-----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, BP2uIt4ricddIt4HX51YjuktEmcWOGgAKvntW+s8FehZTzGQluIr1tqixlHAA4rW +4Vap/Er1WO+7HPCDipo6w== 0000950134-97-002355.txt : 19970507 0000950134-97-002355.hdr.sgml : 19970507 ACCESSION NUMBER: 0000950134-97-002355 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAINSCO INC CENTRAL INDEX KEY: 0000786344 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 751617013 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09828 FILM NUMBER: 97566793 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, 1996 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, 1996 GAINSCO, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1617013 (State of Incorporation) (I.R.S. 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 the voting stock held by non-affiliates of the registrant (17,773,930 shares) as of the close of the business on February 28, 1997 was $162,187,111 (based on the closing sale price of $9.125 per share). As of February 28, 1997, there were 21,080,407 shares of the registrant's $.10 Par Value Common Stock 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] Documents incorporated by reference:
Document Form 10-K Part Proxy Statement for the 1997 Annual Meeting to be held May 12, 1997 III Exhibits to Form 10-K Annual Reports filed with the SEC for fiscal years ended December 31, 1988, 1990, 1991, 1992, 1993, 1994 and 1995 IV Exhibits to Form S-1's filed with the SEC and effective November 6, 1986 (No. 33-7846) and November 14, 1988 (No. 33-25226) IV
2 PART I ITEM 1. BUSINESS General Description GAINSCO, INC. is a holding company, the only operations of which are to provide administrative and financial services for its wholly-owned subsidiaries. The term "Company" as used in this document includes GAINSCO, INC. and its subsidiaries, unless the context otherwise requires. The Company 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 certain specialty excess and surplus markets within the commercial auto, auto garage and general liability insurance lines. The Company's insurance operations are conducted through three insurance companies, General Agents Insurance Company of America, Inc., an Oklahoma corporation, MGA Insurance Company, Inc., a Texas corporation, and GAINSCO County Mutual Insurance Company, a Texas chartered company. The Company is approved to write insurance in 49 states and the District of Columbia on a non-admitted basis and in 45 states on an admitted basis. The Company markets its lines of insurance through 203 non-affiliated general agents' offices. Approximately 73% of the Company's gross premiums written during 1996 resulted from risks located in California, Florida, Georgia, Illinois, Kentucky, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia. Excess and surplus lines of insurance are generally written on classes of risks which admitted insurers will not write; many of which are too small in premium size for larger companies to handle efficiently. For a description of the product lines presently written by the Company, see "Business-Product Lines." Because of the lack of availability of coverage from admitted insurers, premium levels for excess and surplus policies are generally higher than for standard coverages provided by admitted insurers. State insurance authorities permit excess and surplus lines companies greater rate and policy form flexibility than admitted companies. The Company, therefore, sets its policy premiums by applying its own judgment after consideration of the risks involved. Part of its analysis includes the review of historical premium rate and loss cost information as compiled and reported by independent rating bureaus. The Company's current premiums typically range from 160% to 275% of the loss costs published by the rating organizations. These loss cost multipliers approximate a range of 100% to 170% of manual rates. The strategy of the Company is to identify various types of risks where it can price its coverages favorably and maximize the potential for underwriting profit. This strategy has resulted in changes in product mix and product design from time to time. 2 3 The Company is currently writing 18 classes of general liability on a claims-made basis. The remaining classes of general liability are written on an occurrence basis. At December 31, 1996, approximately 2% of the Company's general liability policies in force were on a claims-made basis. The claims-made form of policy provides that coverage applies only to claims that are made during the term of the policy. Once the policy period is over in claims-made policies, the approximate extent of the insurer's liability is known. The occurrence form of policy provides coverage for losses from claims which occurred during the policy period, regardless of when the claims are asserted. Under the claims-made basis the insurer has greater certainty in predicting the extent of its liability for claims. The Company has had no legal challenges on the enforceability of its claims-made policies where denial of coverage was made by the Company under the limited reporting period provision. The Company does have a 60 day grace period provision for reporting claims after the policy expiration date on its claims-made form of policy. The Company feels this provision remedies it against issues of enforceability in recent court decisions. The Company, through a wholly-owned subsidiary, has developed and is marketing a computer software package related to general agency operations. Through another wholly-owned subsidiary, the Company is engaged in the premium finance business. Through MGA Insurance Company, Inc., a wholly-owned subsidiary, the Company earns fee revenues by acting as a servicing carrier for the Commercial Automobile Insurance Procedures of Arkansas, California, Louisiana, and Mississippi and the Commercial Assignment Procedure of Pennsylvania. Through GAINSCO County Mutual Insurance Company, the Company entered into fronting agreements with three non-affiliated insurance companies. The business written under these agreements is ceded 100% to reinsurers rated "A- (Excellent)" or better by A. M. Best and 100% of the liabilities are fully collateralized with pledged investment grade securities or letters of credit. Product Lines The Company's principal products serve certain specialty markets within the commercial auto, auto garage and general liability insurance 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 ------------------------------------------------------------------ 1996 1995 1994 --------------------- -------------------- --------------------- Gross Premiums Written: (Dollar amounts in thousands) Commercial Auto $ 62,328 57% 62,517 58% 58,117 59% Auto Garage 26,871 24% 25,270 23% 20,073 20% General Liability 19,744 18% 19,052 18% 18,564 19% Other Lines 1,057 1% 1,233 1% 1,410 2% -------- --- ------- --- ------ --- Total $110,000 100% 108,072 100% 98,164 100% ======== === ======= === ====== === Policies in Force (End of Period) 35,903 34,309 30,691
3 4 Commercial Auto The commercial auto coverage underwritten by the Company includes risks associated with local haulers of specialized freight (e.g. sand and gravel), tradespersons' vehicles and trucking companies (other than long haulers). Policies are written only for vehicles primarily operated within the state of garaging and one state beyond or 1,000 miles, whichever is the greater distance. Liability and physical damage coverages for these risks are currently limited to $1,000,000 per accident and $100,000 per unit, respectively. Auto Garage The Company's auto garage program includes garage liability, garage keepers' legal liability and dealers' open lot coverages. The maximum limit on these coverages is $1,000,000. 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 with liability limits up to $1,000,000 for small businesses such as car washes, janitorial services, small contractors, apartment buildings, rental dwellings and retail stores. The Company does not underwrite professional liability, manufacturers' products liability, liquor liability, heavy contracting liability, oil well drilling liability, marine liability or municipality risks. Other Lines The Company also issues a variety of other property and casualty insurance coverages including monoline property insurance. The Company's restricted commercial property policy covers fire, extended coverage, vandalism and malicious mischief for commercial establishments. This policy covers property damage up to $200,000. 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 all of the 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. The Company writes casualty policy limits of $1,000,000. For policies with an effective date occurring from 1992 through 1994, the Company has excess reinsurance for 100% of casualty claims exceeding $300,000 up to the $1,000,000 policy limits. For policies with an effective date occurring in 1995 or after, the Company has excess reinsurance for 100% of casualty claims exceeding $500,000 up to the $1,000,000 policy limits which results in a maximum net claim retention per risk of $500,000. The Company's maximum net claim retention per risk is $300,000 for policies with an effective date occurring from 1992 through 1994. 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. 4 5 The Company is operating under excess casualty reinsurance treaties with three reinsurance companies, each of which reinsures a given percentage of ceded risks. The Company's excess reinsurance is provided in varying amounts by these reinsurers which are rated "A- (Excellent)" or better by A. M. Best Company (Best's). See "Business--Rating." The following table identifies each such reinsurer and sets forth the percentage of the coverage assumed by each of them:
Percentage of Risk Reinsured ---------------------------- 1997 1996 1995 ---- ---- ---- Excess Reinsurer Dorinco Reinsurance Company 50% 50% 50% Great Lakes American Reinsurance Company 40% -- -- PMA Reinsurance Corporation -- 50% 50% Republic Western Insurance Company 10% -- -- 100% 100% 100%
The Company carries catastrophe property reinsurance to protect it against catastrophe occurrences for 95% of the property claims which exceed $500,000 but do not exceed $8,000,000. From time to time the Company makes use of facultative reinsurance to cede unusual risks on a negotiated basis. During 1996 and 1995, the Company entered into reinsurance fronting arrangements with three non-affiliated insurance companies. The Company retains no liability as the business written under these agreements is 100% ceded. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by A. M. Best Company, 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 Company has signed contracts in force for its reinsurance treaties for all years through 1996. The Company has written confirmations from reinsurers for 1997 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 insurance products through 203 non-affiliated general agents' 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. 5 6 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 omissions insurance coverage, which indirectly protects the Company against certain negligence on the part of general agents. The Company performs annual financial reviews and does limited quarterly reviews on each of its agent entities. Strict financial solvency and liquidity levels must be maintained by each general agent. 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 commit 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 Company has devoted extensive resources to the development of detailed underwriting manuals so that its general agents can consistently price and select risks, and the Company believes its manuals have been a significant factor in consistently producing superior underwriting results. All manuals stipulate minimum rates to be charged for the various classes of coverage offered. The general agents are compensated on a commission basis which varies by line of business. In addition, the general agency contracts between the Company and its general agents contain significant 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 most 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 45 states and plans to seek authority to write insurance on an admitted basis in all of the remaining states, but no assurance can be given of when or if this goal will be reached. 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. 6 7 Ultimate liability may be greater or lower than current reserves. Reserves are continually monitored by the Company using new information on reported claims and a variety of statistical techniques. 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 -------------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Unpaid claims and claim adjustment expenses, beginning of period $ 95,011 80,729 72,656 Less: Ceded unpaid claims and claim adjustment expenses, beginning of period 24,650 19,972 16,701 -------- ------ ------ Net unpaid claims and claim adjustment expenses, beginning of period 70,361 60,757 55,955 -------- ------ ------ Net claims and claim adjustment expenses incurred related to: Current period 53,037 48,064 37,571 Prior periods 5,342 401 3,618 -------- ------ ------ Total net claims and claim adjustment expenses incurred 58,379 48,465 41,189 -------- ------ ------ Net claim and claim adjustment expenses paid related to: Current period 17,178 14,131 12,297 Prior periods 32,584 26,953(1) 24,090 -------- ------ ------ Total net claim and claim adjustment expenses paid 49,762 41,084 36,387 -------- ------ ------ Commutation of reinsurance treaties -- (2,223)(1) -- -------- ------ ------ Net unpaid claims and claim adjustment expenses, end of period 78,978 70,361 60,757 Plus: Ceded unpaid claims and claim adjustment expenses, end of period 26,713 24,650 (1) 19,972 -------- ------ ------ Unpaid claims and claim adjustment expenses, end of period $105,691 95,011 80,729 ======== ====== ======
(1) The Company commuted its 1993 and 1994 quota-share reinsurance treaties in 1995, and thereby reassumed all risks and the related unpaid claims and claim adjustment expenses of $2,223,000 (see note 4 to the consolidated financial statements). This was accounted for using the paid claim method, whereby unpaid claims and claim adjustment expenses were increased $2,223,000 and paid claims and claim adjustment expenses were decreased $2,223,000, thus preventing distortion of claims and claim adjustment expenses incurred. The development in claims and claim adjustment expenses incurred from prior periods was largely related to commercial auto claims occurring in the 1995 and 1994 years. 7 8 The following table sets forth, as of December 31, 1996, 1995, and 1994, 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 -------------------------------- 1996 1995 1994 ---- ---- ---- (Amounts in thousands) Net reserves reported on a SAP basis $ 79,976 71,169 61,364 Adjustments: Estimated recovery for salvage and subrogation (998) (808) (607) -------- ------ ------ Net reserves reported on a GAAP basis $ 78,978 70,361 60,757 ======== ====== ======
The following table represents the development of GAAP balance sheet reserves for the period 1986 through 1996. 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 upper 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 lower portion of the table shows the reestimated amount of the previously recorded net reserves 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 1990 liability for net claims and claim adjustment expenses reestimated six years later (as of December 31, 1996) was $29,073,000 of which $28,399,000 has been paid, leaving a net reserve of $674,000 for claims and claim adjustment expenses in 1990 and prior years remaining unpaid as of December 31, 1996. "Net cumulative redundancy (deficiency)" represents the change in the estimate from the original balance sheet date to the date of the current estimate. For example, the 1990 net reserve for unpaid claims and claim adjustment expenses indicates a $167,000 net deficiency from December 31, 1990 to December 31, 1996 (six years later). Conditions and trends that have affected development of liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. 8 9
As of and for the years ended December 31 ------------------------------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Unpaid claims & claim adjustment expenses: Gross 16,335 27,352 29,538 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691 Ceded 8,863 18,865 15,005 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713 Net 7,472 8,487 14,533 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978 Net cumulative paid as of: One year later 2,356 3,766 4,902 7,545 10,251 15,037 22,470 24,090 24,730 32,584 Two years later 4,741 5,895 8,660 12,340 18,145 26,819 37,032 39,182 41,874 Three years later 6,061 7,332 10,642 16,413 23,255 33,879 45,884 48,688 Four years later 6,947 8,069 12,606 19,085 26,171 37,292 51,082 Five years later 7,300 8,721 13,815 20,633 26,970 39,999 Six years later 7,647 9,064 14,249 21,020 28,399 Seven years later 7,854 9,312 14,140 21,700 Eight years later 7,999 9,329 14,632 Nine years later 7,997 9,686 Ten years later 8,253 Net reserves reestimated as of: One year later 7,239 8,869 13,645 20,060 28,354 38,528 54,150 59,573 61,157 75,703 Two years later 7,512 9,166 13,694 20,566 28,479 42,235 57,223 59,922 62,296 Three years later 8,055 9,154 14,024 21,214 30,035 43,217 57,459 59,247 Four years later 8,057 9,355 14,675 22,431 30,129 42,493 56,832 Five years later 8,214 9,543 15,248 22,332 29,022 42,191 Six years later 8,186 9,672 15,174 22,034 29,073 Seven years later 8,206 9,606 14,572 21,965 Eight years later 8,237 9,509 14,753 Nine years later 8,220 9,787 Ten years later 8,456 Net cumulative redundancy (deficiency) (984) (1,300) (220) (1,916) (167) (4,148) (6,909) (3,292) (1,539) (5,342)
The Company has an indicated deficiency of approximately 8% of unpaid claims and claim adjustment expenses (C & CAE) for the 1995 year for reasons mentioned previously. Net unpaid C & CAE at December 31, 1996 was approximately $78,978,000, which the Company believes is adequate. During 1996 the Company further refined its reserving methodology which should enable the Company to maintain a +/- 5% tolerance range of initial unpaid C & CAE in the future. Operating 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: 9 10
Years ended December 31 -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ COMPANY RATIOS Claims Ratio 54.3% 48.7% 47.9% 51.4% 47.7% Expense Ratio 34.5% 34.2% 34.4% 33.9% 33.8% ----- ----- ----- ----- ----- Combined Ratio 88.8% 82.9% 82.3% 85.3% 81.5% ===== ===== ===== ===== ===== INDUSTRY RATIOS (1) Claims Ratio 79.8% 78.9% 81.1% 79.5% 88.1% Expense Ratio 26.2% 26.1% 26.0% 26.2% 26.5% ----- ----- ----- ----- ----- Combined Ratio 106.0% 105.0% 107.1% 105.7% 114.6% ===== ===== ===== ===== =====
(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 Company. 1996 is estimated. The Company has continued to produce favorable claims ratios when compared to the industry. This has resulted from the Company maintaining its high underwriting standards and closely monitoring its pricing structure and adjusting it when needed. Since 1988 the Company has targeted, through its pricing decisions, a claims ratio range of 50-55% and a combined ratio range of 85-90%. The Company has been very successful in attaining these goals and when results have fallen outside of the range, it has been on the favorable side. The unfavorable variance to the industry with regard to the expense ratios is because of the specific lines that the Company writes and the profit contingency inducements. The Company's commission expense ratio is higher than the average of the overall industry on a net premiums written basis. Its higher expense ratios are more than offset by significantly lower claims ratios (favorable by an estimated 25.5 percentage points in 1996 and 30.2 percentage points in 1995, when compared to the industry) which results in the highly favorable combined ratio variances of an estimated 17.2 and 22.1 percentage points in 1996 and 1995, respectively. If the development of unpaid C & CAE was applied to the year in which unpaid C & CAE was initially established, the Company would still have a SAP combined ratio at or below 89% for every year 1986 through 1996. It should be noted that the Company ratios 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. 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 10 11 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 ------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Claims Ratio 54.7% 49.8% 48.8% 51.7% 48.2% Expense Ratio 33.8% 33.1% 34.4% 33.0% 33.6% Combined Ratio 88.5% 82.9% 83.2% 84.7% 81.8%
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 be no greater than 3 to 1.
As of and for the years ended December 31 ------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (Amounts in thousands, except ratios) Net premiums written $ 109,227 108,689 91,170 79,278 81,250 Policyholders' surplus $ 59,012 50,140 42,350 35,906 27,291 Ratio 1.85 to 1 2.17 to 1 2.15 to 1 2.21 to 1 2.98 to 1
Investments The Company's investment portfolio is under the direction of the Board of Directors acting through the Investment Committee. The Investment Committee establishes the Company's investment policy, which is to maximize after-tax yield while maintaining safety of capital together with adequate liquidity for insurance operations. The investment portfolio consists primarily of fixed maturity tax-exempt municipal bonds and United States Government securities. The Company does not invest in high yield ("junk") securities. As of December 31, 1996 and 1995, the Company had no high-yield fixed maturity securities nor non-performing fixed maturity securities. Furthermore, the Company has never bought nor sold either high-yield fixed maturity securities or derivatives. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. The Company holds no equity securities in issuers of high-yield debt securities. 11 12 The following table sets forth, for the periods indicated, the Company's investment results, before income tax effects:
As of and for the years ended December 31 --------------------------------------------------------- 1996 1995 1994 1993 1992 -------- ------- ------- ------- ------- (Dollar amounts in thousands) Average investments (1) $192,221 170,881 148,688 128,632 102,254 Investment income 9,161 8,157 6,868 6,159 5,472 Return on average investments (2) 4.8% 4.8% 4.6% 4.8% 5.4% Taxable equivalent return on average investments 6.6% 6.6% 6.4% 6.6% 7.3% Net realized gains 472 108 135 4 172 Net unrealized gains (losses) $ 1,559 2,772 (1,829) 2,395 2,270
- - ---------------------------- (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. The following table sets forth the composition of the investment portfolio of the Company.
As of December 31 --------------------------------------------------------------- 1996 1995 1994 ------------------- ------------------- ------------------- (Dollar amounts in thousands) Amortized Fair Amortized Fair Amortized Fair Type of Investment Cost Value Cost Value Cost Value - - ------------------ -------- -------- -------- -------- -------- -------- Fixed Maturities: Bonds held to maturity: U.S. government securities $ 7,731 7,748 9,606 9,733 10,555 10,213 Tax-exempt state and municipal bonds 97,199 97,977 87,696 88,689 113,088 111,687 Bonds available for sale: Tax-exempt state and municipal bonds 76,880 77,644 77,478 79,130 25,779 25,693 Certificates of deposit 595 595 620 620 570 570 -------- -------- -------- -------- -------- -------- Total fixed maturities 182,405 183,964 175,400 178,172 149,992 148,163 -------- -------- -------- -------- -------- -------- Short-term investments 20,662 20,662 5,975 5,975 10,394 10,394 -------- -------- -------- -------- -------- -------- Total investments $203,067 204,626 181,375 184,147 160,386 158,557 ======== ======== ======== ======== ======== ========
12 13 The maturity distribution of the Company's investments in fixed maturities is as follows:
As of December 31 ------------------------------------------------------------------ 1996 1995 -------------------------- ------------------------ (Dollar amounts in thousands) Amortized Amortized Cost Percent Cost Percent ---- ------- ---- ------- Within 1 year $ 18,754 10.3% $ 17,781 10.1% Beyond 1 year but within 5 years 135,052 74.1% 133,947 76.4% Beyond 5 years but within 10 years 23,059 12.6% 16,572 9.5% Beyond 10 years but within 20 years 5,540 3.0% 6,553 3.7% Beyond 20 years - - 547 .3% ---------- ----- --------- ----- $ 182,405 100.0% $ 175,400 100.0% ========== ===== ========= =====
RATING A.M. Best Company ("Best's"), publisher of Best's insurance reports, property-casualty, has currently assigned an "A+ (Superior)" 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. Best's generally reviews its ratings on a quarterly basis. 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 and Texas. 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 6 to the consolidated financial statements). Additionally, the Texas statutes restrict the ability of any one person to acquire 10% or more of the Company's voting securities without prior regulatory approval while the Oklahoma statute restricts the ability of any one person to acquire 15% or more of the Company's voting securities without prior regulatory approval. COMPETITION The property and casualty insurance industry is highly competitive, with over 2,500 insurance companies transacting business in the United States. The Company underwrites specialty 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. In such event, the Company would be at a competitive disadvantage because many of these companies have substantially greater financial and other resources and could offer a broader variety of specialty risk coverages. The Company's competitive advantages are 1) specialized expertise in its product lines which enables it to price with a great deal of accuracy and 13 14 2) superior service in underwriting and claims handling which provides its agents with a competitive advantage and a stable market. EMPLOYEES As of December 31, 1996, the Company employed 189 persons, of which 13 were officers, 154 were staff and administrative personnel, and 22 were part-time employees. EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers of the Company as of February 28, 1997 is set forth below:
Name Age Position with the Company ---- --- ------------------------- Joseph D. Macchia 61 Chairman of the Board, President and Chief Executive Officer Jack L. Johnson 63 Senior Vice President, Assistant Secretary and Director Daniel J. Coots 45 Senior Vice President, Treasurer and Chief Financial Officer Norman Alberigo 54 Vice President Mark D. Brissman 41 Vice President Richard M. Buxton 48 Vice President J. Landis Graham 42 Vice President Richard A. Laabs 41 Vice President Carolyn E. Ray 44 Vice President Sam Rosen 61 Secretary and Director
Mr. Joseph D. Macchia is the founder of the Company and has served as Chairman of the Board, President and Chief Executive Officer since its formation in 1978. Mr. Macchia has been engaged in the property and casualty insurance business since 1961. Mr. Jack L. Johnson has served as Senior Vice President of the Company since 1984 and became a Director in 1993. From 1979 to 1984, Mr. Johnson served as a Vice President of the Company. Mr. Johnson has been engaged in the property and casualty insurance business since 1962. Mr. Daniel J. Coots has served as Vice President, Treasurer 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. Mr. Norman Alberigo has served as Vice President of the Company since 1988. From 1986 to 1988, Mr. Alberigo served as Assistant Vice President of the Company. Mr. Alberigo has been engaged in the property and casualty insurance business since 1970. 14 15 Mr. Mark D. Brissman has served as Vice President of the Company since October of 1994. From 1989 to 1994, Mr. Brissman was with State Farm Insurance Company in the position of Senior Associate Actuary. Mr. Brissman has been engaged in the property and casualty insurance business since 1978. Mr. Richard M. Buxton has served as Vice President of the Company since December of 1996. From 1986 to 1996 Mr. Buxton was with KN Energy, Inc. in the position of Vice President of Strategic Planning and Financial Services. Mr. J. Landis Graham has served as Vice President of the Company since September of 1993. 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. Mr. Richard A. Laabs has served as Vice President of the Company since June of 1996. 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. Ms. Carolyn E. Ray has served as Vice President of the Company since 1986. 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. Mr. 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. ITEM 2. PROPERTY The Company owns its Corporate offices which provide approximately 35,000 square feet of office space, and additionally provides 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, which previously served as its corporate offices. The Company currently has this property under lease. ITEM 3. LEGAL PROCEEDINGS 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 which arise in the normal course of its insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company'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 American Stock Exchange, as adjusted for stock dividends through July 30, 1996 and by the New York Stock Exchange from July 31, 1996 through December 31, 1996. The prices reported reflect actual sales transactions on these exchanges.
High Low ---- --- 1994 First Quarter 8 3/8 7 1/8 1994 Second Quarter 8 3/16 7 1/8 1994 Third Quarter 8 1/16 7 1994 Fourth Quarter 8 3/8 7 1/8 1995 First Quarter 10 7 1995 Second Quarter 10 1/2 9 5/16 1995 Third Quarter 9 1/2 8 7/16 1995 Fourth Quarter 11 7/8 8 5/16 1996 First Quarter 11 3/4 9 3/4 1996 Second Quarter 11 5/8 9 7/8 1996 Third Quarter 10 3/4 9 3/8 1996 Fourth Quarter 10 3/4 8 3/4
In 1991 the Company adopted a policy to declare quarterly cash dividends of $.01 per share until further action by the Board of Directors. In November of 1995, the Board of Directors increased the quarterly cash dividend to $.0125 per share. In August of 1996, the Board of Directors increased the quarterly cash dividend to $.015 per share. Cash dividends of $.01 per share were granted to shareholders of record on March 31, June 30, September 30 and December 31, 1994 and March 31, June 30 and September 30, 1995. Cash dividends of $.0125 per share were granted to shareholders of record on December 31, 1995, March 29 and June 28, 1996. Cash dividends of $.015 per share were granted to shareholders of record on September 30 and December 31, 1996. On February 17, 1997, the Company declared a $.015 per share cash dividend payable to shareholders of record on March 31, 1997. The Company depends on cash flow from cash dividends paid by its subsidiaries. Stock dividends of 5% were granted to shareholders of record on March 31 and September 30, 1994 and 1995. In November, 1995, the Board of Directors discontinued the semi-annual stock dividends. As of February 28, 1997, there were 550 shareholders of record of the Company's Common Stock. 16 17 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 Peat Marwick LLP, independent certified public accountants. The consolidated balance sheets as of December 31, 1996 and 1995, and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, and the 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 --------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- -------- ------ ------- ----- (Amounts in thousands, except per share data) Income Data: Gross premiums written (1) $ 110,000 108,072 98,164 85,373 83,475 Ceded premiums written 1,749 1,968 8,710 7,412 3,418 ------- -------- ------ ------ ------ Net premiums written 108,251 106,104 89,454 77,961 80,057 Increase in unearned premiums (1,458) (8,849) (5,059) (2,099) (2,874) ------- ------- ------ ------ ------ Net premiums earned 106,793 97,255 84,395 75,862 77,183 Net investment income 9,161 8,157 6,868 6,159 5,472 Net realized gains 472 108 135 4 172 Insurance services 2,379 2,183 2,056 2,388 2,876 ------- ------- ------ ------ ------ Total revenues 118,805 107,703 93,454 84,413 85,703 ------- ------- ------ ------ ------ Claims and claim adjustment expenses 58,379 48,465 41,189 39,239 37,220 Policy acquisition costs 23,828 19,679 17,392 16,183 17,592 Underwriting and operating expenses 15,499 15,579 14,505 12,604 13,036 ------- ------- ------ ------ ------ Total expenses 97,706 83,723 73,086 68,026 67,848 ------- ------- ------ ------ ------ Income before income taxes 21,099 23,980 20,368 16,387 17,855 Income tax expense 5,079 6,352 5,199 3,147 4,676 ------- ------- ------ ------ ------ Net income (2) $ 16,020 17,628 15,169 13,240 13,179 ======= ======= ====== ====== ====== Per Share Data (3): Net income $ .74 .81 .70 .61 .60 === === === === === GAAP Operating Ratios: Claims ratio 54.7% 49.8% 48.8% 51.7% 48.2% Expense ratio 33.8% 33.1% 34.4% 33.0% 33.6% ---- ---- ---- ---- ---- Combined ratio 88.5% 82.9% 83.2% 84.7% 81.8% ==== ==== ==== ==== ====
17 18
As of December 31 ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Balance Sheet Data (4): Investments $ 203,831 183,027 160,300 136,989 120,275 Premiums receivable 15,825 15,914 12,262 10,888 9,140 Ceded unpaid claims and claim adjustment expenses 26,713 24,650 19,972 16,701 16,594 Ceded unearned premiums 16,280 6,008 5,977 5,536 4,692 Deferred policy acquisition costs 12,634 12,115 9,831 8,509 8,203 Property and equipment 6,981 6,562 6,336 6,274 5,508 Total assets 296,846 264,156 230,576 199,187 173,839 Unpaid claims and claim adjustment expenses 105,691 95,011 80,729 72,656 66,517 Unearned premiums 65,255 53,525 44,645 39,145 36,202 Note payable - 1,750 3,500 4,500 4,500 Total liabilities 187,493 164,714 149,029 132,369 118,958 Shareholders' equity 109,353 99,442 81,547 66,818 54,881 Shareholders' equity per share (5) $ 5.19 4.62 3.79 3.14 2.59 Return on beginning equity 16% 22% 23% 24% 31% == == == == ==
(1) Excludes premiums of $31,603,000 in 1996, $8,893,000 in 1995, $5,056,000 in 1994, $5,418,000 in 1993 and $6,942,000 in 1992 from the Company's fronting arrangements and the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company is a servicing carrier. (2) Includes after tax net realized gains of $307,000, $70,000, $87,000, $3,000 and $114,000 for 1996, 1995, 1994, 1993 and 1992, respectively. (3) All years retroactively adjusted for stock dividends and stock splits effected as stock dividends as follows: two 5% in 1995, two 5% in 1994, two 5% in 1993 and one 5% and one 50% in 1992. (4) Certain reclassifications have been made to years prior to 1993 to comply with Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" which the Company implemented in the first quarter of 1993. (5) Based on number of shares outstanding at the end of each year, retroactively adjusted for stock dividends and stock splits effected as stock dividends. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OPERATIONS Net income for 1996 decreased 9% to $16,019,567, or $.74 per share compared to 1995 net income of $17,627,855, or $.81 per share and 1994 net income of $15,168,800, or $.70 per share. The Company recorded a 16% return on beginning equity and a GAAP combined ratio of 88.5% in 1996. 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 revenue item "Insurance services" includes revenues from the computer software, the plan servicing, the premium finance and the fronting reinsurance operations. The expense item "Underwriting and operating expenses" includes the operating expenses of these operations. RESULTS OF OPERATIONS Gross premiums written in 1996 of $110,000,103 were 2% above the $108,071,871 recorded in 1995. In 1995, gross premiums written increased 10% over the 1994 level. Texas accounted for the small growth rate by contributing 4 percentage points (points) of decrease. The following table compares the major product lines between the years for gross premiums written:
1996 1995 1994 ------------------------- -------------------------- ------------------------- (Amounts in thousands) Commercial auto $ 62,328 57% $ 62,517 58% $ 58,117 59% Auto garage 26,871 24% 25,270 23% 20,073 20% General liability 19,744 18% 19,052 18% 18,564 19% Other lines 1,057 1% 1,233 1% 1,410 2% ------- --- ------- --- ------ --- Total $ 110,000 100% $ 108,072 100% $ 98,164 100% ======= === ======= === ====== ===
COMMERCIAL AUTO was flat in 1996 from 1995 after recording a 8% increase in 1995 from 1994. Kentucky contributed 5 points of increase, but Texas and Pennsylvania accounted for 4 points and 2 points of decrease, respectively. The AUTO GARAGE product line produced a 6% increase in 1996 after a 26% increase in 1995. Florida, Kentucky and Pennsylvania were all up significantly in 1996 and Texas was not down materially. The GENERAL LIABILITY line recorded an increase of 4% in 1996 after an increase of 3% in 1995. California and Florida produced 6 points and 5 points of increase, respectively, while Texas recorded 9 points of decrease. For 1996, gross premiums written percentages by significant state/product line are as follows: Texas commercial auto (20%), Kentucky commercial auto (8%), Pennsylvania commercial auto (6%), Texas general liability (5%), and Florida auto garage (5%) with no other individual state/product line comprising 5% or more. The persistency rate decreased to 45% in 1996 from 47% in 1995. Premiums earned increased 10% in 1996 to $106,792,928 and increased 15% in 1995 to $97,254,816 as a direct result of the continued increase in writings. 19 20 Net investment income increased 12% in 1996 over 1995 and increased 19% in 1995 over 1994. These increases are the result of growth in the portfolio due to continued positive cash flows from operations. The return on average investments for 1996 is 4.7% versus 4.8% in 1995 and 4.6% in 1994. Inflation can cause interest rates to increase, which would cause the Company's interest income to increase. Because of the Company's profitability in the underwriting operations, the Company achieves the highest after tax net income by investing predominantly in tax-exempt securities. At December 31, 1996, 86% of the Company's investments were in investment grade tax-exempt bonds with an average maturity of approximately 3.4 years. Since the majority of the Company's investments are tax-exempt, the yields appear lower than those of the industry; however, the industry as a whole has a significantly larger percentage of investments in taxable securities with substantially longer maturities. On a taxable equivalent basis the return on average investments was 6.6% in 1996 and 1995 and 6.4% in 1994. The Company has the ability to hold its fixed maturity securities until their maturity date. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. At December 31, 1996, approximately 4% of the Company's investments were in U.S. Treasury securities and 10% were in short-term money market funds. The Company has not and does not intend to invest in derivatives or high-yield ("junk") securities, nor equity securities in issuers of "junk" debt securities. The Company does not have any non-performing fixed maturity securities. The Company recorded net realized capital gains of $471,956 in 1996 versus $108,024 in 1995. All of these gains were generated from bonds available for sale and were to some extent the result of extending durations. Insurance services revenues increased $196,645 from 1995 to 1996 following an increase of $126,152 in 1995 from 1994. The table below presents the components.
1996 1995 1994 ---------- ---------- ---------- Computer software $ 473,499 $ 475,317 $ 559,554 Premium finance 345,679 281,383 153,736 Plan servicing 1,187,656 1,335,852 1,311,011 Fronting fees 343,266 62,428 -- Other 29,054 27,529 32,056 ---------- ---------- ---------- Total $2,379,154 $2,182,509 $2,056,357 ========== ========== ==========
Revenues in the computer software operation were flat for 1996 following a 15% decrease in 1995. New management brought in during the third quarter of 1995 has improved this operation and revenues are expected to show moderate increases in the future. Revenues from the premium finance operation are up 23% in 1996 over the 1995 level which was 83% above the 1994 level. Marketing efforts implemented in 1995 and continued in 1996 account for the increases in both years. Amounts financed in 1996 were 5% above 1995 which had increased 84% over 1994. Premium finance notes receivable were approximately $1,991,000 at December 31, 1996 versus $2,015,000 at December 31, 1995 and the average return was 17% for 1996 versus 19% in 1995 and 18% in 1994. 20 21 Plan servicing revenues from commercial automobile plans decreased 11% in 1996 from 1995 following a 2% increase in 1995. Written premiums are 28% behind last year as a result of decreases in the three largest state plans. These plans are depopulating as risks are moving into the voluntary market due to lower pricing. The Company continues to pursue management contracts with other states to administer their commercial automobile plans and is seeking a larger participation in the existing state plans. Fronting fee revenues increased $280,838 during 1996 as a result of significant growth in the two fronting reinsurance accounts initiated in 1995 and the addition of a third account in 1996. Claims and claim adjustment expenses (C & CAE) increased $9,913,707 in 1996 over 1995 and $7,276,443 in 1995 over 1994. The C & CAE ratio was 54.7% in 1996, 49.8% in 1995 and 48.8% in 1994. The increase in the C & CAE ratio of 4.9 percentage points in 1996 is largely a result of development of commercial auto claims which occurred in 1995 and 1994. While the Company writes a material amount of business in areas where catastrophes have recently occurred, the gross and net claims incurred from these events were immaterial because the Company primarily writes liability coverages. 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. Less than .1% of the Company's premium writings are for product liability coverages and this is limited to non-manufacturing risks only. 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 increase in commissions from 1995 to 1996 is related to the increase in gross premiums written and to a decrease of approximately $1,669,000 in commission income from reinsurance treaties. Commissions increased in 1995 over 1994 as a result of the increase in written premiums between these years and as a result of additional commission income of approximately $2,164,000 recorded in 1994 from the 5% quota share treaty (it was not renewed in 1995). The ratio of commissions to gross premiums written increased to 22% in 1996 from 20% in 1995 and from the 19% level in 1994 as a result of the decrease in commission income in 1996 and 1995 discussed previously. The ratio of commissions to premiums earned was 23% for 1996 and 1995 as compared to 22% for 1994. The increase in 1995 was related to the decrease in commission income in 1995. The change in deferred policy acquisition costs and deferred ceding commission income (DAC) resulted in a net increase to income of $519,257, $2,284,138 and $1,321,946 for 1996, 1995 and 1994, respectively. The change in the amount of the increase in DAC between the comparable periods is directly related to the rate at which unearned premiums are growing as a result of the growth rate 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. The ratio of DAC to net unearned premiums was 25.8%, 25.5% and 25.4% at December 31, 1996, 1995 and 1994, respectively. Underwriting and operating expenses were down slightly in 1996 from 1995, and they were up 7% in 1995 over 1994. As a percent of operating revenues (premiums earned and insurance services revenues) the ratio continued to decrease to 14.2% in 1996 versus 15.7% in 1995 and 16.8% in 1994. The decrease in 1996 was the result of savings from variable expenses of personnel and the plan servicing operation. 21 22 The effective tax rate of the Company was 24% in 1996 and 26% in 1995 and 1994. The lower rate in 1996 is largely the result of tax-exempt net investment income representing a larger portion of income in 1996 than in previous years. 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 5 of Notes to Consolidated Financial Statements. For 1997 the Company is targeting premiums written to be within a $115-125 million range with a GAAP combined ratio of 85-90% and a return on beginning equity of better than 18%. While the Company is optimistic these forward-looking goals can be attained, no assurances can be given they will occur. 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, 1996, the Company held short-term investments and cash of $21,707,022 which the Company believes is adequate liquidity for the payment of claims and other short-term commitments. With regard to long term liquidity, the average duration of the investment portfolio is approximately 2.9 years. The fair value of the fixed maturity portfolio at December 31, 1996 was $1,558,923 above amortized cost. With regard to the availability of funds to the holding company, see Note 6 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, 1996 and 1995, the balance on deposit for the benefit of such policyholders totalled approximately $12,615,000 and $11,860,000, respectively. The increase in investments is primarily attributable to continued positive cash flows from operating activities which are the result of continued and substantial underwriting profits. Ceded unpaid claims and claim adjustment expenses increased, as well as, ceded unearned premiums largely as a result of the increase in fronting reinsurance activity mentioned previously. Unpaid claims and claim adjustment expenses and unearned premiums both increased largely as a result of increases to reserves on retained business, as well as, material increases from plan servicing and fronting reinsurance. Drafts payable increased because a large amount of drafts were issued in the fourth quarter of 1996 in an aggressive effort to bring specifically targeted claims to an early and fair conclusion. The note payable was retired during the second quarter of 1996 (see Note 3 of Notes to Consolidated Financial Statements). The Company's liquidity position remains strong as a result of cash flows from underwriting and investment activities. The unrealized gains or losses on fixed maturities available for sale are presented, net of tax, as a separate component of shareholders' equity (see Note 2 of Notes to Consolidated Financial Statements). The net unrealized gain on the fixed maturities classified as held to maturity was $794,808 at December 31, 1996. The Company repurchased 470,702 shares of stock during 1996 at a cost of $4,426,182 or $9.40 per share. The Company is authorized to purchase an additional 529,298 shares. 22 23 In March 1995, the Financial Accounting Standards Board (FASB) issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement was effective for years ending after December 15, 1995, and did not have any impact on the financial statements. In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based Compensation." The Statement is effective for years beginning after December 15, 1994, if awards are granted in the fiscal year. The Company granted stock options during 1996 to its directors and officers (see Note 7 of Notes to Consolidated Financial Statements). During 1996, the FASB issued Statement 125, "Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Statement is effective for years beginning after December 31, 1996, and will not have any impact on the financial statements. The Company is not aware of any current recommendations by the 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 significantly exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies. 23 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- The following consolidated Financial Statements are on pages 33 through 58: Report of Management 33 Independent Auditors' Report 34 Consolidated Balance Sheets as of December 31, 1996 and 1995 35-36 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995, and 1994 37 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995, and 1994 38-39 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994 40-41 Notes to Consolidated Financial Statements December 31, 1996, 1995, and 1994 42-58 The following Consolidated Financial Statements Schedules are on pages 59 through 70: Schedule Page -------- ---- Independent Auditors' Report on Supplementary Information 59 I Summary of Investments 60 II Condensed Financial Information of the Registrant 61-67 III Supplementary Insurance Information 68 IV Reinsurance 69 VI Supplemental Information 70
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 24 25 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". The other information required by this item is hereby incorporated by reference from the Registrant's definitive 1997 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from the Registrant's definitive 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference from the Registrant's definitive 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is hereby incorporated by reference from the Registrant's definitive 1997 Proxy Statement. 25 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 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, 1996 and 1995 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements, December 31, 1996, 1995 and 1994 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 (Exhibit 3.1)(1) 26 27 3.2 Articles of Amendment to the Articles of Incorporation dated June 9, 1988 (Exhibit 3.2)(2) 3.3 Restated Bylaws of Registrant (Exhibit 3.2)(1) 3.4 Amendment to the Bylaws dated June 10, 1988 (Exhibit 3.4)(2) 3.5 Sections 2.06 and 2.07 of the Bylaws as Amended on May 25, 1993 (Exhibit 3.5)(7) 3.5.1 Section 3.02 of the Bylaws as Amended on February 17, 1997 (10) 3.6 Articles of Amendment to Articles of Incorporation effective August 13, 1993 (Exhibit 3.6)(7) 4.2 Rights Agreement, dated as of March 3, 1988, between the Registrant and Team Bank/Fort Worth, N.A. (incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 1988) (Exhibit 4.2)(3) 4.3 Amendment No. 1 dated as of March 5, 1990 to Rights Agreement dated as of March 3, 1988 between GAINSCO, INC. and Team Bank as Rights Agent (Exhibit 4.2)(5) 4.4 Amendment No. 2 dated as of May 25, 1993 to Rights Agreement between GAINSCO, INC. and Society National Bank (successor to Team Bank (formerly Texas American Bank/Fort Worth, N.A.)), as Rights Agent (Exhibit 4.4)(7) 4.6 Revised Form of Common Stock Certificate (10) 10.2 (Restated) Incentive Compensation Plan of the Registrant (Exhibit 10.2)(2) 10.14 Profit Sharing Plan and Trust of GAINSCO, INC. effective January 1, 1985, as amended, and Adoption Agreement (Exhibit 10.14)(4) 10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4) 10.17 Loan Agreement and Amendment No. 1 to Loan Agreement between GAINSCO Service Corp., GAINSCO, INC. and Bank One Texas, N.A. (Exhibit 10.17)(6) 10.18 Promissory Note made by GAINSCO Service Corp. payable to Bank One, Texas, N.A. (Exhibit 10.18)(6) 27 28 10.19 Guaranty Agreement executed by GAINSCO, INC., in favor of Bank One Texas, N.A. (Exhibit 10.19)(6) 10.20 Negative Pledge Agreement executed by GAINSCO, INC. (Exhibit 10.20)(6) 10.21 Negative Pledge Agreement executed by GAINSCO Service Corp. (Exhibit 10.21)(6) 10.23 Surplus Debenture issued by GAINSCO County Mutual Insurance Company. (Exhibit 10.23)(6) 10.24 Management Contract between GAINSCO County Mutual Insurance Company and GAINSCO Service Corp. (Exhibit 10.24)(6) 10.25 Certificate of Authority and accompanying Commissioner's Order granting Certificate of Authority, allowing for charter amendments and extension of charter (Exhibit 10.25)(6) 10.27 Amendment to Surplus Debenture issued by GAINSCO County Mutual Insurance Company (Exhibit 10.27)(7) 10.28 Agreement dated August 26, 1994 appointing Continental Stock Transfer & Trust Company transfer agent and registrar (Exhibit 10.28)(8). 10.29 Amendment No. 3 to Rights Agreement and appointment of Continental Stock Transfer & Trust Company as Successor Rights Agent, made September 30, 1994 (Exhibit 10.29)(8). 10.30 Second Amendment to Loan Agreement among GAINSCO Service Corp., GAINSCO, INC. and Bank One Texas, N.A. made on July 26, 1990 (Exhibit 10.30)(8) 10.31 1995 Stock Option Plan of the Registrant (Exhibit 10.31) (9) 10.32 Clarification to the GAINSCO, INC. Executive Incentive Compensation Plan (Exhibit 10.32) (9) 10.33 Loan Agreement between GAINSCO, INC. and Bank One Texas N.A. (10) 10.34 Promissory note made by GAINSCO, INC. payable to Bank One Texas N.A. (10) 10.35 Negative Pledge Agreement executed by GAINSCO, INC. (10) 11 (Not required to be filed as an Exhibit. See footnote (1)(l) on page 47 of this 10-K Report for information called for by number 11 of the Exhibit Table to Item 601 of S-K) 28 29 22.2 Subsidiaries of Registrant (10) 24.2 Consent of KPMG Peat Marwick LLP to incorporation by reference (10) 25.1 Powers of Attorney (10) 27 Financial Data Schedule (10) 28.8 Schedule P from the 1996 Annual Statement of General Agents Insurance Company of America, Inc. (11) 28.9 Schedule P from the 1996 Annual Statement of MGA Insurance Company, Inc. (11) 28.10 Schedule P from the 1996 Annual Statement of GAINSCO County Mutual Insurance Company (11) (1) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration Statement No. 33-7846 on Form S-1, and amendments thereto, filed by the Company with the Securities and Exchange Commission and effective November 6, 1986. (2) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration 33-25226 on Form S-1, and amendments thereto, filed by the Company with the Securities and Exchange Commission and effective November 14, 1988. (3) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (4) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (5) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (6) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 29 30 (8) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (9) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (10) Filed herewith, See Exhibit Index. (11) Filed under Form SE. (b) Reports on Form 8-K During the last quarter of the fiscal year ended December 31, 1996, no reports on Form 8-K have been filed by the Company. (c) Exhibits required by Item 601 of Regulation SK The exhibits listed in Item 14(a) 3 of this Report, and not incorporated by reference to a separate file are filed herewith. 30 31 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/ Joseph D. Macchia - - -------------------------------- By: Joseph D. Macchia, President Date: 3/28/97 --------------------------- 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 ---- ----- ---- /s/ Joseph D. Macchia Chairman of the Board, 3/28/97 - - ----------------------- President and Chief --------------- Joseph D. Macchia Executive Officer /s/ Jack L. Johnson Senior Vice President and 3/28/97 - - ----------------------- Director --------------- Jack L. Johnson /s/ Daniel J. Coots Senior Vice President and 3/28/97 - - ----------------------- Chief Financial Officer --------------- Daniel J. Coots /s/ Sam Rosen Secretary and Director 3/28/97 - - ----------------------- --------------- Sam Rosen Joel C. Puckett* Director 3/28/97 - - ----------------------- --------------- Joel C. Puckett Norman J. E. Roe* Director 3/28/97 - - ----------------------- --------------- Norman J. E. Roe Harden H. Wiedemann* Director 3/28/97 - - ----------------------- --------------- Harden H. Wiedemann John H. Williams* Director 3/28/97 - - ----------------------- --------------- John H. Williams
31 32 *By: /s/ Joseph D. Macchia -------------------------------- Joseph D. Macchia, Attorney in-fact Under Power of Attorney Subsequent to the filing of the Annual Report on this Form, an Annual Report to Security Holders covering the Registrant's last fiscal year and a Proxy Statement and Form of Proxy will be sent to more than ten of the Registrant's security holders with respect to the Annual Meeting. 32 33 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 Peat Marwick 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/ Joseph D. Macchia --------------------------------- Joseph D. Macchia Chairman of the Board, President and Chief Executive Officer /s/ Daniel J. Coots --------------------------------- Daniel J. Coots Senior Vice President and Chief Financial Officer 33 34 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders GAINSCO, INC.: We have audited the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, 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, 1994, 1993 and 1992, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1993, and 1992, 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, 1996, appearing on pages 17 and 18, is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived. KPMG Peat Marwick LLP Dallas, Texas February 24, 1997 34 35 GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995
Assets 1996 1995 ------ -------------- -------------- Investments (note 2): Fixed maturities: Bonds held to maturity, at amortized cost (fair value: $105,725,155 - 1996, $98,421,877 - 1995) $ 104,930,347 97,301,350 Bonds available for sale, at fair value (amortized cost: $76,879,562 - 1996, $77,478,359 - 1995) 77,643,677 79,130,048 Certificates of deposit, at cost (which approximates fair value) 595,000 620,000 Short-term investments, at cost (which approximates fair value) 20,662,282 5,975,412 ------------ ------------ Total investments 203,831,306 183,026,810 Cash 1,044,740 1,774,608 Accrued investment income 4,308,185 4,539,236 Premiums receivable (net of allowance for doubtful accounts: $101,000 - 1996 and 1995) (note 1) 15,824,543 15,913,734 Reinsurance balances receivable 2,156,326 3,505,818 Ceded unpaid claims and claim adjustment expenses 26,713,154 24,650,606 Ceded unearned premiums 16,280,013 6,008,187 Deferred policy acquisition costs (note 1) 12,633,938 12,114,681 Property and equipment (net of accumulated depreciation and amortization: $4,778,524 - 1996, $3,812,976 - 1995) (note 1) 6,981,380 6,561,792 Current Federal income taxes 424,148 - Deferred Federal income taxes (notes 1 and 5) 2,956,510 2,578,714 Management contract 1,787,570 1,837,570 Other assets 1,903,963 1,643,853 ------------ ------------ Total assets $ 296,845,776 $ 264,155,609 =========== ===========
See accompanying notes to consolidated financial statements. 35 36 GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995
Liabilities and Shareholders' Equity 1996 1995 -------------- ------------ Liabilities: Unpaid claims and claim adjustment expenses (notes 1 and 4) $ 105,691,588 95,011,463 Unearned premiums (note 4) 65,255,153 53,525,323 Commissions payable 2,689,337 2,207,353 Accounts payable (note 1) 4,670,947 4,635,715 Reinsurance balances payable 1,057,923 1,817,056 Deferred revenue 593,300 492,393 Drafts payable 6,219,044 2,569,265 Note payable (note 3) - 1,750,000 Dividends payable (note 6) 316,312 269,066 Other liabilities 999,590 1,388,098 Current Federal income taxes - 1,047,981 ----------- ----------- Total liabilities 187,493,194 164,713,713 ----------- ----------- Shareholders' Equity (note 6): Preferred stock ($100 par value, 10,000,000 shares authorized, none issued) - - Common stock ($.10 par value, 250,000,000 shares authorized, 21,670,369 issued at December 31, 1996 and 21,637,481 issued at December 31, 1995) 2,167,037 2,163,748 Additional paid-in capital 87,610,379 87,543,175 Net unrealized gains on fixed maturities 496,675 1,073,597 Retained earnings 24,517,265 9,673,968 Treasury stock, at cost (582,962 shares in 1996, 112,260 shares in 1995) (note 1) (5,438,774) (1,012,592) ------------ ----------- Total shareholders' equity 109,352,582 99,441,896 ----------- ---------- Commitments and contingencies (notes 4, 7, and 8) Total liabilities and shareholders' equity $ 296,845,776 264,155,609 =========== ===========
See accompanying notes to consolidated financial statements. 36 37 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------- ------------- ------------- Revenues: Net premiums earned (note 4) $ 106,792,928 97,254,816 84,394,874 Net investment income (note 2) 9,160,518 8,157,484 6,867,693 Net realized gains (note 1) 471,956 108,024 134,641 Insurance services 2,379,154 2,182,509 2,056,357 ------------- ------------- ------------- 118,804,556 107,702,833 93,453,565 ------------- ------------- ------------- Expenses: Claims and claim adjustment expenses (notes 1 and 4) 58,378,720 48,465,013 41,188,570 Commissions 24,347,250 21,962,839 18,714,356 Change in deferred policy acquisition costs and deferred ceding commission income (note 1) (519,257) (2,284,138) (1,321,946) Underwriting and operating expenses 15,499,641 15,579,260 14,505,108 ------------- ------------- ------------- 97,706,354 83,722,974 73,086,088 ------------- ------------- ------------- Income before Federal income taxes 21,098,202 23,979,859 20,367,477 Federal income taxes (note 5): Current expense 5,145,780 6,412,007 5,554,864 Deferred benefit (67,145) (60,003) (356,187) ------------- ------------- ------------- 5,078,635 6,352,004 5,198,677 ------------- ------------- ------------- Net income $ 16,019,567 17,627,855 15,168,800 ============= ============= ============= Net income per share $ .74 .81 .70 ============= ============= ============= (notes 1 and 6)
See accompanying notes to consolidated financial statements. 37 38 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1995, and 1994
1996 1995 1994 ----------- ----------- ----------- Common stock: Balance at beginning of year $ 2,163,748 1,961,137 1,765,082 Issue of shares as stock dividends (2,009,797 in 1995 and 1,814,941 in 1994) (note 6) -- 200,980 181,495 Exercise of options to purchase shares (32,888 in 1996, 16,316 in 1995 and 145,604 in 1994) 3,289 1,631 14,560 ----------- ----------- ----------- Balance at end of year 2,167,037 2,163,748 1,961,137 ----------- ----------- ----------- Additional paid-in capital: Balance at beginning of year 87,543,175 69,671,214 53,495,511 Issue of shares as stock dividends (2,009,797 in 1995 and 1,814,941 in 1994) (note 6) -- 17,835,103 15,809,524 Exercise of options to purchase shares (32,888 in 1996, 16,316 in 1995 and 145,604 in 1994) 67,204 36,858 366,179 ----------- ----------- ----------- Balance at end of year $87,610,379 87,543,175 69,671,214 ----------- ----------- -----------
(continued) 38 39 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1995, and 1994
1996 1995 1994 ------------- ------------- ------------- Net unrealized gains (losses) on fixed maturities: Balance at beginning of year $ 1,073,597 (55,686) -- Cumulative effect of change in accounting principle -- -- 186,303 Change during year (576,922) 1,129,283 (241,989) ------------- ------------- ------------- Balance at end of year 496,675 1,073,597 (55,686) ------------- ------------- ------------- Retained earnings: Balance at beginning of year 9,673,968 10,982,494 12,569,862 Net income for year 16,019,567 17,627,855 15,168,800 Cash dividends (note 6) (1,176,270) (893,943) (759,938) Stock dividends (note 6) -- (18,042,438) (15,996,230) ------------- ------------- ------------- Balance at end of year 24,517,265 9,673,968 10,982,494 ------------- ------------- ------------- Treasury stock: Balance at beginning of year (1,012,592) (1,012,592) (1,012,362) Change during year (4,426,182) -- (230) ------------- ------------- ------------- Balance at end of year (5,438,774) (1,012,592) (1,012,592) ------------- ------------- ------------- Total shareholders' equity at end of year $ 109,352,582 99,441,896 81,546,567 ============= ============= =============
See accompanying notes to consolidated financial statements. 39 40 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 16,019,567 17,627,855 15,168,800 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 4,720,625 4,092,621 4,899,241 Change in deferred Federal income taxes (67,145) (60,003) (356,187) Change in accrued investment income 231,051 (251,412) (395,598) Change in premiums receivable 89,191 (3,651,377) (1,374,079) Change in reinsurance balances receivable 1,349,492 627,739 (881,513) Change in ceded unpaid claims and claim adjustment expenses (2,062,548) (4,678,318) (3,271,033) Change in ceded unearned premiums (10,271,826) (31,218) (441,304) Change in deferred policy acquisition costs and deferred ceding commission income (519,257) (2,284,138) (1,321,946) Change in management contract 50,000 50,000 50,000 Change in other assets (260,110) 297,216 (83,216) Change in unpaid claims and claim adjustment expenses 10,680,125 14,282,664 8,072,613 Change in unearned premiums 11,729,830 8,880,310 5,500,057 Change in commissions payable 481,984 15,734 691,830 Change in accounts payable 35,232 (626,356) 861,075 Change in reinsurance balances payable (759,133) (4,186,811) 2,086,036 Change in deferred revenue 100,907 71,985 (29,929) Change in drafts payable 3,649,779 (2,035,093) 494,979 Change in other liabilities (388,508) (40,592) (84,666) Change in current Federal income taxes (1,472,129) 998,521 54,076 ------------ ------------ ------------ Net cash provided by operating activities $ 33,337,127 29,099,327 29,639,236 ------------ ------------ ------------
(continued) 40 41 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from investing activities: Bonds held to maturity: Matured $ 10,831,897 45,123,950 11,133,500 Purchased (19,694,034) (41,967,879) (25,834,928) Bonds available for sale: Sold 38,403,636 10,741,080 6,378,737 Matured 8,179,440 3,506,400 13,810,800 Purchased (48,506,215) (46,243,440) (25,838,064) Certificates of deposit matured 450,000 395,000 570,000 Certificates of deposit purchased (425,000) (445,000) (570,000) Property and equipment purchased (1,385,136) (836,114) (739,987) Net change in short-term investments (14,686,870) 4,418,610 (7,269,095) ------------ ------------ ------------ Net cash used for investing activities (26,832,282) (25,307,393) (28,359,037) ------------ ------------ ------------ Cash flows from financing activities: Payments on note payable (1,750,000) (1,750,000) (1,000,000) Cash dividends paid (1,129,024) (819,972) (740,428) Payment for fractional shares resulting from stock dividends -- (6,358) (5,215) Proceeds from exercise of common stock options 70,493 38,489 380,739 Treasury stock acquired (4,426,182) -- (230) ------------ ------------ ------------ Net cash used for financing activities (7,234,713) (2,537,841) (1,365,134) ------------ ------------ ------------ Net increase (decrease) in cash (729,868) 1,254,093 (84,935) Cash at beginning of year 1,774,608 520,515 605,450 ------------ ------------ ------------ Cash at end of year $ 1,044,740 1,774,608 520,515 ============ ============ ============
See accompanying notes to consolidated financial statements. 41 42 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (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. and GAINSCO Service Corp. (GSC). 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 certain specialty excess and surplus markets within the commercial auto, auto garage and general liability insurance lines. The Company is approved to write insurance in 49 states and the District of Columbia on a non-admitted basis and in 45 states on an admitted basis. The Company markets its lines of insurance through 203 non-affiliated general agents' offices. Approximately 73% of the Company's gross premiums written during 1996 resulted from risks located in California, Florida, Georgia, Illinois, Kentucky, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia. 42 43 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (c) Investments Bonds held to maturity are stated at amortized cost, bonds available for sale are stated at fair value. Short-term investments are stated at cost. The "specific identification" method is used to determine costs of investments sold. Since investments not available for sale are generally held until maturity or recovery of fair value, provisions for possible losses are recorded only when the values have experienced impairment considered "other than temporary". Proceeds from the sale of bond securities totalled $38,403,636, $10,741,080 and $6,378,737 in 1996, 1995 and 1994, respectively. The realized gains were $516,997, $108,024 and $134,641 in 1996, 1995 and 1994, respectively. The realized losses were $45,041 in 1996, and $0 for all other years presented. (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. These balances are disclosed on the face of the balance sheet. 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, 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 premiums are earned. Deferred ceding commission income is netted against deferred policy acquisition costs. The 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. 43 44 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The change in the resulting deferred asset or liability is charged (credited) to operations. Information relating to these net deferred amounts, as of and for the years ended December 31, 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994 ------------ ------------ ------------ Asset balance, beginning of period $ 12,114,681 9,830,543 8,508,597 ------------ ------------ ------------ Deferred commissions 21,932,779 21,394,072 19,345,305 Deferred marketing and underwriting expenses 5,854,088 5,506,882 4,953,694 Deferred ceding commission income (76,765) (71,227) (1,675,640) Amortization (27,190,845) (24,545,589) (21,301,413) ------------ ------------ ------------ Net change 519,257 2,284,138 1,321,946 ------------ ------------ ------------ Asset balance, end of period $ 12,633,938 12,114,681 9,830,543 ============ ============ ============
(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 -------------------------- 1996 1995 ----------- ----------- Land $ 865,383 865,383 Buildings 5,766,278 4,987,397 Furniture and equipment 2,935,259 2,665,766 Software 2,192,984 1,856,222 Accumulated depreciation and amortization (4,778,524) (3,812,976) ----------- ----------- $ 6,981,380 6,561,792 =========== ===========
There are no material capital leases 44 45 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (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 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) Treasury Stock The Company records treasury stock in accordance with the "cost method" described in Accounting Principles Board Opinon (APB) 6. The Company held 582,962 shares and 112,260 shares as treasury stock at December 31, 1996 and 1995, respectively, with a cost basis of $9.33 and $9.02 per share, respectively. (i) 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. (j) 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 ultimate cost of settlement. Changes in claim estimates resulting from the continuous review process and differences between estimates and ultimate payments are reflected in expense for the year in which the revision of these estimates first became known. 45 46 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 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 ------------------------------ 1996 1995 1994 -------- -------- -------- (Amounts in thousands) Unpaid claims and claim adjustment expenses, beginning of period $ 95,011 80,729 72,656 Less: Ceded unpaid claims and claim adjustment expenses, beginning of period 24,650 19,972 16,701 -------- -------- -------- Net unpaid claims and claim adjustment expenses, beginning of period 70,361 60,757 55,955 -------- -------- -------- Net claims and claim adjustment expenses incurred related to: Current period 53,037 48,064 37,571 Prior periods 5,342 401 3,618 -------- -------- -------- Total net claims and claim adjustment expenses incurred 58,379 48,465 41,189 -------- -------- -------- Net claim and claim adjustment expenses paid related to: Current period 17,178 14,131 12,297 Prior periods 32,584 26,953(1) 24,090 -------- -------- -------- Total net claim and claim adjustment expenses paid 49,762 41,084 36,387 -------- -------- -------- Commutation of reinsurance treaties -- (2,223)(1) -- -------- -------- -------- Net unpaid claims and claim adjustment expenses, end of period 78,978 70,361 60,757 Plus: Ceded unpaid claims and claim adjustment expenses, end of period 26,713 24,650(1) 19,972 -------- -------- -------- Unpaid claims and claim adjustment expenses, end of period $105,691 95,011 80,729 ======== ======== ========
(1) The Company commuted its 1993 and 1994 quota-share reinsurance treaties in 1995 and thereby reassumed all risks and the related unpaid claims and claim adjustment expenses of $2,223,000 (see note 4 to the consolidated financial statements). This was accounted for using the paid claim method, whereby unpaid claims and claim adjustment expenses were increased $2,223,000 and paid claims and claim adjustment expenses were decreased $2,223,000, thus preventing distortion of claims and claim adjustment expenses incurred. 46 47 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The development in net claims and claim adjustment expenses incurred from prior periods was largely related to commercial auto claims occurring in the 1995 and 1994 years. (k) Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income tax items are accounted for under the deferred method which provides for timing 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 $6,617,909, $5,413,486 and $5,500,787 during 1996, 1995 and 1994, respectively. (l) Earnings Per Share The weighted average number of shares outstanding for the years ending December 31, 1996, 1995 and 1994 were 21,441,389, 21,512,741 and 21,437,031, respectively. Primary earnings per share were $.74, $.81 and $.70 based on the weighted average number of shares outstanding and common stock equivalents (which consist of stock options), when dilutive, of 280,274, 309,549 and 278,490 for the years ending December 31, 1996, 1995, and 1994, respectively. The calculations were made after giving retroactive effect to the stock dividends granted to shareholders (note 6). (m) 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. (n) Accounting Pronouncements In October 1994, the FASB issued Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The Statement was effective for years ending after December 15, 1994 and did not have any impact on the financial statements. In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement was effective for years ending after December 15, 1995, and did not have any impact on the financial statements. During 1996, the FASB issued Statement 125, "Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Statement is effective for years 47 48 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 beginning after December 31, 1996, and will not have any impact on the financial statements. (2) INVESTMENTS The following schedule summarizes the components of net investment income:
Years ended December 31 ----------------------------------------- Investment income on: 1996 1995 1994 ----------- ----------- ----------- Fixed maturities $ 8,331,441 7,481,087 6,414,168 Short-term investments 1,055,481 870,210 513,771 ----------- ----------- ----------- 9,386,922 8,351,297 6,927,939 Investment expenses (226,404) (193,813) (60,246) ----------- ----------- ----------- Net investment income $ 9,160,518 8,157,484 6,867,693 =========== =========== ===========
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: US Government Securities-1996 7,731 41 (24) $7,748 US Government Securities-1995 9,606 157 (30) 9,733 Tax-exempt state & municipal bonds-1996 97,199 875 (97) 97,977 Tax-exempt state & municipal bonds-1995 87,696 1,071 (78) 88,689 Bonds available for sale: Tax-exempt state & municipal bonds-1996 76,880 896 (132) 77,644 Tax-exempt state & municipal bonds-1995 77,478 1,658 (6) 79,130 Certificates of Deposit - 1996 595 - - 595 Certificates of Deposit - 1995 620 - - 620 Total Fixed Maturities-1996 $ 182,405 1,812 (253) 183,964 Total Fixed Maturities-1995 175,400 2,886 (114) 178,172
48 49 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The amortized cost and estimated fair value of debt securities at December 31, 1996 and 1995, by maturity, are shown below.
1996 1995 ------------------- ------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value -------- -------- -------- -------- (Amounts in thousands) Due in one year or less $ 18,754 19,061 17,781 17,872 Due after one year but within five years 135,052 136,185 133,947 135,898 Due after five years but within ten years 23,059 23,165 16,572 17,280 Due after ten years but within twenty years 5,540 5,553 6,553 6,578 Beyond twenty years -- -- 547 544 -------- -------- -------- -------- $182,405 183,964 175,400 178,172 ======== ======== ======== ========
Investments of $1,100,000 were maintained in escrow at December 31, 1996 and 1995 on behalf of certain insurance companies under the terms of their reinsurance agreements with General Agents. In addition, investments of $12,615,000 and $11,860,000, at December 31, 1996 and 1995, respectively, were on deposit with various regulatory bodies as required by law. The FASB has issued Statement 115 "Accounting for Certain Investments in Debt and Equity Securities" (Statement 115). Under this statement, the Company carries certain debt securities classified as "available for sale" at fair value. The unrealized gain or loss, net of tax, is presented as a separate component of shareholders' equity. During 1995, as a result of the Statement 115 "Implementation Guide," the Company transferred certain fixed maturities from the held to maturity portfolio to the available for sale portfolio. The amortized cost of securities transferred was $18,519,856 and the unrealized gain on the date of transfer was $93,803, net of taxes. There were no transfers during 1996. (3) NOTE PAYABLE TO BANK The Company made principal payments of $1,750,000 in May, 1996 and June, 1995. The 1996 payment represented the retirement of the note. Interest was paid monthly at a rate that approximated the prime lending rate. The Company recorded interest expense (which approximates interest paid) of $61,335, $221,934 and $273,552 in 1996, 1995 and 1994, 49 50 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 respectively. The note payable is stated at book value which approximates fair value. (4) REINSURANCE In 1996, 1995 and 1994, General Agents and MGAI (the Insurers) wrote casualty policy limits of $1,000,000. For policies with an effective date occurring in 1994, the Insurers have excess reinsurance for 100% of casualty claims exceeding $300,000 up to the $1,000,000 policy limits. For policies with an effective date occurring in 1995 or after, the Insurers have excess reinsurance for 100% of casualty claims exceeding $500,000 up to the $1,000,000 policy limits. The Company's excess reinsurance is provided in varying amounts by three reinsurers rated "A- (Excellent)" or better by A. M. Best Company. In 1995, the Insurers terminated the quota-share reinsurance treaties that were in effect for 1994 and 1993. Under the terms of the termination agreement, the reinsurer returned assets to the Insurers equal to the remaining unpaid claims and claim adjustment expenses of $2,223,000. The Insurers reassumed all risks and the reinsurer was relieved of any further liability with respect to risks previously covered by the contract. During 1996 and 1995, GCM entered into fronting arrangements with three non-affiliated insurance companies. GCM retains no liability as the business written under these agreements is 100% ceded. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by A. M. Best Company, 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, 1996 and 1995 total $20,174,000 and $3,527,000, respectively. The amounts deducted in the consolidated financial statements for reinsurance ceded as of and for the years ended December 31, 1996, 1995, and 1994 respectively, are set forth in the 50 51 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 following table. Premiums and claims ceded to the commercial automobile plans of Arkansas, California, Louisiana, Mississippi and Pennsylvania are designated as "plan servicing".
1996 1995 1994 ------------ ------------ ------------ Premiums earned $ 1,929,455 3,809,853 8,223,984 Premiums earned - plan servicing $ 4,760,785 5,307,038 5,101,098 Premiums earned - fronting arrangements $ 16,081,808 721,752 -- Claims and claim adjustment expenses $ (206,429) 13,188,258 6,425,030 Claims and claim adjustment expenses - plan servicing $ 6,886,339 5,055,997 5,728,201 Claim and claim adjustment expenses - fronting arrangements $ 11,317,277 418,573 --
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:
1996 1995 1994 ---- ---- ---- Unearned premiums $ 2,149,286 2,836,492 2,517,709 Unearned premiums - fronting arrangements $13,625,619 2,544,837 -- Unpaid claims and claim adjustment expenses $11,012,699 9,842,815 9,829,640 Unpaid claims and claim adjustment expenses - fronting arrangements $ 4,321,085 266,720 --
51 52 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 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. The Insurers, for years prior to 1993, utilized reinsurance arrangements with various non-affiliated admitted insurance companies, whereby the Insurers underwrote the coverage and assumed the policies 100% from the companies. During 1995, 1994 and 1993, the business generated from these arrangements was in a run-off position. 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 insured through such arrangements and assumed by the Insurers. For each of the years ended December 31, 1996, 1995, and 1994, the balance in such escrow accounts totalled $1,100,000. For 1996, 1995 and 1994, the premiums earned by assumption were $0, $(2,496) and $0, respectively and the assumed unpaid claims and claim adjustment expenses were $1,845,000, $4,427,000 and $6,804,000, respectively. The Company has not and does not intend to utilize retrospectively rated reinsurance contracts with indefinite renewal terms. This form of reinsurance is commonly known as a "funded cover". Under a funded cover reinsurance arrangement, an insurance company essentially deposits money with a reinsurer to help cover future losses and records the "deposit" as an expense instead of as an asset; or, the insurance company can borrow from a reinsurer recording the "loan" as income instead of as a liability with the future "loan" payments recorded as expense when the payments are made. (5) 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:
1996 1995 1994 ----------- ----------- ----------- Income tax expense at 35% $ 7,384,371 8,392,950 7,128,617 Tax-exempt interest income (2,308,364) (2,039,995) (1,690,901) Stock option exercise (70,714) -- (92,373) Building rehabilitation tax credit (77,102) -- (30,614) Other, net 150,444 (951) (116,052) ----------- ----------- ----------- Income tax expense $ 5,078,635 6,352,004 5,198,677 =========== =========== ===========
52 53 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The FASB issued Statement 109 "Accounting for Income Taxes" which changed the Company's method of accounting for income taxes. Under APB 11, the primary objective was to match the tax expense with pre-tax operating income on the statement of operations. Under Statement 109, 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. In the Company's opinion, there will be adequate earnings in future years to recover its deferred tax asset and as such, the Company has not established a valuation allowance. 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 ----------------------------- 1996 1995 ----------- ---------- Deferred tax assets: Discounting of unpaid claims and claim adjustment expenses $ 4,510,836 4,307,059 Discounting of unearned premiums 3,418,599 3,316,746 Accruals not currently deductible 41,640 124,667 Deferred service fee income 207,584 171,652 Other 44,557 48,419 ---------- --------- Total deferred tax assets 8,223,216 7,968,543 --------- --------- Deferred tax liabilities: Deferred policy acquisition costs and deferred ceding commission income 4,452,344 4,259,000 Unrealized gains on investments 267,440 578,091 Depreciation and amortization 504,547 495,840 Other 42,375 56,898 ---------- --------- Total deferred tax liabilities 5,266,706 5,389,829 --------- --------- Net deferred tax asset $ 2,956,510 2,578,714 ========= =========
(6) SHAREHOLDERS' EQUITY The Company has 250,000,000 shares of authorized $.10 par value common stock. Of the authorized shares, 21,670,369 and 21,637,481 were issued as of December 31, 1996 and 1995, respectively and 21,087,407 and 21,525,221 were outstanding as of December 31, 1996 and 1995, respectively. The Company also has 10,000,000 shares of preferred stock with $100 par value authorized of which no shares have been issued. The Board of Directors can designate the relative rights and preferences of the authorized preferred stock to be issued. 53 54 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 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. In November of 1995, the Board of Directors increased the cash dividend to $.0125 per share and announced the discontinuance of the semi-annual stock dividends. In August of 1996, the Board of Directors increased the cash dividend to $.015 per share. The Board of Directors granted 5% stock dividends to shareholders of record on March 31, 1995, September 30, 1995, March 31, 1994 and September 30, 1994. The market value of the stock dividends was charged to retained earnings, common stock was credited for the par value, the excess of market value over par value was credited to additional paid-in capital and cash was paid in lieu of issuing fractional shares. The earnings per share computation and the number of stock options and their exercise price have been retroactively adjusted for the effect of the stock dividends. The amount of consolidated statutory shareholder's equity or policyholders' surplus of General Agents and MGAI was $57,011,890, $47,880,301 and $40,100,250 at December 31, 1996, 1995 and 1994, respectively, and the amount of consolidated statutory net income was $15,829,108, $15,167,151 and $13,909,896 for the years ended 1996, 1995, and 1994, respectively. The amount of policyholders' surplus of GCM was $2,000,001, $2,260,001 and $2,250,001 at December 31, 1996, 1995 and 1994, respectively, and the amount of statutory net income was $115,563, $369,356 and $644,257 for the years ended December 31, 1996, 1995 and 1994, 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. At December 31, 1996, General Agents, the Oklahoma subsidiary, had net income of $12,509,842 and policyholders' surplus of $57,011,890 and MGAI, the Texas subsidiary, had net income of $4,869,266 and policyholders' surplus of $20,112,729. 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 54 55 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 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 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. (7) BENEFIT PLANS At December 31, 1996, the Company had two stock option plans, the 1990 Stock Option Plan (90 Plan) and the 1995 Stock Option Plan (95 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 approved by the shareholders on May 10, 1996, reserved 1,071,000 shares 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 exercise price of each 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, 1996 and 1995, and changes during the years ended December 31, 1996 and 1995 is presented below:
1996 1995 --------------------------- ---------------------------- Weighted Weighted Underlying Average Underlying Average Options Shares Exercise Price Shares Exercise Price ------- ---------- -------------- ---------- --------------- Outstanding, beginning of period 401,277 $ 2.60 388,095 $ 2.99 Granted 984,397 $ 10.57 -- Adjustment for stock dividends -- 39,311 Exercised (32,888) $ 2.14 (16,316) $ 2.36 Forfeited -- (9,813) $ 8.16 --------- ------- Outstanding, end of period 1,352,786 $ 8.38 401,277 $ 2.60 ========= ======= Options exercisable at end of period 565,265 401,277 Weighted-average fair value of options granted during the period $ 4.43 --
55 56 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The following table summarizes information for the stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ---------------------------------------------------------------- --------------------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - - ------------------ ----------------- ------------------------ ----------------- ----------------- ------------------- $ 2 to 9 368,389 3.75 years $ 2.52 368,389 $ 2.52 $ 9 to 11 984,397 9.47 years $ 10.57 196,876 $ 10.57 ---------- ------- $ 2 to 11 1,352,786 7.91 years $ 8.38 565,265 $ 5.40 ========== =======
The Company applies APB 25 and related Intepretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. No options were granted during 1995. Had compensation cost been determined consistent with Statement 123 for the options granted during 1996, the Company's net income and earnings per share would have been the pro forma amounts indicated below:
Year ended December 31, 1996 Net income As reported $ 16,019,567 Pro forma $ 15,504,676 Primary earnings per share As reported $ 0.74 Pro forma $ 0.71 Fully diluted earnings per share As reported $ 0.74 Pro forma $ 0.71
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model using an expected dividend yield of 1.5%, an expected volatility of 34%, a risk-free interest rate of 6.05% and an expected life of 7.5 years. 56 57 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 The Company has a profit sharing and trust plan for the benefit of its eligible employees. Contributions are made in such amounts as the Company elects. The annual contributions amounted to $578,107, $605,935, and $536,124 for 1996, 1995 and 1994, respectively. The Company has an incentive compensation plan in which certain key officers of the Company participate and earn bonuses. The fund from which bonuses are paid is comprised of net income for the current year that is in excess of ten percent (10%) of beginning shareholders' equity for the current year, with the fund not to exceed ten percent (10%) of net income for the current year. (8) CONTINGENCIES 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, 1996 and 1995 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. 57 58 (9) QUARTERLY FINANCIAL DATA (UNAUDITED) The following table contains selected unaudited consolidated financial data for each quarter (in thousands, except per share data):
1996 Quarter 1995 Quarter ------------------------------------- ------------------------------------ Fourth Third Second First Fourth Third Second First ------- ------ ------ ------ ------ ------ ------ ------ Gross premiums written $29,107 27,065 29,240 24,588 30,013 27,772 25,762 24,525 Total revenues 30,317 30,067 29,460 28,960 29,237 27,736 25,920 24,810 Total expenses 25,192 26,000 23,331 23,184 21,134 22,251 20,766 19,573 Net income 3,933 3,298 4,514 4,275 5,772 4,083 3,878 3,893 Net income per $ .18 .15 .21 .20 .26 .19 .18 .18 share (a) Common share prices (a) (b) High 10 3/4 10 3/4 11 5/8 11 3/4 11 7/8 9 1/2 10 1/2 10 Low 8 3/4 9 3/8 9 7/8 9 3/4 8 5/16 8 7/16 9 5/16 7
(a) Adjusted for stock dividends and stock splits effected as stock dividends. (b) As reported by the American Stock Exchange from January 1, 1995 to July 30, 1996. As reported by the New York Stock Exchange thereafter. 58 59 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION The Board of Directors and Shareholders GAINSCO, INC: Under date of February 24, 1997, we reported on the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. 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 Peat Marwick LLP Dallas, Texas February 24, 1997 59 60 Schedule I GAINSCO, INC. AND SUBSIDIARIES Summary of Investments - Other Than Investments in Related Parties (Amounts in thousands)
As of December 31 -------------------------------------------------------------------- 1996 1995 1994 -------------------- ------------------ -------------------- Amortized Fair Amortized Fair Amortized Fair Type of Investment Cost Value Cost Value Cost Value - - ------------------ --------- -------- --------- -------- --------- -------- Fixed Maturities: Bonds held to maturity: U.S. government securities $ 7,731 7,748 9,606 9,733 10,555 10,213 Tax exempt state and municipal bonds 97,199 97,977 87,696 88,689 113,088 111,687 Bonds available for sale: Tax exempt state and municipal bonds 76,880 77,644 77,478 79,130 25,779 25,693 Certificates of deposit 595 595 620 620 570 570 -------- -------- -------- -------- -------- -------- Total fixed maturities 182,405 183,964 175,400 178,172 149,992 148,163 -------- -------- -------- -------- -------- -------- Short-term investments 20,662 20,662 5,975 5,975 10,394 10,394 -------- -------- -------- -------- -------- -------- Total investments $203,067 204,626 181,375 184,147 160,386 158,557 ======== ======== ======== ======== ======== ========
See accompanying independent auditors' report on supplementary information. 60 61 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Balance Sheets December 31, 1996 and 1995
Assets 1996 1995 ------ ------------ -------- Investments in subsidiaries $ 102,217,935 95,951,627 Cash 8,243 776 Net receivables from subsidiaries 7,289,111 3,695,959 Other assets 159,492 63,500 ------------- ----------- Total assets $ 109,674,781 99,711,862 ============= =========== Liabilities and Shareholders' Equity Liabilities: Accounts payable $ 5,887 -- Dividends payable 316,312 269,066 Other liabilities -- 900 ------------- ----------- Total liabilities 322,199 269,966 ------------- ----------- Shareholders' equity: Preferred stock ($100 par value, 10,000,000 shares authorized, none issued) -- -- Common stock ($.10 par value, 250,000,000 shares authorized, 21,670,369 issued at December 31, 1996 and 21,637,481 issued at December 31, 1995) 2,167,037 2,163,748 Additional paid-in capital 87,610,379 87,543,175 Net unrealized gains on fixed maturities 496,675 1,073,597 Retained earnings 24,517,265 9,673,968 Treasury stock, at cost (582,962 shares in 1996, 112,260 shares in 1995) (5,438,774) (1,012,592) ------------- ----------- Total shareholders' equity 109,352,582 99,441,896 ------------- ----------- Total liabilities and shareholders' equity $ 109,674,781 99,711,862 ============= ===========
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 61 62 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ----------- Revenues - dividend income $ 9,900,000 3,115,000 800,000 Expenses - operating expenses (1,191,222) (1,092,470) (1,024,949) ------------ ----------- ----------- Operating income before Federal income tax benefit 8,708,778 2,022,530 (224,949) Federal income tax benefit (467,559) (366,716) (429,324) ------------ ----------- ----------- Income before equity in undistributed income of subsidiaries 9,176,337 2,389,246 204,375 Equity in undistributed income of subsidiaries 6,843,230 15,238,609 14,964,425 ------------ ----------- ----------- Net income $ 16,019,567 17,627,855 15,168,800 ============ =========== =========== Net income per share $ .74 .81 .70 ============ =========== ===========
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 62 63 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Common Stock: Balance at beginning of year $ 2,163,748 1,961,137 1,765,082 Issue of shares as stock dividends (2,009,797 in 1995 and 1,814,941 in 1994) -- 200,980 181,495 Exercise of options to purchase shares (32,888 in 1996, 16,316 in 1995 and 145,604 in 1994) 3,289 1,631 14,560 ----------- ----------- ---------- Balance at end of year 2,167,037 2,163,748 1,961,137 ----------- ----------- ---------- Additional paid-in capital: Balance at beginning of year 87,543,175 69,671,214 53,495,511 Issue of shares as stock dividends (2,009,797 in 1995 and 1,814,941 in 1994) -- 17,835,103 15,809,524 Exercise of options to purchase shares (32,888 in 1996, 16,316 in 1995 and 145,604 in 1994) 67,204 36,858 366,179 ----------- ----------- ---------- Balance at end of year $87,610,379 $87,543,175 69,671,214 ----------- ----------- ----------
(continued) 63 64 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------- ----------- ----------- Net unrealized gains (losses) on fixed maturities: Balance at beginning of year $ 1,073,597 (55,686) -- Cumulative effect of change in accounting principle -- -- 186,303 Change during year (576,922) 1,129,283 (241,989) ------------- ----------- ----------- Balance at end of year 496,675 1,073,597 (55,686) ------------- ----------- ----------- Retained earnings: Balance at beginning of year 9,673,968 10,982,494 12,569,862 Net income for year 16,019,567 17,627,855 15,168,800 Cash dividends (1,176,270) (893,943) (759,938) Stock dividends -- (18,042,438) (15,996,230) ------------- ----------- ----------- Balance at end of year 24,517,265 9,673,968 10,982,494 ------------- ----------- ----------- Treasury stock: Balance at beginning of year (1,012,592) (1,012,592) (1,012,362) Change during year (4,426,182) -- (230) ------------- ----------- ----------- Balance at end of year (5,438,774) (1,012,592) (1,012,592) ------------- ----------- ----------- Total shareholders' equity at end of year $ 109,352,582 99,441,896 81,546,567 ============= =========== ===========
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 64 65 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ---------- ---------- Cash flows from operating activities: Net income $ 16,019,567 17,627,855 15,168,800 Adjustments to reconcile net income to cash provided by operating activities: Change in investments in subsidiaries -- -- (100,000) Change in net receivable from subsidiaries (3,593,152) (1,575,085) 241,178 Change in other assets (95,992) (6,750) (4,473) Change in accounts payable 5,887 (18,798) 18,798 Change in other liabilities (900) -- 900 Equity in income of subsidiaries (6,843,230) (15,238,609) (14,964,425) ------------ ----------- ----------- Net cash provided by operating activities 5,492,180 788,613 360,778 ------------ ----------- ----------- Cash flows from investing activities: Cash contribution to subsidiaries -- -- (900) ------------ ----------- ----------- Net cash used for investing activities $ -- -- (900) ------------ ----------- -----------
(continued) 65 66 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ----------- -------- -------- Cash flows from financing activities: Cash dividends paid $(1,129,024) (819,972) (740,428) Payments for fractional shares resulting from stock dividends -- (6,358) (5,215) Proceeds from exercise of common stock options 70,493 38,489 380,739 Treasury stock acquired (4,426,182) -- (230) ----------- -------- -------- Net cash used for financing activities (5,484,713) (787,841) (365,134) ----------- -------- -------- Net increase (decrease) in cash 7,467 772 (5,256) Cash at beginning of year 776 4 5,260 ----------- -------- -------- Cash at end of year $ 8,243 776 4 =========== ======== ========
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 66 67 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Notes to Condensed Financial Statements December 31, 1996, 1995 and 1994 (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, 1996, 1995 and 1994 included elsewhere in this Annual Report. (2) RELATED PARTIES During 1994, the Company made a cash capital contribution to Risk Retention Administrators, Inc. in the amount of $900 and a capital contribution to General Agents Premium Finance Company in the amount of $100,000.
Name of Subsidiary 1996 1995 ------------------ ------------ -------- Agents Processing Systems, Inc. $ 439,711 551,211 GAINSCO Service Corp. 5,677,163 2,688,908 General Agents Insurance Company of America, Inc. 1,172,237 455,840 ---------- --------- Net receivable from subsidiaries $7,289,111 3,695,959 ========== =========
See accompanying independent auditors' report on supplementary information. 67 68 Schedule III GAINSCO, INC. AND SUBSIDIARIES Supplementary Insurance Information Years ended December, 1996, 1995 and 1994 (Amounts in thousands)
Other Amortization Deferred Reserves policy of deferred Other policy for claims claims and Net Net Claims 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, 1996: Property and casualty insurance $12,634 105,691 65,255 6,219 106,793 9,161 58,379 (27,191) 39,847 108,251 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total $12,634 105,691 65,255 6,219 106,793 9,161 58,379 (27,191) 39,847 108,251 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1995 Property and casualty insurance $12,115 95,011 53,525 2,569 97,255 8,157 48,465 (24,546) 37,542 106,104 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total $12,115 95,011 53,525 2,569 97,255 8,157 48,465 (24,546) 37,542 106,104 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1994 Property and casualty insurance $ 9,831 80,729 44,645 4,604 84,395 6,868 41,189 (21,301) 33,219 89,454 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total $ 9,831 80,729 44,645 4,604 84,395 6,868 41,189 (21,301) 33,219 89,454 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Net of the amortization of deferred ceding commission income. See accompanying independent auditors' report on supplementary information. 68 69 Schedule IV GAINSCO, INC. AND SUBSIDIARIES Reinsurance Years ended December 31, 1996, 1995 and 1994 (Amounts in thousands, except percentages)
Percentage Ceded to Assumed from of amount Direct other other Net assumed amount companies companies amount to net -------- -------- -------- -------- -------- Year ended December 31, 1996: Premiums earned: Property and casualty $125,112 -- -- 125,112 Reinsurance -- (18,319) -- (18,319) -------- -------- -------- -------- -------- Total $125,112 (18,319) -- 106,793 - % ======== ======== ======== ======== ======== Year ended December 31, 1995: Premiums earned: Property and casualty $102,779 -- -- 102,779 Reinsurance -- (5,522) (2) (5,524) -------- -------- -------- -------- -------- Total $102,779 (5,522) (2) 97,255 - % ======== ======== ======== ======== ======== Year ended December 31, 1994: Premiums earned: Property and casualty $ 92,619 -- -- 92,619 Reinsurance -- (8,224) -- (8,224) -------- -------- -------- -------- -------- Total $ 92,619 (8,224) -- 84,395 - % ======== ======== ======== ======== ========
See accompanying independent auditors' report on supplementary information. 69 70 Schedule VI GAINSCO, INC. AND SUBSIDIARIES Supplemental Information Years ended December 31, 1996, 1995 and 1994 (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 Net with acquisition adjustment in Unearned earned registrant costs expenses Column C premiums premiums ---------- ------- ---------- -------- -------- -------- Year ended December 31, 1996: Property and casualty insurance $ - 12,634 105,691 - 65,255 106,793 ------- ------ ------- --- ------ ------- Total $ - 12,634 105,691 - 65,255 106,793 ======= ====== ======= === ====== ======= Year ended December 31, 1995 Property and casualty insurance $ - 12,115 95,011 - 53,525 97,255 -- ------ ------ --- ------ ------ Total $ - 12,115 95,011 - 53,525 97,255 == ====== ====== === ====== ====== Year ended December 31, 1994 Property and casualty insurance $ - 9,831 80,729 - 44,645 84,395 ------- ------ ------ --- ------ ------ Total $ - 9,831 80,729 - 44,645 84,395 ======= ====== ====== === ====== ====== Column H Column I Column J Column K Column L -------- -------- -------- -------- -------- Claim and claim adjustment expenses Amortization Paid incurred of deferred claims Net related to: policy and claim Net investment Current Prior acquisition adjustment premiums income year years costs (1) expenses written -------- ---- ----- ----------- ---------- -------- Year ended December 31, 1996: Property and casualty insurance 9,161 53,037 5,342 (27,191) 49,762 108,251 ----- ------ ----- ------ ------ ------- Total 9,161 53,037 5,342 (27,191) 49,762 108,251 ===== ====== ===== ====== ====== ======= Year ended December 31, 1995 Property and casualty insurance 8,157 48,064 401 (24,546) 38,861 106,104 ----- ------ ---- ------ ------ ------- Total 8,157 48,064 401 (24,546) 38,861 106,104 ===== ====== ==== ====== ====== ======= Year ended December 31, 1994 Property and casualty insurance 6,868 37,571 3,618 (21,301) 36,387 89,454 ----- ------ ----- ------ ------ ------- Total 6,868 37,571 3,618 (21,301) 36,387 89,454 ===== ====== ===== ====== ====== =======
(1) Net of the amortization of deferred ceding commission income. See accompanying independent auditors' report on supplementary information. 70 71 EXHIBIT INDEX
Sequentially Exhibit No. Description No. Page - - ----------- ----------- -------- 3.1 Restated Articles of Incorporation of Registrant (Exhibit 3.1)(1) 3.2 Articles of Amendment to the Articles of Incorporation dated June 9, 1988 (Exhibit 3.2)(2) 3.3 Restated Bylaws of Registrant (Exhibit 3.2)(1) 3.4 Amendment to the Bylaws dated June 10, 1988 (Exhibit 3.4)(2) 3.5 Sections 2.06 and 2.07 of the Bylaws as Amended on May 25, 1993 (Exhibit 3.5)(7) 3.5.1 Section 3.02 of the Bylaws as Amended on February 17, 1997 (10) 3.6 Articles of Amendment to Articles of Incorporation effective August 13, 1993 (Exhibit 3.6)(7) 4.2 Rights Agreement, dated as of March 3, 1988, between the Registrant and Team Bank/Fort Worth, N.A. (incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 1988) (Exhibit 4.2)(3) 4.3 Amendment No. 1 dated as of March 5, 1990 to Rights Agreement dated as of March 3, 1988 between GAINSCO, INC. and Team Bank as Rights Agent (Exhibit 4.2)(5) 4.4 Amendment No. 2 dated as of May 25, 1993 to Rights Agreement between GAINSCO, INC. and Society National Bank (successor to Team Bank (formerly Texas American Bank/Fort Worth, N.A.)), as Rights Agent (Exhibit 4.4)(7) 4.6 Revised Form of Common Stock Certificate (10) 10.2 (Restated) Incentive Compensation Plan of the Registrant (Exhibit 10.2)(2) 10.14 Profit Sharing Plan and Trust of GAINSCO, INC. effective January 1, 1985, as amended, and Adoption Agreement (Exhibit 10.14)(4) 10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4) 10.17 Loan Agreement and Amendment No. 1 to Loan Agreement between GAINSCO Service Corp., GAINSCO, INC. and Bank One Texas, N.A. (Exhibit 10.17)(6)
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Sequentially Exhibit No. Description No. Page - - ----------- ----------- -------- 10.18 Promissory Note made by GAINSCO Service Corp. payable to Bank One, Texas, N.A. (Exhibit 10.18)(6) 10.19 Guaranty Agreement executed by GAINSCO, INC., in favor of Bank One Texas, N.A. (Exhibit 10.19)(6) 10.20 Negative Pledge Agreement executed by GAINSCO, INC. (Exhibit 10.20)(6) 10.21 Negative Pledge Agreement executed by GAINSCO Service Corp. (Exhibit 10.21)(6) 10.23 Surplus Debenture issued by GAINSCO County Mutual Insurance Company. (Exhibit 10.23)(6) 10.24 Management Contract between GAINSCO County Mutual Insurance Company and GAINSCO Service Corp. (Exhibit 10.24)(6) 10.25 Certificate of Authority and accompanying Commissioner's Order granting Certificate of Authority, allowing for charter amendments and extension of charter (Exhibit 10.25)(6) 10.27 Amendment to Surplus Debenture issued by GAINSCO County Mutual Insurance Company (Exhibit 10.27)(7) 10.28 Agreement dated August 26, 1994 appointing Continental Stock Transfer & Trust Company transfer agent and registrar (Exhibit 10.28)(8). 10.29 Amendment No. 3 to Rights Agreement and appointment of Continental Stock Transfer & Trust Company as Successor Rights Agent, made September 30, 1994 (Exhibit 10.29)(8). 10.30 Second Amendment to Loan Agreement among GAINSCO Service Corp., GAINSCO, INC. and Bank One Texas, N.A. made on July 26, 1990 (Exhibit 10.30)(8) 10.31 1995 Stock Option Plan of the Registrant (Exhibit 10.31)(9) 10.32 Clarification to the GAINSCO, INC. Executive Incentive Compensation Plan (Exhibit 10.32)(9) 10.33 Loan Agreement between GAINSCO, INC. and Bank One Texas N.A. (10) 10.34 Promissory note made by GAINSCO, INC. payable to Bank One Texas N.A. (10) 10.35 Negative Pledge Agreement executed by GAINSCO, INC. (10)
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Sequentially Exhibit No. Description No. Page - - ----------- ----------- -------- 11 (Not required to be filed as an Exhibit. See footnote (1)(l) on page 47 of this 10-K Report for information called for by number 11 of the Exhibit Table to Item 601 of S-K) 22.2 Subsidiaries of Registrant (10) 24.2 Consent of KPMG Peat Marwick to incorporation by reference (10) 25.1 Powers of Attorney (10) 27 Financial Data Schedule 28.8 Schedule P from the 1996 Annual Statement of General Agents Insurance Company of America, Inc. (11) 28.9 Schedule P from the 1996 Annual Statement of MGA Insurance Company, Inc. (11) 28.10 Schedule P from the 1996 Annual Statement of GAINSCO County Mutual Insurance Company (11) (1) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration Statement No. 33-7846 on Form S-1, and amendments thereto, filed by the Company with the Securities and Exchange Commission and effective November 6, 1986. (2) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration 33-25226 on Form S-1, and amendments thereto, filed by the Company with the Securities and Exchange Commission and effective November 14, 1988. (3) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (4) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (5) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (6) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (7) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
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Sequentially Exhibit No. Description No. Page - - ----------- ----------- -------- (8) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (9) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (10) Filed herewith. (11) Filed under Form SE.
74
EX-3.5.1 2 SECTION 3.02 OF THE BYLAWS-AMENDED 5/25/93 1 EXHIBIT 3.5.1 February 17, 1997 AMENDMENT TO THE BYLAWS OF GAINSCO, INC. The following amendment to Section 3.02 of the Bylaws of GAINSCO INC. was adopted by the Board of Directors on February 17, 1997: "3.02 Number: Qualifications: Election: and Term. The board of directors shall consist of up to nine (9) directors, none of whom 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." EX-4.6 3 REVISED FORM OF COMMON STOCK CERTIFICATE 1 EXHIBIT 4.6 45342 INCORPORATED UNDER THE LAWS COMMON STOCK OF THE STATE OF TEXAS TEN CENT ($.10) PAR VALUE NUMBER SHARES NYSE SYMBOL: GNA THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 363127 10 1 NEW YORK, NEW YORK AND JERSEY CITY, NEW JERSEY SEE REVERSE FOR CERTAIN DEFINITIONS AND RESTRICTIONS GAINSCO, INC. This Certifies that is the owner of SHARES OF FULLY PAID AND NON-ASSESSABLE COMMON STOCK OF Gainsco, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. [GAINSCO, INC. LOGO] [CORPORATE SEAL] [ILLEGIBLE] Dated: 10-7-96 PRESIDENT Countersigned and Registered: CONTINENTAL STOCK TRANSFER & TRUST COMPANY Transfer Agent and Registrar, By [ILLEGIBLE] SECRETARY Authorized Signature 2 [GAINSCO, INC. LOGO] GAINSCO, INC. THE ARTICLES OF INCORPORATION OF THE CORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS SET FORTH: (A) THE AGGREGATE NUMBER OF SHARES AND THE PAR VALUE OF EACH CLASS OF CAPITAL SHARES THE CORPORATION IS AUTHORIZED TO ISSUE, INCLUDING ONE OR MORE SERIES OF PREFERRED STOCK, AND (B) A STATEMENT OF THE AUTHORITY VESTED IN THE BOARD OF DIRECTORS TO ESTABLISH SERIES AND TO FIX AND DETERMINE THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN ANY SUCH SERIES OF THE PREFERRED STOCK SO ESTABLISHED. THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON WRITTEN REQUEST TO THE CORPORATION AT ITS REGISTERED OFFICE. THE PRE-EMPTIVE RIGHT OF SHAREHOLDERS TO ACQUIRE ANY SHARES OF THE CORPORATION HAS BEEN DENIED BY A STATEMENT IN THE ARTICLES OF INCORPORATION OF THE CORPORATION WHICH ARE ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF TEXAS. THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. This Certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between the Corporation and Continental Stock Transfer & Trust Company dated as of March 8, 1988, as amended (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this Certificate. The Corporation will mail to the holder of this Certificate a copy of the Rights Agreement without charge promptly following receipt of a written request therefor. Under certain circumstances as set forth in the Rights Agreement, Rights beneficially owned by acquiring Persons (as defined in the Rights Agreement) and any subsequent holder of such Rights may be suspended. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--__________Custodian___________ (Cust) (Minor) under Uniform Gifts to Minors Act___________________________ (State) Additional abbreviations may also be used though not in the above list. For Value Received ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - - -------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Shares - - -------------------------------------------------------------------------- of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated ____________, 19__. NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. X ------------------------------------------------------------------------------- (SIGNATURE) X ------------------------------------------------------------------------------- (SIGNATURE) - - -------------------------------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN "ELIGIBLE GUARANTOR INSTITUTION" AS DEFINED IN RULE 17Ad-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. - - -------------------------------------------------------------------------------- SIGNATURE(S) GUARANTEED BY: - - -------------------------------------------------------------------------------- EX-10.33 4 LOAN AGREEMENT BETWEEN GAINSCO & BANK ONE TEXAS 1 EXHIBIT 10.33 LOAN AGREEMENT This Loan Agreement is entered into effective this 9 day of Sept, 1996, between GAINSCO, INC., a Texas corporation, with its principal offices at 500 Commerce Street, Fort Worth, Texas 76102 ("Borrower"); and BANK ONE, TEXAS, NATIONAL ASSOCIATION, a national banking association with offices at 500 Throckmorton Street, Fort Worth, Texas 76102 ("Lender"). In consideration of the mutual covenants and agreements herein contained and of the loan described below, Borrower and Lender agree as follows: ARTICLE 1 GENERAL TERMS Section 1.1 Terms Defined Above. As used in this Agreement, the terms "Borrower" and "Lender" have the meanings indicated above. Section 1.2 Certain Definitions. As used in this Agreement, the following terms have the meanings assigned below, unless the context otherwise requires: "Agreement" means this Loan Agreement, as the same may from time to time be amended or supplemented. "Base Rate" means the variable rate of interest per annum established by Lender from time to time as its base rate, whether or not charged. Such rate is established by Lender as a general reference rate of interest, taking into account such factors as Lender may deem appropriate, it being understood that many of Lender's commercial or other loans are priced in relation to such rate, that such rate is not necessarily the lowest or best rate actually charged to any customer and that Lender may make various commercial or other loans at rates of interest having no relationship to such rate. In the event there exists any dispute or uncertainty with respect to the interest rate constituting the Base Rate, the rate certified in writing by the President, Cashier, any Vice President, or any Assistant Cashier of Lender as constituting the Base Rate shall be conclusive evidence of such fact. "Borrowing Request" means a request for the Loan to be made pursuant to Section 2.1 hereof. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banks are authorized or required to be closed under the laws of the State of Texas. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" means the occurrence of any of the events specified in Section 7.1 hereof, provided that any requirement for notice or lapse of time or any other condition precedent has been satisfied. Loan Agreement - Page 1 2 "Excepted Liens" means: (i) liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action; (ii) liens in connection with workers compensation, unemployment insurance or other social security, old age pension or public liability obligations; (iii) legal or equitable encumbrances deemed to exist by reason of negative pledge covenants and other covenants or undertakings of like nature; (iv) legal or equitable encumbrances deemed to exist by reason of the existence of any litigation or other legal proceeding or arising out of a judgment or award with respect to which an appeal is being prosecuted; (v) vendor's, carrier's, warehouseman's, repairman's, mechanic's, workman's, materialman's, construction or other like liens arising by operation of law in the ordinary course of business or incident to the construction or improvement of any Properties in respect of obligations which are not yet due or which are being contested in good faith by appropriate proceedings by or on behalf of Borrower; (vi) servitudes, easements, restrictions, rights-of-way and other similar rights in real or immovable Properties or any interest therein, provided the same do not materially impair the use of such Properties for the purposes for which it is held by Borrower. "Facility Fee" means the fee on the revolving line of credit evidenced by the Note, payable by Borrower to Lender in quarterly installments, and calculated as three-eighths of one percent (3/8%) of the average for the prior quarter of an amount determined daily equal to the difference between $5,000,000 and the daily outstanding principal balance owing on the Loan. "Financial Statements" means the financial statement or statements described or referred to in Section 3.5 hereof "Governmental Requirement" means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, authorization or other direction or requirement (including, without limitation any of the foregoing which relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any (domestic or foreign) federal, state, county, municipal or other government, department, commission, board, court, agency or any other instrumentality of any of them, which exercises jurisdiction over Borrower or any Properties of Borrower. "Highest Lawful Rate" means the maximum non-usurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Note or on other Indebtedness, as the case may be, under laws applicable to Lender which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. "Indebtedness" means any and all amounts owing or to be owing by Borrower to Lender in connection with this Agreement, the Note, any Security Instruments and all other liabilities of Borrower to Lender from time to time existing, whether in connection with this or other transactions. Loan Agreement - Page 2 3 "Lien" means any interest in Properties securing an obligation owed to, or a claim by, a Person other than the owner of the Properties, whether such interest is based on the common law, statute or contract, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" shall include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting the Properties. "Material Adverse Effect" means any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations, affairs or circumstances of Borrower from those reflected in the Financial Statements or from the facts represented or warranted in this Agreement or any Security Instrument, or (ii) the ability of Borrower to carry out its business as at the date of this Agreement or as proposed at the date of this Agreement to be conducted or meet its obligations under this Agreement, the Note and the Security Instruments on a timely basis. "Note" means the promissory note of Borrower described in Section 2.1 hereof and being in the form of note attached as Exhibit A hereto, together with any and all renewals, extensions for any period, increases or rearrangements thereof. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other form of entity. "Plan" means any plan subject to Title IV of ERISA and maintained by Borrower, or any such plan to which Borrower is required to contribute on behalf of its employees. "Potential Default" means the occurrence of any of the events specified in Section 7.1 hereof; whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied. "Properties" means any interest of Borrower in any kind of property or asset, whether real, personal or mixed, and tangible or intangible. "Security Instruments" means the agreements or instruments described or referred to in Subsection 8.1(d) hereof and any and all other agreements or instruments now or hereafter executed and delivered by Borrower or any other Person (other than participation or similar agreements between Lender and any other lender or creditor with respect to any Indebtedness pursuant to this Agreement) in connection with, or as security for the payment or performance of the Note or this Agreement, as such agreements may be amended or supplemented from time to time. Section 1.3 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with generally accepted accounting principles applied on a basis consistent with those Loan Agreement - Page 3 4 reflected by the Financial Statements, except where such principles are inconsistent with the requirements of this Agreement. ARTICLE 2 AMOUNT AND TERMS OF LOAN Section 2.1 The Loan and Facility Fee. (a) Subject to the terms and conditions and relying on the representations and warranties contained in this Agreement, Lender agrees to make a revolving loan in the amount of $5,000,000.00 to Borrower (the "Loan"). To evidence the Loan made by Lender pursuant to this Section, Borrower will execute and deliver the Note in the principal amount of the Loan, which Note will be payable, bear interest and otherwise be in the form attached as Exhibit A. (b) The Note evidences a revolving line of credit for Borrower. Pursuant to this Agreement and so long as there is no current Event of Default, Borrower may borrow, repay, and re-borrow on the Note. Borrower may request advances on the Note and make payments from time to time, provided that the aggregate principal amount outstanding on the Note shall not at any time exceed $5,000,000; and the unpaid principal balance of the Note shall increase and decrease with each new advance or principal payment. (c) On the first day of each February, May, August, and November and at maturity, Borrower will pay to Lender the Facility Fee on the Note. The Facility Fee is calculated as three-eighths of one percent (3/8%) of the average for the prior quarter of an amount determined daily equal to the difference between $5,000,000 and the daily outstanding principal balance owing on the Loan. The Facility Fee is payable to Lender quarterly for the prior quarter. The first payment of the Facility Fee will be due November 1, 1996. Section 2.2 Notice and Manner of Borrowing. The amount and date of each advance hereunder shall be designated by a Borrowing Request properly completed. The Loan shall be made at the office of Lender and shall be funded in immediately available funds in the amount so requested. Section 2.3 Computation. All payments of interest shall be computed on the per annum basis of a year of 360 days and for the actual number of days (including the first day but excluding the last day) elapsed unless such calculation would result in a usurious rate, in which case interest shall be calculated on the per annum basis of a year of 365 or 366 days, as the case may be. Section 2.4 Voluntary Prepayments. Borrower may at its option prepay the principal amount of the Note outstanding hereunder in the manner and as provided therein. Section 2.5 Payment Procedure. All payments and prepayments made by Borrower under the Note or this Agreement shall be made to Lender at its offices described above in immediately available funds before 12:00 noon, Fort Worth time, on the date that such payment is required to be made. Borrower hereby authorizes Lender, if and to the extent payment or Loan Agreement - Page 4 5 prepayment is not made when due hereunder or under the Note or Security Instruments, to charge from time to time against Borrower's account with Lender any amount so due. Any payment received and accepted by Lender after such time shall be considered for all purposes (including the calculation of interest, to the extent permitted by law) as having been made on the next Business Day. Section 2.6 Business Days. If the date for any Loan payment or prepayment hereunder falls on a day which is not a Business Day, then, for all purposes of the Note and this Agreement, the same shall be deemed to have fallen on the next Business Day and such extension of time shall in such case be included in the computation of interest. ARTICLE 3 REPRESENTATIONS AND WARRANTIES To induce Lender to enter into this Agreement, Borrower represents and warrants to Lender that: Section 3.1 Corporate Existence. Borrower is a corporation duly organized, legally existing, and in good standing under the laws of the State of Texas and is duly qualified as a foreign corporation in all jurisdictions wherein the Properties owned or leased or the business transacted by Borrower makes such qualification necessary. Section 3.2 Corporate Power and Authority. Borrower is duly authorized and empowered to create and issue the Note; Borrower is duly authorized and empowered to execute, deliver, and perform this Agreement and the Security Instruments; and all corporate action on Borrower's part requisite for the due creation and issuance of the Note and for the due execution, delivery, and performance of this Agreement and of the Security Instruments has been duly and effectively taken. Section 3.3 Binding Obligations. This Agreement, the Note, and the Security Instruments constitute valid and binding obligations of Borrower, enforceable in accordance with their terms (except that enforcement may be subject to any applicable bankruptcy, insolvency or similar laws generally affecting the enforcement of creditors' rights). Section 3.4 No Legal Bar or Resultant Lien. Borrower's execution, delivery, and performance of the Note, this Agreement, and the Security Instruments does not and will not violate any provisions of its articles of incorporation or bylaws or any contract, agreement, instrument, or Governmental Requirement presently in effect to which Borrower is subject, or result in the creation or imposition of, or obligation to create, any Lien upon any Properties of Borrower, other than those permitted by this Agreement. Section 3.5 Financial Condition. The audited annual consolidated financial statements of Borrower for its fiscal year ended December 31, 1995, and the unaudited interim consolidated financial statements of Borrower for its fiscal quarter ended March 31, 1996 (including any related schedules or notes), which have been delivered to Lender, have been prepared in Loan Agreement - Page 5 6 accordance with generally accepted accounting principles, consistently applied, and fully and accurately present the financial condition and changes in financial position of Borrower at the date or dates and for the period or periods stated (subject only to normal year-end audit adjustments with respect to such unaudited interim statements). No change, either in any case or in the aggregate, has since occurred in the condition, financial or otherwise, of Borrower which would have a Material Adverse Effect. Section 3.6 Investments and Guaranties. At the date of this Agreement, Borrower has not made investments in, advances to or guaranties of the obligations of any Person, except those the material details of which are set forth in the Financial Statements. Section 3.7 Liabilities and Litigation. Except for liabilities incurred in the normal course of business, Borrower has at the date of this Agreement no material liabilities, direct or contingent, except those the material details of which have been set forth in the Financial Statements. At the date of this Agreement there is no litigation, legal, administrative, or arbitral proceeding, investigation, or other action of any nature pending or, to the knowledge of Borrower, threatened against or affecting Borrower or any of its Properties which involves the possibility of any judgment of liability not fully covered by insurance and which would have a Material Adverse Effect. Section 3.8 Taxes; Charges. Borrower has filed all tax returns and reports required to be filed and has paid all taxes, assessments, fees, and other Governmental charges levied upon it or upon its Properties or income which are due and payable, including interest and penalties, or has provided adequate reserves for the payment thereof. Section 3.9 Title. Borrower has good title to its material Properties, free and clear of all Liens, except (i) Liens the material details of which have been set forth in the Financial Statements, (ii) Liens and minor irregularities in title which do not materially interfere with the occupation, use, and the normal course of Borrower's business as presently conducted or materially impair the value thereof for such business, or (iii) Liens otherwise permitted or contemplated by this Agreement or the Security Instruments. Section 3.10 Defaults. Borrower is not in default nor has any event or circumstance occurred which, but for the passage of time of the giving of notice, or both, would constitute a default (in any respect which would have a Material Adverse Effect) under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement, or other agreement or instrument evidencing or pertaining to any obligation for the payment of money of Borrower, or under any material agreement or instrument to which Borrower is a party or by which Borrower or its Properties are bound. No Potential Default hereunder has occurred and is continuing. Section 3.11 Casualties and Taking of Properties. Since the date of the Financial Statements, neither the business nor the Properties of Borrower have been materially and adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition, or taking of Properties or cancellation of contracts, permits, or concessions by any domestic or foreign government or any agency thereof, riot, activities of armed forces, or acts of God or of any public enemy. Loan Agreement - Page 6 7 Section 3.12 Use of Proceeds; Margin Stock. The proceeds of the Note will be used by Borrower for the purpose of providing financing for purchasing treasury stock of Borrower, for Borrower's working capital, and for other general corporate purposes. None of such proceeds will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R., Part 221) or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation U. Borrower is not engaged (principally or as one of Borrower's important activities) in the business of extending credit for the purpose of purchasing or carrying margin stocks. Neither Borrower nor any Person acting on behalf of Borrower has taken or will take any action which might cause the Note, this Agreement, or any of the Security Instruments to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Section 3.13 Compliance with the Law. Borrower is not: (a) in violation of any Governmental Requirement; nor (b) failed to obtain any license, permit, franchise, or other governmental authorization necessary to the ownership of any of its Properties or the conduct of its business; which violation or failure would have (in the event such violation or failure were asserted by any Person through appropriate action) a Material Adverse Effect. Section 3.14 ERISA. Borrower is in compliance in all material respects with the applicable provisions of ERISA, and no "reportable event," as such term is defined in section 4043 of ERISA, has occurred with respect to any Plan of Borrower. Section 3.15 No Material Misstatements. No information, exhibit, or report furnished to Lender by Borrower in connection with the negotiation of this Agreement contained any material misstatement or fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading. Section 3.16 Investment Company Act. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 3.17 Public Utility Holding Company Act. Borrower is not (i) a "holding company," or (ii) a "subsidiary company" of a "holding company," or (iii) an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," or (iv) a "public utility," within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 3.18 Leases. Borrower enjoys peaceful and undisturbed possession of all leases necessary for the operation of its Properties, none of which contain any unusual or burdensome Loan Agreement - Page 7 8 provisions which might affect or impair the operation of the Properties. All leases are valid and in full force and effect. ARTICLE 4 AFFIRMATIVE COVENANTS Borrower will at all times comply with the covenants contained in this Article 4, from the date hereof and for so long as any part of the Indebtedness is outstanding; Section 4.1 Financial Statements and Reports. Borrower will promptly furnish to Lender from time to time upon request such information regarding its business and affairs and financial condition as Lender may reasonably request, and will furnish or cause to be furnished to Lender: (a) Audited Annual Reports for Borrower - Promptly after becoming available, and in any event within 90 days after the close of each fiscal year of Borrower, the audited balance sheet of Borrower as at the end of such year, the audited statement of profit and loss of Borrower for such year and the audited statement of reconciliation of capital accounts of Borrower for such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, accompanied by the related report of independent public accountants acceptable to Lender which report shall be to the effect that such statements have been prepared in accordance with generally accepted accounting principles consistently followed throughout the period indicated, except for such changes in such principles with which the independent public accountants shall have concurred; and (b) Annual Statutory Reports - Promptly after becoming available, and in any event within 90 days after the close of each fiscal year of General Agents Insurance Company of America, Inc., an Oklahoma corporation, MGA Insurance Company, Inc., a Texas corporation, and GAINSCO County Mutual Insurance Company, a Texas chartered company (collectively the "Insurance Companies"), the statutory statements of each of the Insurance Companies as at the end of such year, prepared on both a consolidated and an individual basis and in accordance with the requirements of the states in which the Insurance Companies are licensed to operate (the "statutory basis"), setting forth in each case in comparative form the corresponding figures for the preceding fiscal year; and (c) Quarterly Reports - Promptly after becoming available, and in any event within 45 days after the end of each fiscal quarter of Borrower, the balance sheets of Borrower as of the end of such period, the statements of profit and loss of Borrower for such fiscal quarter and for the period from the beginning of the fiscal year to the close of such fiscal quarter, and the statements of reconciliation of capital accounts of Borrower for such fiscal quarter and for the period from the beginning of the fiscal year to the close of such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the same period of the preceding fiscal year, certified by the chief financial officer of Borrower to have been prepared in accordance with generally accepted accounting principles, consistently followed throughout the period indicated, Loan Agreement - Page 8 9 except to the extent stated therein, subject to the normal changes resulting from year-end adjustments; and (d) Quarterly Statutory Reports - Promptly after becoming available, and in any event within 45 days after the end of each fiscal quarter of the Insurance Companies, the statutory statements of each of the Insurance Companies, prepared in accordance with the statutory basis; and (e) Additional Information - As soon as available, such other information, not otherwise required herein, respecting the business affairs, assets, and liabilities of Borrower and the Insurance Companies, as Lender may from time to time reasonably request. All financial statements, reports, and information required concerning Borrower shall be prepared and computed on a consolidated basis so as to include information concerning its subsidiaries. All financial statements and reports concerning the Insurance Companies shall be prepared on both a consolidated and an individual basis and in accordance with the requirements of the states in which they are licensed to operate. Section 4.2 Certificates of Compliance. Borrower will furnish or cause to be furnished to Lender concurrently with the furnishing of the quarterly financial statements and statutory reports pursuant to Subsections 4.1(c) and (d) hereof, a certificate of compliance signed by the chief financial officer of Borrower (i) stating that a review of the activities of Borrower has been made under his supervision with a view to determining whether Borrower has fulfilled all of its obligations under this Agreement, the Security Instruments, and the Note; (ii) stating that Borrower has fulfilled its obligations under such instruments and that all representations made herein continue to be true and correct (or specifying the nature of any change), or if any Potential Default shall have occurred which is continuing, specifying such Potential Default and the nature and status thereof; (iii) specifically affirming compliance of Borrower and the Insurance Companies with Sections 6.1 through 6.5 hereof, in the form of the Compliance Certificate attached hereto as Exhibit B; and (iv) containing or accompanied by such financial or other details, information, and materials as Lender may reasonably request to evidence such compliance. Section 4.3 Taxes and Other Liens. Borrower will pay and discharge promptly all taxes, assessments, and governmental charges or levies imposed upon Borrower or upon its income or any of its Properties, as well as all claims of any kind (including claims for labor, materials, supplies, and rent) which, if unpaid, might become a Lien upon any or all of its Properties; provided, however, Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim if the amount, applicability, or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted by or on behalf of Borrower and if Borrower shall have set up reserves therefor adequate under generally accepted accounting principles. Section 4.4 Maintenance. Borrower will (i) maintain its corporate existence, rights, and franchises; (ii) observe and comply (to the extent necessary so that any failure would not have a Material Adverse Effect) with all Governmental Requirements, and (iii) maintain its Properties (and any Properties leased by or consigned to it or held under title retention or conditional sales Loan Agreement - Page 9 10 contracts) in good and workable condition at all times and make all repairs, replacements, additions, and improvements to its Properties as are needed and proper so that the business carried on in connection therewith may be conducted properly and efficiently at all times. Section 4.5 Further Assurances. Borrower will promptly cure any defects in the creation and issuance of the Note and the execution and delivery of this Agreement and the Security Instruments. Borrower will at its expense promptly execute and deliver to Lender upon request all such other and further documents, agreements, and instruments in compliance with or accomplishment of the covenants and agreements in this Agreement and in the Security Instruments or to further evidence and more fully describe the collateral intended as security for the Note, or to correct any omissions in the Security Instruments, or more fully to state the security obligations set out herein or in any of the Security Instruments, or to perfect, protect, or preserve any Liens created pursuant to any of the Security Instruments, or to make any recordings, to file any notices, or obtain any consents, all as may be necessary or appropriate in connection therewith. Section 4.6 Reimbursement of Expenses. Borrower will pay all legal fees incurred by Lender in connection with the preparation of this Agreement and any and all Security Instruments contemplated hereby (including any amendments hereto or thereto or consents or waivers hereunder or thereunder) and will also pay all fees, charges or taxes for the recording or filing of the Security Instruments. Borrower will also pay all out-of-pocket expenses of Lender in connection with the administration of this Agreement and the Security Instruments. Borrower will, upon request, promptly reimburse Lender for all amounts expended, advanced, or incurred by Lender to satisfy any obligation of Borrower under this Agreement or any Security Instrument or to collect the Note, or to enforce the rights of Lender under this Agreement or any Security Instrument, which amounts will include all court costs, attorneys fees (including, without limitation, for trial, appeal, or other proceedings), fees of auditors and accountants, and investigation expenses reasonably incurred by Lender in connection with any such matters, together with interest at the post-maturity rate specified in the Note on each such amount from the date of written demand or request by Lender for reimbursement until the date of reimbursement to Lender. Section 4.7 Insurance. Borrower now maintains and will continue to maintain with financially sound and reputable insurers, insurance with respect to its Properties and business against such liabilities, casualties, risks, and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated. Upon request of Lender, Borrower will furnish or cause to be furnished to Lender from time to time a summary of the insurance coverage in form and substance satisfactory to Lender and if requested will furnish Lender copies of the applicable policies. In the case of any fire, accident, or other casualty causing loss or damage to any Properties of Borrower, the proceeds of such policies shall be used (i) to repair or replace the damaged Properties, or (ii) to prepay the Indebtedness. Borrower will obtain endorsements to the policies pertaining to all Properties in which Lender shall have a Lien under the Security Instruments, naming Lender as a loss payee and containing provisions that such policies will not be canceled without 30 days prior written notice having been given by the insurance company to Lender. Loan Agreement - Page 10 11 Section 4.8 Accounts and Records. Borrower will keep books of record and account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and activities, in accordance with generally accepted accounting principles, consistently applied, except only for changes in accounting principles or practices with which Borrower's independent public accountants concur and Lender consents. Section 4.9 Right of Inspection. Borrower will permit any officer, employee or agent of Lender to visit and inspect any of the Properties of Borrower, examine Borrower's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances, and accounts of Borrower with Borrower's officers, accountants, and auditors, all at such reasonable times and as often as Lender may desire. Section 4.10 Notice of Certain Events. Borrower shall promptly notify Lender if it learns of the occurrence of (i) any event which constitutes a Potential Default, together with a detailed statement by a responsible officer of the steps being taken to cure the effect of such Potential Default; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture, or other evidence of indebtedness of Borrower with respect to a claimed default, together with a detailed statement by a responsible officer specifying the notice given or other action taken by such holder and the nature of the claimed default and what action Borrower is taking or proposes to take with respect thereto; or (iii) any legal, judicial, or regulatory proceedings affecting Borrower, or any of its Properties in which the amount involved is material and is not covered by insurance or which, if adversely determined, would have a Material Adverse Effect; or (iv) any event or condition having a Material Adverse Effect. Section 4.11 ERISA Information and Compliance. Borrower will promptly furnish to Lender (i) if requested by Lender, promptly after the filing thereof with the United States Secretary of Labor or the Pension Benefit Guaranty Corporation, copies of each annual and other report with respect to each Plan or any trust created thereunder, and (ii) immediately upon becoming aware of the occurrence of any "reportable event," as such term is defined in Section 4043 of ERISA, or of any "prohibited transaction," as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended, in connection with any Plan or any trust created thereunder, a written notice signed by the president or the principal financial officer of Borrower specifying the nature thereof, what action Borrower is taking or proposes to take with respect thereto and, when known, any action taken by the Internal Revenue Service with respect thereto. Borrower will fund all current service pension liabilities as they are incurred under the provisions of all Plans from time to time in effect for the benefit of employees of Borrower and comply with all applicable provisions of ERISA. Section 4.12 Fort Worth Office. Borrower will at all times during the term hereof maintain an office located in Fort Worth, Texas. Section 4.13 Withholding Taxes. Borrower will make timely payment or deposit of all amounts of tax required to be withheld and paid to or deposited with the United States pursuant to the provisions of Title C of the Internal Revenue Code of 1954, as from time to time amended, with respect to any and all wages paid to employees. Loan Agreement - Page 11 12 Section 4.14 Regulatory and Environmental Compliance. Borrower shall comply with all Governmental Requirements applicable to its business and to the use of its Properties, including, without limitation, all Environmental Requirements. As used herein, "Environmental Requirements" means all applicable present and future federal, state, and local statutes, regulations, ordinances, orders, actions, policies, or common law relating to the protection of human health or the environment. Section 4.15 Best Rating. Borrower shall cause General Agents Insurance Company of America, Inc., to operate and maintain at all times its business so as to ensure an "A" (excellent) or better rating by A.M. Best Company. ARTICLE 5 NEGATIVE COVENANTS Borrower will at all times comply (and will cause the Insurance Companies to comply) with the covenants contained in this Article 5, from the date hereof and for so long as any part of the Indebtedness is outstanding: Section 5.1 Other Liabilities. Without Lender's prior written consent, Borrower will not incur or suffer to exist any indebtedness except: (a) indebtedness to Lender; (b) indebtedness to trade creditors incurred in the ordinary course of business; and (c) indebtedness in respect of taxes, assessments, and governmental charges or levies, so long as continued existence of such taxes or other liabilities does not result in a violation of Section 4.3 hereof. Section 5.2 Liens. Borrower will not create, incur, assume or suffer to exist any Lien on any of its Properties (now owned or hereafter acquired) except: (a) Liens securing the payment of any Indebtedness; (b) Excepted Liens; and (c) Liens existing on Properties owned by Borrower on the date of this Agreement which are disclosed to Lender in Exhibit 5.2 hereto, and all renewals and extensions thereof. Section 5.3 Transactions with Affiliates. Borrower will not enter into any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to Borrower than Borrower would obtain in a comparable arm's length transaction with a person or entity not an Affiliate. This covenant respecting transactions with an Affiliate does not pertain to transactions of an immaterial nature. As used herein, the term "Affiliate" means any Person that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with Borrower. Loan Agreement - Page 12 13 Section 5.4 Loans and Advances by Borrower. Borrower shall not, without the prior written consent of Lender, make or permit to remain outstanding any loans or investments to any Person. Section 5.5 Sales and Leasebacks. Borrower will not enter into any arrangement, directly or indirectly, with any Person whereby Borrower shall sell or transfer any Properties, whether now owned or hereafter acquired, and whereby Borrower shall then or thereafter rent or lease as lessee such Properties or any part thereof or other Properties which Borrower intends to use for substantially the same purpose or purposes as the Properties sold or transferred. Section 5.6 Merger, Etc. Borrower will not merge or consolidate with, or sell, assign, lease, or otherwise dispose of (whether in one transaction or in a series of transactions) all, substantially all, or any integral portion of its Properties (whether now owned or hereafter acquired) to any Person. Section 5.7 Proceeds of Note. Borrower will not permit the proceeds of the Note to be used for any purposes other than those permitted by Section 3.12 hereof. Section 5.8 ERISA Compliance. Borrower will not at any time permit any Plan maintained by it to: (a) engage in any "prohibited transaction" as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended; (b) incur any "accumulated funding deficiency" as such term is defined in Section 302 of ERISA; or (c) terminate any such Plan in a manner which could result in the imposition of a Lien on the Properties of Borrower pursuant to Section 4068 of ERISA. Section 5.9 Nature of Business. Borrower will not permit any material change to be made in the character of its business as carried on at the date hereof. Section 5.10 Sale or Discount of Receivables. Borrower will not, except to minimize losses on bona fide debts previously contracted, discount or sell with recourse, or sell for less than the greater of the face or market value thereof, any of its notes receivable or accounts receivable. Section 5.11 Contingent Liabilities. Borrower will not guarantee the obligations of any Person. Section 5.12 Compensation and Management Fees. Borrower will not pay any management or similar fees nor pay any unreasonable or unusual increases in employee compensation. Section 5.13 Purchase of Substantial Assets. Borrower will not purchase, lease, or otherwise acquire all or substantially all of the assets of any other Person or entity, without Loan Agreement - Page 13 14 Lender's prior written consent, unless the aggregate contract price of all such transactions does not exceed $5,000,000. Section 5.14 Prepayments. Except with respect to revolving lines of credit entered into with Lender's prior written consent, Borrower will not directly or indirectly pay any indebtedness other than indebtedness owing to Lender, prior to the date on which such indebtedness is due and payable in accordance with the terms thereof (regardless of any right to prepay under the terms of such indebtedness). Section 5.15 Fiscal Year. Borrower will not change its fiscal year or present methods of accounting. Section 5.16 Cash Flow Coverage Ratio. Borrower will not allow the cash flow coverage ratio to be less than 1.20:1.0. Such ratio is defined as the quotient obtained by dividing: (a) the maximum allowable annual dividends payable to Borrower under applicable state law by General Agents Insurance Company of America, Inc. as of the preceding December 31; by (b) the sum of: (i) Borrower's "annualized" year-to-date non-consolidated operating expenses, plus (ii) annualized" year-to-date cash dividends paid or declared by Borrower, plus (iii) $1,500,000. The cash flow coverage ratio will be calculated substantially in the manner set forth in the Compliance Certificate attached hereto as Exhibit B. ARTICLE 6 FINANCIAL AND INVESTMENT RATIOS AND COVENANTS FOR INSURANCE COMPANIES Borrower will at all times cause the Insurance Companies to comply with the following: Section 6.1 Minimum Risk-based Capital. Risk-Adjusted Surplus to Policyholders (as calculated in accordance with principles approved by The National Association of Insurance Commissioners) will not be less than four (4) times the Authorized Control Level Risk-based Capital. Section 6.2 Maximum Combined Ratio. The "combined ratio" for the Insurance Companies, measured as the sum for Insurance Companies of (i) the "loss ratio" and (ii) the "expense ratio," shall not exceed 100% at any time. Section 6.3 Bond Portfolio Investment Ratio. The Insurance Companies shall not, without the prior written consent of Lender, invest in or hold bonds which carry Standard and Poor's or Moody's ratings of less than BBB/Baa. The bond holdings of the Insurance Companies rated AA/Aa or better, when combined with the investments of the Insurance Companies in U.S. Treasury Securities and short-term money market funds, shall represent not less than 80% of the Insurance Companies' consolidated investment portfolio at any time. Loan Agreement - Page 14 15 Section 6.4 Equity Investments Ratio. The equity investments of the Insurance Companies shall not exceed 10% of the Insurance Companies' consolidated investment portfolio at any time. Section 6.5 Investments in High-Yield Securities. None of the Insurance Companies shall, without Lender's prior written consent, invest in any high-yield securities (commonly referred to as "junk securities"), nor in any equity securities of issuers of such securities. The ratios set forth above in this Article 6 shall be based upon the consolidated reports prepared on a statutory basis and as furnished by the Insurance Companies to Lender. For purposes of determining compliance with this Agreement, the ratios will be calculated substantially in the manner set forth in the Compliance Certificate attached hereto as Exhibit B, which manner of calculation may differ from that used by the National Association of Insurance Commissioners in reporting similar ratios. ARTICLE 7 EVENTS OF DEFAULT Section 7.1 Events of Default. Any of the following events shall be considered an "Event of Default" as that term is used herein: (a) Payments - default is made in the payment or prepayment when due of any installment of principal or interest on the Note or other Indebtedness; or (b) Representations and Warranties - any representation or warranty by Borrower in this Agreement or any Security Instrument proves to have been incorrect in any material respect as of the date hereof; or any representation, statement (including financial statements), certificate, request, or other document furnished pursuant to or under this Agreement or any Security Instrument (whether by Borrower, any Person party to any Security Instrument, or any officer, accountant, or attorney thereof) proves to have been incorrect in any material respect as of the date when made or deemed made; or (c) Affirmative Covenants - default is made in the due observance or performance by Borrower of any of the covenants or agreements contained in Article 4 of this Agreement; or (d) Negative Covenants - default is made in the due observance or performance by Borrower of any of the covenants or agreements contained in Article 5 of this Agreement; or (e) Financial Covenants - default is made in the due observance or performance by Borrower of, or there is otherwise any failure to comply with the standards and ratios set forth in, any of the terms, covenants, or agreements contained in Article 6 of this Agreement, and such default or failure continues unremedied for a period of 10 days after the Loan Agreement - Page 15 16 earlier of (i) notice thereof being given by Lender to Borrower, or (ii) such default otherwise becoming known to Borrower; or (f) Security Instrument Obligations - default is made in the due observance or performance by Borrower or any other Person of any of the covenants or agreements contained in any Security Instrument; or (g) Involuntary Bankruptcy or Other Proceedings - an involuntary case or other proceeding shall be commenced against Borrower which seeks liquidation, reorganization, or other relief with respect to it or its debts or other liabilities under any bankruptcy, insolvency, or other similar law now or hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or any substantial part of its Properties, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of 30 days; or an order for relief against Borrower shall be entered in any such case under the federal Bankruptcy Code; or (h) Voluntary Bankruptcy - Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts or other liabilities under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or any substantial part of its Properties, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to, or shall admit in writing its inability to, pay its debts generally as they become due, or shall take any corporate action to authorize or effect any of the foregoing; or (i) Discontinuance of Business - Borrower discontinues its usual business; or (j) Default on Other Indebtedness - Borrower fails to make any payment due on any other indebtedness or obligation for the payment of money; or any event shall occur or any condition shall exist in respect of any such indebtedness or obligation, or under any agreement or instrument under or by which any such indebtedness or obligation is created, evidenced, or secured, the effect of which, with notice, lapse of time, or both, is to cause or to permit any holder of such indebtedness or obligation or a trustee to cause such indebtedness or obligation, or a portion thereof; to become due prior to its stated maturity or prior to its regularly scheduled dates of payment; or (k) Undischarged Judgments - Borrower shall fail within 30 days to pay, bond, or otherwise discharge any judgment or order for the payment of money that is not otherwise being satisfied in accordance with its terms or is not stayed on appeal; or (l) Security Instruments - the Security Instruments after delivery thereof shall for any reason, except to the extent permitted by the terms thereof; cease to be in full force and effect and valid, binding, and enforceable (except as enforceability may be limited as stated in Section 3.3 hereof) in accordance with their terms, or cease to create a valid and perfected lien of Loan Agreement - Page 16 17 the priority required thereby on any of the collateral purported to be covered thereby, or Borrower shall so state in writing. Section 7.2 Certain Remedies. Upon the occurrence of any Event of Default described in Subsection 7.1(g) or (h) hereof; the obligations, if any, of Lender hereunder shall immediately terminate, and the entire principal amount of all indebtedness then outstanding together with interest then accrued thereon shall automatically and immediately become due and payable, all without written notice and without presentment, demand, protest, notice of protest or dishonor, notice of intention to accelerate, notice of acceleration, or any other notice of default of any kind, all of which are hereby expressly waived by Borrower. Upon the occurrence and at any time during the continuance of any other Event of Default, Lender may by written notice to Borrower (i) declare the entire principal amount of all Indebtedness then outstanding together with interest then accrued thereon to be immediately due and payable without presentment, demand, protest, notice of protest or dishonor, notice of intention to accelerate, or other notice of default of any kind, all of which are hereby expressly waived by Borrower, and (ii) terminate the obligations, if any, of Lender hereunder unless and until Lender shall reinstate same in writing. Section 7.3 Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, or if Borrower becomes insolvent, however evidenced, Lender is hereby authorized at any time and from time to time, without notice to Borrower (any such notice being expressly waived by Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by Lender to or for the credit or the account of Borrower against any and all of the Indebtedness of Borrower, irrespective of whether or not Lender shall have made any demand under this Agreement or the Note and although such obligations may be unmatured. Lender agrees promptly to notify Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which Lender may have. ARTICLE 8 CONDITIONS OF LENDING The obligation of Lender to make the Loan pursuant to this Agreement is subject to the conditions precedent stated in this Article 8: Section 8.1 Closing and Documentation. The obligation of Lender to make the Loan under this Agreement is subject to the following conditions precedent wherein each document to be delivered to Lender shall be in form, substance, and detail satisfactory to Lender, in its sole discretion: (a) Closing - On a Business Day acceptable to Lender there shall have occurred a closing at which Borrower shall deliver to Lender executed counterparts of this Loan Agreement - Page 17 18 Agreement and of all instruments, certificates, and opinions referred to in this Article 8 not previously delivered. (b) Note - Borrower shall have duly and validly issued, executed, and delivered the Note to Lender. (c) Secretary's Certificates - (i) Lender shall have received certificates of the secretary or assistant secretary of Borrower setting forth (A) resolutions of its board of directors in form and substance satisfactory to Lender with respect to the authorization of the Note, this Agreement, and any Security Instruments provided herein and the officers of Borrower authorized to sign such instruments, and (B) specimen signatures of the officers so authorized. (ii) Lender shall also have received a copy, certified as true by the secretary or assistant secretary of Borrower, of the articles of incorporation and the bylaws of Borrower. (d) Security Instruments - Lender shall have received the following instruments, each duly and validly executed and delivered by the respective parties thereto (other than Lender), and in sufficient executed counterparts for recording purposes when applicable, as security for the Note and other Indebtedness: (i) Negative Pledge from Borrower by the terms of which Borrower agrees not to pledge, transfer, or encumber any of its assets, whether now owned or hereafter acquired, including stock held in its subsidiaries. (ii) Lender reserves the right at any time to require the pledge of all of Borrower's stock in its subsidiaries as security for the Loan, and any failure by Borrower to deliver such pledge on request in form, substance, and detail satisfactory to Lender, shall constitute an additional Event of Default under this Agreement. If required, the pledge or security agreement covering the stock in the subsidiaries will also be a Security Instrument. (e) Other - Lender shall have received such other documents as it may reasonably have requested at any time at or prior to the closing referred to in Subsection 8.1(a) hereof ARTICLE 9 MISCELLANEOUS Section 9.1 Notices. Any notice required or permitted to be given under or in connection with this Agreement, the Security Instruments, or the Note shall be in writing and shall be mailed by first class or express mail, postage prepaid, or sent by telex, telegram, telecopy, or other similar form of rapid transmission confirmed by mailing (by first class or express mail, postage prepaid) with written confirmation at substantially the same time as such rapid Loan Agreement - Page 18 19 transmission, or personally delivered to an officer of the receiving party. All such communications shall be mailed, sent, or delivered, (a) if to Borrower, to its address shown at the beginning of this Agreement, or to such other address and to such individual's or department's attention as Borrower may have furnished Lender in writing; or (b) if to Lender, to its address shown at the beginning of this Agreement, or to such other address and to such individual's or department's attention as Lender may have furnished Borrower in writing. Any communication so addressed and mailed shall be deemed to be given when so mailed and any notice so sent by rapid transmission shall be deemed to be given when receipt of such transmission is acknowledged, and any communication so delivered in person shall be deemed to be given when receipted for by, or actually received by, an authorized officer of Borrower or Lender. Section 9.2 Amendments and Waivers. No provision of this Agreement, the Security Instruments, or the Note may be amended or waived, except in writing signed by Borrower (and any other Person, who is a party to any Security Instrument being amended or with respect to which a waiver is being obtained) and Lender. Section 9.3 Invalidity. In the event that any one or more of the provisions contained in the Note, this Agreement, or in any Security Instrument shall, for any reason be held invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of the Note, this Agreement, or any Security Instrument. Section 9.4 Survival of Agreements. All covenants and agreements of Borrower herein and in the Security Instruments not fully performed before the date hereof or the date of the Security Instruments and all representations and warranties of Borrower herein or in the Security Instruments, shall survive such date or dates. Section 9.5 Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower in the Note, this Agreement, and any Security Instrument shall bind its successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest herein, without the prior written consent of Lender. In the event that Lender sells participations in the Note or other Indebtedness of Borrower incurred or to be incurred pursuant to this Agreement, to other lenders, each of such other lenders shall have the rights of set-off against such Indebtedness and similar rights or Liens to the same extent as may be available to Lender. Section 9.6 Renewal. Extension. or Rearrangement. All provisions of this Agreement and of any Security Instruments relating to the Note or other Indebtedness shall apply with equal force and effect to each and all promissory notes hereafter executed which in whole or in part represent a renewal, extension of any period, increase, or rearrangement of any part of the Indebtedness, originally represented by the Note or of any part of such other Indebtedness. Section 9.7 Waivers. No course of dealing on the part of Lender, its officers, employees, consultants, attorneys, or agents, nor any failure or delay by Lender with respect to exercising any right, power, or privilege of Lender under the Note, this Agreement, or any Loan Agreement - Page 19 20 Security Instrument shall operate as a waiver thereof; except as otherwise provided in Section 9.2 hereof. Section 9.8 Cumulative Rights. Rights and remedies of Lender under the Note, this Agreement, and each Security Instrument shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. Section 9.9 Singular and Plural. Words used herein in the singular, where the context so permits, shall be deemed to include the plural and vice versa. The definitions of words in the singular herein shall apply to such words when used in the plural where the context so permits and vice versa. Section 9.10 Construction. This Agreement, the Note, and each Security Instrument are contracts made under, and shall be construed in accordance with and governed by, the laws of the United States of America and the State of Texas, as such laws are now in effect and, with respect to usury laws, if any, applicable to Lender and to the extent allowed thereby, as such laws may hereafter be in effect which allow a higher maximum nonusurious interest rate than now allowed. Section 9.11 Performance by Lender. Should any covenant, duty, or agreement of Borrower fail to be performed in accordance with this Agreement, the Note, or any Security Instrument, Lender may, at its option, perform or attempt to perform such covenant, duty, or agreement on behalf of Borrower. In such event, Borrower shall, at the request of Lender, promptly pay to Lender any amount expended in such performance or attempted performance, together with interest thereon at the Highest Lawful Rate from the date of such expenditure by Lender until repaid. Notwithstanding the foregoing, it is expressly understood that Lender does not assume any liability or responsibility for the performance of any of the duties of Borrower or any other Person hereunder or in connection with all or any part of any Properties upon which Lender has or will acquire a Lien. Section 9.12 Indemnification of Lender. Borrower hereby indemnifies and holds Lender harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses, and disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against Lender, in any way relating to, or arising out of this Agreement, the Note, the Security Instruments, or any of the transactions contemplated therein, directly or indirectly, from any claims made or actions, suits, or proceedings commenced by or on behalf of any Person other than Lender. Section 9.13 Expenditures by Lender. Any sums spent by Lender pursuant to the exercise of any right or remedy provided under this Agreement, the Note, or any Security Instrument shall become part of the Indebtedness and shall bear interest at the Highest Lawful Rate from the date spent until the date repaid by Borrower. Section 9.14 Interest. It is the intention of the parties hereto to conform strictly to usury laws applicable to Lender. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the United States of America and the State of Texas), then, in that event, notwithstanding anything to the contrary in the Note, this Agreement, Loan Agreement - Page 20 21 or in any Security Instrument or other agreement entered into in connection with or as security for the Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to Lender that is contracted for, taken, reserved, charged, or received under the Note, this Agreement, or Security Instruments or under any of the other aforesaid agreements or otherwise with respect to the Note and the Indebtedness, after giving effect to reductions, if any, required by law from the nominal amount loaned to or incurred by Borrower hereunder to determine the true principal amount thereof; shall under no circumstances exceed the maximum amount of nonusurious interest allowed by such applicable law, and the excess, if any, shall be credited by Lender on the principal amount of the Indebtedness (or, if the principal amount of the Indebtedness shall have been paid in full, refunded to Borrower); and (ii) in the event that the maturity of the principal amount of and accrued interest with respect to the Note and the Indebtedness is accelerated by reason of an election of Lender resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to Lender may never, after giving effect to reductions, if any, required by law from the nominal amount loaned to or incurred by Borrower hereunder to determine the true principal amount thereof; include more than the maximum amount of nonusurious interest allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited by Lender on the principal amount of the Indebtedness (or, if the principal amount of the Indebtedness shall have been paid in full, refunded by Lender to Borrower). All interest so paid or agreed to be paid under the Note, this Agreement, or any Security Instrument shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period of the Loan until payment in full of the Indebtedness so that the interest for such full period shall not exceed the maximum amount of nonusurious interest allowed by such applicable law. To the extent that Article 5069-1.04, as amended, of the Texas Revised Civil Statutes is applicable to Lender for the purpose of determining the Highest Lawful Rate, Lender hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to Lender's right subsequently to change such method in accordance with applicable law. Section 9.15 References. The words "herein," "hereof;" "hereunder," and other words of similar import when used in this Agreement refer to this Agreement as a whole, and not to any particular article, section, or subsection. Section 9.16 Entire Agreement. The Note, this Agreement, and the Security Instruments embody the entire agreement and understanding between Lender, Borrower, and the other respective parties and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof Section 9.17 Exhibits. The exhibits attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein, except that in the event of any conflict between any of the provisions of such exhibits and the provisions of this Agreement, the provisions of this Agreement shall prevail. Section 9.18 Titles of Articles. All titles or headings to articles, sections, subsections, or other divisions of this Agreement or the exhibits hereto are only for the convenience of the parties Loan Agreement- Page 21 22 and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections, or other divisions, such content being controlling as to the agreement between the parties hereto. Section 9.19 Counterparts. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. THIS WRITTEN LOAN AGREEMENT TOGETHER WITH THE OTHER LOAN INSTRUMENTS MENTIONED HEREIN REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. Executed effective as of the date first written above. BORROWER: GAINSCO, INC. By: /s/ DANIEL J. COOTS ------------------------------- Daniel J. Coots, Senior Vice President and Chief Financial Officer LENDER: BANK ONE, TEXAS, N.A. By: /s/ JOHN D. HUDGENS ------------------------------- John D. Hudgens Vice President Exhibits A - Note B - Compliance Certificate Loan Agreement - Page 22 23 NOTICE OF FINAL AGREEMENT To: GAINSCO, INC. ("Borrower") 500 Commerce Street Fort Worth, Texas 76102 As of the effective date of this Notice, Borrower and BANK ONE, TEXAS, NATIONAL ASSOCIATION ("BANK") have consummated a transaction pursuant to which Bank has agreed to make a loan or loans to Borrower, to renew and extend an existing loan or loans to Borrower, or to otherwise extend credit or make financial accommodations to or for the benefit of Borrower, in an aggregate amount up to $5,000,000.00 (collectively, whether one or more, the "LOAN"). In connection with the Loan, Borrower and Bank and the undersigned guarantors and other obligors, if any (collectively, whether one or more, "OTHER OBLIGORS") have executed and delivered and may hereafter execute and deliver certain agreements, instruments, and documents (collectively hereinafter referred to as the "WRITTEN LOAN AGREEMENT"). It is the intention of Borrower, Bank, and Other Obligors that this Notice be incorporated by reference into each of the written agreements, instruments and documents comprising the Written Loan Agreement. Borrower, Bank, and Other Obligors each warrant and represent that the entire agreement made and existing by or among Borrower, Bank, and Other Obligors with respect to the Loan is and shall be contained within the Written Loan Agreement, as amended and supplemented hereby, and that no agreements or promises exist or shall exist by or among, Borrower, Bank, and Other Obligors that are not reflected in the Written Loan Agreement. THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. Effective Date: September 9, 1996. BANK ONE TEXAS, NATIONAL ASSOCIATION By: /s/ JOHN D. HUDGENS ------------------------------- John D. Hudgens, Vice President ACKNOWLEDGED AND AGREED: BORROWER: GAINSCO, INC. By: /s/ DANIEL J. COOTS - - ---------------------------------- Daniel J. Coots Senior Vice President and Chief Financial Officer EX-10.34 5 PROMISSORY NOTE 1 EXHIBIT 10.34 BANK ONE, TEXAS, NATIONAL ASSOCIATION REVOLVING PROMISSORY NOTE $5,000,000.00 Fort Worth, Texas 9-9, 1996 PROMISE TO PAY. For value received, on or before August 15, 1997 ("Maturity Date"), GAINSCO, INC. ("Borrower"), a Texas corporation, promises to pay to the order of BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Bank") at its offices in Tarrant County, Texas, at 500 Throckmorton Street, Fort Worth, Texas 76102, the principal amount of Five Million Dollars ($5,000,000.00) ("Total Principal Amount"), or such amount less than the Total Principal Amount is outstanding from time to time if the total amount outstanding under this Promissory Note ("Note") is less than the Total Principal Amount, together with interest on such portion of the Total Principal Amount which has been advanced to Borrower from the date advanced until paid at a fluctuating rate per annum which shall from day to day be equal to the lesser of (a) the Maximum Rate (as hereinafter defined), or (b) a rate ("Contract Rate"), calculated on the basis of the actual days elapsed but computed as if each year consisted of 360 days, equal to the Bank One Base Rate of interest ("Base Rate") as established from time to time by Bank (which may not be the lowest, best, or most favorable rate of interest which Bank may charge on loans to its customers), each change in the rate to be charged on this Note to become effective without notice to Borrower on the effective date of each change in the Maximum Rate or the Base Rate, as the case may be; provided, however, that if at any time the Contract Rate shall exceed the Maximum Rate, thereby causing the interest on this Note to be limited to the Maximum Rate, then any subsequent reduction in the Base Rate shall not reduce the rate of interest on this Note below the Maximum Rate until the total amount of interest accrued on this Note equals the amount of interest which would have accrued on this Note if the Contract Rate had at all times been in effect. The term "Maximum Rate," as used herein, shall mean at the particular time in question the maximum rate of interest which, under applicable law, may then be charged on this Note. If such maximum rate of interest changes after the date hereof and this Note provides for a fluctuating rate of interest, the Maximum Rate shall be automatically increased or decreased, as the case may be, without notice to Borrower from time to time as of the effective date of each change in such maximum rate. If applicable law ceases to provide for such a maximum rate of interest, the Maximum Rate shall be equal to eighteen percent (18%) per annum. PAYMENT TERMS. The principal of and all accrued but unpaid interest on this Note shall be due and payable as follows: (a) interest shall be due and payable monthly as it accrues, commencing on the first (1st) day of October, 1996, and continuing on the first (1st) day of each successive month thereafter during the term of this Note; and (b) the outstanding principal balance of this Note, together with all accrued but unpaid interest, shall be due and payable on the Maturity Date. PAST DUE PAYMENTS. To the extent that any interest is not paid on or before the fifth day after it becomes due and payable, Bank may, at its option, add such accrued interest to the principal of this Note. Notwithstanding anything herein to the contrary, upon an Event of Default (as hereinafter defined) or at Revolving Promissory Note - Page 1 2 maturity whether by acceleration or otherwise, all principal of this Note shall, at the option of Bank, bear interest at the Maximum Rate until paid. SECURITY. This Note evidences obligations and indebtedness from time to time owing by Borrower to Bank pursuant to that certain Loan Agreement of even date herewith by and between Borrower and Bank ("Loan Agreement"), and is secured by, a Negative Pledge Agreement of even date. This Note, the Loan Agreement, and all other documents evidencing, securing, governing, guaranteeing or pertaining to this Note, including but not limited to those documents described above, are hereinafter collectively referred to as the "Loan Documents." The holder of this Note is entitled to the benefits and security provided in the Loan Documents. REVOLVING CREDIT. Under the Loan Agreement, Borrower may request advances and make payments hereunder from time to time, provided that it is understood and agreed that the aggregate principal amount outstanding from time to time hereunder shall not at any time exceed the Total Principal Amount. The unpaid balance of this Note shall increase and decrease with each new advance or payment hereunder, as the case may be. This Note shall not be deemed terminated or canceled prior to the Maturity Date, although the entire principal balance hereof may from time to time be paid in full. Borrower may borrow, repay and reborrow hereunder. All regularly scheduled payments of the indebtedness evidenced by this Note and by any of the other Loan Documents shall be applied first to any accrued but unpaid interest then due and payable hereunder or thereunder and then to the principal amount then due and payable. All non-regularly scheduled payments shall be applied to such indebtedness in such order and manner as the holder of this Note may from time to time determine in its sole discretion. All payments and prepayments of principal of or interest on this Note shall be made in lawful money of the United States of America in immediately available funds, at the address of Bank indicated above, or such other place as the holder of this Note shall designate in writing to Borrower. If any payment of principal of or interest on this Note shall become due on a day which is not a Business Day (as hereinafter defined), such payment shall be made on the next succeeding Business Day and any such extension of time shall be included in computing interest in connection with such payment. As used herein, the term "Business Day" shall mean any day other than a Saturday, Sunday, or any other day on which national banking associations are authorized to be closed. The books and records of Bank shall be prima facie evidence of all outstanding principal of and accrued and unpaid interest on this Note. BUSINESS LOAN. Borrower agrees that no advances under this Note shall be used for personal, family, or household purposes, and that all advances hereunder shall be used solely for business, commercial, investment, or other similar purposes. DEFAULTS: REMEDIES. Borrower agrees that upon the occurrence of any one or more of the following events of default ("Event of Default"): (a) failure of Borrower to pay any installment of principal of or interest on this Note or on any other indebtedness of Borrower to Bank when due; or (b) the occurrence of any event of default specified in any of the other Loan Documents; or Revolving Promissory Note - Page 2 3 (c) the bankruptcy or insolvency of the assignment for the benefit of creditors by, or the appointment of a receiver for any of the property of or the liquidation, termination, dissolution, or death or legal incapacity of any party liable for the payment of this Note, whether as maker, endorser, guarantor, surety, or otherwise; the holder of this Note may, at its option, without further notice or demand, (i) declare the outstanding principal balance of and accrued but unpaid interest on this Note at once due and payable, (ii) refuse to advance any additional amounts under this Note, (iii) foreclose all liens securing payment hereof; (iv) pursue any and all other rights, remedies, and recourses available to the holder hereof, including but not limited to any such rights, remedies, or recourses under the Loan Documents, at law or in equity, or (v) pursue any combination of the foregoing. CUMULATIVE REMEDIES AND WAIVER. The failure to exercise the option to accelerate the maturity of this Note or any other right, remedy, or recourse available to the holder hereof upon the occurrence of an Event of Default hereunder shall not constitute a waiver of the right of the holder of this Note to exercise the same at that time or at any subsequent time with respect to such Event of Default or any other Event of Default. The rights, remedies, and recourses of the holder hereof; as provided in this Note and in any of the other Loan Documents, shall be cumulative and concurrent and may be pursued separately, successively, or together as often as occasion therefore shall arise, at the sole discretion of the holder hereof. The acceptance by the holder hereof of any payment under this Note which is less than the payment in full of all amounts due and payable at the time of such payment shall not (i) constitute a waiver of or impair, reduce, release, or extinguish any right, remedy, or recourse of the holder hereof, or nullify any prior exercise of any such right, remedy, or recourse, or (ii) impair, reduce, release, or extinguish the obligations of any party liable under any of the Loan Documents as originally provided herein or therein. SAVINGS CLAUSE. This Note and all of the other Loan Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable usury laws. If any provision hereof or of any of the other Loan Documents or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the application of such provision to any other person or circumstance nor the remainder of the instrument in which such provision is contained shall be affected thereby, and all provisions shall be enforced to the greatest extent permitted by law. It is expressly stipulated and agreed to be the intent of the holder hereof to at all times comply with the usury and other applicable laws now or hereafter governing the interest payable on the indebtedness evidence by this Note. If the applicable law is ever revised, repealed, or judicially interpreted so as to render usurious any amount called for under this Note or under any of the other Loan Documents, or contracted for, charged, taken, reserved, or received with respect to the indebtedness evidenced by this Note, or if Bank's exercise of the option to accelerate the maturity of this Note or if any prepayment by Borrower results in Borrower having paid any interest in excess of that permitted by law, then it is the express intent of Borrower and Bank that all excess amounts theretofore collected by Bank be credited on the principal balance of this Note (or, if this Note and all other indebtedness arising under or pursuant to the other Loan Documents have been paid in full, refunded to Borrower), and the provisions of this Note and the other Loan Documents immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise Revolving Promissory Note - Page 3 4 called for hereunder or thereunder. All sums paid, or agreed to be paid, by Borrower for the use, forbearance, detention, taking, charging, receiving, or reserving of the indebtedness of Borrower to Bank under this Note or arising under or pursuant to the other Loan Documents shall, to the maximum extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to such indebtedness for so long as such indebtedness is outstanding. To the extent federal law permits Bank to contract for, charge or receive a greater amount of interest, Bank will rely on federal law instead of TEX REV. CIV. STAT. ANN. art. 5069-1.04, as amended, for the purpose of determining the Maximum Rate. Additionally, to the maximum extent permitted by applicable law now or hereafter in effect, Bank may, at its option and from time to time, implement any other method of computing the Maximum Rate under such Article 5069-1.04, as amended, or under other applicable law by giving notice, if required, to Borrower as provided by applicable law now or hereafter in effect. Notwithstanding anything to the contrary contained herein or in any of the other Loan Documents, it is not the intention of Bank to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration. APPLICABILITY OF LAWS. In no event shall TEX. REV. CIV. STAT. ANN. art. 5069 Ch. 15 (which regulates certain revolving loan accounts and revolving tri-party accounts) apply to this Note. To the extent that TEX. REV. CIV. STAT. ANN. art. 5069-1.04, as amended, is applicable to this Note, the "indicated rate ceiling" specified in such article is the applicable ceiling; provided that, if any applicable law permits greater interest, the law permitting the greatest interest shall apply. ATTORNEYS FEES AND COSTS. If this Note is placed in the hands of an attorney for collection, or is collected in whole or in part by suit or through probate, bankruptcy, or other legal proceedings of any kind, Borrower agrees to pay, in addition to all other sums payable hereunder, all costs and expenses of collection, including but not limited to reasonable attorneys fees. WAIVER OF NOTICE. Borrower and any and all endorsers and guarantors of this Note severally waive presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration and dishonor, diligence in enforcement and indulgences of every kind and without further notice hereby agree to renewals, extensions, exchanges or releases of collateral, taking of additional collateral, indulgences or partial payments, either before or after maturity. CAPTIONS. Captions used herein are for convenience only and should not be used in interpreting this Note. Revolving Promissory Note - Page 4 5 GOVERNING LAW. THIS NOTE HAS BEEN EXECUTED UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT AS SUCH LAWS ARE PREEMPTED BY APPLICABLE FEDERAL LAWS. GAINSCO, NC. By: /s/ DANIEL J. COOTS ------------------------------ Daniel J. Coots, Senior Vice President and Chief Financial Officer Revolving Promissory Note - Page 5 EX-10.35 6 NEGATIVE PLEDGE AGREEMENT EXECUTED BY GAINSCO 1 EXHIBIT 10.35 NEGATIVE PLEDGE AGREEMENT This Negative Pledge Agreement (the "Negative Pledge") is executed effective 9-9, 1996, by GAINSCO, INC. ("Borrower"), a Texas corporation, and BANK ONE, TEXAS, NATIONAL ASSOCIATION ("Bank One"), in connection with a loan from Bank One to Borrower. 1. Obligations. Bank One has agreed to make a loan to Borrower to be evidenced by a Revolving Promissory Note of even date, in the original principal sum of $5,000,000.00. The revolving promissory note and all extensions and renewals thereof and any and all other loans, advances, or extensions of credit by Bank One to Borrower (whether created directly or acquired by Bank One indirectly by assignment or otherwise), and whether now existing or hereafter arising, absolute or contingent, primary or secondary will be collectively called the "Obligations". 2. Negative Pledge. In consideration of Bank One extending credit to Borrower, so long as any of the Obligations shall remain unpaid and outstanding, Borrower agrees not to mortgage, encumber, pledge, or grant a lien upon or security interest in all or any part of Borrower's assets, whether now owned or hereafter acquired, including without limitation, all stock and other evidence of ownership in Borrower's subsidiary corporations (all collectively referred to as the "Assets"). Borrower also will not create, incur, suffer, or permit to exist any mortgage, deed of trust, pledge, assignment, title retention, lien, security interest, or any other preferential arrangement, charge, or encumbrance (including any conditional sale or finance lease), on, in, or with respect to the Assets, without Bank One's prior written consent. 3. Additional Covenants. So long as any of the Obligations remain unpaid, Borrower further agrees that: (a) Borrower will not sell, lease, assign, or convey all or any part of the Assets without first obtaining Bank One's prior written consent; and (b) Borrower will cause the Assets to be kept free and clear of any and all liens, mortgage, charges, security interest, and encumbrances of every character, except for those consented to in writing by Bank One. 4. Events of Default. The happening of any of the following events or conditions shall constitute an "Event of Default" hereunder: (a) Borrower fails or refuses to punctually and properly perform, observe, and comply with all of the terms, covenants, and conditions of this Negative Pledge; or (b) Any of the Assets is attached or otherwise levied upon or placed in the hands of a receiver or other representative of a court. 5. Remedies. Upon the occurrence of an Event of Default, or at any time thereafter, Bank One may, at its option, among other things, declare the unpaid principal balance of and the interest accruing on the Obligations to be immediately due and Negative Pledge Agreement - Page 1 2 payable, without any notice, presentment, protest, notice of protest, notice of intent to accelerate, notice of acceleration, or demand of any kind, all of which are hereby expressly waived. 6. Release of Negative Pledge. Upon full and complete payment of the Obligations owing by Borrower to Bank One, Bank One will release this Negative Pledge. 7. Miscellaneous. (a) Borrower agrees to execute any and all further documents, including financing statements, and to take all actions as Bank One may require in the furtherance of this Negative Pledge. (b) This Negative Pledge, together with the covenants and warranties contained herein, shall inure to the benefit of Bank One and any subsequent owner of the Obligations, and shall be binding upon Borrower, and its successors and assigns. (c) The laws of the State of Texas and of the United States shall govern the rights and duties of Borrower and Bank One hereunder and the validity, construction, enforcement, and interpretation of this Negative Pledge. The duties and obligations herein imposed upon Borrower are performable in Fort Worth, Tarrant County, Texas. (d) Borrower is making this Negative Pledge Agreement in order to induce Bank One into making the loan represented by the note described above, and Borrower acknowledges that Bank One is relying on the covenants and warranties of the Borrower herein in making that loan. EXECUTED to be effective on the date first written above. GAINSCO, INC. By: /s/ DANIEL J. COOTS ---------------------------- Daniel J. Coots, Senior Vice President and Chief Financial Officer BANK ONE, TEXAS, NATIONAL ASSOCIATION By: /s/ JOHN D. HUDGENS ---------------------------- John D. Hudgens, Vice President Negative Pledge Agreement - Page 2 EX-22.2 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 22.2 SUBSIDIARIES OF REGISTRANT ------------- GAINSCO, INC. 75-1617013 (Texas) ------------- - - --------------- ----------------- ----------------- --------------- -------------- GAINSCO Service Agents Processing General Agents General Agents Risk Retention Corp. Systems, Inc. Insurance Company Premium Finance Administrators of America, Inc. Company Inc. 75-2282846 75-1796560 75-1629914 75-1631637 75-2217958 (Texas) (Texas) (Oklahoma) (Texas) (Nevada) - - --------------- ----------------- ----------------- --------------- -------------- * - - ---------------- --------------- ------------- GAINSCO County MGA Premium MGA Insurance Mutual Insurance Finance Company Company, Inc. Company 75-2447701 75-2371163 75-1767545 (Texas) (Texas) (Texas) - - ---------------- --------------- ------------- ---------------- MGA Agency, Inc. 75-1622457 (Texas) ----------------
* GAINSCO Service Corp. owns the charter and management contract, thereby giving it 100% control of GAINSCO County Mutual Insurance Company.
EX-24.2 8 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 24.2 CONSENT OF INDEPENDENT AUDITORS TO INCORPORATION BY REFERENCE The Board of Directors GAINSCO, INC.: We consent to incorporation by reference in the registration statement (No. 33-48634) on Form S-8 of GAINSCO, INC. of our report dated February 24, 1997, relating to the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, and all related schedules, which report appears in the December 31, 1996 annual report on Form 10-K of GAINSCO, INC. /s/ KPMG PEAT MARWICK LLP ---------------------------- KPMG Peat Marwick LLP Dallas, Texas March 11, 1997 EX-25.1 9 POWERS OF ATTORNEY 1 EXHIBIT 25.1 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS THAT I, the undersigned, of Dallas County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally, my true and lawful attorneys and agents to execute in my name, place and stead in my capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1996, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, such power to extend to the execution of any amendment to the Form 10-K. WITNESS MY HAND this 17th day of March, 1997. /s/ HARDEN H. WIEDEMANN ----------------------------- HARDEN H. WIEDEMANN 2 EXHIBIT 25.1 SPECIAL POWER OF ATTORNEY THE STATE OF ARIZONA KNOW ALL MEN BY THESE PRESENTS: COUNTY OF MARICOPA THAT I, the undersigned, of Antrim County, Michigan, have made, constituted and appointed and by these presents do make, constitute and appoint JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally, my true and lawful attorneys and agents to execute in my name, place and stead in my capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1996, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, such power to extend to the execution of any amendment to the Form 10-K. WITNESS MY HAND this 15th day of March, 1997. /s/ NORMAN J. E. ROE ----------------------------- NORMAN J.E. ROE 3 EXHIBIT 25.1 SPECIAL POWER OF ATTORNEY THE STATE OF MINNESOTA KNOW ALL MEN BY THESE PRESENTS: COUNTY OF HENNEPIN THAT I, the undersigned, of Hennepin County, Minnesota, have made, constituted and appointed and by these presents do make, constitute and appoint JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally, my true and lawful attorneys and agents to execute in my name, place and stead in my capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1996, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as the undersigned might or could do in person, such power to extend to the execution of any amendment to the Form 10-K. WITNESS MY HAND this 17th day of March, 1997. /s/ JOEL C. PUCKETT ----------------------------- JOEL C. PUCKETT 4 EXHIBIT 25.1 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS Section KNOW ALL MEN BY THESE PRESENTS: COUNTY OF DALLAS Section THAT I, the undersigned, of Dallas County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOSEPH D. MACCHIA, DANIEL J. COOTS and SAM ROSEN, and each of them severally, my true and lawful attorneys and agents to execute in my name, place and stead in my capacity as Director of GAINSCO, INC. the Annual Report on Form 10-K of GAINSCO, INC. ("Form 10-K") for the fiscal year ended December 31, 1996, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned every act whatsoever necessary or advisable to be done in the premises as filly and to all intents and purposes as the undersigned might or could do in person, such power to extend to the execution of any amendment to the Form 10-K. WITNESS MY HAND this 16th day of March, 1997. /s/ JOHN H. WILLIAMS ----------------------------- JOHN H. WILLIAMS EX-27 10 FINANCIAL DATA SCHEDULE
7 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 77,643,677 104,930,347 105,725,155 0 0 0 203,831,306 1,044,740 2,156,326 12,633,938 296,845,776 105,691,588 65,255,153 0 0 0 0 0 2,167,037 0 296,845,776 106,792,928 9,160,518 471,956 2,379,154 58,378,720 (519,257) 15,499,641 21,098,202 5,078,635 0 0 0 0 16,019,567 .74 .74 70,361 53,037 5,342 17,178 32,584 78,978 (5,342)
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