional paid-in capital 112,674,842 87,778,548 Accumulated other comprehensive income (loss) (2,246,575) 1,138,941 Retained earnings 27,586,440 22,086,868 Treasury stock, at cost (844,094 shares at December 31, 1999 and December 31, 1998) (7,694,525) (7,694,525) ------------- ------------- Total shareholders' equity 137,698,575 105,483,898 ------------- ------------- Total liabilities and shareholders' equity $ 158,201,386 123,896,796 ============= =============
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 73 74 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Operations Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ----------- ----------- ----------- Revenues - dividend income $ 6,980,000 3,900,000 3,700,000 Investment income 371,928 2,255 3,779 Expenses: Interest expense (1,265,529) (101,763) -- Amortization of goodwill (688,645) (171,502) -- Operating expense (1,720,440) (2,069,139) (1,367,178) ----------- ----------- ----------- Operating income before Federal income taxes 3,677,314 1,559,851 2,336,601 Federal income taxes: Current benefit (872,941) (354,324) (455,679) Deferred expense (benefit) 44,545 (439,874) -- ----------- ----------- ----------- (828,396) (794,198) (455,679) ----------- ----------- ----------- Income before equity in undistributed income (loss) of subsidiaries 4,505,710 2,354,049 2,792,280 Equity in undistributed income of subsidiaries 2,621,427 (14,016,631) 9,131,246 ----------- ----------- ----------- Net income (loss) $ 7,127,137 (11,662,564) 11,923,526 =========== =========== =========== Earnings (loss) per share: Basic $ .34 (.56) .57 =========== =========== =========== Diluted $ .32 (.56) .56 =========== =========== ===========
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 74 75 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Preferred stock: Balance at beginning of year $ -- -- -- Issuance of shares (31,620 in 1999) 3,162,000 -- -- ------------ ------------ ------------ Balance at end of year 3,162,000 -- -- ------------ ------------ ------------ Common stock: Balance at beginning of year 2,174,066 2,170,112 2,167,037 Exercise of options to purchase shares (23,270 in 1999, 39,539 in 1998 and 30,749 in 1997) 2,327 3,954 3,075 ------------ ------------ ------------ Balance at end of year 2,176,393 2,174,066 2,170,112 ------------ ------------ ------------ Common stock warrants: Balance at beginning of year -- -- -- Issuance of warrants in connection with preferred stock 2,040,000 -- -- ------------ ------------ ------------ Balance at end of year 2,040,000 -- -- ------------ ------------ ------------ Additional paid-in capital Balance at beginning of year 87,778,548 87,697,754 87,610,379 Exercise of options to purchase shares (23,270 in 1999, 39,539 in 1998 and 30,749 in 1997) 47,551 80,794 87,375 Issuance of preferred shares (31,620 in 1999) 24,762,929 -- -- Accretion of discount on preferred share 85,814 -- -- ------------ ------------ ------------ Balance at end of year $112,674,842 87,778,548 87,697,754 ------------ ------------ ------------
(continued) 75 76 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------------------------ ------------------------------ ------------------------------ Retained earnings: Balance at beginning of year $ 22,086,868 35,188,460 24,517,265 Net income (loss) for year 7,127,137 7,127,137 (11,662,564) (11,662,564) 11,923,526 11,923,526 Cash dividend - common (1,463,227) (1,462,070) (1,310,518) Cash dividend - preferred (108,500) -- -- Accretion of discount on preferred shares (85,814) -- -- Tax benefit on non-qualified stock options exercised 29,976 23,042 58,187 ------------- ------------- ------------- Balance at end of year 27,586,440 22,086,868 35,188,460 ------------- ------------- ------------- Accumulated other comprehensive income (loss): Balance at beginning of year 1,138,941 1,058,268 496,675 Unrealized gains (losses) on securities, net of reclassification adjustment, net of tax (3,385,516) (3,385,516) 80,673 80,673 561,593 561,593 ------------- ------------- ------------- ------------- ------------- ------------- Comprehensive income (loss) 3,741,621 (11,581,891) 12,485,119 ============= ============= ============= Balance at end of year (2,246,575) 1,138,941 1,058,268 ------------- ------------- ------------- Treasury stock: Balance at beginning of year (7,694,525) (7,552,334) (5,438,774) Change during year -- (142,191) (2,113,560) ------------- ------------- ------------- Balance at end of year (7,694,525) (7,694,525) (7,552,334) ------------- ------------- ------------- Total shareholders' equity at end of year $ 137,698,575 105,483,898 118,562,260 ============= ============= =============
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 76 77 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 7,127,137 (11,662,564) 11,923,526 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 688,645 171,502 -- Change in investments in subsidiaries -- -- (5,390,712) Change in accrued investment income (75,392) -- -- Change in net receivables from subsidiaries (1,214,283) (813,276) 5,981,096 Change in other assets (16,960) 66,498 (32,224) Change in accounts payable 1,981,005 30,275 11,046 Equity in (income) loss of subsidiaries (2,621,427) 14,016,612 (9,131,246) ------------ ------------ ------------ Net cash provided by operating activities 5,868,725 1,809,047 3,361,486 ------------ ------------ ------------ Cash flows from investing activities: Equity Investments purchased (916,278) -- -- Change in short term investments (30,991,387) 39,937 (83,475) Net assets acquired through purchase of subsidiary (2,012,500) (18,330,298) -- ------------ ------------ ------------ Net cash used for investing activities $(33,920,165) (18,290,361) (83,475) ------------ ------------ ------------
(continued) 77 78 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ Cash flows from financing activities: Proceeds from note payable $ -- 18,000,000 -- Cash dividends paid (1,462,820) (1,461,679) (1,261,530) Preferred stock issued 29,964,929 -- -- Proceeds from exercise of common stock options 49,878 84,748 90,450 Treasury stock acquired -- (142,191) (2,113,560) ------------ ------------ ------------ Net cash provided by/(used for) financing activities 28,551,987 16,480,878 (3,284,640) ------------ ------------ ------------ Net increase (decrease) in cash 500,547 (436) (6,629) Cash at beginning of year 1,178 1,614 8,243 ------------ ------------ ------------ Cash at end of year $ 501,725 1,178 1,614 ============ ============ ============
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 78 79 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Notes to Condensed Financial Statements December 31, 1999, 1998 and 1997 (1) GENERAL The accompanying condensed financial statements should be read in conjunction with the notes to the consolidated financial statements for the years ended December 31, 1999, 1998 and 1997 included elsewhere in this Annual Report. (2) RELATED PARTIES During 1997, the Company made a capital contribution to GAINSCO Service Corp. by forgiving an intercompany debt in the amount of $5,390,712. The Company acquired the net assets of the Lalande Group of $1,101,024 in October 1998 through a 100% purchase. The following table presents the components of the Net receivables from subsidiaries at December 31, 1999 and 1998:
1999 1998 ---------- ---------- Name of subsidiary Agents Processing Systems, Inc. $ 883,224 883,224 GAINSCO Service Corp 1,168,749 425,593 General Agents Insurance Company of America, Inc. 1,394,806 812,474 ---------- ---------- Net receivables from subsidiaries $3,446,779 2,121,291 ========== ==========
See accompanying independent auditors' report on supplementary information. 79 80 Schedule III GAINSCO, INC. AND SUBSIDIARIES Supplementary Insurance Information Years ended December, 1999, 1998 and 1997 (Amounts in thousands)
Other Amortization Deferred Reserves policy Claims of deferred Other policy for claims claims and Net Net and policy operating Net acquisition and claim Unearned benefits premiums investment claim acquisition costs and premiums Segment costs expenses premiums payable earned income expenses costs(1) expenses written - ------- ---------- ---------- --------- ---------- -------- ---------- -------- ---------- --------- -------- Year ended December 31, 1999: Commercial lines $ 11,019 127,460 65,350 4,206 91,928 7,607 60,083 (24,399) 32,161 94,607 Personal lines 3,909 5,354 16,870 -- 21,352 2,115 16,266 (5,139) 7,624 36,530 Other -- -- -- -- -- -- -- -- 4,589 -- ---------- -------- ------- ------- ------ ------- ------- -------- ------- ------- Total $ 14,928 132,814 82,220 4,206 113,280 9,722 76,349 (29,538) 44,374 131,137 ========== ======== ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1998: Commercial lines $ 10,789 136,400 61,430 5,835 91,697 9,648 85,996 (23,680) 34,938 86,362 Personal lines 531 398 2,172 -- 506 155 357 (197) 728 2,197 Other -- -- -- -- -- -- -- -- 4,589 -- ---------- -------- ------- ------- ------- ------- ------ ------- ------- ------- Total $ 11,320 136,798 63,602 5,835 92,203 9,803 86,353 (24,382) 40,255 88,559 ========== ======== ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1997: Commercial lines $ 11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 33,437 98,139 Personal lines -- -- -- -- -- -- -- -- -- -- Other -- -- -- -- -- -- -- -- 3,645 -- ---------- -------- ------- ------- ------- ------- ------- ------- ------- ------- Total $ 11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 37,082 98,139 ========== ======== ======= ======= ======= ======= ======= ======= ======= =======
(1) Net of the amortization of deferred ceding commission income. See accompanying independent auditors' report on supplementary information. 80 81 Schedule IV GAINSCO, INC. AND SUBSIDIARIES Reinsurance Years ended December 31, 1999, 1998 and 1997 (Amounts in thousands, except percentages)
Percentage Ceded to Assumed of amount Direct other from other Net assumed amount companies companies amount to net Year ended December 31, 1999: Premiums earned: Property and casualty $ 113,375 -- -- 113,375 Reinsurance -- (12,107) 12,012 (95) ---------- ---------- ---------- ---------- Total $ 113,375 (12,107) 12,012 113,280 10.6% ========== ========== ========== ========== ========== Year ended December 31, 1998 Premiums earned: Property and casualty $ 93,632 -- -- 93,632 Reinsurance -- (2,120) 691 (1,429) --------- ---------- ---------- ---------- Total $ 93,632 (2,120) 691 92,203 0.7% ========== ========== ========== ========== ========== Year ended December 31, 1997 Premiums earned: Property and casualty $ 105,949 -- -- 105,949 Reinsurance -- (3,693) -- (3,693) ---------- ---------- ---------- ---------- Total $ 105,949 (3,693) -- 102,256 --% ========== ========== ========== ========== ==========
See accompanying independent auditors' report on supplementary information. 81 82 Schedule VI GAINSCO, INC. AND SUBSIDIARIES Supplemental Information Years ended December 31, 1999, 1998 and 1997 (Amounts in thousands)
Column A Column B Column C Column D Column E Column F ---------- ---------- ---------- ---------- ---------- ---------- Reserves for unpaid Discount Deferred claims if any, Affiliation policy and claim deducted with acquisition adjustment in Unearned Net earned Segment registrant costs expenses Column C premiums premiums - -------- ---------- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1999: Commercial lines $ -- 11,019 127,460 -- 65,350 91,928 Personal lines -- 3,909 5,354 -- 16,870 21,352 Other -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total $ -- 14,928 132,814 -- 82,220 113,280 ========== ========== ========== ========== ========== ========== Year ended December 31, 1998: Commercial lines $ -- 10,789 136,400 -- 61,430 91,697 Personal lines -- 531 398 -- 2,172 506 Other -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total $ -- $ 11,320 136,798 -- 63,602 92,203 ========== ========== ========== ========== ========== ========== Year ended December 31, 1997: Commercial lines $ -- 11,618 113,227 -- 64,005 102,256 Personal lines -- -- -- -- -- -- Other -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total -- $ 11,618 113,227 -- 64,005 102,256 ========== ========== ========== ========== ========== ========== Column H Column I Column J Column K Column L ---------- ---------- ---------- ---------- ---------- Claims and claim adjustment expenses incurred Amortization Paid related to of deferred claims and Net ----------------------- policy claim Net investment Current Prior acquisition adjustment premiums Segment income year year costs(1) expenses written - ------- ---------- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1999: Commercial lines 7,607 59,894 189 (24,399) 71,422 94,607 Personal lines 2,115 16,082 184 (5,139) 11,180 36,530 Other -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total 9,722 75,976 373 (29,538) 82,602 131,137 ========== ========== ========== ========== ========== ========== Year ended December 31, 1998: Commercial lines 9,648 59,278 26,718 (23,680) 68,183 86,362 Personal lines 155 357 -- (197) 105 2,197 Other -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total 9,803 59,635 26,718 (24,382) 68,288 88,559 ========== ========== ========== ========== ========== ========== Year ended December 31, 1997: Commercial lines 9,731 53,969 8,117 (26,179) 57,361 98,139 Personal lines -- -- -- -- -- -- Other -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total 9,731 53,969 8,117 (26,179) 57,361 98,139 ========== ========== ========== ========== ========== ==========
(1) Net of the amortization of deferred ceding commission income. See accompanying independent auditors' report on supplementary information. 82 83 INDEX OF EXHIBITS
Exhibit No. Description 3.5 Bylaws of Registrant as amended through February 24, 2000. 10.11 Investment Management Agreements dated October 4, 1999 between GMSP and each of Registrant, General Agents Insurance Company of America, Inc., MGA Insurance Company, Inc. and Gainsco County Mutual Insurance Company; and Investment Management Agreement dated January 6, 2000 between GMSP and Midwest Casualty Insurance Company. 10.14 Stock Purchase Agreement dated as of November 17, 1999 among Registrant, Tri-State, Ltd., Herbert A. Hill and Alan E. Heidt and related Pledge Agreement dated as of January 7, 2000 executed by the Registrant in favor of Bank One, NA and Unlimited Guaranty dated as of January 7, 2000 executed by Tri-State, Ltd. in favor of Bank One, NA 10.15 Agreement of Limited Partnership of GNA Investments I, L.P. dated as of November 30, 1999 between the Registrant and Goff Moore Strategic Partners, L.P. 10.16 Professional Service Agreement dated as of October 22, 1999 between Registrant and ClientSoft, Inc. 21 Subsidiaries of Registrant. 23 Consent of KPMG LLP to incorporation by reference. 24 Powers of Attorney. 27 Financial Data Schedule.
EX-3.5 2 BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.5 BYLAWS OF GAINSCO, INC. As amended as of February 24, 2000 Contents ARTICLE 1: OFFICES 1 1.01 Registered Office and Agent 1 1.02 Other Offices 1 ARTICLE 2: SHAREHOLDERS 1 2.01 Place of Meetings 1 2.02 Annual Meeting 1 2.03 Voting Stock; Voting List 1 2.04 Special Meetings 1 2.05 Notice 2 2.06 Quorum 2 2.07 Majority Vote; Withdrawal of Quorum 2 2.08 Method of Voting 2 2.09 Record Date; Closing Transfer Books 3 2.10 Action Without Meeting 3 2.11 Order of Business at Meetings 3 2.12 Notice of Matters to be Considered 3 2.13 Nominations 4 ARTICLE 3: DIRECTORS 5 3.01 Management 5 3.02 Number; Qualifications; Election; and Term 5 3.03 Change in Number 5 3.04 Removal 5 3.05 Vacancies 5 3.06 Voting in Election of Directors 5 3.07 Place of Meetings 5 3.08 First Meeting 5 3.09 Regular Meetings 6 3.10 Special Meetings 6 3.11 Quorum; Majority Vote 6 3.12 Compensation 6 3.13 Procedure 6 3.14 Interested Directors and Officers 6 3.15 Action Without Meeting 7 3.16 Advisory Directors 7 3.17 Chairman of Board 7 i. 2 ARTICLE 4: NOTICE AND ATTENDANCE THROUGH USE OF ELECTRONIC EQUIPMENT 8 4.01 Method 8 4.02 Waiver 8 4.03 Telephone and Similar Meetings 8 ARTICLE 5: OFFICERS AND AGENTS 8 5.01 Number; Qualification; Election; Term 8 5.02 Removal 9 5.03 Vacancies 9 5.04 Authority 9 5.05 Compensation 9 5.06 President 9 5.07 Vice Presidents 9 5.08 Secretary 9 5.09 Assistant Secretary 9 5.10 Treasurer 10 5.11 Assistant Treasurer 10 ARTICLE 6: CERTIFICATES AND SHAREHOLDERS 10 6.01 Certificates 10 6.02 Issuance 10 6.03 Payment for Shares 11 6.04 Lien 11 6.05 Lost, Stolen or Destroyed Certificates 11 6.06 Registration of Transfer 11 6.07 Registered Shareholders 12 6.08 Denial of Preemptive Rights 12 ARTICLE 7: GENERAL PROVISIONS 12 7.01 Dividends and Reserves 12 7.02 Books and Records 12 7.03 Annual Statement 13 7.04 Checks and Notes 13 7.05 Fiscal Year 13 7.06 Seal 13 7.07 Indemnification; Insurance 13 7.08 Resignation 13 7.09 Amendment of Bylaws 13 7.10 Construction 13 7.11 Table of Contents; Headings 14 7.12 Relation to Articles of Incorporation 14 ARTICLE 8: COMMITTEES 14 8.01 Designation 14 8.02 Number; Qualification; Term 14 8.03 Authority 14 ii. 3 8.04 Change in Number 15 8.05 Removal 15 8.06 Vacancies 15 8.07 Meetings 15 8.08 Quorum; Majority Vote 15 8.09 Compensation 15 8.10 Committee Charters 15 iii. 4 ARTICLE 1: OFFICES 1.01 Registered Office and Agent. The registered office of the corporation shall be at 500 Commerce Street, Fort Worth, Texas 76102. The name of the registered agent at such address is Glenn W. Anderson. Anything in these Bylaws to the contrary notwithstanding revision of the registered office or the registered agent of the corporation in accordance with the provisions of the Texas Business Corporation Act shall automatically and without further action amend this section to name such newly adopted office or registered agent. 1.02 Other Offices. The corporation may have offices at other places both within and without the State of Texas as the board of directors may determine or as the business of the corporation may require. ARTICLE 2: SHAREHOLDERS 2.01 Place of Meetings. All meetings of the shareholders shall be held at such time and place, in or out of the State of Texas, as shall be stated in the notice of the meeting or in a waiver of notice. 2.02 Annual Meeting. An annual meeting of the shareholders shall be held each year at a time and on a day as may be selected by the board of directors. At the meeting, the shareholders shall elect directors and transact such other business as may properly be brought before the meeting. 2.03 Voting Stock; Voting List. (a) The holders of record as of the close of business on the record date, determined in accordance with Sec. 2.09, of shares of the Company's common stock, par value $.10 per share ("Common Stock"), and Series A Convertible Preferred Stock, par value $100 per share ("Series A Preferred Stock"), shall be entitled to vote on all matters presented at each meeting of shareholders and are hereinafter referred to collectively as "Voting Stock." Each share of Common Stock outstanding on the record date shall be entitled to one vote on each matter to come before the meeting. Each share of Series A Preferred Stock shall be entitled to vote on each matter on which the Common Stock may vote and shall be entitled to one vote per share of Common Stock into which it is convertible on the record date. References herein to numbers of shares of Voting Stock are references to the combined number of shares of Common Stock outstanding on the record date and the number of shares of Common Stock then issuable upon conversion of the Series A Preferred Stock. (b) At least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the officer or agent having charge of the stock transfer books. The list, for a period of ten days prior to the meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and shall be subject to the inspection of any shareholder during the whole time of the meeting. 2.04 Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the articles of incorporation, may be called by the president, the Board of Directors, or the holders of not less than twenty-five percent of all of the shares of Voting Stock entitled 1 5 to vote at the meetings. Business transacted at a special meeting shall be confined to the objects stated in the notice of the meeting. 2.05 Notice. Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than fifty days before the date of the meeting, either personally or by mail, by or at the direction of the president, the secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. 2.06 Quorum. At all meetings of the shareholders, the presence in person or by proxy of the holders of a majority of the shares of Voting Stock issued and outstanding on the record date and entitled to vote will be necessary and sufficient to constitute a quorum for the transaction of business except as otherwise provided by law, the articles of incorporation or these bylaws. If a quorum is not present or represented at a meeting of the shareholders, the shareholders entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice (other than announcement at the meeting of the time and place at which the meeting is to be reconvened) until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. For purposes of determining the presence or absence of a quorum under this bylaw 2.06, abstentions and broker non-votes (as such terms are defined in bylaw 2.07) shall be treated as shares present and entitled to vote. 2.07 Majority Vote; Withdrawal of Quorum. When a quorum is present at any meeting of the shareholders, the vote of the holders of a majority of the shares of Voting Stock entitled to vote, present in person or represented by proxy and voting "for" or "against" any question brought before the meeting shall decide such question, unless the question is one upon which, by express provision of law, the articles of incorporation or these bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question but if such other express provision does not specify that the affirmative vote of a given percent of outstanding shares are required, the matter shall be approved or adopted if the required percent of the shares entitled to vote, present in person or represented by proxy and voting "for" or "against" such matter has voted "for". Abstentions and broker non-votes are not counted (even though such shares are considered present and entitled to vote for purposes of determining a quorum pursuant to bylaw 2.06). The term "abstentions" shall refer to shares which are not voted "for" or "against" a particular question by a holder or holders present in person or by proxy at a meeting and entitled to vote such shares on such question. The term "broker non-vote" shall refer to shares held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote and that the broker or nominee does not have discretionary power to vote on the particular question on which the vote is being counted. Anything herein to the contrary notwithstanding, any alteration, amendment, or repeal of bylaws 2.07, 3.02, 3.03, 3.04, 3.05, 3.11 and 7.09, or adoption of any provision inconsistent therewith, by the shareholders shall require the vote of the holders of two-thirds (2/3) of the shares having voting power. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 2.08 Method of Voting. At any meeting of the shareholders, every shareholder having the right to vote may vote either in person, or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after seven months from the date of its execution, unless 2 6 otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Each proxy shall be filed with the secretary of the corporation prior to or at the time of the meeting. Voting for directors shall be in accordance with Section 3.06 of these bylaws. Any vote may be taken by voice or by show of hands unless someone entitled to vote objects, in which case, written ballots shall be used. 2.09 Record Date; Closing Transfer Books. The board of directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of the shareholders, the record date to be not less than ten (10) nor more than sixty (60) days prior to the meeting; or the board of directors may close the stock transfer books for such purpose for a period of not less than ten nor more than sixty (60) days prior to such meeting. In the absence of any action by the board of directors, the date upon which the notice of the meeting is mailed shall be the record date. 2.10 Action Without Meeting. Any action required by statute to be taken at a meeting of the shareholders, or any action which may be taken at a meeting of the shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof and such consent shall have the same force and effect as a unanimous vote of the shareholders. The consent may be in more than one counterpart so long as each shareholder signs one of the counterparts. The consent shall be placed in the Minute Book. 2.11 Order of Business at Meetings. The order of business at annual meetings and so far as practicable at other meetings of shareholders shall be as follows unless changed by the board of directors: (1) call to order (2) proof of due notice of meeting (3) determination of quorum and examination of proxies (4) announcement of availability of voting list (see Bylaw 2.03) (5) announcement of distribution of annual statement (see Bylaw 8.03) (6) reading and disposing of minutes of last meeting of shareholders (7) reports of officers and committees (8) appointment of voting inspectors (9) unfinished business (10) new business (11) nomination of directors (12) opening of polls for voting (13) recess (14) reconvening; closing of polls (15) report of voting inspectors (16) other business (17) adjournment 2.12 Notice of Matters to be Considered. At an annual meeting of the shareholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, otherwise properly brought before the meeting by or at the direction of the board of directors, or otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual 3 7 meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the shareholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.12; provided, however, that nothing in this Section 2.12 shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting in accordance with said procedure. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.12, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.13 Nominations. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of shareholders by or at the direction of the board of directors by any nominating committee or person appointed by the board of directors or by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.13. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice to the secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice, (i) the name and record address of the shareholder and (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the shareholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. No person shall 4 8 be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE 3: DIRECTORS 3.01 Management. The business and affairs of the corporation shall be managed by the board of directors who may exercise all such powers of the corporation and do all such lawful acts and things as are not (by statute or by the articles of incorporation or by these bylaws) directed or required to be exercised or done by the shareholder. 3.02 Number; Qualifications; Election; and Term. The board of directors shall consist of nine (9) directors until changed by resolution adopted by the board of directors pursuant to Bylaw 3.03. None of the members of the board of directors need to be shareholders or residents of the State of Texas. The directors shall be elected at the annual meeting of the shareholders, except as provided in Bylaws 3.03 and 3.05. Each director shall hold office until his successor shall be elected and shall qualify. 3.03 Change in Number. The number of directors may be increased or decreased from time to time by resolution adopted by the Board of Directors but no decrease shall have the effect of shortening the term of any incumbent director. 3.04 Removal. Any director may be removed either for or without cause at any special or annual meeting of shareholders, by the affirmative vote of over two-thirds in number of shares of Voting Stock present in person or by proxy at such meeting and entitled to vote for the election of such director if notice of intention to act upon such matter shall have been given in the notice calling such meeting. 3.05 Vacancies. Any vacancy occurring in the board of directors (by death, resignation or removal) may be filled by an affirmative vote of a majority of the remaining directors though less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled either (i) by election at an annual meeting or at a special meeting of shareholders called for that purpose or (ii) by the Board, provided the Board may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. 3.06 Voting in Election of Directors. Directors shall be elected by plurality vote. Cumulative voting shall not be permitted. 3.07 Place of Meetings. Meetings of the board of directors, regular or special, may be held either within or without the State of Texas. 3.08 First Meeting. The first meeting of each newly elected board shall be held without further notice immediately following the annual meeting of shareholders, and at the same place, unless (by unanimous consent of the directors then elected and serving) such time or place shall be changed. 5 9 3.09 Regular Meetings. Regular meetings of the board of directors may be held without notice at such time and place as shall from time to time be determined by the board. 3.10 Special Meetings. Special meetings of the board of directors may be called by the president on three days' notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the president or secretary in like manner and on like notice on the written request of a majority of the directors. Except as otherwise expressly provided by statute, or by the articles of incorporation, or by these bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice. 3.11 Quorum; Majority Vote. At all meetings of the board of directors, a majority of the board of directors fixed by these Bylaws shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act by the board of directors, except as otherwise specifically provided by statute, by the Articles of Incorporation or by these Bylaws. Anything herein to the contrary not withstanding, any alteration, amendment, or repeal of Bylaws 2.07, 3.02, 3.03, 3.04, 3.05, 3.11 and 7.09, or adoption of any provision inconsistent therewith, by the board of directors shall require the affirmative vote of two-thirds (2/3) of the board of directors of the corporation. If a quorum is not present at a meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.12 Compensation. By resolution of the board of directors, the directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of the Executive Committee or of special or standing committees may, by resolution of the board of directors, be allowed like compensation for attending committee meetings. 3.13 Procedure. The board of director shall keep regular minutes of its proceedings. The minutes shall be placed in the minute book of the corporation. 3.14 Interested Directors and Officers. (a) An otherwise valid contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership or other entity in which one or more of the directors or officers are directors or officers or have a financial interest, shall be valid notwithstanding that the director or officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purposes, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or 6 10 (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the board of directors, a committee thereof, or the shareholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors. 3.15 Action Without Meeting. Any action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all members of the board of directors. Such consent shall have the same force and effect as a unanimous vote at a meeting and may be stated as such in any document or instrument filed with the Secretary of State. 3.16 Advisory Directors. The board of directors, by resolution adopted by not less than a majority of the directors then in office, may from time to time appoint such number of individuals as it may deem appropriate to serve as advisory directors at the pleasure of the board of directors. Advisory directors may be given such designations (including without limitation "advisory director," "director emeritus" or "honorary director") as the board of directors may from time to time determine. Advisory directors are not, and shall not have the duties and responsibilities of, directors of the corporation, and the terms "director" or "member of the board of directors" as used in these Bylaws shall not be deemed to mean or include advisory directors; provided that an advisory director who was previously a director of the Company shall be deemed a director for the sole purpose of preventing options previously granted to him under the stock option plans of the Company from terminating as a result of his ceasing to serve as a director of the Company. Without limiting the generality of the foregoing, advisory directors shall not be entitled (a) to receive any notice of any meeting of the board of directors, (b) to attend any meeting of the board of directors except at the invitation of the board of directors, (c) to vote on any matter presented for action by the board of directors or, except at the invitation of the board of directors, to participate in the consideration of any such matter or the formulation or determination of corporate policy, (d) to receive any non-public information regarding the business or affairs of the corporation or any matters presented for action or consideration by the board of directors, or (e) to receive any compensation for serving as an advisory director except as the board of directors may otherwise determine by resolution. 3.17 Chairman of Board. The board of directors may from time to time elect from their number individuals to serve as chairman of the board. The chairman of the board, if one shall be elected, shall preside at all meetings of the shareholders and the directors. In addition, the chairman of the board shall perform such services for the board of directors and such additional duties, and shall exercise such powers, as the board of directors may from time to time prescribe, but shall not be deemed an officer or employee of the corporation by virtue of holding such position. 7 11 ARTICLE 4: NOTICE AND ATTENDANCE THROUGH USE OF ELECTRONIC EQUIPMENT 4.01 Method. Whenever by statute or the articles of incorporation or these bylaws, notice is required to be given to any director or shareholder, and no provision is made as to how the notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given (a) in writing, by mail, postage prepaid, addressed to the director or shareholder at the address appearing on the books of the corporation, or (b) in any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is thus deposited in the United States mails. 4.02 Waiver. Whenever, by statute or the articles of incorporation or these bylaws, notice is required to be given to any shareholder or director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 4.03 Telephone and Similar Meetings. Shareholders, directors and committee members may participate in and hold a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE 5: OFFICERS AND AGENTS 5.01 Number; Qualification; Election; Term. (a) The corporation shall have: (1) a president, one or more vice presidents (the number and categories thereof to be determined by the board of directors), a secretary and a treasurer, and (2) such other officers and assistant officers and agents as the board of directors may determine. (b) No officer or agent need be a shareholder, a director or a resident of Texas. (c) Officers named in Section 5.01(a)(1) shall be elected by the board of directors on the expiration of an officer's term or whenever a vacancy exists. Officers and agents named in Section 5.01(a)(2) may be elected by the board at any meeting. (d) Unless otherwise specified by the board at the time of election or appointment, or in any employment contract approved by the board, each officer's and agent's term shall end at the first meeting of directors after the next annual meeting of shareholders. He shall serve until the end of his term or, if earlier, his death, resignation or removal. (e) Any two or more offices may be held by the same person, except that the president and the secretary shall not be the same person. 8 12 5.02 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation will be served thereby. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 5.03 Vacancies. Any vacancy occurring in any office of the corporation (by death, resignation, removal or otherwise) maybe filled by the board of directors. 5.04 Authority. Officers and agents shall have such authority and perform such duties in the management of the corporation as are provided in these bylaws or as may be determined by resolution of the board of directors not inconsistent with these bylaws. 5.05 Compensation. The compensation of officers and agents shall be fixed from time to time by the board of directors. 5.06 President. The president shall be the chief executive officer of the corporation; he shall preside at all meetings of the shareholders and the board of directors, shall have general and active management of the business and affairs of the corporation, shall see that all orders and resolutions of the board are carried into effect. He shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe. 5.07 Vice Presidents. The vice presidents, in the order of their ranking (by category or otherwise) determined by the board of directors or, in the absence of any such ranking or any specific determination by the board of directors, in the order of the length of their service as a vice president, shall, in the absence or disability of the president, perform the duties and have the authority and exercise the powers of the president. They shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe or as the president may from time to time delegate. 5.08 Secretary. (a) The secretary shall attend all meetings of the board of directors and all meetings of the shareholders and record the minutes of all proceedings in a book to be kept for that purpose. (b) The secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the board of directors. (c) The secretary shall keep in safe custody the seal of the corporation and, when authorized by the board of directors or the executive committee, affix the same to any instrument requiring it. (d) The secretary shall be under the supervision of the president and shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe or as the president may from time to time delegate. 5.09 Assistant Secretary. The assistant secretary shall, in the absence or disability of the secretary, perform the duties and have the authority and exercise the powers of the secretary. He shall 9 13 perform such other duties and have such other powers as the board of directors may from time to time prescribe or as the president may from time to time delegate. 5.10 Treasurer. (a) The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements of the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. (b) He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and directors, at the regular meetings of the board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the corporation. (c) If required by the board of directors, he shall give the corporation a bond in such form, in such sum, and with such surety or sureties as shall be satisfactory to the board for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. (d) He shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe or as the president may from time to time delegate. 5.11 Assistant Treasurer. The assistant treasurer shall, in the absence or disability of the treasurer, perform the duties and have the authority and exercise the powers of the treasurer. He shall perform such other duties and have such other powers as the board of directors may from time to time prescribe or the president may from time to time delegate. ARTICLE 6: CERTIFICATES AND SHAREHOLDERS 6.01 Certificates. Certificates in the form determined by the board of directors shall be delivered representing all shares to which shareholders are entitled. Certificates shall be consecutively numbered and shall be entered in the books of the corporation or its agents as they are issued. Each certificate shall state on its face the holder's name, the number and class of shares, the par value of shares or a statement that such shares are without par value, and such other matters as may be required by law. They shall be signed by the president or a vice president and such other officer or officers as the board of directors shall designate, and may be sealed with the seal of the corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent or registered by a registrar (either of which is other than the corporation or an employee of the corporation), the signature of any such officer may be facsimile. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of its issuance. 6.02 Issuance. Shares (both treasury and authorized but unissued) may be issued for such consideration (not less than par value) and to such persons as the board of directors may determine from time 10 14 to time. Shares may not be issued until the full amount of the consideration, fixed as provided by law, has been paid. 6.03 Payment for Shares. (a) Kind. The consideration for the issuance of shares shall consist of any tangible or intangible benefit to the Company, including cash, promissory notes, services performed, contracts for services to be performed, other securities of the Company, or securities of any corporation or other entity. (b) Validation. In the absence of fraud in the transaction, the judgment of the board of directors as to the value of consideration received shall be conclusive. (c) Effect. When consideration, fixed as provided by law, has been paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. (d) Allocation of Consideration. The consideration received for shares shall be allocated by the board of directors in accordance with law, between stated capital and capital surplus accounts. 6.04 Lien. For any indebtedness of a shareholder to the corporation, the corporation shall have a first and prior lien on all shares of its stock owned by him and on all dividends or other distributions declared thereon. 6.05 Lost, Stolen or Destroyed Certificates. The corporation shall issue a new certificate in place of any certificate for shares previously issued if the registered owner of the certificate: (a) Claim. Makes proof in affidavit form that it has been lost, destroyed or wrongfully taken; and (b) Timely Request. Requests the issuance of a new certificate before the corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; and (c) Bond. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the corporation may direct, to indemnify the corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction or theft of the certificate; and (d) Other Requirements. Satisfies any other reasonable requirements imposed by the corporation. When a certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the corporation within a reasonable time after he has notice of it, and the corporation registers a transfer of the shares represented by the certificate before receiving such notification, the holder of record is precluded from making any claim against the corporation for the transfer or for a new certificate. 6.06 Registration of Transfer. The corporation shall register the transfer of a certificate for shares presented to it for transfer if: 11 15 (a) Endorsement. The certificate is properly endorsed by the registered owner or by his duly authorized attorney; and (b) Guarantee and Effectiveness of Signature. The signature of such person has been guaranteed by a national banking association or member of the New York Stock Exchange, and reasonable assurance is given that such endorsements are effective; and (c) Adverse Claims. The corporation has no notice of an adverse claim or has discharged any duty to inquire into such a claim; and (d) Collection of Taxes. Any applicable law relating to the collection of taxes has been complied with. 6.07 Registered Shareholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law. 6.08 Denial of Preemptive Rights. No shareholder of corporation nor other person shall have any preemptive rights whatsoever. ARTICLE 7: GENERAL PROVISIONS 7.01 Dividends and Reserves. (a) Declaration and Payment. Subject to statute and the articles of incorporation, dividends may be declared by the board of directors at any regular or special meeting and may be paid in cash, in property or in shares of the corporation. The declaration and payment shall be at the discretion of the board of directors. (b) Record Date. The board of directors may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any dividend, the record date to be not more than fifty days prior to the payment date of such dividend, or the board of directors may close the stock transfer books for such purpose for a period of not more than fifty days prior to the payment date of such dividend. In the absence of any action by the board of directors, the date upon which the board of directors adopts the resolution declaring the dividend shall be the record date. (c) Reserves. By resolution the board of directors may create such reserve or reserves out of the earned surplus of the corporation as the directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the corporation, or for any other purpose they think beneficial to the corporation. The directors may modify or abolish any such reserve in the manner in which it was created. 7.02 Books and Records. The corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and board of directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record 12 16 of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. 7.03 Annual Statement. The board of directors shall present at each annual meeting of shareholders a full and clear statement of the business and condition of the corporation, including a reasonably detailed balance sheet, income statement and surplus statement. 7.04 Checks and Notes. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. 7.05 Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors. 7.06 Seal. The corporation seal (of which there may be one or more) shall contain the name of the corporation and the name of the state of incorporation. The seal may be used by impressing it or reproducing a facsimile of it, or otherwise. 7.07 Indemnification; Insurance. The corporation shall indemnify to the full extent permitted by law any person who is made a named defendant or respondent in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such action, suit or proceeding, by reason of the fact that he or she is or was a director or officer of the corporation, against all expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such director or officer in connection with any such action, suit or proceeding. The corporation may indemnify other persons, as permitted by law. The corporation may advance expenses to directors, officers or other persons, as permitted by law. The corporation may purchase and maintain insurance on behalf of the directors, officers or other persons, against any liability asserted against such persons in their capacities as directors, officers or otherwise, of the corporation, whether or not the corporation would have the power to indemnify such directors, officers or other persons against such liability. 7.08 Resignation. Any director, officer or agent may resign by giving written notice to the president or the secretary. The resignation shall take effect at the time specified therein, or immediately if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 7.09 Amendment of Bylaws. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the board of directors (subject to the shareholders repealing or changing the action of the board of directors, or making new Bylaws, at an annual or special meeting called and held as provided in these Bylaws) at any meeting at which a quorum is present. 7.10 Construction. Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural, and conversely. If any portion of these bylaws shall be invalid or inoperative, then, so far as is reasonable and possible: (a) The remainder of these bylaws shall be considered valid and operative, and 13 17 (b) Effect shall be given to the intent manifested by the portion held invalid or inoperative. 7.11 Table of Contents; Headings. The table of contents and headings used in these bylaws have been inserted for convenience only and do not constitute matter to be construed in interpretation. 7.12 Relation to Articles of Incorporation. These bylaws are subject to and governed by the articles of incorporation. ARTICLE 8: COMMITTEES 8.01 Designation. The board of directors may, by resolution adopted by a majority of the whole board, designate from among its members an executive committee and one or more such other committees as it may determine necessary. 8.02 Number; Qualification; Term. The executive committee and any other designated committees shall consist of two or more directors, not less than a majority of whom in each case shall be directors who are not officers or employees of the Company. The committees shall serve at the pleasure of the board of directors. 8.03 Authority. Each committee, to the extent provided in such resolution, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the corporation, except in the following matters and except where action of the full board of directors is required by statute or by the articles of incorporation: (a) Amending the articles of incorporation; (b) Amending, altering or repealing the bylaws of the corporation or adopting new bylaws; (c) Approving and/or recommending or submitting to shareholders: (1) merger (2) consolidation (3) sale, lease (as Lessor), exchange or other disposition of all or substantially all the property and assets of the corporation; (4) dissolution; (d) Filling vacancies in the board of directors or any such committee; (e) Electing or removing officers of the corporation or members of any such committee; (f) Fixing compensation of any person who is a member of any such committee; (g) Declaring dividends; (h) Altering or repealing any resolution of the board of directors. 14 18 8.04 Change in Number. The number of committee members may be increased or decreased (but not below two) from time to time by resolution adopted by a majority of the whole board of directors. 8.05 Removal. Any committee member may be removed by the board of directors by the affirmative vote of a majority of the whole board, whenever in its judgment the best interests of the corporation will be served thereby. 8.06 Vacancies. A vacancy occurring in any committee (by death, resignation, removal or otherwise) may be filled by the board of directors in the manner provided for original designation in paragraph 8.01. 8.07 Meetings. Time, place and notice (if any) of all committee meetings shall be determined by the respective committee. (see also paragraph 4.03). 8.08 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the board of directors shall constitute a quorum for the transaction of business. The act of a majority of the members present at any meeting at which a quorum is present shall be the act of the committee, except as otherwise specifically provided by statute or by the articles of incorporation or by these bylaws. If a quorum is not present at a meeting of the committee, the members present thereat may adjourn the meeting from time to time, without notice other than an announcement at the meeting until a quorum is present. 8.09 Compensation. Compensation of committee members shall be fixed pursuant to the provisions of paragraph 3.12 of these bylaws. 8.10 Committee Charters. Any committee designated by the board may adopt a charter governing any of the matters covered by Sections 8.02 and 8.04 through 8.09 and, to the extent approved by the board of directors, any such charter shall supercede the provisions of Sections 8.02 and 8.04 through 8.09. 15 EX-10.11 3 INVESTMENT MANAGEMENT AGREEMENTS 1 EXHIBIT 10.11 INVESTMENT MANAGEMENT AGREEMENT FOR MGA INSURANCE COMPANY, INC. THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into this 4th day of October, 1999, by and between Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"), and MGA Insurance Company, Inc., a Texas corporation ("GNA"), an indirect subsidiary of GAINSCO, INC. ("Parent"). WHEREAS, GNA is a regulated insurance company; WHEREAS, GNA desires to appoint GMSP to serve as investment manager with respect to certain investments held by it; and WHEREAS, GMSP is willing to provide investment advisory services to GNA on the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries controls, is controlled by or is under common control with such specified Person. For this purpose the term "control" (including the terms "controlling", "controlled by" and "under common control with") shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting Securities, by contract, or otherwise. "Agreement" has the meaning set forth in the first paragraph hereof. "Applicable Law" means any statute, law, rule, policy, guideline, or regulation or any judgment, order, writ, injunction, or decree of any Governmental Authority to which a specified Person or property is subject. "Associate" means (i) any corporation or entity (other than GNA, Parent or a Subsidiary of GNA or Parent) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of Equity Securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of GNA or any of its Subsidiaries. "Board" means the board of directors of GNA. INVESTMENT MANAGEMENT AGREEMENT 1 2 "Breach" means any violation or breach of, any misrepresentation or inaccuracy in, any default under, or any failure to perform or comply with any representation, warranty, covenant, obligation, or other provision of this Agreement. "Business Day " means any day other than a Saturday or Sunday on which national banks are open for business in Fort Worth, Texas and New York, New York. "Cash" means any currency or immediately available funds on deposit with a financial institution. "Cause" means that GMSP has committed or engaged in (i) any malfeasance, bad faith or negligence in respect of GMSP's material duties pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or indictment of or plea of no contest to any felony by GMSP or any member of the GMSP Group; (iv) any violation of the provisions of the U. S. federal securities laws or state securities laws by GMSP or any GMSP Principal; or (v) any material breach by GMSP of its obligations (including, without limitation, its obligations to observe and comply with the provisions of the Policy Letter) under, or its representations or warranties in, this Agreement if such breach continues for more than 10 days after GMSP receives written notice, specifying such breach with particularity and demanding cure, from GNA. "Committee" means the Board's Investment Committee, none of the members of which shall be members of the GMSP Group. "Confidential Information" means information received by GMSP from GNA or received by GNA from GMSP that is not generally known or which would logically be considered confidential or proprietary, or which would do GNA or GMSP, as applicable, harm if divulged, or which is marked "Confidential Information." "Damages" has the meaning set forth in Section 10. "Equity Securities" means any capital stock or other equity interests of any Person, any Securities directly or indirectly convertible into, or exercisable or exchangeable for any capital stock or other equity interests of any Person, or any right, option, warrant or other Security which, with the payment of additional consideration, the expiration of time or the occurrence of any event shall give the holder thereof the right to acquire any capital stock or other equity interests of any Person or any Security convertible into or exercisable or exchangeable for, any capital stock or other equity interests of any Person. "Fair Market Value" means as to any Securities on any date, (a) if such Securities are listed or admitted to trading on any national securities exchange on any such trading day, the amount equal to the last sale price of such Securities, regular way settlement, on such dates or, if no such sale takes place on a date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Securities are then listed or admitted to trading, (b) if such Securities are not then listed or admitted to trading on any national securities exchange but are reported through the automated quotation system of a registered securities association, the last trading price of such Securities on such dates, or if there shall have been no trading on a date, the average of the closing bid and asked prices of such Securities on such date as shown by such automated quotation system or (c) if such Securities are not then so listed, admitted to trading or reported, the value determined by GMSP subject to review and approval by the Committee, which valuation shall be equal to (i) cost or (ii) in the event that either GMSP or the Committee determine that there has been a material change in the value of such Securities since the date of acquisition of such Securities, such other valuation as is reflective of the value INVESTMENT MANAGEMENT AGREEMENT 2 3 of such Securities; provided, however, that, if GMSP and the Committee are unable to agree on such fair market value, such Securities shall be valued by such nationally recognized independent public accounting firm or investment banking firm desiGNAted by the Committee and reasonably acceptable to GMSP. Any such third-party valuation shall be final and binding on the parties and enforceable in accordance with the provisions of the Texas General Arbitration Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA. "Fees" has the meaning set forth in Section 4. "GAAP" means generally accepted accounting principles for financial reporting in the U.S., consistently applied. "GMSP" has the meaning set forth in the introductory paragraph of this Agreement. "GMSP Group" means GMSP together with its Affiliates, Associates and employees, including without limitation GMSP's partners, the partners of the general partner of GMSP and the GMSP Principals. "GMSP Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability of GMSP to conduct business, the financial condition or the results of operations of GMSP that is material to GMSP or as to the ability of GMSP to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or the insurance industry generally. "GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other Persons employed by or otherwise affiliated with GMSP or its general partner who have access to information regarding particular Securities being considered for purchase or sale by GNA. The parties recognize that the limited partners of GMSP as of the date hereof are not GMSP Principals. "GNA" has the meaning set forth in the introductory paragraph of this Agreement. "GNA Applicable Insurance Department " means the Texas Department of Insurance. "GNA Entities" means GAINSCO, INC., a Texas corporation; GNA Insurance Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a Texas mutual insurance company; and General Agents Insurance Company of America, Inc., an Oklahoma corporation. "GNA Investment Management Agreements" means the Investment Management Agreements of even date herewith between GMSP and each of the GNA Entities, including this Agreement. "GNA Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability to conduct business, the financial condition or the results of operations of GNA and its Subsidiaries that is material to Parent and its Subsidiaries taken as a whole or as to the ability of GNA to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or insurance industry generally. "good faith", when used in respect of any action, means that the action was taken with (i) honesty of intention, (ii) freedom from knowledge of circumstances which ought to put the Person taking such action on inquiry or negligence, and (iii) intention to abstain from taking any unconscientious advantage of another. INVESTMENT MANAGEMENT AGREEMENT 3 4 "Governmental Authority" means any U.S. federal, state, local, foreign, supernational or supranational court or tribunal, governmental, regulatory or administrative agency, department, bureau, authority, commission or arbitral panel. "Investment Grade Debt Obligations" means any interest bearing debt obligations issued by any Person, including a Governmental Authority, rated at least "B minus" or the equivalent thereof by Standard & Poor's Corporation or Moody's Investor's Service, Inc. "Malfunction" means any failure to: (a) accurately recognize dates falling before, on or after the Year 2000; or (b) accurately record, store, retrieve and process data input and date information. "Parent" has the meaning set forth in the first paragraph hereof. "Person" means any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including any Governmental Authority. "Policy Letter" has the meaning set forth in Section 2. "Portfolio " means those investments held by GNA in Securities of the type more particularly described under the category "Investments" in Parent's periodic filings with the SEC. "Proceedings" means all proceedings, actions, suits, investigations, and inquiries by or before any arbitrator or Governmental Authority. "Research" means research, statistical and similar information and services. "SEC" means the Securities and Exchange Commission. "Security" means any capital stock, partnership interest, membership interest, subscription, certificate of trust or other ownership interest, warrant, bond, note, debenture, or other debt or equity interest of any Person commonly known as a "security," and all rights and options relating to any of the foregoing, regardless of whether traded on a national securities exchange; but shall not include Cash Equivalents. "Securities Purchase Agreement" means the Securities Purchase Agreement dated June 29, 1999, between GMSP and Parent. "Short Term Debt" means any note, draft, bill of exchange, or similar security which has a maturity at the time of issuance of not exceeding nine (9) months exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. "Subsidiary" means, with respect to any Person, any corporation or other entity (including partnerships and other business associations) in which the Person directly or indirectly owns at least a majority of the outstanding voting Securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors, or otherwise to direct the management and policies, of such corporation or other entity. "U.S." means the United States of America. INVESTMENT MANAGEMENT AGREEMENT 4 5 "Year 2000" means the calendar year 2000 A.D. 2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve, as investment manager with respect to the Portfolio on the terms and conditions hereinafter set forth: (a) The investment policies and all other actions of the Portfolio are and shall at all times be subject to the oversight and direction of the Committee. GMSP shall manage the Portfolio in accordance with the investment objectives and policies set forth in the letter (the "Policy Letter") heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy Letter, including the investment criteria and other instructions set forth therein, in whole or in part and at any time and from time to time; provided, however, that no amendment or supplement shall be binding upon GMSP until GMSP is notified of the amendment or supplement; and provided further, that in the event that an amended or supplemented Policy Letter shall require GMSP to make any changes in the manner in which GMSP has performed its services pursuant to this Agreement, GMSP shall have a reasonable time period to comply with such changes. GMSP shall periodically evaluate the provisions of the Policy Letter and provide GNA with any recommendations for the amendment or supplementation of the provisions of the Policy Letter that GMSP deems advisable for the benefit of GNA. To the extent that the provisions of the Policy Letter, as the same may be amended or supplemented from time to time, conflict with the provisions of this Agreement, the provisions of this Agreement shall control. (b) GNA will retain ownership and control of the assets in the Portfolio at all times. The assets shall be held for the benefit of GNA solely at one or more financial institutions or other locations specified from time to time in the Policy Letter. (c) Subject to the provisions of the Policy Letter and the oversight and direction of the Committee, GMSP shall have authority to make all specific investment decisions with respect to the assets in the Portfolio. (d) GMSP shall exercise its discretion and discharge its obligations under this Agreement in compliance with all Applicable Laws. (e) GMSP shall employ and dedicate to GNA continuously during the term of this Agreement a qualified investment portfolio manager reasonably acceptable to GNA, who shall have the primary responsibilities of coordinating all aspects of the day-to-day investment activities of the Portfolio. (f) GNA acknowledges that GMSP has informed GNA that GMSP currently is not registered as an (i) investment adviser under the Investment Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under the Securities Exchange Act of 1934, as amended, and all other Applicable Laws. 3. REPORTS. (a) GMSP shall provide to GNA periodic financial reports with respect to the assets in and investment performance of the Portfolio. The reports shall include such financial information in such format as GNA may reasonably request in connection with the administration of the Portfolio and a record of all transactions effected during the interim period from the preceding report, including the price per Security, the broker or dealer executing the transaction and the commissions paid. The reports shall be made with such frequency, but not less often than within 20 days following the end of each calendar month, as INVESTMENT MANAGEMENT AGREEMENT 5 6 GNA may reasonably request in connection with the administration of the Portfolio; provided that the late delivery of a complete report no more than one time in any three-year period with respect to any particular Security in the Portfolio shall not constitute a Breach of this Agreement if (i) the delay was caused by the failure of an unaffiliated Person in providing information to GMSP that had been timely requested by GMSP, (ii) any portion of the report that is not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause such late report to be delivered as promptly as practicable. (b) GMSP shall (i) afford GNA and its authorized representatives reasonable access to the GMSP Principals, GMSP's offices and other facilities, and all books, records and other documents of GMSP relating to the Portfolio or this Agreement and (ii) permit GNA and its authorized representatives to make such inspections and copies of all books, records and other documents as they may reasonably require to verify the accuracy of any report furnished pursuant to Section 3(a). 4. COMPENSATION; EXPENSES. (a) For services performed by GMSP, GNA agrees to pay to GMSP investment management fees (the "Fees") equal on an annual basis to (i) 30 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at the end of a given calendar month or during a majority of the days in the given calendar month and (ii) 100 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Equity Securities or other alternative investments in Securities which are not Investment Grade Debt Obligations. The Fees otherwise payable with respect to any calendar month (or prorated portion thereof) shall be reduced by an amount equal to the sum of (i) the amount of fees, commissions and expenses paid by or on behalf of GNA to any investment or mutual fund from which any member of the GMSP Group is eligible to receive compensation or profits plus (ii) the amount of any fees paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, plus (iii) the amount of any finder's fees, brokerage commissions or other benefit or compensation paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group in connection with any transaction in Securities pursuant to this Agreement. Notwithstanding anything to the contrary contained in this Agreement, (x) no Fees shall be payable with respect to any portion of the Portfolio invested in Cash during a majority of the days in the given calendar month and (y) the Committee and GMSP may agree upon a different Fee structure for special situations. (b) The Fees shall be based on the Fair Market Value of the assets in the Portfolio at the end of each calendar month, and shall be calculated at the end of each calendar month based upon the actual number of days elapsed during the calendar month, during which this Agreement is in effect over a year of 365 days. Within fifteen (15) days after the end of each calendar month, GNA shall pay to GMSP the Fees earned with respect to the preceding calendar month. In the event of termination prior to the end of a calendar month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair Market Value of the assets in the Portfolio at the time of termination. No other fees, charges or assessments shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP Group with respect to the services performed by GMSP pursuant to this Agreement, provided that GNA shall have the responsibility to reimburse GMSP for GMSP's payment of any amounts described pursuant to Section 4(d) below. There shall not be any annual reconciliation, adjustment or other "true-up" at the end of each calendar year. (c) GMSP shall be solely responsible for all of its general and administrative costs and expenses incurred in connection with performing its duties and obligations under this Agreement, which shall INVESTMENT MANAGEMENT AGREEMENT 6 7 consist of all costs and expenses in connection with the provision of office space and facilities, equipment and personnel for servicing the investments of the Portfolio and the salaries and fees of all personnel employed by GMSP performing services relating to research, statistical and investment activities. (d) GNA shall be responsible for, and pay directly, the following costs and expenses related to GMSP's performance of its duties pursuant to this Agreement that are reasonable and payable to Persons not affiliated with the GMSP Group: (i) brokerage commissions and other costs, fees and expenses incurred in the purchase and sale of Securities; (ii) fees and expenses of custodians selected pursuant to Section 2(b); (iii) costs related to third party Proceedings involving GNA's ownership of Securities pursuant to this Agreement, directly or indirectly, including, without limitation, attorneys' fees incurred in connection therewith (but excluding all costs related to Proceedings or other disputes between GNA and GMSP or any member of the GMSP Group or which constitute Cause); (iv) interest on and fees and expenses arising out of all borrowings made by GNA with respect to the purchase of Securities, including, but not limited to, the arranging thereof; (v) taxes, fees or other governmental charges levied against GNA; and (vi) any other expense, whether ordinary or extraordinary, that is determined by the Committee to be appropriate for GNA to pay pursuant to this Agreement. (e) In discharging its duties pursuant to this Agreement, GMSP may give preference, and may cause GNA to pay higher negotiated commission rates, to unaffiliated brokers which, in addition to having the capacity of obtaining the best price for the Security itself and of executing the order with speed, efficiency and confidentiality, also provide Research to GMSP or GNA. Research furnished by brokers through whom Securities transactions are effected may be used by GMSP in servicing all of its accounts, and there shall be no reduction in the compensation of GMSP hereunder as a consequence of its receipt of such Research. In the allocation of brokerage, however, GMSP must determine in good faith, and demonstrate to GNA upon request, that the amount of the commission is reasonable in relation to the value of the brokerage services and Research provided by the broker, viewed in terms of either the particular transaction or GMSP's overall responsibilities with respect to the Portfolio. In the allocation of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law and such policies and requirements that the Committee may adopt or approve as reflected in the Policy Letter. (f) In the event that, in any calendar month, the aggregate amount of Fees (as such term is defined in the respective GNA Investment Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an amount equal to the product of (i) the quotient of the Fair Market Value of the Portfolio divided by the Fair Market Value of all of the Portfolios (as such term is defined in the respective GNA Investment Management Agreements) of all of the GNA Entities, multiplied by (ii) an amount equal to the difference between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA Entities with respect to such calendar month. INVESTMENT MANAGEMENT AGREEMENT 7 8 5. ACTIVITIES OF GMSP. (a) The services of GMSP to GNA are not deemed to be exclusive, and GMSP shall be free to engage in any other business or to render similar services to others. GMSP and any member of the GMSP Group may engage independently or with others, for its or their own accounts and for the accounts of others, in other business ventures and activities of every nature and description, including, without limitation, purchasing, selling or holding Securities for the account of any other Person or for its or his own account, including Securities included within the Portfolio or eligible for investment pursuant to this Agreement; provided, that the management of such entities and accounts do not interfere with the performance of their obligations and duties to GNA pursuant to this Agreement. GNA shall not have any rights or obligations by virtue of this Agreement in and to such independent ventures and activities or the income or profits derived therefrom. The foregoing notwithstanding, without the prior written consent of GNA in a specific case, GMSP shall at all times adhere, and cause the members of the GMSP Group or the GMSP Principals, as the case may be, to adhere, to the following: (i) Neither GMSP nor any member of the GMSP Group shall act, either as principal or agent, on the opposite side of any transaction in which GNA or the Portfolio is involved. (ii) GMSP and each GMSP Principal shall at all times (A) place the interests of GNA before such member's personal transactional interests; (B) conduct all personal transactions in Securities in such a manner as to avoid any actual or potential conflict of interest or abuse of such Person's position of trust and confidence in relation to GNA; and (C) promptly disclose to GNA all personal transactions made by or on behalf of such Person in Securities which are or were at any time during the preceding two years in the Portfolio or issued by Persons whose Securities are in the Portfolio. (b) On any issue involving an actual or potential conflict of interest which is not specifically authorized by or pursuant to this Agreement, GMSP shall submit such issue to the Committee for prior approval, and shall take such actions, if any, as are determined by the Committee to be necessary or appropriate to ameliorate the conflict of interest. If GMSP carries out the actions specified by the Committee in respect of a matter giving rise to a conflict of interest, neither GMSP nor any member of the GMSP Group shall have any liability to GNA in respect of actions taken in good faith by them as a consequence of the approval by the Committee. (c) GMSP shall be liable for any breach of this Section 5 by any member of the GMSP Group as if GMSP had committed such breach. 6. DURATION AND TERMINATION. The term of this Agreement shall commence on the date of this Agreement and shall continue until terminated: (a) by the written agreement of GNA and GMSP; (b) by GMSP upon not less than 90 days written notice to GNA at any time after the third anniversary hereof; (c) by GNA upon not less than 90 days written notice to GMSP at any time after the third anniversary hereof; INVESTMENT MANAGEMENT AGREEMENT 8 9 (d) by GNA, at any time, immediately upon written notice to GMSP following (i) the good faith determination by both the Committee and two-thirds of the members of the Board (excluding members of the Board desiGNAted for election by GMSP or its successors in interest under the Securities Purchase Agreement or otherwise affiliated with GMSP) that an event that constitutes Cause has occurred and is continuing beyond any applicable period for notice and opportunity to cure or (ii) the commencement by a Governmental Authority of any Proceeding alleging any matter which, if proven, would constitute Cause. (e) by GMSP upon not less than 10 days notice in the event that GNA defaults in the performance of any of its material obligations hereunder and such default continues for not less than 10 days after GNA receives notice of such default; provided, however, that in the event that such default is of a nature that it cannot, with due diligence, be cured within 10 days, GMSP may not terminate this Agreement so long as GNA begins to cure such default within 10 days and thereafter diligently pursues such cure to completion. Termination of this Agreement shall not terminate GMSP's obligations under Section 3 to furnish reports concerning facts and circumstances prior to termination or under Section 11 to maintain the confidentiality of Confidential Information , terminate GNA's obligations to pay fees earned by GMSP prior to the date of termination, or terminate either party's obligations to indemnify the other party pursuant to this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF GMSP. (a) GMSP is a limited partnership duly organized, validly existing and in good standing under the Texas Revised Limited Partnership Act, as amended, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GMSP is duly qualified and in good standing (to the extent applicable) to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GMSP Material Adverse Effect. (b) GMSP has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GMSP. This Agreement has been duly and validly executed and delivered by GMSP and, assuming the due authorization, execution and delivery hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable against GMSP in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GMSP other than as described in the Securities Purchase Agreement or with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GMSP do not and will not result in any violation by GMSP under any provisions of: (i) the partnership agreement or similar governing documents of GMSP; INVESTMENT MANAGEMENT AGREEMENT 9 10 (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GMSP or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GMSP is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect; (e) There is no Proceeding pending, or to the knowledge of GMSP, threatened against GMSP that questions the validity of this Agreement or any action to be taken by GMSP in connection with this Agreement except as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect. (f) GMSP is, and during the term of this Agreement will continue to be (i) either exempt from registration or duly registered as an investment adviser under the Investment Advisers Act of 1940 and all Applicable Laws and (ii) qualified and eligible to manage the Portfolio under the statutes and regulations administered by the GNA Applicable Insurance Department, provided that GNA shall inform GMSP immediately in the event that GNA becomes aware of any changes in the qualification and eligibility requirements with respect to such statutes and regulations. GMSP will provide prompt written notice to GNA if GMSP ceases to be so registered or qualified or becomes aware of any fact, event or circumstance which will or is reasonably likely to cause it to cease to be so registered or qualified. (g) Taken in the aggregate, the factual information (including, without limitation, information regarding its knowledge, investment experience and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999 in writing for purposes of this Agreement did not contain untrue statements of material facts, or omit to state material facts necessary to make the statements made not misleading in the light of the circumstances under which they were made, as of the date as of which such information is dated. All financial forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were prepared in good faith on the basis of assumptions believed to be reasonable and data, information, tests or conditions believed to be valid or accurate or to exist at the time such forecasts were prepared. (h) All of the equipment, Software and computer hardware owned or used by GMSP or used and operated by third parties on behalf of GMSP, which performs or is or may be required to perform functions involving dates or the computation of dates, or containing date related data, has the programming, design and performance capabilities to ensure that: (i) it will not suffer any Malfunction that would reasonably be expected to have a GMSP Material Adverse Effect; and (ii) it will not, as a result of the date change at the end of the twentieth century or the input, processing, storage or use of dates up to and including December 31, 2001, (A) be adversely affected, (B) require changes in inputting or operating practices, (C) produce invalid or incorrect output or results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in functionality or performance that, in any of the above, could reasonably be expected to have a GMSP Material Adverse Effect. INVESTMENT MANAGEMENT AGREEMENT 10 11 8. REPRESENTATIONS AND WARRANTIES OF GNA. (a) GNA is an insurance company duly organized and validly existing under the laws of the State of Texas, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GNA is duly qualified and in good standing to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GNA Material Adverse Effect. (b) GNA has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GNA. This Agreement has been duly and validly executed and delivered by GNA and, assuming the due authorization, execution and delivery hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable against GNA in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GNA other than as described in the Securities Purchase Agreement or with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GNA do not and will not result in any violation by GNA under any provisions of: (i) articles of incorporation or similar governing documents of GNA; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GNA or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GNA is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (e) There is no Proceeding pending, or to the knowledge of GNA, threatened against GNA that questions the validity of this Agreement or any action to be taken by GNA in connection with this Agreement except as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (f) GNA has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of entering into this Agreement. INVESTMENT MANAGEMENT AGREEMENT 11 12 (g) No part of the funds to be used to purchase and hold Securities or to pay any amounts pursuant to this Agreement constitutes an asset of any employee benefit plan within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)). 9. LIABILITY. It is recognized that decisions concerning investments or potential investments involve the exercise of judgment and the risk of loss. To the extent permitted by Applicable Law, neither GMSP nor any of its officers, directors, or employees nor other members of the GMSP Group shall be liable for any loss suffered by GNA on account of such investments, or any act taken or omission made in good faith under this Agreement. For purposes of the foregoing sentence, no action or omission by GMSP shall be considered to have been made "in good faith" if GMSP was negligent, violated any law, or made any misrepresentation (whether affirmatively or by omission). 10. INDEMNIFICATION. (a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any and all claims, actions, causes of action, demands, losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from (i) any Breach by GNA of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or (ii) any Proceeding brought against any of them by a Person other than GNA or any of its Affiliates, Associates or shareholders in respect of any action taken in good faith on behalf of GNA in the course of the performance of GMSP's duties under this Agreement; provided, however, that GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any reasonable expenses incurred by such Person(s) in connection with a Proceeding brought against any of them by any of GNA's shareholders if such Person(s) is wholly successful, on the merits or otherwise, in the defense of such Proceeding, and provided, further, that GNA's obligation to indemnify, defend and hold harmless as provided in this Section 10(a) shall not apply to the first $750,000 in the aggregate of claims hereunder (other than claims for expenses in defending a Proceeding for which the Person is entitled to indemnification under clause (ii) of this Section) and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (b) GMSP shall indemnify, defend, and hold harmless GNA and its Affiliates, Associates, directors, officers and employees from and against any and all Damages asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from any Breach by GMSP of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto; provided, however, that GMSP's obligation to indemnify, defend and hold harmless as provided in this Section 10(b) shall not apply to the first $750,000 in the aggregate of claims hereunder and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (c) Promptly after receipt by an indemnified party under Section 10(a) or (b) of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability INVESTMENT MANAGEMENT AGREEMENT 12 13 that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests which renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. The indemnifying party shall have no liability with respect to any compromise or settlement of any action effected without its written consent (which shall not be unreasonably withheld). 11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential Information in confidence, and shall not disclose said information to any other party other than such party's employees, advisors, attorneys and accountants, who will be advised of the confidential nature of information. Each party shall protect the Confidential Information with the same degree of care as such party normally uses in the protection of its confidential and proprietary information. Each party further agrees not to use Confidential Information for any purpose except in connection with the performance of its duties under this Agreement. The restrictions set forth herein shall not apply with respect to Confidential Information which (i) is already generally available to the public when received by such party; (ii) becomes available to the public through no fault of any member of the GMSP Group or GNA, as applicable; or (iii) is required to be disclosed by Applicable Law or a Governmental Authority. 12. INSURANCE. GMSP shall maintain at all times during the term of this Agreement fiduciary liability insurance of the type customary for investment managers in similar situations naming GNA as an insured with such limits, terms, conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP and shall provide GNA with complete copies of all binders and other policy information. GMSP also shall obtain and maintain a fidelity bond in the amount of not less than $5,000,000 and otherwise containing terms and conditions reasonably acceptable to GNA. In the event that any such policy or bond is canceled or suspended, GMSP promptly shall notify GNA in writing. 13. NOTICES. All notices required to be given in writing hereunder shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following listed Persons at the addresses and facsimile numbers specified below, or to such other Persons, addresses or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: If to GMSP, to: 777 Main Street, Suite 2250 Fort Worth, Texas 76102 Attention: J. Randall Chappel Fax: (817) 820-6651 INVESTMENT MANAGEMENT AGREEMENT 13 14 If to GNA, to: 500 Commerce Street Fort Worth, Texas 76102-5439 Attention: President Fax: (817) 338-1454 If given personally or by documented courier or delivery service, a notice shall be deemed to have been given when it is received. If transmitted by facsimile, a notice shall be deemed to have been given on the date received, if electronic confirmation of receipt occurs during normal business hours on a Business Day, and otherwise, on the first Business Day following electronic confirmation of receipt. If given by mail, it shall be deemed to have been given on the third Business Day following the day on which it was posted. 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 15. NATURE OF RELATIONSHIP. The parties hereto intend that the services provided by GMSP to GNA pursuant to this Agreement are being provided as an independent contractor. Nothing contained in this Agreement shall constitute or be construed to be or create a general partnership or joint venture between GMSP and GNA or their respective successors or assigns. 16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder may be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the parties hereto, and their respective heirs, legal representatives, successors, and permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. 17. INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. For purposes of this Agreement, the words "includes" and "including" shall mean "including without limitation" and the word "or" is used in the inclusive sense. All capitalized terms defined herein are equally applicable to both the singular and plural forms. 18. SEVERABILITY. In the event that this Agreement, or any of its provisions, or the performance of any provision, is found to be illegal or unenforceable under applicable law now or hereafter in effect, the parties shall be excused from performance of such portions of this Agreement as shall be found to be illegal or unenforceable under the applicable laws or regulations without affecting the validity of the remaining provisions of the Agreement. 19. TIME OF ESSENCE. With regard to all dates and time periods set forth in this Agreement, time is of the essence. 20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their respective subsidiaries or affiliates waives any attorney-client, work product or other privilege with respect to any information furnished pursuant to this Agreement. INVESTMENT MANAGEMENT AGREEMENT 14 15 21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 22. COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, the parties hereto. INVESTMENT MANAGEMENT AGREEMENT 15 16 IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed all as of the day and year first above written. MGA INSURANCE COMPANY, INC. a Texas corporation By: /s/ Glenn W. Anderson --------------------------------------------------- Glenn W. Anderson, President GOFF MOORE STRATEGIC PARTNERS, L.P., a Texas limited partnership By: GMSP Operating Partners, L.P., its general partner By: GMSP, L.L.C., its general partner By: /s/ John C. Goff ---------------------------------------------- John C. Goff, Managing Principal By: /s/ J. Randall Chappel ----------------------------------------------- J. Randall Chappel, Principal INVESTMENT MANAGEMENT AGREEMENT 16 17 INVESTMENT MANAGEMENT AGREEMENT FOR GENERAL AGENTS INSURANCE COMPANY OF AMERICA, INC. THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into this 4th day of October, 1999, by and between Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"), and General Agents Insurance Company of America, Inc., an Oklahoma corporation ("GNA"), a subsidiary of GAINSCO, INC. ("Parent"). WHEREAS, GNA is a regulated insurance company; WHEREAS, GNA desires to appoint GMSP to serve as investment manager with respect to certain investments held by it; and WHEREAS, GMSP is willing to provide investment advisory services to GNA on the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries controls, is controlled by or is under common control with such specified Person. For this purpose the term "control" (including the terms "controlling", "controlled by" and "under common control with") shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting Securities, by contract, or otherwise. "Agreement" has the meaning set forth in the first paragraph hereof. "Applicable Law" means any statute, law, rule, policy, guideline, or regulation or any judgment, order, writ, injunction, or decree of any Governmental Authority to which a specified Person or property is subject. "Associate" means (i) any corporation or entity (other than GNA, Parent or a Subsidiary of GNA or Parent) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of Equity Securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of GNA or any of its Subsidiaries. "Board" means the board of directors of GNA. INVESTMENT MANAGEMENT AGREEMENT 1 18 "Breach" means any violation or breach of, any misrepresentation or inaccuracy in, any default under, or any failure to perform or comply with any representation, warranty, covenant, obligation, or other provision of this Agreement. "Business Day" means any day other than a Saturday or Sunday on which national banks are open for business in Fort Worth, Texas and New York, New York. "Cash" means any currency or immediately available funds on deposit with a financial institution. "Cause" means that GMSP has committed or engaged in (i) any malfeasance, bad faith or negligence in respect of GMSP's material duties pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or indictment of or plea of no contest to any felony by GMSP or any member of the GMSP Group; (iv) any violation of the provisions of the U. S. federal securities laws or state securities laws by GMSP or any GMSP Principal; or (v) any material breach by GMSP of its obligations (including, without limitation, its obligations to observe and comply with the provisions of the Policy Letter) under, or its representations or warranties in, this Agreement if such breach continues for more than 10 days after GMSP receives written notice, specifying such breach with particularity and demanding cure, from GNA. "Committee" means the Board's Investment Committee, none of the members of which shall be members of the GMSP Group. "Confidential Information" means information received by GMSP from GNA or received by GNA from GMSP that is not generally known or which would logically be considered confidential or proprietary, or which would do GNA or GMSP, as applicable, harm if divulged, or which is marked "Confidential Information." "Damages" has the meaning set forth in Section 10. "Equity Securities" means any capital stock or other equity interests of any Person, any Securities directly or indirectly convertible into, or exercisable or exchangeable for any capital stock or other equity interests of any Person, or any right, option, warrant or other Security which, with the payment of additional consideration, the expiration of time or the occurrence of any event shall give the holder thereof the right to acquire any capital stock or other equity interests of any Person or any Security convertible into or exercisable or exchangeable for, any capital stock or other equity interests of any Person. "Fair Market Value" means as to any Securities on any date, (a) if such Securities are listed or admitted to trading on any national securities exchange on any such trading day, the amount equal to the last sale price of such Securities, regular way settlement, on such dates or, if no such sale takes place on a date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Securities are then listed or admitted to trading, (b) if such Securities are not then listed or admitted to trading on any national securities exchange but are reported through the automated quotation system of a registered securities association, the last trading price of such Securities on such dates, or if there shall have been no trading on a date, the average of the closing bid and asked prices of such Securities on such date as shown by such automated quotation system or (c) if such Securities are not then so listed, admitted to trading or reported, the value determined by GMSP subject to review and approval by the Committee, which valuation shall be equal to (i) cost or (ii) in the event that either GMSP or the Committee determine that there has been a material change in the value of such Securities since the date of acquisition of such Securities, such other valuation as is reflective of the value INVESTMENT MANAGEMENT AGREEMENT 2 19 of such Securities; provided, however, that, if GMSP and the Committee are unable to agree on such fair market value, such Securities shall be valued by such nationally recognized independent public accounting firm or investment banking firm desiGNAted by the Committee and reasonably acceptable to GMSP. Any such third-party valuation shall be final and binding on the parties and enforceable in accordance with the provisions of the Texas General Arbitration Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA. "Fees" has the meaning set forth in Section 4. "GAAP" means generally accepted accounting principles for financial reporting in the U.S., consistently applied. "GMSP" has the meaning set forth in the introductory paragraph of this Agreement. "GMSP Group" means GMSP together with its Affiliates, Associates and employees, including without limitation GMSP's partners, the partners of the general partner of GMSP and the GMSP Principals. "GMSP Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability of GMSP to conduct business, the financial condition or the results of operations of GMSP that is material to GMSP or as to the ability of GMSP to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or the insurance industry generally. "GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other Persons employed by or otherwise affiliated with GMSP or its general partner who have access to information regarding particular Securities being considered for purchase or sale by GNA. The parties recognize that the limited partners of GMSP as of the date hereof are not GMSP Principals. "GNA" has the meaning set forth in the introductory paragraph of this Agreement. "GNA Applicable Insurance Department" means the Oklahoma Department of Insurance. "GNA Entities" means GAINSCO, INC., a Texas corporation; MGA Insurance Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a Texas mutual insurance company; and General Agents Insurance Company of America, Inc., an Oklahoma corporation. "GNA Invest ment Management Agreements" means the Investment Management Agreements of even date herewith between GMSP and each of the GNA Entities, including this Agreement. "GNA Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability to conduct business, the financial condition or the results of operations of GNA and its Subsidiaries that is material to Parent and its Subsidiaries taken as a whole or as to the ability of GNA to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or insurance industry generally. "good faith", when used in respect of any action, means that the action was taken with (i) honesty of intention, (ii) freedom from knowledge of circumstances which ought to put the Person taking such action on inquiry or negligence, and (iii) intention to abstain from taking any unconscientious advantage of another. INVESTMENT MANAGEMENT AGREEMENT 3 20 "Governmental Authority" means any U.S. federal, state, local, foreign, supernational or supranational court or tribunal, governmental, regulatory or administrative agency, department, bureau, authority, commission or arbitral panel. "Investment Grade Debt Obligations" means any interest bearing debt obligations issued by any Person, including a Governmental Authority, rated at least "B minus" or the equivalent thereof by Standard & Poor's Corporation or Moody's Investor's Service, Inc. "Malfunction" means any failure to: (a) accurately recognize dates falling before, on or after the Year 2000; or (b) accurately record, store, retrieve and process data input and date information. "Parent" has the meaning set forth in the first paragraph hereof. "Person" means any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including any Governmental Authority. "Policy Letter" has the meaning set forth in Section 2. "Portfolio" means those investments held by GNA in Securities of the type more particularly described under the category "Investments" in Parent's periodic filings with the SEC. "Proceedings" means all proceedings, actions, suits, investigations, and inquiries by or before any arbitrator or Governmental Authority. "Research" means research, statistical and similar information and services. "SEC" means the Securities and Exchange Commission. "Security" means any capital stock, partnership interest, membership interest, subscription, certificate of trust or other ownership interest, warrant, bond, note, debenture, or other debt or equity interest of any Person commonly known as a "security," and all rights and options relating to any of the foregoing, regardless of whether traded on a national securities exchange; but shall not include Cash Equivalents. "Securities Purchase Agreement" means the Securities Purchase Agreement dated June 29, 1999, between GMSP and Parent. "Short Term Debt" means any note, draft, bill of exchange, or similar security which has a maturity at the time of issuance of not exceeding nine (9) months exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. "Subsidiary" means, with respect to any Person, any corporation or other entity (including partnerships and other business associations) in which the Person directly or indirectly owns at least a majority of the outstanding voting Securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors, or otherwise to direct the management and policies, of such corporation or other entity. "U.S." means the United States of America. INVESTMENT MANAGEMENT AGREEMENT 4 21 "Year 2000" means the calendar year 2000 A.D. 2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve, as investment manager with respect to the Portfolio on the terms and conditions hereinafter set forth: (a) The investment policies and all other actions of the Portfolio are and shall at all times be subject to the oversight and direction of the Committee. GMSP shall manage the Portfolio in accordance with the investment objectives and policies set forth in the letter (the "Policy Letter") heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy Letter, including the investment criteria and other instructions set forth therein, in whole or in part and at any time and from time to time; provided, however, that no amendment or supplement shall be binding upon GMSP until GMSP is notified of the amendment or supplement; and provided further, that in the event that an amended or supplemented Policy Letter shall require GMSP to make any changes in the manner in which GMSP has performed its services pursuant to this Agreement, GMSP shall have a reasonable time period to comply with such changes. GMSP shall periodically evaluate the provisions of the Policy Letter and provide GNA with any recommendations for the amendment or supplementation of the provisions of the Policy Letter that GMSP deems advisable for the benefit of GNA. To the extent that the provisions of the Policy Letter, as the same may be amended or supplemented from time to time, conflict with the provisions of this Agreement, the provisions of this Agreement shall control. (b) GNA will retain ownership and control of the assets in the Portfolio at all times. The assets shall be held for the benefit of GNA solely at one or more financial institutions or other locations specified from time to time in the Policy Letter. (c) Subject to the provisions of the Policy Letter and the oversight and direction of the Committee, GMSP shall have authority to make all specific investment decisions with respect to the assets in the Portfolio. (d) GMSP shall exercise its discretion and discharge its obligations under this Agreement in compliance with all Applicable Laws. (e) GMSP shall employ and dedicate to GNA continuously during the term of this Agreement a qualified investment portfolio manager reasonably acceptable to GNA, who shall have the primary responsibilities of coordinating all aspects of the day-to-day investment activities of the Portfolio. (f) GNA acknowledges that GMSP has informed GNA that GMSP currently is not registered as an (i) investment adviser under the Investment Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under the Securities Exchange Act of 1934, as amended, and all other Applicable Laws. 3. REPORTS. (a) GMSP shall provide to GNA periodic financial reports with respect to the assets in and investment performance of the Portfolio. The reports shall include such financial information in such format as GNA may reasonably request in connection with the administration of the Portfolio and a record of all transactions effected during the interim period from the preceding report, including the price per Security, the broker or dealer executing the transaction and the commissions paid. The reports shall be made with such frequency, but not less often than within 20 days following the end of each calendar month, as INVESTMENT MANAGEMENT AGREEMENT 5 22 GNA may reasonably request in connection with the administration of the Portfolio; provided that the late delivery of a complete report no more than one time in any three-year period with respect to any particular Security in the Portfolio shall not constitute a Breach of this Agreement if (i) the delay was caused by the failure of an unaffiliated Person in providing information to GMSP that had been timely requested by GMSP, (ii) any portion of the report that is not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause such late report to be delivered as promptly as practicable. (b) GMSP shall (i) afford GNA and its authorized representatives reasonable access to the GMSP Principals, GMSP's offices and other facilities, and all books, records and other documents of GMSP relating to the Portfolio or this Agreement and (ii) permit GNA and its authorized representatives to make such inspections and copies of all books, records and other documents as they may reasonably require to verify the accuracy of any report furnished pursuant to Section 3(a). 4. COMPENSATION; EXPENSES. (a) For services performed by GMSP, GNA agrees to pay to GMSP investment management fees (the "Fees") equal on an annual basis to (i) 30 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at the end of a given calendar month or during a majority of the days in the given calendar month and (ii) 100 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Equity Securities or other alternative investments in Securities which are not Investment Grade Debt Obligations. The Fees otherwise payable with respect to any calendar month (or prorated portion thereof) shall be reduced by an amount equal to the sum of (i) the amount of fees, commissions and expenses paid by or on behalf of GNA to any investment or mutual fund from which any member of the GMSP Group is eligible to receive compensation or profits plus (ii) the amount of any fees paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, plus (iii) the amount of any finder's fees, brokerage commissions or other benefit or compensation paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group in connection with any transaction in Securities pursuant to this Agreement. Notwithstanding anything to the contrary contained in this Agreement, (x) no Fees shall be payable with respect to any portion of the Portfolio invested in Cash during a majority of the days in the given calendar month and (y) the Committee and GMSP may agree upon a different Fee structure for special situations. (b) The Fees shall be based on the Fair Market Value of the assets in the Portfolio at the end of each calendar month, and shall be calculated at the end of each calendar month based upon the actual number of days elapsed during the calendar month, during which this Agreement is in effect over a year of 365 days. Within fifteen (15) days after the end of each calendar month, GNA shall pay to GMSP the Fees earned with respect to the preceding calendar month. In the event of termination prior to the end of a calendar month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair Market Value of the assets in the Portfolio at the time of termination. No other fees, charges or assessments shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP Group with respect to the services performed by GMSP pursuant to this Agreement, provided that GNA shall have the responsibility to reimburse GMSP for GMSP's payment of any amounts described pursuant to Section 4(d) below. There shall not be any annual reconciliation, adjustment or other "true-up" at the end of each calendar year. (c) GMSP shall be solely responsible for all of its general and administrative costs and expenses incurred in connection with performing its duties and obligations under this Agreement, which shall INVESTMENT MANAGEMENT AGREEMENT 6 23 consist of all costs and expenses in connection with the provision of office space and facilities, equipment and personnel for servicing the investments of the Portfolio and the salaries and fees of all personnel employed by GMSP performing services relating to research, statistical and investment activities. (d) GNA shall be responsible for, and pay directly, the following costs and expenses related to GMSP's performance of its duties pursuant to this Agreement that are reasonable and payable to Persons not affiliated with the GMSP Group: (i) brokerage commissions and other costs, fees and expenses incurred in the purchase and sale of Securities; (ii) fees and expenses of custodians selected pursuant to Section 2(b); (iii) costs related to third party Proceedings involving GNA's ownership of Securities pursuant to this Agreement, directly or indirectly, including, without limitation, attorneys' fees incurred in connection therewith (but excluding all costs related to Proceedings or other disputes between GNA and GMSP or any member of the GMSP Group or which constitute Cause); (iv) interest on and fees and expenses arising out of all borrowings made by GNA with respect to the purchase of Securities, including, but not limited to, the arranging thereof; (v) taxes, fees or other governmental charges levied against GNA; and (vi) any other expense, whether ordinary or extraordinary, that is determined by the Committee to be appropriate for GNA to pay pursuant to this Agreement. (e) In discharging its duties pursuant to this Agreement, GMSP may give preference, and may cause GNA to pay higher negotiated commission rates, to unaffiliated brokers which, in addition to having the capacity of obtaining the best price for the Security itself and of executing the order with speed, efficiency and confidentiality, also provide Research to GMSP or GNA. Research furnished by brokers through whom Securities transactions are effected may be used by GMSP in servicing all of its accounts, and there shall be no reduction in the compensation of GMSP hereunder as a consequence of its receipt of such Research. In the allocation of brokerage, however, GMSP must determine in good faith, and demonstrate to GNA upon request, that the amount of the commission is reasonable in relation to the value of the brokerage services and Research provided by the broker, viewed in terms of either the particular transaction or GMSP's overall responsibilities with respect to the Portfolio. In the allocation of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law and such policies and requirements that the Committee may adopt or approve as reflected in the Policy Letter. (f) In the event that, in any calendar month, the aggregate amount of Fees (as such term is defined in the respective GNA Investment Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an amount equal to the product of (i) the quotient of the Fair Market Value of the Portfolio divided by the Fair Market Value of all of the Portfolios (as such term is defined in the respective GNA Investment Management Agreements) of all of the GNA Entities, multiplied by (ii) an amount equal to the difference between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA Entities with respect to such calendar month. INVESTMENT MANAGEMENT AGREEMENT 7 24 5. ACTIVITIES OF GMSP. (a) The services of GMSP to GNA are not deemed to be exclusive, and GMSP shall be free to engage in any other business or to render similar services to others. GMSP and any member of the GMSP Group may engage independently or with others, for its or their own accounts and for the accounts of others, in other business ventures and activities of every nature and description, including, without limitation, purchasing, selling or holding Securities for the account of any other Person or for its or his own account, including Securities included within the Portfolio or eligible for investment pursuant to this Agreement; provided, that the management of such entities and accounts do not interfere with the performance of their obligations and duties to GNA pursuant to this Agreement. GNA shall not have any rights or obligations by virtue of this Agreement in and to such independent ventures and activities or the income or profits derived therefrom. The foregoing notwithstanding, without the prior written consent of GNA in a specific case, GMSP shall at all times adhere, and cause the members of the GMSP Group or the GMSP Principals, as the case may be, to adhere, to the following: (i) Neither GMSP nor any member of the GMSP Group shall act, either as principal or agent, on the opposite side of any transaction in which GNA or the Portfolio is involved. (ii) GMSP and each GMSP Principal shall at all times (A) place the interests of GNA before such member's personal transactional interests; (B) conduct all personal transactions in Securities in such a manner as to avoid any actual or potential conflict of interest or abuse of such Person's position of trust and confidence in relation to GNA; and (C) promptly disclose to GNA all personal transactions made by or on behalf of such Person in Securities which are or were at any time during the preceding two years in the Portfolio or issued by Persons whose Securities are in the Portfolio. (b) On any issue involving an actual or potential conflict of interest which is not specifically authorized by or pursuant to this Agreement, GMSP shall submit such issue to the Committee for prior approval, and shall take such actions, if any, as are determined by the Committee to be necessary or appropriate to ameliorate the conflict of interest. If GMSP carries out the actions specified by the Committee in respect of a matter giving rise to a conflict of interest, neither GMSP nor any member of the GMSP Group shall have any liability to GNA in respect of actions taken in good faith by them as a consequence of the approval by the Committee. (c) GMSP shall be liable for any breach of this Section 5 by any member of the GMSP Group as if GMSP had committed such breach. 6. DURATION AND TERMINATION. The term of this Agreement shall commence on the date of this Agreement and shall continue until terminated: (a) by the written agreement of GNA and GMSP; (b) by GMSP upon not less than 90 days written notice to GNA at any time after the third anniversary hereof; (c) by GNA upon not less than 90 days written notice to GMSP at any time after the third anniversary hereof; INVESTMENT MANAGEMENT AGREEMENT 8 25 (d) by GNA, at any time, immediately upon written notice to GMSP following (i) the good faith determination by both the Committee and two-thirds of the members of the Board (excluding members of the Board desiGNAted for election by GMSP or its successors in interest under the Securities Purchase Agreement or otherwise affiliated with GMSP) that an event that constitutes Cause has occurred and is continuing beyond any applicable period for notice and opportunity to cure or (ii) the commencement by a Governmental Authority of any Proceeding alleging any matter which, if proven, would constitute Cause. (e) by GMSP upon not less than 10 days notice in the event that GNA defaults in the performance of any of its material obligations hereunder and such default continues for not less than 10 days after GNA receives notice of such default; provided, however, that in the event that such default is of a nature that it cannot, with due diligence, be cured within 10 days, GMSP may not terminate this Agreement so long as GNA begins to cure such default within 10 days and thereafter diligently pursues such cure to completion. Termination of this Agreement shall not terminate GMSP's obligations under Section 3 to furnish reports concerning facts and circumstances prior to termination or under Section 11 to maintain the confidentiality of Confidential Information , terminate GNA's obligations to pay fees earned by GMSP prior to the date of termination, or terminate either party's obligations to indemnify the other party pursuant to this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF GMSP. (a) GMSP is a limited partnership duly organized, validly existing and in good standing under the Texas Revised Limited Partnership Act, as amended, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GMSP is duly qualified and in good standing (to the extent applicable) to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GMSP Material Adverse Effect. (b) GMSP has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GMSP. This Agreement has been duly and validly executed and delivered by GMSP and, assuming the due authorization, execution and delivery hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable against GMSP in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GMSP other than as described in the Securities Purchase Agreement or with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GMSP do not and will not result in any violation by GMSP under any provisions of: (i) the partnership agreement or similar governing documents of GMSP; INVESTMENT MANAGEMENT AGREEMENT 9 26 (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GMSP or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GMSP is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect; (e) There is no Proceeding pending, or to the knowledge of GMSP, threatened against GMSP that questions the validity of this Agreement or any action to be taken by GMSP in connection with this Agreement except as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect. (f) GMSP is, and during the term of this Agreement will continue to be (i) either exempt from registration or duly registered as an investment adviser under the Investment Advisers Act of 1940 and all Applicable Laws and (ii) qualified and eligible to manage the Portfolio under the statutes and regulations administered by the GNA Applicable Insurance Department, provided that GNA shall inform GMSP immediately in the event that GNA becomes aware of any changes in the qualification and eligibility requirements with respect to such statutes and regulations. GMSP will provide prompt written notice to GNA if GMSP ceases to be so registered or qualified or becomes aware of any fact, event or circumstance which will or is reasonably likely to cause it to cease to be so registered or qualified. (g) Taken in the aggregate, the factual information (including, without limitation, information regarding its knowledge, investment experience and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999 in writing for purposes of this Agreement did not contain untrue statements of material facts, or omit to state material facts necessary to make the statements made not misleading in the light of the circumstances under which they were made, as of the date as of which such information is dated. All financial forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were prepared in good faith on the basis of assumptions believed to be reasonable and data, information, tests or conditions believed to be valid or accurate or to exist at the time such forecasts were prepared. (h) All of the equipment, Software and computer hardware owned or used by GMSP or used and operated by third parties on behalf of GMSP, which performs or is or may be required to perform functions involving dates or the computation of dates, or containing date related data, has the programming, design and performance capabilities to ensure that: (i) it will not suffer any Malfunction that would reasonably be expected to have a GMSP Material Adverse Effect; and (ii) it will not, as a result of the date change at the end of the twentieth century or the input, processing, storage or use of dates up to and including December 31, 2001, (A) be adversely affected, (B) require changes in inputting or operating practices, (C) produce invalid or incorrect output or results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in functionality or performance that, in any of the above, could reasonably be expected to have a GMSP Material Adverse Effect. INVESTMENT MANAGEMENT AGREEMENT 10 27 8. REPRESENTATIONS AND WARRANTIES OF GNA. (a) GNA is an insurance company duly organized and validly existing under the laws of the State of Oklahoma, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GNA is duly qualified and in good standing to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GNA Material Adverse Effect. (b) GNA has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GNA. This Agreement has been duly and validly executed and delivered by GNA and, assuming the due authorization, execution and delivery hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable against GNA in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GNA other than as described in the Securities Purchase Agreement or with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GNA do not and will not result in any violation by GNA under any provisions of: (i) articles of incorporation or similar governing documents of GNA; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GNA or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GNA is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (e) There is no Proceeding pending, or to the knowledge of GNA, threatened against GNA that questions the validity of this Agreement or any action to be taken by GNA in connection with this Agreement except as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (f) GNA has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of entering into this Agreement. INVESTMENT MANAGEMENT AGREEMENT 11 28 (g) No part of the funds to be used to purchase and hold Securities or to pay any amounts pursuant to this Agreement constitutes an asset of any employee benefit plan within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)). 9. LIABILITY. It is recognized that decisions concerning investments or potential investments involve the exercise of judgment and the risk of loss. To the extent permitted by Applicable Law, neither GMSP nor any of its officers, directors, or employees nor other members of the GMSP Group shall be liable for any loss suffered by GNA on account of such investments, or any act taken or omission made in good faith under this Agreement. For purposes of the foregoing sentence, no action or omission by GMSP shall be considered to have been made "in good faith" if GMSP was negligent, violated any law, or made any misrepresentation (whether affirmatively or by omission). 10. INDEMNIFICATION. (a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any and all claims, actions, causes of action, demands, losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from (i) any Breach by GNA of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or (ii) any Proceeding brought against any of them by a Person other than GNA or any of its Affiliates, Associates or shareholders in respect of any action taken in good faith on behalf of GNA in the course of the performance of GMSP's duties under this Agreement; provided, however, that GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any reasonable expenses incurred by such Person(s) in connection with a Proceeding brought against any of them by any of GNA's shareholders if such Person(s) is wholly successful, on the merits or otherwise, in the defense of such Proceeding, and provided, further, that GNA's obligation to indemnify, defend and hold harmless as provided in this Section 10(a) shall not apply to the first $750,000 in the aggregate of claims hereunder (other than claims for expenses in defending a Proceeding for which the Person is entitled to indemnification under clause (ii) of this Section) and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (b) GMSP shall indemnify, defend, and hold harmless GNA and its Affiliates, Associates, directors, officers and employees from and against any and all Damages asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from any Breach by GMSP of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto; provided, however, that GMSP's obligation to indemnify, defend and hold harmless as provided in this Section 10(b) shall not apply to the first $750,000 in the aggregate of claims hereunder and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (c) Promptly after receipt by an indemnified party under Section 10(a) or (b) of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability INVESTMENT MANAGEMENT AGREEMENT 12 29 that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests which renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. The indemnifying party shall have no liability with respect to any compromise or settlement of any action effected without its written consent (which shall not be unreasonably withheld). 11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential Information in confidence, and shall not disclose said information to any other party other than such party's employees, advisors, attorneys and accountants, who will be advised of the confidential nature of information. Each party shall protect the Confidential Information with the same degree of care as such party normally uses in the protection of its confidential and proprietary information. Each party further agrees not to use Confidential Information for any purpose except in connection with the performance of its duties under this Agreement. The restrictions set forth herein shall not apply with respect to Confidential Information which (i) is already generally available to the public when received by such party; (ii) becomes available to the public through no fault of any member of the GMSP Group or GNA, as applicable; or (iii) is required to be disclosed by Applicable Law or a Governmental Authority. 12. INSURANCE. GMSP shall maintain at all times during the term of this Agreement fiduciary liability insurance of the type customary for investment managers in similar situations naming GNA as an insured with such limits, terms, conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP and shall provide GNA with complete copies of all binders and other policy information. GMSP also shall obtain and maintain a fidelity bond in the amount of not less than $5,000,000 and otherwise containing terms and conditions reasonably acceptable to GNA. In the event that any such policy or bond is canceled or suspended, GMSP promptly shall notify GNA in writing. 13. NOTICES. All notices required to be given in writing hereunder shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following listed Persons at the addresses and facsimile numbers specified below, or to such other Persons, addresses or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: If to GMSP, to: 777 Main Street, Suite 2250 Fort Worth, Texas 76102 Attention: J. Randall Chappel Fax: (817) 820-6651 INVESTMENT MANAGEMENT AGREEMENT 13 30 If to GNA, to: 500 Commerce Street Fort Worth, Texas 76102-5439 Attention: President Fax: (817) 338-1454 If given personally or by documented courier or delivery service, a notice shall be deemed to have been given when it is received. If transmitted by facsimile, a notice shall be deemed to have been given on the date received, if electronic confirmation of receipt occurs during normal business hours on a Business Day, and otherwise, on the first Business Day following electronic confirmation of receipt. If given by mail, it shall be deemed to have been given on the third Business Day following the day on which it was posted. 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 15. NATURE OF RELATIONSHIP. The parties hereto intend that the services provided by GMSP to GNA pursuant to this Agreement are being provided as an independent contractor. Nothing contained in this Agreement shall constitute or be construed to be or create a general partnership or joint venture between GMSP and GNA or their respective successors or assigns. 16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder may be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the parties hereto, and their respective heirs, legal representatives, successors, and permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. 17. INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. For purposes of this Agreement, the words "includes" and "including" shall mean "including without limitation" and the word "or" is used in the inclusive sense. All capitalized terms defined herein are equally applicable to both the singular and plural forms. 18. SEVERABILITY. In the event that this Agreement, or any of its provisions, or the performance of any provision, is found to be illegal or unenforceable under applicable law now or hereafter in effect, the parties shall be excused from performance of such portions of this Agreement as shall be found to be illegal or unenforceable under the applicable laws or regulations without affecting the validity of the remaining provisions of the Agreement. 19. TIME OF ESSENCE. With regard to all dates and time periods set forth in this Agreement, time is of the essence. 20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their respective subsidiaries or affiliates waives any attorney-client, work product or other privilege with respect to any information furnished pursuant to this Agreement. INVESTMENT MANAGEMENT AGREEMENT 14 31 21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 22. COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, the parties hereto. INVESTMENT MANAGEMENT AGREEMENT 15 32 IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed all as of the day and year first above written. GENERAL AGENTS INSURANCE COMPANY OF AMERICA, INC., an Oklahoma corporation By: /s/ Glenn W. Anderson ---------------------------------------- Glenn W. Anderson, President GOFF MOORE STRATEGIC PARTNERS, L.P., a Texas limited partnership By: GMSP Operating Partners, L.P., its general partner By: GMSP, L.L.C., its general partner By: /s/ John C. Goff ------------------------------------ John C. Goff, Managing Principal By: /s/ J. Randall Chappel ------------------------------------ J. Randall Chappel, Principal INVESTMENT MANAGEMENT AGREEMENT 16 33 INVESTMENT MANAGEMENT AGREEMENT FOR GAINSCO, INC. THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into this 4th day of October, 1999, by and between Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"), and GAINSCO, INC., a Texas corporation ("GNA"). WHEREAS, GNA is a holding company whose subsidiaries are regulated insurance companies; WHEREAS, GNA desires to appoint GMSP to serve as investment manager with respect to certain investments held by it; and WHEREAS, GMSP is willing to provide investment advisory services to GNA on the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries controls, is controlled by or is under common control with such specified Person. For this purpose the term "control" (including the terms "controlling", "controlled by" and "under common control with") shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting Securities, by contract, or otherwise. "Agreement" has the meaning set forth in the first paragraph hereof. "Applicable Law" means any statute, law, rule, policy, guideline, or regulation or any judgment, order, writ, injunction, or decree of any Governmental Authority to which a specified Person or property is subject. "Associate" means (i) any corporation or entity (other than GNA or a Subsidiary of GNA) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of Equity Securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of GNA or any of its Subsidiaries. "Board" means the board of directors of GNA. INVESTMENT MANAGEMENT AGREEMENT 1 34 "Breach" means any violation or breach of, any misrepresentation or inaccuracy in, any default under, or any failure to perform or comply with any representation, warranty, covenant, obligation, or other provision of this Agreement. "Business Day" means any day other than a Saturday or Sunday on which national banks are open for business in Fort Worth, Texas and New York, New York. "Cash" means any currency or immediately available funds on deposit with a financial institution. "Cause" means that GMSP has committed or engaged in (i) any malfeasance, bad faith or negligence in respect of GMSP's material duties pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or indictment of or plea of no contest to any felony by GMSP or any member of the GMSP Group; (iv) any violation of the provisions of the U. S. federal securities laws or state securities laws by GMSP or any GMSP Principal; or (v) any material breach by GMSP of its obligations (including, without limitation, its obligations to observe and comply with the provisions of the Policy Letter) under, or its representations or warranties in, this Agreement if such breach continues for more than 10 days after GMSP receives written notice, specifying such breach with particularity and demanding cure, from GNA. "Committee" means the Board's Investment Committee, none of the members of which shall be members of the GMSP Group. "Confidential Information" means information received by GMSP from GNA or received by GNA from GMSP that is not generally known or which would logically be considered confidential or proprietary, or which would do GNA or GMSP, as applicable, harm if divulged, or which is marked "Confidential Information." "Damages" has the meaning set forth in Section 10. "Equity Securities" means any capital stock or other equity interests of any Person, any Securities directly or indirectly convertible into, or exercisable or exchangeable for any capital stock or other equity interests of any Person, or any right, option, warrant or other Security which, with the payment of additional consideration, the expiration of time or the occurrence of any event shall give the holder thereof the right to acquire any capital stock or other equity interests of any Person or any Security convertible into or exercisable or exchangeable for, any capital stock or other equity interests of any Person. "Fair Market Value" means as to any Securities on any date, (a) if such Securities are listed or admitted to trading on any national securities exchange on any such trading day, the amount equal to the last sale price of such Securities, regular way settlement, on such dates or, if no such sale takes place on a date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Securities are then listed or admitted to trading, (b) if such Securities are not then listed or admitted to trading on any national securities exchange but are reported through the automated quotation system of a registered securities association, the last trading price of such Securities on such dates, or if there shall have been no trading on a date, the average of the closing bid and asked prices of such Securities on such date as shown by such automated quotation system or (c) if such Securities are not then so listed, admitted to trading or reported, the value determined by GMSP subject to review and approval by the Committee, which valuation shall be equal to (i) cost or (ii) in the event that either GMSP or the Committee determine that there has been a material change in the value of such Securities since the date of acquisition of such Securities, such other valuation as is reflective of the value INVESTMENT MANAGEMENT AGREEMENT 2 35 of such Securities; provided, however, that, if GMSP and the Committee are unable to agree on such fair market value, such Securities shall be valued by such nationally recognized independent public accounting firm or investment banking firm designated by the Committee and reasonably acceptable to GMSP. Any such third-party valuation shall be final and binding on the parties and enforceable in accordance with the provisions of the Texas General Arbitration Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA. "Fees" has the meaning set forth in Section 4. "GAAP" means generally accepted accounting principles for financial reporting in the U.S., consistently applied. "GMSP" has the meaning set forth in the introductory paragraph of this Agreement. "GMSP Group" means GMSP together with its Affiliates, Associates and employees, including without limitation GMSP's partners, the partners of the general partner of GMSP and the GMSP Principals. "GMSP Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability of GMSP to conduct business, the financial condition or the results of operations of GMSP that is material to GMSP or as to the ability of GMSP to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or the insurance industry generally. "GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other Persons employed by or otherwise affiliated with GMSP or its general partner who have access to information regarding particular Securities being considered for purchase or sale by GNA. The parties recognize that the limited partners of GMSP as of the date hereof are not GMSP Principals. "GNA" has the meaning set forth in the introductory paragraph of this Agreement. "GNA Applicable Insurance Department" means the Oklahoma Department of Insurance and the Texas Department of Insurance. "GNA Entities" means GAINSCO, INC., a Texas corporation; MGA Insurance Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a Texas mutual insurance company; and General Agents Insurance Company of America, Inc., an Oklahoma corporation. "GNA Investment Management Agreements" means the Investment Management Agreements of even date herewith between GMSP and each of the GNA Entities, including this Agreement. "GNA Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability to conduct business, the financial condition or the results of operations of GNA and its Subsidiaries that is material to GNA and its Subsidiaries taken as a whole or as to the ability of GNA to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or insurance industry generally provided, that no change in the prices at which the Common Stock is quoted or traded on the NYSE or otherwise shall be a GNA Material Adverse Effect INVESTMENT MANAGEMENT AGREEMENT 3 36 "good faith", when used in respect of any action, means that the action was taken with (i) honesty of intention, (ii) freedom from knowledge of circumstances which ought to put the Person taking such action on inquiry or negligence, and (iii) intention to abstain from taking any unconscientious advantage of another. "Governmental Authority" means any U.S. federal, state, local, foreign, supernational or supranational court or tribunal, governmental, regulatory or administrative agency, department, bureau, authority, commission or arbitral panel. "Investment Grade Debt Obligations" means any interest bearing debt obligations issued by any Person, including a Governmental Authority, rated at least "B minus" or the equivalent thereof by Standard & Poor's Corporation or Moody's Investor's Service, Inc. "Malfunction" means any failure to: (a) accurately recognize dates falling before, on or after the Year 2000; or (b) accurately record, store, retrieve and process data input and date information. "Person" means any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including any Governmental Authority. "Policy Letter" has the meaning set forth in Section 2. "Portfolio" means those investments held by GNA at the holding company level in Securities of the type more particularly described under the category "Investments" in GNA's periodic filings with the SEC. "Proceedings" means all proceedings, actions, suits, investigations, and inquiries by or before any arbitrator or Governmental Authority. "Research" means research, statistical and similar information and services. "SEC" means the Securities and Exchange Commission. "Security" means any capital stock, partnership interest, membership interest, subscription, certificate of trust or other ownership interest, warrant, bond, note, debenture, or other debt or equity interest of any Person commonly known as a "security," and all rights and options relating to any of the foregoing, regardless of whether traded on a national securities exchange; but shall not include Cash Equivalents. "Securities Purchase Agreement" means the Securities Purchase Agreement dated June 29, 1999, between GMSP and GAINSCO, INC. "Short Term Debt" means any note, draft, bill of exchange, or similar security which has a maturity at the time of issuance of not exceeding nine (9) months exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. "Subsidiary " means, with respect to any Person, any corporation or other entity (including partnerships and other business associations) in which the Person directly or indirectly owns at least a majority of the outstanding voting Securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors, or otherwise to direct the management and policies, of such corporation or other entity. INVESTMENT MANAGEMENT AGREEMENT 4 37 "U.S." means the United States of America. "Year 2000" means the calendar year 2000 A.D. 2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve, as investment manager with respect to the Portfolio on the terms and conditions hereinafter set forth: (a) The investment policies and all other actions of the Portfolio are and shall at all times be subject to the oversight and direction of the Committee. GMSP shall manage the Portfolio in accordance with the investment objectives and policies set forth in the letter (the "Policy Letter") heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy Letter, including the investment criteria and other instructions set forth therein, in whole or in part and at any time and from time to time; provided, however, that no amendment or supplement shall be binding upon GMSP until GMSP is notified of the amendment or supplement; and provided further, that in the event that an amended or supplemented Policy Letter shall require GMSP to make any changes in the manner in which GMSP has performed its services pursuant to this Agreement, GMSP shall have a reasonable time period to comply with such changes. GMSP shall periodically evaluate the provisions of the Policy Letter and provide GNA with any recommendations for the amendment or supplementation of the provisions of the Policy Letter that GMSP deems advisable for the benefit of GNA. To the extent that the provisions of the Policy Letter, as the same may be amended or supplemented from time to time, conflict with the provisions of this Agreement, the provisions of this Agreement shall control. (b) GNA will retain ownership and control of the assets in the Portfolio at all times. The assets shall be held for the benefit of GNA solely at one or more financial institutions or other locations specified from time to time in the Policy Letter. (c) Subject to the provisions of the Policy Letter and the oversight and direction of the Committee, GMSP shall have authority to make all specific investment decisions with respect to the assets in the Portfolio. (d) GMSP shall exercise its discretion and discharge its obligations under this Agreement in compliance with all Applicable Laws. (e) GMSP shall employ and dedicate to GNA continuously during the term of this Agreement a qualified investment portfolio manager reasonably acceptable to GNA, who shall have the primary responsibilities of coordinating all aspects of the day-to-day investment activities of the Portfolio. (f) GNA acknowledges that GMSP has informed GNA that GMSP currently is not registered as an (i) investment adviser under the Investment Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under the Securities Exchange Act of 1934, as amended, and all other Applicable Laws. 3. REPORTS. (a) GMSP shall provide to GNA periodic financial reports with respect to the assets in and investment performance of the Portfolio. The reports shall include such financial information in such format as GNA may reasonably request in connection with the administration of the Portfolio and a record of all transactions effected during the interim period from the preceding report, including the price per INVESTMENT MANAGEMENT AGREEMENT 5 38 Security, the broker or dealer executing the transaction and the commissions paid. The reports shall be made with such frequency, but not less often than within 20 days following the end of each calendar month, as GNA may reasonably request in connection with the administration of the Portfolio; provided that the late delivery of a complete report no more than one time in any three-year period with respect to any particular Securities in the Portfolio shall not constitute a Breach of this Agreement if (i) the delay was caused by the failure of an unaffiliated Person in providing information to GMSP that had been timely requested by GMSP, (ii) any portion of the report that is not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause such late report to be delivered as promptly as practicable. (b) GMSP shall (i) afford GNA and its authorized representatives reasonable access to the GMSP Principals, GMSP's offices and other facilities, and all books, records and other documents of GMSP relating to the Portfolio or this Agreement and (ii) permit GNA and its authorized representatives to make such inspections and copies of all books, records and other documents as they may reasonably require to verify the accuracy of any report furnished pursuant to Section 3(a). 4. COMPENSATION; EXPENSES. (a) For services performed by GMSP, GNA agrees to pay to GMSP investment management fees (the "Fees") equal on an annual basis to (i) 30 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at the end of a given calendar month or during a majority of the days in the given calendar month and (ii) 100 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Equity Securities or other alternative investments in Securities which are not Investment Grade Debt Obligations. The Fees otherwise payable with respect to any calendar month (or prorated portion thereof) shall be reduced by an amount equal to the sum of (i) the amount of fees, commissions and expenses paid by or on behalf of GNA to any investment or mutual fund from which any member of the GMSP Group is eligible to receive compensation or profits plus (ii) the amount of any fees paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, plus (iii) the amount of any finder's fees, brokerage commissions or other benefit or compensation paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group in connection with any transaction in Securities pursuant to this Agreement. Notwithstanding anything to the contrary contained in this Agreement, (x) no Fees shall be payable with respect to any portion of the Portfolio invested in Cash during a majority of the days in the given calendar month and (y) the Committee and GMSP may agree upon a different Fee structure for special situations. (b) The Fees shall be based on the Fair Market Value of the assets in the Portfolio at the end of each calendar month, and shall be calculated at the end of each calendar month based upon the actual number of days elapsed during the calendar month, during which this Agreement is in effect over a year of 365 days. Within fifteen (15) days after the end of each calendar month, GNA shall pay to GMSP the Fees earned with respect to the preceding calendar month. In the event of termination prior to the end of a calendar month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair Market Value of the assets in the Portfolio at the time of termination. No other fees, charges or assessments shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP Group with respect to the services performed by GMSP pursuant to this Agreement, provided that GNA shall have the responsibility to reimburse GMSP for GMSP's payment of any amounts described pursuant to Section 4(d) below. There shall not be any annual reconciliation, adjustment or other "true-up" at the end of each calendar year. INVESTMENT MANAGEMENT AGREEMENT 6 39 (c) GMSP shall be solely responsible for all of its general and administrative costs and expenses incurred in connection with performing its duties and obligations under this Agreement, which shall consist of all costs and expenses in connection with the provision of office space and facilities, equipment and personnel for servicing the investments of the Portfolio and the salaries and fees of all personnel employed by GMSP performing services relating to research, statistical and investment activities. (d) GNA shall be responsible for, and pay directly, the following costs and expenses related to GMSP's performance of its duties pursuant to this Agreement that are reasonable and payable to Persons not affiliated with the GMSP Group: (i) brokerage commissions and other costs, fees and expenses incurred in the purchase and sale of Securities; (ii) fees and expenses of custodians selected pursuant to Section 2(b); (iii) costs related to third party Proceedings involving GNA's ownership of Securities pursuant to this Agreement, directly or indirectly, including, without limitation, attorneys' fees incurred in connection therewith (but excluding all costs related to Proceedings or other disputes between GNA and GMSP or any member of the GMSP Group or which constitute Cause); (iv) interest on and fees and expenses arising out of all borrowings made by GNA with respect to the purchase of Securities, including, but not limited to, the arranging thereof; (v) taxes, fees or other governmental charges levied against GNA; and (vi) any other expense, whether ordinary or extraordinary, that is determined by the Committee to be appropriate for GNA to pay pursuant to this Agreement. (e) In discharging its duties pursuant to this Agreement, GMSP may give preference, and may cause GNA to pay higher negotiated commission rates, to unaffiliated brokers which, in addition to having the capacity of obtaining the best price for the Security itself and of executing the order with speed, efficiency and confidentiality, also provide Research to GMSP or GNA. Research furnished by brokers through whom Securities transactions are effected may be used by GMSP in servicing all of its accounts, and there shall be no reduction in the compensation of GMSP hereunder as a consequence of its receipt of such Research. In the allocation of brokerage, however, GMSP must determine in good faith, and demonstrate to GNA upon request, that the amount of the commission is reasonable in relation to the value of the brokerage services and Research provided by the broker, viewed in terms of either the particular transaction or GMSP's overall responsibilities with respect to the Portfolio. In the allocation of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law and such policies and requirements that the Committee may adopt or approve as reflected in the Policy Letter. (f) In the event that, in any calendar month, the aggregate amount of Fees (as such term is defined in the respective GNA Investment Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an amount equal to the product of (i) the quotient of the Fair Market Value of the Portfolio divided by the Fair Market Value of all of the Portfolios (as such term is defined in the respective GNA Investment Management Agreements) of all of the GNA Entities, multiplied by (ii) an amount equal to the difference INVESTMENT MANAGEMENT AGREEMENT 7 40 between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA Entities with respect to such calendar month. 5. ACTIVITIES OF GMSP. (a) The services of GMSP to GNA are not deemed to be exclusive, and GMSP shall be free to engage in any other business or to render similar services to others. GMSP and any member of the GMSP Group may engage independently or with others, for its or their own accounts and for the accounts of others, in other business ventures and activities of every nature and description, including, without limitation, purchasing, selling or holding Securities for the account of any other Person or for its or his own account, including Securities included within the Portfolio or eligible for investment pursuant to this Agreement; provided, that the management of such entities and accounts do not interfere with the performance of their obligations and duties to GNA pursuant to this Agreement. GNA shall not have any rights or obligations by virtue of this Agreement in and to such independent ventures and activities or the income or profits derived therefrom. The foregoing notwithstanding, without the prior written consent of GNA in a specific case, GMSP shall at all times adhere, and cause the members of the GMSP Group or the GMSP Principals, as the case may be, to adhere, to the following: (i) Neither GMSP nor any member of the GMSP Group shall act, either as principal or agent, on the opposite side of any transaction in which GNA or the Portfolio is involved. (ii) GMSP and each GMSP Principal shall at all times (A) place the interests of GNA before such member's personal transactional interests; (B) conduct all personal transactions in Securities in such a manner as to avoid any actual or potential conflict of interest or abuse of such Person's position of trust and confidence in relation to GNA; and (C) promptly disclose to GNA all personal transactions made by or on behalf of such Person in Securities which are or were at any time during the preceding two years in the Portfolio or issued by Persons whose Securities are in the Portfolio. (b) On any issue involving an actual or potential conflict of interest which is not specifically authorized by or pursuant to this Agreement, GMSP shall submit such issue to the Committee for prior approval, and shall take such actions, if any, as are determined by the Committee to be necessary or appropriate to ameliorate the conflict of interest. If GMSP carries out the actions specified by the Committee in respect of a matter giving rise to a conflict of interest, neither GMSP nor any member of the GMSP Group shall have any liability to GNA in respect of actions taken in good faith by them as a consequence of the approval by the Committee. (c) GMSP shall be liable for any breach of this Section 5 by any member of the GMSP Group as if GMSP had committed such breach. 6. DURATION AND TERMINATION. The term of this Agreement shall commence on the date of this Agreement and shall continue until terminated: (a) by the written agreement of GNA and GMSP; (b) by GMSP upon not less than 90 days written notice to GNA at any time after the third anniversary hereof; INVESTMENT MANAGEMENT AGREEMENT 8 41 (c) by GNA upon not less than 90 days written notice to GMSP at any time after the third anniversary hereof; (d) by GNA, at any time, immediately upon written notice to GMSP following (i) the good faith determination by both the Committee and two-thirds of the members of the Board (excluding members of the Board designated for election by GMSP or its successors in interest under the Securities Purchase Agreement or otherwise affiliated with GMSP) that an event that constitutes Cause has occurred and is continuing beyond any applicable period for notice and opportunity to cure or (ii) the commencement by a Governmental Authority of any Proceeding alleging any matter which, if proven, would constitute Cause. (e) by GMSP upon not less than 10 days notice in the event that GNA defaults in the performance of any of its material obligations hereunder and such default continues for not less than 10 days after GNA receives notice of such default; provided, however, that in the event that such default is of a nature that it cannot, with due diligence, be cured within 10 days, GMSP may not terminate this Agreement so long as GNA begins to cure such default within 10 days and thereafter diligently pursues such cure to completion. Termination of this Agreement shall not terminate GMSP's obligations under Section 3 to furnish reports concerning facts and circumstances prior to termination or under Section 11 to maintain the confidentiality of Confidential Information , terminate GNA's obligations to pay fees earned by GMSP prior to the date of termination, or terminate either party's obligations to indemnify the other party pursuant to this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF GMSP. (a) GMSP is a limited partnership duly organized, validly existing and in good standing under the Texas Revised Limited Partnership Act, as amended, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GMSP is duly qualified and in good standing (to the extent applicable) to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GMSP Material Adverse Effect. (b) GMSP has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GMSP. This Agreement has been duly and validly executed and delivered by GMSP and, assuming the due authorization, execution and delivery hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable against GMSP in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GMSP other than as described in the Securities Purchase Agreement or with any GNA Applicable Insurance Department. INVESTMENT MANAGEMENT AGREEMENT 9 42 (d) The execution, delivery and performance of this Agreement by GMSP do not and will not result in any violation by GMSP under any provisions of: (i) the partnership agreement or similar governing documents of GMSP; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GMSP or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GMSP is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect; (e) There is no Proceeding pending, or to the knowledge of GMSP, threatened against GMSP that questions the validity of this Agreement or any action to be taken by GMSP in connection with this Agreement except as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect. (f) GMSP is, and during the term of this Agreement will continue to be (i) either exempt from registration or duly registered as an investment adviser under the Investment Advisers Act of 1940 and all Applicable Laws and (ii) qualified and eligible to manage the Portfolio under the statutes and regulations administered by the GNA Applicable Insurance Departments, provided that GNA shall inform GMSP immediately in the event that GNA becomes aware of any changes in the qualification and eligibility requirements with respect to such statutes and regulations. GMSP will provide prompt written notice to GNA if GMSP ceases to be so registered or qualified or becomes aware of any fact, event or circumstance which will or is reasonably likely to cause it to cease to be so registered or qualified. (g) Taken in the aggregate, the factual information (including, without limitation, information regarding its knowledge, investment experience and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999 in writing for purposes of this Agreement did not contain untrue statements of material facts, or omit to state material facts necessary to make the statements made not misleading in the light of the circumstances under which they were made, as of the date as of which such information is dated. All financial forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were prepared in good faith on the basis of assumptions believed to be reasonable and data, information, tests or conditions believed to be valid or accurate or to exist at the time such forecasts were prepared. (h) All of the equipment, Software and computer hardware owned or used by GMSP or used and operated by third parties on behalf of GMSP, which performs or is or may be required to perform functions involving dates or the computation of dates, or containing date related data, has the programming, design and performance capabilities to ensure that: (i) it will not suffer any Malfunction that would reasonably be expected to have a GMSP Material Adverse Effect; and INVESTMENT MANAGEMENT AGREEMENT 10 43 (ii) it will not, as a result of the date change at the end of the twentieth century or the input, processing, storage or use of dates up to and including December 31, 2001, (A) be adversely affected, (B) require changes in inputting or operating practices, (C) produce invalid or incorrect output or results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in functionality or performance that, in any of the above, could reasonably be expected to have a GMSP Material Adverse Effect. 8. REPRESENTATIONS AND WARRANTIES OF GNA. (a) GNA is a corporation duly organized and validly existing under the laws of the State of Texas, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GNA is duly qualified and in good standing to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GNA Material Adverse Effect. (b) GNA has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GNA. This Agreement has been duly and validly executed and delivered by GNA and, assuming the due authorization, execution and delivery hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable against GNA in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GNA other than as described in the Securities Purchase Agreement or with any GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GNA do not and will not result in any violation by GNA under any provisions of: (i) articles of incorporation or similar governing documents of GNA; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GNA or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GNA is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (e) There is no Proceeding pending, or to the knowledge of GNA, threatened against GNA that questions the validity of this Agreement or any action to be taken by GNA in connection with this INVESTMENT MANAGEMENT AGREEMENT 11 44 Agreement except as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (f) GNA has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of entering into this Agreement. (g) No part of the funds to be used to purchase and hold Securities or to pay any amounts pursuant to this Agreement constitutes an asset of any employee benefit plan within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)). 9. LIABILITY. It is recognized that decisions concerning investments or potential investments involve the exercise of judgment and the risk of loss. To the extent permitted by Applicable Law, neither GMSP nor any of its officers, directors, or employees nor other members of GMSP Group shall be liable for any loss suffered by GNA on account of such investments, or any act taken or omission made in good faith under this Agreement. For purposes of the foregoing sentence, no action or omission by GMSP shall be considered to have been made "in good faith" if GMSP was negligent, violated any law, or made any misrepresentation (whether affirmatively or by omission). 10. INDEMNIFICATION. (a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any and all claims, actions, causes of action, demands, losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from (i) any Breach by GNA of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or (ii) any Proceeding brought against any of them by a Person other than GNA or any of its Affiliates, Associates or shareholders in respect of any action taken in good faith on behalf of GNA in the course of the performance of GMSP's duties under this Agreement; provided, however, that GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any reasonable expenses incurred by such Person(s) in connection with a Proceeding brought against any of them by any of GNA's shareholders if such Person(s) is wholly successful, on the merits or otherwise, in the defense of such Proceeding, and provided, further, that GNA's obligation to indemnify, defend and hold harmless as provided in this Section 10(a) shall not apply to the first $750,000 in the aggregate of claims hereunder (other than claims for expenses in defending a Proceeding for which the Person is entitled to indemnification under clause (ii) of this Section) and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (b) GMSP shall indemnify, defend, and hold harmless GNA and its Affiliates, Associates, directors, officers and employees from and against any and all Damages asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from any Breach by GMSP of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto; provided, however, that GMSP's obligation to indemnify, defend and hold harmless as provided in this Section 10(b) shall not apply to the first $750,000 in the aggregate of claims hereunder and provided, further, that such $750,000 amount INVESTMENT MANAGEMENT AGREEMENT 12 45 shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (c) Promptly after receipt by an indemnified party under Section 10(a) or (b) of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests which renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. The indemnifying party shall have no liability with respect to any compromise or settlement of any action effected without its written consent (which shall not be unreasonably withheld). 11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential Information in confidence, and shall not disclose said information to any other party other than such party's employees, advisors, attorneys and accountants, who will be advised of the confidential nature of information. Each party shall protect the Confidential Information with the same degree of care as such party normally uses in the protection of its confidential and proprietary information. Each party further agrees not to use Confidential Information for any purpose except in connection with the performance of its duties under this Agreement. The restrictions set forth herein shall not apply with respect to Confidential Information which (i) is already generally available to the public when received by such party; (ii) becomes available to the public through no fault of any member of the GMSP Group or GNA, as applicable; or (iii) is required to be disclosed by Applicable Law or a Governmental Authority. 12. INSURANCE. GMSP shall maintain at all times during the term of this Agreement fiduciary liability insurance of the type customary for investment managers in similar situations naming GNA as an insured with such limits, terms, conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP and shall provide GNA with complete copies of all binders and other policy information. GMSP also shall obtain and maintain a fidelity bond in the amount of not less than $5,000,000 and otherwise containing terms and conditions reasonably acceptable to GNA. In the event that any such policy or bond is canceled or suspended, GMSP promptly shall notify GNA in writing. 13. NOTICES. All notices required to be given in writing hereunder shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following listed Persons at the addresses and facsimile numbers specified below, or to such other Persons, addresses INVESTMENT MANAGEMENT AGREEMENT 13 46 or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: If to GMSP, to: 777 Main Street, Suite 2250 Fort Worth, Texas 76102 Attention: J. Randall Chappel Fax: (817) 820-6651 If to GNA, to: 500 Commerce Street Fort Worth, Texas 76102-5439 Attention: Chief Executive Officer Fax: (817) 338-1454 If given personally or by documented courier or delivery service, a notice shall be deemed to have been given when it is received. If transmitted by facsimile, a notice shall be deemed to have been given on the date received, if electronic confirmation of receipt occurs during normal business hours on a Business Day, and otherwise, on the first Business Day following electronic confirmation of receipt. If given by mail, it shall be deemed to have been given on the third Business Day following the day on which it was posted. 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 15. NATURE OF RELATIONSHIP. The parties hereto intend that the services provided by GMSP to GNA pursuant to this Agreement are being provided as an independent contractor. Nothing contained in this Agreement shall constitute or be construed to be or create a general partnership or joint venture between GMSP and GNA or their respective successors or assigns. 16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder may be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the parties hereto, and their respective heirs, legal representatives, successors, and permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. 17. INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. For purposes of this Agreement, the words "includes" and "including" shall mean "including without limitation" and the word "or" is used in the inclusive sense. All capitalized terms defined herein are equally applicable to both the singular and plural forms. 18. SEVERABILITY. In the event that this Agreement, or any of its provisions, or the performance of any provision, is found to be illegal or unenforceable under applicable law now or hereafter in effect, the parties shall be excused from performance of such portions of this Agreement as shall be found to be illegal or unenforceable under the applicable laws or regulations without affecting the validity of the remaining provisions of the Agreement. INVESTMENT MANAGEMENT AGREEMENT 14 47 19. TIME OF ESSENCE. With regard to all dates and time periods set forth in this Agreement, time is of the essence. 20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their respective subsidiaries or affiliates waives any attorney-client, work product or other privilege with respect to any information furnished pursuant to this Agreement. 21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 22. COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, the parties hereto. INVESTMENT MANAGEMENT AGREEMENT 15 48 IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed all as of the day and year first above written. GAINSCO, INC. By: /s/ Glenn W. Anderson -------------------------------------------------- Glenn W. Anderson President and Chief Executive Officer GOFF MOORE STRATEGIC PARTNERS, L.P., a Texas limited partnership By: GMSP Operating Partners, L.P., its general partner By: GMSP, L.L.C., its general partner By: /s/ John C. Goff ---------------------------------------------- John C. Goff, Managing Principal By: /s/ J. Randall Chappel ---------------------------------------------- J. Randall Chappel, Principal INVESTMENT MANAGEMENT AGREEMENT 16 49 INVESTMENT MANAGEMENT AGREEMENT FOR GAINSCO COUNTY MUTUAL INSURANCE COMPANY THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into this 4th day of October, 1999, by and between Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"), and GAINSCO COUNTY MUTUAL INSURANCE COMPANY ("GNA"), a Texas county mutual insurance company which on October 13, 1996 entered into a management contract with GAINSCO Services Corp., a Texas corporation which is wholly-owned subsidiary of GAINSCO, INC. ("Parent") and owns the charter of GNA. WHEREAS, GNA is a regulated insurance company; WHEREAS, GNA desires to appoint GMSP to serve as investment manager with respect to certain investments held by it; and WHEREAS, GMSP is willing to provide investment advisory services to GNA on the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries controls, is controlled by or is under common control with such specified Person. For this purpose the term "control" (including the terms "controlling", "controlled by" and "under common control with") shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting Securities, by contract, or otherwise. "Agreement" has the meaning set forth in the first paragraph hereof. "Applicable Law" means any statute, law, rule, policy, guideline, or regulation or any judgment, order, writ, injunction, or decree of any Governmental Authority to which a specified Person or property is subject. "Associate" means (i) any corporation or entity (other than GNA, Parent or a Subsidiary of GNA or Parent) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of Equity Securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of GNA or any of its Subsidiaries. "Board" means the board of directors of GNA. INVESTMENT MANAGEMENT AGREEMENT 1 50 "Breach" means any violation or breach of, any misrepresentation or inaccuracy in, any default under, or any failure to perform or comply with any representation, warranty, covenant, obligation, or other provision of this Agreement. "Business Day" means any day other than a Saturday or Sunday on which national banks are open for business in Fort Worth, Texas and New York, New York. "Cash" means any currency or immediately available funds on deposit with a financial institution. "Cause" means that GMSP has committed or engaged in (i) any malfeasance, bad faith or negligence in respect of GMSP's material duties pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or indictment of or plea of no contest to any felony by GMSP or any member of the GMSP Group; (iv) any violation of the provisions of the U. S. federal securities laws or state securities laws by GMSP or any GMSP Principal; or (v) any material breach by GMSP of its obligations (including, without limitation, its obligations to observe and comply with the provisions of the Policy Letter) under, or its representations or warranties in, this Agreement if such breach continues for more than 10 days after GMSP receives written notice, specifying such breach with particularity and demanding cure, from GNA. "Committee" means the Board's Investment Committee, none of the members of which shall be members of the GMSP Group. "Confidential Information" means information received by GMSP from GNA or received by GNA from GMSP that is not generally known or which would logically be considered confidential or proprietary, or which would do GNA or GMSP, as applicable, harm if divulged, or which is marked "Confidential Information." "Damages" has the meaning set forth in Section 10. "Equity Securities" means any capital stock or other equity interests of any Person, any Securities directly or indirectly convertible into, or exercisable or exchangeable for any capital stock or other equity interests of any Person, or any right, option, warrant or other Security which, with the payment of additional consideration, the expiration of time or the occurrence of any event shall give the holder thereof the right to acquire any capital stock or other equity interests of any Person or any Security convertible into or exercisable or exchangeable for, any capital stock or other equity interests of any Person. "Fair Market Value" means as to any Securities on any date, (a) if such Securities are listed or admitted to trading on any national securities exchange on any such trading day, the amount equal to the last sale price of such Securities, regular way settlement, on such dates or, if no such sale takes place on a date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Securities are then listed or admitted to trading, (b) if such Securities are not then listed or admitted to trading on any national securities exchange but are reported through the automated quotation system of a registered securities association, the last trading price of such Securities on such dates, or if there shall have been no trading on a date, the average of the closing bid and asked prices of such Securities on such date as shown by such automated quotation system or (c) if such Securities are not then so listed, admitted to trading or reported, the value determined by GMSP subject to review and approval by the Committee, which valuation shall be equal to (i) cost or (ii) in the event that either GMSP or the Committee determine that there has been a material change in the value of such Securities since the date of acquisition of such Securities, such other valuation as is reflective of the value INVESTMENT MANAGEMENT AGREEMENT 2 51 of such Securities; provided, however, that, if GMSP and the Committee are unable to agree on such fair market value, such Securities shall be valued by such nationally recognized independent public accounting firm or investment banking firm designated by the Committee and reasonably acceptable to GMSP. Any such third-party valuation shall be final and binding on the parties and enforceable in accordance with the provisions of the Texas General Arbitration Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA. "Fees" has the meaning set forth in Section 4. "GAAP" means generally accepted accounting principles for financial reporting in the U.S., consistently applied. "GMSP" has the meaning set forth in the introductory paragraph of this Agreement. "GMSP Group" means GMSP together with its Affiliates, Associates and employees, including without limitation GMSP's partners, the partners of the general partner of GMSP and the GMSP Principals. "GMSP Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability of GMSP to conduct business, the financial condition or the results of operations of GMSP that is material to GMSP or as to the ability of GMSP to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or the insurance industry generally. "GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other Persons employed by or otherwise affiliated with GMSP or its general partner who have access to information regarding particular Securities being considered for purchase or sale by GNA. The parties recognize that the limited partners of GMSP as of the date hereof are not GMSP Principals. "GNA" has the meaning set forth in the introductory paragraph of this Agreement. "GNA Applicable Insurance Department" means the Texas Department of Insurance. "GNA Entities" means GAINSCO, INC., a Texas corporation; MGA Insurance Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a Texas mutual insurance company; and General Agents Insurance Company of America, Inc., an Oklahoma corporation. "GNA Investment Management Agreements" means the Investment Management Agreements of even date herewith between GMSP and each of the GNA Entities, including this Agreement. "GNA Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability to conduct business, the financial condition or the results of operations of GNA and its Subsidiaries that is material to Parent and its Subsidiaries taken as a whole or as to the ability of GNA to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or insurance industry generally. "good faith", when used in respect of any action, means that the action was taken with (i) honesty of intention, (ii) freedom from knowledge of circumstances which ought to put the Person taking such action on inquiry or negligence, and (iii) intention to abstain from taking any unconscientious advantage of another. INVESTMENT MANAGEMENT AGREEMENT 3 52 "Governmental Authority" means any U.S. federal, state, local, foreign, supernational or supranational court or tribunal, governmental, regulatory or administrative agency, department, bureau, authority, commission or arbitral panel. "Investment Grade Debt Obligations" means any interest bearing debt obligations issued by any Person, including a Governmental Authority, rated at least "B minus" or the equivalent thereof by Standard & Poor's Corporation or Moody's Investor's Service, Inc. "Malfunction" means any failure to: (a) accurately recognize dates falling before, on or after the Year 2000; or (b) accurately record, store, retrieve and process data input and date information. "Parent" has the meaning set forth in the first paragraph hereof. "Person" means any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including any Governmental Authority. "Policy Letter" has the meaning set forth in Section 2. "Portfolio" means those investments held by GNA in Securities of the type more particularly described under the category "Investments" in Parent's periodic filings with the SEC. "Proceedings" means all proceedings, actions, suits, investigations, and inquiries by or before any arbitrator or Governmental Authority. "Research" means research, statistical and similar information and services. "SEC" means the Securities and Exchange Commission. "Security" means any capital stock, partnership interest, membership interest, subscription, certificate of trust or other ownership interest, warrant, bond, note, debenture, or other debt or equity interest of any Person commonly known as a "security," and all rights and options relating to any of the foregoing, regardless of whether traded on a national securities exchange; but shall not include Cash Equivalents. "Securities Purchase Agreement" means the Securities Purchase Agreement dated June 29, 1999, between GMSP and Parent. "Short Term Debt" means any note, draft, bill of exchange, or similar security which has a maturity at the time of issuance of not exceeding nine (9) months exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. "Subsidiary" means, with respect to any Person, any corporation or other entity (including partnerships and other business associations) in which the Person directly or indirectly owns at least a majority of the outstanding voting Securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors, or otherwise to direct the management and policies, of such corporation or other entity. "U.S." means the United States of America. INVESTMENT MANAGEMENT AGREEMENT 4 53 "Year 2000" means the calendar year 2000 A.D. 2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve, as investment manager with respect to the Portfolio on the terms and conditions hereinafter set forth: (a) The investment policies and all other actions of the Portfolio are and shall at all times be subject to the oversight and direction of the Committee. GMSP shall manage the Portfolio in accordance with the investment objectives and policies set forth in the letter (the "Policy Letter") heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy Letter, including the investment criteria and other instructions set forth therein, in whole or in part and at any time and from time to time; provided, however, that no amendment or supplement shall be binding upon GMSP until GMSP is notified of the amendment or supplement; and provided further, that in the event that an amended or supplemented Policy Letter shall require GMSP to make any changes in the manner in which GMSP has performed its services pursuant to this Agreement, GMSP shall have a reasonable time period to comply with such changes. GMSP shall periodically evaluate the provisions of the Policy Letter and provide GNA with any recommendations for the amendment or supplementation of the provisions of the Policy Letter that GMSP deems advisable for the benefit of GNA. To the extent that the provisions of the Policy Letter, as the same may be amended or supplemented from time to time, conflict with the provisions of this Agreement, the provisions of this Agreement shall control. (b) GNA will retain ownership and control of the assets in the Portfolio at all times. The assets shall be held for the benefit of GNA solely at one or more financial institutions or other locations specified from time to time in the Policy Letter. (c) Subject to the provisions of the Policy Letter and the oversight and direction of the Committee, GMSP shall have authority to make all specific investment decisions with respect to the assets in the Portfolio. (d) GMSP shall exercise its discretion and discharge its obligations under this Agreement in compliance with all Applicable Laws. (e) GMSP shall employ and dedicate to GNA continuously during the term of this Agreement a qualified investment portfolio manager reasonably acceptable to GNA, who shall have the primary responsibilities of coordinating all aspects of the day-to-day investment activities of the Portfolio. (f) GNA acknowledges that GMSP has informed GNA that GMSP currently is not registered as an (i) investment adviser under the Investment Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under the Securities Exchange Act of 1934, as amended, and all other Applicable Laws. 3. REPORTS. (a) GMSP shall provide to GNA periodic financial reports with respect to the assets in and investment performance of the Portfolio. The reports shall include such financial information in such format as GNA may reasonably request in connection with the administration of the Portfolio and a record of all transactions effected during the interim period from the preceding report, including the price per Security, the broker or dealer executing the transaction and the commissions paid. The reports shall be made with such frequency, but not less often than within 20 days following the end of each calendar month, as INVESTMENT MANAGEMENT AGREEMENT 5 54 GNA may reasonably request in connection with the administration of the Portfolio; provided that the late delivery of a complete report no more than one time in any three-year period with respect to any particular Security in the Portfolio shall not constitute a Breach of this Agreement if (i) the delay was caused by the failure of an unaffiliated Person in providing information to GMSP that had been timely requested by GMSP, (ii) any portion of the report that is not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause such late report to be delivered as promptly as practicable. (b) GMSP shall (i) afford GNA and its authorized representatives reasonable access to the GMSP Principals, GMSP's offices and other facilities, and all books, records and other documents of GMSP relating to the Portfolio or this Agreement and (ii) permit GNA and its authorized representatives to make such inspections and copies of all books, records and other documents as they may reasonably require to verify the accuracy of any report furnished pursuant to Section 3(a). 4. COMPENSATION; EXPENSES. (a) For services performed by GMSP, GNA agrees to pay to GMSP investment management fees (the "Fees") equal on an annual basis to (i) 30 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at the end of a given calendar month or during a majority of the days in the given calendar month and (ii) 100 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Equity Securities or other alternative investments in Securities which are not Investment Grade Debt Obligations. The Fees otherwise payable with respect to any calendar month (or prorated portion thereof) shall be reduced by an amount equal to the sum of (i) the amount of fees, commissions and expenses paid by or on behalf of GNA to any investment or mutual fund from which any member of the GMSP Group is eligible to receive compensation or profits plus (ii) the amount of any fees paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, plus (iii) the amount of any finder's fees, brokerage commissions or other benefit or compensation paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group in connection with any transaction in Securities pursuant to this Agreement. Notwithstanding anything to the contrary contained in this Agreement, (x) no Fees shall be payable with respect to any portion of the Portfolio invested in Cash during a majority of the days in the given calendar month and (y) the Committee and GMSP may agree upon a different Fee structure for special situations. (b) The Fees shall be based on the Fair Market Value of the assets in the Portfolio at the end of each calendar month, and shall be calculated at the end of each calendar month based upon the actual number of days elapsed during the calendar month, during which this Agreement is in effect over a year of 365 days. Within fifteen (15) days after the end of each calendar month, GNA shall pay to GMSP the Fees earned with respect to the preceding calendar month. In the event of termination prior to the end of a calendar month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair Market Value of the assets in the Portfolio at the time of termination. No other fees, charges or assessments shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP Group with respect to the services performed by GMSP pursuant to this Agreement, provided that GNA shall have the responsibility to reimburse GMSP for GMSP's payment of any amounts described pursuant to Section 4(d) below. There shall not be any annual reconciliation, adjustment or other "true-up" at the end of each calendar year. (c) GMSP shall be solely responsible for all of its general and administrative costs and expenses incurred in connection with performing its duties and obligations under this Agreement, which shall INVESTMENT MANAGEMENT AGREEMENT 6 55 consist of all costs and expenses in connection with the provision of office space and facilities, equipment and personnel for servicing the investments of the Portfolio and the salaries and fees of all personnel employed by GMSP performing services relating to research, statistical and investment activities. (d) GNA shall be responsible for, and pay directly, the following costs and expenses related to GMSP's performance of its duties pursuant to this Agreement that are reasonable and payable to Persons not affiliated with the GMSP Group: (i) brokerage commissions and other costs, fees and expenses incurred in the purchase and sale of Securities; (ii) fees and expenses of custodians selected pursuant to Section 2(b); (iii) costs related to third party Proceedings involving GNA's ownership of Securities pursuant to this Agreement, directly or indirectly, including, without limitation, attorneys' fees incurred in connection therewith (but excluding all costs related to Proceedings or other disputes between GNA and GMSP or any member of the GMSP Group or which constitute Cause); (iv) interest on and fees and expenses arising out of all borrowings made by GNA with respect to the purchase of Securities, including, but not limited to, the arranging thereof; (v) taxes, fees or other governmental charges levied against GNA; and (vi) any other expense, whether ordinary or extraordinary, that is determined by the Committee to be appropriate for GNA to pay pursuant to this Agreement. (e) In discharging its duties pursuant to this Agreement, GMSP may give preference, and may cause GNA to pay higher negotiated commission rates, to unaffiliated brokers which, in addition to having the capacity of obtaining the best price for the Security itself and of executing the order with speed, efficiency and confidentiality, also provide Research to GMSP or GNA. Research furnished by brokers through whom Securities transactions are effected may be used by GMSP in servicing all of its accounts, and there shall be no reduction in the compensation of GMSP hereunder as a consequence of its receipt of such Research. In the allocation of brokerage, however, GMSP must determine in good faith, and demonstrate to GNA upon request, that the amount of the commission is reasonable in relation to the value of the brokerage services and Research provided by the broker, viewed in terms of either the particular transaction or GMSP's overall responsibilities with respect to the Portfolio. In the allocation of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law and such policies and requirements that the Committee may adopt or approve as reflected in the Policy Letter. (f) In the event that, in any calendar month, the aggregate amount of Fees (as such term is defined in the respective GNA Investment Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an amount equal to the product of (i) the quotient of the Fair Market Value of the Portfolio divided by the Fair Market Value of all of the Portfolios (as such term is defined in the respective GNA Investment Management Agreements) of all of the GNA Entities, multiplied by (ii) an amount equal to the difference between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA Entities with respect to such calendar month. INVESTMENT MANAGEMENT AGREEMENT 7 56 5. ACTIVITIES OF GMSP. (a) The services of GMSP to GNA are not deemed to be exclusive, and GMSP shall be free to engage in any other business or to render similar services to others. GMSP and any member of the GMSP Group may engage independently or with others, for its or their own accounts and for the accounts of others, in other business ventures and activities of every nature and description, including, without limitation, purchasing, selling or holding Securities for the account of any other Person or for its or his own account, including Securities included within the Portfolio or eligible for investment pursuant to this Agreement; provided, that the management of such entities and accounts do not interfere with the performance of their obligations and duties to GNA pursuant to this Agreement. GNA shall not have any rights or obligations by virtue of this Agreement in and to such independent ventures and activities or the income or profits derived therefrom. The foregoing notwithstanding, without the prior written consent of GNA in a specific case, GMSP shall at all times adhere, and cause the members of the GMSP Group or the GMSP Principals, as the case may be, to adhere, to the following: (i) Neither GMSP nor any member of the GMSP Group shall act, either as principal or agent, on the opposite side of any transaction in which GNA or the Portfolio is involved. (ii) GMSP and each GMSP Principal shall at all times (A) place the interests of GNA before such member's personal transactional interests; (B) conduct all personal transactions in Securities in such a manner as to avoid any actual or potential conflict of interest or abuse of such Person's position of trust and confidence in relation to GNA; and (C) promptly disclose to GNA all personal transactions made by or on behalf of such Person in Securities which are or were at any time during the preceding two years in the Portfolio or issued by Persons whose Securities are in the Portfolio. (b) On any issue involving an actual or potential conflict of interest which is not specifically authorized by or pursuant to this Agreement, GMSP shall submit such issue to the Committee for prior approval, and shall take such actions, if any, as are determined by the Committee to be necessary or appropriate to ameliorate the conflict of interest. If GMSP carries out the actions specified by the Committee in respect of a matter giving rise to a conflict of interest, neither GMSP nor any member of the GMSP Group shall have any liability to GNA in respect of actions taken in good faith by them as a consequence of the approval by the Committee. (c) GMSP shall be liable for any breach of this Section 5 by any member of the GMSP Group as if GMSP had committed such breach. 6. DURATION AND TERMINATION. The term of this Agreement shall commence on the date of this Agreement and shall continue until terminated: (a) by the written agreement of GNA and GMSP; (b) by GMSP upon not less than 90 days written notice to GNA at any time after the third anniversary hereof; (c) by GNA upon not less than 90 days written notice to GMSP at any time after the third anniversary hereof; INVESTMENT MANAGEMENT AGREEMENT 8 57 (d) by GNA, at any time, immediately upon written notice to GMSP following (i) the good faith determination by both the Committee and two-thirds of the members of the Board (excluding members of the Board designated for election by GMSP or its successors in interest under the Securities Purchase Agreement or otherwise affiliated with GMSP) that an event that constitutes Cause has occurred and is continuing beyond any applicable period for notice and opportunity to cure or (ii) the commencement by a Governmental Authority of any Proceeding alleging any matter which, if proven, would constitute Cause. (e) by GMSP upon not less than 10 days notice in the event that GNA defaults in the performance of any of its material obligations hereunder and such default continues for not less than 10 days after GNA receives notice of such default; provided, however, that in the event that such default is of a nature that it cannot, with due diligence, be cured within 10 days, GMSP may not terminate this Agreement so long as GNA begins to cure such default within 10 days and thereafter diligently pursues such cure to completion. Termination of this Agreement shall not terminate GMSP's obligations under Section 3 to furnish reports concerning facts and circumstances prior to termination or under Section 11 to maintain the confidentiality of Confidential Information , terminate GNA's obligations to pay fees earned by GMSP prior to the date of termination, or terminate either party's obligations to indemnify the other party pursuant to this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF GMSP. (a) GMSP is a limited partnership duly organized, validly existing and in good standing under the Texas Revised Limited Partnership Act, as amended, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GMSP is duly qualified and in good standing (to the extent applicable) to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GMSP Material Adverse Effect. (b) GMSP has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GMSP. This Agreement has been duly and validly executed and delivered by GMSP and, assuming the due authorization, execution and delivery hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable against GMSP in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GMSP other than as described in the Securities Purchase Agreement or with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GMSP do not and will not result in any violation by GMSP under any provisions of: (i) the partnership agreement or similar governing documents of GMSP; INVESTMENT MANAGEMENT AGREEMENT 9 58 (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GMSP or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GMSP is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect; (e) There is no Proceeding pending, or to the knowledge of GMSP, threatened against GMSP that questions the validity of this Agreement or any action to be taken by GMSP in connection with this Agreement except as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect. (f) GMSP is, and during the term of this Agreement will continue to be (i) either exempt from registration or duly registered as an investment adviser under the Investment Advisers Act of 1940 and all Applicable Laws and (ii) qualified and eligible to manage the Portfolio under the statutes and regulations administered by the GNA Applicable Insurance Department, provided that GNA shall inform GMSP immediately in the event that GNA becomes aware of any changes in the qualification and eligibility requirements with respect to such statutes and regulations. GMSP will provide prompt written notice to GNA if GMSP ceases to be so registered or qualified or becomes aware of any fact, event or circumstance which will or is reasonably likely to cause it to cease to be so registered or qualified. (g) Taken in the aggregate, the factual information (including, without limitation, information regarding its knowledge, investment experience and investment track record) furnished by GMSP to GNA subsequent to May 11, 1999 in writing for purposes of this Agreement did not contain untrue statements of material facts, or omit to state material facts necessary to make the statements made not misleading in the light of the circumstances under which they were made, as of the date as of which such information is dated. All financial forecasts prepared and furnished by GMSP to GNA subsequent to May 11, 1999 were prepared in good faith on the basis of assumptions believed to be reasonable and data, information, tests or conditions believed to be valid or accurate or to exist at the time such forecasts were prepared. (h) All of the equipment, Software and computer hardware owned or used by GMSP or used and operated by third parties on behalf of GMSP, which performs or is or may be required to perform functions involving dates or the computation of dates, or containing date related data, has the programming, design and performance capabilities to ensure that: (i) it will not suffer any Malfunction that would reasonably be expected to have a GMSP Material Adverse Effect; and (ii) it will not, as a result of the date change at the end of the twentieth century or the input, processing, storage or use of dates up to and including December 31, 2001, (A) be adversely affected, (B) require changes in inputting or operating practices, (C) produce invalid or incorrect output or results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in functionality or performance that, in any of the above, could reasonably be expected to have a GMSP Material Adverse Effect. INVESTMENT MANAGEMENT AGREEMENT 10 59 8. REPRESENTATIONS AND WARRANTIES OF GNA. (a) GNA is an insurance company duly organized and validly existing under the laws of the State of Texas, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GNA is duly qualified and in good standing to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GNA Material Adverse Effect. (b) GNA has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GNA. This Agreement has been duly and validly executed and delivered by GNA and, assuming the due authorization, execution and delivery hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable against GNA in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GNA other than as described in the Securities Purchase Agreement or with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GNA do not and will not result in any violation by GNA under any provisions of: (i) articles of incorporation or similar governing documents of GNA; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GNA or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GNA is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (e) There is no Proceeding pending, or to the knowledge of GNA, threatened against GNA that questions the validity of this Agreement or any action to be taken by GNA in connection with this Agreement except as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (f) GNA has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of entering into this Agreement. INVESTMENT MANAGEMENT AGREEMENT 11 60 (g) No part of the funds to be used to purchase and hold Securities or to pay any amounts pursuant to this Agreement constitutes an asset of any employee benefit plan within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit plan investor" (as such term is defined in 29 C.F.R. Section 2510.3-101(f)(2)). 9. LIABILITY. It is recognized that decisions concerning investments or potential investments involve the exercise of judgment and the risk of loss. To the extent permitted by Applicable Law, neither GMSP nor any of its officers, directors, or employees nor other members of the GMSP Group shall be liable for any loss suffered by GNA on account of such investments, or any act taken or omission made in good faith under this Agreement. For purposes of the foregoing sentence, no action or omission by GMSP shall be considered to have been made "in good faith" if GMSP was negligent, violated any law, or made any misrepresentation (whether affirmatively or by omission). 10. INDEMNIFICATION. (a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any and all claims, actions, causes of action, demands, losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from (i) any Breach by GNA of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or (ii) any Proceeding brought against any of them by a Person other than GNA or any of its Affiliates, Associates or shareholders in respect of any action taken in good faith on behalf of GNA in the course of the performance of GMSP's duties under this Agreement; provided, however, that GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any reasonable expenses incurred by such Person(s) in connection with a Proceeding brought against any of them by any of GNA's shareholders if such Person(s) is wholly successful, on the merits or otherwise, in the defense of such Proceeding, and provided, further, that GNA's obligation to indemnify, defend and hold harmless as provided in this Section 10(a) shall not apply to the first $750,000 in the aggregate of claims hereunder (other than claims for expenses in defending a Proceeding for which the Person is entitled to indemnification under clause (ii) of this Section) and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (b) GMSP shall indemnify, defend, and hold harmless GNA and its Affiliates, Associates, directors, officers and employees from and against any and all Damages asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from any Breach by GMSP of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto; provided, however, that GMSP's obligation to indemnify, defend and hold harmless as provided in this Section 10(b) shall not apply to the first $750,000 in the aggregate of claims hereunder and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (c) Promptly after receipt by an indemnified party under Section 10(a) or (b) of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability INVESTMENT MANAGEMENT AGREEMENT 12 61 that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests which renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. The indemnifying party shall have no liability with respect to any compromise or settlement of any action effected without its written consent (which shall not be unreasonably withheld). 11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential Information in confidence, and shall not disclose said information to any other party other than such party's employees, advisors, attorneys and accountants, who will be advised of the confidential nature of information. Each party shall protect the Confidential Information with the same degree of care as such party normally uses in the protection of its confidential and proprietary information. Each party further agrees not to use Confidential Information for any purpose except in connection with the performance of its duties under this Agreement. The restrictions set forth herein shall not apply with respect to Confidential Information which (i) is already generally available to the public when received by such party; (ii) becomes available to the public through no fault of any member of the GMSP Group or GNA, as applicable; or (iii) is required to be disclosed by Applicable Law or a Governmental Authority. 12. INSURANCE. GMSP shall maintain at all times during the term of this Agreement fiduciary liability insurance of the type customary for investment managers in similar situations naming GNA as an insured with such limits, terms, conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP and shall provide GNA with complete copies of all binders and other policy information. GMSP also shall obtain and maintain a fidelity bond in the amount of not less than $5,000,000 and otherwise containing terms and conditions reasonably acceptable to GNA. In the event that any such policy or bond is canceled or suspended, GMSP promptly shall notify GNA in writing. 13. NOTICES. All notices required to be given in writing hereunder shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following listed Persons at the addresses and facsimile numbers specified below, or to such other Persons, addresses or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: If to GMSP, to: 777 Main Street, Suite 2250 Fort Worth, Texas 76102 Attention: J. Randall Chappel Fax: (817) 820-6651 INVESTMENT MANAGEMENT AGREEMENT 13 62 If to GNA, to: 500 Commerce Street Fort Worth, Texas 76102-5439 Attention: President Fax: (817) 338-1454 If given personally or by documented courier or delivery service, a notice shall be deemed to have been given when it is received. If transmitted by facsimile, a notice shall be deemed to have been given on the date received, if electronic confirmation of receipt occurs during normal business hours on a Business Day, and otherwise, on the first Business Day following electronic confirmation of receipt. If given by mail, it shall be deemed to have been given on the third Business Day following the day on which it was posted. 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 15. NATURE OF RELATIONSHIP. The parties hereto intend that the services provided by GMSP to GNA pursuant to this Agreement are being provided as an independent contractor. Nothing contained in this Agreement shall constitute or be construed to be or create a general partnership or joint venture between GMSP and GNA or their respective successors or assigns. 16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder may be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the parties hereto, and their respective heirs, legal representatives, successors, and permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. 17. INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. For purposes of this Agreement, the words "includes" and "including" shall mean "including without limitation" and the word "or" is used in the inclusive sense. All capitalized terms defined herein are equally applicable to both the singular and plural forms. 18. SEVERABILITY. In the event that this Agreement, or any of its provisions, or the performance of any provision, is found to be illegal or unenforceable under applicable law now or hereafter in effect, the parties shall be excused from performance of such portions of this Agreement as shall be found to be illegal or unenforceable under the applicable laws or regulations without affecting the validity of the remaining provisions of the Agreement. 19. TIME OF ESSENCE. With regard to all dates and time periods set forth in this Agreement, time is of the essence. 20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their respective subsidiaries or affiliates waives any attorney-client, work product or other privilege with respect to any information furnished pursuant to this Agreement. INVESTMENT MANAGEMENT AGREEMENT 14 63 21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 22. COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, the parties hereto. [Intentionally Left Blank] INVESTMENT MANAGEMENT AGREEMENT 15 64 IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed all as of the day and year first above written. GAINSCO SERVICES CORP., a Texas corporation By: /s/ Glenn W. Anderson ----------------------------------------------------- Glenn W. Anderson, President GOFF MOORE STRATEGIC PARTNERS, L.P., a Texas limited partnership By: GMSP Operating Partners, L.P., its general partner By: GMSP, L.L.C., its general partner By: /s/ John C. Goff ------------------------------------------------- John C. Goff, Managing Principal By: /s/ J. Randall Chappell ------------------------------------------------- J. Randall Chappel, Principal INVESTMENT MANAGEMENT AGREEMENT 16 65 INVESTMENT MANAGEMENT AGREEMENT FOR MIDWEST CASUALTY INSURANCE COMPANY THIS INVESTMENT MANAGEMENT AGREEMENT (this "Agreement") is entered into this 1st day of January, 2000, by and between Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"), and Midwest Casualty Insurance Company, a North Dakota insurance corporation ("GNA"), an indirect subsidiary of GAINSCO, INC. ("Parent"). WHEREAS, GNA is a regulated insurance company; WHEREAS, GNA desires to appoint GMSP to serve as investment manager with respect to certain investments held by it; and WHEREAS, GMSP is willing to provide investment advisory services to GNA on the terms and conditions hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly, through one or more intermediaries controls, is controlled by or is under common control with such specified Person. For this purpose the term "control" (including the terms "controlling", "controlled by" and "under common control with") shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person whether through the ownership of voting Securities, by contract, or otherwise. "Agreement" has the meaning set forth in the first paragraph hereof. "Applicable Law" means any statute, law, rule, policy, guideline, or regulation or any judgment, order, writ, injunction, or decree of any Governmental Authority to which a specified Person or property is subject. "Associate" means (i) any corporation or entity (other than GNA, Parent or a Subsidiary of GNA or Parent) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of Equity Securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of GNA or any of its Subsidiaries. "Board" means the board of directors of GNA. INVESTMENT MANAGEMENT AGREEMENT 1 66 "Breach" means any violation or breach of, any misrepresentation or inaccuracy in, any default under, or any failure to perform or comply with any representation, warranty, covenant, obligation, or other provision of this Agreement. "Business Day" means any day other than a Saturday or Sunday on which national banks are open for business in Fort Worth, Texas and New York, New York. "Cash" means any currency or immediately available funds on deposit with a financial institution. "Cause" means that GMSP has committed or engaged in (i) any malfeasance, bad faith or negligence in respect of GMSP's material duties pursuant to this Agreement; (ii) any commission of any fraud by GMSP; (iii) any conviction or indictment of or plea of no contest to any felony by GMSP or any member of the GMSP Group; (iv) any violation of the provisions of the U. S. federal securities laws or state securities laws by GMSP or any GMSP Principal; or (v) any material breach by GMSP of its obligations (including, without limitation, its obligations to observe and comply with the provisions of the Policy Letter) under, or its representations or warranties in, this Agreement if such breach continues for more than 10 days after GMSP receives written notice, specifying such breach with particularity and demanding cure, from GNA. "Committee" means the Board's Investment Committee, none of the members of which shall be members of the GMSP Group. "Confidential Information" means information received by GMSP from GNA or received by GNA from GMSP that is not generally known or which would logically be considered confidential or proprietary, or which would do GNA or GMSP, as applicable, harm if divulged, or which is marked "Confidential Information." "Damages" has the meaning set forth in Section 10. "Equity Securities" means any capital stock or other equity interests of any Person, any Securities directly or indirectly convertible into, or exercisable or exchangeable for any capital stock or other equity interests of any Person, or any right, option, warrant or other Security which, with the payment of additional consideration, the expiration of time or the occurrence of any event shall give the holder thereof the right to acquire any capital stock or other equity interests of any Person or any Security convertible into or exercisable or exchangeable for, any capital stock or other equity interests of any Person. "Fair Market Value" means as to any Securities on any date, (a) if such Securities are listed or admitted to trading on any national securities exchange on any such trading day, the amount equal to the last sale price of such Securities, regular way settlement, on such dates or, if no such sale takes place on a date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Securities are then listed or admitted to trading, (b) if such Securities are not then listed or admitted to trading on any national securities exchange but are reported through the automated quotation system of a registered securities association, the last trading price of such Securities on such dates, or if there shall have been no trading on a date, the average of the closing bid and asked prices of such Securities on such date as shown by such automated quotation system or (c) if such Securities are not then so listed, admitted to trading or reported, the value determined by GMSP subject to review and approval by the Committee, which valuation shall be equal to (i) cost or (ii) in the event that either GMSP or the Committee determine that there has been a material change in the value of such Securities since the date of acquisition of such Securities, such other valuation as is reflective of the value INVESTMENT MANAGEMENT AGREEMENT 2 67 of such Securities; provided, however, that, if GMSP and the Committee are unable to agree on such fair market value, such Securities shall be valued by such nationally recognized independent public accounting firm or investment banking firm designated by the Committee and reasonably acceptable to GMSP. Any such third-party valuation shall be final and binding on the parties and enforceable in accordance with the provisions of the Texas General Arbitration Act, and the costs and expenses thereof shall be shared equally by GMSP and GNA. "Fees" has the meaning set forth in Section 4. "GAAP" means generally accepted accounting principles for financial reporting in the U.S., consistently applied. "GMSP" has the meaning set forth in the introductory paragraph of this Agreement. "GMSP Group" means GMSP together with its Affiliates, Associates and employees, including without limitation GMSP's partners, the partners of the general partner of GMSP and the GMSP Principals. "GMSP Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability of GMSP to conduct business, the financial condition or the results of operations of GMSP that is material to GMSP or as to the ability of GMSP to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or the insurance industry generally. "GMSP Principals" shall mean John C. Goff, J. Randall Chappel and any other Persons employed by or otherwise affiliated with GMSP or its general partner who have access to information regarding particular Securities being considered for purchase or sale by GNA. The parties recognize that the limited partners of GMSP as of the date hereof are not GMSP Principals. "GNA" has the meaning set forth in the introductory paragraph of this Agreement. "GNA Applicable Insurance Department" means the Insurance Department of North Dakota. "GNA Entities" means GAINSCO, INC., a Texas corporation; GNA Insurance Company, Inc., a Texas corporation; GAINSCO County Mutual Insurance Company, a Texas mutual insurance company; General Agents Insurance Company of America, Inc., an Oklahoma corporation and Midwest Casualty Insurance Company, a North Dakota insurance corporation. "GNA Investment Management Agreements" means the Investment Management Agreements of even date herewith between GMSP and each of the GNA Entities, including this Agreement. "GNA Material Adverse Effect" means any condition, circumstance or development having an adverse effect on the ability to conduct business, the financial condition or the results of operations of GNA and its Subsidiaries that is material to Parent and its Subsidiaries taken as a whole or as to the ability of GNA to perform its obligations pursuant to this Agreement, excluding any such condition, circumstance or development which adversely affects the U.S. economy, financial markets or insurance industry generally. INVESTMENT MANAGEMENT AGREEMENT 3 68 "good faith", when used in respect of any action, means that the action was taken with (i) honesty of intention, (ii) freedom from knowledge of circumstances which ought to put the Person taking such action on inquiry or negligence, and (iii) intention to abstain from taking any unconscientious advantage of another. "Governmental Authority" means any U.S. federal, state, local, foreign, supernational or supranational court or tribunal, governmental, regulatory or administrative agency, department, bureau, authority, commission or arbitral panel. "Investment Grade Debt Obligations" means any interest bearing debt obligations issued by any Person, including a Governmental Authority, rated at least "B minus" or the equivalent thereof by Standard & Poor's Corporation or Moody's Investor's Service, Inc. "Malfunction" means any failure to: (a) accurately recognize dates falling before, on or after the Year 2000; or (b) accurately record, store, retrieve and process data input and date information. "Parent" has the meaning set forth in the first paragraph hereof. "Person" means any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including any Governmental Authority. "Policy Letter" has the meaning set forth in Section 2. "Portfolio" means those investments held by GNA in Securities of the type more particularly described under the category "Investments" in Parent's periodic filings with the SEC. "Proceedings" means all proceedings, actions, suits, investigations, and inquiries by or before any arbitrator or Governmental Authority. "Research" means research, statistical and similar information and services. "SEC" means the Securities and Exchange Commission. "Security" means any capital stock, partnership interest, membership interest, subscription, certificate of trust or other ownership interest, warrant, bond, note, debenture, or other debt or equity interest of any Person commonly known as a "security," and all rights and options relating to any of the foregoing, regardless of whether traded on a national securities exchange; but shall not include Cash Equivalents. "Securities Purchase Agreement" means the Securities Purchase Agreement dated June 29, 1999, between GMSP and Parent. "Short Term Debt" means any note, draft, bill of exchange, or similar security which has a maturity at the time of issuance of not exceeding nine (9) months exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. "Subsidiary" means, with respect to any Person, any corporation or other entity (including partnerships and other business associations) in which the Person directly or indirectly owns at least a majority of the outstanding voting Securities or other equity interests having the power, under ordinary INVESTMENT MANAGEMENT AGREEMENT 4 69 circumstances, to elect a majority of the directors, or otherwise to direct the management and policies, of such corporation or other entity. "U.S." means the United States of America. "Year 2000" means the calendar year 2000 A.D. 2. INVESTMENT MANAGER. GNA hereby retains GMSP, and GMSP agrees to serve, as investment manager with respect to the Portfolio on the terms and conditions hereinafter set forth: (a) The investment policies and all other actions of the Portfolio are and shall at all times be subject to the oversight and direction of the Committee. GMSP shall manage the Portfolio in accordance with the investment objectives and policies set forth in the letter (the "Policy Letter") heretofore delivered to GMSP by GNA. GNA may amend or supplement the contents of the Policy Letter, including the investment criteria and other instructions set forth therein, in whole or in part and at any time and from time to time; provided, however, that no amendment or supplement shall be binding upon GMSP until GMSP is notified of the amendment or supplement; and provided further, that in the event that an amended or supplemented Policy Letter shall require GMSP to make any changes in the manner in which GMSP has performed its services pursuant to this Agreement, GMSP shall have a reasonable time period to comply with such changes. GMSP shall periodically evaluate the provisions of the Policy Letter and provide GNA with any recommendations for the amendment or supplementation of the provisions of the Policy Letter that GMSP deems advisable for the benefit of GNA. To the extent that the provisions of the Policy Letter, as the same may be amended or supplemented from time to time, conflict with the provisions of this Agreement, the provisions of this Agreement shall control. (b) GNA will retain ownership and control of the assets in the Portfolio at all times. The assets shall be held for the benefit of GNA solely at one or more financial institutions or other locations specified from time to time in the Policy Letter. (c) Subject to the provisions of the Policy Letter and the oversight and direction of the Committee, GMSP shall have authority to make all specific investment decisions with respect to the assets in the Portfolio. (d) GMSP shall exercise its discretion and discharge its obligations under this Agreement in compliance with all Applicable Laws. (e) GMSP shall employ and dedicate to GNA continuously during the term of this Agreement a qualified investment portfolio manager reasonably acceptable to GNA, who shall have the primary responsibilities of coordinating all aspects of the day-to-day investment activities of the Portfolio. (f) GNA acknowledges that GMSP has informed GNA that GMSP currently is not registered as an (i) investment adviser under the Investment Advisers Act of 1940, as amended, and all other Applicable Laws or (ii) a broker or dealer under the Securities Exchange Act of 1934, as amended, and all other Applicable Laws. INVESTMENT MANAGEMENT AGREEMENT 5 70 3. REPORTS. (a) GMSP shall provide to GNA periodic financial reports with respect to the assets in and investment performance of the Portfolio. The reports shall include such financial information in such format as GNA may reasonably request in connection with the administration of the Portfolio and a record of all transactions effected during the interim period from the preceding report, including the price per Security, the broker or dealer executing the transaction and the commissions paid. The reports shall be made with such frequency, but not less often than within 20 days following the end of each calendar month, as GNA may reasonably request in connection with the administration of the Portfolio; provided that the late delivery of a complete report no more than one time in any three-year period with respect to any particular Security in the Portfolio shall not constitute a Breach of this Agreement if (i) the delay was caused by the failure of an unaffiliated Person in providing information to GMSP that had been timely requested by GMSP, (ii) any portion of the report that is not dependent upon the unaffiliated Person is delivered to GNA by GMSP on a timely basis, and (iii) GMSP uses its commercially reasonable efforts to cause such late report to be delivered as promptly as practicable. (b) GMSP shall (i) afford GNA and its authorized representatives reasonable access to the GMSP Principals, GMSP's offices and other facilities, and all books, records and other documents of GMSP relating to the Portfolio or this Agreement and (ii) permit GNA and its authorized representatives to make such inspections and copies of all books, records and other documents as they may reasonably require to verify the accuracy of any report furnished pursuant to Section 3(a). 4. COMPENSATION; EXPENSES. (a) For services performed by GMSP, GNA agrees to pay to GMSP investment management fees (the "Fees") equal on an annual basis to (i) 30 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Short Term Debt or Investment Grade Debt Obligations at the end of a given calendar month or during a majority of the days in the given calendar month and (ii) 100 basis points multiplied by the Fair Market Value with respect to any portion of the Portfolio invested in Equity Securities or other alternative investments in Securities which are not Investment Grade Debt Obligations. The Fees otherwise payable with respect to any calendar month (or prorated portion thereof) shall be reduced by an amount equal to the sum of (i) the amount of fees, commissions and expenses paid by or on behalf of GNA to any investment or mutual fund from which any member of the GMSP Group is eligible to receive compensation or profits plus (ii) the amount of any fees paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group under Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended, plus (iii) the amount of any finder's fees, brokerage commissions or other benefit or compensation paid by or on behalf of GNA to or accrued for the benefit of any member of the GMSP Group in connection with any transaction in Securities pursuant to this Agreement. Notwithstanding anything to the contrary contained in this Agreement, (x) no Fees shall be payable with respect to any portion of the Portfolio invested in Cash during a majority of the days in the given calendar month and (y) the Committee and GMSP may agree upon a different Fee structure for special situations. (b) The Fees shall be based on the Fair Market Value of the assets in the Portfolio at the end of each calendar month, and shall be calculated at the end of each calendar month based upon the actual number of days elapsed during the calendar month, during which this Agreement is in effect over a year of 365 days. Within fifteen (15) days after the end of each calendar month, GNA shall pay to GMSP the Fees earned with respect to the preceding calendar month. In the event of termination prior to the end of a calendar month, GNA will pay to GMSP a prorated portion of the Fees based upon the Fair Market INVESTMENT MANAGEMENT AGREEMENT 6 71 Value of the assets in the Portfolio at the time of termination. No other fees, charges or assessments shall be payable by GNA to or for the benefit of GMSP or any member of the GMSP Group with respect to the services performed by GMSP pursuant to this Agreement, provided that GNA shall have the responsibility to reimburse GMSP for GMSP's payment of any amounts described pursuant to Section 4(d) below. There shall not be any annual reconciliation, adjustment or other "true-up" at the end of each calendar year. (c) GMSP shall be solely responsible for all of its general and administrative costs and expenses incurred in connection with performing its duties and obligations under this Agreement, which shall consist of all costs and expenses in connection with the provision of office space and facilities, equipment and personnel for servicing the investments of the Portfolio and the salaries and fees of all personnel employed by GMSP performing services relating to research, statistical and investment activities. (d) GNA shall be responsible for, and pay directly, the following costs and expenses related to GMSP's performance of its duties pursuant to this Agreement that are reasonable and payable to Persons not affiliated with the GMSP Group: (i) brokerage commissions and other costs, fees and expenses incurred in the purchase and sale of Securities; (ii) fees and expenses of custodians selected pursuant to Section 2(b); (iii) costs related to third party Proceedings involving GNA's ownership of Securities pursuant to this Agreement, directly or indirectly, including, without limitation, attorneys' fees incurred in connection therewith (but excluding all costs related to Proceedings or other disputes between GNA and GMSP or any member of the GMSP Group or which constitute Cause); (iv) interest on and fees and expenses arising out of all borrowings made by GNA with respect to the purchase of Securities, including, but not limited to, the arranging thereof; (v) taxes, fees or other governmental charges levied against GNA; and (vi) any other expense, whether ordinary or extraordinary, that is determined by the Committee to be appropriate for GNA to pay pursuant to this Agreement. (e) In discharging its duties pursuant to this Agreement, GMSP may give preference, and may cause GNA to pay higher negotiated commission rates, to unaffiliated brokers which, in addition to having the capacity of obtaining the best price for the Security itself and of executing the order with speed, efficiency and confidentiality, also provide Research to GMSP or GNA. Research furnished by brokers through whom Securities transactions are effected may be used by GMSP in servicing all of its accounts, and there shall be no reduction in the compensation of GMSP hereunder as a consequence of its receipt of such Research. In the allocation of brokerage, however, GMSP must determine in good faith, and demonstrate to GNA upon request, that the amount of the commission is reasonable in relation to the value of the brokerage services and Research provided by the broker, viewed in terms of either the particular transaction or GMSP's overall responsibilities with respect to the Portfolio. In the allocation of brokerage for the Portfolio, GMSP shall be subject always to Applicable Law and such policies and requirements that the Committee may adopt or approve as reflected in the Policy Letter. INVESTMENT MANAGEMENT AGREEMENT 7 72 (f) In the event that, in any calendar month, the aggregate amount of Fees (as such term is defined in the respective GNA Investment Management Agreements) paid to GMSP by the GNA Entities pursuant to the GNA Investment Management Agreements is less than $75,000, GNA shall pay to GMSP an amount equal to the product of (i) the quotient of the Fair Market Value of the Portfolio divided by the Fair Market Value of all of the Portfolios (as such term is defined in the respective GNA Investment Management Agreements) of all of the GNA Entities, multiplied by (ii) an amount equal to the difference between $75,000 and the sum of the aggregate Fees paid to GMSP by all of the GNA Entities with respect to such calendar month. 5. ACTIVITIES OF GMSP. (a) The services of GMSP to GNA are not deemed to be exclusive, and GMSP shall be free to engage in any other business or to render similar services to others. GMSP and any member of the GMSP Group may engage independently or with others, for its or their own accounts and for the accounts of others, in other business ventures and activities of every nature and description, including, without limitation, purchasing, selling or holding Securities for the account of any other Person or for its or his own account, including Securities included within the Portfolio or eligible for investment pursuant to this Agreement; provided, that the management of such entities and accounts do not interfere with the performance of their obligations and duties to GNA pursuant to this Agreement. GNA shall not have any rights or obligations by virtue of this Agreement in and to such independent ventures and activities or the income or profits derived therefrom. The foregoing notwithstanding, without the prior written consent of GNA in a specific case, GMSP shall at all times adhere, and cause the members of the GMSP Group or the GMSP Principals, as the case may be, to adhere, to the following: (i) Neither GMSP nor any member of the GMSP Group shall act, either as principal or agent, on the opposite side of any transaction in which GNA or the Portfolio is involved. (ii) GMSP and each GMSP Principal shall at all times (A) place the interests of GNA before such member's personal transactional interests; (B) conduct all personal transactions in Securities in such a manner as to avoid any actual or potential conflict of interest or abuse of such Person's position of trust and confidence in relation to GNA; and (C) promptly disclose to GNA all personal transactions made by or on behalf of such Person in Securities which are or were at any time during the preceding two years in the Portfolio or issued by Persons whose Securities are in the Portfolio. (b) On any issue involving an actual or potential conflict of interest which is not specifically authorized by or pursuant to this Agreement, GMSP shall submit such issue to the Committee for prior approval, and shall take such actions, if any, as are determined by the Committee to be necessary or appropriate to ameliorate the conflict of interest. If GMSP carries out the actions specified by the Committee in respect of a matter giving rise to a conflict of interest, neither GMSP nor any member of the GMSP Group shall have any liability to GNA in respect of actions taken in good faith by them as a consequence of the approval by the Committee. (c) GMSP shall be liable for any breach of this Section 5 by any member of the GMSP Group as if GMSP had committed such breach. 6. DURATION AND TERMINATION. The term of this Agreement shall commence on the date of this Agreement and shall continue until terminated: INVESTMENT MANAGEMENT AGREEMENT 8 73 (a) by the written agreement of GNA and GMSP; (b) by GMSP upon not less than 90 days written notice to GNA at any time after the third anniversary hereof; (c) by GNA upon not less than 90 days written notice to GMSP at any time after the third anniversary hereof; (d) by GNA, at any time, immediately upon written notice to GMSP following (i) the good faith determination by both the Committee and two-thirds of the members of the Board (excluding members of the Board designated for election by GMSP or its successors in interest under the Securities Purchase Agreement or otherwise affiliated with GMSP) that an event that constitutes Cause has occurred and is continuing beyond any applicable period for notice and opportunity to cure or (ii) the commencement by a Governmental Authority of any Proceeding alleging any matter which, if proven, would constitute Cause. (e) by GMSP upon not less than 10 days notice in the event that GNA defaults in the performance of any of its material obligations hereunder and such default continues for not less than 10 days after GNA receives notice of such default; provided, however, that in the event that such default is of a nature that it cannot, with due diligence, be cured within 10 days, GMSP may not terminate this Agreement so long as GNA begins to cure such default within 10 days and thereafter diligently pursues such cure to completion. Termination of this Agreement shall not terminate GMSP's obligations under Section 3 to furnish reports concerning facts and circumstances prior to termination or under Section 11 to maintain the confidentiality of Confidential Information, terminate GNA's obligations to pay fees earned by GMSP prior to the date of termination, or terminate either party's obligations to indemnify the other party pursuant to this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF GMSP. (a) GMSP is a limited partnership duly organized, validly existing and in good standing under the Texas Revised Limited Partnership Act, as amended, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GMSP is duly qualified and in good standing (to the extent applicable) to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GMSP Material Adverse Effect. (b) GMSP has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GMSP. This Agreement has been duly and validly executed and delivered by GMSP and, assuming the due authorization, execution and delivery hereof by GNA, constitutes the valid and binding obligation of GMSP, enforceable against GMSP in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. INVESTMENT MANAGEMENT AGREEMENT 9 74 (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GMSP other than with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GMSP do not and will not result in any violation by GMSP under any provisions of: (i) the partnership agreement or similar governing documents of GMSP; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GMSP or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GMSP is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect; (e) There is no Proceeding pending, or to the knowledge of GMSP, threatened against GMSP that questions the validity of this Agreement or any action to be taken by GMSP in connection with this Agreement except as could not, individually or in the aggregate, reasonably be expected to have a GMSP Material Adverse Effect. (f) GMSP is, and during the term of this Agreement will continue to be (i) either exempt from registration or duly registered as an investment adviser under the Investment Advisers Act of 1940 and all Applicable Laws and (ii) qualified and eligible to manage the Portfolio under the statutes and regulations administered by the GNA Applicable Insurance Department, provided that GNA shall inform GMSP immediately in the event that GNA becomes aware of any changes in the qualification and eligibility requirements with respect to such statutes and regulations. GMSP will provide prompt written notice to GNA if GMSP ceases to be so registered or qualified or becomes aware of any fact, event or circumstance which will or is reasonably likely to cause it to cease to be so registered or qualified. (g) Taken in the aggregate, the factual information (including, without limitation, information regarding its knowledge, investment experience and investment track record) furnished by GMSP to GNA in writing for purposes of this Agreement did not contain untrue statements of material facts, or omit to state material facts necessary to make the statements made not misleading in the light of the circumstances under which they were made, as of the date as of which such information is dated. All financial forecasts prepared and furnished by GMSP to GNA were prepared in good faith on the basis of assumptions believed to be reasonable and data, information, tests or conditions believed to be valid or accurate or to exist at the time such forecasts were prepared. (h) All of the equipment, Software and computer hardware owned or used by GMSP or used and operated by third parties on behalf of GMSP, which performs or is or may be required to perform functions involving dates or the computation of dates, or containing date related data, has the programming, design and performance capabilities to ensure that: INVESTMENT MANAGEMENT AGREEMENT 10 75 (i) it will not suffer any Malfunction that would reasonably be expected to have a GMSP Material Adverse Effect; and (ii) it will not, as a result of the date change at the end of the twentieth century or the input, processing, storage or use of dates up to and including December 31, 2001, (A) be adversely affected, (B) require changes in inputting or operating practices, (C) produce invalid or incorrect output or results, (D) cause any abnormal ending scenario, or (E) suffer any diminution in functionality or performance that, in any of the above, could reasonably be expected to have a GMSP Material Adverse Effect. 8. REPRESENTATIONS AND WARRANTIES OF GNA. (a) GNA is an insurance company duly organized and validly existing under the laws of the State of North Dakota, and has the power and authority to own all of its properties and assets and to carry on its business as now being conducted. GNA is duly qualified and in good standing to transact business in each jurisdiction in which the performance of its obligations hereunder require such qualification except where the failure to be duly qualified or in good standing would not have or reasonably be expected to have a GNA Material Adverse Effect. (b) GNA has all requisite power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of GNA. This Agreement has been duly and validly executed and delivered by GNA and, assuming the due authorization, execution and delivery hereof by GMSP, constitutes the valid and binding obligation of GNA, enforceable against GNA in accordance with its terms, except as would be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies, including specific performance, may be subject to the discretion of any court before which any proceeding therefor may be brought. (c) No declaration, filing or registration with, or notice to or authorization, consent or approval of any Governmental Authority is necessary for the execution, delivery and performance of this Agreement by GNA other than with the GNA Applicable Insurance Department. (d) The execution, delivery and performance of this Agreement by GNA do not and will not result in any violation by GNA under any provisions of: (i) articles of incorporation or similar governing documents of GNA; (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any Governmental Authority applicable to GNA or any of its properties or assets; or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which GNA is now a party or by which it or any of its properties or assets may be bound or affected; excluding from the foregoing clauses (ii) and (iii) such violations as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. INVESTMENT MANAGEMENT AGREEMENT 11 76 (e) There is no Proceeding pending, or to the knowledge of GNA, threatened against GNA that questions the validity of this Agreement or any action to be taken by GNA in connection with this Agreement except as could not, in the aggregate, reasonably be expected to have a GNA Material Adverse Effect. (f) GNA has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of entering into this Agreement. (g) No part of the funds to be used to purchase and hold Securities or to pay any amounts pursuant to this Agreement constitutes an asset of any employee benefit plan within the meaning of Section 3 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and GNA is not a "benefit plan investor" (as such term is defined in 29 C.F.R. ss.2510.3-101(f)(2)). 9. LIABILITY. It is recognized that decisions concerning investments or potential investments involve the exercise of judgment and the risk of loss. To the extent permitted by Applicable Law, neither GMSP nor any of its officers, directors, or employees nor other members of the GMSP Group shall be liable for any loss suffered by GNA on account of such investments, or any act taken or omission made in good faith under this Agreement. For purposes of the foregoing sentence, no action or omission by GMSP shall be considered to have been made "in good faith" if GMSP was negligent, violated any law, or made any misrepresentation (whether affirmatively or by omission). 10. INDEMNIFICATION. (a) GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any and all claims, actions, causes of action, demands, losses, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from (i) any Breach by GNA of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto or (ii) any Proceeding brought against any of them by a Person other than GNA or any of its Affiliates, Associates or shareholders in respect of any action taken in good faith on behalf of GNA in the course of the performance of GMSP's duties under this Agreement; provided, however, that GNA shall indemnify, defend, and hold harmless GMSP and the GMSP Principals from and against any reasonable expenses incurred by such Person(s) in connection with a Proceeding brought against any of them by any of GNA's shareholders if such Person(s) is wholly successful, on the merits or otherwise, in the defense of such Proceeding, and provided, further, that GNA's obligation to indemnify, defend and hold harmless as provided in this Section 10(a) shall not apply to the first $750,000 in the aggregate of claims hereunder (other than claims for expenses in defending a Proceeding for which the Person is entitled to indemnification under clause (ii) of this Section) and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (b) GMSP shall indemnify, defend, and hold harmless GNA and its Affiliates, Associates, directors, officers and employees from and against any and all Damages asserted against, resulting to, imposed upon, or incurred by any of them, directly or indirectly, by reason of or resulting from any Breach by GMSP of any of its representations, warranties, covenants, or agreements contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto; provided, however, that GMSP's obligation to indemnify, defend and hold harmless as provided in this Section 10(b) shall not apply INVESTMENT MANAGEMENT AGREEMENT 12 77 to the first $750,000 in the aggregate of claims hereunder and provided, further, that such $750,000 amount shall be reduced dollar-for-dollar by an amount equal to the cumulative aggregate of all claims made under one or more of the GNA Investment Management Agreements. (c) Promptly after receipt by an indemnified party under Section 10(a) or (b) of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests which renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. The indemnifying party shall have no liability with respect to any compromise or settlement of any action effected without its written consent (which shall not be unreasonably withheld). 11. CONFIDENTIALITY. Each of GMSP and GNA shall keep all Confidential Information in confidence, and shall not disclose said information to any other party other than such party's employees, advisors, attorneys and accountants, who will be advised of the confidential nature of information. Each party shall protect the Confidential Information with the same degree of care as such party normally uses in the protection of its confidential and proprietary information. Each party further agrees not to use Confidential Information for any purpose except in connection with the performance of its duties under this Agreement. The restrictions set forth herein shall not apply with respect to Confidential Information which (i) is already generally available to the public when received by such party; (ii) becomes available to the public through no fault of any member of the GMSP Group or GNA, as applicable; or (iii) is required to be disclosed by Applicable Law or a Governmental Authority. 12. INSURANCE. GMSP shall maintain at all times during the term of this Agreement fiduciary liability insurance of the type customary for investment managers in similar situations naming GNA as an insured with such limits, terms, conditions and "tail" provisions as are reasonably acceptable to GNA and GMSP and shall provide GNA with complete copies of all binders and other policy information. GMSP also shall obtain and maintain a fidelity bond in the amount of not less than $5,000,000 and otherwise containing terms and conditions reasonably acceptable to GNA. In the event that any such policy or bond is canceled or suspended, GMSP promptly shall notify GNA in writing. 13. NOTICES. All notices required to be given in writing hereunder shall be deemed to have been given if (i) delivered personally or by documented courier or delivery service, (ii) transmitted by facsimile or (iii) mailed by registered or certified mail (return receipt requested and postage prepaid) to the following INVESTMENT MANAGEMENT AGREEMENT 13 78 listed Persons at the addresses and facsimile numbers specified below, or to such other Persons, addresses or facsimile numbers as a party entitled to notice shall give, in the manner hereinabove described, to the others entitled to notice: If to GMSP, to: 777 Main Street, Suite 2250 Fort Worth, Texas 76102 Attention: J. Randall Chappel Fax: (817) 820-6651 If to GNA, to: 500 Commerce Street Fort Worth, Texas 76102-5439 Attention: President Fax: (817) 338-1454 If given personally or by documented courier or delivery service, a notice shall be deemed to have been given when it is received. If transmitted by facsimile, a notice shall be deemed to have been given on the date received, if electronic confirmation of receipt occurs during normal business hours on a Business Day, and otherwise, on the first Business Day following electronic confirmation of receipt. If given by mail, it shall be deemed to have been given on the third Business Day following the day on which it was posted. 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 15. NATURE OF RELATIONSHIP. The parties hereto intend that the services provided by GMSP to GNA pursuant to this Agreement are being provided as an independent contractor. Nothing contained in this Agreement shall constitute or be construed to be or create a general partnership or joint venture between GMSP and GNA or their respective successors or assigns. 16. BINDING EFFECT; ASSIGNMENT; NO THIRD PARTY BENEFIT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns. Neither this Agreement nor any of the rights, interests, or obligations hereunder may be assigned by either of the parties hereto without the prior written consent of the other party. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person other than the parties hereto, and their respective heirs, legal representatives, successors, and permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement. 17. INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. For purposes of this Agreement, the words "includes" and "including" shall mean "including without limitation" and the word "or" is used in the inclusive sense. All capitalized terms defined herein are equally applicable to both the singular and plural forms. 18. SEVERABILITY. In the event that this Agreement, or any of its provisions, or the performance of any provision, is found to be illegal or unenforceable under applicable law now or hereafter in effect, the parties shall be excused from performance of such portions of this Agreement as shall be found to be illegal or unenforceable under the applicable laws or regulations without affecting the validity of the remaining provisions of the Agreement. INVESTMENT MANAGEMENT AGREEMENT 14 79 19. TIME OF ESSENCE. With regard to all dates and time periods set forth in this Agreement, time is of the essence. 20. NO WAIVER OF PRIVILEGE. Neither GNA nor GMSP nor any of their respective subsidiaries or affiliates waives any attorney-client, work product or other privilege with respect to any information furnished pursuant to this Agreement. 21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. 22. COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, the parties hereto. INVESTMENT MANAGEMENT AGREEMENT 15 80 IN WITNESS WHEREOF, GMSP and GNA have caused this Agreement to be executed all as of the day and year first above written. MIDWEST CASUALTY INSURANCE COMPANY a North Dakota insurance corporation By: /s/ Herbert A. Hill ------------------------------------------ Herbert A. Hill, President GOFF MOORE STRATEGIC PARTNERS, L.P., a Texas limited partnership By: GMSP Operating Partners, L.P., its general partner By: GMSP, L.L.C., its general partner By: /s/ John C. Goff ------------------------------------- John C. Goff, Managing Principal By: /s/ J. Randall Chappel ------------------------------------- J. Randall Chappel, Principal INVESTMENT MANAGEMENT AGREEMENT 16 EX-10.14 4 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.14 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is made as of November 17, 1999, by and among GAINSCO, INC., a Texas corporation ("Buyer"), Herbert A. Hill ("Hill"), Alan E. Heidt ("Heidt" and together with Hill, the "Sellers") and Tri-State, Ltd., a North Dakota corporation ("TSL"). RECITALS: WHEREAS, Sellers are the record and beneficial owners of all of the outstanding capital stock of TSL; and WHEREAS, Sellers desire to sell, and Buyer desires to purchase, all of the issued and outstanding shares of the capital stock of TSL (the "Shares") for the consideration and on the terms set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, mutual covenants and agreements set forth and for other good and valuable consideration, the adequacy, sufficiency and receipt of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms have the meanings specified or referred to in this Article I: "Acquired Company" -- any of TSL or its Subsidiaries, and the term "Acquired Companies" means TSL and its Subsidiaries, collectively. "Applicable Contract" -- any Contract (a) under which any Acquired Company has or may acquire any rights, (b) under which any Acquired Company has or may become subject to any obligation or liability, or (c) by which any Acquired Company or any of the assets owned or used by it is or may become bound. "Best Efforts" -- the efforts that a prudent Person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously as possible. "Breach" -- a "Breach" of a representation, warranty, covenant, obligation, or other provision of this Agreement or any instrument delivered pursuant to this Agreement will be deemed to have occurred if there is or has been (a) any inaccuracy in or breach of, or any failure to perform or STOCK PURCHASE AGREEMENT 1 2 comply with, such representation, warranty, covenant, obligation, or other provision, or (b) any claim (by any Person) or other occurrence or circumstance that is or was inconsistent with such representation, warranty, covenant, obligation, or other provision, and the term "Breach" means any such inaccuracy, breach, failure, claim, occurrence, or circumstance. "Buyer's Disclosure Letter" -- the disclosure letter delivered by Buyer to Sellers concurrently with the execution and delivery of this Agreement. "Closing Date" -- the date and time as of which the Closing actually takes place. "Consent" -- any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization). "Contemplated Transactions" -- all of the transactions contemplated by this Agreement, including (a) the sale of the Shares by Sellers to Buyer; (b) the execution, delivery, and performance of the Hill Employment Agreement, the Heidt Employment Agreement and the Sellers' Release; (c) the performance by Buyer, Sellers and TSL of their respective covenants and obligations under this Agreement; and (d) Buyer's acquisition and ownership of the Shares and exercise of control over the Acquired Companies. "Contract" -- any agreement, contract, obligation, promise, or undertaking (whether written or oral and whether express or implied) that is legally binding, including any contract of insurance or reinsurance written by or for the benefit of the specified Person "December 31, 1999 Audit" -- the audit of the balance sheets and related statements of income, changes in shareholders' equity, and cash flow for the Acquired Companies as of and for the year ended December 31, 1999, performed by Eide Bailly, LLP, independent certified public accountants. "Employee Benefit Plan" -- any "Employee Pension Benefit Plan" (as defined in Section 3(2) of ERISA), "Employee Welfare Benefit Plan" (as defined in Section 3(1) of ERISA), "Multi-employer Plan" (as defined in Section 3(37) of ERISA), plan of deferred compensation, medical plan, life insurance plan, long-term disability plan, dental plan or other plan providing for the welfare of any of TSL's employees or former employees or beneficiaries thereof (as applicable), personnel policy (including but not limited to vacation time, holiday pay, bonus programs, moving expense reimbursement programs and sick leave), excess benefit plan, bonus or incentive plan (including but not limited to stock options, restricted stock, stock bonus and deferred bonus plans), salary reduction agreement, change-of-control agreement, employment agreement, consulting agreement or any other benefit, program or contract. "Encumbrance" -- any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, STOCK PURCHASE AGREEMENT 2 3 including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership. "Environmental Law" -- the Federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Water Pollution Control Act, the Safe Drinking Water Act, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act, the Hazardous Materials Transportation Act, the Federal Solid Waste Disposal Act, the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Occupational Safety and Health Act, each as amended, and all other environmental statutes enacted by any Governmental Body, and any executive order, ordinances, rules or regulations promulgated under any of the foregoing. "ERISA" -- the Employee Retirement Income Security Act of 1974 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Facilities" -- any real property, leaseholds, or other interests currently or formerly owned or operated by any Acquired Company and any buildings, plants, structures, or equipment (including motor vehicles) currently or formerly owned or operated by any Acquired Company. "GAAP" -- United States generally accepted accounting principles, applied on a basis consistent with the basis on which the TSL Balance Sheet and the other financial statements referred to in Section 3.4 were prepared. "Governmental Authorization" -- any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement. "Governmental Body" -- any (a) nation, state, county, city, town, village, district, or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign, or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal); (d) multi-national organization or body; or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature. "Hazardous Materials" -- any waste or other substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, radioactive, or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials. "Insurance Permit" -- any Governmental Authorization in any jurisdiction to underwrite, place, sell or otherwise transact insurance or reinsurance, or to engage in other insurance-related activities. STOCK PURCHASE AGREEMENT 3 4 "Investment Guidelines" -- a written statement of the current investment programs, containing the investment policies and guidelines. "IRC" -- the Internal Revenue Code of 1986 or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law. "IRS" -- the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. "Knowledge" -- an individual will be deemed to have "Knowledge" of a particular fact or other matter if (a) such individual is actually aware of such fact or other matter; or (b) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation concerning the existence of such fact or other matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving, or who has at any relevant time served, as a director or officer of such Person has, or at any time had, knowledge of such fact or other matter and the matter is within the scope of duties of that individual. "Legal Requirement" -- any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty. "Order" -- any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator. "Ordinary Course of Business" -- an action taken by a Person will be deemed to have been taken in the "Ordinary Course of Business" only if (a) such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; (b) such action is not required to be authorized by the board of directors of such Person (or by any Person or group of Persons exercising similar authority); and (c) such action is similar in nature and magnitude to actions customarily taken, without any authorization by the board of directors (or by any Person or group of Persons exercising similar authority), in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as such Person. "Organizational Documents" -- the articles or certificate of incorporation and the bylaws of a corporation and any amendment thereto. "Person" -- any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body. STOCK PURCHASE AGREEMENT 4 5 "Plan Affiliate" -- with respect to any Person, any other person or entity with whom the Person constitutes all or part of a controlled group, or which would be treated with the Person as under common control or whose employees would be treated as employed by the Person, under Section 414 of the IRC and any regulations, administrative rulings and case law interpreting the foregoing. "Proceeding" -- any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. "Proprietary Rights Agreement" -- any confidentiality, noncompetition, or proprietary rights agreement. "Related Person" -- with respect to a particular individual, (a) each other member of such individual's Family; (b) any Person that is directly or indirectly controlled by such individual or one or more members of such individual's Family; (c) any Person in which such individual or members of such individual's Family hold (individually or in the aggregate) a Material Interest; and (d) any Person with respect to which such individual or one or more members of such individual's Family serves as a director, officer, partner, executor, or trustee (or in a similar capacity). With respect to a specified Person other than an individual, (a) any Person that directly or indirectly controls, is directly or indirectly controlled by, or is directly or indirectly under common control with such specified Person; (b) any Person that holds a Material Interest in such specified Person; (c) each Person that serves as a director, officer, partner, executor, or trustee of such specified Person (or in a similar capacity); (d) any Person in which such specified Person holds a Material Interest; (e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity); and (f) any Related Person of any individual described in clause (b) or (c). For purposes of this definition, (a) the "Family" of an individual includes (i) the individual, (ii) the individual's spouse and former spouses, (iii) any other natural person who is related to the individual or the individual's spouse within the second degree, and (iv) any other natural person who resides with such individual, and (b) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting securities or other voting interests representing at least ten percent (10%) of the outstanding voting power of a Person or equity securities or other equity interests representing at least ten percent (10%) of the outstanding equity securities or equity interests in a Person. "Release" -- any spilling, leaking, emitting, discharging, depositing, escaping, leaching, dumping, or other releasing into the Environment, whether intentional or unintentional. STOCK PURCHASE AGREEMENT 5 6 "Representative" -- with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors. "Securities Act" -- the Securities Act of 1933 or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "Sellers' Disclosure Letter" -- the disclosure letter delivered by Sellers to Buyer concurrently with the execution and delivery of this Agreement. "Subsidiary" -- with respect to any Person (the "Owner"), any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Owner or one or more of its Subsidiaries. "Tax" -- any tax (including any income tax, capital gains tax, value-added tax, sales tax, property tax, gift tax or estate tax), levy, assessment, tariff, duty (including any customs duty), deficiency or other fee, and any related charge or amount (including any fine, penalty, interest or addition to tax), imposed, assessed or collected by or under the authority of any Governmental Body or payable pursuant to any tax-sharing agreement or any other Contract relating to the sharing or payment of any such tax, levy, assessment, tariff, duty, deficiency or fee. "Tax Return" -- any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax. "Threatened" -- a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing), or if any other event has occurred or any other circumstances exist, that would lead a prudent Person to conclude that such a claim, Proceeding, dispute, action, or other matter is likely to be asserted, commenced, taken, or otherwise pursued in the future. "Year 2000 Compliant" -- with respect to any item of software or hardware shall mean that such item will operate after the year 2000 and will correctly keep track of dates before and after the year 2000 and will interface with other applications by correctly providing date output both before and after the year 2000. STOCK PURCHASE AGREEMENT 6 7 ARTICLE II SALE AND TRANSFER OF SHARES; CLOSING 2.1 SHARES. Subject to the terms and conditions of this Agreement, at the Closing, Sellers will sell and transfer the Shares to Buyer, and Buyer will purchase the Shares from Sellers. 2.2 PURCHASE PRICE. (a) The purchase price (the "Purchase Price") for the Shares shall be (i) $6,000,000 in cash (the "Initial Purchase Price"), subject to adjustment pursuant to Section 2.2(c) below, plus (ii) the payments made pursuant to Section 2.3 hereof, if any. (b) Within thirty (30) days following the receipt of audited consolidated financial statements for the Acquired Companies as of December 31, 1999, Buyer shall deliver to the Sellers' Advisory Representative (defined below) a written calculation of the Book Value Change (defined in Section 2.3(a) below). If the Sellers' Advisory Representative does not deliver a written objection with respect to the calculation of the Book Value Change to Buyer within ten (10) days after the receipt by the Sellers' Advisory Representative of the Buyer's calculation, such calculation shall be conclusive and binding upon the parties to this Agreement. If the Sellers' Advisory Representative does deliver a timely written objection with respect to the calculation of the Book Value Change, the calculation of the Book Value Change shall be submitted to an Independent CPA Firm (defined below), whose calculation of the Book Value Change shall be completed within thirty (30) days after submission and shall be conclusive and binding upon the parties to this Agreement. (c) Upon the later of (i) thirty (30) days following the date that the calculation of the Book Value Change is conclusive and binding upon the parties or (ii) the Closing Date, if the Book Value Change is a positive number, Buyer will pay to Seller an amount (the "Book Value Adjustment Amount") equal to the Book Value Change plus interest on the amount of the Book Value Change, accruing from the Closing Date at the Applicable Rate (defined below). If the Book Value Change is a negative number, Buyer shall offset from the Integration Consideration (defined below) otherwise payable to Sellers, an amount in the aggregate equal to the Book Value Change, plus interest accruing from the Closing Date on the amount of the Book Value Change at the Applicable Rate. 2.3 INTEGRATION CONSIDERATION AND EARNOUT PAYMENTS. (a) The terms below shall have the following respective meanings for the purposes of this Section 2.3: "Acquired Companies" means, for purposes of this Section 2.3, TSL and its Subsidiaries, collectively, and any business or businesses conducted by Buyer, or by any Subsidiaries or affiliated corporations of Buyer, that represent a succession to and a continuation of the business conducted by TSL and its Subsidiaries, collectively, as the same may be expanded or contracted from and after Closing. STOCK PURCHASE AGREEMENT 7 8 "Applicable Rate" means the annual rate on 13-week U.S. Government Treasury Bills as of the most recent auction date for which results are quoted in the "Money Rates" section of the "Wall Street Journal" on the Closing Date. "Book Value Change" means the change in the book value, computed in accordance with GAAP, of TSL from December 31, 1998 to December 31, 1999. As used in this definition, "book value" means total assets less total liabilities. "Computation Statement" means a statement setting forth in reasonable detail Buyer's calculation of the Pre-Tax Earnings of the Acquired Companies during the applicable Earnout Period and the calculation of the Earnout Amount for such Earnout Period. "Earned Premiums" means earned premiums as determined in accordance with GAAP. "Earnout Commencement Date" means January 1, 2001, or such earlier date that is mutually agreed upon by Buyer and Sellers and that is the first day of a calendar quarter. "Earnout Consideration" means the sum of $3,000,000. "Earnout Period" means the following periods, as applicable: (i) the first Earnout Period will commence on the Earnout Commencement Date and will terminate one day prior to the first anniversary of the Earnout Commencement Date; (ii) the second Earnout Period will commence on the first anniversary of the Earnout Commencement Date and will terminate one day prior to the second anniversary of the Earnout Commencement Date; and (iii) the third Earnout Period will commence on the second anniversary of the Earnout Commencement Date and will terminate one day prior to the third anniversary of the Earnout Commencement Date. "Earnout Ratio" means, for each applicable Earnout Period, the quotient of (i) the difference between (A) Pre-Tax Earnings for that Earnout Period and (B) the Threshold Earnout Level for that Earnout Period divided by (ii) $2,000,000; provided, however, that in the event the Threshold Earnout Level for such Earnout Period is equal to or exceeds the Pre-Tax Earnings for the Earnout Period, the Earnout Ratio shall be zero (0). "Incurred Losses and Loss Adjustment Expenses" means, for any period, (A) case basis reserves plus losses incurred but not reported ("IBNR"), including development of losses for the applicable Earnout Period, as of the end of the period, using the latest information available at the conclusion of each Earnout Period or Release Period, plus (B) losses and Loss Adjustment Expenses paid during the period and less (C) case basis reserves plus IBNR, including development of losses for the applicable Earnout Period, as of the beginning of the period, using the latest information available at the conclusion of each Earnout Period or Release Period. STOCK PURCHASE AGREEMENT 8 9 "Independent Actuarial Firm" means either Tillinghast-Towers Perrin or Milliman & Robertson, Inc., whichever is mutually agreed upon by Buyer and the Sellers' Advisory Representative. "Independent CPA Firm" means a national public accounting firm selected by Buyer and reasonably satisfactory to the Sellers' Advisory Representative. "Integration Date" means the latest to occur of (i) the date on which ninety percent (90%) or more of the personal auto policies in force as of the Closing Date written by or through the Acquired Companies are policies in force of Subsidiaries of Buyer, (ii) the date on which Buyer's Lalande Group electronic data processing systems and work flow systems, or alternative systems designated by Buyer have been installed on site and are functional or (iii) the Closing Date. "Loss Adjustment Expenses" means, for any period, expenses incurred in the course of investigating and settling claims, including, without limitation, legal and adjusters' fees and the costs of paying claims and related expenses. "Loss Ratio" means, for any period, the quotient of (i) Incurred Losses and Loss Adjustment Expenses for the period and (ii) Earned Premiums for the period. "Payment Date" means the date sixty (60) days after the termination of each Earnout Period (or the next succeeding business day if such date is not a business day). "Pre-Tax Earnings" means, for each Earnout Period, the difference between (i) the net earnings, before all income taxes and interest expense, of Buyer and its Subsidiaries, attributable to the operation of the Acquired Companies, minus (ii) the amount of the Support Functions Reimbursement, calculated in accordance with GAAP. Pre-Tax Earnings shall be calculated (x) on the accrual basis of accounting in accordance with GAAP and (y) as though the Acquired Companies were a single corporation with all of its shares owned by persons who are neither directly nor indirectly related to Buyer. "Release Date" means the date sixty (60) days after the termination of each Release Period (or the next succeeding business day if such date is not a business day). "Release Period" means the following periods, as applicable: (i) the first Release Period for the first Earnout Period will commence one day after the termination date of the first Earnout Period and will terminate on the first anniversary of such termination date, and the second Release Period for the first Earnout Period will commence one day after the first anniversary of the termination date of the first Earnout Period and will terminate on the second anniversary of such termination date; (ii) the first Release Period for the second Earnout Period will commence one day after the termination date of the second Earnout Period and will terminate on the first anniversary of such termination date, and the second STOCK PURCHASE AGREEMENT 9 10 Release Period for the second Earnout Period will commence one day after the first anniversary of the termination date of the second Earnout Period and will terminate on the second anniversary of such termination date; and (iii) the first Release Period for the third Earnout Period will commence one day after the termination date of the third Earnout Period and will terminate on the first anniversary of such termination date, and the second Release Period for the third Earnout Period will commence one day after the first anniversary of the termination date of the third Earnout Period and will terminate on the second anniversary of such termination date. "Reserve Adjustment" means the amount of reserve adjustments for increases (compared to the amounts therefor set forth on the audited TSL balance sheet at December 31, 1999) in ultimate estimated liabilities relating to 1999 and prior accident years. The Reserve Adjustment shall be calculated by Buyer and delivered to the Sellers' Advisory Representative at least sixty (60) days prior to the Payment Date for the first Earnout Period. If the Sellers' Advisory Representative does not deliver to Buyer a written objection with respect to the calculation of the Reserve Adjustment within ten (10) days following receipt, the calculation of the Reserve Adjustment shall be conclusive and binding upon the parties to this Agreement. If the Sellers' Advisory Representative does deliver a timely written objection with respect to the calculation of the Reserve Adjustment, the calculation of the Reserve Adjustment shall be submitted to an Independent Actuarial Firm, whose calculation of the Reserve Adjustment shall be conclusive and binding upon the parties to this Agreement. If the Reserve Adjustment calculated in accordance with the foregoing is determined to be negative due to net decreases in ultimate estimated liabilities relating to 1999 and prior accident years, the Reserve Adjustment will be zero (0). "Sellers' Advisory Representative" means Hill, acting on behalf of himself and Heidt, together. "Subsequent Earnout Payment" means (i) the $1,000,000 for that Earnout Period multiplied by (ii) the Earnout Ratio for that Earnout Period. "Support Functions Reimbursement" means a reasonable monthly fee charged to the Acquired Companies to cover Buyer's expenses in connection with providing direct support functions as are reasonably necessary or desirable, such as information systems support, actuarial support, human resources support and accounting support. In the event the Acquired Companies require special attention for any unusual circumstance in any month, the monthly fee may be increased for that month to reflect a reasonable amount for the services provided. In such case Buyer shall provide, as part of its Computation Statement, the basis for such increased monthly fee. "Threshold Earnout Level" means the following amounts, corresponding to the applicable Earnout Period: (i) for the first Earnout Period, $2,000,000; (ii) for the second Earnout Period, $2,500,000; and (iii) for the third Earnout Period, $3,000,000. STOCK PURCHASE AGREEMENT 10 11 (b) INTEGRATION CONSIDERATION. Except as provided in this Agreement, Buyer will deliver to Sellers additional consideration (the "Integration Consideration") for the Shares equal to $1,500,000 within thirty (30) days after the Integration Date. Additionally, in the event that electronic data processing systems and work flow systems of Buyer's Lalande Group, or alternative systems designated by Buyer, are not installed on site and functional on or prior to ninety (90) days following the Closing Date, then Buyer shall deliver to Sellers as part of the Integration Consideration interest accruing from the ninety-first (91st) day following the Closing Date on the Integration Consideration at the Applicable Rate. As provided in Section 2.2(c), if the Book Value Change is a negative number, Buyer shall offset against the Integration Consideration an amount in the aggregate equal to the Book Value Change plus interest accruing from the Closing Date on the amount of the integral Book Value Change at the Applicable Rate. (c) SUBSEQUENT EARNOUT PAYMENTS (i) On the Payment Date for the first Earnout Period, Buyer will deliver to Sellers (A) additional consideration (the "First Earnout Period Subsequent Earnout Payment") for the Shares, equal to the Subsequent Earnout Payment for the first Earnout Period multiplied by 50%; provided, however, that the amount paid pursuant to this clause (i) shall not exceed $500,000 for the first Earnout Period minus (B) an amount equal to the Reserve Adjustment, unless such amount is less than zero, in which case Buyer shall pay no amount to Seller, and further provided that if such amount is less than zero, no amount shall be paid by Sellers. (ii) On the Payment Date for the second Earnout Period, Buyer will deliver to Sellers additional consideration (the "Second Earnout Period Subsequent Earnout Payment") for the Shares equal to 50% of the Subsequent Earnout Payment for the second Earnout Period; provided, however, that the amount paid pursuant to this clause (ii) shall not exceed $500,000 for the second Earnout Period. (iii) On the Payment Date for the third Earnout Period, Buyer will deliver to Sellers additional consideration (the "Third Earnout Period Subsequent Earnout Payment") for the Shares equal to 50% of the Subsequent Earnout Payment for the third Earnout Period; provided, however, that the amount paid pursuant to this clause (iii) shall not exceed $500,000 for the third Earnout Period. (iv) At the conclusion of each Earnout Period, Buyer shall prepare a Computation Statement for the Earnout Amount earned during such Earnout Period and shall provide such Computation Statement to the Sellers' Advisory Representative for his review and comments within forty-five (45) days after the termination of such Earnout Period. If, within thirty (30) days after delivery of the Computation Statement to the Sellers' Advisory Representative, the Sellers' Advisory Representative has not given written notice to Buyer disputing such statement and indicating the basis of such dispute such Computation Statement shall be conclusive and binding on Sellers. In the event the Sellers' Advisory Representative gives Buyer such notice of dispute within such 30-day period, the Sellers' Advisory Representative STOCK PURCHASE AGREEMENT 11 12 and Buyer will use their Best Efforts to settle the dispute within 30 days after the giving of such notice. Any dispute unresolved after such 30-day period shall be submitted to an Independent CPA Firm. The decision of such Independent CPA Firm with respect to such dispute shall be final and binding on the parties hereto. If, as a result of such arbitration, it is determined that Sellers are entitled to an Earnout Amount which exceeds the Earnout Amount set forth on the applicable Computation Statement by an aggregate amount greater than ten percent (10%) of such Earnout Amount, Buyer shall pay the cost of the arbitration. Otherwise, Sellers shall pay the cost of the arbitration. Buyer shall maintain books and records for the Acquired Companies in a manner which will facilitate its calculation of each Earnout Amount and the review by the Sellers' Advisory Representative of each Computation Statement. Buyer shall make available, at Buyer's offices during normal business hours, to the Sellers' Advisory Representative and his attorneys, accountants and other representatives for examination, such of its books of account, contracts, licenses, leases, instruments, commitments, sale orders, purchase orders, records, accountant's work papers and other documents as are relevant to the preparation of the Computation Statement. (d) RETROACTIVE PAYMENTS (i) First Earnout Period Retroactive Payments. (A) On the first anniversary of the Payment Date for the first Earnout Period, Buyer will deliver to Sellers additional consideration (the "First Period Second Year Payment") for the Shares equal to the: ((((Loss Ratio for the first Earnout Period - Loss Ratio for the first Earnout Period recomputed as of the first anniversary of the end of the first Earnout Period) x Earned Premiums for the first Earnout Period) + Pre-Tax Earnings for the first Earnout Period - $2,000,000) x 0.50 x 75%) - the Reserve Adjustment - First Earnout Period Subsequent Earnout Payment. Provided, however, that if the sum of the First Earnout Period Subsequent Earnout Payment and the First Period Second Year Payment exceeds $750,000 for the first Earnout Period, Buyer shall only pay Sellers an amount equal to the difference between (i) $750,000 for the first Earnout Period minus the Reserve Adjustment and (ii) the First Earnout Period Subsequent Earnout Payment. If the First Period Second Year Payment is less than zero, Buyer shall pay no amount to Sellers; and further provided that if the First Period Second Year Payment is less than zero, no amount shall be paid by Sellers. (B) On the second anniversary of the Payment Date for the first Earnout Period, Buyer will deliver to Sellers additional consideration (the "First Period Third Year Payment") for the Shares equal to the: STOCK PURCHASE AGREEMENT 12 13 ((((Loss Ratio for the first Earnout Period - Loss Ratio for the first Earnout Period recomputed as of the second anniversary of the end of the first Earnout Period) x Earned Premiums for the first Earnout Period) + Pre-Tax Earnings for the first Earnout Period - $2,000,000) x 0.50) - the Reserve Adjustment- First Earnout Period Subsequent Earnout Payment - First Period Second Year Payment. Provided, however, that if the sum of the First Earnout Period Subsequent Earnout Payment, the First Period Second Year Payment and the First Period Third Year Payment exceeds $1,000,000 for the first Earnout Period, Buyer shall only pay Sellers an amount equal to (i) $1,000,000 for the first Earnout Period minus the Reserve Adjustment, minus (ii) the First Earnout Period Subsequent Earnout Payment minus (iii) the First Period Second Year Payment. If the First Period Third Year Payment is less than zero, Buyer shall pay no amount to Sellers; and further provided that if the First Period Third Year Payment is less than zero, Sellers shall pay the integral amount of the First Period Third Year Payment to Buyer, not to exceed the sum of (x) the First Earnout Period Subsequent Earnout Payment plus (y) the First Period Second Year Payment plus (z) the Reserve Adjustment. The Future Earnout Amount for the First Earnout Period shall be equal to (i) $1,000,000 for the first Earnout Period minus the Reserve Adjustment, minus (ii) the First Earnout Period Subsequent Earnout Payment minus (iii) the First Period Second Year Payment minus (iv) the First Period Third Year Payment, unless such amount is less than zero, in which case the Future Earnout Amount for the First Earnout Period shall be equal to zero. (ii) Second Earnout Period Retroactive Payments. (A) On the first anniversary of the Payment Date for the second Earnout Period, Buyer will deliver to Seller additional consideration (the "Second Period Second Year Payment") for the Shares equal to the: ((((Loss Ratio for the second Earnout Period - Loss Ratio for the second Earnout Period recomputed as of the first anniversary of the end of the second Earnout Period) x Earned Premiums for the second Earnout Period) + Pre-Tax Earnings for the second Earnout Period - $2,500,000) x 0.50 x 75%) - Second Earnout Period Subsequent Earnout Payment. Provided, however, that if the sum of the Second Earnout Period Subsequent Earnout Payment and the Second Period Second Year Payment exceeds $750,000 for the second Earnout Period, Buyer shall only pay Seller an amount equal to the difference between STOCK PURCHASE AGREEMENT 13 14 (i) $750,000 for the second Earnout Period, minus (ii) the Second Earnout Period Subsequent Earnout Payment. If the Second Period Second Year Payment is less than zero, Buyer shall pay no amount to Seller; and further provided that if the Second Period Second Year Payment is less than zero, no amount shall be paid by Seller. (B) On the second anniversary of the Payment Date for the second Earnout Period, Buyer will deliver to Seller additional consideration (the "Second Period Third Year Payment") for the Shares equal to the: ((((Loss Ratio for the second Earnout Period - Loss Ratio for the second Earnout Period recomputed as of the second anniversary of the end of the second Earnout Period) x Earned Premiums for the second Earnout Period) + Pre-Tax Earnings for the second Earnout Period - $2,500,000) x 0.50) - Second Earnout Period Subsequent Earnout Payment - Second Period Second Year Payment. Provided, however, that if the sum of the Second Earnout Period Subsequent Earnout Payment, the Second Period Second Year Payment and the Second Period Third Year Payment exceeds the sum of (x) $1,000,000 for the second Earnout Period and (y) the Future Earnout Amount for the First Earnout Period, Buyer shall only pay Seller an amount equal to (i) $1,000,000 for the second Earnout Period, plus (ii) the Future Earnout Amount for the First Earnout Period minus (iii) the Second Earnout Period Subsequent Earnout Payment minus (iv) the Second Period Second Year Payment. If the Third Year Payment is less than zero, Buyer shall pay no amount to Seller; and further provided that if the Second Period Third Year Payment is less than zero, Seller shall pay the integral amount of the Second Period Third Year Payment to Buyer, not to exceed the sum of (x) the Second Earnout Period Subsequent Earnout Payment and (y) the Second Period Second Year Payment. The Future Earnout Amount for the Second Earnout Period shall be equal to (i) $1,000,000 for the second Earnout Period plus (ii) the Future Earnout Amount for the First Earnout Period minus (iii) the Second Earnout Period Subsequent Earnout Payment minus (iv) the Second Period Second Year Payment minus (v) the Second Period Third Year Payment, unless such amount is less than zero, in which case the Future Earnout Amount for the Second Earnout Period shall be equal to zero. (iii) Third Earnout Period Retroactive Payments. STOCK PURCHASE AGREEMENT 14 15 (A) On the first anniversary of the Payment Date for the third Earnout Period, Buyer will deliver to Seller additional consideration (the "Third Period Second Year Payment") for the Shares equal to the: ((((Loss Ratio for the third Earnout Period - Loss Ratio for the third Earnout Period recomputed as of the first anniversary of the end of the third Earnout Period) x Earned Premiums for the third Earnout Period) + Pre-Tax Earnings for the third Earnout Period - $3,000,000) x 0.50 x 75%) - Third Earnout Period Subsequent Earnout Payment. Provided, however, that if the sum of the Third Earnout Period Subsequent Earnout Payment and the Third Period Second Year Payment exceeds $750,000 for the third Earnout Period, Buyer shall only pay Seller an amount equal to the difference between (i) $750,000 for the third Earnout Period and (ii) the Third Earnout Period Subsequent Earnout Payment. If the Third Period Second Year Payment is less than zero, Buyer shall pay no amount to Seller; and further provided that if the Third Period Second Year Payment is less than zero, no amount shall be paid by Seller. (B) On the second anniversary of the Payment Date for the third Earnout Period, Buyer will deliver to Seller additional consideration (the "Third Period Third Year Payment") for the Shares equal to the: ((((Loss Ratio for the third Earnout Period - Loss Ratio for the third Earnout Period recomputed as of the second anniversary of the end of the third Earnout Period) x Earned Premiums for the third Earnout Period) + Pre-Tax Earnings for the third Earnout Period - $3,000,000) x 0.50) - Third Earnout Period Subsequent Earnout Payment - Third Period Second Year Payment. Provided, however, that if the sum of the Third Earnout Period Subsequent Earnout Payment, the Third Period Second Year Payment and the Third Period Third Year Payment exceeds the sum of (x) $1,000,000 for the third Earnout Period and (y) the Future Earnout Amount for the Second Earnout Period, Buyer shall only pay Seller an amount equal to (i) $1,000,000 for the third Earnout Period, plus (ii) the Future Earnout Amount for the Second Earnout Period minus (iii) the Third Earnout Period Subsequent Earnout Payment minus (iv) the Third Period Second Year Payment. If the Third Period Second Year Payment is less than zero, Buyer shall pay no amount to Seller; and further provided that if the Third Period Third Year Payment is less than zero, Seller shall pay the integral amount of the Third Period Third Year Payment to Buyer, not to exceed the sum of (x) the Third Earnout Period Subsequent Earnout Payment and (y) the Third Period Second Year Payment. STOCK PURCHASE AGREEMENT 15 16 (iv) At the conclusion of each Release Period, Buyer shall prepare a Retroactive Computation Statement for the Pre-Tax Earnings recomputed for the applicable Earnout Period and shall provide such Retroactive Computation Statement to the Sellers' Advisory Representative for his review and comments within forty-five (45) days after the termination of such Release Period. If, within thirty (30) days after delivery of the Retroactive Computation Statement to the Sellers' Advisory Representative, the Sellers' Advisory Representative has not given written notice to Buyer disputing such statement and indicating the basis of such dispute such Retroactive Computation Statement shall be conclusive and binding on Sellers. In the event the Sellers' Advisory Representative gives Buyer such notice of dispute within such 30-day period, the Sellers' Advisory Representative and Buyer will use their Best Efforts to settle the dispute within 30 days after the giving of such notice. Except as set forth in Section 2.3(d)(v), any dispute unresolved after such 30-day period shall be submitted to an Independent CPA Firm. The decision of such Independent CPA Firm with respect to such dispute shall be final and binding on the parties hereto. If, as a result of such arbitration(s), it is determined that Sellers are entitled to such disputed amount, Buyer shall pay the cost of the arbitration(s). Otherwise, Sellers shall pay the cost of the arbitration(s). Buyer shall maintain books and records for the Acquired Companies in a manner which will facilitate its recomputation of the Pre-Tax Earnings applicable for each Earnout Period and the review by the Sellers' Advisory Representative of each Retroactive Computation Statement. Buyer shall make available, at Buyer's offices during normal business hours, to the Sellers' Advisory Representative and his attorneys, accountants and other representatives for examination, such of its books of account, contracts, licenses, leases, instruments, commitments, sale orders, purchase orders, records, accountant's work papers and other documents as are relevant to the preparation of the Retroactive Computation Statement. (v) After the conclusion of the final Release Period with respect to each Earnout Period, in the event that the Sellers' Advisory Representative gives Buyer notice (in accordance with Section 2.3(d)(iv)) that the Sellers' Advisory Representative disputes the calculation of the Retroactive Computation Statement based upon (in whole or in part) the determination of Incurred Loss and Loss Adjustment Expense, then the Sellers' Advisory Representative and Buyer will use their Best Efforts to settle the dispute within 30 days after the giving of notice of dispute. Any dispute relating to the determination of Incurred Loss and Loss Adjustment Expense unresolved after such 30 day period shall be submitted to an Independent Actuarial Firm. The decision of such Independent Actuarial Firm with respect to such dispute shall be final and binding on the parties hereto. If, as a result of such arbitration(s), it is determined that Sellers are entitled to such disputed amount, Buyer shall pay the cost of the arbitration(s). Otherwise, Sellers shall pay the cost of the arbitration(s). (e) An example of the payments to be made pursuant to this Section 2.3 is attached hereto as Exhibit 2.3(e). Such example is for illustrative purposes only. STOCK PURCHASE AGREEMENT 16 17 2.4 CLOSING. The purchase and sale (the "Closing") provided for in this Agreement will take place at the offices of Jackson Walker LLP, at 301 Commerce Street, Suite 2400, Fort Worth, Texas, at 10:00 a.m. (local time) on a date that is no later than five (5) days after all conditions to Closing have been satisfied, or at such other time and place as the parties may agree. Subject to the provisions of Article IX, failure to consummate the purchase and sale provided for in this Agreement on the date and time and at the place determined pursuant to this Section 2.4 will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement. 2.5 CLOSING OBLIGATIONS. At the Closing: (a) Sellers will deliver to Buyer: (i) certificates representing the Shares, duly endorsed (or accompanied by duly executed stock powers), for transfer to Buyer; (ii) a release in the form of Exhibit 2.5(a)(ii) executed by both Sellers ("Sellers' Release"); (iii) an employment agreement in the form of Exhibit 2.5(a)(iii), executed by Hill (the "Hill Employment Agreement"); (iv) an employment agreement in the form of Exhibit 2.5(a)(iv), executed by Heidt (the "Heidt Employment Agreement"); (v) a certificate executed by Sellers and TSL, representing and warranting to Buyer that each of Sellers' and the TSL's representations and warranties in this Agreement was accurate in all respects as of the date of this Agreement and is accurate in all respects as of the Closing Date as if made on the Closing Date (giving full effect to any supplements to the Sellers' Disclosure Letter delivered by Sellers and TSL to Buyer prior to the Closing Date in accordance with Section 6.4); (vi) an opinion of Pearce & Durick P.L.L.P., dated the Closing Date, in the form of Exhibit 2.5(a)(vi); and (vii) A Lease in the form of Exhibit 2.5(a)(vii), executed by Hill (the "Real Property Lease"). (b) Buyer will deliver to Sellers: (i) $6,000,000 by wire transfer payable to the orders of Hill and Heidt pro rata in accordance with their respective ownership interests in TSL; STOCK PURCHASE AGREEMENT 17 18 (ii) a certificate executed by Buyer, representing and warranting to Sellers that each of Buyer's representations and warranties in this Agreement was accurate in all respects as of the date of this Agreement and is accurate in all respects as of the Closing Date as if made on the Closing Date (giving full effect to any supplements to the Buyer's Disclosure Letter prior to the Closing Date in accordance with Section 6.4); (iii) the Hill Employment Agreement and the Heidt Employment Agreement, each executed by Buyer; (iv) an opinion of Jackson Walker LLP, dated the Closing Date, in the form of Exhibit 2.5(b)(iv); and (v) the Real Property Lease, executed on behalf of TSL. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE COMPANY Sellers and TSL jointly and severally represent and warrant to Buyer as follows: 3.1 ORGANIZATION AND GOOD STANDING. (a) Part 3.1 of the Sellers' Disclosure Letter contains a complete and accurate list, for each Acquired Company, of its name, its jurisdiction of incorporation, other jurisdictions in which it is authorized to do business, and its capitalization (including the identity of each shareholder and the number of shares held by each). Each Acquired Company is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under Applicable Contracts. Each Acquired Company is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification. No jurisdiction, other than those listed in Part 3.1 of the Sellers' Disclosure Letter, has claimed, in writing, that any Acquired Company is required to hold a Governmental Authorization, and none of the Acquired Companies files or is required to file any Tax Returns in any other jurisdiction. (b) Sellers have delivered to Buyer true and correct copies of the Organizational Documents of each Acquired Company, as currently in effect. STOCK PURCHASE AGREEMENT 18 19 3.2 AUTHORITY; NO CONFLICT. (a) This Agreement constitutes the legal, valid, and binding obligation of TSL and Sellers, enforceable against TSL and Sellers in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and by general principles of equity. Upon the execution and delivery by Sellers of the Hill Employment Agreement, the Heidt Employment Agreement and the Sellers' Release (collectively, the "Sellers' Closing Documents"), the Sellers' Closing Documents will constitute the legal, valid, and binding obligations of Sellers, enforceable against Sellers in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and by general principles of equity. Each Seller has all right, power, authority, and capacity to execute and deliver this Agreement and the Sellers' Closing Documents and to perform his obligations under this Agreement and the Sellers' Closing Documents. TSL has all corporate right, power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. (b) Except as set forth in Part 3.2 of the Sellers' Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time) (i) conflict with, or result in a violation of any provision of the Organizational Documents of any of the Acquired Companies; (ii) conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which any Acquired Company or Sellers, or any of the assets owned or used by any Acquired Company, may be subject; (iii) conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, suspend, terminate, or modify, any Insurance Permit or other Governmental Authorization that is held by any Acquired Company or that otherwise relates to the business of, or any of the assets owned or used by, any Acquired Company; (iv) conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract; or (v) result in the imposition or creation of any Encumbrance upon or with respect to any of the assets owned or used by any Acquired Company. Except as set forth in Part 3.2 of the Sellers' Disclosure Letter, neither Sellers nor any Acquired Company is or will be required to give any notice to or obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 3.3 CAPITALIZATION. The authorized equity securities of TSL consist of 50,000 shares of common stock, $1.00 par value per share, of which 10,060 shares are issued and outstanding. The ownership of TSL is as set forth in Part 3.3 of the Sellers' Disclosure Letter. Sellers are and will be on the Closing Date the record and beneficial owners and holders of all of the outstanding shares of TSL's capital stock, free and clear of all Encumbrances. TSL has no other class or series of capital STOCK PURCHASE AGREEMENT 19 20 stock authorized, issued and outstanding. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights or other contracts or commitments that could require any Acquired Company to issue, sell or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to the Acquired Companies. With the exception of the shares listed in Part 3.3 of the Sellers' Disclosure Letter, all of the outstanding equity securities and other securities of each Acquired Company are owned of record and beneficially by one or more of the Acquired Companies, free and clear of all Encumbrances. Except as set forth in Part 3.3 of the Sellers' Disclosure Letter, no legend or other reference to any purported Encumbrance appears upon any certificate representing equity securities of any Acquired Company. All of the outstanding equity securities of each Acquired Company have been duly authorized and validly issued and are fully paid and nonassessable. There are no Contracts relating to the issuance, sale, or transfer of any equity securities or other securities of any Acquired Company. None of the outstanding equity securities or other securities of any Acquired Company was issued in violation of the Securities Act or any other Legal Requirement. No Acquired Company owns, or has any Contract to acquire, any equity securities or other securities of any Person (other than Acquired Companies) or any direct or indirect equity or ownership interest in any other business. Except as set forth in Part 3.3 of the Sellers' Disclosure Letter, there are no restrictions upon the voting or transfer of, or the declaration or payment of any dividend or distribution on, any shares of capital stock of any Acquired Company. 3.4 FINANCIAL STATEMENTS. Sellers have delivered to Buyer the audited balance sheets of the Acquired Companies as of December 31 for the year 1998, the unaudited balance sheets of the Acquired Companies as of December 31 for the years 1996 and 1997 and the related audited (or unaudited, as the case may be) statements of income, changes in shareholders' equity, and cash flow for each of the fiscal years then ended, together with the report thereon, if applicable, of the independent certified public accountants responsible for such audited statements (including the notes thereto, the "TSL Balance Sheet"). Sellers shall deliver to Buyer at least fifteen (15) days prior to Closing a reviewed balance sheet of the Acquired Companies as of the most recently practicable date, but no earlier than September 30, 1999 (the "TSL Interim Balance Sheet") and the related reviewed statements of income, changes in shareholders' equity, and cash flow for the interim period then ended, including in each case the notes thereto. Such financial statements and notes fairly present the financial condition and the results of operations, changes in shareholders' equity, and cash flow of the Acquired Companies at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP, subject, in the case of interim financial statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse) and the absence of notes (that, if presented, would not differ materially from those included in the TSL Balance Sheet); the financial statements referred to in this Section 3.4 reflect the consistent application of such accounting principles throughout the periods involved, except as disclosed in the notes to such financial statements; and the reserves carried in such financial statements for the payment of estimated claims and claim adjustment expenses for both reported and unreported claims are adequate in all material respects to cover the incurred claims STOCK PURCHASE AGREEMENT 20 21 on all policies of insurance written by any wholly owned insurance company subsidiaries of TSL. No financial statements of any Person other than the Acquired Companies are required by GAAP to be included in the financial statements of TSL. 3.5 BOOKS AND RECORDS. The books of account, minute books, stock record books, and other records of the Acquired Companies, all of which have been made available to Buyer, are complete and correct and have been maintained in accordance with sound business practices, including the maintenance of an adequate system of internal controls. The minute books of the Acquired Companies contain accurate and complete records of all meetings held of, and corporate action taken by, the shareholders, the Boards of Directors, and committees of the Boards of Directors of the Acquired Companies, and no meeting of any such shareholders, Board of Directors, or committee has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of those books and records will be in the possession of the Acquired Companies. 3.6 TITLE TO PROPERTIES; ENCUMBRANCES. Part 3.6 of the Sellers' Disclosure Letter contains a complete and accurate list of all real property, leaseholds, or other interests therein owned by any Acquired Company. Sellers have delivered or made available to Buyer copies of the deeds and other instruments (as recorded) by which the Acquired Companies acquired such real property and interests, and copies of all title insurance policies, opinions, abstracts, and surveys in the possession of Sellers or the Acquired Companies and relating to such property or interests. The Acquired Companies own (with good and marketable title in the case of real property, subject only to the matters permitted by the following sentence) all the properties and assets (whether real, personal, or mixed and whether tangible or intangible) that they purport to own located in the facilities owned or operated by the Acquired Companies or reflected as owned in the books and records of the Acquired Companies, including all of the properties and assets reflected in the TSL Balance Sheet and the TSL Interim Balance Sheet (except for personal property sold since the date of the TSL Balance Sheet and the TSL Interim Balance Sheet, as the case may be, in the Ordinary Course of Business), and all of the properties and assets purchased or otherwise acquired by the Acquired Companies since the date of the TSL Balance Sheet (except for personal property acquired and sold since the date of the TSL Balance Sheet in the Ordinary Course of Business and consistent with past practice), which subsequently purchased or acquired properties and assets (other than short-term investments) are listed in Part 3.6 of the Sellers' Disclosure Letter. All material properties and assets reflected in the TSL Balance Sheet and the TSL Interim Balance Sheet are free and clear of all Encumbrances and are not, in the case of real property, subject to any rights of way, building use restrictions, exceptions, variances, reservations, or limitations of any nature. 3.7 ACCOUNTS RECEIVABLE. All accounts receivable of the Acquired Companies that are reflected on the TSL Balance Sheet or the TSL Interim Balance Sheet or on the accounting records of the Acquired Companies as of the Closing Date (collectively, the "TSL Accounts Receivable") represent or will represent valid obligations arising from sales actually made or services actually performed in the Ordinary Course of Business. Unless paid prior to the Closing Date, the TSL Accounts Receivable are or will be as of the Closing Date current and collectible net of the STOCK PURCHASE AGREEMENT 21 22 respective reserves shown on the TSL Balance Sheet or the TSL Interim Balance Sheet or on the accounting records of the Acquired Companies as of the Closing Date (which reserves are adequate and calculated consistent with past practice and, in the case of the reserve as of the Closing Date, will not represent a greater percentage of the TSL Accounts Receivable as of the Closing Date than the reserve with respect to the TSL Accounts Receivable as reflected in the TSL Interim Balance Sheet and will not represent a material adverse change in the composition of such TSL Accounts Receivable in terms of aging). Subject to such reserves, each of the TSL Accounts Receivable either has been or, to the Knowledge of TSL and Sellers, will be collected in full, without any set-off, within ninety days after the day on which it first becomes due and payable. There is no contest, claim, or right of set-off, other than returns in the Ordinary Course of Business, under any Contract with any obligor of an TSL Accounts Receivable relating to the amount or validity of such TSL Accounts Receivable. Part 3.7 of the Sellers' Disclosure Letter contains a complete and accurate list of all TSL Accounts Receivable as of the date of the TSL Interim Balance Sheet, which list sets forth the aging of such TSL Accounts Receivable. 3.8 NO UNDISCLOSED LIABILITIES. Except as set forth in Part 3.8 of the Sellers' Disclosure Letter, the Acquired Companies have no material liabilities or obligations of any nature (whether known or unknown and whether absolute, accrued, contingent, or otherwise) except for liabilities or obligations reflected or reserved against in the TSL Balance Sheet or the TSL Interim Balance Sheet and current liabilities incurred in the Ordinary Course of Business since the respective dates thereof. 3.9 TAXES. (a) The Acquired Companies or Sellers, as applicable, have filed or caused to be filed on a timely basis all Tax Returns that are or were required to be filed by or with respect to any of the Acquired Companies, pursuant to applicable Legal Requirements. Sellers have delivered or made available to Buyer copies of, and Part 3.9 of the Sellers' Disclosure Letter contains a complete and accurate list of, all such Tax Returns filed since January 1, 1996. The Acquired Companies or Sellers, as applicable, have paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by Sellers or any Acquired Company, except such Taxes, if any, as are listed in Part 3.9 of the Sellers' Disclosure Letter and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the TSL Balance Sheet and the TSL Interim Balance Sheet. (b) Part 3.9 of the Sellers' Disclosure Letter contains a complete and accurate list of all audits of all such Tax Returns, including a reasonably detailed description of the nature and outcome of each audit. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in Part 3.9 of the Sellers' Disclosure Letter, are being contested in good faith by appropriate proceedings. Part 3.9 of the Sellers' Disclosure Letter describes all adjustments to the United States federal income Tax Returns filed by any Acquired Company or Sellers for all taxable years since 1995 with respect to or that are directly or indirectly related to any Acquired STOCK PURCHASE AGREEMENT 22 23 Company, and the resulting deficiencies proposed by the IRS. Except as described in Part 3.9 of the Sellers' Disclosure Letter, neither Sellers nor any Acquired Company has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of, with respect to, or that are directly or indirectly related to any Acquired Company or for which Sellers or any Acquired Company may be liable. (c) The charges, accruals, and reserves with respect to, or that are directly or indirectly related to, Taxes on the respective books of each Acquired Company are adequate (determined in accordance with GAAP) and are at least equal to that Acquired Company's liability for Taxes. There exists no proposed tax assessment against any Acquired Company or Sellers with respect to or that is directly or indirectly related to any Acquired Company except as disclosed in the TSL Balance Sheet or in Part 3.9 of the Sellers' Disclosure Letter. All Taxes with respect to or that are directly or indirectly related to any Acquired Company that any Acquired Company or either Seller is or was required by Legal Requirements to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person. (d) All Tax Returns filed by any Acquired Company or by Sellers with respect to or that are directly or indirectly related to any Acquired Company are true, correct, and complete. There is no tax sharing agreement that will require any payment by any Acquired Company after the date of this Agreement. During the consistency period (as defined in Section 338(h)(4) of the IRC with respect to the sale of the Shares to Buyer), no Acquired Company or target affiliate (as defined in Section 338(h)(6) of the IRC with respect to the sale of the Shares to Buyer) has sold or will sell any property or assets to Buyer or to any member of the affiliated group (as defined in Section 338(h)(5) of the IRC) that includes Buyer. Part 3.9 of the Sellers' Disclosure Letter lists all such target affiliates. 3.10 NO MATERIAL ADVERSE CHANGE. Since the date of the TSL Balance Sheet, there has not been any material adverse change in the business, operations, properties, prospects, assets, or condition of any Acquired Company, and no event has occurred or circumstance exists that may result in such a material adverse change. 3.11 EMPLOYEE BENEFIT PLANS. Except as set forth in Part 3.11 of the Sellers' Disclosure Letter, neither TSL nor any Plan Affiliate has maintained, sponsored, adopted, made contributions to or obligated itself to make contributions to or to pay any benefits or grant rights under or with respect to any Employee Benefit Plan, whether or not written, which could give rise to or result in TSL or such Plan Affiliate having any material debt, liability, claim or obligation of any kind or nature, whether accrued, absolute, contingent, direct, indirect, known or unknown, perfected or inchoate or otherwise and whether or not due or to become due. Correct and complete copies of all Employee Benefit Plans of TSL previously have been furnished to Buyer. The Employee Benefit Plans of TSL are in compliance in all material respects with governing documents and agreements and with applicable laws. There has not been any act or omission by TSL under ERISA or the terms of the Employee Benefit Plans of TSL, or any other applicable law or agreement which could give STOCK PURCHASE AGREEMENT 23 24 rise to any liability of TSL, whether under ERISA, the IRC or other laws or agreements. Neither TSL nor any Plan Affiliate maintains or contributes to, or has maintained or contributed to, any Employee Benefit Plan subject to Title IV of ERISA. 3.12 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS. (a) Except as set forth in Part 3.12 of the Sellers' Disclosure Letter, each Acquired Company is, and at all times since January 1, 1996 has been, in full compliance with each Legal Requirement that is or was applicable to it or to the conduct or operation of its business or the ownership or use of any of its assets. (b) Part 3.12 of the Sellers' Disclosure Letter contains a complete and accurate list of each Governmental Authorization, including each Governmental Authorization to conduct insurance, insurance agency or brokerage and premium finance business and each Insurance Permit, that is held by any Acquired Company or that otherwise relates to the business of, or to any of the assets owned or used by, any Acquired Company. Each Governmental Authorization listed or required to be listed in Part 3.12 of the Sellers' Disclosure Letter is valid and in full force and effect. Each Acquired Company owns or possesses all right, title and interest in and to all of the Governmental Authorizations and Insurance Permits that are necessary to enable it to carry on the business of such Acquired Company as presently conducted. Each Acquired Company has taken all necessary action to maintain such Governmental Authorizations. No loss or expiration of any such Governmental Authorization is threatened, pending or, to the Knowledge of TSL and Sellers, reasonably foreseeable. The consummation of the transactions contemplated hereby will not result in the suspension, modification, cancellation, revocation or nonrenewal of any such Governmental Authorization. Except for compliance with periodic renewal procedures, no approvals or authorizations are required to permit the Acquired Companies to continue their business as presently conducted, following the Closing. (c) None of the Acquired Companies or, to the Knowledge of Sellers and TSL, any of its agents or brokers are engaged in any insurance underwriting, insurance agency or brokerage or premium finance business in any jurisdiction in which it is not duly authorized or qualified to transact such business. (d) Except as set forth in Part 3.12 of the Sellers' Disclosure Letter, each of the Acquired Companies has filed all material reports, statements, registrations, applications, filings or other documents and submissions required to be filed with, or provided to any Governmental Body. Except as set forth in Part 3.12 of the Sellers' Disclosure Letter, all such reports, statements, registrations, applications, filings, documents and submissions were in compliance in all material respects with all applicable Legal Requirements when filed, and no material deficiencies have been asserted by any Governmental Body with respect thereto. (e) Sellers have furnished to Buyer true and complete copies of all annual and quarterly statements filed with or submitted to any state insurance regulatory authority and all reports of STOCK PURCHASE AGREEMENT 24 25 examinations (whether financial, market conduct or other) issued by any state insurance regulatory authorities in respect of any of the Acquired Companies covering, in whole or in part, any period on or after January 1, 1993, together with true and complete copies of all written responses submitted by or on behalf of any of Sellers, the Acquired Companies or their Affiliates in respect of any such report of examination. In addition, Sellers have made, or has caused the Acquired Companies to make, available to Buyer all files of Sellers and the Acquired Companies relating to correspondence with insurance regulatory authorities and other Governmental Bodies. 3.13 LEGAL PROCEEDINGS; ORDERS. (a) Except as set forth in Part 3.13 of the Sellers' Disclosure Letter, there is no pending Proceeding (i) that has been commenced by or against any Acquired Company or that otherwise relates to or may affect the business of, or any of the assets owned or used by, any Acquired Company; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To the Knowledge of Sellers and TSL, (1) no such Proceeding has been Threatened, and (2) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such Proceeding not in the Ordinary Course of Business of the Acquired Companies. Sellers have delivered to Buyer copies of all pleadings, correspondence, and other documents relating to each Proceeding listed in Part 3.13 of the Sellers' Disclosure Letter. The Proceedings listed in Part 3.13 of the Sellers' Disclosure Letter will not have a material adverse effect on the business, operations, assets, condition, or prospects of any Acquired Company. (b) Except as set forth in Part 3.13 of the Sellers' Disclosure Letter: (i) there is no Order to which any of the Acquired Companies, or any of the assets owned or used by any Acquired Company, is subject; and (ii) each Acquired Company is, and at all times since January 1, 1995 has been, in full compliance with all of the terms and requirements of each Order to which it, or any of the assets owned or used by it, is or has been subject. (c) Except as set forth in Part 3.13 of the Sellers' Disclosure Letter, no claim is pending nor, to the Knowledge of Sellers or TSL, threatened against any of the Acquired Companies by any state insurance Governmental Body. 3.14 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in Part 3.14 of the Sellers' Disclosure Letter, since the date of the TSL Balance Sheet, the Acquired Companies have conducted their businesses only in the Ordinary Course of Business and there has not been any: (a) change in any Acquired Company's authorized or issued capital stock; grant of any stock option or right to purchase shares of capital stock of any Acquired Company; issuance of any security convertible into such capital stock; grant of any registration rights; purchase, redemption, retirement, or other acquisition by any Acquired Company of any shares of any such capital stock; or declaration or payment of any dividend or other distribution or payment in respect of shares of capital stock; STOCK PURCHASE AGREEMENT 25 26 (b) amendment to the Organizational Documents of any Acquired Company; (c) payment or increase by any Acquired Company of any bonuses, salaries, or other compensation to any shareholder, director, officer, or (except in the Ordinary Course of Business) employee or entry into any employment, severance, or similar Contract with any director, officer, or employee; (d) adoption of, or increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other Employee Benefit Plan for or with any employees of any Acquired Company; (e) damage to or destruction or loss of any asset or property of any Acquired Company, whether or not covered by insurance, materially and adversely affecting the properties, assets, business, financial condition, or prospects of the Acquired Companies, taken as a whole; (f) entry into, termination of, or receipt of notice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit, or similar agreement, or (ii) any Contract or transaction involving a total remaining commitment by or to any Acquired Company of at least $10,000; (g) sale, lease, or other disposition of any material asset or property of any Acquired Company or mortgage, pledge, or imposition of any lien or other encumbrance on any material asset or property of any Acquired Company, including the sale, lease, or other disposition of any of the TSL Intellectual Property Assets (as defined in Section 3.20); (h) cancellation or waiver of any claims or rights with a value to any Acquired Company in excess of $10,000; (i) material change in the accounting methods used by any Acquired Company; (j) agreement, whether oral or written, by any Acquired Company to do any of the foregoing; or (k) change in its business, underwriting, billing, reserving, reinsurance, investment or claims adjustment policies and practices or any change in any activity that (i) has had the effect of accelerating the recording and billing of premiums or accounts receivable or delaying the payment of expenses or the establishment of loss and loss adjustment expense and other reserves in connection with the business or any material accounts of any of the Acquired Companies or (ii) has had the effect of materially altering, modifying or changing the historic financial or accounting practices or policies of any of the Acquired Companies, including accruals of and reserves for Taxes. STOCK PURCHASE AGREEMENT 26 27 3.15 CONTRACTS; NO DEFAULTS. (a) Part 3.15(a) of the Sellers' Disclosure Letter contains a complete and accurate list, and Sellers have delivered to Buyer true and complete copies, of all the material Contracts of each Acquired Company. Part 3.15(a) of the Sellers' Disclosure Letter sets forth reasonably complete details concerning such Contracts, including the parties to the Contracts, the amount of the remaining commitment of the Acquired Companies under the Contracts, and the Acquired Companies' office where details relating to the Contracts are located. (b) Except as set forth in Part 3.15(b) of the Sellers' Disclosure Letter, each Contract identified or required to be identified in Part 3.15(a) of the Sellers' Disclosure Letter is in full force and effect and is valid and enforceable in accordance with its terms. (c) Except as set forth in Part 3.15(c) of the Sellers' Disclosure Letter: (i) each Acquired Company is, and at all times since January 1, 1996 has been, in full compliance with all applicable terms and requirements of each Contract under which such Acquired Company has or had any obligation or liability or by which such Acquired Company or any of the assets owned or used by such Acquired Company is or was bound; (ii) each other Person that has or had any obligation or liability under any Contract under which an Acquired Company has or had any rights is, and at all times since January 1, 1996 has been, in full compliance with all applicable terms and requirements of such Contract; (iii) no event has occurred or circumstance exists that (with or without notice or lapse of time) may conflict with, or result in a violation or breach of, or give any Acquired Company or other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract; and (iv) no Acquired Company has given to or received from any other Person, at any time since January 1, 1996, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation or breach of, or default under, any Contract. (d) The Contracts relating to the sale or provision of services by the Acquired Companies have been entered into in the Ordinary Course of Business and have been entered into without the commission of any act alone or in concert with any other Person, or any consideration having been paid or promised, that is or would be in violation of any Legal Requirement. STOCK PURCHASE AGREEMENT 27 28 3.16 INSURANCE. (a) Sellers have delivered to Buyer true and complete copies of all policies of insurance to which any Acquired Company is an insured or a beneficiary or under which any Acquired Company, or any director of any Acquired Company, is or has been covered at any time within the three (3) years preceding the date of this Agreement; (b) Part 3.16(b) of the Sellers' Disclosure Letter sets forth, by year, for the current policy year and each of the three (3) preceding policy years, a summary of the loss experience under each policy described in Section 3.16(a). TSL and Sellers have no Knowledge of any loss experience that would affect future potential insurability with respect to such policies. (c) Except as set forth in Part 3.16(c) of the Sellers' Disclosure Letter: (i) All policies to which any Acquired Company is an insured or a beneficiary or that provide coverage to any Acquired Company or any director or officer of an Acquired Company (A) are valid, outstanding, and enforceable; (B) taken together, provide adequate insurance coverage as is customary for similar entities in similar businesses for the assets and the operations of the Acquired Companies for all risks to which the Acquired Companies are normally exposed; (C) are sufficient for compliance with all Legal Requirements and Contracts to which any Acquired Company is a party or by which any of them is bound; and (D) will continue in full force and effect following the consummation of the Contemplated Transactions. (ii) No Acquired Company has received (A) any refusal of coverage or any notice that a defense will be afforded with reservation of rights, or (B) any notice of cancellation or any other indication that any insurance policy is no longer in full force or effect or will not be renewed or that the issuer of any policy is not willing or able to perform its obligations thereunder. (iii) The Acquired Companies have paid all premiums due, and have otherwise performed all of their respective obligations, under each policy to which any Acquired Company is an insured or a beneficiary or that provides coverage to any Acquired Company or director thereof. (iv) The Acquired Companies have given notice to the insurer of all claims that may be insured thereby. 3.17 ENVIRONMENTAL MATTERS. Except as set forth in Part 3.17 of the Sellers' Disclosure Letter, to the Knowledge of Sellers and TSL, each of the Acquired Companies is in compliance with all Environmental Laws, the failure to comply with which could have a Material Adverse Effect. Neither (i) either Seller nor (ii) any of the Acquired Companies has received notice of any material violation by any of the Acquired Companies of, or material default by the same under, any STOCK PURCHASE AGREEMENT 28 29 Environmental Law, and neither (i) either Seller nor (ii) TSL has any Knowledge of any existing facts or circumstances that are likely to result in any such violation or default. There is no action, suit, claim, proceeding or investigation pending or, to the Knowledge of Sellers and TSL, threatened against any of the Acquired Companies that alleges or would allege any violation of any Environmental Law. 3.18 EMPLOYEES. (a) Part 3.18 of the Sellers' Disclosure Letter contains a complete and accurate list of the following information for each employee or director of the Acquired Companies, including each employee on leave of absence or layoff status: employer; name; job title; current compensation paid or payable and any change in compensation since January 1, 1996; paid time off accrued; and service credited for purposes of vesting and eligibility to participate under any Acquired Company's pension, retirement, profit-sharing, thrift-savings, deferred compensation, stock bonus, stock option, cash bonus, employee stock ownership (including investment credit or payroll stock ownership), severance pay, insurance, medical, welfare, or vacation plan, other Employee Pension Benefit Plan or Employee Welfare Benefit Plan, or any other Employee Benefit Plan or any Director Plan. (b) No employee or director of any Acquired Company is a party to, or is otherwise bound by, any agreement or arrangement, including any Proprietary Rights Agreement, between such employee or director and any other Person that in any way adversely affects or will affect (i) the performance of his duties as an employee or director of the Acquired Companies, or (ii) the ability of any Acquired Company to conduct its business, including any Proprietary Rights Agreement with Sellers or the Acquired Companies by any such employee or director. To each Seller's and TSL's Knowledge, no director or officer of any Acquired Company intends to terminate his employment with such Acquired Company. (c) Part 3.18 of the Sellers' Disclosure Letter also contains a complete and accurate list of the following information for each retired employee or director of the Acquired Companies, or their dependents, receiving benefits or scheduled to receive benefits in the future: name, pension benefit, pension option election, retiree medical insurance coverage, retiree life insurance coverage, and other benefits. 3.19 LABOR RELATIONS; COMPLIANCE. Except as set forth on Part 3.19 of the Sellers' Disclosure Letter, since January 1, 1996, no Acquired Company has been or is a party to any collective bargaining or other labor Contract. Since January 1, 1996, there has not been, there is not presently pending or existing, and, to the Knowledge of TSL and Sellers, there is not Threatened, (a) any strike, slowdown, picketing, work stoppage, lockout or employee grievance process, (b) any Proceeding against or affecting any Acquired Company relating to the alleged violation of any Legal Requirement pertaining to labor relations or employment matters or (c) any application for certification of a collective bargaining agent. Each Acquired Company has complied in all respects with all Legal Requirements relating to employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining and occupational STOCK PURCHASE AGREEMENT 29 30 safety and health. No Acquired Company is liable for the payment of any compensation, damages, taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements. 3.20 INTELLECTUAL PROPERTY. (a) Each Acquired Company (i) owns or has ordered all the licenses, trademarks, tradenames, copyrights, marks, patents and applications for patents listed and attributed to it on Part 3.20(a) of the Sellers' Disclosure Letter (the "TSL Intellectual Property Assets"), (ii) neither owns nor uses any such items which are not listed in the Sellers' Disclosure Letter, (iii) pays no royalties to anyone with respect to any such items, and (iv) has full and lawful right to bring actions for the infringement thereof. Each Acquired Company owns, or possesses adequate and enforceable rights to use without payment of royalties, all licenses, trademarks, tradenames, copyrights, patents, trade secrets and processes necessary for the conduct of, or use in, its business as the same is presently being conducted, the absence of which would have a material adverse effect or the potential for a material adverse effect on such Acquired Company. (b) Except as set forth in Part 3.20(b) of the Sellers' Disclosure Letter, TSL has no Knowledge nor has received any notice to the effect that any service it or any other Acquired Company provides or sells, or any process or method it employs in its business for the use by it or another of any such service, may infringe, or is in conflict with, any asserted right of another. There is no pending or Threatened claim or litigation action against any Acquired Company contesting its right to use or the validity of any of the TSL Intellectual Property Assets or asserting its misuse of any of the foregoing, which would deprive it of the right to assert its rights thereunder or which would prevent the sale of any service provided or sold by it. (c) The software systems of each Acquired Company are Year 2000 Compliant. 3.21 CERTAIN PAYMENTS. Since January 1, 1996, no Acquired Company or director, officer, agent, or employee of any Acquired Company, or any other Person associated with or acting for or on behalf of any Acquired Company, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business, (ii) to pay for favorable treatment for business secured, (iii) to obtain special concessions or for special concessions already obtained, for or in respect of any Acquired Company or any affiliate of an Acquired Company, or (iv) in violation of any Legal Requirement or (b) established or maintained any fund or asset that has not been recorded in the books and records of the Acquired Companies. STOCK PURCHASE AGREEMENT 30 31 3.22 DISCLOSURE. (a) No representation or warranty of Sellers or TSL in this Agreement and no statement in the Sellers' Disclosure Letter omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. (b) There is no fact known to Sellers or TSL that has specific application to Sellers or any Acquired Company (other than general economic or industry conditions) and that materially adversely affects or, as far as Sellers or TSL can reasonably foresee, materially threatens, the assets, business, prospects, financial condition, or results of operations of the Acquired Companies (on a consolidated basis) that has not been set forth in this Agreement or the Sellers' Disclosure Letter. 3.23 RELATIONSHIPS WITH RELATED PERSONS. Except as set forth in Part 3.23 of the Sellers' Disclosure Letter, neither either Seller nor any Related Person of either Seller or of any Acquired Company has, or since January 1, 1996 has had, any interest in any property (whether real, personal, or mixed and whether tangible or intangible), used in or pertaining to the Acquired Companies' businesses. Except as set forth in Part 3.23 of the Sellers' Disclosure Letter, neither either Seller nor any Related Person of either Seller or of any Acquired Company is, or since January 1, 1996, has owned (of record or as a beneficial owner) an equity interest or any other financial or profit interest in, a Person that has (i) had business dealings or a material financial interest in any transaction with any Acquired Company, or (ii) engaged in competition with any Acquired Company with respect to any line of the products or services of such Acquired Company ("TSL Competing Business") in any market presently served by such Acquired Company. Except as set forth in Part 3.23 of the Sellers' Disclosure Letter, neither Seller nor any Related Person of either Seller or of any Acquired Company is a party to any Contract with, or has any claim or right against, any Acquired Company. 3.24 AGENTS AND PRODUCERS. Part 3.24 of the Sellers' Disclosure Letter lists all agents, brokers, producers, underwriting managers and other Persons of each of the Acquired Companies who were paid, directly or indirectly, either (i) at least $25,000 in commissions by or through any of the Acquired Companies, during the year ended December 31, 1998, including the total amount of commissions paid to such Persons in such year, or (ii) at least $18,750 in commissions by or through any of the Acquired Companies, during the nine months ended September 30, 1999, including the total amount of commissions paid to such Persons in such period. To the Knowledge of TSL and Sellers, each of the Acquired Companies generally enjoys good relations with the Persons listed on Part 3.24 of the Sellers' Disclosure Letter as a whole, and also generally enjoys good relations with its other insurance agents, brokers and producers as a whole. To the Knowledge of Sellers and TSL, all Persons listed on Part 3.24 of the Sellers' Disclosure Letter are duly licensed to act as agents, brokers or producers in the jurisdictions where they engage in such activities. 3.25 THREATS OF CANCELLATION. Except as set forth in Part 3.25 of the Sellers' Disclosure Letter hereto, since January 1, 1996, no policyholder or group of policyholders under a group policy, or agent, broker, producer or other Person writing, selling or producing insurance, reinsurance or retrocessional coverage, which, individually or in the aggregate together with other related policyholders, agents, brokers and producers, accounted for one percent (1%) or more of the aggregate gross premiums written by or through the Acquired Companies in any year ended since STOCK PURCHASE AGREEMENT 31 32 December 31, 1996, has terminated or given written notice of termination of its relationship with any of the Acquired Companies. The Acquired Companies have received no notice that any such policyholder, group of policyholders, agent, broker, producer or other such Person will or is reasonably likely to terminate such relationship as a result of the transactions contemplated by this Agreement. 3.26 INVESTMENTS. Part 3.26 of the Sellers' Disclosure Letter contains (a) a true and complete list of all securities and other investments owned by each of the Acquired Companies as of the end of the most recent calendar month, including the date of purchase, book value or amortized cost, market value and carrying value thereof on the books and records of account of such Acquired Company as of such date and (b) the Investment Guidelines of each such Acquired Company. Except as set forth in Part 3.26 of the Sellers' Disclosure Letter, none of the securities and other investments owned by such Persons is in default in the payment of principal or interest or dividends. All such securities and other investments substantially comply with the Investment Guidelines and all insurance laws and regulations of each of the jurisdictions to which the Acquired Companies are subject with respect thereto. 3.27 BANK ACCOUNTS. Part 3.27 of the Sellers' Disclosure Letter contains a true and complete list of (a) the names and locations of all banks, trust companies, securities brokers and other financial institutions at which any of the Acquired Companies has an account or safe deposit box or maintains a banking, custodial, trading or other similar relationship, (b) a true and complete list and description of each such account, box and relationship and (c) the name of every Person authorized to draw thereon or having access thereto. 3.28 BROKERS OR FINDERS. Except for those certain obligations to Philo Smith & Co., Inc., Sellers, each Acquired Company and their agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. 3.29 CLAIMS AGAINST BUYER. Each Seller hereby represents that, both as of the date of this Agreement and as of the Closing, such Seller has no Knowledge of the basis of any claims, demands, or causes of action capable of being raised by either Seller against Buyer or any director, officer or employee of Buyer whatsoever arising contemporaneously with or prior to the Closing Date or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the Closing Date, whether or not relating to claims pending on, or asserted after, the Closing Date other than any obligations of Buyer arising under the Agreement. STOCK PURCHASE AGREEMENT 32 33 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Sellers as follows: 4.1 ORGANIZATION AND GOOD STANDING. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Texas. 4.2 AUTHORITY; NO CONFLICT. (a) This Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and by general principles of equity. Upon the execution and delivery by Buyer of the Hill Employment Agreement and the Heidt Employment Agreement, the Hill Employment Agreement and the Heidt Employment Agreement will constitute the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and by general principles of equity. Buyer has all corporate right, power, and authority to execute and deliver this Agreement, the Hill Employment Agreement and the Heidt Employment Agreement and to perform its obligations under this Agreement, the Hill Employment Agreement and the Heidt Employment Agreement. (b) Except as set forth in Part 4.2 of the Buyer's Disclosure Letter, neither the execution and delivery of this Agreement nor the consummation or performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time) (i) conflict with, or result in a violation of any provision of the Organizational Documents of Buyer; (ii) conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which Buyer, or any of the assets owned or used by Buyer, may be subject; (iii) conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, suspend, terminate, or modify, any Insurance Permit or other Governmental Authorization that is held by Buyer or that otherwise relates to the business of, or any of the assets owned or used by, Buyer; (iv) conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract; or (v) result in the imposition or creation of any Encumbrance upon or with respect to any of the assets owned or used by Buyer. Except as set forth in Part 4.2 of the Buyer's Disclosure Letter, Buyer is not and will not be required to give any notice to or obtain any Consent from any Person in connection with the STOCK PURCHASE AGREEMENT 33 34 execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions. 4.3 INVESTMENT INTENT. Buyer is acquiring the Shares for its own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act. 4.4 CERTAIN PROCEEDINGS. There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. 4.5 BROKERS OR FINDERS. Buyer and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. 4.6 DISCLOSURE. (a) No representation or warranty of Buyer in this Agreement and no statement in the Buyer's Disclosure Letter omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. (b) There is no fact known to Buyer that has specific application to Buyer (other than general economic or industry conditions) and that materially adversely affects or, as far as Buyer can reasonably foresee, materially threatens, the assets, business, prospects, financial condition, or results of operations of Buyer (on a consolidated basis) that has not been set forth in this Agreement or the Buyer's Disclosure Letter. ARTICLE V COVENANTS OF SELLERS AND TSL 5.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and the Closing Date, Sellers and TSL will, and will cause each Acquired Company and its Representatives to, (a) afford Buyer and its Representatives (collectively, "Buyer's Advisors") full and free access to each Acquired Company, its personnel, properties, contracts, books and records, and all other documents and data, (b) furnish Buyer and Buyer's Advisors with copies of all such contracts, books and records, and other existing documents and data as Buyer may reasonably request, and (c) furnish Buyer and Buyer's Advisors with such additional financial, operating, and other data and information as Buyer may reasonably request. 5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES. Between the date of this Agreement and the Closing Date, Sellers and TSL will, and will cause each Acquired Company to: STOCK PURCHASE AGREEMENT 34 35 (a) conduct the business of such Acquired Company only in the Ordinary Course of Business and in accordance with all valid regulations, laws and orders of all Governmental Bodies; (b) preserve intact the current business organization of such Acquired Company, keep available the services of the current officers, employees, and agents of such Acquired Company, and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, agents, and others having business relationships with such Acquired Company; (c) confer with Buyer concerning operational matters of a material nature; and (d) otherwise report from time to time to Buyer concerning the status of the business, operations, and finances of such Acquired Company. 5.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by this Agreement or disclosed in the Sellers' Disclosure Letter, between the date of this Agreement and the Closing Date, Sellers and TSL will not, and will cause each Acquired Company not to, without the prior consent of Buyer, take any affirmative action, or fail to take any reasonable action within their or its control, as a result of which any of the changes or events listed in Section 3.14 is likely to occur. 5.4 REQUIRED APPROVALS. As promptly as practicable after the date of this Agreement, Sellers will, and will cause each Acquired Company to, make all filings required by Legal Requirements to be made by them in order to consummate the Contemplated Transactions. Between the date of this Agreement and the Closing Date, Sellers will, and will cause each Acquired Company to, (a) cooperate with Buyer with respect to all filings that Buyer elects to make or is required by Legal Requirements to make in connection with the Contemplated Transactions and (b) cooperate with Buyer in obtaining all consents identified in Part 4.2 of the Buyer's Disclosure Letter. 5.5 NOTIFICATION. Between the date of this Agreement and the Closing Date, Sellers will promptly notify Buyer in writing if Sellers or any Acquired Company becomes aware of any fact or condition that causes or constitutes a Breach of any of Sellers' or the Company's representations and warranties as of the date of this Agreement, or if either Seller or the Company becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. Should any such fact or condition require any change in the Sellers' Disclosure Letter if the Sellers' Disclosure Letter were dated the date of the occurrence or discovery of any such fact or condition, Sellers will promptly deliver to Buyer a supplement to the Sellers' Disclosure Letter specifying such change. During the same period, Sellers will promptly notify Buyer of the occurrence of any Breach of any covenant of Sellers or the Company in this Article V or of the occurrence of any event that may make the satisfaction of the conditions in Article VII impossible or unlikely. No notice given pursuant to this Section 5.5 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading. STOCK PURCHASE AGREEMENT 35 36 5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS. Except as expressly provided in this Agreement, Sellers will cause all indebtedness owed to an Acquired Company by either Seller or any Related Person of any Seller to be paid in full contemporaneous with Closing. 5.7 BEST EFFORTS. Between the date of this Agreement and the Closing Date, Sellers will use their Best Efforts to cause the conditions in Articles VII and VIII to be satisfied. 5.8 REVIEWED FINANCIAL STATEMENTS OF THE ACQUIRED COMPANIES. Sellers and TSL shall deliver the financial statements as required by Section 3.4. 5.9 NO SOLICITATION. (a) Until the earlier to occur of (i) the Closing or (ii) the termination of this Agreement, TSL agrees that neither it nor any of its Subsidiaries nor any of the officers and directors of it or its Subsidiaries shall, and that it shall direct and use its reasonable efforts to cause its and its Subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or knowingly facilitate (including by way of furnishing information) any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving, or any purchase (including, without limitation, by way of tender offer) or sale of any of the assets of any of the Acquired Companies (other than in the Ordinary Course of Business) or shares of the common stock of any of the Acquired Companies (any such proposal or offer (other than a proposal or offer made by Buyer) being hereinafter referred to as an "Acquisition Proposal"). (b) TSL further agrees that neither it nor any of its Subsidiaries nor any of the officers and directors of it or its Subsidiaries shall, and that it shall direct and use its Best Efforts to cause its and its Subsidiaries' employees, agents and representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, have any discussion with or provide any confidential information or data to any Person relating to an Acquisition Proposal, or engage in any negotiations concerning an Acquisition Proposal or accept an Acquisition Proposal. (c) TSL agrees that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. 5.10 ANNUAL STATEMENT. Sellers will use their Best Efforts to cause an appropriate officer of each Acquired Company that was employed by such Acquired Company during the 1999 calendar year to execute the Annual Statement and all other insurance regulatory and filings relating to the 1999 calendar year required (as applicable) to be filed with respect to such Acquired Company. STOCK PURCHASE AGREEMENT 36 37 5.11 AUDIT COSTS. The Acquired Companies shall take all action necessary to ensure that all costs of the December 31, 1999 Audit are accrued and reflected on the balance sheets for the Acquired Companies as of December 31, 1999. 5.12 PERSONAL GUARANTIES. Sellers shall use their commercially reasonable efforts to cause the personal guaranties of the indebtedness described in Part 6.5 of Sellers' Disclosure Letter to be extinguished or released within 15 days following the Closing Date. 5.13 NON-COMPETITION AGREEMENT. (a) Buyer and Sellers hereby agree and acknowledge that a portion of the Initial Purchase Price, constituting at least $100,000.00, represents the value of the good will established by Sellers in TSL and transferred to Buyer by this Agreement. (b) Each Seller, on his own behalf, acknowledges that: (i) the services to be performed by him under the attached Hill Employment Agreement and Heidt Employment Agreement, respectively, are of a special, unique, unusual, extraordinary, and intellectual character; (ii ) Buyer's business is currently national in scope and its services and products are marketed throughout the United States and the scope of TSL's business and the market for its products currently extends through the states of North Dakota, South Dakota and Minnesota and is contemplated to be expanded following the Closing; (iii) TSL competes with other businesses that are or could be located in any part of the United States; (iv) Buyer has required that each Seller make the covenants set forth in this section as a condition to Buyer's purchase of the shares of capital stock of TSL owned by each Seller pursuant to this Agreement; and (v) the provisions of this section are reasonable and necessary to protect the TSL's business. (c) In consideration of the acknowledgments by each Seller, and in consideration of the amounts paid or to be paid by Buyer to each Seller under this Agreement, each Seller covenants on his own behalf that he will not, directly or indirectly: (i) during the Employment Term (as defined below), except in the course of his employment by TSL, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend Seller's name or any similar name to, lend Seller's credit to or render services or advice to, any business whose products, services or activities compete in whole or in part with the products, services or activities of TSL, Buyer or any affiliate thereof anywhere in the world; provided, however, that each Seller may purchase or otherwise acquire up to (but not more than) five percent (5%) of any class of securities of any enterprise involved in the Business (defined below) (but without otherwise participating in the activities of such enterprise), other than Buyer, if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; and further provided that Executive may purchase securities of Buyer in those purchase windows authorized for Buyer's officers by the Chief Executive Officer of Buyer; STOCK PURCHASE AGREEMENT 37 38 (ii) during the Post-Employment Period (as defined below), engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend the Executive's name or any similar name to, lend Executive's credit to or render services or advice to, any business whose products, services or activities are involved in, directly or indirectly or in whole or in part, the Business in Burleigh County, North Dakota, or any geographical areas outside of North Dakota in which TSL conducts operations as of the Closing Date; provided, however, that each Seller may purchase or otherwise acquire, directly or indirectly, up to (but not more than) five percent of any class of securities of any enterprise involved in the Business (but without otherwise participating in the activities of such enterprise), if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934; provided, further, that in the event that, during the Post-Agreement Period, TSL, Buyer and all affiliates thereof cease to engage in any given segment of the Business in the States of North Dakota, South Dakota and Minnesota, then the provisions of this Section 5.13(c)(ii) will not apply to either Seller with respect to that particular segment of Business in the States of North Dakota, South Dakota and Minnesota only but will remain in effect and applicable to each Seller for all other purposes. (iii) whether for Seller's own account or for the account of any other Person, at any time during the Employment Term and the Post-Employment Period, solicit business of the same or similar type being carried on by TSL, from any Person known by Seller to be a customer of TSL, whether or not Seller had personal contact with such Person during and by reason of Seller's employment with TSL; (iv) whether for Seller's own account or the account of any other Person (A) at any time during the Employment Term and the Post-Employment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any Person who is or was an employee of TSL at any time during the Employment Term or in any manner induce or attempt to induce any employee of TSL to terminate his employment with TSL; or (B) at any time during the Employment Term and the Post-Employment Period, interfere with TSL's relationship with any Person, including any Person who at any time during the Employment Term was an employee, agent, insurer, or customer of TSL; or (v) at any time during or after the Employment Term, disparage TSL or any of its shareholders, directors, officers, employees, or agents. (d) For purposes of this sections the term "Employment Term" shall have an identical meaning to Term as defined in the Hill Employment Agreement or the Heidt Employment Agreement, respectively; "Post-Employment Period" means the period beginning on the date of termination of Seller's employment with TSL, plus the remainder of the Term, if any, not fulfilled by Seller for any reason plus three years. For purposes of this section, the term "Business" means the business of writing, underwriting, selling, claims adjusting, acting as an agent with respect to STOCK PURCHASE AGREEMENT 38 39 nonstandard private passenger automotive or commercial automotive insurance or other related insurance activities. (e) If any covenant in this section is held to be unreasonable, arbitrary, or against public policy, such covenant will be considered to be divisible with respect to scope, time, and geographic area, and such lesser scope, time, or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary, and not against public policy, will be effective, binding, and enforceable against each Seller. (f) The period of time applicable to any covenant in this section will be extended by the duration of any violation by each Seller, respectively, of such covenant. (g) Each Seller will, while the covenant under this section is in effect, give notice to TSL, within ten days after accepting any other employment, of the identity of Seller's employer. Buyer or TSL may notify such employer that Seller is bound by this Agreement and, at TSL's election, furnish such employer with a copy of this Agreement or relevant portions thereof. (h) Each Seller acknowledges on his own behalf that the injury that would be suffered by TSL as a result of a breach of the provisions of this section would be irreparable and that an award of monetary damages to TSL for such a breach would be an inadequate remedy. Consequently, TSL will have the right, in addition to any other rights it may have, to obtain injunctive relief to restrain any breach or threatened breach or otherwise to specifically enforce any provision of this section, and TSL will not be obligated to post bond or other security in seeking such relief. (i) The covenants by each Seller in this section are essential elements of this Agreement, and without each Seller's agreement to comply with such covenants, Buyer would not have purchased the capital stock of TSL owned by Sellers under this Agreement and TSL would not have agreed to employ or continue the employment of each Seller pursuant to the attached Hill Employment Agreement and Heidt Employment Agreement, respectively. TSL and each Seller have independently consulted their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenants, with specific regard to the nature of the business conducted by TSL. (j) Each Seller's covenants in this section are independent covenants and the existence of any claim by either Seller against TSL under this Agreement or otherwise, or against Buyer, will not excuse either Seller's breach of any covenant in this section. (k) Notwithstanding the provisions of Section 10.5 or any other provision of this Agreement to the contrary, the provisions of this Section 5.13 will continue in full force and effect after Closing as is necessary or appropriate to enforce the covenants and agreements of each Seller in this section. STOCK PURCHASE AGREEMENT 39 40 ARTICLE VI COVENANTS OF BUYER 6.1 APPROVALS OF GOVERNMENTAL BODIES. As promptly as practicable after the date of this Agreement, Buyer will make all filings required by Legal Requirements to be made by it in order to consummate the Contemplated Transactions. Between the date of this Agreement and the Closing Date, Buyer will (a) cooperate with Sellers with respect to all filings that Sellers elect to make or is required by Legal Requirements to make in connection with the Contemplated Transactions and (b) cooperate with Sellers in obtaining all consents identified in Part 3.2 of the Sellers' Disclosure Letter; provided that this Agreement will not require Buyer to dispose of or make any change in any portion of its business or to incur any other burden to obtain a Governmental Authorization. 6.2 BEST EFFORTS. Except as set forth in the proviso to Section 6.1, between the date of this Agreement and the Closing Date, Buyer will use its Best Efforts to cause the conditions in Articles VII and VIII to be satisfied. 6.3 ACCESS. Between the date of this Agreement and the Closing Date, Buyer shall provide to Sellers responses to the Sellers' reasonable due diligence requests. 6.4 NOTIFICATION. Between the date of this Agreement and the Closing Date, Buyer will promptly notify Sellers in writing if Buyer becomes aware of any fact or condition that causes or constitutes a Breach of any of Buyer's representations and warranties as of the date of this Agreement, or if Buyer becomes aware of the occurrence after the date of this Agreement of any fact or condition that would (except as expressly contemplated by this Agreement) cause or constitute a Breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition. Should any such fact or condition require any change in the Buyer's Disclosure Letter if the Buyer's Disclosure Letter were dated the date of the occurrence or discovery of any such fact or condition, Buyer will promptly deliver to Sellers a supplement to the Buyer's Disclosure Letter specifying such change. During the same period, Buyer will promptly notify Sellers of the occurrence of any Breach of any covenant of Buyer in this Article VI or of the occurrence of any event that may make the satisfaction of the conditions in Article VIII impossible or unlikely. No notice given pursuant to this Section 6.4 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading. 6.5 PERSONAL GUARANTIES. To the extent that Sellers' efforts to cause the personal guaranties of the indebtedness described in Part 6.5 of the Sellers' Disclosure Letter to be extinguished or released within 15 days after the Closing Date are unsuccessful, Buyer shall take all action necessary (including without limitation causing the underlying indebtedness to be extinguished) to cause such personal guaranties to be extinguished or released within 45 days after the Closing Date. STOCK PURCHASE AGREEMENT 40 41 ARTICLE VII CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE Buyer's obligation to purchase the Shares and to take the other actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part): 7.1 ACCURACY OF REPRESENTATIONS. Each of Sellers' and the Company's representations and warranties in this Agreement must have been accurate in all material respects (other than those contained in Section 3.29, which must have been accurate without regard to materiality) as of the date of this Agreement, and must be accurate in all material respects (other than those contained in Section 3.29, which must be accurate without regard to materiality) as of the Closing Date as if made on the Closing Date, without giving effect to any supplement to the Sellers' Disclosure Letter. 7.2 SELLERS' PERFORMANCE. Each of the covenants and obligations that Sellers and the Company are required to perform or to comply with pursuant to this Agreement at or prior to the Closing must have been duly performed and complied with in all material respects. 7.3 CONSENTS. Each of the Consents identified in Part 3.2 of the Sellers' Disclosure Letter and Part 4.2 of the Buyer's Disclosure Letter must have been obtained and must be in full force and effect. 7.4 ADDITIONAL DOCUMENTS. Each of the following documents must have been delivered to Buyer: (a) estoppel certificates executed on behalf of all landlords, lenders and lessors of the Acquired Companies, dated as of a date not more than five (5) days prior to the Closing Date; (b) such other documents as Buyer may reasonably request for the purpose of (i) evidencing the accuracy of any of Sellers' and the Company's representations and warranties, (ii) evidencing the performance by Sellers and the Company of, or the compliance by Sellers and the Company with, any covenant or obligation required to be performed or complied with by Sellers and the Company, (iii) evidencing the satisfaction of any condition referred to in this Article VII or (iv) otherwise facilitating the consummation or performance of any of the Contemplated Transactions. 7.5 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS. There must not have been made or Threatened by any Person any claim asserting that such Person (a) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, any stock of, or any other voting, equity, or ownership interest in, any of the Acquired Companies or (b) is entitled to all or any portion of the Purchase Price payable for the Shares. STOCK PURCHASE AGREEMENT 41 42 7.6 NO PROHIBITION. Neither the consummation nor the performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time), materially contravene, or conflict with, or result in a material violation of, or cause Buyer or any Person affiliated with Buyer to suffer any material adverse consequence under, (a) any applicable Legal Requirement or Order or (b) any Legal Requirement or Order that has been published, introduced, or otherwise proposed by or before any Governmental Body. Neither the consummation nor the performance of the Contemplated Transactions will directly or indirectly violate an Order. 7.7 REGULATORY APPROVAL. Buyer or a Subsidiary of Buyer shall have obtained the necessary regulatory approvals in the states in which any of the Acquired Companies operate to consummate the Contemplated Transactions. 7.8 TRANSFER OF CERTAIN ASSETS. Hill shall have purchased the company airplane and real property described in Part 7.8 of the Sellers' Disclosure Letter on the terms described therein and assumed all associated liabilities, obligations and indebtedness, including but not limited to future and accrued but unpaid maintenance costs and taxes. 7.9 CLOSING DELIVERIES. All items contemplated in Section 2.5(a) shall have been delivered to Buyer. ARTICLE VIII CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE Sellers' obligation to sell the Shares and to take the other actions required to be taken by Sellers at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Sellers, in whole or in part): 8.1 ACCURACY OF REPRESENTATIONS. Each of Buyer's representations and warranties in this Agreement must have been accurate in all material respects as of the date of this Agreement, and must be accurate in all material respects as of the Closing Date as if made on the Closing Date, without giving effect to any supplement to the Buyer's Disclosure Letter. 8.2 BUYER'S PERFORMANCE. Each of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing must have been performed and complied with in all material respects. 8.3 CONSENTS. Each of the Consents identified in Part 3.2 of the Sellers' Disclosure Letter and Part 4.2 of the Buyer's Disclosure Letter must have been obtained and must be in full force and effect. STOCK PURCHASE AGREEMENT 42 43 8.4 ADDITIONAL DOCUMENTS. Buyer must have caused such other documents as Sellers may reasonably request for the purpose of (i) evidencing the accuracy of any representation or warranty of Buyer, (ii) evidencing the performance by Buyer of, or the compliance by Buyer with, any covenant or obligation required to be performed or complied with by Buyer, (iii) evidencing the satisfaction of any condition referred to in this Article VIII or (iv) otherwise facilitating the consummation of any of the Contemplated Transactions. 8.5 NO PROHIBITION. Neither the consummation nor the performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time), materially contravene, or conflict with, or result in a material violation of, or cause Sellers or any Person affiliated with either Seller to suffer any material adverse consequence under, (a) any applicable Legal Requirement or Order or (b) any Legal Requirement or Order that has been published, introduced, or otherwise proposed by or before any Governmental Body. Neither the consummation nor the performance of the Contemplated Transactions will directly or indirectly violate an Order. 8.6 CLOSING DELIVERIES. All items contemplated in Section 2.5(b) shall have been delivered to Sellers. ARTICLE IX TERMINATION 9.1 TERMINATION EVENTS. This Agreement may, by notice given prior to or at the Closing, be terminated: (a) by either Buyer or Sellers if a material Breach of any provision of this Agreement has been committed by the other party and such Breach has not been waived or such Breach has not been remedied within thirty (30) days after written notice is given specifying the Breach and demanding it to be remedied; (b) (i) by Buyer if any of the conditions in Article VII has not been satisfied as of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of Buyer to comply with its obligations under this Agreement) and Buyer has not waived such condition on or before the Closing Date; or (ii) by Sellers, if any of the conditions in Article VIII has not been satisfied as of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of Sellers to comply with their obligations under this Agreement) and Sellers have not waived such condition on or before the Closing Date; (c) by mutual consent of Buyer and Sellers; STOCK PURCHASE AGREEMENT 43 44 (d) by either Buyer or Sellers if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before June 30, 2000, or such later date as the parties may agree upon; or (e) by Buyer if Buyer is not completely satisfied on or before November 19, 1999 in its sole discretion with the results of the review of the Acquired Companies' operations and books and records by Buyer and Buyer's Advisors. 9.2 EFFECT OF TERMINATION. Each party's right of termination under Section 9.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 9.1, all further obligations of the parties under this Agreement will terminate, except that the obligations in Sections 11.1 and 11.3 will survive; provided, however, that if this Agreement is terminated by a party because of the Breach of the Agreement by the other party or because one or more of the conditions to the terminating party's obligations under this Agreement is not satisfied as a result of the other party's failure to comply with its obligations under this Agreement, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. ARTICLE X INDEMNIFICATION; REMEDIES 10.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE. All representations, warranties, covenants, and obligations in this Agreement, the Sellers' Disclosure Letter, the supplements to the Sellers' Disclosure Letter, the certificates delivered pursuant to Section 2.5(a)(iv), and any other certificate or document delivered pursuant to this Agreement will survive the Closing. The right to indemnification, payment of Damages or other remedy based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Damages, or other remedy based on such representations, warranties, covenants, and obligations. 10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS. Sellers will indemnify and hold harmless Buyer, the Acquired Companies, and their respective Representatives, shareholders, controlling persons, and affiliates (collectively, the "Indemnified Persons") for, and will pay to the Indemnified Persons the amount of, any loss, liability, claim, damage (including incidental and consequential damages), expense (including costs of investigation and defense and reasonable STOCK PURCHASE AGREEMENT 44 45 attorneys' fees) or diminution of value, whether or not involving a third-party claim (collectively, "Damages"), arising, directly or indirectly, from or in connection with: (a) any Breach of any representation or warranty made by Sellers or TSL in this Agreement (without giving effect to any supplement to the Sellers' Disclosure Letter), the Sellers' Disclosure Letter, the supplements to the Sellers' Disclosure Letter, or any other certificate or document delivered by either or both Sellers or TSL under this Agreement; (b) any Breach of any representation or warranty made by Sellers or TSL in this Agreement as if such representation or warranty were made on and as of the Closing Date without giving effect to any supplement to the Sellers' Disclosure Letter, other than any such Breach that is disclosed in a supplement to the Sellers' Disclosure Letter and is expressly identified in the certificates delivered pursuant to Section 2.5(a)(v) as having caused the condition specified in Section 7.1 not to be satisfied; (c) any Breach by either Seller or TSL of any covenant or obligation of Sellers or TSL; or (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with either Seller, TSL, any other Acquired Company (or any Person acting on their behalf) in connection with any of the Contemplated Transactions; provided, however, that Sellers shall have no obligation to make any payment to Indemnified Persons under Sections 10.2 and 10.3 unless the aggregate amount to which the Indemnified Persons are entitled by reason of all claims under Sections 10.2 and 10.3 exceeds the sum of $50,000 in the aggregate under Sections 10.2 and 10.3, it being understood that only after such sum is exceeded, shall the aggregate of all claims under Sections 10.2 and 10.3 be payable by Sellers on demand. The remedies provided in this Section 10.2 will not be exclusive of or limit any other remedies that may be available to Buyer or the other Indemnified Persons. 10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS -- ENVIRONMENTAL MATTERS. In addition to the provisions of Section 10.2, Sellers will indemnify and hold harmless Buyer, the Acquired Companies, and the other Indemnified Persons for, and will pay to Buyer, the Acquired Companies, and the other Indemnified Persons the amount of, any Damages (including costs of cleanup, containment, or other remediation) arising, directly or indirectly, from or in connection with: (a) any Environmental, Health, and Safety Liabilities arising out of or relating to: (i) (A) the ownership, operation, or condition at any time on or prior to the Closing Date of the Facilities or any other properties and assets (whether real, personal, or mixed and whether tangible or intangible) in which Sellers, each Seller, any Acquired Company has or had an interest, or (B) any STOCK PURCHASE AGREEMENT 45 46 Hazardous Materials or other contaminants that were present on the Facilities or such other properties and assets at any time on or prior to the Closing Date; or (ii) (A) any Hazardous Materials or other contaminants, wherever located, that were, or were allegedly, generated, transported, stored, treated, Released, or otherwise handled by Sellers, any Acquired Company, or by any other Person for whose conduct they are or may be held responsible at any time on or prior to the Closing Date, or (B) any Hazardous Activities that were, or were allegedly, conducted by Sellers, any Acquired Company or by any other Person for whose conduct they are or may be held responsible; or (b) any bodily injury (including illness, disability, and death, and regardless of when any such bodily injury occurred, was incurred, or manifested itself), personal injury, property damage (including trespass, nuisance, wrongful eviction, and deprivation of the use of real property), or other damage of or to any Person, including any employee or former employee of either Seller, any Acquired Company, or any other Person for whose conduct they are or may be held responsible, in any way arising from or allegedly arising from any Hazardous Activity conducted or allegedly conducted with respect to the Facilities or the operation of the Acquired Companies prior to the Closing Date, or from Hazardous Material that was (i) present or suspected to be present on or before the Closing Date on or at the Facilities (or present or suspected to be present on any other property, if such Hazardous Material emanated or allegedly emanated from any of the Facilities and was present or suspected to be present on any of the Facilities on or prior to the Closing Date) or (ii) Released or allegedly Released by either Seller, any Acquired Company, or any other Person for whose conduct they are or may be held responsible, at any time on or prior to the Closing Date; provided, however, that Sellers shall have no obligation to make any payment to Indemnified Persons under Sections 10.2 and 10.3 unless the aggregate amount to which the Indemnified Persons are entitled by reason of all claims under Sections 10.2 and 10.3 exceeds the sum of$50,000 in the aggregate under Sections 10.2 and 10.3, it being understood that only after such sum is exceeded, shall the aggregate of all claims under Sections 10.2 and 10.3 be payable by Sellers on demand. Buyer will be entitled to control any Cleanup, any related Proceeding, and, except as provided in the following sentence, any other Proceeding with respect to which indemnity may be sought under this Section 10.3. The procedure described in Section 10.7 will apply to any claim solely for monetary damages relating to a matter covered by this Section 10.3. 10.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER. Buyer will indemnify and hold harmless Sellers, and will pay to Sellers the amount of any Damages arising, directly or indirectly, from or in connection with (a) any Breach of any representation or warranty made by Buyer in this Agreement (without giving effect to any supplement to the Buyer's Disclosure Letter), the Buyer's Disclosure Letter, the supplements to the Buyer's Disclosure Letter, or any other certificate or document delivered by Buyer pursuant to this Agreement; (b) any Breach of any representation or warranty made by Buyer in this Agreement as if such representation or warranty were made on and as of the Closing Date without giving effect to any supplement to the Buyer's Disclosure Letter, other than any such Breach that is disclosed in a STOCK PURCHASE AGREEMENT 46 47 supplement to the Buyer's Disclosure Letter and is expressly identified in the certificate delivered pursuant to Section 2.5(b)(ii) as having caused the condition specified in Section 8.1 not to be satisfied; (c) any Breach by Buyer of any covenant or obligation of Buyer in this Agreement; or (d) any claim by any Person for brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with any of the Contemplated Transactions (other than Philo Smith & Co., Inc.); provided, however, that Buyer shall have no obligation to make any payment to Sellers under this Section 10.4 unless the aggregate amount to which Sellers are entitled by reason of all claims under this Section 10.4 exceeds $50,000 in the aggregate of all amounts collectible under the Acquired Companies' errors and omissions policies, it being understood that once such amount is exceeded, the aggregate of all claims under this Section 10.4 shall be payable by Buyer on demand. The remedies provided in this Section 10.4 will not be exclusive of or limit any other remedies that may be available to Sellers. 10.5 TIME LIMITATIONS. If the Closing occurs, Sellers will have no liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied with prior to the Closing Date, other than those in Sections 3.3, 3.9, 3.11, 3.17, unless on or before the earlier of (i) the second anniversary of the Date for the third Earnout Period or (ii) July 1, 2003, Buyer notifies Sellers of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Buyer; a claim with respect to Section 3.3, 3.9, 3.11, 3.17, or a claim for indemnification or reimbursement not based upon any representation or warranty or any covenant or obligation to be performed and complied with prior to the Closing Date, may be made at any time. If the Closing occurs, Buyer will have no liability (for indemnification or otherwise) with respect to any representation or warranty, or covenant or obligation to be performed and complied with prior to the Closing Date, unless on or before July 1, 2003, Sellers notify Buyer of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by Sellers. 10.6 RIGHT OF SET-OFF. Upon notice to Sellers specifying in reasonable detail the basis for such set-off, Buyer may set off any amount to which it may be entitled under this Article X against amounts otherwise payable to Sellers under this Agreement. The exercise of such right of set-off by Buyer in good faith, whether or not ultimately determined to be justified, will not constitute a Breach of this Agreement. Neither the exercise of nor the failure to exercise such right of set-off shall constitute an election of remedies or limit Buyer in any manner in the enforcement of any other remedies that may be available to it. Any amount set-off pursuant to this Section 10.6 shall be considered a reduction in the Purchase Price of that amount. In the event that it is finally determined that any set-off pursuant to this Section 10.6 was wrongful, the amount determined to have been STOCK PURCHASE AGREEMENT 47 48 wrongfully set-off shall be paid to Sellers pro rata in accordance with their ownership interests in TSL (immediately prior to the Closing) together with interest accruing at the Applicable Rate from the date such amount originally was to be paid to Sellers. 10.7 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS. (a) Promptly after receipt by an indemnified party under Section 10.2 or 10.4, or (to the extent provided in the last sentence of Section 10.3) Section 10.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except and only to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party's failure to give such notice. (b) If any Proceeding referred to in Section 10.7(a) is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Taxes not related to the Acquired Companies, be entitled to participate in such Proceeding with respect to the Acquired Companies and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Article X for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification; (ii) no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party's consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten days after the indemnified party's notice is given, give notice to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the indemnified party. STOCK PURCHASE AGREEMENT 48 49 (c) Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent (which may not be unreasonably withheld). 10.8 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. ARTICLE XI GENERAL PROVISIONS 11.1 EXPENSES. Except as otherwise expressly provided in this Agreement, the Sellers shall be responsible for the obligations of the Acquired Companies and Sellers with regard to both (i) Philo Smith & Co., Inc. and (ii) expenses incurred by either Seller or any Acquired Company in connection with the negotiation, preparation and execution of this Agreement and the Contemplated Transactions, including all fees and expenses of Sellers' or any of the Acquired Companies' agents, representatives, counsel, and accountants (including, without limitation, all costs and expenses related to the December 31, 1999 Audit pursuant to Section 5.11 of this Agreement). Buyer shall be responsible for the obligations of Buyer with regard to expenses incurred by Buyer in connection with the negotiation, preparation and execution of this Agreement and the Contemplated Transactions, including all fees and expenses of Buyer's agents, representatives, counsel, and accountants. In the event of termination of this Agreement, the obligation of Buyer to pay such expenses will be subject to any rights of Buyer arising from a breach of this Agreement by another party. 11.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, at such time and in such manner as Buyer determines. Buyer will use its commercially reasonable efforts to provide copies of public announcements to Sellers for Sellers' review prior to release. Unless consented to by Buyer in advance or required by Legal Requirements, prior to the Closing Sellers shall, and shall cause the Acquired Companies to, keep this Agreement strictly confidential and may not make any disclosure of this Agreement to any Person other than any professional advisors of Sellers. Sellers and Buyer will consult with each other concerning the means by which the Acquired Companies' employees, customers, and suppliers and others having dealings with the Acquired Companies will be informed of the Contemplated Transactions, and Buyer will have the right to be present for any such communication. STOCK PURCHASE AGREEMENT 49 50 11.3 CONFIDENTIALITY. Between the date of this Agreement and the Closing Date, Buyer and Sellers will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Buyer and the Acquired Companies to maintain in confidence, and not use to the detriment of another party or an Acquired Company any written, oral, or other information obtained in confidence from another party or an Acquired Company in connection with this Agreement or the Contemplated Transactions, unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the Contemplated Transactions, or (c) the furnishing or use of such information is required by legal proceedings. If the Contemplated Transactions are not consummated, each party will return or destroy as much of such written information as the other party may reasonably request. Whether or not the Closing takes place, Sellers waive, and will upon Buyer's request cause the Acquired Companies to waive, any cause of action, right, or claim arising out of the access of Buyer or its representatives to any trade secrets or other confidential information of the Acquired Companies except for the competitive misuse by Buyer of such trade secrets or confidential information. 11.4 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties): If to either Seller or TSL: 1605 E. Capitol Avenue Bismarck, North Dakota 58501 Facsimile No.: (701) 223-0842 (Notices to TSL should be to the attention of Herbert A. Hill) with a copy of all notices to Sellers and TSL to: Pearce & Durick P.L.L.P. P.O. Box 400 314 East Thayer Avenue Bismarck, North Dakota 58502 Attention: Patrick W. Durick Facsimile No.: (701) 223-7865 STOCK PURCHASE AGREEMENT 50 51 If to Buyer: GAINSCO, INC. 500 Commerce Street Fort Worth, Texas 76102-5439 Attention: Chief Executive Officer Facsimile No.: (817) 338-1454 with a copy to: Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75202 Attention: Byron F. Egan Fax: (214) 953-5822 11.5 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the State of Texas, County of Dallas, or, if it has or can acquire jurisdiction, in the United States District Court for the Northern District of Texas, Dallas Division, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world. 11.6 FURTHER ASSURANCES. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. 11.7 WAIVER. The rights and remedies of the parties to this Agreement are cumulative and not alternative. The rights of Buyer and Sellers hereunder are in addition to all other rights provided by law. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 11.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the parties hereto. STOCK PURCHASE AGREEMENT 51 52 11.9 SELLERS' DISCLOSURE LETTER. (a) The disclosures in the Sellers' Disclosure Letter, and those in any Supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate and not to any other representation or warranty in this Agreement. (b) In the event of any inconsistency between the statements in the body of this Agreement and those in the Sellers' Disclosure Letter (other than an exception expressly set forth as such in the Sellers' Disclosure Letter with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control. 11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, except that Buyer may assign any of its rights under this Agreement to any Subsidiary of Buyer. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. In the event Buyer assigns any of its rights under this Agreement to any Subsidiary of Buyer and such Subsidiary does not fulfill its obligations under this Agreement, Buyer shall assume and fulfill such Subsidiary's obligations under this Agreement. 11.11 SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 11.12 ARTICLE AND SECTION HEADINGS, CONSTRUCTION AND USAGE. The headings of Articles and Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Article" or "Articles" refer to the corresponding Article or Articles of this Agreement, and all references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms, and "or" is used in the inclusive sense of "and/or". Where the Agreement provides that a payment will be made by Buyer to the Sellers collectively, such payment shall be made to the Sellers pro rata in accordance with their ownership interest in TSL immediately prior to the Closing. 11.13 TIME OF ESSENCE. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence. STOCK PURCHASE AGREEMENT 52 53 11.14 GOVERNING LAW. This Agreement will be governed by the laws of the State of Texas without regard to conflicts of laws principles. 11.15 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. [Intentionally left blank.] STOCK PURCHASE AGREEMENT 53 54 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. SELLERS /s/ Herbert A. Hill ------------------------------------------- Herbert A. Hill /s/ Alan E. Heidt ------------------------------------------- Alan E. Heidt TRI-STATE, LTD. By: /s/ Herbert A. Hill --------------------------------------- Name: Herbert A. Hill Title: President GAINSCO, INC. By: /s/ Glenn W. Anderson --------------------------------------- Name: Glenn W. Anderson Title: President and Chief Executive Officer STOCK PURCHASE AGREEMENT 54 55 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT ("Agreement") is made as of the 7th day of January, 2000, by GAINSCO, INC., a Texas corporation (hereinafter called "Pledgor", whether one or more), in favor of BANK ONE, NA ("Bank"). Pledgor hereby agrees with Bank as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings indicated below: (a) The term "Borrower" shall mean GAINSCO, Inc., a Texas corporation, and GAINSCO Service Corp., a Texas corporation, or either of them. (b) The term "Code" shall mean the Uniform Commercial Code as in effect in the State of Texas on the date of this Agreement or as it may hereafter be amended from time to time. (c) The term "Collateral" shall mean all property specifically described on Schedule A attached hereto and made a part hereof. The term Collateral, as used herein, shall also include (i) all certificates, instruments and/or other documents evidencing the foregoing, (ii) all renewals, replacements and substitutions of all of the foregoing, (iii) all Additional Property (as hereinafter defined), and (iv) all PRODUCTS and PROCEEDS of all of the foregoing. The designation of proceeds does not authorize Pledgor to sell, transfer or otherwise convey any of the foregoing property. The delivery at any time by Pledgor to Secured Party of any property as a pledge to secure payment or performance of any indebtedness or obligation whatsoever shall also constitute a pledge of such property as Collateral hereunder. (d) The term "Indebtedness" shall mean all indebtedness, obligations and liabilities of Borrower to Secured Party of any kind or character, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including without limitation all indebtedness, obligations and liabilities of Borrower to Secured Party now existing or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, purchase, overdraft, discount, indemnity agreement or otherwise, (ii) all accrued but unpaid interest on any of the indebtedness described in (i) above, (iii) all obligations of Borrower to Secured Party under any documents evidencing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i) and (ii) above, (iv) all costs and expenses incurred by Secured Party in connection with the collection and administration of all or any part of the indebtedness and obligations described in (i), (ii) and (iii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys' fees, and (v) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above. (e) The term "Loan Documents" shall mean all instruments and documents evidencing, securing, governing, guaranteeing and/or pertaining to the Indebtedness, including without limitation the Revolving Credit Agreement dated as of November 13, 1998 (as the same may be amended from time to time, the "Credit Agreement") among GAINSCO, Inc., GAINSCO Service Corp. and Bank. (f) The term "Obligated Party" shall mean any party other than Borrower who secures, guarantees and/or is otherwise obligated to pay all or any portion of the Indebtedness. (g) The term "Secured Party" shall mean Bank, its successors and assigns, including without limitation, any party to whom Bank, or its successors or assigns, may assign its rights and interests under this Agreement. All words and phrases used herein which are expressly defined in Section 1.201, Chapter 8 or Chapter 9 of the Code shall have the meaning provided for therein. Other words and phrases defined elsewhere in the Code shall have the meaning specified therein except to the extent such meaning is inconsistent with a definition in Section 1.201, Chapter 8 or Chapter 9 of the Code. Pledge Agreement-Page 1 GAINSCO, Inc. 56 2. SECURITY INTEREST. As security for the Indebtedness, Pledgor, for value received, hereby grants to Secured Party a continuing security interest in the Collateral. 3. ADDITIONAL PROPERTY. Collateral shall also includes the following property (collectively, the "Additional Property") which Pledgor becomes entitled to receive or shall receive in connection with any other Collateral: (a) any stock certificate, including without limitation, any certificate representing a stock dividend or any certificate in connection with any recapitalization, reclassification, merger, consolidation, conversion, sale of assets, combination of shares, stock split or spin-off; (b) any option, warrant, subscription or right, whether as an addition to or in substitution of any other Collateral; (c) any dividends or distributions of any kind whatsoever, whether distributable in cash, stock or other property; (d) any interest, premium or principal payments; and (e) any conversion or redemption proceeds; provided, however, that until the occurrence of an Event of Default (as hereinafter defined), Pledgor shall be entitled to all cash dividends and all interest paid on the Collateral (except interest paid on any certificate of deposit pledged hereunder) free of the security interest created under this Agreement. All Additional Property received by Pledgor (except for dividends permitted to be retained by Pledgor pursuant to the immediately preceding sentence) shall be received in trust for the benefit of Secured Party. All Additional Property and all certificates or other written instruments or documents evidencing and/or representing the Additional Property that is received by Pledgor, together with such instruments of transfer as Secured Party may request, shall immediately be delivered to or deposited with Secured Party and held by Secured Party as Collateral under the terms of this Agreement. If the Additional Property received by Pledgor shall be shares of stock or other securities, such shares of stock or other securities shall be duly endorsed in blank or accompanied by proper instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a bank or member firm of the New York Stock Exchange, all in form and substance satisfactory to Secured Party. Secured Party shall be deemed to have possession of any Collateral in transit to Secured Party or its agent. 4. VOTING RIGHTS. As long as no Event of Default shall have occurred hereunder, any voting rights incident to any stock or other securities pledged as Collateral may be exercised by Pledgor; provided, however, that Pledgor will not exercise, or cause to be exercised, any such voting rights, without the prior written consent of Secured Party, if the direct or indirect effect of such vote will result in an Event of Default hereunder. 5. MAINTENANCE OF COLLATERAL. Other than the exercise of reasonable care to assure the safe custody of any Collateral in Secured Party's possession from time to time, Secured Party does not have any obligation, duty or responsibility with respect to the Collateral. Without limiting the generality of the foregoing, Secured Party shall not have any obligation, duty or responsibility to do any of the following: (a) ascertain any maturities, calls, conversions, exchanges, offers, tenders or similar matters relating to the Collateral or informing Pledgor with respect to any such matters; (b) fix, preserve or exercise any right, privilege or option (whether conversion, redemption or otherwise) with respect to the Collateral unless (i) Pledgor makes written demand to Secured Party to do so, (ii) such written demand is received by Secured Party in sufficient time to permit Secured Party to take the action demanded in the ordinary course of its business, and (iii) Pledgor provides additional collateral, acceptable to Secured Party in its sole discretion; (c) collect any amounts payable in respect of the Collateral (Secured Party being liable to account to Pledgor only for what Secured Party may actually receive or collect thereon); (d) sell all or any portion of the Collateral to avoid market loss; (e) sell all or any portion of the Collateral unless and until (i) Pledgor makes written demand upon Secured Party to sell the Collateral, and (ii) Pledgor provides additional collateral, acceptable to Secured Party in its sole discretion; or (f) hold the Collateral for or on behalf of any party other than Pledgor. 6. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants the following to Secured Party: (a) Due Authorization. The execution, delivery and performance of this Agreement and all of the other Loan Documents by Pledgor have been duly authorized by all necessary corporate action of Pledgor, to the extent Pledgor is a corporation, or by all necessary partnership action, to the extent Pledgor is a partnership. (b) Enforceability. This Agreement and the other Loan Documents constitute legal, valid and binding obligations of Pledgor, enforceable in accordance with their respective terms, except as limited by Pledge Agreement-Page 2 GAINSCO, Inc. 57 bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. (c) Ownership and Liens. Pledgor has good and indefeasible title to the Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement. No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. Pledgor has not executed any other security agreement currently affecting the Collateral and no financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except as may have been executed or filed in favor of Secured Party. (d) No Conflicts or Consents. Neither the ownership, the intended use of the Collateral by Pledgor, the grant of the security interest by Pledgor to Secured Party herein nor (except for restrictions imposed by any applicable Insurance Holding Company Laws (as hereinafter defined) the exercise by Secured Party of its rights or remedies hereunder, will (i) conflict with any provision of (A) any domestic or foreign law, statute, rule or regulation, (B) the articles or certificate of incorporation, charter, bylaws or partnership agreement, as the case may be, of Pledgor, or (C) any agreement, judgment, license, order or permit applicable to or binding upon Pledgor or otherwise affecting the Collateral, or (ii) result in or require the creation of any lien, charge or encumbrance upon any assets or properties of Pledgor or of any person except as may be expressly contemplated in the Loan Documents. Except as expressly contemplated in the Loan Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, governmental authority or third party is required in connection with the grant by Pledgor of the security interest herein or the exercise by Secured Party of its rights and remedies hereunder. (e) Security Interest. Pledgor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any lien, security interest or other charge or encumbrance. This Agreement creates a legal, valid and binding security interest in favor of Secured Party in the Collateral. (f) Location. Pledgor's residence or chief executive office, as the case may be, and the office where the records concerning the Collateral are kept is located at its address set forth on the signature page hereof. (g) Solvency of Pledgor. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Pledgor at the time of the execution of this Agreement, (i) Pledgor is and will be solvent, (ii) the fair saleable value of Pledgor's assets exceeds and will continue to exceed Pledgor's liabilities (both fixed and contingent), (iii) Pledgor is and will continue to be able to pay its debts as they mature, and (iv) if Pledgor is not an individual, Pledgor has and will have sufficient capital to carry on Pledgor's businesses and all businesses in which Pledgor is about to engage. (h) Nature of Ownership. Pledgor is the registered owner of the securities pledged as Collateral and a certificate has been issued in Pledgor's name to evidence Pledgor's ownership in such securities. (i) Securities/100% Ownership. Any certificates evidencing securities pledged as Collateral are valid and genuine and have not been altered. All securities pledged as Collateral have been duly authorized and validly issued, are fully paid and non-assessable, and were not issued in violation of the preemptive rights of any party or of any agreement by which Pledgor or the issuer thereof is bound. No restrictions or conditions exist with respect to the transfer or voting of any securities pledged as Collateral, except as has been disclosed to Secured Party in writing. To the best of Pledgor's knowledge, no issuer of such securities (other than securities of a class which are publicly traded) has any outstanding stock rights, rights to subscribe, options, warrants or convertible securities outstanding or any other rights outstanding entitling any party to have issued to such party capital stock of such issuer, except as has been disclosed to Secured Party in writing. Pledgor owns 100% of the issued and outstanding shares of capital stock of each issuer listed on Schedule A attached hereto. Pledge Agreement-Page 3 GAINSCO, Inc. 58 (j) Chattel Paper, Documents and Instruments. The security interest in chattel paper, documents and instruments of Pledgor granted hereunder is valid and genuine, and all such chattel paper, documents and instruments have only one original counterpart. No party other than Pledgor or Secured Party is in actual or constructive possession of any such chattel paper, documents or instruments. 7. AFFIRMATIVE COVENANTS. Pledgor will comply with the covenants contained in this Section at all times during the period of time this Agreement is effective unless Secured Party shall otherwise consent in writing. (a) Ownership and Liens. Pledgor will maintain good and indefeasible title to all Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted by the other Loan Documents. Pledgor will not permit any dispute, right of setoff, counterclaim or defense to exist with respect to all or any part of the Collateral. Pledgor will cause any financing statement or other security instrument with respect to the Collateral to be terminated, except as may exist or as may have been filed in favor of Secured Party. Pledgor will defend at its expense Secured Party's right, title and security interest in and to the Collateral against the claims of any third party. (b) Inspection of Books and Records. Pledgor will keep adequate records concerning the Collateral and will permit Secured Party and all representatives and agents appointed by Secured Party to inspect Pledgor's books and records of or relating to the Collateral at any time during normal business hours, to make and take away photocopies, photographs and printouts thereof and to write down and record any such information. (c) Adverse Claim. Pledgor covenants and agrees to promptly notify Secured Party of any claim, action or proceeding affecting title to the Collateral, or any part thereof, or the security interest created hereunder and, at Pledgor's expense, defend Secured Party's security interest in the Collateral against the claims of any third party. Pledgor also covenants and agrees to promptly deliver to Secured Party a copy of all written notices received by Pledgor with respect to the Collateral, including without limitation, notices received from the issuer of any securities pledged hereunder as Collateral. (d) Delivery of Instruments and/or Certificates. Contemporaneously herewith, Pledgor covenants and agrees to deliver to Secured Party any certificates, documents or instruments representing or evidencing the Collateral, together with Pledgor's endorsement thereon and/or accompanied by proper instruments of transfer and assignment duly executed in blank with, if requested by Secured Party, signatures guaranteed by a bank or member firm of the New York Stock Exchange, all in form and substance satisfactory to Secured Party. If required by Secured Party, Pledgor also covenants and agrees to cooperate with Secured Party in registering the pledge of the securities pledged as Collateral with the issuer of such securities. (e) Further Assurances. Pledgor will from time to time at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation, executing and filing such financing or continuation statements, or any amendments thereto. (f) Chattel Paper, Documents and Instruments. Pledgor will take such action as may be requested by Secured Party in order to cause any chattel paper, documents or instruments to be valid and enforceable and will cause all chattel paper to have only one original counterpart. Upon request by Secured Party, Pledgor will deliver to Secured Party all originals of chattel paper, documents or instruments and will mark all chattel paper with a legend indicating that such chattel paper is subject to the security interest granted hereunder. Pledge Agreement-Page 4 GAINSCO, Inc. 59 8. NEGATIVE COVENANTS. Pledgor will comply with the covenants contained in this Section at all times during the period of time this Agreement is effective, unless Secured Party shall otherwise consent in writing. (a) Transfer or Encumbrance. Pledgor will not (i) sell, assign (by operation of law or otherwise) or transfer Pledgor's rights in any of the Collateral, (ii) grant a lien or security interest in or execute, file or record any financing statement or other security instrument with respect to the Collateral to any party other than Secured Party, or (iii) deliver actual or constructive possession of any certificate, instrument or document evidencing and/or representing any of the Collateral to any party other than Secured Party. (b) Impairment of Security Interest. Pledgor will not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party's security interest in any Collateral. (c) Dilution of Ownership. As to any securities pledged as Collateral (other than securities of a class which are publicly traded), Pledgor will not consent to or approve of the issuance of (i) any additional shares of any class of securities of such issuer (unless immediately upon issuance additional securities are pledged and delivered to Secured Party pursuant to the terms hereof to the extent necessary to give Secured Party a security interest after such issuance in at least the same percentage of such issuer's outstanding securities as Secured Party had before such issuance), (ii) any instrument convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any such securities, or (iii) any warrants, options, contracts or other commitments entitling any third party to purchase or otherwise acquire any such securities. (d) Restrictions on Securities. Pledgor will not enter into any agreement creating, or otherwise permit to exist, any restriction or condition upon the transfer, voting or control of any securities pledged as Collateral, except as consented to in writing by Secured Party. 9. RIGHTS OF SECURED PARTY. Secured Party shall have the rights contained in this Section at all times during the period of time this Agreement is effective. (a) Power of Attorney. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, such power of attorney being coupled with an interest, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, to take any action and to execute any instrument which Secured Party may from time to time in Secured Party's discretion deem necessary or appropriate to accomplish the purposes of this Agreement, including without limitation, the following action: (i) subject to any applicable Insurance Holding Company Laws, transfer any securities, instruments, documents or certificates pledged as Collateral in the name of Secured Party or its nominee; (ii) use any interest, premium or principal payments, conversion or redemption proceeds or other cash proceeds received in connection with any Collateral to reduce any of the Indebtedness; (iii) exchange any of the securities pledged as Collateral for any other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, and, in connection therewith, to deposit and deliver any and all of such securities with any committee, depository, transfer agent, registrar or other designated agent upon such terms and conditions as Secured Party may deem necessary or appropriate; (iv) exercise or comply with any conversion, exchange, redemption, subscription or any other right, privilege or option pertaining to any securities pledged as Collateral; provided, however, except as provided herein, Secured Party shall not have a duty to exercise or comply with any such right, privilege or option (whether conversion, redemption or otherwise) and shall not be responsible for any delay or failure to do so; and (v) file any claims or take any action or institute any proceedings which Secured Party may deem necessary or appropriate for the collection and/or preservation of the Collateral or otherwise to enforce the rights of Secured Party with respect to the Collateral. (b) Performance by Secured Party. If Pledgor fails to perform any agreement or obligation provided herein, Secured Party may itself perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be a part of the Indebtedness, secured by the Collateral and payable by Pledgor on demand. Pledge Agreement-Page 5 GAINSCO, Inc. 60 (c) Notification of Account Debtors and Other Rights. With respect to chattel paper or instruments which are Collateral, Secured Party, without notice to Pledgor, shall have the right at any time and from time to time after the occurrence and during the continuation of an Event of Default to notify and direct the account debtor or obligor thereon to thereafter make all payments on such Collateral directly to Secured Party, regardless of whether Pledgor was previously making collections thereon. Each account debtor and obligor making payment to Secured Party hereunder shall be fully protected in relying on the written statement of Secured Party that it then holds a security interest which entitles it to receive such payment, and the receipt of Secured Party for such payment shall be full acquittance therefor to the party making such payment. Payments received by Secured Party shall be held or disposed of by it in accordance with the terms of this Agreement. Secured Party shall, however, never be obligated to collect, or use any effort to collect, any such payments, its sole liability to the Pledgor being to account for payments, if any, actually received. Notwithstanding any other provision herein to the contrary, Secured Party does not have any duty to exercise or continue to exercise any of the foregoing rights and shall not be responsible for any failure to do so or for any delay in doing so. 10. EVENTS OF DEFAULT. Each of the following constitutes an "Event of Default" under this Agreement: (a) Non-Performance of Covenants. The failure of Pledgor or any Obligated Party to timely and properly observe, keep or perform (i) any covenant, agreement, warranty or condition contained in Sections 7(a), 7(e) or 8 or (ii) any other covenant, agreement, warranty or condition required herein and, in the case of (ii), such failure shall continue for fifteen (15) days; or (b) Default Under other Credit Agreement. The occurrence of an Event of Default under Article 8 of the Credit Agreement; or (c) False Representation. Any representation contained herein or in any of the other Loan Documents made by Borrower or any Obligated Party is false or misleading in any material respect; or (d) Execution on Collateral. The Collateral or any portion thereof is taken on execution or other process of law in any action against Pledgor; or (e) Abandonment. Pledgor abandons the Collateral or any portion thereof; or (f) Action by Other Lienholder. The holder of any lien or security interest on any of the Collateral (without hereby implying the consent of Secured Party to the existence or creation of any such lien or security interest on the Collateral), declares a default thereunder or institutes foreclosure or other proceedings for the enforcement of its remedies thereunder; or (g) Dilution of Ownership. The issuer of any securities (other than securities of a class which are publicly traded) constituting Collateral hereafter issues any shares of any class of capital stock (unless immediately upon issuance, additional securities are pledged and delivered to Secured Party pursuant to the terms hereof to the extent necessary to give Secured Party a security interest after such issuance in at least the same percentage of such issuer's outstanding securities as Secured Party had before such issuance) or any options, warrants or other rights to purchase any such capital stock. 11. REMEDIES AND RELATED RIGHTS. If an Event of Default shall have occurred, and without limiting any other rights and remedies provided herein, under any of the other Loan Documents or otherwise available to Secured Party, Secured Party may exercise one or more of the rights and remedies provided in this Section. (a) Remedies. Secured Party may from time to time at its discretion, subject to compliance with any applicable Insurance Holding Company Laws, without limitation and without notice except as expressly provided in any of the Loan Documents: Pledge Agreement-Page 6 GAINSCO, Inc. 61 (i) exercise in respect of the Collateral all the rights and remedies of a secured party under the Code (whether or not the Code applies to the affected Collateral); (ii) reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest granted hereunder by any available judicial procedure; (iii) sell or otherwise dispose of, at its office, on the premises of Pledgor or elsewhere, the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale or other disposition of any part of the Collateral shall not exhaust Secured Party's power of sale, but sales or other dispositions may be made from time to time until all of the Collateral has been sold or disposed of or until the Indebtedness has been paid and performed in full), and at any such sale or other disposition it shall not be necessary to exhibit any of the Collateral; (iv) buy the Collateral, or any portion thereof, at any public sale; (v) buy the Collateral, or any portion thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations; (vi) apply for the appointment of a receiver for the Collateral, and Pledgor hereby consents to any such appointment; and (vii) at its option, retain the Collateral in satisfaction of the Indebtedness whenever the circumstances are such that Secured Party is entitled to do so under the Code or otherwise. Pledgor agrees that in the event Pledgor is entitled to receive any notice under the Uniform Commercial Code, as it exists in the state governing any such notice, of the sale or other disposition of any Collateral, reasonable notice shall be deemed given five (5) days after such notice is deposited in a depository receptacle under the care and custody of the United States Postal Service, postage prepaid, at Pledgor's address set forth on the signature page hereof, ten (10) days prior to the date of any public sale, or after which a private sale, of any of such Collateral is to be held. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor further acknowledges and agrees that the redemption by Secured Party of any certificate of deposit pledged as Collateral shall be deemed to be a commercially reasonable disposition under Section 9.504(c) of the Code. (b) Private Sale of Securities. Pledgor recognizes that Secured Party may be unable to effect a public sale of all or any part of the securities pledged as Collateral because of restrictions in applicable federal and state securities laws and that Secured Party may, therefore, determine to make one or more private sales of any such securities to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that each any such private sale may be at prices and other terms less favorable then what might have been obtained at a public sale and, notwithstanding the foregoing, agrees that each such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to delay the sale of any such securities for the period of time necessary to permit the issuer to register such securities for public sale under any federal or state securities laws. Pledgor further acknowledges and agrees that any offer to sell such securities which has been made privately in the manner described above to not less than five (5) bona fide offerees shall be deemed to involve a "public sale" for the purposes of Section 9.504(c) of the Code, notwithstanding that such sale may not constitute a "public offering" Pledge Agreement-Page 7 GAINSCO, Inc. 62 under any federal or state securities laws and that Secured Party may, in such event, bid for the purchase of such securities. (c) Application of Proceeds. If any Event of Default shall have occurred, Secured Party may at its discretion apply or use any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party in respect of any sale or other disposition of, collection from, or other realization upon, all or any part of the Collateral as follows in such order and manner as Secured Party may elect: (i) to the repayment or reimbursement of the reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Secured Party in connection with (A) the administration of the Loan Documents, (B) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, and (C) the exercise or enforcement of any of the rights and remedies of Secured Party hereunder; (ii) to the payment or other satisfaction of any liens and other encumbrances upon the Collateral; (iii) to the satisfaction of the Indebtedness; (iv) by holding such cash and proceeds as Collateral; (v) to the payment of any other amounts required by applicable law (including without limitation, Section 9.504(a)(3) of the Code or any other applicable statutory provision); and (vi) by delivery to Pledgor or any other party lawfully entitled to receive such cash or proceeds whether by direction of a court of competent jurisdiction or otherwise. (d) Deficiency. In the event that the proceeds of any sale of, collection from, or other realization upon, all or any part of the Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Borrower and any party who guaranteed or is otherwise obligated to pay all or any portion of the Indebtedness shall be liable for the deficiency, together with interest thereon as provided in the Loan Documents. (e) Non-Judicial Remedies. In granting to Secured Party the power to enforce its rights hereunder without prior judicial process or judicial hearing, Pledgor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Secured Party to enforce its rights by judicial process. Pledgor recognizes and concedes that non-judicial remedies are consistent with the usage of trade, are responsive to commercial necessity and are the result of a bargain at arm's length. Nothing herein is intended to prevent Secured Party or Pledgor from resorting to judicial process at either party's option. (f) Other Recourse. Pledgor waives any right to require Secured Party to proceed against any third party, exhaust any Collateral or other security for the Indebtedness, or to have any third party joined with Pledgor in any suit arising out of the Indebtedness or any of the Loan Documents, or pursue any other remedy available to Secured Party. Pledgor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension of the Indebtedness. Pledgor further waives any defense arising by reason of any disability or other defense of any third party or by reason of the cessation from any cause whatsoever of the liability of any third party. Until all of the Indebtedness shall have been paid in full, Pledgor shall have no right of subrogation and Pledgor waives the right to enforce any remedy which Secured Party has or may hereafter have against any third party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Secured Party. Pledgor authorizes Secured Party, and without notice or demand and without any reservation of rights against Pledgor and without affecting Pledgor's liability hereunder or on the Indebtedness, to (i) take or hold any other property of any type Pledge Agreement-Page 8 GAINSCO, Inc. 63 from any third party as security for the Indebtedness, and exchange, enforce, waive and release any or all of such other property, (ii) apply such other property and direct the order or manner of sale thereof as Secured Party may in its discretion determine, (iii) renew, extend, accelerate, modify, compromise, settle or release any of the Indebtedness or other security for the Indebtedness, (iv) waive, enforce or modify any of the provisions of any of the Loan Documents executed by any third party, and (v) release or substitute any third party. (g) Voting Rights. Upon the occurrence of an Event of Default, Pledgor will not exercise any voting rights with respect to securities pledged as Collateral. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact (such power of attorney being coupled with an interest) and proxy to exercise, subject to compliance with any applicable Insurance Holding Company Laws, any voting rights with respect to Pledgor's securities pledged as Collateral upon the occurrence of an Event of Default. (h) Dividend Rights and Interest Payments. Upon the occurrence of an Event of Default: (i) all rights of Pledgor to receive and retain the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 3 shall automatically cease, and all such rights shall thereupon become vested with Secured Party which shall thereafter have the sole right to receive, hold and apply as Collateral such dividends and interest payments; and (ii) all dividend and interest payments which are received by Pledgor contrary to the provisions of clause (i) of this Subsection shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor, and shall be forthwith paid over to Secured Party in the exact form received (properly endorsed or assigned if requested by Secured Party), to be held by Secured Party as Collateral. (i) Insurance Holding Company Laws. Because of laws and regulations governing change of control of insurance companies that may be applicable (collectively, the "Insurance Holding Company Laws"), certain purchasers of the Collateral at foreclosure may be required to obtain regulatory approval prior to a final and binding acquisition of the Collateral. The Pledgor acknowledges that such laws and regulations may adversely affect the purchase price to be paid by a purchaser of the Collateral, or any part thereof, at a private or public foreclosure sale, and that the Bank may (and is hereby authorized by the Pledgor to) modify the notices, advertisements, terms and procedures of any foreclosure sale of the Collateral in order to comply with Insurance Holding Company Laws. Without limiting the foregoing, the Pledgor acknowledges that the Bank may accept bids at foreclosure sale on a provisional basis, pending receipt by the successful bidder of necessary regulatory approvals under the Insurance Holding Company Laws. In addition, the Pledgor acknowledges that the Bank may (but shall not be required to) limit bidding at foreclosure sales to those parties which have demonstrated an ability to comply with requirements of the Insurance Holding Company Laws. Moreover, the Pledgor acknowledges that the Bank may require the successful bidder at a foreclosure sale to execute a purchase agreement, deposit a portion of the purchase price, and take other actions reflecting the requirements of the Insurance Holding Company Laws and the resulting delay in consummating a foreclosure sale. 12. INDEMNITY. Pledgor hereby indemnifies and agrees to hold harmless Secured Party, and its officers, directors, employees, agents and representatives (each an "Indemnified Person") from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the "Claims") which may be imposed on, incurred by, or asserted against, any Indemnified Person (whether or not caused by any Indemnified Person's sole, concurrent or contributory negligence) arising in connection with the Loan Documents, the Indebtedness or the Collateral (including without limitation, the enforcement of the Loan Documents and the defense of any Indemnified Person's actions and/or inactions in connection with the Loan Documents), except to the limited extent the Claims against an Indemnified Person are proximately caused by such Indemnified Person's gross negligence or willful misconduct. If Pledgor or any third party ever alleges such gross negligence or willful misconduct by any Indemnified Person, the indemnification provided for in this Section shall nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a court of competent Pledge Agreement-Page 9 GAINSCO, Inc. 64 jurisdiction enters a final judgment as to the extent and effect of the alleged gross negligence or willful misconduct. The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder. 13. MISCELLANEOUS. (a) Entire Agreement. This Agreement contains the entire agreement of Secured Party and Pledgor with respect to the Collateral. If the parties hereto are parties to any prior agreement, either written or oral, relating to the Collateral, the terms of this Agreement shall amend and supersede the terms of such prior agreements as to transactions on or after the effective date of this Agreement, but all security agreements, financing statements, guaranties, other contracts and notices for the benefit of Secured Party shall continue in full force and effect to secure the Indebtedness unless Secured Party specifically releases its rights thereunder by separate release. (b) Amendment. No modification, consent or amendment of any provision of this Agreement or any of the other Loan Documents shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. (c) Actions by Secured Party. The lien, security interest and other security rights of Secured Party hereunder shall not be impaired by (i) any renewal, extension, increase or modification with respect to the Indebtedness, (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Secured Party may grant with respect to the Collateral, or (iii) any release or indulgence granted to any endorser, guarantor or surety of the Indebtedness. The taking of additional security by Secured Party shall not release or impair the lien, security interest or other security rights of Secured Party hereunder or affect the obligations of Pledgor hereunder. (d) Waiver by Secured Party. Secured Party may waive any Event of Default without waiving any other prior or subsequent Event of Default. Secured Party may remedy any default without waiving the Event of Default remedied. Neither the failure by Secured Party to exercise, nor the delay by Secured Party in exercising, any right or remedy upon any Event of Default shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right or remedy at a later date. No single or partial exercise by Secured Party of any right or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right or remedy hereunder may be exercised at any time. No waiver of any provision hereof or consent to any departure by Pledgor therefrom shall be effective unless the same shall be in writing and signed by Secured Party and then such waiver or consent shall be effective only in the specific instances, for the purpose for which given and to the extent therein specified. No notice to or demand on Pledgor in any case shall of itself entitle Pledgor to any other or further notice or demand in similar or other circumstances. (e) Costs and Expenses. Pledgor will upon demand pay to Secured Party the amount of any and all costs and expenses (including without limitation, attorneys' fees and expenses), which Secured Party may incur in connection with (i) the transactions which give rise to the Loan Documents, (ii) the preparation of this Agreement and the perfection and preservation of the security interests granted under the Loan Documents, (iii) the administration of the Loan Documents, (iv) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, (v) the exercise or enforcement of any of the rights of Secured Party under the Loan Documents, or (vi) the failure by Pledgor to perform or observe any of the provisions hereof. (f) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS. Pledge Agreement-Page 10 GAINSCO, Inc. 65 (g) Venue. This Agreement has been entered into in the county in Texas where Bank's address for notice purposes is located, and it shall be performable for all purposes in such county. Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Agreement and venue for any such disputes shall be in the county or judicial district where this Agreement has been executed and delivered. (h) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable. (i) No Obligation. Nothing contained herein shall be construed as an obligation on the part of Secured Party to extend or continue to extend credit to Borrower. (j) Notices. All notices, requests, demands or other communications required or permitted to be given pursuant to this Agreement shall be in writing and given by (i) personal delivery, (ii) expedited delivery service with proof of delivery, or (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, sent to the intended addressee at the address set forth on the signature page hereof or to such different address as the addressee shall have designated by written notice sent pursuant to the terms hereof and shall be deemed to have been received either, in the case of personal delivery, at the time of personal delivery, in the case of expedited delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of mail, five (5) days after deposit in a depository receptacle under the care and custody of the United States Postal Service. Either party shall have the right to change its address for notice hereunder to any other location within the continental United States by notice to the other party of such new address at least thirty (30) days prior to the effective date of such new address. (k) Binding Effect and Assignment. This Agreement (i) creates a continuing security interest in the Collateral, (ii) shall be binding on Pledgor and the heirs, executors, administrators, personal representatives, successors and assigns of Pledgor, and (iii) shall inure to the benefit of Secured Party and its successors and assigns. Without limiting the generality of the foregoing, Secured Party may pledge, assign or otherwise transfer the Indebtedness and its rights under this Agreement and any of the other Loan Documents to any other party, subject to any rights of Pledgor hereunder. Pledgor's rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Secured Party. (l) Termination. It is contemplated by the parties hereto that from time to time there may be no outstanding Indebtedness, but notwithstanding such occurrences, this Agreement shall remain valid and shall be in full force and effect as to subsequent outstanding Indebtedness. Upon (i) the satisfaction in full of the Indebtedness, (ii) the termination or expiration of any commitment of Secured Party to extend credit to Borrower, (iii) written request for the termination hereof delivered by Pledgor to Secured Party, and (iv) written release delivered by Secured Party to Pledgor, this Agreement and the security interests created hereby shall terminate. Upon termination of this Agreement and Pledgor's written request, Secured Party will, at Pledgor's sole cost and expense, return to Pledgor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof and execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. (m) JURY TRIAL WAIVER. PLEDGOR AND BANK EACH HEREBY WAIVE ANY RIGHT TO A JURY TRIAL WITH RESPECT TO ANY MATTER ARISING OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. (n) Cumulative Rights. All rights and remedies of Secured Party hereunder are cumulative of each other and of every other right or remedy which Secured Party may otherwise have at law or in equity or under any of the other Loan Documents, and the exercise of one or more of such rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of any other rights or remedies. Pledge Agreement-Page 11 GAINSCO, Inc. 66 (o) Gender and Number. Within this Agreement, words of any gender shall be held and construed to include the other gender, and words in the singular number shall be held and construed to include the plural and words in the plural number shall be held and construed to include the singular, unless in each instance the context requires otherwise. (p) Descriptive Headings. The headings in this Agreement are for convenience only and shall in no way enlarge, limit or define the scope or meaning of the various and several provisions hereof. [SIGNATURE PAGE FOLLOWS] Pledge Agreement-Page 12 GAINSCO, Inc. 67 EXECUTED as of the date first written above. Pledgor's Address: PLEDGOR: ------- 500 Commerce Street GAINSCO, INC. Fort Worth, Texas 76102 By: -------------------------------------------- Its: -------------------------------------------- Secured Party's Address: Bank One, NA 1 Bank One Plaza Chicago, Illinois 60670-0085 Pledge Agreement-Page 13 GAINSCO, Inc. 68 SCHEDULE A TO PLEDGE AGREEMENT BY GAINSCO, INC. The following property is a part of the Collateral as defined in Subsection 1(c): (a) All shares of capital stock of Tri-State, Ltd., a North Dakota corporation, owned by Pledgor, including without limitation 10,060 shares of common stock evidenced by share certificate no. 9 issued in the name of Pledgor. 69 UNLIMITED GUARANTY THIS UNLIMITED GUARANTY ("Guaranty") is made as of the 7th day of January, 2000, by Guarantor (as hereinafter defined) for the benefit of Bank (as hereinafter defined). 1. Definitions. As used in this Guaranty, the following terms shall have the meanings indicated below: (a) The term "Bank" shall mean BANK ONE, NA, whose address for notice purposes is the following: 1 Bank One Plaza Chicago, Illinois 60670-0085 Attn: Thomas W. Doddridge (b) The term "Borrower" (whether one or more) shall mean the following: GAINSCO, INC. and GAINSCO SERVICE CORP., or either of them. (c) The term "Guaranteed Indebtedness" shall mean (i) all indebtedness, obligations and liabilities of Borrower to Bank of any kind or character, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, and regardless of whether such indebtedness, obligations and liabilities may, prior to their acquisitions by Bank, be or have been payable to or in favor of a third party and subsequently acquired by Bank (it being contemplated that Bank may make such acquisitions from third parties), including without limitation all indebtedness, obligations and liabilities of Borrower to Bank now existing or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, purchase, overdraft, discount, indemnity agreement or otherwise, (ii) all accrued but unpaid interest on any of the indebtedness described in (i) above, (iii) all obligations of Borrower to Bank under any documents evidencing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i) and (ii) above (collectively, the "Loan Documents"), (iv) all costs and expenses incurred by Bank in connection with the collection and administration of all or any part of the indebtedness and obligations described in (i), (ii) and (iii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys' fees, and (v) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above. (d) The term "Guarantor" shall mean TRI-STATE, LTD., a North Dakota corporation, whose address for notice purposes is the following: 500 Commerce Street Fort Worth, Texas 76102. 2. Obligations. As an inducement to Bank to extend or continue to extend credit and other financial accommodations to Borrower, Guarantor, for value received, does hereby unconditionally and absolutely guarantee the prompt and full payment and performance of the Guaranteed Indebtedness when due or declared to be due and at all times thereafter. 3. Character of Obligations. This is an absolute, continuing and unconditional guaranty of payment and not of collection and if at any time or from time to time there is no outstanding Guaranteed Indebtedness, the obligations of Guarantor with respect to any and all Guaranteed Indebtedness incurred thereafter shall not be affected. All Guaranteed Indebtedness heretofore, concurrently herewith or hereafter made by Bank to Borrower shall be conclusively presumed to have been made or acquired in acceptance hereof. Guarantor shall be liable, jointly and severally, with Borrower and any other guarantor of all or any part of the Guaranteed Indebtedness. UNLIMITED GUARANTY - PAGE 1 70 4. Right of Revocation. Guarantor understands and agrees that Guarantor may revoke its future obligations under this Guaranty at any time by giving Bank written notice that Guarantor will not be liable hereunder for any indebtedness or obligations of Borrower incurred on or after the effective date of such revocation. Such revocation shall be deemed to be effective on the day following the day Bank receives such notice delivered either by: (a) personal delivery to the address and designated department of Bank identified in subparagraph 1(a) above, or (b) United States mail, registered or certified, return receipt requested, postage prepaid, addressed to Bank at the address shown in subparagraph 1(a) above. Notwithstanding such revocation, Guarantor shall remain liable on its obligations hereunder until payment in full to Bank of (x) all of the Guaranteed Indebtedness that is outstanding on the effective date of such revocation, and any renewals and extensions thereof, and (y) all loans, advances and other extensions of credit made to or for the account of Borrower on or after the effective date of such revocation pursuant to the obligation of Bank under a commitment or agreement made to or with Borrower prior to the effective date of such revocation. The terms and conditions of this Guaranty, including without limitation the consents and waivers set forth in paragraph 7 hereof, shall remain in effect with respect to the Guaranteed Indebtedness described in the preceding sentence in the same manner as if such revocation had not been made by Guarantor. 5. Representations and Warranties. Guarantor hereby represents and warrants the following to Bank: (a) This Guaranty may reasonably be expected to benefit, directly or indirectly, Guarantor, and (i) if Guarantor is a corporation, the Board of Directors of Guarantor has determined that this Guaranty may reasonably be expected to benefit, directly or indirectly, Guarantor, or (ii) if Guarantor is a partnership, the requisite number of its partners have determined that this Guaranty may reasonably be expected to benefit, directly or indirectly, Guarantor; and (b) Guarantor is familiar with, and has independently reviewed the books and records regarding, the financial condition of Borrower and is familiar with the value of any and all collateral intended to be security for the payment of all or any part of the Guaranteed Indebtedness; provided, however, Guarantor is not relying on such financial condition or collateral as an inducement to enter into this Guaranty; and (c) Guarantor has adequate means to obtain from Borrower on a continuing basis information concerning the financial condition of Borrower and Guarantor is not relying on Bank to provide such information to Guarantor either now or in the future; and (d) Guarantor has the power and authority to execute, deliver and perform this Guaranty and any other agreements executed by Guarantor contemporaneously herewith, and the execution, delivery and performance of this Guaranty and any other agreements executed by Guarantor contemporaneously herewith do not and will not violate (i) any agreement or instrument to which Guarantor is a party, (ii) any law, rule, regulation or order of any governmental authority to which Guarantor is subject, or (iii) its articles or certificate of incorporation or bylaws, if Guarantor is a corporation, or its partnership agreement, if Guarantor is a partnership; and (e) Neither Bank nor any other party has made any representation, warranty or statement to Guarantor in order to induce Guarantor to execute this Guaranty; and (f) As of the date hereof, and after giving effect to this Guaranty and the obligations evidenced hereby, (i) Guarantor is and will be solvent, (ii) the fair saleable value of Guarantor's assets exceeds and will continue to exceed its liabilities (both fixed and contingent), (iii) Guarantor is and will continue to be able to pay its debts as they mature, and (iv) if Guarantor is not an individual, Guarantor has and will continue to have sufficient capital to carry on its business and all businesses in which it is about to engage. 6. Covenants. Guarantor hereby covenants and agrees with Bank as follows: (a) Guarantor shall not, so long as its obligations under this Guaranty continue, transfer or pledge any material portion of its assets for less than full and adequate consideration; and UNLIMITED GUARANTY - PAGE 2 71 (b) Guarantor shall promptly furnish to Bank at any time and from time to time such financial statements and other financial information of Guarantor as are required under the Loan Documents; and (c) Guarantor shall comply with all terms and provisions of the Loan Documents that apply to Guarantor. 7. Consent and Waiver. (a) Guarantor waives (i) promptness, diligence and notice of acceptance of this Guaranty and notice of the incurring of any obligation, indebtedness or liability to which this Guaranty applies or may apply and waives presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration, notice of dishonor, diligence in enforcement and indulgences of every kind, and (ii) the taking of any other action by Bank, including without limitation, giving any notice of default or any other notice to, or making any demand on, Borrower, any other guarantor of all or any part of the Guaranteed Indebtedness or any other party. (b) Guarantor waives any rights Guarantor has under, or any requirements imposed by, Chapter 34 of the Texas Business and Commerce Code, as in effect on the date of this Guaranty or as it may be amended from time to time. (c) Bank may at any time, without the consent of or notice to Guarantor, without incurring responsibility to Guarantor and without impairing, releasing, reducing or affecting the obligations of Guarantor hereunder: (i) change the manner, place or terms of payment of all or any part of the Guaranteed Indebtedness, or renew, extend, modify, rearrange or alter all or any part of the Guaranteed Indebtedness; (ii) change the interest rate accruing on any of the Guaranteed Indebtedness (including, without limitation, any periodic change in such interest rate that occurs because such Guaranteed Indebtedness accrues interest at a variable rate which may fluctuate from time to time); (iii) sell, exchange, release, surrender, subordinate, realize upon or otherwise deal with in any manner and in any order any collateral for all or any part of the Guaranteed Indebtedness or this Guaranty or setoff against all or any part of the Guaranteed Indebtedness; (iv) neglect, delay, omit, fail or refuse to take or prosecute any action for the collection of all or any part of the Guaranteed Indebtedness or this Guaranty or to take or prosecute any action in connection with any of the Loan Documents; (v) exercise or refrain from exercising any rights against Borrower or others, or otherwise act or refrain from acting; (vi) settle or compromise all or any part of the Guaranteed Indebtedness and subordinate the payment of all or any part of the Guaranteed Indebtedness to the payment of any obligations, indebtedness or liabilities which may be due or become due to Bank or others; (vii) apply any deposit balance, fund, payment, collections through process of law or otherwise or other collateral of Borrower to the satisfaction and liquidation of the indebtedness or obligations of Borrower to Bank, if any, not guaranteed under this Guaranty pursuant to paragraph 4 or 11 herein; and (viii) apply any sums paid to Bank by Guarantor, Borrower or others to the Guaranteed Indebtedness in such order and manner as Bank, in its sole discretion, may determine. (d) Should Bank seek to enforce the obligations of Guarantor hereunder by action in any court or otherwise, Guarantor waives any requirement, substantive or procedural, that (i) Bank first enforce any rights or remedies against Borrower or any other person or entity liable to Bank for all or any part of the Guaranteed Indebtedness, including without limitation that a judgment first be rendered against Borrower or any other person or entity, or that Borrower or any other person or entity should be joined in such cause, or (ii) Bank shall first enforce rights against any collateral which shall ever have been given to secure all or any part of the Guaranteed Indebtedness or this Guaranty. Such waiver shall be without prejudice to Bank's right, at its option, to proceed against Borrower or any other person or entity, whether by separate action or by joinder. (e) In addition to any other waivers, agreements and covenants of Guarantor set forth herein, Guarantor hereby further waives and releases all claims, causes of action, defenses and offsets for any act or omission of Bank, its directors, officers, employees, representatives or agents in connection with Bank's administration of the Guaranteed Indebtedness, except for Bank's willful misconduct and gross negligence. UNLIMITED GUARANTY - PAGE 3 72 8. Obligations Not Impaired. (a) Guarantor agrees that its obligations hereunder shall not be released, diminished, impaired, reduced or affected by the occurrence of any one or more of the following events: (i) the death, disability or lack of corporate power of Borrower, Guarantor (except as provided in paragraph 11 herein) or any other guarantor of all or any part of the Guaranteed Indebtedness, (ii) any receivership, insolvency, bankruptcy or other proceedings affecting Borrower, Guarantor or any other guarantor of all or any part of the Guaranteed Indebtedness, or any of their respective property; (iii) the partial or total release or discharge of Borrower or any other guarantor of all or any part of the Guaranteed Indebtedness, or any other person or entity from the performance of any obligation contained in any instrument or agreement evidencing, governing or securing all or any part of the Guaranteed Indebtedness, whether occurring by reason of law or otherwise; (iv) the taking or accepting of any collateral for all or any part of the Guaranteed Indebtedness or this Guaranty; (v) the taking or accepting of any other guaranty for all or any part of the Guaranteed Indebtedness; (vi) any failure by Bank to acquire, perfect or continue any lien or security interest on collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty; (vii) the impairment of any collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty; (viii) any failure by Bank to sell any collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty in a commercially reasonable manner or as otherwise required by law; (ix) any invalidity or unenforceability of or defect or deficiency in any of the Loan Documents; or (x) any other circumstance which might otherwise constitute a defense available to, or discharge of, Borrower or any other guarantor of all or any part of the Guaranteed Indebtedness. (b) This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of all or any part of the Guaranteed Indebtedness is rescinded or must otherwise be returned by Bank upon the insolvency, bankruptcy or reorganization of Borrower, Guarantor, any other guarantor of all or any part of the Guaranteed Indebtedness, or otherwise, all as though such payment had not been made. (c) In the event Borrower is a corporation, joint stock association or partnership, or is hereafter incorporated, none of the following shall affect Guarantor's liability hereunder: (i) the unenforceability of all or any part of the Guaranteed Indebtedness against Borrower by reason of the fact that the Guaranteed Indebtedness exceeds the amount permitted by law; (ii) the act of creating all or any part of the Guaranteed Indebtedness is ultra vires; or (iii) the officers or partners creating all or any part of the Guaranteed Indebtedness acted in excess of their authority. Guarantor hereby acknowledges that withdrawal from, or termination of, any ownership interest in Borrower now or hereafter owned or held by Guarantor shall not alter, affect or in any way limit the obligations of Guarantor hereunder. 9. Actions against Guarantor. In the event of a default in the payment or performance of all or any part of the Guaranteed Indebtedness when such Guaranteed Indebtedness becomes due, whether by its terms, by acceleration or otherwise, Guarantor shall, without notice or demand, promptly pay the amount due thereon to Bank, in lawful money of the United States, at Bank's address set forth in subparagraph 1(a) above. One or more successive or concurrent actions may be brought against Guarantor, either in the same action in which Borrower is sued or in separate actions, as often as Bank deems advisable. The exercise by Bank of any right or remedy under this Guaranty or under any other agreement or instrument, at law, in equity or otherwise, shall not preclude concurrent or subsequent exercise of any other right or remedy. The books and records of Bank shall be admissible in evidence in any action or proceeding involving this Guaranty and shall be prima facie evidence of the payments made on, and the outstanding balance of, the Guaranteed Indebtedness. 10. Payment by Guarantor. Whenever Guarantor pays any sum which is or may become due under this Guaranty, written notice must be delivered to Bank contemporaneously with such payment. Such notice shall be effective for purposes of this paragraph when contemporaneously with such payment Bank receives such notice either by: (a) personal delivery to the address and designated department of Bank identified in subparagraph 1(a) above, or (b) United States mail, certified or registered, return receipt requested, postage prepaid, addressed to Bank at the address shown in subparagraph 1(a) above. In the absence of such notice to Bank by Guarantor in compliance UNLIMITED GUARANTY - PAGE 4 73 with the provisions hereof, any sum received by Bank on account of the Guaranteed Indebtedness shall be conclusively deemed paid by Borrower. 11. [intentionally omitted.] 12. Notice of Sale. In the event that Guarantor is entitled to receive any notice under the Uniform Commercial Code, as it exists in the state governing any such notice, of the sale or other disposition of any collateral securing all or any part of the Guaranteed Indebtedness or this Guaranty, reasonable notice shall be deemed given when such notice is deposited in the United States mail, postage prepaid, at the address for Guarantor set forth in subparagraph 1(d) above, five (5) days prior to the date any public sale, or after which any private sale, of any such collateral is to be held; provided, however, that notice given in any other reasonable manner or at any other reasonable time shall be sufficient. 13. Waiver by Bank. No delay on the part of Bank in exercising any right hereunder or failure to exercise the same shall operate as a waiver of such right. In no event shall any waiver of the provisions of this Guaranty be effective unless the same be in writing and signed by an officer of Bank, and then only in the specific instance and for the purpose given. 14. Successors and Assigns. This Guaranty is for the benefit of Bank, its successors and assigns. This Guaranty is binding upon Guarantor and Guarantor's heirs, executors, administrators, personal representatives and successors, including without limitation any person or entity obligated by operation of law upon the reorganization, merger, consolidation or other change in the organizational structure of Guarantor. 15. Costs and Expenses. Guarantor shall pay on demand by Bank all costs and expenses, including without limitation, all reasonable attorneys' fees incurred by Bank in connection with the preparation, administration, enforcement and/or collection of this Guaranty. This covenant shall survive the payment of the Guaranteed Indebtedness. 16. Severability. If any provision of this Guaranty is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Guaranty and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable. 17. No Obligation. Nothing contained herein shall be construed as an obligation on the part of Bank to extend or continue to extend credit to Borrower. 18. Amendment. No modification or amendment of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank and of Guarantor, and then shall be effective only in the specific instance and for the purpose for which given. 19. Cumulative Rights. All rights and remedies of Bank hereunder are cumulative of each other and of every other right or remedy which Bank may otherwise have at law or in equity or under any instrument or agreement, and the exercise of one or more of such rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of any other rights or remedies. 20. GOVERNING LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS. 21. Venue. This Guaranty has been entered into in the county in Texas where Bank's address for notice purposes is located, and it shall be performable for all purposes in such county. Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Guaranty and venue for any such disputes shall be in the county or judicial district where the Bank's address for notice purposes is located. UNLIMITED GUARANTY - PAGE 5 74 22. Compliance with Applicable Usury Laws. Notwithstanding any other provision of this Guaranty or of any instrument or agreement evidencing, governing or securing all or any part of the Guaranteed Indebtedness, Guarantor and Bank by its acceptance hereof agree that Guarantor shall never be required or obligated to pay interest in excess of the maximum nonusurious interest rate as may be authorized by applicable law for the written contracts which constitute the Guaranteed Indebtedness. It is the intention of Guarantor and Bank to conform strictly to the applicable laws which limit interest rates, and any of the aforesaid contracts for interest, if and to the extent payable by Guarantor, shall be held to be subject to reduction to the maximum nonusurious interest rate allowed under said law. 23. Descriptive Headings. The headings in this Guaranty are for convenience only and shall not define or limit the provisions hereof. 24. Gender. Within this Guaranty, words of any gender shall be held and construed to include the other gender. 25. Entire Agreement. This Guaranty contains the entire agreement between Guarantor and Bank regarding the subject matter hereof and supersedes all prior written and oral agreements and understandings, if any, regarding same; provided, however, this Guaranty is in addition to and does not replace, cancel, modify or affect any other guaranty of Guarantor now or hereafter held by Bank that relates to Borrower or any other person or entity. (SIGNATURE PAGE FOLLOWS) UNLIMITED GUARANTY - PAGE 6 75 EXECUTED as of the date first above written. GUARANTOR: TRI-STATE, LTD. By: ------------------------------- Its: ------------------------------ UNLIMITED GUARANTY - PAGE 7 EX-10.15 5 AGREEMENT OF LP - GOFF MOORE STRATEGIC PARTNERS 1 EXHIBIT 10.15 CONFORMED COPY AGREEMENT OF LIMITED PARTNERSHIP OF GNA INVESTMENTS I, L. P. (A TEXAS LIMITED PARTNERSHIP) DATED AS OF NOVEMBER 30, 1999 THE LIMITED PARTNERSHIP INTERESTS DESCRIBED HEREIN HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS IN RELIANCE UPON EXEMPTIONS THEREFROM. THEY MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND THE RESTRICTIONS ON TRANSFER SET FORTH IN THIS AGREEMENT. 2 TABLE OF CONTENTS
Page ARTICLE I. DEFINITIONS ...................................................................... 1 1.1 Certain Definitions ..................................................... 1 1.2 Terms Defined in Investment Management Agreement ........................ 5 ARTICLE II. FORMATION ........................................................................ 6 2.1 Formation, Name and Principal Office .................................... 6 2.2 Office and Agent for Service of Process ................................. 6 2.3 Purpose of the Partnership .............................................. 6 2.4 Names and Addresses of the Partners ..................................... 6 2.5 Term of the Partnership ................................................. 6 2.6 Required Documents ...................................................... 7 ARTICLE III. CAPITALIZATION ................................................................... 7 3.1 Initial Capital Contribution ............................................ 7 3.2 Additional Capital Contributions ........................................ 7 3.3 Withdrawal and Return on Capital ........................................ 7 3.4 Loans ................................................................... 8 3.5 Limitation of Liability ................................................. 8 ARTICLE IV. ALLOCATIONS ...................................................................... 8 4.1 Allocation of Net Income and Net Loss ................................... 8 4.2 Special Allocations ..................................................... 8 4.3 Other Allocation Rules .................................................. 9 4.4 Allocations for Federal Income Tax Purposes ............................. 9 4.5 Withholding Taxes ....................................................... 9 ARTICLE V. DISTRIBUTIONS .................................................................... 10 5.1 Distributions ........................................................... 10 ARTICLE VI. ADMINISTRATIVE PROVISIONS ........................................................ 11 6.1 Rights of the Limited Partner ........................................... 11 6.2 Management by the General Partner ....................................... 12 6.3 Powers of the General Partner ........................................... 12 6.4 Limitations on Powers of the General Partner ............................ 13
i 3 6.5 Other Ventures .......................................................... 13 6.6 Duties with Respect to Investment Decisions ............................. 14 6.7 Payment of Organization Costs and Expenses .............................. 15 6.8 Partner Compensation .................................................... 15 6.9 Filing of Tax Returns ................................................... 15 6.10 Tax Matters Partner ..................................................... 15 6.11 Records and Financial Statements ........................................ 16 6.12 Tax Reports to Partners ................................................. 17 6.13 Valuation of Partnership Assets ......................................... 18 6.14 Confidentiality ......................................................... 18 ARTICLE VII. TRANSFER OF A PARTNERSHIP INTEREST; WITHDRAWALS .................................. 18 7.1 Transfers by the Limited Partner ........................................ 18 7.2 Withdrawal by a Limited Partner ......................................... 19 7.3 Transfers by the General Partner ........................................ 20 7.4. Withdrawal by the General Partner ....................................... 20 ARTICLE VIII. DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP ................................... 20 8.1 Dissolution Events ...................................................... 20 8.2 Conversion of General Partner Interest to a Limited Partner Interest .... 20 8.3 Winding Up of the Partnership ........................................... 20 8.4 Application of Proceeds of Liquidation .................................. 21 8.5 Restoration Obligation .................................................. 21 8.6 Timing of Liquidating Distributions ..................................... 21 8.7 Liquidating Trust ....................................................... 21 ARTICLE IX. LIABILITY AND INDEMNIFICATION OF THE GENERAL PARTNER .................... 22 9.1 Liability ............................................................... 22 9.2 Indemnification ......................................................... 22 ARTICLE X. GENERAL PROVISIONS ............................................................... 22 10.1 Special Meetings ........................................................ 22 10.2 Entire Agreement ........................................................ 22 10.3 Amendments .............................................................. 22 10.4 Governing Law ........................................................... 23 10.5 Severability ............................................................ 23 10.6 Counterparts ............................................................ 23 10.7 Survival of Rights ...................................................... 23 10.8 Notices ................................................................. 23
ii 4 10.9 Consents ................................................................ 23 10.10 No Partition ............................................................ 23 10.11 Representations by Limited Partner ...................................... 23
Attachments: Schedule A Investment Criteria Schedule B Names, Addresses, Initial Capital Contributions and Sharing Ratios iii 5 AGREEMENT OF LIMITED PARTNERSHIP OF GNA INVESTMENTS I, L. P. (A TEXAS LIMITED PARTNERSHIP) THIS AGREEMENT OF LIMITED PARTNERSHIP (this "AGREEMENT") of GNA Investments I, L. P. a Texas limited partnership (the "PARTNERSHIP"), is entered into as of November 30, 1999 by and among Goff Moore Strategic Partners, L.P., a Texas limited partnership ("GMSP"), as the sole General Partner, and GAINSCO, INC., a Texas corporation ("GNA") as the sole Limited Partner. WHEREAS, GNA and GMSP have heretofore entered into an Investment Management Agreement dated as of October 4, 1999 (the "INVESTMENT MANAGEMENT AGREEMENT") pursuant to which GMSP is serving as investment manager with respect to certain investments of GMSP; and WHEREAS, GNA and GMSP are entering into this Agreement to facilitate the co-investment by GNA with GMSP in investments that meet the criteria set forth in Schedule A (the "INVESTMENT CRITERIA"). NOW, THEREFORE, for and in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, GMSP and GNA hereby agree as follows: ARTICLE I. DEFINITIONS 1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "ACT" means the Texas Revised Limited Partnership Act, as amended. "AGREEMENT" has the meaning specified in the first paragraph hereof. "ASSIGNEE" means a Person who has acquired all or a portion of the Limited Partner's Interest in the Partnership, but who has not become a Substitute Limited Partner. "BANKRUPTCY"or "BANKRUPT" means, with respect to a Person, (i) the making of a general assignment for the benefit of creditors, (ii) the entry of an order for relief in any bankruptcy, reorganization or insolvency proceeding, (iii) the filing or commencement by or against the Person of any application or petition for the appointment of a trustee, receiver or other similar official over 6 the Person or any substantial part of the Person's assets, or of any proceeding under any bankruptcy, insolvency or reorganization statute or under any liquidation or other law relating to relief of debtors, unless, in the case of such an action or proceeding filed or commenced against the Person without the Person's acquiescence or consent, the action or proceeding is dismissed within ninety (90) days after the date of its filing or commencement. "BOOK BASIS" means, with respect to any Partnership asset, the asset's adjusted basis for federal income tax purposes, except that (i) the initial Book Basis of a Partnership asset contributed by a Partner to the Partnership shall be the gross Fair Market Value of the asset on the date of contribution, as determined by the Valuation Partner in accordance with Section 6.13; (ii) upon the occurrence of a Revaluation Event, the Book Basis of each Partnership asset shall be adjusted to its respective Fair Market Value on such date, as determined by the Valuation Partner in accordance with Section 6.13; and (iii) if the Book Basis of any Partnership asset has been determined pursuant to subsection (i) or (ii) above, the Book Basis of the asset shall thereafter be adjusted by depreciation, amortization or other cost recovery deductions determined in accordance with the provisions of Treasury regulations Section 1.704-1(b)(2)(iv)(g)(3) in lieu of any depreciation, amortization or other cost recovery deductions allowable for federal income tax purposes. "CAPITAL ACCOUNT" means, for each Partner, a separate account that is: (a) increased by (i) the amount of such Partner's Capital Contributions and (ii) allocations of Net Income and items of Income to such Partner pursuant to Article IV; (b) decreased by (i) the amount of cash distributed to such Partner by the Partnership, (ii) the Fair Market Value of any other property distributed to such Partner by the Partnership (determined as of the date of distribution, without regard to Code Section 7701(g), and net of liabilities secured by such property that the Partner assumes or to which the Partner's ownership of the property is subject), and (iii) allocations of Net Loss and items of Loss to such Partner pursuant to Article IV; and (c) otherwise adjusted so as to conform to the requirements of Code Sections 704(b) and the Treasury regulations thereunder. "CAPITAL CONTRIBUTIONS" means, for a Partner, the amount of cash and the Fair Market Value, without regard to Code Section 7701(g), of any other property (determined as of the date of contribution and net of liabilities secured by such property that the Partnership assumes or to which the Partnership's ownership of the property is subject) contributed by the Partner to the capital of the Partnership. Unless otherwise permitted by the General Partner, all Capital Contributions shall be made in cash. "CODE" means the Internal Revenue Code of 1986, as amended. 2 7 "EXPENSES" of the Partnership means all direct, out-of-pocket costs and expenses reasonably incurred either by the Partnership or by the General Partner or an Affiliate thereof on behalf of the Partnership relating to (a) the fees and expenses associated with the preparation of financial statements pursuant to Section 6.11 and the tax reports described in Section 6.12, (b) the fees, costs and expenses incurred in connection with investigating, negotiating, acquiring, holding, selling or exchanging of Securities (including fees and expenses of lawyers, accountants, consultants, brokerage fees, incentive fees or finder's fees, investment banker's fees, commitment fees, underwriting discounts or sales fees), (c) legal, audit and other expenses incurred in connection with the registration of the offer and sale of Securities owned by the Partnership under the Securities Act of 1933, as amended, and any applicable state or foreign securities laws, and (d) other expenses described in Section 4(d) of the Investment Management Agreement; provided, however, that in no event shall Expenses include any of the following costs and expenses incurred by the Partnership or the General Partner or any of its Affiliates: (i) the salaries, wages and employee benefits of all officers, directors, and employees of the General Partner or an Affiliate thereof, (ii) office rent, utility charges and equipment and furniture costs and expenses, (iii) any other general, administrative and overhead expense, including insurance premiums relating to the matters described in this clause (iii) and the preceding clauses (i) and (ii), and (iv) amounts payable by the Partnership (other than for the actual value of services rendered to or property purchased by the Partnership) in consequence of any actual or alleged fraud, negligence, breach of fiduciary duty, violation of any law, governmental rule or regulation or other misconduct by the General Partner. "FAIR MARKET VALUE" has the meaning specified in the Investment Management Agreement in the case of Securities and, in the case of any other asset, means the price that would obtain in a transaction between a willing buyer and a willing seller in which neither party was under any compulsion to enter into the transaction. "FISCAL YEAR" means the period from January 1 through December 31 of each year. "GENERAL PARTNER" means Goff Moore Strategic Partners, L.P., a Texas limited partnership, or any other Person admitted to the Partnership as a general partner pursuant to Section 7.3 or 8.1(c). "GMSP" has the meaning set forth in the first paragraph hereof. "GNA" has the meaning set forth in the first paragraph hereof. "INCOME" means, for each Fiscal Year, each item of income and gain as determined, recognized and classified for federal income tax purposes, provided, that (i) items of income or gain exempt from federal income tax shall be included as items of Income, (ii) upon a disposition of any Partnership asset, items of income or gain arising therefrom shall be computed by reference to the asset's Book Basis on the date of disposition rather than the asset's adjusted tax basis, (iii) upon a distribution of any Partnership asset, whether or not in connection with the liquidation of the Partnership, any unrealized items of income or gain inherent therein that have not previously been reflected in the Partners' Capital Accounts shall be included as items of Income as if the asset had 3 8 been sold for its Fair Market Value on the date of its distribution, and (iv) if the Book Basis of any Partnership asset is adjusted upwards upon the occurrence of a Revaluation Event, the amount of the adjustment shall be included as an item of Income. "INTEREST" means all of a Partner's interest in the Partnership, including rights to distributions, allocations, information and reports, and to vote, consent or approve. "INTEREST RATE" means a varying rate per annum equal to the lesser of (i) the "prime rate" as quoted by the Wall Street Journal (Southwest Edition) from time to time or (ii) the maximum nonusurious rate permitted from time to time by Applicable Law. "INVESTMENT CRITERIA" has the meaning set forth in the second WHEREAS clause of this Agreement. "INVESTMENT MANAGEMENT AGREEMENT" has the meaning set forth in the first WHEREAS clause of this Agreement. "LIMITED PARTNER" means GNA and any other Person admitted to the Partnership as a limited partner or as a Substitute Limited Partner and which has not withdrawn from the Partnership or transferred its entire Interest to a Substitute Limited Partner pursuant to Article VII. Except where the context requires otherwise, a reference in this Agreement to the "LIMITED PARTNER" shall mean all of the Limited Partners of the Partnership at the time of determination. "LIQUIDATOR" means the General Partner unless another Person is selected pursuant to Section 8.3. "LOSS" means, for each Fiscal Year, each item of loss or deduction as determined, recognized and classified for federal income tax purposes; provided that (i) expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treasury regulations Section 1.704-1(b)(2)(iv)(i) shall be included as items of Loss, (ii) upon a disposition of any Partnership asset, items of loss or deduction arising therefrom shall be computed by reference to the asset's Book Basis on the date of disposition rather than the asset's adjusted tax basis, (iii) upon a distribution of any Partnership asset, whether or not in connection with the liquidation of the Partnership, any unrealized items of loss or deduction inherent therein which have not previously been reflected in the Partners' Capital Accounts shall be included as items of Loss as if the asset had been sold for its Fair Market Value on the date of distribution, (iv) if the Book Basis of any Partnership asset is adjusted downwards upon the occurrence of a Revaluation Event, the amount of the adjustment shall be included as an item of Loss, and (v) if the Book Basis of any Partnership asset differs from the adjusted tax basis of the asset, items of depreciation, amortization or other cost recovery deductions attributable to the asset shall be determined in accordance with the provisions of Treasury regulations Section 1.704-1(b)(2)(iv)(g)(3) in lieu of any depreciation, amortization or other cost recovery deductions allowable for federal income tax purposes. 4 9 "NET INCOME" and "NET LOSS" mean, for each Fiscal Year, the positive or negative difference, as the case may be, between all items of Income for such year and all items of Loss for such year; provided, that Net Income or Net Loss for each Fiscal Year shall be computed by excluding from such computation any item of Income or Loss specially allocated to a Partner under Section 4.2. "ORGANIZATION COSTS" shall mean all actual out-of-pocket legal fees, costs and expenses of the General Partner and all filing fees payable to governmental entities associated with the formation of the Partnership. "PARTNER" means the General Partner or the Limited Partner as the context requires. Except where the context requires otherwise, a reference in this Agreement to the "PARTNERS" shall mean all of the Partners of the Partnership at the time of determination. "PARTNERSHIP" has the meaning set forth in the first paragraph hereof. "REVALUATION EVENT" means any of the following: (i) the acquisition of an additional Interest by any new or existing Partner in exchange for more than a de minimis Capital Contribution, (ii) a distribution to one or more Partners of more than a de minimis amount of money or other property as consideration for all or part of the Partner's Interest, or (iii) the liquidation of the Partnership within the meaning of Treasury regulations Section 1.704-1(b)(2)(ii)(g); provided, that the General Partner may elect, in its discretion, to treat other events as Revaluation Events or to treat any of the above named events as not constituting Revaluation Events to the extent the General Partner determines doing or not doing so better reflects the economic interests of the Partners in the Partnership. "SHARING RATIOS" means, initially, the ratio of each Partner's initial Capital Contribution to the total initial Capital Contributions of all Partners, as reflected on Schedule B hereto. Upon the occurrence of a Revaluation Event, the Sharing Ratios shall be redetermined by the General Partner based on the ratio of each Partner's Capital Account balance (as adjusted to reflect the Revaluation Event) to the total Capital Account balances (as adjusted to reflect the Revaluation Event) of all Partners. "SUBSTITUTE LIMITED PARTNER" means an Assignee of a Limited Partner's Interest that becomes a Limited Partner and succeeds, to the extent of the Interest assigned, to the rights and powers and becomes subject to the restrictions and liabilities of the assignor Limited Partner. "VALUATION PARTNER" has the meaning set forth in Section 6.13(a). 1.2 TERMS DEFINED IN INVESTMENT MANAGEMENT AGREEMENT. Unless otherwise defined in this Agreement or the context otherwise requires, terms used but not otherwise defined in this Agreement shall have the meanings specified in the Investment Management Agreement. The terms 5 10 whose meaning is so incorporated by reference from the Investment Management Agreement include without limitation: Affiliate Applicable Law Associate Confidential Information GMSP Group GMSP Principals good faith Governmental Authority Person Securities ARTICLE II. FORMATION 2.1 FORMATION, NAME AND PRINCIPAL OFFICE. The Partners hereby enter into and form the Partnership for the limited purpose and scope set forth in this Agreement. The Partnership shall be a limited partnership and, except as provided herein, shall be governed by the Act. The name of the Partnership shall be "GNA Investments I, L.P." The address of the principal office of the Partnership shall be 777 Main Street, Suite 2250, Fort Worth, Texas 76102 or, upon notice to the Limited Partner, at such other place as may be designated by the General Partner. 2.2 OFFICE AND AGENT FOR SERVICE OF PROCESS. The Partnership shall have a principal office located within the State of Texas at which shall be maintained records and documents of the Partnership as required under Section 1.07 of the Act. Unless otherwise designated by the General Partner as provided in the Act, the registered agent for service of process on the Partnership shall be J. Randall Chappel and the street address of the registered office of the Partnership shall be 777 Main Street, Suite 2250, Fort Worth, Texas 76102. 2.3 PURPOSE OF THE PARTNERSHIP. The purpose of the Partnership shall be to acquire, hold for investment, and distribute or otherwise dispose of Securities which meet the Investment Criteria at the time of acquisition. 2.4 NAMES AND ADDRESSES OF THE PARTNERS. The name and address of each Partner shall be set forth on Schedule B. 2.5 TERM OF THE PARTNERSHIP. The Partnership shall commence on the date of admission of the Limited Partner pursuant to Section 3.1 and, unless the Partnership is earlier dissolved pursuant to Article VIII, shall continue until the close of business on the tenth (10th) anniversary of such date or until the close of business on such later date as is provided for in a consent executed by the General Partner and the Limited Partner. 6 11 2.6 REQUIRED DOCUMENTS. (a) Partnership Documents. The General Partner shall cause to be filed, recorded or amended, as necessary, the Certificate of Limited Partnership of the Partnership and any other documents required to be filed, recorded or amended in connection with the formation or operation of the Partnership pursuant to the laws of the State of Texas or any other jurisdiction in which the Partnership's business is conducted. (b) Other Documents. The Limited Partner shall execute and acknowledge as requested by the General Partner such documents as may be necessary or desirable to (i) comply with legal requirements applicable to the formation of the Partnership or the operation of the Partnership's business, or (ii) otherwise give effect to the terms of this Agreement. (c) Special Power of Attorney. The Limited Partner hereby grants to the General Partner a special power of attorney (with full rights of assignment) irrevocably appointing the General Partner as the Limited Partner's attorney-in-fact with power and authority to execute and acknowledge, in the Limited Partner's name and on its behalf, any document described in Section 2.6(a) or (b). Such special power of attorney is coupled with an interest and shall not be revoked by the death or disability of any Limited Partner. ARTICLE III. CAPITALIZATION 3.1 INITIAL CAPITAL CONTRIBUTION. Each Partner, immediately upon entering into this Agreement, shall make the initial Capital Contribution specified for that Partner on Schedule B. 3.2 ADDITIONAL CAPITAL CONTRIBUTIONS. (a) General. Except as otherwise provided in Section 3.2(b) or any nonvariable provision of the Act, no Partner shall be permitted or required to make any additional Capital Contributions to the Partnership. (b) Voluntary Additional Capital Contributions. If the General Partner determines that the Partnership needs additional capital to acquire additional Securities, for the payment of Partnership Expenses or for any other proper Partnership purpose, the General Partner may so notify the Limited Partner and permit voluntary additional Capital Contributions by the Limited Partner. The General Partner shall make additional Capital Contributions from time to time to the extent necessary to cause its aggregate Capital Contributions to equal 1.01% of the aggregate Capital Contributions of the Limited Partner. 3.3 WITHDRAWAL AND RETURN ON CAPITAL. Except as otherwise specifically provided in this Agreement, no Partner shall (i) have the right or power to withdraw all or any portion of its Capital Contributions without the prior consent of the General Partner or (ii) be entitled to receive 7 12 any return on any portion of its Capital Contributions or Capital Account. Under circumstances involving a return of any Capital Contribution, no Partner shall have the right to receive property other than cash. 3.4 LOANS. No Partner shall be required to lend any money to the Partnership or to guarantee any Partnership indebtedness. Any loan by a Partner or an Affiliate or Associate of a Partner to the Partnership shall be on commercially reasonable terms and shall bear interest at the Interest Rate. Loans by a Partner to the Partnership shall not be considered Capital Contributions. 3.5 LIMITATION OF LIABILITY. Except as otherwise provided by the Act or Section 3.2, a Limited Partner shall have no liability as a Partner. A Partner that receives a distribution (i) in violation of this Agreement or (ii) which is required to be returned to the Partnership under the Act shall return the distribution immediately upon demand therefor by the other Partner. A Partner obligated to return property may, at its option, return cash equal to the Fair Market Value of the property on the date of such return. ARTICLE IV. ALLOCATIONS 4.1 ALLOCATION OF NET INCOME AND NET LOSS. For each Fiscal Year or period thereof, after first giving effect to the special allocations set forth in Section 4.2, Net Income or Net Loss, as applicable, shall be allocated to the Partners in proportion to their Sharing Ratios. 4.2 SPECIAL ALLOCATIONS. For each Fiscal Year or period thereof, the following items of Income and Loss shall be specially allocated to the Partners as follows, before allocations of Net Income or Net Loss are made pursuant to Section 4.1: (a) If a Partner unexpectedly receives any adjustment, allocation or distribution described in Treasury regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of income and gain (including gross income) shall be specially allocated to the Partner in an amount and manner sufficient to eliminate, to the extent required by the Treasury regulations, the deficit balance in the Partner's Capital Account as quickly as possible. This Section 4.2(a) shall be interpreted consistently with Treasury regulations Section 1.704-1(b)(2)(ii)(d). (b) To the extent an adjustment to the adjusted tax basis of any Partnership asset under Code Sections 734(b) or 743(b) is required to be taken into account in determining Capital Accounts under Treasury regulations Section 1.704-1(b)(2)(iv)(m), the amount of the Capital Account adjustment shall be included in determining items of Income or Loss and treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) and shall be specially allocated to the Partners consistent with the manner in which their Capital Accounts are required to be adjusted by such Treasury regulation. 8 13 (c) To minimize any distortions in the manner that the Partners would have shared distributions if the special allocations required by Section 4.2(a) and Section 4.2(b) (the "REGULATORY ALLOCATIONS") had not been part of this Agreement, the General Partner may specially allocate to the Partners offsetting items of Income or Loss so that the net amounts allocated to each Partner pursuant to Sections 4.1 and Section 4.2 will, to the extent possible, equal the net amounts that would have been allocated to each Partner pursuant to Section 4.1 if the Regulatory Allocations had not been part of this Agreement. 4.3 OTHER ALLOCATION RULES. (a) To reflect any varying Interests during a Fiscal Year, Net Income and Net Loss and items of Income and Loss shall be determined by the General Partner on a daily, monthly or other basis using any convention or method permitted under Code Section 706 and the Treasury regulations thereunder. (b) If the Partnership borrows money or property on a nonrecourse basis, the General Partner, in consultation with the Partnership's tax advisors, shall modify the allocation provisions of this Article IV to the minimum extent necessary to ensure that allocations relating to such nonrecourse borrowing are respected for federal income tax purposes while preserving the underlying economic objectives of the Partners as reflected in this Agreement. 4.4 ALLOCATIONS FOR FEDERAL INCOME TAX PURPOSES. (a) Subject to Section 4.4(b), for each Fiscal Year or period thereof, all items of taxable income, gain, loss and deduction of the Partnership, determined solely for federal income tax purposes, shall be allocated to the Partners in the same manner as each correlative item of Income and Loss and Net Income and Net Loss is allocated pursuant to the provisions of Sections 4.1, 4.2 and 4.3. (b) In accordance with Code Section 704(c) and the Treasury regulations thereunder, items of income, gain, loss and deduction with respect to any Partnership asset with a Book Basis that differs from its adjusted tax basis shall, solely for federal income tax purposes, be allocated among the Partners so as to take account of such difference at the time it arose. Unless otherwise approved by the Partners, such allocations shall be made utilizing the "Traditional Method with Curative Allocations" set forth in Treasury regulations Section 1.704-3(c). (c) Allocations pursuant to this Section 4.4 are solely for federal income tax purposes and shall not affect the determination of the Partners' Capital Accounts. 4.5 WITHHOLDING TAXES. The Partnership shall withhold taxes from distributions to, and allocations among, the Partners to the extent required by law (as determined by the General Partner in its sole discretion). Any amount so withheld by the Partnership with regard to a Partner shall be treated for purposes of this Agreement as an amount actually distributed to such Partner in 9 14 accordance with the provisions of Article V. An amount shall be considered withheld by the Partnership if, and at the time, remitted to a Governmental Authority without regard to whether such remittance occurs at the same time as the distribution or allocation to which it relates; provided, that an amount actually withheld from a specific distribution or designated by the General Partner as withheld from a specific allocation shall be treated as if distributed at the time such distribution or allocation occurs. To the extent operation of the foregoing provisions of this Section 4.5 would create or increase a deficit balance in a Partner's Capital Account, the amount of the deemed distribution shall instead be treated as a loan by the Partnership to such Partner, which loan shall bear interest at the Interest Rate. ARTICLE V. DISTRIBUTIONS 5.1 DISTRIBUTIONS. (a) Operating Distributions. The General Partner may, from time to time and in its sole discretion, cause the Partnership to distribute cash or property (including Securities) to the Partners. All distributions pursuant to this Section 5.1(a) shall be made to the Partners in proportion to their Sharing Ratios. (b) Liquidating Distributions. Notwithstanding the provisions of Section 5.1(a), cash or property of the Partnership available for distribution upon the dissolution of the Partnership (including cash or property received upon the sale or other disposition of assets in anticipation of or in connection with such dissolution) shall be distributed in accordance with the provisions of Section 8.4. (c) Limitation on Distributions. The General Partner shall use its best efforts to ensure that no distribution shall be made to a Partner pursuant to Section 5.1(a) or (b) if and to the extent that such distribution would: (i) create or increase a deficit balance in a Partner's Capital Account; (ii) cause the Partnership to be insolvent; or (iii) render the Limited Partner liable for a return of such distribution under the Act. 10 15 ARTICLE VI. ADMINISTRATIVE PROVISIONS 6.1 RIGHTS OF THE LIMITED PARTNER. (a) No Management. The Limited Partner shall take no part in the management or control (within the meaning of the Act) of the Partnership's business and shall have no right or authority to act for the Partnership or to vote on Partnership matters other than as specifically set forth in this Agreement or as required under the Act. (b) Outside Activities. The Limited Partner may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership. Neither the Partnership nor any of the Partners have any rights by virtue of this Agreement in any business venture of any other Partner. (c) Return of Capital. The Limited Partner is not entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions are made pursuant to this Agreement or upon termination of the Partnership. (d) Information. In addition to other rights provided by this Agreement, the Investment Management Agreement or by Applicable Law, the Limited Partner has the following rights relating to the Partnership: (i) The Limited Partner has the right to inspect and copy any of the Partnership's books for a proper purpose related to its interest in the Partnership whenever circumstances render it just and reasonable, but such inspection and copying is at the Limited Partner's own expense. (ii) The Limited Partner has the right for a proper purpose related to such Person's interest in the Partnership to have on demand true and full information of all things affecting the Partnership and a formal accounting of Partnership affairs whenever circumstances render it just and reasonable, but the furnishing of such information or conducting such accounting is at the Limited Partner's own expense. (iii) The Limited Partner has the right, upon notifying the General Partner of a proper purpose related to the Limited Partner's interests in the Partnership, to have furnished to it, at its expense, a copy of the names and amounts in interest of all Partners as of the date specified in its written request. 11 16 (iv) The Limited Partner has the right to have, on demand and without charge, true copies of: (i) this Agreement, the Certificate of Limited Partnership and all amendments or restatements thereof; and (ii) any of the tax returns of the Partnership. 6.2 MANAGEMENT BY THE GENERAL PARTNER. The General Partner shall devote such time and attention, and shall diligently perform those duties as are reasonably necessary to manage effectively the Partnership's business; provided, that to the extent not inconsistent with the foregoing requirements of this Section 6.2 or the Investment Management Agreement, the General Partner shall be permitted to conduct other affairs as described in Section 6.5. 6.3 POWERS OF THE GENERAL PARTNER. Subject to the provisions of the Act, this Agreement and the Investment Management Agreement, the General Partner shall have the exclusive power to perform all acts associated with the management and operation of the Partnership including, without limitation, the right to: (a) Receive, buy, sell, exchange, trade and otherwise deal in and with Securities and other property of the Partnership; (b) Acquire Securities on the basis of investment representations and subject to transfer restrictions; (c) Make all decisions with respect to the voting of Partnership Securities; (d) Cause the Partnership to enter into, make and perform such contracts, agreements and other undertakings, and to do such other acts, as it may deem necessary or advisable for, or as may be incidental to, the conduct of the business of the Partnership; (e) Open, conduct business regarding, draw checks or other payment orders upon, and close cash, checking, custodial or similar accounts with banks or brokers on behalf of the Partnership and pay the customary fees and charges applicable to transactions in respect of all such accounts; and (f) Assume and exercise all powers and responsibilities granted a general partner by the laws of the State of Texas. Without limitation upon the foregoing, any contract, agreement, deed, lease, note or other document or instrument executed on behalf of the Partnership by the General Partner shall be deemed to have been duly executed, the Limited Partner's signature shall not be required in connection with the foregoing, and third parties shall be entitled to rely upon the General Partner's authority under the provisions of this sentence without otherwise ascertaining that the requirements of this Agreement have been satisfied. 12 17 6.4 LIMITATIONS ON POWERS OF THE GENERAL PARTNER. The General Partner, without the prior consent of the Limited Partner, shall have no authority to: (a) Perform any act in contravention of this Agreement or the Investment Management Agreement or, subject to the provisions of Sections 6.5 and 6.6, any act which is detrimental to or incompatible with the business of the Partnership; (b) Possess Partnership property, or assign its General Partner's rights in specific Partnership property, for other than a Partnership purpose; (c) Admit a Person as an additional General Partner of the Partnership; (d) Receive any compensation or benefit from any issuer of any Securities held by the Partnership or any of its Affiliates or Associates that is not shared pro rata with the Partnership in accordance with the amount invested, other than as specifically permitted pursuant to Section 6.5(b); (e) Cause the Partnership to make any borrowings for the purpose of acquiring or carrying Securities, provided that any Partner may advance funds to the Partnership in accordance with Section 3.4 for the purpose of permitting the Partnership to meet its obligations to pay Expenses; (f) Invest any Partnership funds in Securities of an issuer in which the General Partner or any member of the GMSP Group is an investor on a basis different from that on which the Partnership invests; (g) Cause the Partnership to enter into any agreement that would commit the Partnership to purchase Securities that are not fully paid and non-assessable at the time of purchase or that would commit the Partnership to make future "follow-on" investments in issuers in addition to the Securities acquired pursuant to a specific purchase agreement; or (h) Commit the Partnership to pay any net profits interest or convey any participation or other contingent interest in Partnership Securities to any investment banker, broker, finder or other person on account of the Partnership's investment in such Securities. 6.5 OTHER VENTURES. (a) The Limited Partner (i) acknowledges that the General Partner and its Affiliates, Associates, partners, officers, directors, agents and employees are or may be involved in other financial, investment and professional activities, including, but not limited to, management of other investment funds, purchases and sales of Securities (including, without limitation, venture capital and leveraged buy-out investment Securities), investment and management counseling, and serving as officers, directors, advisors and agents of other companies; and (ii) agrees that the General Partner 13 18 and its Affiliates, Associates, partners, officers, directors, agents and employees may engage for their own accounts and for the accounts of others in any such ventures and activities as and to the full extent provided in this Agreement and in Section 5 of the Investment Management Agreement. (b) No provision of this Agreement or the Investment Management Agreement shall be construed to preclude the partners, Affiliates or employees of the General Partner from acting as a director or officer (or any similar capacity) to any corporation, partnership, trust or other business entity in which the Partnership has acquired Securities, or from receiving compensation or profit therefor. In connection with the foregoing, the Partners contemplate that partners, Affiliates or employees of the General Partner may serve on the board of directors of companies in which the Partnership acquires Securities, and any compensation received by such persons in connection with such service on the board of directors of any such company, which compensation is consistent with the compensation payable to other members of any such board of directors, will not be payable to the Partnership or deemed a reduction from the fees payable to the General Partner pursuant to the Investment Management Agreement and is specifically authorized by the terms of this Agreement. 6.6 DUTIES WITH RESPECT TO INVESTMENT DECISIONS. (a) The Limited Partner recognizes that the Partnership will participate with the General Partner as a co-investor in the acquisition of certain Securities to the extent that the General Partner determines in its sole discretion, provided that the General Partner shall have no obligation to offer to the Partnership any particular co-investment opportunity in each Security acquired by the General Partner that otherwise satisfies the Investment Criteria. In the event that the General Partner does permit the Partnership to co-invest with the General Partner, the amount of any such co-investment will be set by the General Partner in its sole discretion, and the decision of the General Partner shall be final. The terms of any co-investment by the Partnership shall be on terms identical to or substantially similar and no less favorable in any material respect than the terms of the investment made by the General Partner. No such decisions by the General Partner shall be considered a breach of this Agreement or its fiduciary duties to the Limited Partner or a breach of the Investment Management Agreement. Furthermore, to the extent that any decisions made pursuant to this Section 6.6(a) are deemed to involve an actual or potential conflict of interest, such conflict of interest is hereby specifically authorized pursuant to Section 5(b) of the Investment Management Agreement. (b) The Limited Partner recognizes that decisions concerning investments and potential investments that meet the Investment Criteria involve the exercise of judgment, are highly speculative and could involve the complete loss of the Partnership's investment, and agrees that Investment Management Agreement, as specifically modified by this Agreement, establishes the parameters of the General Partner's duties and responsibilities with respect thereto. (c) The Partners also recognize that the General Partner in its sole discretion may offer co-investment opportunities to its partners, its designated Affiliates and/or any other person that the General Partner shall determine in its sole discretion in the same manner as the Partnership will co-invest with the General Partner. It is the intention of the General Partner to so offer co-investment 14 19 opportunities, when practicable and feasible, with respect to each investment made by the Partnership, provided that the General Partner shall be under no obligation to do so. The amount of any such co-investment will be set by the General Partner in its sole discretion, subject to acceptance by the potential investor. 6.7 PAYMENT OF ORGANIZATION COSTS AND EXPENSES. (a) The Partnership shall pay, or shall reimburse the General Partner or any Affiliate thereof for its payment of, Organization Costs. (b) The Partnership shall pay, or shall reimburse the General Partner or any Affiliate thereof for its payment of, all Expenses. (c) To the extent any Expenses or other costs are attributable to any of the Partnership and other co-investors (including the General Partner investing for its own account), such costs shall be allocated among such entities based on their respective (i) interests in such Securities if such Expenses are attributable to such Securities, or (ii) aggregate amounts of capital agreed to be contributed and/or loaned to them by their respective partners and Affiliates if such costs are not attributable to any specific acquisition of Securities. (d) Other than the compensation payable pursuant to Section 4 of the Investment Management Agreement (as described in Section 6.8 below) and for the payment of Expenses described in above in this Section 6.7, the General Partner shall not be entitled to any other payments from the Partnership or the Limited Partner for its services as the General Partner of the Partnership. 6.8 PARTNER COMPENSATION. No Partner shall be entitled to any compensation for services provided by such Partner to, or for the benefit of, the Partnership, except that the General Partner may receive and retain compensation as provided in the Investment Management Agreement, and the Limited Partner's Sharing Ratio of Securities acquired by the Partnership shall be taken into consideration in calculating the compensation payable to the General Partner pursuant to Section 4 of the Investment Management Agreement as if such Securities were owned directly by the Limited Partner. 6.9 FILING OF TAX RETURNS. The General Partner shall prepare and file, or cause to be prepared and filed, a federal information tax return in compliance with Code Section 6031 and all other returns or reports required to be filed by the Partnership by any foreign, federal, state and local tax authorities. 6.10 TAX MATTERS PARTNER. (a) General. The General Partner is hereby designated the "tax matters partner" of the Partnership within the meaning of Code Section 6231(a)(7). Except as specifically provided in the Code and the regulations issued thereunder, the General Partner in its sole discretion shall have 15 20 exclusive authority to act for or on behalf of the Partnership with regard to tax matters, including, without limitation, the authority to make (or decline to make) any available tax elections. (b) Notice of Inconsistent Treatment of Partnership Item. No Partner shall file a notice with the Internal Revenue Service under Code Section 6222(b) in connection with such Partner's intention to treat an item on such Partner's federal income tax return in a manner which is inconsistent with the treatment of such item on the Partnership's federal income tax return unless such Partner has, not less than thirty (30) days prior to the filing of such notice, provided the General Partner with a copy of the notice and thereafter in a timely manner provides such other information related thereto as the General Partner shall reasonably request. (c) Notice of Settlement Agreement. Any Partner entering into a settlement agreement with the Secretary of the Treasury which concerns a Partnership item shall notify the other Partner of such settlement agreement and its terms within sixty (60) days from the date thereof. 6.11 RECORDS AND FINANCIAL STATEMENTS. (a) The General Partner shall cause the Partnership to maintain or cause to be maintained true and proper books, records, reports, and accounts in which shall be entered all transactions of the Partnership. Such books, records, reports and accounts shall be located at the principal place of business of the Partnership and shall be available to any Partner for inspection and copying during reasonable business hours. (b) The books and records of the Partnership may in the Limited Partner's discretion and at its expense be audited annually by an independent accounting firm selected by the Limited Partner from time to time. For purposes of determining and maintaining the Partners' Capital Accounts, the books of account of the Partnership shall be maintained in accordance with federal income tax principles (adjusted as provided in this Agreement) and the accrual method of accounting. Additionally, the General Partner shall cause the Partnership's financial books and records to be maintained in compliance with GAAP. (c) Within a reasonable time after each Fiscal Year, a copy of the following shall be mailed or otherwise furnished to each Partner and shall include (i) a balance sheet of the Partnership, (ii) income and cash flow statements of the Partnership, (iii) a statement of changes in the Partners' Capital Account balances from the last day of the prior Fiscal Year, and (iv) if applicable, the report of the results of the examination by the Partnership's independent auditors . (d) Upon completion of any valuation of the Partnership's assets in accordance with the provisions of Section 6.13, the Valuation Partner shall furnish to each Partner a statement showing (i) the net worth of the Partnership and the Fair Market Value of each Partnership asset and (ii) the Capital Account balance of such Partner. 16 21 (e) The General Partner shall keep or cause to be kept the following records at the principal office of the Partnership or make them available at that office within five days after the date of receipt of a written request therefor pursuant to Section 6.1: (i) a current list that states (w) the name and mailing address of each Partner, separately identifying in alphabetical order each general partner and limited partner; (x) the last known street address of the business or residence of each general partner; (y) the percentage or other interest in the Partnership owned by each partner; and (z) the names of the partners who are members of each specified class or group established pursuant to this Agreement; (ii) copies of the Partnership's federal, state, and local information or income tax returns for each of the Partnership's six most recent tax years; (iii) a copy of this Agreement and the Certificate of Limited Partnership, all amendments or restatements, executed copies of any powers of attorney under which this Agreement, the Certificate of Limited Partnership, and all amendments or restatements to this Agreement and the Certificate have been executed, and copies of any document that creates, in the manner provided by this Agreement, classes or groups of partners; (iv) a written statement of: (x) the amount of the cash contribution and a description and statement of the agreed value of any other contribution made by each Partner, and the amount of the cash contribution and a description and statement of the agreed value of any other contribution that the Partner has agreed to make in the future as an additional contribution; and (y) the date on which each Partner in the Partnership became a Partner; and (v) books and records of account of the Partnership. Any records maintained by the Partnership in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics, computer disks, or any other information storage device, if the records so kept are convertible into clearly legible written form within a reasonable period of time. The names, the business, residence, or mailing addresses, and the capital contributions to the Partnership of the Partners are as shown on the books and records of the Partnership. 6.12 TAX REPORTS TO PARTNERS. Within ninety (90) days after the end of each Fiscal Year, the Partnership shall prepare and mail, or cause to be prepared and mailed, to each Partner and, to the extent necessary, to each former Partner (or its legal representative), a report setting forth in sufficient detail information which will enable the Partner or former Partner (or its legal representative) to prepare their respective federal income tax returns in accordance with the laws, rules and regulations then prevailing. 17 22 6.13 VALUATION OF PARTNERSHIP ASSETS. (a) The General Partner (or the Liquidator, if appropriate, either being the "VALUATION PARTNER") shall value the Partnership's assets upon (i) the occurrence of any Revaluation Event and (ii) whenever otherwise required by this Agreement or determined by the Valuation Partner in its sole discretion. (b) In determining the value of Partnership property or a Partner's Interest, or in any accounting among the Partners: (i) No value shall be placed on the goodwill, going concern value, name, records, files, statistical data or similar assets of the Partnership not normally reflected in the Partnership's accounting records, but there shall be taken into consideration any items of income earned but not yet received, expenses incurred but not yet paid, liabilities fixed or contingent, and prepaid expenses to the extent not otherwise reflected in the books of account as well as the Fair Market Value of options or commitments to purchase or sell Securities pursuant to agreements entered into on or prior to the valuation date; and (ii) Securities held by the Partnership shall be valued at their Fair Market Value as defined in the Investment Management Agreement. 6.14 CONFIDENTIALITY. The Partners acknowledge and agree that all Confidential Information provided to or by them in respect of the Partnership shall be kept confidential as provided in Section 11 of the Investment Management Agreement. ARTICLE VII. TRANSFER OF A PARTNERSHIP INTEREST; WITHDRAWALS 7.1 TRANSFERS BY THE LIMITED PARTNER. (a) The Limited Partner may transfer its Interest only with the prior consent of the General Partner, which consent shall not unreasonably be withheld. (b) No Assignee of the Limited Partner shall become a Substitute Limited Partner without the consent of the General Partner, which consent shall not unreasonably be withheld. (c) Notwithstanding any other provision hereof, any successor to all or a portion of the Limited Partner's Interest shall be bound by the provisions of this Agreement. Prior to recognizing any transfer in accordance with this Article VII, the General Partner may require the transferring Limited Partner to execute and acknowledge an instrument of assignment in form and substance reasonably satisfactory to the General Partner and may require the Assignee to execute an amendment to this Agreement and to assume all obligations of the assigning Limited Partner. An Assignee who is not a Partner at the time of the transfer shall be entitled to the allocations and 18 23 distributions attributable to the Interest assigned to it and to transfer and assign such Interest in accordance with the terms of this Agreement; provided, that such Assignee shall not be entitled to the other rights of a Limited Partner unless and until such Assignee becomes a Substitute Limited Partner. Notwithstanding the foregoing, the Partnership and the General Partner shall incur no liability for allocations and distributions made in good faith to the transferring Limited Partner until a written instrument of assignment (as approved by the General Partner) has been received by the Partnership and recorded on its books and the effective date of the assignment has passed. 7.2 WITHDRAWAL BY A LIMITED PARTNER. (a) The Interest of a Limited Partner may not be withdrawn from the Partnership in whole or in part, other than with the consent of the General Partner, which consent shall not unreasonably be withheld. (b) In the event of the withdrawal of the Limited Partner, the General Partner, with the approval of the Limited Partner which shall not unreasonably be withheld, shall provide for payment to the withdrawing Limited Partner for its withdrawn Interest by either of the following alternatives: (i) The General Partner may cause the Partnership to distribute to the withdrawing Limited Partner an amount equal to any positive balance in the withdrawing Limited Partner's Capital Account. The General Partner may cause the Partnership to make the distribution in respect of any portion of the Interest of a withdrawing Limited Partner in cash or in kind; provided, that unless the withdrawing Limited Partner otherwise consents, the withdrawing Limited Partner shall not be required to receive an in kind distribution of any asset which exceeds the portion of such asset that would have been distributed to the withdrawing Limited Partner if the Partnership had dissolved on the effective date of the withdrawal and undivided interests in all Partnership assets were distributed to the Partners pro rata in proportion to their respective interest in the liquidation proceeds under Section. 8.4. If a distribution is to be made in kind and if such distribution cannot be made in full because of restrictions on the transfer of Securities or for any other reason, the distribution may be delayed until an effective transfer and distribution may be made, and Securities for transfer in respect of the withdrawing Limited Partner's Interest shall be designated as such. The designated Securities may nevertheless be sold by the General Partner, provided that the General Partner remits the cash proceeds therefrom to the withdrawing Limited Partner. (ii) The General Partner may sell the Interest of the withdrawing Limited Partner for cash and remit the proceeds of such sale to the withdrawing Limited Partner. The sale price for the Interest of the withdrawing Limited Partner shall be an amount equal to the lesser of: (1) the withdrawing Limited Partner's positive Capital Account balance, if any; or (2) the withdrawing Limited Partner's aggregate Capital Contributions. 19 24 (iii) If only a portion of the Limited Partner's Interest is withdrawn, payment under the foregoing provisions of this Section 7.2(b) shall be adjusted to provide for payment only in connection with such withdrawn Interest. 7.3 TRANSFERS BY THE GENERAL PARTNER. The General Partner shall not transfer its Interest as General Partner without the prior consent of the Limited Partner, which consent may be granted or withheld in the Limited Partners's sole discretion. 7.4. WITHDRAWAL BY THE GENERAL PARTNER. The General Partner may withdraw as a General Partner at any time upon thirty (30) days' prior written notice to the Limited Partner. ARTICLE VIII DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP 8.1 DISSOLUTION EVENTS. The Partnership shall be dissolved only upon the occurrence of any of the following events: (a) Expiration of the Partnership term as provided in Section 2.5; (b) the agreement of the General Partner and the Limited Partner to dissolve the Partnership; (c) the Bankruptcy, dissolution, termination of existence or occurrence of any other event of withdrawal of a General Partner within the meaning of Section 4.02 of the Act, unless (i) there remains at least one General Partner that continues the Partnership's business, or (ii) within ninety (90) days after the event of withdrawal, the Limited Partner agrees in writing to continue the Partnership's business and to the appointment, effective as of the date of the event of withdrawal, of one or more new General Partners; or (d) the entry of a decree of judicial dissolution under Section 8.02 of the Act. 8.2 CONVERSION OF GENERAL PARTNER INTEREST TO A LIMITED PARTNER INTEREST. Unless otherwise determined by the Limited Partner, if the Partnership is continued and not wound up on the occurrence of an event of withdrawal of a General Partner within the meaning of Section 4.02 of the Act, the Interest of the withdrawn General Partner shall automatically be converted to a Limited Partner Interest effective as of the date of the event of withdrawal; provided, that this Section 8.2 shall not be construed to preclude or to be in lieu of any cause of action the Partnership or the other Partner may have as a result of a General Partner's wrongful withdrawal. 8.3 WINDING UP OF THE PARTNERSHIP. Upon the occurrence of an event of dissolution, the Partnership shall continue solely for the purposes of winding up its business and affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Partners, and no Partner shall take any action that is inconsistent with such. To the extent consistent with the 20 25 foregoing, this Agreement shall continue in effect until the Partnership's property has been distributed or applied in satisfaction of Partnership liabilities and a certificate of cancellation has been filed for the Partnership pursuant to the Act. The General Partner or, if the General Partner has withdrawn, a liquidator or liquidating committee appointed by the Limited Partner (in either case, the "LIQUIDATOR") shall be responsible for winding up the Partnership. The Liquidator shall cause the Partnership's property to be liquidated as promptly as is consistent with obtaining the Fair Market Value thereof; provided, that (a) the Liquidator may distribute any assets of the Partnership in kind and subject to any indebtedness secured thereby (except that in kind distributions shall be subject to the provisions of Section 7.2(b)(i)), and (b) the Liquidator may, in its sole and absolute discretion, retain and distribute as collected any deferred payment obligation owed to the Partnership. The Liquidator shall have all of the powers of the General Partner to the extent consistent with the Liquidator's obligations and shall be entitled to the benefit of the provisions of Article IX during the winding up. 8.4 APPLICATION OF PROCEEDS OF LIQUIDATION. During or upon completion of the winding up, the proceeds of liquidation and other assets of the Partnership shall be applied and distributed in one or more installments in the following order and priority: (a) to the payment, or provision for payment, of the Expenses of winding up; (b) to the payment, or provision for payment, of creditors of the Partnership (including Partners other than in respect of distributions) in the order of priority provided by law; (c) to the establishment of any reserves deemed necessary or appropriate by the Liquidator to provide for contingent or unforeseen liabilities of the Partnership; and (d) the balance (including reductions in reserves established pursuant to Section 8.4(c)) shall be distributed to the Partners in accordance with the positive balances of their Capital Accounts, determined after taking into account all Capital Account adjustments for the current and all prior periods. 8.5 RESTORATION OBLIGATION. No Partner shall have an obligation to restore any deficit balance in its Capital Account. 8.6 TIMING OF LIQUIDATING DISTRIBUTIONS. To the extent reasonably practicable, the distributions described in Section 8.4(d), if any, shall be made to the Partners before the end of the taxable year in which the Partnership is liquidated (within the meaning of Treasury regulations Section 1.704-1(b)(2)(iv)(g)(3)) or, if later, within ninety (90) days after the date of such liquidation. 8.7 LIQUIDATING TRUST. In the discretion of the Liquidator, all or any proportionate part of the distributions that would otherwise be made to the Partners pursuant to Section 8.4(d) may be distributed to a trust established by the Liquidator for the benefit of the Partners and for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership or paying any 21 26 contingent or unforeseen obligations of the Partnership. The assets of such trust shall be distributed to the Partners from time to time, in the reasonable discretion of the trustee (who may or may not be the Liquidator or an Affiliate of the Liquidator), in the same proportions as the amounts distributed to such trust by the Partnership would otherwise have been distributed to them pursuant to Section 8.4(d). ARTICLE IX. LIABILITY AND INDEMNIFICATION OF THE GENERAL PARTNER 9.1 LIABILITY. (a) The liability of the General Partner, its officers, directors and employees, and other members of the GMSP Group in respect of their actions under this Agreement shall be limited as and to the extent provided in Section 9 of the Investment Management Agreement. (b) All debts and obligations of the Partnership shall be paid or discharged first with the assets of the Partnership (including Capital Contributions from the Partners), and the General Partner shall not be obligated to pay or discharge any such debt or obligation with its personal assets unless the General Partner is required to do so pursuant to the Act or other applicable law and to the extent that the documents creating such debts or obligations do not otherwise release the General Partner from such obligation. 9.2 INDEMNIFICATION. The Partnership shall indemnify and hold harmless the General Partner and the GMSP Principals in respect of their actions under this Agreement as and to the extent provided in the Investment Management Agreement. ARTICLE X. GENERAL PROVISIONS 10.1 SPECIAL MEETINGS. Subject to the provisions of the Act and subject to the right of any Partner to waive notice of any meeting, the General Partner may call a special meeting of all Partners at any reasonable time upon not less than ten (10) nor more than sixty (60) days notice. 10.2 ENTIRE AGREEMENT. This Agreement and the Investment Management Agreement contain the entire understanding among the Partners and supersede any prior written or oral agreement between them respecting the Partnership. There are no representations, agreements, arrangements, or understandings, oral or written, among the Partners relating to the Partnership which are not fully expressed in this Agreement or the Investment Management Agreement. 10.3 AMENDMENTS. This Agreement is subject to amendment only with the consent of the General Partner and the Limited Partner. 22 27 10.4 GOVERNING LAW. All questions with respect to the interpretation of this Agreement and the rights and liabilities of the Partners shall be governed by the laws of the State of Texas without regard to conflict of laws principles. 10.5 SEVERABILITY. If any one or more of the provisions of this Agreement is determined to be invalid or unenforceable, such provision or provisions shall be deemed severable from the remainder of this Agreement and shall not cause the invalidity or unenforceability of the remainder of this Agreement. 10.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and when so executed, all of such counterparts shall constitute a single instrument binding upon all parties notwithstanding the fact that all parties are not signatory to the original or to the same counterpart. 10.7 SURVIVAL OF RIGHTS. Subject to the restrictions against unauthorized assignment or transfer set forth in this Agreement, the provisions of this Agreement shall inure to the benefit of and be binding upon each Partner and such Partner's heirs, devised, legatees, personal representatives, successors, and assigns. 10.8 NOTICES. Any notice required or permitted to be given under this Agreement or the Act shall be in writing and shall be deemed duly given when as provided in Section 13 of the Investment Management Agreement. 10.9 CONSENTS. All consents, agreements and approvals provided for or permitted by this Agreement shall be in writing and signed copies thereof shall be retained with the books of the Partnership. 10.10 NO PARTITION. Except as otherwise permitted by this Agreement, no Partner shall have the right, and each Partner does hereby agree that it shall not seek, to cause a partition of the Partnership's property whether by court action or otherwise. 10.11 REPRESENTATIONS BY LIMITED PARTNER. The Limited Partner hereby represents and warrants that, with respect to its Interest: (i) it is acquiring or has acquired such Interest for purposes of investment only, for its own account, and not with a view to resell or distribute the same or any part thereof; and (ii) no other Person has any interest in such Interest or in the rights of the Limited Partner under this Agreement. The Limited Partner also represents and warrants to the Partnership and the other Partners that it acknowledges that the Securities that may be purchased by the Partnership will be speculative in nature and that it has the business and financial knowledge and experience necessary to acquire its Interest in the amount of its Capital Contributions to the Partnership on the terms contemplated herein and that it has the ability to bear the risks of such investment (including the risk of sustaining a complete loss of all such Capital Contributions) without the need for the investor protections provided by the registration requirements of the Securities Act of 1933, as amended. 23 28 * * * * * [Signature Pages to Follow] 24 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. GENERAL PARTNER: GOFF MOORE STRATEGIC PARTNERS, L.P. By: GMSP Operating Partners, L.P., its general partner By: GMSP, L.L.C., its general partner By:/s/ John C. Goff ----------------------------------------------- John C. Goff, Managing Principal By:/s/ J. Randall Chappel ----------------------------------------------- J. Randall Chappel, Principal LIMITED PARTNER: GAINSCO, INC. By: /s/ Glenn W. Anderson --------------------------------------------------- Glenn W. Anderson, President 25 30 SCHEDULE A INVESTMENT CRITERIA The General Partner shall seek investments for the Partnership in issuers related in any manner to the technology industry. The Partnership will invest in the Securities of issuers only in the event that the General Partner is also acquiring Securities of such issuers for its own account in the same transaction. The Partnership shall not invest more that $400,000 in Securities of any particular issuer. Partnership investments will be highly speculative with a view towards generating high rates of return. The Partnership expects to invest in Securities in private transactions exempt from the registration requirements of the Securities Act of 1933, as amended. Such Securities will typically have significant restrictions on transfer, including restrictions imposed by contract and applicable securities laws. Partnership investments will be made in issuers in various stages in the venture capital financing process, including seed, early or late round financings. 26 31 SCHEDULE B
INITIAL CAPITAL SHARING RATIOS --------------- -------------- CONTRIBUTION --------------- GENERAL PARTNER: Goff Moore Strategic Partners, L.P. $ 20,200 1% 777 Main Street, Suite 2250 Fort Worth, Texas 76102 LIMITED PARTNER: GAINSCO, INC. 2,000,000 99% 500 Commerce Street Fort Worth, Texas 76102-5439 ========== === Total Initial General and $2,020,200 100% Limited Partner Contributions
EX-10.16 6 PROFESSIONAL SERVICE AGREEMENT - CLIENTSOFT, INC. 1 [CLIENTSOFT LOGO] EXHIBIT 10.16 CLIENTSOFT INC. 8 SKYLINE DRIVE HAWTHORNE, NY 10532 PROFESSIONAL SERVICE AGREEMENT - -------------------------------------------------------------------------------- CUSTOMER: GAINSCO, INC. CONTACT: RICK LAABS SENIOR VICE-PRESIDENT INFORMATION TECHNOLOGIES Address: 500 Commerce Street, Fort Worth, Texas 76102 This Agreement is made and effective as of the 22nd day of October, 1999 (the "Effective Date"), by and between ClientSoft Inc. a Delaware Company ("ClientSoft"), with offices at 8 Skyline Drive, Hawthorne, NY 10532 and the Customer. WHEREAS, Customer desires ClientSoft to provide certain professional services to the Customer; and WHEREAS, ClientSoft has agreed to provide professional services to the Customer as hereinafter more particularly described and subject to and in accordance with the terms and conditions hereinafter appearing. NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, ClientSoft and Customer hereby agree as follows: 1. PROFESSIONAL SERVICES AND TERM a. ClientSoft will provide certain professional services ("Professional Services," as more fully described on Exhibit A annexed hereto) to assist Customer in connection with the Customer's use of ClientSoft's products and solutions. The Customer is solely responsible for determining its objectives and obtaining its desired results from the Professional Services to be provided by ClientSoft pursuant to this Agreement. Exhibit A annexed hereto sets forth the fees to be paid by Customer to ClientSoft for the Professional Services to be provided in accordance with the provisions of this Agreement. b. ClientSoft will endeavor to provide the Professional Services on a timely basis, subject to the availability of qualified personnel and the difficulty and scope of the Professional Services. c. ClientSoft may assign, reassign and substitute personnel at any time and may provide the same or similar services to any other third party. d. The Professional Services to be rendered to the Customer shall, except as otherwise agreed to by the parties, be rendered at a location specified by ClientSoft. e. The term of this Agreement shall commence upon the date first above written and shall terminate (unless sooner terminated pursuant to the provisions of Section 7.a. or Section 8.b. of this Agreement) upon the date of payment by the Customer to ClientSoft of all fees and expenses due to ClientSoft pursuant to the terms of this Agreement. f. ClientSoft personnel shall consist of ClientSoft employees and consultants engaged by ClientSoft for the design of solutions and performance of Professional Services. 2. RIGHTS IN WORK PRODUCT/PERSONNEL a. Any customer-specific documentation, designs or plans developed by ClientSoft personnel solely in connection with and unique to the performance of Professional Services under this Agreement shall be the exclusive property of Customer. b. The Customer acknowledges and agrees that, except as is expressly provided in Section 2.a. above, no right, title or interest whatsoever (express or implied) in or to any documentation, ideas, concepts, know how, data processing or other techniques used or developed by ClientSoft personnel (either alone or jointly with the Customer) in connection with the performance of the Professional Services hereunder is transferred or granted by ClientSoft to Customer. c. During the term of this Agreement and for a period of twelve (12) months thereafter, neither party shall, without the prior written approval of the other party, solicit the services of or make an offer of employment to any person who is or was, as the case may be, an employee or consultant of the other party during the term of this Agreement. In case of breach, the parties agree to liquidated damages of $50,000 per person. 3. INDUSTRY STANDARDS/DISCLAIMER OF WARRANTY a. ClientSoft will provide the Professional Services to Customer in a good and workmanlike manner in accordance with normal industry standards. b. EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, CLIENTSOFT MAKES AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOLUTIONS, PROFESSIONAL SERVICES AND/OR THE WORK PRODUCT PROVIDED BY CLIENTSOFT TO CUSTOMER HEREUNDER. 4. CUSTOMER RESPONSIBILITIES Customer shall: a. Assist ClientSoft personnel engaged in the performance of the Professional Services in the clarification and understanding of any matter relating to the Solution and Professional Services which the Customer requires ClientSoft to perform under this Agreement, as the same are described in Exhibit A hereto. b. Provide ClientSoft with the name of Customer's employee who has been designated by the Customer as the "Project Manager" and who has authority to make decisions on behalf of the Customer with respect to matters relating to the Solution and Professional Services to be provided hereunder. Such Project Coordinator shall be familiar with the objectives to be realized by the Customer in connection with the Solution and Professional Services. c. Provide to ClientSoft's personnel, for such periods of time and at such times as are reasonably required by ClientSoft, access to and use of any of Customer's systems and/or equipment, including without limitation Customer's computer system and/or communications network, which is required to enable the performance by ClientSoft of the Professional Services. d. Make available to ClientSoft personnel such office space, computer equipment, customer systems access, furniture and use of a telephone(s) as may be required by ClientSoft to facilitate ClientSoft's performance at the Customer's facility, as deemed appropriate by ClientSoft. 5. PAYMENT a. ClientSoft shall invoice Customer at the end of each phase (if on a fixed based contract) or month (if on a time materials basis) for all Professional Services performed by ClientSoft during such month in accordance with Exhibit A annexed hereto. ClientSoft's invoice shall reflect the number of work days expended by ClientSoft with respect to the creation of the solution or Professional Services to be provided pursuant to this Agreement. In addition, ClientSoft's invoice shall reflect any travel, living and accommodation charges which have been incurred by ClientSoft personnel in providing solution development and/or Professional Services at a Customer facility which is located outside of a fifty (50) mile radius of the ClientSoft facility at which such ClientSoft personnel are based. b. In the event that Customer requires any or all Professional Services to be performed on a Saturday, Sunday or public holiday observed by ClientSoft, the applicable hourly or other rates (as set forth in Exhibit A) charged by ClientSoft to the Customer shall be subject to an overtime premium of fifty (50%) percent of the applicable rate charged by ClientSoft pursuant to Exhibit A. c. Customer shall make payment of all invoices rendered by ClientSoft to Customer, pursuant to this Section 5, within thirty (30) days of the date of each invoice. Customer agrees to pay a late payment charge computed and payable monthly at the rate of one and one half (1 1/2%) percent per month or the maximum late payment charge permitted by law, whichever is less, on any 1 2 d. amounts which are not paid by the Customer within the aforesaid thirty (30) day payment period and reasonable attorney costs incurred in the collection process. e. Customer will pay any taxes ClientSoft becomes obligated to pay by virtue of this Agreement, exclusive of taxes based upon the net income of ClientSoft. 6. LIMITATION OF LIABILITY a. ClientSoft shall not be liable for any indirect, consequential, incidental or special damages sustained by the Customer in connection with or arising out of this Agreement, even if ClientSoft knew or should have known of the possibility of such damages. b. ClientSoft's entire liability and Customer's sole and exclusive remedy for direct damages from any cause relating to or arising out of this Agreement, regardless of the form of action, whether in contract or in tort (including negligence) or otherwise, shall not exceed in the aggregate the lesser of Ten Thousand ($10,000) Dollars or the charges actually paid by the Customer pursuant to this Agreement for the Professional Services which are the subject matter of or directly related to the causes of action asserted. 7. TERMINATION a. This Agreement may be terminated by either party in the event of a material breach by the other party of any of its obligations under this Agreement which material breach has not been cured within sixty (60) days of the date of receipt of written notice of such breach given by the non-breaching party to the other party. Any such written notice shall set forth with particularity the nature of any such material breach. b. Upon the termination of this Agreement pursuant to the provisions of Section 7.a. above or Section 8.b. of this Agreement, neither party shall have any further liability to the other pursuant to this Agreement except that the Customer shall remain liable to ClientSoft for any and all payments due to ClientSoft hereunder with respect to solutions provided or Professional Services performed by ClientSoft up to such date of termination, together with any and all expenses associated therewith which are to be reimbursed by Customer to ClientSoft in accordance with the provisions of Section 5 above. 8. CIRCUMSTANCES BEYOND CONTROL OF THE PARTIES a. In the event of any circumstance, occurrence, act or omission arising at any time which is beyond the control of ClientSoft or the Customer and which has a material effect on the performance by either party of any of its obligations pursuant to this Agreement, the parties agree that the performance of the affected obligation(s) shall be suspended until such time as the circumstance, occurrence, act or omission (which is preventing the performance of such obligation) no longer affects the performance of the particular obligation(s) and the agreed upon period for performance of such obligation(s) shall be extended by a period equal to the period during which such suspension of performance was in effect. b. Either party may terminate this Agreement upon written notice to the other party, in the event that the performance of any obligation (to be performed by either party hereunder) is suspended, pursuant to the provisions of Section 8.a. above, for a period of ninety (90) days or longer. 9. GENERAL a. This Agreement, together with Exhibits A annexed hereto, which are incorporated into and made a part of this Agreement, constitutes the entire agreement between the parties with regard to the subject matter hereof and supersedes all prior oral and written agreements, understandings, representations, proposals or communications, of whatsoever kind, between the parties with respect to the subject matter of this Agreement. b. No modifications or amendments to this Agreement and no waiver of any provision of this Agreement shall be valid unless made in writing and signed by duly authorized representatives of the parties hereto. c. Customer shall not assign any of its rights or delegate any of its duties under the terms of this Agreement without the prior written consent of ClientSoft. d. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. e. The parties hereto acknowledge and agree that Sections 2, 3, 5, 6 and 9 shall survive the termination of this Agreement. f. In performing the Professional Services set forth in Exhibits A hereto, ClientSoft is acting as an independent contractor and not as an employee, agent or representative of the Customer. ClientSoft has no authority to transact any business in the name of or for the account of the Customer or to otherwise obligate the Customer in any manner. g. Except as otherwise provided in this Agreement, all notices or other communications hereunder shall be deemed to have been duly given when made in writing and delivered in person or deposited in the U.S. mail, postage prepaid, certified mail, return receipt requested, and addressed to the Participant as shown above and to ClientSoft as follows: ClientSoft Inc., 8 Skyline Drive, Hawthorne, NY 10532, Attn: Vice Pres. - Professional Services, with a copy (which shall not constitute notice) to Corporate Secretary at the same address. h. Neither ClientSoft or the Customer shall disclose the terms of this Agreement or publish any information concerning the same without the prior written consent of the other. i. The failure of either party, in one or more instances, to insist upon the performance of any term or condition or to exercise any right or remedy available to such party, shall not be construed as a waiver by such party of the right to insist upon the performance or exercise of any right or remedy now available or which may arise in the future. j. The unenforceability of any provision hereof shall not affect the remaining provisions of this Agreement, but rather such provision shall be served and the remainder of this Agreement shall remain in full force and effect. k. This Agreement may be executed in any number of counterpart copies, each of which shall be deemed an original, but which together shall constitute a single instrument. l. All paragraph headings and captions used herein are for the convenience of the parties only and shall not be part of the text, or affect the meaning of this Agreement. m. Each of the parties hereto acknowledges to the other that it has had the opportunity to have this agreement reviewed by counsel of its choice and has had the opportunity to obtain the assistance of such counsel in the negotiation, preparation, execution and deliver thereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives. GAINSCO, INC. CLIENTSOFT, INC. By: /s/ RICK LAABS 12/22/99 By: /s/ ROBERT C. EVELYN 12/22/99 ------------------------------ ------------------------------- Authorized Signatory Date Authorized Signatory Date Rick Laabs Robert C. Evelyn ------------------------------ ------------------------------- Type or Print Name Type or Print Name Title: Sr. Vice President - IT Title: SVP Technology ------------------------------ ------------------------------- 3 EXHIBIT A STATEMENT OF WORK NUMBER 99075 CONTRACTED PROFESSIONAL SERVICES The following is a Statement of Work between ClientSoft Inc., ("ClientSoft") and Gainsco, Inc. ("Gainsco"). This Statement of Work states all of the rights and responsibilities of, and supersedes all prior oral and written communications, between ClientSoft and Gainsco regarding the Professional Services described below (the "Project"). This Statement of Work supplements and is subject to the terms and conditions contained in the Professional Services Agreement between ClientSoft and Gainsco dated December 22, 1999 (the "Agreement"). This Agreement shall be the controlling document for any subsequent Statements of Work executed via its Change Control Process. I. PERSONNEL ClientSoft and Gainsco will appoint representatives to the following positions: A. ClientSoft Project Executive - ClientSoft will appoint a Project Executive who will be responsible for overall management of the Project. The Project Executive will work with ClientSoft and Gainsco personnel to perform Project reviews, accomplish the tasks outlined in this Statement of Work, manage day-to-day project activities, and serve as ClientSoft's single point of contact with respect to interfacing with Gainsco on project issues. Sales related issues remain the responsibility of the ClientSoft Account Manager. B. Gainsco Project Executive - Gainsco will designate a Project Executive who will regularly available to meet with Gainsco and ClientSoft personnel on all matters pertaining to the Project. This individual will procure, manage and Gainsco's resources as defined in this Statement of Work. The Gainsco Project Executive will have the authority to signoff on each deliverable and completion criteria defined for each phase and task defined below. C. ClientSoft Resources - ClientSoft will make appropriate personnel available as needed to complete this project. D. Gainsco Resources - Gainsco will make appropriate personnel available as needed to complete this project. HQ required resources will include at least one individual from identified departments to participate as necessary to meet project objectives. Required resources include at least one end-user representative, representing a cross-section of the user population covered by this project. E. The current Project Executives assigned by each party are: Gainsco -- Rick Laabs, Senior Vice President Information Technologies ClientSoft -- Carlos Rivera, Asst. Vice President of Development In the event the Project Executive cannot execute a Change Request, the Change Request can be executed by an officer of the respective company. B-0 4 II. PROJECT SCOPE Based on the initial results from the current scoping engagements for Phase II, Umbrella Policies, and Change Requests to these contracts, ClientSoft agrees to provide Gainsco with a block of professional services resources to be utilized January 1, 2000 -- December 31, 2000. Gainsco shall use this block of resources for the performance of services that shall be defined by specific Statements of Work for each project that must be approved and accepted by Gainsco and ClientSoft. These resources will be utilized for, but not limited to, the Phase II and Umbrella projects. Detailed Statements of Work will be provided to Gainsco for approval for each project or Change Request. The value of each Statement of Work/Change Request accepted by Gainsco shall be deducted from the value of this agreement. The total value of the Statements of Work or Change Requests may be less than or exceed the value of this agreement. Any remaining value of this agreement may be transferred to any Joint Venture or Application Service Provider agreements made between ClientSoft and Gainsco. III. SCHEDULE OF SERVICES ClientSoft shall begin work at a mutually agreed upon date upon the acceptance of the specific Statements of Work for each project. These Statements of Work will be executed and processed in accordance with the Change Control Process listed in this document. IV. CLIENTSOFT'S RESPONSIBILITIES A. ClientSoft will assign a Project Executive, allocate appropriate resources, and use reasonable efforts to avoid project delays. B. ClientSoft will perform the Services described in the Statements of Work resulting from this contract. C. ClientSoft will provide Gainsco with a detailed Statement of Work for each project. Gainsco and ClientSoft will mutually agree on the Statement of Work prior to project commencement. V. GAINSCO'S RESPONSIBILITIES A. Gainsco will participate in Project Updates, if any, with ClientSoft in accordance with the timeframes as set forth in "Schedule 1 to Exhibit A - Project Update/Communications" annexed hereto. B. Gainsco will assign a Project Executive, allocate appropriate resources, and use its reasonable efforts to avoid Project delays. VI. KEY ASSUMPTIONS The following are key assumptions made by ClientSoft of Gainsco and this project. 1. Any Statement of Work developed will be signed by all parties, and attached to this Agreement as an appendix prior to application development. 2. The ClientSoft and Gainsco Project Executives, shall be the sole point of contact between parties for issues related to this Agreement. B-1 5 VII. VALUE OF SERVICES ClientSoft will provide Gainsco with a block of Professional Services to perform tasks identified in specific Statements of Work for Phase II, Umbrella, and other projects. The value of this block of services is: 1. VALUE OF PROFESSIONAL SERVICES PROFESSIONAL SERVICES Block of Professional Services 1,000,000 PROJECT TOTAL 1,000,000
2. INVOICING ClientSoft will invoice Gainsco in accordance with the payment schedules that accompany the Change Request and detailed Statements of Work approved and accepted by Gainsco and ClientSoft. Additional ClientSoft Professional Services requested by Customer that are not included in or exceed the scope of this Statement of Work or Change Request to this Statement of Work, and which are agreed to by both parties, shall be priced separately based on time and resource requirements (subject to increase in accordance with Sections 5(b) and 5(c) of the Agreement). These additional services may also be added to the scope of this agreement via the Change Control Process. Customer shall pay ClientSoft's reasonable expenses, which are incurred by ClientSoft for travel, lodging, meals, and cost of materials and equipment (i.e., printed materials, etc.). VIII. CHANGE CONTROL PROCESS The "Change Control Process" governs changes to the Project scope and deliverables during the life of the Project. The purpose of this process is to coordinate and properly document the development, installation and evaluation of new features and functionality during the Project. The process will apply to new Project components and to enhancements of existing Project components. The Change Control Process will be implemented from the start of the Project and will continue throughout the Project's duration. A. The Project Manager of the requesting party will submit a written Change Request to the Project Manager for the other party in the format identified in "Schedule 2 to Exhibit A - Change Request Form" annexed hereto. B. Both ClientSoft and Gainsco will review the proposed Change Request and either approve it for further study or reject it. The amount and payment of the costs of further study, if any, will be agreed upon by both ClientSoft and Gainsco. The results of the study will be used to determine the effect that the implementation of the Change Request will have on the Project cost and schedule. C. Once the parties have evaluated the Change Request, and have agreed to the change and the terms and conditions for the change, ClientSoft and Gainsco will complete and sign a "Change Request Evaluation Response Form" in the format identified in "Schedule 3 to Exhibit A" annexed hereto and setting forth the change and agreed terms and conditions. B-2 6 SCHEDULE 1 TO EXHIBIT A PROJECT UPDATE/COMMUNICATIONS ClientSoft and Gainsco acknowledge that regular communication among and between the parties is essential to be Project's successful completion. The parties agree that, in addition to normal, day-to-day communication, Project Updates will be held: ________ Twice Weekly (insert days of week meetings will be held on regularly ________ Weekly, every (insert day of week for regular update ________ Bi-weekly, every other (insert day of week for regular update) at: ________ (insert start time of regular update) via ___________ on-site meeting held at______________________(insert location) _______ teleconference, which will be initiated by _______ (identify party) The expected duration of each Project Update is estimated to be _________ hours/minutes. Both ClientSoft and Gainsco's Project Managers will determine, and be responsible for the attendance of, the appropriate participants for each Project Update. The ClientSoft Project manager will issue minutes of each Project Update within two (2) business days of the update. The minutes will include: attendee list, status of previously opened items, list new items including person(s) responsible for resolution, and summary of the Project's overall status. Other items will be added as appropriate. Other meetings, correspondence, etc. will occur as necessary during the course of the Project. The regular Project Update is not intended to eliminate or replace other forms of communication between the parties. B-3 7 SCHEDULE 2 TO EXHIBIT A CHANGE REQUEST FORM CONTRACTED PROFESSIONAL SERVICES Requester Name: -------------------------------------------- Requester Company Name: ------------------------------------ Date Requested: -------------------------------------------- Response Requested By: ------------------------------------- Change Requested: ------------------------------------------ (Provide a detailed description of the change requested, the area of the project plan/schedule being modified, and the benefits of making the change.) Change Request Received: Gainsco, Inc.: ClientSoft Inc. Signed: Signed: ------------------------------- ------------------------------- By: By: ----------------------------------- ----------------------------------- Title: Title: -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- Change Request No.: ------------------- B-4 8 SCHEDULE 3 TO EXHIBIT A CHANGE REQUEST EVALUATION RESPONSE FORM Change Request No.: ---------------------------------------- Requester Name: -------------------------------------------- Review Date: ------------- Request No. has been: -------------- accepted with changes -------- accepted with modification (see below) -------- rejected -------- Modifications to Change Requested: (Insert any changes that are made to the original Change Request. Ensure that, whether or not modified, the Change Request as accepted identifies, in detail, the changes to the Project scope, deliverables, schedule and costs.) Schedule Revision: (Insert new dates or attach revised project plan/schedule, which show the impact of the Change Request, if any.) Cost Revision: (Define any additional costs to be incurred as a result of proposed changes. Include in responsible parties, payment due date and any additional deliverables or modifications to acceptance criteria) Responsible Project Manager/Executive: ------------------------ Change Request Agreed and Accepted: Gainsco, Inc.: ClientSoft Inc. By: By: ----------------------------------- ----------------------------------- Title: Title: -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- B-5 9 [MOVES AUTO PHASE II AND UMBRELLA UNDER CONTROL OF MASTER SOW 99075] SCHEDULE 2 TO EXHIBIT A CHANGE REQUEST FORM CONTRACTED PROFESSIONAL SERVICES Requester Name: Carlos Rivera -------------------------------------------- Requester Company Name: ClientSoft ------------------------------------ Date Requested: 12/22/99 -------------------------------------------- Response Requested By: 12/22/99 ------------------------------------- Change Requested: ------------------------------------------ FOR PROJECT CONTROL PURPOSES WE ARE REQUESTING THAT STATEMENTS OF WORK #99054 AND 99055 BE ADDED UNDER THE CONTROL OF STATEMENT OF WORK #99075. THE ORIGINAL CONTRACT VALUE FOR SOW 99054 & 99055 WILL NOT BE REFLECTED IN SOW 99075. ANY ADDITIONAL CHANGE REQUESTS TO SOW 99054 & 99055 SHALL BE HANDLED IN ACCORDANCE AND UNDER THE CONTROL OF SOW 99075. Change Request Received: 12/22/99 Gainsco, Inc.: ClientSoft Inc. Signed: /s/ RICK LAABS Signed: /s/ CARLOS A. RIVERA ------------------------------- ------------------------------- By: Rick Laabs By: Carlos A. Rivera ----------------------------------- ----------------------------------- Title: Sr. Vice President - II Title: AVP Development -------------------------------- -------------------------------- Date: 12/22/99 Date: 12/22/99 --------------------------------- --------------------------------- Change Request No.: 99075-1 ------------------- B-0 10 SCHEDULE 3 TO EXHIBIT A CHANGE REQUEST EVALUATION RESPONSE FORM Change Request No.: 99075-1 ---------------------------------------- Requester Name: Carlos Rivera -------------------------------------------- Review Date: 12/22/99 ----------------------------------------------- Request No. 99075-1 has been: --------- X accepted with changes -------- accepted with modification (see below) -------- rejected -------- Modifications to Change Requested: NO MODIFICATION TO BE ADDED. Schedule Revision: THIS CHANGE REQUEST WILL HAVE NO IMPACT ON SCHEDULE. Cost Revision: THIS CHANGE REQUEST HAS ZERO ($0) COST ASSOCIATED WITH ITS ACCEPTANCE. Responsible Project Manager/Executive: Carlos Rivera and Rick Laabs ------------------------------ Change Request Agreed and Accepted: Gainsco, Inc.: ClientSoft Inc. Signed: /s/ RICK LAABS Signed: /s/ CARLOS A. RIVERA ------------------------------- ------------------------------- By: Rick Laabs By: Carlos A. Rivera ----------------------------------- ----------------------------------- Title: Sr. Vice President - II Title: AVP Development -------------------------------- -------------------------------- Date: 12/22/99 Date: 12/22/99 --------------------------------- --------------------------------- B-1 11 [CLIENTSOFT LOGO] EXHIBIT 10.16 CLIENTSOFT INC. 8 SKYLINE DRIVE HAWTHORNE, NY 10532 PROFESSIONAL SERVICE AGREEMENT - -------------------------------------------------------------------------------- CUSTOMER: GAINSCO, INC. CONTACT: RICK LAABS SENIOR VICE-PRESIDENT INFORMATION SERVICES Address: 500 Commerce Street, Fort Worth, Texas 76102 This Agreement is made and effective as of the 22nd day of October, 1999 (the "Effective Date"), by and between ClientSoft Inc. a Delaware Company ("ClientSoft"), with offices at 8 Skyline Drive, Hawthorne, NY 10532 and the Customer. WHEREAS, Customer desires ClientSoft to provide certain professional services to the Customer; and WHEREAS, ClientSoft has agreed to provide professional services to the Customer as hereinafter more particularly described and subject to and in accordance with the terms and conditions hereinafter appearing. NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, ClientSoft and Customer hereby agree as follows: 1. PROFESSIONAL SERVICES AND TERM a. ClientSoft will provide certain professional services ("Professional Services,") as more fully described on Exhibit A annexed hereto) to assist Customer in connection with the Customer's use of ClientSoft's products and solutions. The Customer is solely responsible for determining its objectives and obtaining its desired results from the Professional Services to be provided by ClientSoft pursuant to this Agreement. Exhibit A annexed hereto sets forth the fees to be paid by Customer to ClientSoft for the Professional Services to be provided in accordance with the provisions of this Agreement. b. ClientSoft will endeavor to provide the Professional Services on a timely basis, subject to the availability of qualified personnel and the difficulty and scope of the Professional Services. c. ClientSoft may assign, reassign and substitute personnel at any time and may provide the same or similar services to any other third party. d. The Professional Services to be rendered to the Customer shall, except as otherwise agreed to by the parties, be rendered at a location specified by ClientSoft. e. The term of this Agreement shall commence upon the date first above written and shall terminate (unless sooner terminated pursuant to the provisions of Section 7.a. or Section 8.b. of this Agreement) upon the date of payment by the Customer to ClientSoft of all fees and expenses due to ClientSoft pursuant to the terms of this Agreement. f. ClientSoft personnel shall consist of ClientSoft employees and consultants engaged by ClientSoft for the design of solutions and performance of Professional Services. 2. RIGHTS IN WORK PRODUCT/PERSONNEL a. Any customer-specific documentation, designs or plans developed by ClientSoft personnel solely in connection with and unique to the performance of Professional Services under this Agreement shall be the exclusive property of Customer. b. The Customer acknowledges and agrees that, except as is expressly provided in Section 2.a. above, no right, title or interest whatsoever (express or implied) in or to any documentation, ideas, concepts, know how, data processing or other techniques used or developed by ClientSoft personnel (either alone or jointly with the Customer) in connection with the performance of the Professional Services hereunder is transferred or granted by ClientSoft to Customer. c. During the term of this Agreement and for a period of twelve (12) months thereafter, neither party shall, without the prior written approval of the other party, solicit the services of or make an offer of employment to any person who is or was, as the case may be, an employee or consultant of the other party during the term of this Agreement. In case of breach, the parties agree to liquidated damages of $50,000 per person. 3. INDUSTRY STANDARDS/DISCLAIMER OF WARRANTY a. ClientSoft will provide the Professional Services to Customer in a good and workmanlike manner in accordance with normal industry standards. b. EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, CLIENTSOFT MAKES AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOLUTIONS, PROFESSIONAL SERVICES AND/OR THE WORK PRODUCT PROVIDED BY CLIENTSOFT TO CUSTOMER HEREUNDER. 4. CUSTOMER RESPONSIBILITIES Customer shall: a. Assist ClientSoft personnel engaged in the performance of the Professional Services in the clarification and understanding of any matter relating to the Solution and Professional Services which the Customer requires ClientSoft to perform under this Agreement, as the same are described in Exhibit A hereto. b. Provide ClientSoft with the name of Customer's employee who has been designated by the Customer as the "Project Manager" and who has authority to make decisions on behalf of the Customer with respect to matters relating to the Solution and Professional Services to be provided hereunder. Such Project Coordinator shall be familiar with the objectives to be realized by the Customer in connection with the Solution and Professional Services. c. Provide to ClientSoft's personnel, for such periods of time and at such times as are reasonably required by ClientSoft, access to and use of any of Customer's systems and/or equipment, including without limitation Customer's computer system and/or communications network, which is required to enable the performance by ClientSoft of the Professional Services. d. Make available to ClientSoft personnel such office space, computer equipment, customer systems access, furniture and use of a telephone(s) as may be required by ClientSoft to facilitate ClientSoft's performance at the Customer's facility, as deemed appropriate by ClientSoft. 5. PAYMENT a. ClientSoft shall invoice Customer at the end of each phase (if on a fixed based contract) or month (if on a time and materials basis) for all Professional Services performed by ClientSoft during such month in accordance with Exhibit A annexed hereto. ClientSoft's invoice shall reflect the number of work days expended by ClientSoft with respect to the creation of the solution or Professional Services to be provided pursuant to this Agreement. In addition, ClientSoft's invoice shall reflect any travel, living and accommodation charges which have been incurred by ClientSoft personnel in providing solution development and/or Professional Services at a Customer facility which is located outside of a fifty (50) mile radius of the ClientSoft facility at which such ClientSoft personnel are based. b. In the event that Customer requires any or all Professional Services to be performed on a Saturday, Sunday or public holiday observed by ClientSoft, the applicable hourly or other rates (as set forth in Exhibit A) charged by ClientSoft to the Customer shall be subject to an overtime premium of fifty (50%) percent of the applicable rate charged by ClientSoft pursuant to Exhibit A. c. Customer shall make payment of all invoices rendered by ClientSoft to Customer, pursuant to this Section 5, within thirty (30) days of the date of each invoice. Customer agrees to pay a late payment charge computed and payable monthly at the rate of one and one half (1 1/2%) percent per month or the maximum late payment charge permitted by law, whichever is less, on any 1 12 d. amounts which are not paid by the Customer within the aforesaid thirty (30) day payment period and reasonable attorney costs incurred in the collection process. e. Customer will pay any taxes ClientSoft becomes obligated to pay by virtue of this Agreement, exclusive of taxes based upon the net income of ClientSoft. 6. LIMITATION OF LIABILITY a. ClientSoft shall not be liable for any indirect, consequential, incidental or special damages sustained by the Customer in connection with or arising out of this Agreement, even if ClientSoft knew or should have known of the possibility of such damages. b. ClientSoft's entire liability and Customer's sole and exclusive remedy for direct damages from any cause relating to or arising out of this Agreement, regardless of the form of action, whether in contract or in tort (including negligence) or otherwise, shall not exceed in the aggregate the lesser of Ten Thousand ($10,000) Dollars or the charges actually paid by the Customer pursuant to this Agreement for the Professional Services which are the subject matter of or directly related to the causes of action asserted. 7. TERMINATION a. This Agreement may be terminated by either party in the event of a material breach by the other party of any of its obligations under this Agreement which material breach has not been cured within sixty (60) days of the date of receipt of written notice of such breach given by the non-breaching party to the other party. Any such written notice shall set forth with particularity the nature of any such material breach. b. Upon the termination of this Agreement pursuant to the provisions of Section 7.a. above or Section 8.b. of this Agreement, neither party shall have any further liability to the other pursuant to this Agreement except that the Customer shall remain liable to ClientSoft for any and all payments due to ClientSoft hereunder with respect to solutions provided or Professional Services performed by ClientSoft up to such date of termination, together with any and all expenses associated therewith which are to be reimbursed by Customer to ClientSoft in accordance with the provisions of Section 5 above. 8. CIRCUMSTANCES BEYOND CONTROL OF THE PARTIES a. In the event of any circumstance, occurrence, act or omission arising at any time which is beyond the control of ClientSoft or the Customer and which has a material effect on the performance by either party of any of its obligations pursuant to this Agreement, the parties agree that the performance of the affected obligation(s) shall be suspended until such time as the circumstance, occurrence, act or omission (which is preventing the performance of such obligation) no longer affects the performance of the particular obligation(s) and the agreed upon period for performance of such obligation(s) shall be extended by a period equal to the period during which such suspension of performance was in effect. b. Either party may terminate this Agreement upon written notice to the other party, in the event that the performance of any obligation (to be performed by either party hereunder) is suspended, pursuant to the provisions of Section 8.a. above, for a period of ninety (90) days or longer. 9. GENERAL a. This Agreement, together with Exhibits A annexed hereto, which are incorporated into and made a part of this Agreement, constitutes the entire agreement between the parties with regard to the subject matter hereof and supersedes all prior oral and written agreements, understandings, representations, proposals or communications, of whatsoever kind, between the parties with respect to the subject matter of this Agreement. b. No modifications or amendments to this Agreement and no waiver of any provision of this Agreement shall be valid unless made in writing and signed by duly authorized representatives of the parties hereto. c. Customer shall not assign any of its rights or delegate any of its duties under the terms of this Agreement without the prior written consent of ClientSoft. d. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. e. The parties hereto acknowledge and agree that Sections 2, 3, 5, 6 and 9 shall survive the termination of this Agreement. f. In performing the Professional Services set forth in Exhibits A hereto, ClientSoft is acting as an independent contractor and not as an employee, agent or representative of the Customer. ClientSoft has no authority to transact any business in the name of or for the account of the Customer or to otherwise obligate the Customer in any manner. g. Except as otherwise provided in this Agreement, all notices or other communications hereunder shall be deemed to have been duly given when made in writing and delivered in person or deposited in the U.S. mail, postage prepaid, certified mail, return receipt requested, and addressed to the Participant as shown above and to ClientSoft as follows: ClientSoft Inc., 8 Skyline Drive, Hawthorne, NY 10532, Attn: Vice Pres. - Professional Services, with a copy (which shall not constitute notice) to Corporate Secretary at the same address. h. Neither ClientSoft or the Customer shall disclose the terms of this Agreement or publish any information concerning the same without the prior written consent of the other. i. The failure of either party, in one or more instances, to insist upon the performance of any term or condition or to exercise any right or remedy available to such party, shall not be construed as a waiver by such party of the right to insist upon the performance or exercise of any right or remedy now available or which may arise in the future. j. The unenforceability of any provision hereof shall not affect the remaining provisions of this Agreement, but rather such provision shall be served and the remainder of this Agreement shall remain in full force and effect. k. This Agreement may be executed in any number of counterpart copies, each of which shall be deemed an original, but which together shall constitute a single instrument. l. All paragraph headings and captions used herein are for the convenience of the parties only and shall not be part of the text, or affect the meaning of this Agreement. m. Each of the parties hereto acknowledges to the other that it has had the opportunity to have this agreement reviewed by counsel of its choice and has had the opportunity to obtain the assistance of such counsel in the negotiation, preparation, execution and deliver thereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives. GAINSCO, INC. CLIENTSOFT, INC. By: /s/ RICK A. LAABS 11/16/99 By: ------------------------------ ------------------------------- Authorized Signatory Date Authorized Signatory Date Rick A. Laabs ------------------------------ ------------------------------- Type or Print Name Type or Print Name Title: Sr. Vice President - IT Title: ------------------------------ ------------------------------- 13 EXHIBIT A STATEMENT OF WORK NUMBER 99055 eXoro PHASE II SCOPE DEVELOPMENT The following is a Statement of Work between ClientSoft Inc., ("ClientSoft") and Gainsco, Inc. ("Gainsco"). This Statement of Work states all of the rights and responsibilities of, and supersedes all prior oral and written communications, between ClientSoft and Gainsco regarding the Scope Development project described below (the "Project"). This Statement of Work supplements and is subject to the terms and conditions contained in the Professional Services Agreement between ClientSoft and Gainsco dated October 22, 1999 (the "Agreement"). I. PERSONNEL ClientSoft and Gainsco will appoint representatives to the following positions: A. ClientSoft Project Manager - ClientSoft will appoint a Project Manager who will be responsible for overall management of the Project. The Project Manager will work with ClientSoft and Gainsco personnel to perform Project reviews, accomplish the tasks outlined in this Statement of Work, manage day-to-day project activities, and serve as ClientSoft's single point of contact with respect to interfacing with Gainsco on project issues. Sales related issues remain the responsibility of the ClientSoft Account Manager. B. Gainsco Project Manager - Gainsco will designate a Project Manager who will regularly available to meet with Gainsco and ClientSoft personnel on all matters pertaining to the Project. This individual will procure, manage and Gainsco's resources as defined in this Statement of Work. The Gainsco Project Manager will have the authority to signoff on each deliverable and completion criteria defined for each phase and task defined below. C. ClientSoft Resources - ClientSoft will make appropriate personnel available as needed to complete this project. D. Gainsco Resources - Gainsco will make appropriate personnel available as needed to complete this project. HQ required resources will include at least one individual from identified departments to participate in the Validate Process Logic Flow and Application Design as necessary to meet project objectives. Required resources include at least one end-user representative, representing a cross-section of the user population covered by this project. B-0 14 II. PROJECT SCOPE This Statement of Work (SOW) defines the scope of tasks to be accomplished by ClientSoft for development of a Scope Document. Over a three to four week period, ClientSoft will conduct a series of meetings to collect information relevant to a requirement definition to identify and develop application scope for the system implementation. The deliverable of this activity (discussed in detail below) will be documented process detailing the application flow that maps the ClientBuilder functions and how they integrate to Gainsco's system, including a Graphical User Interface Prototype (proposed screen layouts). The final output of this short engagement is a fixed-price proposal to complete development of the prototype into a finished system. This document will also include a description of the proposed rollout and testing phases. Upon acceptance of the developed proposal, ClientSoft and Gainsco will be free to engage the project as described in the proposal. SCOPE DEVELOPMENT The deliverables from this work include (Italics identify deliverables & completion criteria): 1. DOCUMENTATION OF THE `AS-IS' PROCESS FLOW This task performs the following: o Applies a simple processing mapping tool and modified Process mapping techniques, to document the `AS-IS' process. Special attention is paid to identify bottlenecks and process issues, which can become targets for process improvement. o Based on significant interaction in a series of intense process oriented meetings and interviews, ClientSoft consultants work with the End-User and IT representatives to document existing processes. It is imperative that the End-User representatives understand the flow of the Gainsco system and be able to answer questions as to process flow, screen content, data element usage and navigation. Significant input will be required from the End-User and IT representatives to ensure that bottlenecks and process improvement opportunities are fully understood. This directly affects the benefits derived. DELIVERABLE: Documented AS-IS process flow COMPLETION CRITERIA: This task is complete when the AS-IS process flow has been document and verified by the Gainsco Project Manager. EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 5O screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 2. COLLECT/ANALYZE/DOCUMENT SCREEN IMAGES AND DATA ELEMENTS This task performs the following: COLLECT GAINSCO SCREENS o Gainsco will provide ClientSoft with the proper Access, User ID & Password and End-User representative to walk through and document each screen in the Gainsco system. Analysis will focus on how the current system behaves, a general description of what is required to duplicate that behavior (either using mainframe or local server files), and what mainframe field or fields must be updated as a result of the end state of each control. DOCUMENT DATA ELEMENTS AND CONTROLS o Working with the appropriate Gainsco IT and End-User representatives, the ClientSoft consultant will document the data elements and controls (action fields, command lines and `PF' keys) on each screen. These will be cross-referenced in the design document for the Graphical User Interface Prototype. B-1 15 o Screen edits and usability features are extremely important to identify at this juncture. When a user does not key all of the data required for a screen to commit, a `screen edit' is displayed. The goal is to ensure that one of these screen edits does not interrupt the flow of processing and that it is handled gracefully. Usability features are especially important to evaluate in situations where cryptic codes are used and should be replaced with more readable text. PERFORM ANALYSIS o The collected screen images and data elements and controls are analyzed and the `As-Is' process document created from the material gathered. Each screen image is numbered along with each significant control to allow clearer discussion of process flow, specific data elements and screen flow and their impact on the complexity of the solution in the `To-Be' process development. o In addition to the `As-Is' process flow, documentation will include pages describing each screen and further broken down into paragraphs explaining each control's behavior and end state relationship to host screens. This information is critical to understanding how the ClientBuilder code must react to changes in the mainframe. Failure to identify mainframe functions (PF keys, pop-up windows, navigation requirements, etc) will create `holes' in the process flow, which will surface once actual coding, and acceptance testing begins. Such omissions in the requirements gathering process will create change request situations, which could affect deliverable timeframes and increase project costs. o It is imperative that the End-User representative understands the flow of the Gainsco system and is able to answer questions as to screen content, data element usage and navigation. During this process, it is important to note where process flow is impacted by the current system. Identification of bottlenecks and process improvement opportunities are critical at this juncture. STAGE REVIEW o A stage review meeting is scheduled to review the `As-Is' documentation to ensure completeness and accuracy. This is a critical juncture in the process and requires signoff by the Gainsco project manager prior to further analysis. DELIVERABLE: Gainsco screens collected in the CSD, Data elements documented COMPLETION CRITERIA: This task is complete when the Gainsco screens have been collected in the CSD and the Data Element documented and the stage acceptance form is signed by the Gainsco Project Manager. EXCEPTIONS: The pricing for this project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 3. DEVELOP `TO-BE' PROCESS IMPROVEMENTS This task performs the following: CREATE IMPROVED PROCESS o Applies a simple processing mapping tool and modified process mapping techniques, to create the `To-Be' process from the documented `As-Is' process. Special attention is paid to the identified bottlenecks and process issues, which are targets for process improvement. o Based on significant interaction, ClientSoft consultants work with the End-User and IT representatives to create process improvements. It is imperative that the End-User representatives understand the flow of the Gainsco system and be able to answer questions as to process flow, screen content, data element usage and navigation. Significant input will be required from the End-User and IT representatives to ensure that bottleneck elimination and process improvement opportunities are fully realized. DELIVERABLE: Gainsco 'To-Be' process defined. COMPLETION CRITERIA: This task is complete when the Gainsco `To-Be' process has been defined and the phase acceptance form is signed by the Gainsco Project Manager. B-2 16 EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 5O screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 4. DEVELOP `TO-BE' GRAPHICAL USER INTERFACE PROTOTYPE From a usability and complexity of development perspective, this task is the most critical. Herein the flow of the system, its functions and capabilities from the End-User perspective is created and approved. Errors or omissions in function or feature will create a change control situation, which could affect the timeframe and cost of the project. This task performs the following: CREATE GRAPHICAL USER INTERFACE PROTOTYPE o Using basic GUI graphical objects, which are supported by ClientBuilder, the ClientSoft consultant will work with the End-User and IT representatives to create the Graphical User Interface Prototype. Though possibly missing icons, colors of the final product and other minor GUI features (spinning icons, etc), the prototype will be roughly equivalent to the final delivered product. The key task accomplished in this phase is to correctly identify how the `To-Be' GUI interface will work. Special attention to where the data elements on the GUI screens come from and how they behave must be documented (i.e. some GUI screens may required data from multiple host screens). o Again, it is imperative that the End-User representatives understand the flow of the Gainsco system and be able to answer questions as to process flow, screen content, data element usage and navigation. Significant input will be required from the End-User and IT representatives to ensure that bottlenecks and process improvement opportunities are fully realized. DOCUMENT PROTOTYPE DATA ELEMENTS AND CONTROLS o Working with the appropriate Gainsco IT and End-User representatives, the ClientSoft consultant will document the GUI data elements and controls (click boxes, drop down lists and so forth) on each screen. These will be cross-referenced in the design document against the host fields documented in the `As-Is' process. o Screen edits and usability features are extremely important to identify at this juncture. When a user does not key all of the data required for a screen to commit, a `screen edit' is displayed. The goal is to ensure that one of these screen edits does not interrupt the flow of processing and that it is handled gracefully. Usability features are especially important to evaluate in situations where cryptic codes are used and should be replaced with more readable text. PERFORM ANALYSIS o The collected screen images and data elements and controls are analyzed and the Graphical User Interface Prototype document created from the material gathered. Each screen image is numbered along with each significant control and cross-referenced to the host screens to allow clearer discussion of process flow, specific data elements and screen flow and their impact on the complexity of the solution in the `To-Be' process development. o In addition to the `To-Be' GUI prototype, documentation will include pages describing each GUI screen and further broken down into paragraphs explaining each control's behavior and end state relationship to host screens. This information is critical to understanding how the ClientBuilder code must react to changes in the mainframe. Failure to identify prototype functions (check boxes, drop down lists, navigation requirements, etc) will create `holes' in the process flow which will surface once actual coding and acceptance testing begins. Such omissions in the requirements gathering process will create change request situations, which could affect deliverable timeframes and increase project costs. o It is imperative that the End-User representative understands the flow of the desired Gainsco process relative to the existing system and is able to answer questions as to screen content, data element usage and navigation. During this process, it is important to note where process flow will be positively impacted by the `To-Be' system. Solutions to bottlenecks and estimates of positive process improvement impacts over the `As-Is' system are important to identify for financial justification of the proposed system. B-3 17 STAGE REVIEW o A stage review meeting is scheduled to review the `As-Is' documentation to ensure completeness and accuracy. This is a critical juncture in the process and requires signoff by the Gainsco project manager prior to further analysis. DELIVERABLE: Gainsco Prototype defined. COMPLETION CRITERIA: This task is complete when the Gainsco Prototype has been defined and the phase acceptance form is signed by the Gainsco Project Manager. EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 5. DEVELOP FIXED PRICE PROPOSAL This task performs the following: Using the material developed in Tasks 1-4, the ClientSoft team will create a fixed-price proposal to develop the Gainsco solution. NOTE: This task is performed off-site and concludes the work effort for this scope development project. This will include (but is not limited to) the following areas: PHASE I: MOBILIZATION AND PROJECT SETUP o Development Server Installation Tasks -- These are tasks associated with the installation of the development servers required to support the solution. o Development Workstation Installation Tasks -- These are tasks associated with the installation of the development workstations required to support the solution. o Acceptance Test Plan -- A significant portion of mobilization is the development of test data and the acceptance test plan. ClientSoft consultants work with the End-User and IT representatives to ensure that a comprehensive acceptance test plan is built and readied for implementation at the appropriate time. PHASE II: DEVELOPMENT o Describes in detail, stage limited functional releases of the software developed by ClientSoft. ClientSoft consultants will begin the integration of ClientBuilder to the Gainsco system based on the specifications developed in the application scope document described in the deliverables to this project. o Any changes to the application scope will require a written request detailing the changes requested and any additional costs if applicable, signed by all parties. PHASE III: TESTING & ROLLOUT o Application testing and rollout. After the ClientBuilder application is integrated with the PDS back-end and the agent front-end according to the specification of the application scope document, the application testing and rollout phase will commence. Phase III represents 25% of the project deliverables. OUT OF SCOPE WORK o The fixed-price proposal will specifically identify items required for successful implementation of this project which are out of scope and provided for by Gainsco. Failure to provide these functions could adversely affect this project and Gainsco holds ClientSoft harmless in that event. DELIVERABLE: Gainsco Fixed Price Proposal COMPLETION CRITERIA: This task is complete when the Gainsco Fixed-Price Proposal has been defined and the phase acceptance form is signed by the Gainsco Project Manager. B-4 18 EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. III. SCHEDULE OF SERVICES ClientSoft shall begin work at a mutually agreed upon date upon the acceptance of this Statement of Work. IV. CLIENTSOFT'S RESPONSIBILITIES A. ClientSoft will assign a Project Manager, allocate appropriate resources, and use reasonable efforts to avoid project delay. B. ClientSoft will perform the Services described in this Statement of Work for the Project. C. ClientSoft shall provide at its own cost and expense the following software. ClientBuilder Software used to collect and document the host screens. V. GAINSCO'S RESPONSIBILITIES A. Gainsco will participate in Project Updates, if any, with ClientSoft in accordance with the timeframes as set forth in "Schedule 1 to Exhibit A - Project Update/Communications" annexed hereto. B. Gainsco will assign a Project Manager, allocate appropriate resources, and use its reasonable efforts to avoid Project delays. C. Gainsco shall provide at its own cost and expense the following Hardware and software: 1. Developer Workstation: Prior to the start of the project, Gainsco will provide the necessary developer workstation and network Host connectivity necessary for completing this project. A minimum developer workstation is a Win95, Win98 or WinNT computer with 128 megs of Ram and approximately 1.0GB of free disk space. The workstation must have network access and terminal emulation to the Host. VI. KEY ASSUMPTIONS The following are key assumptions made by ClientSoft of Gainsco and this project. 1. The application and functions will be documented (scope document), signed by all parties, and attached to this Agreement as an appendix prior to application development. 2. ClientSoft and Gainsco will assign a Project Manager, who will be the primary point of contact between parties prior to the commencement of this project. 3. Gainsco shall make available to ClientSoft the required hardware (as defined in Gainsco's Responsibilities) at Gainsco's additional cost and expense before the contract start date. 4. Gainsco shall make available to ClientSoft the required software (as defined in Gainsco's Responsibilities) at Gainsco's additional cost and expense before contract start date. B-5 19 VII. PAYMENT The prices to be paid to ClientSoft by Gainsco for the Services provided in accordance with this Statement of Work are as follows: 1. SCHEDULE OF CHARGES PROFESSIONAL SERVICES Scope Development 25,000 PROJECT TOTAL 25,000
2. INVOICING ClientSoft will invoice Gainsco as follows: Acceptance of Scope Document and signoff of project: 100% Additional ClientSoft Professional Services requested by Customer that are not included in or exceed the scope of this Statement of Work and which are agreed to by both parties, shall be priced separately based on time and resource requirements (subject to increase in accordance with Sections 5(b) and 5(c) of the Agreement): Customer shall pay ClientSoft's reasonable expenses, which are incurred by ClientSoft for travel, lodging, meals and cost of materials and equipment (i.e., printed materials, etc.). VIII. CHANGE CONTROL PROCESS The "Change Control Process" governs changes to the Project scope and deliverables during the life of the Project. The purpose of this process is to coordinate and properly document the development, installation and evaluation of new features and functionality during the Project. The process will apply to new Project components and to enhancements of existing Project components. The Change Control Process will be implemented from the start of the Project and will continue throughout the Project's duration. A. The Project Manager of the requesting party will submit a written Change Request to the Project Manager for the other party in the format identified in "Schedule 2 to Exhibit A - Change Request Form" annexed hereto. B. Both ClientSoft and Gainsco will review the proposed Change Request and either approve it for further study or reject it. The amount and payment of the costs of further study, if any, will be agreed upon by both ClientSoft and Gainsco. The results of the study will be used to determine the effect that the implementation of the Change Request will have on the Project cost and schedule. D. Once the parties have evaluated the Change Request, and have agreed to the change and the terms and conditions for the change, ClientSoft and Gainsco will complete and sign a "Change Request Evaluation Response Form" in the format identified in "Schedule 3 to Exhibit A" annexed hereto and setting forth the change and agreed terms and conditions. B-6 20 IX. ACCEPTANCE CRITERIA A Deliverable will be considered accepted when each of the Completion Criteria has been met (see Project Scope). Gainsco's Project Manager will complete an acceptance form, in the format of "Schedule 4 to Exhibit A - Deliverable Acceptance Form" annexed hereto, for each Deliverable and provide such form to the ClientSoft Project Manager. The Project will be considered accepted when all of the Completion Criteria have been met. Gainsco's Project Manager will complete a Project acceptance form, in the format of "Schedule 5 to Exhibit A - Project Completion and Evaluation Summary" annexed hereto, and provide such form to the ClientSoft Project Manager. Agreed and Accepted: Gainsco, Inc: ClientSoft Inc. By: /s/ [ILLEGIBLE] By: -------------------------------- ------------------------------------- Title: Sr. Vice President Title: ----------------------------- ---------------------------------- Date: 11/16/99 Date: ------------------------------ ----------------------------------- B-7 21 SCHEDULE 1 TO EXHIBIT A PROJECT UPDATE/COMMUNICATIONS ClientSoft and Gainsco acknowledge that regular communication among and between the parties is essential to be Project's successful completion. The parties agree that, in addition to normal, day-to-day communication, Project Updates will be held: [X] Twice Weekly (insert days of week meetings will be held on regularly) [X] Weekly, every (insert day of week for regular update) [ ] Bi-weekly, every other (insert day of week for regular update) at 10:00 (insert start time of regular update) Thursdays via_____ on-site meeting held at__________________________(insert location) [ ] teleconference, which will be initiated by ClientSoft (identify party) The expected duration of each Project Update is estimated to be 1 hours/minutes. Both ClientSoft and Gainsco's Project Managers will determine, and be responsible for the attendance of, the appropriate participants for each Project Update. The ClientSoft Project manager will issue minutes of each Project Update within two (2) business days of the update. The minutes will include: attendee list, status of previously opened items, list new items including person(s) responsible for resolution, and summary of the Project's overall status. Other items will be added as appropriate. Other meetings, correspondence, etc. will occur as necessary during the course of the Project. The regular Project Update is not intended to eliminate or replace other forms of communication between the parties. B-8 22 SCHEDULE 2 TO EXHIBIT A CHANGE REQUEST FORM GAINSCO SCOPE DEVELOPMENT Requester Name: -------------------------------------------- Requester Company Name: ------------------------------------ Date Requested: -------------------------------------------- Response Requested By: ------------------------------------- Change Requested: ------------------------------------------ (Provide a detailed description of the change requested, the area of the project plan/schedule being modified, and the benefits of making the change.) Change Request Received: Gainsco, Inc.: ClientSoft Inc. Signed: Signed: ------------------------------- ------------------------------- By: By: ----------------------------------- ----------------------------------- Title: Title: -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- Change Request No.: ------------------- B-9 23 SCHEDULE 3 TO EXHIBIT A CHANGE REQUEST EVALUATION RESPONSE FORM Change Request No.: ---------------------------------------- Requester Name: -------------------------------------------- Review Date: ----------------------------------------------- Request No. has been: --------- accepted without changes -------- accepted with modification (see below) -------- rejected -------- Modifications to Change Request: (Insert any changes that are made to the original Change Request. Ensure that, whether or not modified, the Change Request as accepted identifies, in detail, the changes to the Project scope, deliverables, schedule and costs.) Schedule Revision: (Insert new dates or attach revised project plan/schedule, which show the impact of the Change Request, if any.) Cost Revision: (Define any additional costs to be incurred as a result of proposed changes. Include in responsible parties, payment due date and any additional deliverables or modifications to acceptance criteria) Change Request Agreed and Accepted: Gainsco, Inc.: ClientSoft Inc. By: By: ----------------------------------- ----------------------------------- Title: Title: -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- B-10 24 SCHEDULE 4 TO EXHIBIT A DELIVERABLE ACCEPTANCE FORM Statement of Work Number 99138 - Scope Document Development Delivery Date: ---------------------------------------------------------------- Service(s) Provided: ---------------------------------------------------------- - ------------------------------------------------------------------------------ ClientSoft Project Manager: ---------------------------------------------------
=============================================================================== Project Deliverable Acceptance Criteria Completion Date Amount Due - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ===============================================================================
* Identify the appropriate project deliverables from section II Project Scope which apply to this phase. ClientSoft has met the milestones identified above and satisfactorily proved all related deliverables. Gainsco Corporation: Accepted By: ------------------------------------------------------------------ Name (print): ----------------------------------------------------------------- Title: ------------------------------------------------------------------------ Date: ------------------------------------------------------------------------- B-11 25 SCHEDULE 5 TO EXHIBIT A PROJECT COMPLETION AND EVALUATION SUMMARY Project Name: eXORO PHASE II SCOPE DEVELOPMENT Project Description: To collect requirements and develop a fixed cost project estimate. Dates of Services: ----------------------- ClientSoft Project Manager: tbd Please take a few moments to help us serve you better by answering a few questions about our Services. Your opinion will help us deliver the service quality you expect. The information above is needed to compile service specific statistics. For each of the following questions, using a 1-7 scale, please rate the level of satisfaction you have had by checking the appropriate box. Satisfaction Rating (1 = extremely dissatisfied, 7 = extremely satisfied, N/A = area does not apply) 1. Professionalism of ClientSoft personnel, who provided Services to you on N/A (1) (2) (3) (4) (5) (6) (7) this project, (i.e., attitude, interpersonal skills, ethical standards, etc.)? 2. ClientSoft's ability to provide Services when requested? N/A (1) (2) (3) (4) (5) (6) (7) 3. ClientSoft's level of technical knowledge about the Products and Systems N/A (1) (2) (3) (4) (5) (6) (7) related to your needs? 4. ClientSoft's knowledge of your industry and business environment? N/A (1) (2) (3) (4) (5) (6) (7) 5. ClientSoft's ability to complete the Services you contracted for within the N/A (1) (2) (3) (4) (5) (6) (7) established time frame? 6. ClientSoft's communication of plans, schedules and progress for the N/A (1) (2) (3) (4) (5) (6) (7) Service(s) provided? 7. ClientSoft's accessibility and installation support when not on-site? N/A (1) (2) (3) (4) (5) (6) (7) 8. ClientSoft's written documentation (i.e., reports, procedure manuals, custom N/A (1) (2) (3) (4) (5) (6) (7) program documentation)? 9. ClientSoft's ability to train your personnel as per the Statement of Work? N/A (1) (2) (3) (4) (5) (6) (7) 10. Overall, how do you rate ClientSoft's Services? N/A (1) (2) (3) (4) (5) (6) (7)
B-12 26 What is the most important thing we can do to improve your satisfaction with ClientSoft in the future? (PROVIDE AS MUCH INFORMATION AS YOU FEEL APPROPRIATE) Gainsco Scope Development project is accepted as meeting the Deliverables as defined in the Statement of Work between ClientSoft and Gainsco, dated October 22, 1999. Agreed and Signed: Gainsco, Inc.: By: ---------------------------- Title: ------------------------- Date: -------------------------- B-13 27 [CLIENTSOFT LOGO] CLIENTSOFT INC. 8 SKYLINE DRIVE HAWTHORNE, NY 10532 PROFESSIONAL SERVICE AGREEMENT - -------------------------------------------------------------------------------- CUSTOMER: GAINSCO, INC. CONTACT: RICK LAABS SENIOR VICE-PRESIDENT INFORMATION SERVICES Address: 500 Commerce Street, Fort Worth, Texas 76102 This Agreement is made and effective as of the 22nd day of October, 1999 (the "Effective Date"), by and between ClientSoft Inc. a Delaware Company ("ClientSoft), with offices at 8 Skyline Drive, Hawthorne, NY 10532 and the Customer. WHEREAS, Customer desires ClientSoft to provide certain professional services to the Customer; and WHEREAS, ClientSoft has agreed to provide professional services to the Customer as hereinafter more particularly described and subject to and in accordance with the terms and conditions hereinafter appearing. NOW THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, ClientSoft and Customer hereby agree as follows: 1. PROFESSIONAL SERVICES AND TERM a. ClientSoft will provide certain professional services ("Professional Services," as more fully described on Exhibit A annexed hereto) to assist Customer in connection with the Customer's use of ClientSoft's products and solutions. The Customer is solely responsible for determining its objectives and obtaining its desired results from the Professional Services to be provided by ClientSoft pursuant to this Agreement. Exhibit A annexed hereto sets forth the fees to be paid by Customer to ClientSoft for the Professional Services to be provided in accordance with the provisions of this Agreement. b. ClientSoft will endeavor to provide the Professional Services on a timely basis, subject to the availability of qualified personnel and the difficulty and scope of the Professional Services. c. ClientSoft may assign, reassign and substitute personnel at any time and may provide the same or similar services to any other third party. d. The Professional Services to be rendered to the Customer shall, except as otherwise agreed to by the parties, be rendered at a location specified by ClientSoft. e. The term of this Agreement shall commence upon the date first above written and shall terminate (unless sooner terminated pursuant to the provisions of Section 7.a. or Section 8.b. of this Agreement) upon the date of payment by the Customer to ClientSoft of all fees and expenses due to ClientSoft pursuant to the terms of this Agreement. f. ClientSoft personnel shall consist of ClientSoft employees and consultants engaged by ClientSoft for the design of solutions and performance of Professional Services. 2. RIGHTS IN WORK PRODUCT/PERSONNEL a. Any customer-specific documentation, designs or plans developed by ClientSoft personnel solely in connection with and unique to the performance of Professional Services under this Agreement shall be the exclusive property of Customer. b. The Customer acknowledges and agrees that, except as is expressly provided in Section 2.a. above, no right, title or interest whatsoever (express or implied) in or to any documentation, ideas, concepts, know how, data processing or other techniques used or developed by ClientSoft personnel (either alone or jointly with the Customer) in connection with the performance of the Professional Services hereunder is transferred or granted by ClientSoft to Customer. c. During the term of this Agreement and for a period of twelve (12) months thereafter, neither party shall, without the prior written approval of the other party, solicit the services of or make an offer of employment to any person who is or was, as the case may be, an employee or consultant of the other party during the term of this Agreement. In case of breach, the parties agree to liquidated damages of $50,000 per person. 3. INDUSTRY STANDARDS/DISCLAIMER OF WARRANTY a. ClientSoft will provide the Professional Services to Customer in a good and workmanlike manner in accordance with normal industry standards. b. EXCEPT AS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT, CLIENTSOFT MAKES AND THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOLUTIONS, PROFESSIONAL SERVICES AND/OR THE WORK PRODUCT PROVIDED BY CLIENTSOFT TO CUSTOMER HEREUNDER. 4. CUSTOMER RESPONSIBILITIES Customer shall: a. Assist ClientSoft personnel engaged in the performance of the Professional Services in the clarification and understanding of any matter relating to the Solution and Professional Services which the Customer requires ClientSoft to perform under this Agreement, as the same are described in Exhibit A hereto. b. Provide ClientSoft with the name of Customer's employee who has been designated by the Customer as the "Project Manager" and who has authority to make decisions on behalf of the Customer with respect to matters relating to the Solution and Professional Services to be provided hereunder. Such Project Coordinator shall be familiar with the objectives to be realized by the Customer in connection with the Solution and Professional Services. c. Provide to ClientSoft's personnel, for such periods of time and at such times as are reasonably required by ClientSoft, access to and use of any of Customer's system and/or equipment, including without limitation Customer's computer system and/or communications network, which is required to enable the performance by ClientSoft of the Professional Services. d. Make available to ClientSoft personnel such office space, computer equipment, customer systems access, furniture and use of a telephone(s) as may be required by ClientSoft to facilitate ClientSoft's performance at the Customer's facility, as deemed appropriate by ClientSoft. 5. PAYMENT a. ClientSoft shall invoice Customer at the end of each phase (if on a fixed based contract) or month (if on a time and materials basis) for all Professional Services performed by ClientSoft during such month in accordance with Exhibit A annexed hereto. ClientSoft's invoice shall reflect the number of work days expended by ClientSoft with respect to the creation of the solution or Professional Services to be provided pursuant to this Agreement. In addition, ClientSoft's invoice shall reflect any travel, living and accommodation charges which have been incurred by ClientSoft personnel in providing solution development and/or Professional Services at a Customer facility which is located outside of a fifty (50) mile radius of the ClientSoft facility at which such ClientSoft personnel are based. b. In the event that Customer requires any or all Professional Services to be performed on a Saturday, Sunday or public holiday observed by ClientSoft, the applicable hourly or other rates (as set forth in Exhibit A) charged by ClientSoft to the Customer shall be subject to an overtime premium of fifty (50%) percent of the applicable rate charged by ClientSoft pursuant to Exhibit A. c. Customer shall make payment of all invoices rendered by ClientSoft to Customer, pursuant to this Section 5, within thirty (30) days of the date of each invoice. Customer agrees to pay a late payment charge computed and payable monthly at the rate of one and one half (1 1/2%) percent per month or the maximum late payment charge permitted by law, whichever is less, on any 1 28 d. amounts which are not paid by the Customer within the aforesaid thirty (30) day payment period and reasonable attorney costs incurred in the collection process. e. Customer will pay any taxes ClientSoft becomes obligated to pay by virtue of this Agreement, exclusive of taxes based upon the net income of ClientSoft. 6. LIMITATION OF LIABILITY a. ClientSoft shall not be liable for any indirect, consequential, incidental or special damages sustained by the Customer in connection with or arising out of this Agreement, even if ClientSoft knew or should have known of the possibility of such damages. b. ClientSoft's entire liability and Customer's sole and exclusive remedy for direct damages from any cause relating to or arising out of this Agreement, regardless of the form of action, whether in contract or in tort (including negligence) or otherwise, shall not exceed in the aggregate the lesser of Ten Thousand ($10,000) Dollars or the charges actually paid by the Customer pursuant to this Agreement for the Professional Services which are the subject matter of or directly related to the causes of action asserted. 7. TERMINATION a. This Agreement may be terminated by either party in the event of a material breach by the other party of any of its obligations under this Agreement which material breach has not been cured within sixty (60) days of the date of receipt of written notice of such breach given by the non-breaching party to the other party. Any such written notice shall set forth with particularity the nature of any such material breach. b. Upon the termination of this Agreement pursuant to the provisions of Section 7.a. above or Section 8.b. of this Agreement, neither party shall have any further liability to the other pursuant to this Agreement except that the Customer shall remain liable to ClientSoft for any and all payments due to ClientSoft hereunder with respect to solutions provided or Professional Services performed by ClientSoft up to such date of termination, together with any and all expenses associated therewith which are to be reimbursed by Customer to ClientSoft in accordance with the provisions of Section 5 above. 8. CIRCUMSTANCES BEYOND CONTROL OF THE PARTIES a. In the event of any circumstance, occurrence, act or omission arising at any time which is beyond the control of ClientSoft or the Customer and which has a material effect on the performance by either party of any of its obligations pursuant to this Agreement, the parties agree that the performance of the affected obligation(s) shall be suspended until such time as the circumstance, occurrence, act or omission (which is preventing the performance of such obligation) no longer affects the performance of the particular obligation(s) and the agreed upon period for performance of such obligation(s) shall be extended by a period equal to the period during which such suspension of performance was in effect. b. Either party may terminate this Agreement upon written notice to the other party, in the event that the performance of any obligation (to be performed by either party hereunder) is suspended, pursuant to the provisions of Section 8.a. above, for a period of ninety (90) days or longer. 9. GENERAL a. This Agreement, together with Exhibits A annexed hereto, which are incorporated into and made a part of this Agreement, constitutes the entire agreement between the parties with regard to the subject matter hereof and supersedes all prior oral and written agreements, understandings, representations, proposals or communications, of whatsoever kind, between the parties with respect to the subject matter of this Agreement. b. No modifications or amendments to this Agreement and no waiver of any provision of this Agreement shall be valid unless made in writing and signed by duly authorized representatives of the parties hereto. c. Customer shall not assign any of its rights or delegate any of its duties under the terms of this Agreement without the prior written consent of ClientSoft. d. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. e. The parties hereto acknowledge and agree that Sections 2, 3, 5, 6 and 9 shall survive the termination of this Agreement. f. In performing the Professional Services set forth in Exhibits A hereto, ClientSoft is acting as an independent contractor and not as an employee, agent or representative of the Customer. ClientSoft has no authority to transact any business in the name of or for the account of the Customer or to otherwise obligate the Customer in any manner. g. Except as otherwise provided in this Agreement, all notices or other communications hereunder shall be deemed to have been duly given when made in writing and delivered in person or deposited in the U.S. mail, postage prepaid, certified mail, return receipt requested, and addressed to the Participant as shown above and to ClientSoft as follows: ClientSoft Inc., 8 Skyline Drive, Hawthorne, NY 10532, Attn: Vice Pres. - Professional Services, with a copy (which shall not constitute notice) to Corporate Secretary at the same address. h. Neither ClientSoft or the Customer shall disclose the terms of this Agreement or publish any information concerning the same without the prior written consent of the other. i. The failure of either party, in one or more instances, to insist upon the performance of any term or condition or to exercise any right or remedy available to such party, shall not be construed as a waiver by such party of the right to insist upon the performance or exercise of any right or remedy now available or which may arise in the future. j. The unenforceability of any provision hereof shall not affect the remaining provisions of this Agreement, but rather such provision shall be served and the remainder of this Agreement shall remain in full force and effect. k. This Agreement may be executed in any number of counterpart copies, each of which shall be deemed an original, but which together shall constitute a single instrument. l. All paragraph headings and captions used herein are for the convenience of the parties only and shall not be part of the text, or affect the meaning of this Agreement. m. Each of the parties hereto acknowledges to the other that it has had the opportunity to have this agreement reviewed by counsel of its choice and has had the opportunity to obtain the assistance of such counsel in the negotiation, preparation, execution and deliver thereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives. GAINSCO, INC. CLIENTSOFT, INC. By: /s/ RICK A. LAABS 12/22/99 By: ------------------------------ ------------------------------- Authorized Signatory Date Authorized Signatory Date Rick A. Laabs ------------------------------ ------------------------------- Type or Print Name Type or Print Name Title: Sr. Vice President - IT Title: ------------------------------ ------------------------------- 29 EXHIBIT A STATEMENT OF WORK NUMBER 99054 UMBRELLA POLICY SCOPE DEVELOPMENT The following is a Statement of Work between ClientSoft Inc., ("ClientSoft") and Gainsco, Inc. ("Gainsco"). This Statement of Work states all of the rights and responsibilities of, and supersedes all prior oral and written communications, between ClientSoft and Gainsco regarding the Scope Development project described below (the "Project"). This Statement of Work supplements and is subject to the terms and conditions contained in the Professional Services Agreement between ClientSoft and Gainsco dated October 22, 1999 (the "Agreement"). I. PERSONNEL ClientSoft and Gainsco will appoint representatives to the following positions: A. ClientSoft Project Manager - ClientSoft will appoint a Project Manager who will be responsible for overall management of the Project. The Project Manager will work with ClientSoft and Gainsco personnel to perform Project reviews, accomplish the tasks outlined in this Statement of Work, manage day-to-day project activities, and serve as ClientSoft's single point of contact with respect to interfacing with Gainsco on project issues. Sales related issues remain the responsibility of the ClientSoft Account Manager. B. Gainsco Project Manager - Gainsco will designate a Project Manager who will regularly available to meet with Gainsco and ClientSoft personnel on all matters pertaining to the Project. This individual will procure, manage and Gainsco's resources as defined in this Statement of Work. The Gainsco Project Manager will have the authority to signoff on each deliverable and completion criteria defined for each phase and task defined below. C. ClientSoft Resources - ClientSoft will make appropriate personnel available as needed to complete this project. D. Gainsco Resources - Gainsco will make appropriate personnel available as needed to complete this project. HQ required resources will include at least one individual from identified departments to participate in the Validate Process Logic Flow and Application Design as necessary to meet project objectives. Required resources include at least one end-user representative, representing a cross-section of the user population covered by this project. B-0 30 II. PROJECT SCOPE This Statement of Work (SOW) defines the scope of tasks to be accomplished by ClientSoft for development of a Scope Document. Over a three to four week period, ClientSoft will conduct a series of meetings to collect information relevant to a requirement definition to identify and develop application scope for the system implementation. The deliverable of this activity (discussed in detail below) will be documented process detailing the application flow that maps the ClientBuilder functions and how they integrate to Gainsco's system, including a Graphical User Interface Prototype (proposed screen layouts). The final output of this short engagement is a fixed-price proposal to complete development of the prototype into a finished system. This document will also include a description of the proposed rollout and testing phases. Upon acceptance of the developed proposal, ClientSoft and Gainsco will be free to engage the project as described in the proposal. SCOPE DEVELOPMENT The deliverables from this work include (Italics identify deliverables & completion criteria): 1. DOCUMENTATION OF THE `AS-IS' PROCESS FLOW This task performs the following: o Applies a simple processing mapping tool and modified Process mapping techniques, to document the `AS-IS' process. Special attention is paid to identify bottlenecks and process issues, which can become targets for process improvement. o Based on significant interaction in a series of intense process oriented meetings and interviews, ClientSoft consultants work with the End-User and IT representatives to document existing processes. It is imperative that the End-User representatives understand the flow of the Gainsco system and be able to answer questions as to process flow, screen content, data element usage and navigation. Significant input will be required from the End-User and IT representatives to ensure that bottlenecks and process improvement opportunities are fully understood. This directly affects the benefits derived. DELIVERABLE: Documented AS-IS process flow COMPLETION CRITERIA: This task is complete when the AS-IS process flow has been document and verified by the Gainsco Project Manager. EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 2. COLLECT/ANALYZE/DOCUMENT SCREEN IMAGES AND DATA ELEMENTS This task performs the following: COLLECT GAINSCO SCREENS o (Gainsco will provide ClientSoft with the proper Access, User ID & Password and End-User representative to walk through and document each screen in the Gainsco system. Analysis will focus on how the current system behaves, a general description of what is required to duplicate that behavior (either using mainframe or local server files), and what mainframe field or fields must be updated as a result of the end state of each control. DOCUMENT DATA ELEMENTS AND CONTROLS o Working with the appropriate Gainsco IT and End-User representatives, the ClientSoft consultant will document the data elements and controls (action fields, command lines and `PF' keys) on each screen. These will be cross-referenced in the design document for the Graphical User Interface Prototype. B-1 31 o Screen edits and usability features are extremely important to identify at this juncture. When a user does not key all of the data required for a screen to commit, a `screen edit' is displayed. The goal is to ensure that one of these screen edits does not interrupt the flow of processing and that it is handled gracefully. Usability features are especially important to evaluate in situations where cryptic codes are used and should be replaced with more readable text. PERFORM ANALYSIS o The collected screen images and data elements and controls are analyzed and the `As-Is' process document created from the material gathered. Each screen image is numbered along with each significant control to allow clearer discussion of process flow, specific data elements and screen flow and their impact on the complexity of the solution in the `To-Be' process development. o In addition to the `As-Is' process flow, documentation will include pages describing each screen and further broken down into paragraphs explaining each control's behavior and end state relationship to host screens. This information is critical to understanding how the ClientBuilder code must react to changes in the mainframe. Failure to identify mainframe functions (PF keys, pop-up windows, navigation requirements, etc) will create `holes' in the process flow, which will surface once actual coding, and acceptance testing begins. Such omissions in the requirements gathering process will create change request situations, which could affect deliverable timeframes and increase project costs. o It is imperative that the End-User representative understands the flow of the Gainsco system and is able to answer questions as to screen content, data element usage and navigation. During this process, it is important to note where process flow is impacted by the current system. Identification of bottlenecks and process improvement opportunities are critical at this juncture. STAGE REVIEW o A stage review meeting is scheduled to review the `As-Is' documentation to ensure completeness and accuracy. This is a critical juncture in the process and requires signoff by the Gainsco project manager prior to further analysis. DELIVERABLE: Gainsco screens collected in the CSD, Data elements documented COMPLETION CRITERIA: This task is complete when the Gainsco screens have been collected in the CSD and the Data Element documented and the stage acceptance form is signed by the Gainsco Project Manager. EXCEPTIONS: The pricing for this project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 3. DEVELOP `TO-BE' PROCESS IMPROVEMENTS This task performs the following: CREATE IMPROVED PROCESS o Applies a simple processing mapping tool and modified process mapping techniques, to create the `To-Be' process from the documented `As-Is' process. Special attention is paid to the identified bottlenecks and process issues, which are targets for process improvement. o Based on significant interaction, ClientSoft consultants work with the End-User and IT representatives to create process improvements. It is imperative that the End-User representatives understand the flow of the Gainsco system and be able to answer questions as to process flow, screen content, data element usage and navigation. Significant input will be required from the End-User and IT representatives to ensure that bottleneck elimination and process improvement opportunities are fully realized. DELIVERABLE: Gainsco `To-Be' process defined. COMPLETION CRITERIA: This task is complete when the Gainsco `To-Be' process has been defined and the phase acceptance form is signed by the Gainsco Project Manager. B-2 32 EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 4. DEVELOP `TO-BE' GRAPHICAL USER INTERFACE PROTOTYPE From a usability and complexity of development perspective, this task is the most critical. Herein the flow of the system, its functions and capabilities from the End-User perspective is created and approved. Errors or omissions in function or feature will create a change control situation, which could affect the timeframe and cost of the project. This task performs the following: CREATE GRAPHICAL USER INTERFACE PROTOTYPE o Using basic GUI graphical objects, which are supported by ClientBuilder, the ClientSoft consultant will work with the End-User and IT representatives to create the Graphical User Interface Prototype. Though possibly missing icons, colors of the final product and other minor GUI features (spinning icons, etc), the prototype will be roughly equivalent to the final delivered product. The key task accomplished in this phase is to correctly identify how the `To-Be' GUI interface will work. Special attention to where the data elements on the GUI screens come from and how they behave must be documented (i.e. some GUI screens may required data from multiple host screens). o Again, it is imperative that the End-User representatives understand the flow of the Gainsco system and be able to answer questions as to process flow, screen content, data element usage and navigation. Significant input will be required from the End-User and IT representatives to ensure that bottlenecks and process improvement opportunities are fully realized. DOCUMENT PROTOTYPE DATA ELEMENTS AND CONTROLS o Working with the appropriate Gainsco IT and End-User representatives, the ClientSoft consultant will document the GUI data elements and controls (click boxes, drop down lists and so forth) on each screen. These will be cross-referenced in the design document against the host fields documented in the `As-Is' process. o Screen edits and usability features are extremely important to identify at this juncture. When a user does not key all of the data required for a screen to commit, a `screen edit' is displayed. The goal is to ensure that one of these screen edits does not interrupt the flow of processing and that it is handled gracefully. Usability features are especially important to evaluate in situations where cryptic codes are used and should be replaced with more readable text. PERFORM ANALYSIS o The collected screen images and data elements and controls are analyzed and the Graphical User Interface Prototype document created from the material gathered. Each screen image is numbered along with each significant control and cross-referenced to the host screens to allow clearer discussion of process flow, specific data elements and screen flow and their impact on the complexity of the solution in the `To-Be' process development. o In addition to the `To-Be' GUI prototype, documentation will include pages describing each GUI screen and further broken down into paragraphs explaining each control's behavior and end state relationship to host screens. This information is critical to understanding how the ClientBuilder code must react to changes in the mainframe. Failure to identify prototype functions (check boxes, drop down lists, navigation requirements, etc) will create `holes' in the process flow which will surface once actual coding and acceptance testing begins. Such omissions in the requirements gathering process will create change request situations, which could affect deliverable timeframes and increase project costs. o It is imperative that the End-User representative understands the flow of the desired Gainsco process relative to the existing system and is able to answer questions as to screen content, data element usage and navigation. During this process, it is important to note where process flow will be positively impacted by the `To-Be' system. Solutions to bottlenecks and estimates of positive process improvement impacts over the `As-Is' system are important to identify for financial justification of the proposed system. B-3 33 STAGE REVIEW o A stage review meeting is scheduled to review the `As-Is' documentation to ensure completeness and accuracy. This is a critical juncture in the process and requires signoff by the Gainsco project manager prior to further analysis. DELIVERABLE: Gainsco Prototype defined. COMPLETION CRITERIA: This task is complete when the Gainsco Prototype has been defined and the phase acceptance form is signed by the Gainsco Project Manager. EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. 5. DEVELOP FIXED PRICE PROPOSAL This task performs the following: Using the material developed in Tasks 1-4, the ClientSoft team will create a fixed-price proposal to develop the Gainsco solution. NOTE: This task is performed off-site and concludes the work effort for this scope development project. This will include (but is not limited to) the following areas: PHASE I: MOBILIZATION AND PROJECT SETUP o Development Server Installation Tasks -- These are tasks associated with the installation of the development servers required to support the solution. o Development Workstation Installation Tasks -- These are tasks associated with the installation of the development workstations required to support the solution. o Acceptance Test Plan -- A significant portion of mobilization is the development of test data and the acceptance test plan. ClientSoft consultants work with the End-User and IT representatives to ensure that a comprehensive acceptance test plan is built and readied for implementation at the appropriate time. PHASE II: DEVELOPMENT o Describes in detail, stage limited functional releases of the software developed by ClientSoft. ClientSoft consultants will begin the integration of ClientBuilder to the Gainsco system based on the specifications developed in the application scope document described in the deliverables to this project. o Any changes to the application scope will require a written request detailing the changes requested and any additional costs if applicable, signed by all parties. PHASE III: TESTING & ROLLOUT o Application testing and rollout. After the ClientBuilder application is integrated with the PDS back-end and the agent front-end according to the specification of the application scope document, the application testing and rollout phase will commence. Phase III represents 25% of the project deliverables. OUT OF SCOPE WORK o The fixed-price proposal will specifically identify items required for successful implementation of this project which are out of scope and provided for by Gainsco. Failure to provide these functions could adversely affect this project and Gainsco holds ClientSoft harmless in that event. DELIVERABLE: Gainsco Fixed Price Proposal COMPLETION CRITERIA: This task is complete when the Gainsco Fixed-Price Proposal has been defined and the phase acceptance form is signed by the Gainsco Project Manager. B-4 34 EXCEPTIONS: The pricing for the project is based upon the specific number of screens identified by Gainsco (up to 50 screens). Additional screens identified during the scope development or subsequent phases will require additional effort to document and will increase the price of the contract and time of delivery. III. SCHEDULE OF SERVICES ClientSoft shall begin work at a mutually agreed upon date upon the acceptance of this Statement of Work. IV. CLIENTSOFT'S RESPONSIBILITIES A. ClientSoft will assign a Project Manager, allocate appropriate resources, and use reasonable efforts to avoid project delay. B. ClientSoft will perform the Services described in this Statement of Work for the Project. C. ClientSoft shall provide at its own cost and expense the following software. ClientBuilder Software used to collect and document the host screens. V. GAINSCO'S RESPONSIBILITIES A. Gainsco will participate in Project Updates, if any, with ClientSoft in accordance with the timeframes as set forth in "Schedule 1 to Exhibit A - Project Update/Communications" annexed hereto. B. Gainsco will assign a Project Manager, allocate appropriate resources, and use its reasonable efforts to avoid Project delays. C. Gainsco shall provide at its own cost and expense the following Hardware and software: 1. Developer Workstation: Prior to the start of the project, Gainsco will provide the necessary developer workstation and network Host connectivity necessary for completing this project. A minimum developer workstation is a Win95, Win98 or WinNT computer with 128 megs of Ram and approximately 1.0GB of free disk space. The workstation must have network access and terminal emulation to the Host. VI. KEY ASSUMPTIONS The following are key assumptions made by ClientSoft of Gainsco and this project. 1. The application and functions will be documented (scope document), signed by all parties, and attached to this Agreement as an appendix prior to application development. 2. ClientSoft and Gainsco will assign a Project Manager, who will be the primary point of contact between parties prior to the commencement of this project. 3. Gainsco shall make available to ClientSoft the required hardware (as defined in Gainsco's Responsibilities) at Gainsco's additional cost and expense before the contract start date. 4. Gainsco shall make available to ClientSoft the required software (as defined in Gainsco's Responsibilities) at Gainsco's additional cost and expense before contract start date. B-5 35 VII. PAYMENT The prices to be paid to ClientSoft by Gainsco for the Services provided in accordance with this Statement of Work are as follows: 1. SCHEDULE OF CHARGES - ------------------------------------------------------------------ PROFESSIONAL SERVICES - ------------------------------------------------------------------ Scope Development 25,000 - ------------------------------------------------------------------ PROJECT TOTAL 25,000 - ------------------------------------------------------------------
2. INVOICING ClientSoft will invoice Gainsco as follows: Acceptance of Scope Document and signoff of project: 100% Additional ClientSoft Professional Services requested by Customer that are not included in or exceed the scope of this Statement of Work and which are agreed to by both parties, shall be priced separately based on time and resource requirements (subject to increase in accordance with Sections 5(b) and 5(c) of the Agreement): Customer shall pay ClientSoft's reasonable expenses, which are incurred by ClientSoft for travel, lodging, meals and cost of materials and equipment (i.e., printed materials, etc.). VIII. CHANGE CONTROL PROCESS The "Change Control Process" governs changes to the Project scope and deliverables during the life of the Project. The purpose of this process is to coordinate and properly document the development, installation and evaluation of new features and functionality during the Project. The process will apply to new Project components and to enhancements of existing Project components. The Change Control Process will be implemented from the start of the Project and will continue throughout the Project's duration. A. The Project Manager of the requesting party will submit a written Change Request to the Project Manager for the other party in the format identified in "Schedule 2 to Exhibit A - Change Request Form" annexed hereto. B. Both ClientSoft and Gainsco will review the proposed Change Request and either approve it for further study or reject it. The amount and payment of the costs of further study, if any, will be agreed upon by both ClientSoft and Gainsco. The results of the study will be used to determine the effect that the implementation of the Change Request will have on the Project cost and schedule. D. Once the parties have evaluated the Change Request, and have agreed to the change and the terms and conditions for the change, ClientSoft and Gainsco will complete and sign a "Change Request Evaluation Response Form" in the format identified in "Schedule 3 to Exhibit A" annexed hereto and setting forth the change and agreed terms and conditions. B-6 36 IX. ACCEPTANCE CRITERIA A Deliverable will be considered accepted when each of the Completion Criteria has been met (see Project Scope). Gainsco's Project Manager will complete an acceptance form, in the format of "Schedule 4 to Exhibit A - Deliverable Acceptance Form" annexed hereto, for each Deliverable and provide such form to the ClientSoft Project Manager. The Project will be considered accepted when all of the Completion Criteria have been met. Gainsco's Project Manager will complete a Project acceptance form, in the format of "Schedule 5 to Exhibit A - Project Completion and Evaluation Summary" annexed hereto, and provide such form to the ClientSoft Project Manager. Agreed and Accepted: Gainsco, Inc: ClientSoft Inc. By: By: -------------------------------- ------------------------------------- Title: Title: ----------------------------- ---------------------------------- Date: Date: ------------------------------ ----------------------------------- B-7 37 SCHEDULE 1 TO EXHIBIT A PROJECT UPDATE/COMMUNICATIONS ClientSoft and Gainsco acknowledge that regular communication among and between the parties is essential to be Project's successful completion. The parties agree that, in addition to normal, day-to-day communication, Project Updates will be held: [ ] Twice Weekly (insert days of week meetings will be held on regularly [X] Weekly, every (insert day of week for regular update) [ ] Bi-weekly, every other (insert day of week for regular update) at 10:00 AM EST ON THURSDAYS (insert start time of regular update) via_____ on-site meeting held at__________________________(insert location) [X] teleconference, which will be initiated by ClientSoft (identify party) The expected duration of each Project Update is estimated to be 1 hour. Both ClientSoft and Gainsco's Project Managers will determine, and be responsible for the attendance of, the appropriate participants for each Project Update. The ClientSoft Project manager will issue minutes of each Project Update within two (2) business days of the update. The minutes will include: attendee list, status of previously opened items, list new items including person(s) responsible for resolution, and summary of the Project's overall status. Other items will be added as appropriate. Other meetings, correspondence, etc. will occur as necessary during the course of the Project. The regular Project Update is not intended to eliminate or replace other forms of communication between the parties. B-8 38 SCHEDULE 2 TO EXHIBIT A CHANGE REQUEST FORM GAINSCO SCOPE DEVELOPMENT Requester Name: -------------------------------------------- Requester Company Name: ------------------------------------ Date Requested: -------------------------------------------- Response Requested By: ------------------------------------- Change Requested: (Provide a detailed description of the change requested, the area of the project plan/schedule being modified, and the benefits of making the change.) Change Request Received: Gainsco, Inc.: ClientSoft Inc. Signed: Signed: ------------------------------- ------------------------------- By: By: ----------------------------------- ----------------------------------- Title: Title: -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- Change Request No.: ------------------- B-9 39 SCHEDULE 3 TO EXHIBIT A CHANGE REQUEST EVALUATION RESPONSE FORM Change Request No.: ---------------------------------------- Requester Name: -------------------------------------------- Review Date: ----------------------------------------------- Request No. has been: --------- accepted without changes -------- accepted with modification (see below) -------- rejected -------- Modifications to Change Request: (Insert any changes that are made to the original Change Request. Ensure that, whether or not modified, the Change Request as accepted identifies, in detail, the changes to the Project scope, deliverables, schedule and costs.) Schedule Revision: (Insert new dates or attach revised project plan/schedule, which show the impact of the Change Request, if any.) Cost Revision: (Define any additional costs to be incurred as a result of proposed changes. Include in responsible parties, payment due date and any additional deliverables or modifications to acceptance criteria) Change Request Agreed and Accepted: Gainsco, Inc.: ClientSoft Inc., By: By: ----------------------------------- ----------------------------------- Title: Title: -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- B-10 40 SCHEDULE 4 TO EXHIBIT A DELIVERABLE ACCEPTANCE FORM Statement of Work Number 99138 - Scope Document Development Delivery Date: ---------------------------------------------------------------- Service(s) Provided: ---------------------------------------------------------- - ------------------------------------------------------------------------------ ClientSoft Project Manager: ---------------------------------------------------
=============================================================================== Project Deliverable Acceptance Criteria Completion Date Amount Due - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ===============================================================================
* Identify the appropriate project deliverables from section II Project Scope which apply to this phase. ClientSoft has met the milestones identified above and satisfactorily proved all related deliverables. Gainsco Corporation: Accepted By: ------------------------------------------------------------------ Name (print): ----------------------------------------------------------------- Title: ------------------------------------------------------------------------ Date: ------------------------------------------------------------------------- B-11 41 SCHEDULE 5 TO EXHIBIT A PROJECT COMPLETION AND EVALUATION SUMMARY Project Name: UMBRELLA POLICY SCOPE DEVELOPMENT Project Description: To collect requirements and develop a fixed cost project estimate. Dates of Services: ----------------------- ClientSoft Project Manager: tbd Please take a few moments to help us serve you better by answering a few questions about our Services. Your opinion will help us deliver the service quality you expect. The information above is needed to compile service specific statistics. For each of the following questions, using a 1-7 scale, please rate the level of satisfaction you have had by checking the appropriate box. Satisfaction Rating (1 = extremely dissatisfied, 7 = extremely satisfied, N/A = area does not apply) 1. Professionalism of ClientSoft personnel, who provided Services to you on N/A (1) (2) (3) (4) (5) (6) (7) this project, (i.e., attitude, interpersonal skills, ethical standards, etc.)? 2. ClientSoft's ability to provide Services when requested? N/A (1) (2) (3) (4) (5) (6) (7) 3. ClientSoft's level of technical knowledge about the Products and Systems N/A (1) (2) (3) (4) (5) (6) (7) related to your needs? 4. ClientSoft's knowledge of your industry and business environment? N/A (1) (2) (3) (4) (5) (6) (7) 5. ClientSoft's ability to complete the Services you contracted for within the N/A (1) (2) (3) (4) (5) (6) (7) established time frame? 6. ClientSoft's communication of plans, schedules and progress for the N/A (1) (2) (3) (4) (5) (6) (7) Service(s) provided? 7. ClientSoft's accessibility and installation support when not on-site? N/A (1) (2) (3) (4) (5) (6) (7) 8. ClientSoft's written documentation (i.e., reports, procedure manuals, custom N/A (1) (2) (3) (4) (5) (6) (7) program documentation)? 9. ClientSoft's ability to train your personnel as per the Statement of Work? N/A (1) (2) (3) (4) (5) (6) (7) 10. Overall, how do you rate ClientSoft's Services? N/A (1) (2) (3) (4) (5) (6) (7)
B-12 42 What is the most important thing we can do to improve your satisfaction with ClientSoft in the future? (PROVIDE AS MUCH INFORMATION AS YOU FEEL APPROPRIATE) Gainsco Scope Development project is accepted as meeting the Deliverables as defined in the Statement of Work between ClientSoft and Gainsco, dated October 22, 1999. Agreed and Signed: Gainsco, Inc.: By: ---------------------------- Title: ------------------------- Date: -------------------------- B-13
EX-21 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 [FLOWCHART] * GAINSCO Service Corp. owns the charter and management contract thereby giving it 100% control of GAINSCO County Mutual Insurance Company. * Goff Moore Strategic Partners, L.P. organizational chart attached. * Goff Moore Strategic Partners L.P. owns approximately 34% of the outstanding Common Stock of the Applicant on a fully converted basis consisting of (a) 6,200,000 shares of Common Stock which GMSP may acquire upon conversion of 31,620 shares of the Series A Preferred Stock, (b) 3,100,000 shares of Common Stock issuable upon exercise of presently exercisable warrants to purchase shares of Common Stock, and (c) 1,064,000 shares of Common Stock. EX-23 8 CONSENT OF KPMG LLP 1 Exhibit 23 Consent of Independent Auditors To Incorporation by Reference The Board of Directors GAINSCO, INC.: We consent to incorporation by reference in the registration statements (No. 33-48634 and No. 33-37070) on Form S-8 of GAINSCO, INC. of our reports dated February 25, 2000, relating to the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1999, and all related schedules, which reports appear in the December 31, 1999 annual report on Form 10-K of GAINSCO, INC. KPMG LLP Dallas, Texas March 30, 2000 EX-24 9 POWERS OF ATTORNEY 1 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this _______ day of March 2000. By: /s/ HARDEN WIEDEMANN ---------------------------- 2 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this 10th day of March 2000. By: /s/ JOHN C. GOFF ---------------------------- 3 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this 16th day of March 2000. By: /s/ ROBERT J. MCGEE, JR. ---------------------------- 4 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this 8th day of March 2000. By: /s/ SAM ROSEN ---------------------------- 5 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this 9th day of March 2000. By: /s/ JOHN WILLIAMS ---------------------------- 6 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this 9th day of March 2000. By: /s/ JOEL C. PUCKETT ---------------------------- 7 EXHIBIT 24 SPECIAL POWER OF ATTORNEY The undersigned hereby appoints Glenn W. Anderson, Daniel J. Coots and Joel C. Puckett, and each of them (with full power in each to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign, in my capacity as a director or officer of GAINSCO, INC., a Texas corporation ("GNA"), and file with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 or the Securities Exchange Act of 1934, as the case may be, GNA's Annual Report on Form 10-K for its fiscal year ended December 31, 1999 and one or more Form S-8 Registration Statements covering GNA's 1998 Long-Term Incentive Plan, 1995 Stock Option Plan, 1990 Stock Option Plan, Profit Sharing Plan and Trust, 401(k) Plan, any Nonqualified Stock Option Agreement between GNA and Glenn W. Anderson or any other employee, officer, director or consultant of GNA or any of its subsidiaries, and any other employee benefit and stock option plans that GNA or any of its subsidiaries may have heretofore adopted or may hereafter adopt, including any and all amendments (including pre-effective and post-effective amendments to filings heretofore or hereafter made) and exhibits to said filings and any and all applications, instruments and other documents to be filed with the SEC or any state regulatory agency pertaining to the registration of securities of GNA, with full power and authority to do and perform any and all acts and things whatever that they or he may deem requisite or desirable in their or his sole discretion in the premises as fully and to all intents and purposes as the undersigned might or could do in person, and to file copies of this power of attorney with the SEC or any such agency or body. The power and authority hereby granted shall continue until revoked by a written instrument of revocation delivered to the President of GNA. Witness my hand this ___ day of March 2000. By: /s/ J. RANDALL CHAPPEL ------------------------- EX-27 10 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF GAINSCO, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1999, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME AND CASH FLOWS FOR THE YEAR ENDING DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 197,077,075 0 0 1,170,329 0 0 245,180,132 1,205,364 3,254,930 14,927,673 395,647,711 132,813,583 82,219,785 4,206,314 0 18,000,000 0 3,162,000 2,176,393 0 395,647,711 113,280,292 9,722,213 605,606 1,848,590 76,349,044 (3,607,531) 14,524,068 8,341,300 1,214,163 0 0 0 0 7,127,137 .34 .32 101,768,000 75,976,000 373,000 32,651,000 49,951,000 95,515,000 (373,000)
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