-----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, VPt5ESTxPJcodSIqwD1WF32nHqYEhZY8wYY9zvUtpEyLlGLUlbFU9eEGZYbAk/av 5tPKeaGqgzux/1vXQXEwfQ== 0000950134-99-002278.txt : 19990402 0000950134-99-002278.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002278 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAINSCO INC CENTRAL INDEX KEY: 0000786344 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 751617013 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09828 FILM NUMBER: 99579628 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-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 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, 1998 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 (20,314,021 shares) as of the close of the business on February 28, 1999 was $101,570,105 (based on the closing sale price of $5.00 per share). As of February 28, 1999, there were 20,896,563 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. [ ] Documents incorporated by reference:
Document Form 10-K Part -------- -------------- Exhibits to Form 10-K Annual Reports filed with the SEC for fiscal years ended December 31, 1988, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997 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 Exhibits to Form 8-K's filed with the SEC and dated May 5, 1998 and August 26, 1998 IV Exhibits to Form 10-Q Quarterly report filed with the SEC for the quarter ended June 30, 1998 IV Exhibits to Form 10-Q/A Amendment filed with the SEC and dated June 16, 1998 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 and nonstandard markets within the commercial auto, auto garage, general liability, property and personal nonstandard auto 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 48 states and the District of Columbia on a non-admitted basis and in 44 states and the District of Columbia on an admitted basis. The Company markets its commercial lines of insurance through 180 non-affiliated general agency offices and its personal line of insurance through approximately 800 non-affiliated retail agencies. Approximately 72% of the Company's gross premiums written during 1998 resulted from risks located in Arkansas, California, Florida, Georgia, Louisiana, Pennsylvania, Tennessee and Texas. The Company's lines of insurance are written on certain classes and types of risks which are not generally insured by many of the standard companies, although such companies have been competing in this market more frequently in recent years. The strategy of the Company is to identify various types of risks where it can price its coverages profitably and competitively. This strategy results in changes in product mix and product design from time to time. For a description of the product lines presently written by the Company, see "Business-Product Lines." The Company sets its policy premiums by applying its own judgment after consideration of the risks involved and the competition. Part of its analysis includes the review of historical premium rate and loss cost information as compiled and reported by independent rating bureaus. Through GAINSCO County Mutual Insurance Company, the Company has fronting agreements with two non-affiliated insurance companies. The business written under these agreements is ceded 100% to reinsurers rated "A-(Excellent)" or better by A.M. Best Company (Best's), and 100% of the liabilities are fully collateralized with pledged investment grade securities or letters of credit. RECENT DEVELOPMENTS Servicing Arrangements Cancellations. Through MGA Insurance Company, Inc., a wholly-owned subsidiary, the Company has earned 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. These servicing carrier agreements were canceled by the Company 2 3 effective December 31, 1998 and the servicing carrier operation is currently in run-off. Strategic Alternatives. On August 28, 1998, the Company announced that its Board of Directors had determined to commence pursuit of additional strategic alternatives to maximize shareholder value, including a possible sale of the Company, and had engaged Wasserstein Perella & Co., Inc. to assist in the process. This process is continuing. Lalande Acquisition. On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"), a privately-owned Miami, Florida-based operation specializing in underwriting, servicing and claims adjusting in the nonstandard personal automobile insurance market in Florida. The Lalande Group includes National Specialty Lines, Inc. ("NSL") and De La Torre Insurance Adjusters, Inc. ("DLT"). NSL is a managing general agency which markets nonstandard personal auto insurance through approximately 800 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was $18 million in cash to be paid at closing plus up to an additional $22 million in cash to be paid over approximately five years contingent upon the performance of the Lalande Group. APS Disposition. On March 9, 1999, the Company announced the signing of an agreement for sale of substantially all of the assets of Agents Processing Systems, Inc. ("APS"), its wholly-owed subsidiary engaged in marketing computer software related to general agency operations. The sale is expected to be completed in April 1999. The purchaser is to acquire all rights to the APS software products, assignment of the APS customer contracts and other miscellaneous assets for a nominal amount of cash, assumption of contract obligations, a fixed number of software use licenses and development work on an electronic data interchange project. PRODUCT LINES The Company's principal products serve certain specialty markets within the commercial auto, auto garage, general liability, property and personal nonstandard auto 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. 3 4
Years ended December 31 ---------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- ------------------------ ------------------------ (Dollar amounts in thousands) Gross Premiums Written: Commercial auto $ 50,037 55% 56,704 57% 62,328 57% Auto garage 19,974 22% 23,279 23% 26,871 24% General liability 17,046 19% 17,829 18% 19,744 18% Property 1,721 2% 1,267 1% 1,056 1% Personal auto 891 -% 690 1% - -% Other lines 1,493 2% 7 -% 1 -% ---------- ---------- ---------- ---------- ---------- ---------- Total $ 91,162 100% 99,776 100% 110,000 100% ========== ========== ========== ========== ========== ========== Policies in Force (End of Period) 38,939 35,962 35,903
Commercial Auto The commercial auto coverage underwritten by the Company includes risks associated with local haulers of specialized freight, tradespersons' vehicles and trucking companies. 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 product line 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. Personal Auto The Company's personal auto product line is in the nonstandard Florida market and is primarily written with minimum liability limits on an admitted basis. Property The Company underwrites commercial property coverages which include fire, extended coverage, vandalism and malicious mischief for commercial establishments with limits up to $5,000,000 per risk. Limits in excess of $300,000 are reinsured under property excess per risk treaties, see "Business-Reinsurance". Other Lines The Company underwrites other property and casualty coverages, the largest of which is mobile home risks. 4 5 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 commercial 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, resulting in a maximum net claim retention per risk of $300,000 for such policies. 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 under those policies. Excess casualty reinsurance carried by the Company includes "extra-contractual obligations" coverage. This coverage protects the Company against claims arising out of certain legal liability theories not directly based on the terms and conditions of the Company's policies of insurance. Extra-contractual obligation claims are covered 90% under the excess casualty reinsurance treaty up to its respective limits. The Company is operating under excess casualty reinsurance treaties with four 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. 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 ---------------------------- 1999 1998 1997 ------- ------ -------- Excess Reinsurer Dorinco Reinsurance Company 35% 35% 50% First Excess and Reinsurance Corporation 35% -- -- Great Lakes American Reinsurance Company -- -- 40% Liberty Mutual Insurance Company 20% 20% -- PMA Reinsurance Corporation -- 35% -- Republic Western Insurance Company 10% 10% 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 for a single catastrophe. The Company also carries property excess per risk reinsurance which covers property claims exceeding $300,000 up to $5,000,000 net loss each risk. From time to time the Company makes use of facultative reinsurance to cede unusual risks on a negotiated basis. 5 6 Since 1995, the Company has had reinsurance fronting arrangements with non-affiliated insurance companies. The Company retains no portion as the business written under these agreements is 100% ceded. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by Best's, the agreements require that collateral (in the form of trust agreements and/or letters of credit) be maintained to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to the risks insured under these fronting arrangements. The Company has signed contracts in force for its reinsurance treaties for all years through 1998. The Company has written confirmations from reinsurers for 1999 regarding the basic terms and provisions under which they will assume the Company's risks, but, as of the date hereof, formal reinsurance treaty contracts with these reinsurers have not been executed. It is customary in the industry for insurance companies and reinsurers to operate under such commitments pending the execution of formal reinsurance treaties. No assurance can be given that such reinsurance treaties will be executed or, if executed, that the terms and provisions thereof will not be modified. MARKETING AND DISTRIBUTION The Company markets its commercial lines insurance products through 180 non-affiliated general agency offices, commonly referred to as wholesale agents. These general agents each represent several insurance companies, some of which may compete with the Company. The general agents solicit business from independent local agents or brokers, commonly referred to as retail agents, who are in direct contact with insurance buyers. The Company has elected to utilize general agents to market its insurance products in order to avoid the fixed costs of a branch office system. These general agents have experience in the specialty lines of coverages in which the Company concentrates and, in many instances, a long business history with members of the Company's management. The Company requires that its general agents have a specified level of errors and omissions insurance coverage, which indirectly protects the Company against certain negligence on the part of general agents. The Company reviews its appointed agencies for financial solvency and liquidity levels. The Company has errors and omissions insurance coverage to protect against negligence on the part of its employees. The Company has developed underwriting manuals to be used by its general agents. The general agents are authorized to bind the Company to provide insurance if the risks and terms involved in the particular coverage are within the underwriting guidelines set forth in the Company's underwriting manuals. The manuals stipulate minimum rates to be charged for the various classes of coverage offered. The general agents are compensated on a commission basis which varies by line of business. In addition, the general agency contracts between the Company and its general agents contain profit contingency inducements designed to reward those general agents with superior claim ratios who write certain minimum levels of premium with the Company. The general agents also retain a portion of the payment made by the insured as policy fee in connection with the issuance of some of the Company's non-admitted policies. Certain coverages, such as auto liability, may only be written in some states by companies with the authority to write insurance on an admitted basis in such states. The Company currently is approved to write insurance 6 7 on an admitted basis in 44 states and the District of Columbia. Personal nonstandard auto is marketed through approximately 800 non-affiliated retail agencies which are compensated on a commission basis. The retail agents may represent several insurance companies and they are in direct contact with the insurance buyer. This business is written on an admitted basis. UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES The Company maintains reserves for the payment of claims and claim adjustment expenses for both reported and unreported claims. Claim reserves are estimates, at a given point in time, of amounts that the Company expects to pay on incurred claims based on facts and circumstances then known. The amount of claim reserves for reported claims is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding the claim, and the policy provisions relating to the type of claim. The amount of claim reserves for unreported claims and case reserve development is determined on the basis of historical information and anticipated future conditions by lines of insurance and actuarial review. Reserves for claim adjustment expenses are intended to cover the ultimate costs of settling claims, including investigation and defense of lawsuits resulting from such claims. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results. The process of establishing claim reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured claim and the settlement of the claim. Some judicial decisions and legislative actions broaden liability and policy definitions and increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult claim reserving process. Ultimate liability may be greater or lower than current reserves. Reserves are monitored by the Company using new information on reported claims and a variety of statistical techniques. The reserves are reviewed annually by an independent actuarial firm. The Company does not discount to present value that portion of its claim reserves expected to be paid in future periods. 7 8 The following table sets forth the changes in unpaid claims and claim adjustment expenses, net of reinsurance cessions, as shown in the Company's consolidated financial statements for the periods indicated:
As of and for the years ended December 31 -------------------------------- 1998 1997 1996 -------- -------- -------- (Amounts in thousands) Unpaid claims and claim adjustment expenses, beginning of period $113,227 105,691 95,011 Less: Ceded unpaid claims and claim adjustment expenses, beginning of period 29,524 26,713 24,650 -------- -------- -------- Net unpaid claims and claim adjustment expenses, beginning of period 83,703 78,978 70,361 -------- -------- -------- Net claims and claim adjustment expenses incurred related to: Current period 59,635 53,969 53,037 Prior periods 26,718 8,117 5,342 -------- -------- -------- Total net claims and claim adjustment expenses incurred 86,353 62,086 58,379 -------- -------- -------- Net claim and claim adjustment expenses paid related to: Current period 19,693 17,807 17,178 Prior periods 48,595 39,554 32,584 -------- -------- -------- Total net claim and claim adjustment expenses paid 68,288 57,361 49,762 -------- -------- -------- Net unpaid claims and claim adjustment expenses, end of period 101,768 83,703 78,978 Plus: Ceded unpaid claims and claim adjustment expenses, end of period 35,030 29,524 26,713 -------- -------- -------- Unpaid claims and claim adjustment expenses, end of period $136,798 113,227 105,691 ======== ======= =======
For 1998 the unfavorable development in claims and claim adjustment expenses incurred was primarily the result of unanticipated unfavorable development for commercial auto claims for the 1997, 1996 and 1995 accident years. For 1997 and 1996 the unfavorable development in claims and claim adjustment expenses incurred was largely a result of claim reserve increases recorded for commercial auto claims in Kentucky for the 1996 and 1995 accident years and adverse development in claim adjustment expense reserves for commercial auto in the 1996, 1995 and 1994 accident years. 8 9 The following table sets forth, as of December 31, 1998, 1997, and 1996, 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 ------------------------------------- 1998 1997 1996 --------- ------ ------ (Amounts in thousands) Net unpaid claims and claim adjustment expenses reported on a SAP basis $ 102,404 84,406 79,976 Adjustments: Estimated recovery for salvage and subrogation (636) (703) (998) --------- ------ ------ Net unpaid claims and claim adjustment expenses reported on a GAAP basis $ 101,768 83,703 78,978 ========= ====== ======
The following table represents the development of GAAP balance sheet reserves for the years ended December 31, 1988 through 1998. 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 unpaid claims and claim adjustment expenses based on experience as of the end of each succeeding year, including net cumulative payments made since the end of the respective year. For example, the 1994 liability for net claims and claim adjustment expenses reestimated four years later (as of December 31, 1998) was $67,442,000 of which $62,389,000 has been paid, leaving a net reserve of $5,053,000 for claims and claim adjustment expenses in 1994 and prior years remaining unpaid as of December 31, 1998. "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 1994 net unpaid claims and claim adjustment expenses indicates a $6,685,000 net deficiency from December 31, 1994 to December 31, 1998 (four years later). Conditions and trends that have affected development of liability in the past may or may not necessarily occur in the future. Accordingly, it may or may not be appropriate to extrapolate future redundancies or deficiencies based on this table. 9 10
As of and for the years ended December 31 -------------------------------------------------------------------------------------------------------- 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------ (Amounts in thousands) Unpaid claims & claim adjustment expenses: Gross 29,538 35,744 45,214 53,148 66,517 72,656 80,729 95,011 105,691 113,227 136,798 Ceded 15,005 15,695 16,308 15,105 16,594 16,701 19,972 24,650 26,713 29,524 35,030 Net ------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------ 14,533 20,049 28,906 38,043 49,923 55,955 60,757 70,361 78,978 83,703 101,768 Net cumulative paid as of: One year later 4,902 7,545 10,251 15,037 22,470 24,090 24,730 32,584 39,554 48,595 Two years later 8,660 12,340 18,145 26,819 37,032 39,182 41,874 56,605 70,185 Three years later 10,642 16,413 23,255 33,879 45,884 48,688 55,338 73,349 Four years later 12,606 19,085 26,171 37,292 51,082 54,428 62,389 Five years later 13,815 20,633 26,970 39,999 54,092 57,628 Six years later 14,249 21,020 28,399 41,143 55,828 Seven years later 14,140 21,700 28,734 42,020 Eight years later 14,632 21,871 28,806 Nine years later 14,752 21,830 Ten years later 14,682 Net unpaid claims and claim adjustment expenses reestimated as of: One year later 13,645 20,060 28,354 38,528 54,150 59,573 61,157 75,703 87,095 110,421 Two years later 13,694 20,566 28,479 42,235 57,223 59,922 62,296 80,356 104,588 Three years later 14,024 21,214 30,035 43,217 57,459 59,247 63,871 88,867 Four years later 14,675 22,431 30,129 42,493 56,832 58,414 67,442 Five years later 15,248 22,332 29,022 42,191 56,337 59,735 Six years later 15,174 22,034 29,073 41,984 56,721 Seven years later 14,572 21,965 28,908 42,356 Eight years later 14,753 21,950 28,828 Nine years later 14,782 21,872 Ten years later 14,719 Net cumulative redundancy (deficiency) (186) (1,823) (78) (4,313) (6,798) (3,780) (6,685) (18,506) (25,610) (26,718)
The Company has an indicated deficiency of approximately 32% of net unpaid claims and claim adjustment expenses ("C & CAE") for the 1997 year for reasons mentioned previously. Net unpaid C & CAE at December 31, 1998 was approximately $101,768,000, which the Company believes is adequate. 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 10 11 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:
Years ended December 31 ------------------------------------------- 1998 1997 1996 1995 1994 ----- ---- ----- ----- ----- COMPANY RATIOS Claims Ratio 95.9% 60.0% 54.3% 48.7% 47.9% Expense Ratio 37.9% 34.4% 34.5% 34.2% 34.4% Combined Ratio 133.8% 94.4% 88.8% 82.9% 82.3% INDUSTRY RATIOS (1) Claims Ratio 76.2% 72.8% 78.4% 78.9% 81.1% Expense Ratio 27.3% 27.1% 26.3% 26.1% 26.0% Combined Ratio 103.5% 99.9% 104.7% 105.0% 107.1% ===== ==== ===== ===== =====
- -------------- (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 Best's. Ratios for 1998 are estimated. The unfavorable variance to the industry with regard to the claims ratio in 1998 is largely related to unanticipated unfavorable claim development recorded in 1998 on the 1997, 1996 and 1995 accident years for the commercial auto liability line. For 1998, the increase in the unfavorable variance to the industry with regard to the expense ratio is largely because of downward adjustments in reinsurance commission income as a result of the unanticipated unfavorable claim development in 1998. For 1998 and prior years, 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. It should be noted that the Company ratios in the table above relate only to insurance operations. The holding company provides administrative and financial services for its wholly-owned subsidiaries. The allocation of the holding company's expenses solely to its insurance companies would have an impact on their results of operations and would also affect the ratios presented. As such, expenses related to the strategic alternatives review process are not included in these ratios. Generally Accepted Accounting Principles (GAAP) Basis - Claims and claim adjustment expenses are stated as a percentage of premiums earned as they are on a SAP basis. However, earned premiums include net policy fees earned whereas on a SAP basis policy fees earned are recorded on a gross basis. The GAAP expense ratio is based on premiums earned and includes the change in policy acquisition costs and underwriting expenses. Other differences include the treatment of the allowance for doubtful accounts. The following table presents the Company's claims, expense and combined ratios on a GAAP basis: 11 12
Years ended December 31 ------------------------------------------ 1998 1997 1996 1995 1994 ----- ---- ---- ---- ---- Claims Ratio 93.7% 60.7% 54.7% 49.8% 48.8% Expense Ratio 39.0% 33.7% 33.8% 33.1% 34.4% ----- ---- ---- ---- ---- Combined Ratio 132.7% 94.4% 88.5% 82.9% 83.2% ===== ==== ==== ==== ====
It should be noted that the Company ratios in the table above relate only to insurance operations. The holding company provides administrative and financial services for its wholly-owned subsidiaries. The allocation of the holding company's expenses solely to its insurance companies would have an impact on their results of operations and would also affect the ratios presented. As such, expenses related to the strategic alternatives review process are not included in these ratios. 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 ------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- ------ ------- ------- ------ (Dollar amounts in thousands) Net premiums written $ 87,040 98,858 109,227 108,689 91,170 Policyholders' surplus $ 71,826 78,496 59,012 50,140 42,350 Ratio 1.21 to 1 1.26 to 1 1.85 to 1 2.17 to 1 2.15 to 1
INVESTMENTS The Company's investment portfolio is under the direction of the Board of Directors acting through its 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. As of December 31, 1998 and 1997, the Company had no non-performing fixed maturity securities. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. 12 13 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 ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Average investments (1) $213,896 209,121 192,221 170,881 148,688 Investment income 9,803 9,731 9,161 8,157 6,868 Return on average investments (2) 4.6% 4.7% 4.8% 4.8% 4.6% Taxable equivalent return on average investments 6.2% 6.5% 6.6% 6.6% 6.4% Net realized gains 693 327 472 108 135 Net unrealized gains (losses) (3) $2,925 2,422 1,559 2,772 (1,829)
(1) Average investments is the average of beginning and ending investments at amortized cost, computed on an annual basis. (2) Includes taxable and tax-exempt securities. (3) Includes net unrealized gains (losses) for total investments. The following table sets forth the composition of the investment portfolio of the Company.
As of December 31 -------------------------------------------------------------------------- 1998 1997 1996 -------------------- -------------------- --------------------- (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 $ 5,668 5,887 5,404 5,476 7,731 7,748 Tax-exempt state and municipal bonds 54,120 55,091 84,330 85,052 97,199 97,977 Bonds available for sale: U.S. government securities 13,734 13,969 27,322 27,404 -- -- Tax-exempt state and municipal bonds 130,072 131,619 94,700 96,246 76,880 77,644 Certificates of deposit 595 595 595 595 595 595 Marketable securities 316 269 -- -- -- -- --------- ------- ------- ------- ------- ------- 204,505 207,430 212,351 214,773 182,405 183,964 --------- ------- ------- ------- ------- ------- Short-term investments 4,749 4,749 2,823 2,823 20,662 20,662 --------- ------- ------- ------- ------- ------- Total investments $ 209,254 212,179 215,174 217,596 203,067 204,626 ========= ======= ======= ======= ======= =======
13 14 The maturity distribution of the Company's investments in fixed maturities is as follows:
As of December 31 -------------------------------------------- 1998 1997 -------------------- --------------------- (Dollar amounts in thousands) Amortized Amortized Cost Percent Cost Percent --------- ------- --------- ------- Within 1 year $ 31,335 15.3% $ 35,142 16.6% Beyond 1 year but within 5 years 123,550 60.5% 140,571 66.2% Beyond 5 years but within 10 years 46,692 22.9% 30,608 14.4% Beyond 10 years but within 20 years 2,612 1.3% 6,030 2.8% -------- ----- -------- ----- $204,189 100.0% $212,351 100.0% ======== ===== ======== =====
RATING Best's insurance reports, property-casualty, has currently assigned an "A (Excellent)" pooled rating to the Company. Best's ratings are based on an analysis of the financial condition and operation of an insurance company as they relate to the industry in general. 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 7 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. The Company underwrites lines of insurance on risks not generally insured by many of the large standard property and casualty insurers. However, few barriers exist to prevent property and casualty insurance companies from entering into the Company's segments of the industry. To the extent this occurs, the Company can be at a competitive disadvantage because many of these companies have substantially greater financial and other resources and can offer a broader variety of specialty risk coverages. The Company believes that its principal competitive advantages are; 1) expertise in its product lines which facilitates underwriting selection and pricing and 2) service in underwriting and claims handling which provides its agents with a competitive advantage and a stable market. 14 15 EMPLOYEES As of December 31, 1998, the Company employed 140 persons, of which 11 were officers, 122 were staff and administrative personnel, and 7 were part-time employees. The Company is not a party to any collective bargaining agreement. The Company believes that its relations with its employees are good. EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the executive officers of the Company as of February 28, 1999 is set forth below:
Name Age Position with the Company ---- --- ------------------------- Glenn W. Anderson 46 President, Chief Executive Officer and Director Daniel J. Coots 47 Senior Vice President, Treasurer, Chief Financial Officer and Director J. Landis Graham 44 Senior Vice President Carolyn E. Ray 46 Senior Vice President Richard M. Buxton 50 Vice President Richard A. Laabs 43 Vice President Joseph W. Pitts 35 Vice President Sam Rosen 63 Secretary and Director
Mr. Glenn W. Anderson has served as President, Chief Executive Officer and Director of the Company since April 1998. From 1996 to April 1998, Mr. Anderson served as Executive Vice President of USF&G. From 1993 to 1996, Mr. Anderson held the position of Senior Vice President with USF&G. Mr. Anderson has been engaged in the property and casualty business since 1975. 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. J. Landis Graham has served as Vice President of the Company since September of 1993. Mr. Graham was promoted to Senior Vice President in 1998. 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. Ms. Carolyn E. Ray has served as Vice President of the Company since 1986. Ms. Ray was promoted to Senior Vice President in 1998. 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. 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. 15 16 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. Mr. Joseph W. Pitts has served as Vice President of the Company since August of 1997. From 1992 to 1997, Mr. Pitts was with USAA in the position of Actuary and Manager. Mr. Pitts has been engaged in the property and casualty business since 1988. 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. PROPERTIES The Company owns its corporate offices which provide approximately 35,000 square feet of office space and additional parking. Future expansion will be possible by converting the parking area into office space. The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all improvements located thereon, including a 10,000 square foot office building. The Company currently has this property under lease. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in the proceedings styled William Steiner v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC., filed in the United States District Court for the Northern District of Texas, Fort Worth Division. In that case, the plaintiff asserts claims on behalf of a putative class of persons who purchased the Company's common stock between August 6, 1997 and July 16, 1998, inclusive. The plaintiff asserts claims under section 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the Company's financial results did not reflect the Company's true financial position and results of operations in accordance with generally accepted accounting principles in that they understated reserves for claims and claim adjustment expenses. The Company believes that it has meritorious defenses to plaintiff's claims and intends to vigorously defend the action. In the normal course of its operations, the Company has been named as defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. In the opinion of the Company's management the ultimate liability, if any, resulting from the disposition of these claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company's management believes that unpaid claims and claim adjustment expenses are adequate to cover liabilities from claims which arise in the normal course of its insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 17 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, 1998. The prices reported reflect actual sales transactions on these exchanges.
High Low ---- --- 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 1997 First Quarter 9 7/8 8 7/8 1997 Second Quarter 9 3/8 8 1/8 1997 Third Quarter 9 7/8 8 7/8 1997 Fourth Quarter 10 1/16 8 1/8 1998 First Quarter 8 11/16 7 7/8 1998 Second Quarter 9 7/8 6 1998 Third Quarter 7 15/16 5 15/16 1998 Fourth Quarter 7 1/8 5 15/16
Cash dividends of $.0125 per share were paid to shareholders of record on March 29 and June 28, 1996. Cash dividends of $.015 per share were paid to shareholders of record on September 30 and December 31, 1996 and March 31, June 30 and September 30, 1997. Cash dividends of $.0175 per share were paid to shareholders of record on December 31, 1997, March 31, June 30 and September 30, 1998. On February 24, 1999, the Company declared a $.0175 per share cash dividend payable to shareholders of record on March 31, 1999. The Company depends on cash flow from cash dividends paid by its subsidiaries for dividend payments on its Common Stock. The Company purchased 243,932 and 470,702 shares of its Common Stock during 1997 and 1996, respectively. Additionally, a total of 17,200 shares were purchased in January and February of 1998. The Company has not purchased shares of its stock since February 1998 and has no plans to purchase additional shares. As of February 28, 1999, there were 370 shareholders of record of the Company's Common Stock. 17 18 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below for, and as of the end of each of the years ended December 31, have been derived from the consolidated financial statements of the Company which have been audited by KPMG LLP, independent certified public accountants. The consolidated balance sheets as of December 31, 1998 and 1997, and the consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998, 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 -------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (Amounts in thousands, except per share data) Income Data: Gross premiums written (1) $ 91,162 99,776 110,000 108,072 98,164 Ceded premiums written 2,603 1,637 1,749 1,968 8,710 --------- --------- --------- --------- --------- Net premiums written 88,559 98,139 108,251 106,104 89,454 Decrease (increase) in unearned premiums 3,644 4,117 (1,458) (8,849) (5,059) --------- --------- --------- --------- --------- Net premiums earned 92,203 102,256 106,793 97,255 84,395 Net investment income 9,803 9,731 9,161 8,157 6,868 Net realized gains 693 327 472 108 135 Insurance services 2,927 2,631 2,379 2,183 2,056 --------- --------- --------- --------- --------- Total revenues 105,626 114,945 118,805 107,703 93,454 --------- --------- --------- --------- --------- Claims and claim adjustment expenses 86,353 62,086 58,379 48,465 41,189 Policy acquisition costs 23,619 22,552 23,828 19,679 17,392 Underwriting and operating expenses 16,934 15,545 15,499 15,579 14,505 --------- --------- --------- --------- --------- Total expenses 126,906 100,183 97,706 83,723 73,086 --------- --------- --------- --------- --------- Income (loss) before income taxes (21,280) 14,762 21,099 23,980 20,368 Income tax expense (benefit) (9,617) 2,838 5,079 6,352 5,199 --------- --------- --------- --------- --------- Net income (loss) (2) $ (11,663) 11,924 16,020 17,628 15,169 ========= ====== ======= ======= ========= Earnings (loss) per share (3): Basic $ (.56) .57 .75 .82 .71 ========= ========= ========= ========= ========= Diluted $ (.56) .56 .74 .81 .70 ========= ========= ========= ========= ========= GAAP operating ratios: Claims ratio 93.7% 60.7% 54.7% 49.8% 48.8% Expense ratio 39.0% 33.7% 33.8% 33.1% 34.4% --------- --------- --------- --------- --------- Combined ratio 132.7% 94.4% 88.5% 82.9% 83.2% ========= ========= ========= ========= =========
18 19
As of December 31 -------------------------------------------------------- 1998 1997 1996 1995 1994 -------- ------- ------- ------- ------- Balance Sheet Data: Investments $210,989 216,802 203,831 183,027 160,300 Premiums receivable 14,885 14,250 15,825 15,914 12,262 Ceded unpaid claims and claim adjustment expenses 35,030 29,524 26,713 24,650 19,972 Ceded unearned premiums 22,388 19,146 16,280 6,008 5,977 Deferred policy acquisition costs 11,320 11,618 12,634 12,115 9,831 Property and equipment 6,717 6,941 6,981 6,562 6,336 Goodwill 17,058 -- -- -- -- Total assets 345,590 313,685 296,846 264,156 230,576 Unpaid claims and claim adjustment expenses 136,798 113,227 105,692 95,011 80,729 Unearned premiums 63,602 64,005 65,255 53,525 44,645 Note payable 18,000 -- -- 1,750 3,500 Total liabilities 240,106 195,123 187,493 164,714 149,029 Shareholders' equity 105,484 118,562 109,353 99,442 81,547 Shareholders' equity per share (4) $ 5.05 5.68 5.19 4.62 3.79
- ------------------------ (1) Excludes premiums of $47,588,000 in 1998, $40,136,000 in 1997, $31,603,000 in 1996, $8,893,000 in 1995 and $5,056,000 in 1994 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 $457,000, $212,000, $307,000, $70,000 and $87,000 for 1998, 1997, 1996, 1995 and 1994, respectively. (3) All years retroactively adjusted for stock dividends and stock splits effected as stock dividends as follows: two 5% in 1995 and two 5% in 1994. (4) Based on number of shares outstanding at the end of each year, retroactively adjusted for stock dividends and stock splits effected as stock dividends. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OPERATIONS The Company recorded a net loss in 1998 of $11,662,564, or $.56 per share (basic), compared to net income for 1997 of $11,923,526, or $.56 per share (diluted), and net income of $16,019,567, or $.74 per share (diluted), for 1996. The Company recorded a GAAP combined ratio of 132.7% in 1998. On August 28, 1998, the Company announced that its Board of Directors had determined to commence pursuit of additional strategic alternatives to maximize shareholder value, including a possible sale of the Company, and had engaged Wasserstein Perella & Co., Inc. to assist in the process. This process is continuing. On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. ("Lalande Group"). The Lalande Group includes National Specialty Lines, Inc. ("NSL") and De La Torre Insurance Adjusters, Inc. ("DLT"). NSL is a managing general agency which markets nonstandard personal auto insurance through approximately 800 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was for $18 million in cash paid at closing plus up to an additional $22 million in cash to be paid over approximately five years contingent upon the operating performance of the Lalande Group. On March 9, 1999, the Company announced the signing of an agreement for sale of the assets of Agents Processing Systems, Inc. ("APS"), its wholly-owed subsidiary engaged in marketing a computer software package related to general agency operations. The sale is expected to be completed in April 1999. The purchaser is to acquire all rights to the APS software products, assignment of the APS customer contracts and other miscellaneous assets for a nominal amount of cash, assumption of contract obligations, a fixed number of software use licenses and development work on an electronic data interchange project. The Company anticipates a small write-off as a result of this transaction. 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 1998 of $91,162,086 were 9% below the $99,775,854 recorded in 1997, largely because of the run-off of discontinued classes and continued pricing pressure from competition. In 1997, gross premiums written decreased 9% from the 1996 level. In 1997, the run-off of the Kentucky coal truck program and a taxi program in New Jersey contributed 3 percentage points (points) of decrease while increased competition in the Florida, Georgia, Pennsylvania and Virginia markets contributed another 4 points of decrease in 1997. The following table compares the major product lines between the years for gross premiums written: 20 21
1998 1997 1996 -------------------- -------------------- -------------------- (Amounts in thousands) Commercial auto $ 50,037 55% $ 56,704 57% $ 62,328 57% Auto garage 19,974 22% 23,279 23% 26,871 24% General liability 17,046 19% 17,829 18% 19,744 18% Property 1,721 2% 1,267 1% 1,056 1% Personal auto 891 --% 690 1% -- --% Other lines 1,493 2% 7 --% 1 --% -------- --- -------- --- -------- --- Total $ 91,162 100% $ 99,776 100% $110,000 100%
COMMERCIAL AUTO was down 12% in 1998 from 1997 and down 9% in 1997 from 1996. In 1998 the continued run-off of the Kentucky commercial auto business accounted for the majority of the unfavorable variance. Additionally, the decision to exit certain other unprofitable classes contributed to the decrease. In 1997, Kentucky contributed 4 points of decrease with Georgia, New Jersey, Pennsylvania and Virginia accounting for the remaining 5 points of decrease. A decision was made during 1997 to discontinue writing Kentucky coal truck risks and a New Jersey taxi cab program because of adverse claim results. In Georgia, Pennsylvania and Virginia competition had dramatically intensified with regard to pricing and additional writers. The AUTO GARAGE product line decreased 14% in 1998 and 13% in 1997. Continued pricing pressure and new entrants to the market account for the decreases in both years. The GENERAL LIABILITY line decreased 4% in 1998 after a decrease of 10% in 1997. For 1998 continued pricing pressure and competitors entering the market produced the decrease. California and Florida accounted for 6 points and 2 points of the 1997 decrease, respectively. An underwriting decision was made in California to not renew large general contractors. In Florida, increased competition from new and existing companies contributed to the decrease. OTHER LINES increased in 1998 primarily as a result of mobile home business the Company began writing in 1998. For 1998, gross premiums written percentages by significant state/product line are as follows: Texas commercial auto (22%), Texas general liability (7%), Pennsylvania commercial auto (5%), and Florida auto garage (5%), with no other individual state/product line comprising 5% or more. The persistency rate remained at 46% for both years. Premiums earned decreased 10% in 1998 to $92,203,393 and decreased 4% in 1997 to $102,255,979 as a direct result of the level of premiums written. Net investment income increased 1% in 1998 over 1997 and increased 6% in 1997 over 1996. The increase in 1997 was the result of growth in the portfolio due to continued positive cash flows from operations. The return on average investments for 1998 is 4.6% versus 4.7% in 1997 and 4.8% in 1996. Inflation can cause interest rates to increase, which would cause the Company's interest income to increase. The Company achieves a higher after tax net income by investing predominantly in tax-exempt securities as compared to taxable fixed income securities. At December 31, 1998, 88% of the Company's investments were in investment grade tax-exempt bonds with an average maturity of approximately 3.8 years. On a taxable equivalent basis the return on average investments was 6.2% in 1998, 6.5% in 1997 and 6.6% in 1996. 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, 1998, approximately 9% of the Company's investments were in U.S. Treasury securities and 2% were in short-term money market funds. The Company does not have any non-performing fixed maturity securities. 21 22 The Company recorded net realized capital gains of $692,510 in 1998 versus $326,905 in 1997 and $471,956 in 1996. All of these gains were generated from the bonds available for sale category of the fixed maturity portfolio. Insurance services revenues increased $296,268 from 1997 to 1998 following an increase of $252,165 in 1997 from 1996. The table below presents the components.
1998 1997 1996 ---------- --------- --------- Plan servicing $ 978,670 1,048,835 1,187,656 Fee income 732,506 608,287 343,266 Computer software 604,387 657,592 473,499 Premium finance 137,445 286,347 345,679 Lalande Group 459,616 -- -- Other 14,963 30,258 29,054 ---------- --------- --------- Total $2,927,587 2,631,319 2,379,154 ========== ========== ==========
Plan servicing revenues from commercial automobile plans decreased 7% in 1998 from 1997 following an 12% decrease in 1997. Written premiums decreased 4% in 1998 and 14% in 1997 as a result of decreases in the Louisiana and Pennsylvania plans. The Company terminated its servicing carrier agreements effective December 31, 1998 and this operation is in run-off. Fee income increased $124,219 in 1998 over 1997 and $265,021 in 1997 over 1996 as a result of continued growth from the fronting accounts. Revenues in the APS computer software operation decreased 8% in 1998 from 1997 and increased 39% in 1997 from 1996. The Company has announced an agreement for the sale of the APS operation and expects to close in April 1999. Revenues from the premium finance operation are down 52% in 1998 from 1997 and down 17% in 1997 from the 1996 level. The Company decided in the second quarter of 1998 to exit the premium finance business for commercial lines but will continue to offer interest free payment plans for the Company's insurance operations. Revenues in the Lalande Group are from automobile claim adjusting services and agency commissions on business from outside parties generated since the acquisition. Claims and claim adjustment expenses ("C & CAE") increased $24,267,337 in 1998 over 1997 and $3,706,923 in 1997 over 1996. The C & CAE ratio was 93.7% in 1998, 60.7% in 1997 and 54.7% in 1996. For 1998 the increase in the C & CAE ratio of 33 percentage points is the result of unanticipated unfavorable development in C & CAE incurred from the 1997, 1996 and 1995 accident years for commercial auto liability. The Company reduced outstanding claim counts 30% in 1998 from the 1997 level. The increase in the C & CAE ratio of 6 percentage points in 1997 is the result of claim reserve increases recorded for commercial auto claims in Kentucky from the 1995 and 1996 accident years and adverse development in claim adjustment expense reserves for commercial auto in the 1994, 1995 and 1996 accident years. 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 22 23 coverages in its policies. The Company's premium writings for product liability coverages are immaterial. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results. The increase in commissions from 1997 to 1998 is primarily due to a decrease in commission income of approximately $3,318,000 as a result of reducing previously accrued reinsurance commission income due to adverse development in C & CAE incurred. The reinsurance commission income had been accrued in prior years based on a lower expected ultimate C & CAE ratio. The decrease in commissions from 1996 to 1997 is related to the decrease in gross premiums written. The ratio of commissions to premiums earned was 25% for 1998 versus 21% for 1997 and 23% for 1996. The increase in 1998 is a result of the decrease in reinsurance commission income. The decrease in 1997 was related to the decrease in the commission expense rate in 1997 because of lower contingent commissions resulting from higher C & CAE ratios. The change in deferred policy acquisition costs and deferred ceding commission income ("DAC") resulted in a net decrease to income of $297,994 and $1,015,802 for 1998 and 1997, respectively, and a net increase to income of $519,257 for 1996. The change in the amount of the increase or decrease in DAC between the comparable periods is directly related to the rate at which unearned premiums are growing or declining as a result of premium writings. Since DAC (asset) is a function of unearned premiums (liability), an increase in the growth rate of net unearned premiums would correspondingly result in an increase in the growth rate of DAC and vice versa. Underwriting and operating expenses were up 9% in 1998 over 1997 and up slightly in 1997 from 1996. The increase in 1998 included approximately $2 million in non-recurring expenses associated with a reduction in force, legal fees and consulting fees. For 1998 the Company generated a current tax benefit as a result of the loss from operations. The large increase in the deferred tax benefit is mainly the result of the large increase to C & CAE reserves. The effective tax benefit rate for 1998 of 45% is above the Federal statutory rate largely because of tax-exempt interest income. The effective tax rate of the Company was 19% in 1997 and 24% in 1996. The lower rate in 1997 is largely the result of tax-exempt net investment income representing a larger portion of income than in 1996. For the Company, the fresh start adjustment (tax benefit) was immaterial for all years presented. A reconciliation between income taxes computed at the Federal statutory rates and the provision for income taxes is included in Note 6 of Notes to Consolidated Financial Statements. 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, 1998, the Company held short-term investments and cash of $8,731,198 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 3 years. The fair value of the fixed maturity portfolio at December 31, 1998 was $2,971,884 above amortized cost. With regard to the availability of funds to the holding company, see Note 7 of Notes to Consolidated Financial Statements for restrictions on the payment of dividends by the insurance companies. Various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1998 and 1997, the balance on deposit for the benefit of such policyholders totaled approximately $14,115,000 and $12,965,000, respectively. 23 24 The decrease in investments is primarily attributable to negative cash flows from operating activities which is the result of the large amount of claim payments made during 1998. Ceded unpaid claims and claim adjustment expenses as well as ceded unearned premiums increased largely as a result of the increase in fronting reinsurance activity mentioned previously. Deferred Federal income taxes increased for reasons mentioned previously. Goodwill has been recorded in conjunction with the Lalande Group purchase made in the fourth quarter of 1998. Unpaid claims and claim adjustment expenses increased largely as a result of unanticipated unfavorable claim and claim adjustment expense development from prior accident years, as well as material increases from plan servicing and fronting accounts. Unearned premiums decreased because of the decrease in premiums written, offset to some extent by an increase in fronting accounts. Accounts payable decreased because of the decrease in payables contingent upon profitability. Drafts payable decreased because a large amount of drafts were issued in the fourth quarter of 1997 this did not recur in the fourth quarter of 1998. The note payable resulted from the Lalande Group acquisition mentioned previously. The unrealized gains or losses on fixed maturities available for sale are presented, net of tax, as a separate component of shareholders' equity entitled Accumulated Other Comprehensive Income. The net unrealized gain on the fixed maturities classified as held to maturity was $1,189,912 at December 31, 1998. The Company purchased 17,200 shares of its common stock during 1998 at a cost of $142,191, or $8.27 per share, which accounts for the increase in Treasury stock. 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 exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies. YEAR 2000 READINESS Y2K Problem A "Year 2000 problem" exists worldwide because many existing computer programs use only the last 2 digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results. In addition to the two-digit portion of the problem, other date issues can generate erroneous results. These include Year 2000 being a leap year and the use of Gregorian date of 9999 or the use of Julian date 9999 in a date field to alert the program to perform special handling, while Gregorian September 9, 1999 and Julian April 9, 1999 are actual dates. Company (Excluding Lalande) Readiness The Company began addressing its Year 2000 readiness in 1996, excluding the Lalande Group whose acquisition by the Company was completed on October 23, 1998. The Company appointed a Year 2000 team involving personnel from all business units responsible for implementing the project, while the department Vice Presidents formed the Year 2000 steering committee. The project scope encompassed information technology, including hardware and software whether developed internally or externally, building systems, vendors, banks, agents, reinsurers and the Company's exposure relating to policy coverage. The Company has completed the assessment phase, the strategy phase, the analysis phase and the planning phase for its hardware and software systems, non-information technology equipment and strategic business relationships. The Company believes that it has completed the remediation and testing phase of all mission critical systems and all hardware. The Company is either in the remediation or testing phase of its non-mission critical software. The Company anticipates that its non-mission critical software will be compliant by June 30, 24 25 1999. The foregoing readiness analysis does not apply to software for certain discontinued operations which are in a runoff phase. During 1998 the Company contracted with a major consulting vendor to perform due diligence assessment and testing of its Year 2000 project. While assessing the Company's readiness, the vendor identified some programs that required additional remediation and re-testing. The Company believes that it has corrected all the identified non-conforming programs. The Company has performed a written survey of all strategic business partners including producers, general agents, material vendors, reinsurers, reinsurance intermediaries, utilities, telecommunications services, web hosting providers, Internet service providers, hardware providers, software providers and financial institutions. The Company is monitoring the progress of the partners, which if impaired by a Year 2000 problem, would have a material impact on the Company. The Company is developing contingency plans in the event that a material business partner is not Year 2000 ready. However, there can be no assurance that all material business partners will be Year 2000 ready and such could have a material effect on the Company's financial position. A comprehensive review was performed by the Company of the insurance policies written by it and its underwriting guides to determine Year 2000 exposure. The Company made a decision to exclude Year 2000 exposures from all insurance policies written by it and began adding exclusions in November 1997. The Company believes Year 2000 liabilities are not fortuitous in nature and would not be covered under its insurance policies. The Company believes that its coverage exposure with respect to Year 2000 losses will not be material. However, changes in social and legal trends may establish coverage unintended for Year 2000 exposures by re-interpreting insurance contracts and exclusions. Litigation with respect to Year 2000 claims and the attendant costs are to be expected. It is impossible to predict what exposure insurance companies may bear for the Year 2000 losses. The Company is establishing contingency plans for hardware and software failures with respect to the Year 2000 problem. Since the Company's mission critical systems and hardware are believed to be Year 2000 compliant and have been assessed by an outside vendor, the Company does not expect any material Year 2000 failures. The Company believes that it has reviewed all material business partners' readiness, and has been advised that their mission critical systems and software are believed to be Year 2000 compliant. If, in the event the Company becomes aware of a strategic partner's failure to be prepared, the Company will evaluate using another vendor. Lalande Readiness The Lalande Group has been addressing its Year 2000 readiness since 1997. As of December 31, 1998, Lalande's mission critical systems are believed to be Year 2000 compliant. The Company expects that Lalande's non-mission critical systems will be Year 2000 compliant by September 30, 1999. Costs The Company estimates that its costs of addressing the Year 2000 problem will aggregate approximately $880,000, including modifying or replacing software and other systems, hiring Year 2000 solution providers and internal assessment, remediation and testing. Of this amount, approximately $435,000 was expensed prior to 1998, approximately $375,000 was expensed in the twelve months ended December 31, 1998 and approximately $70,000 remains to be expended. These costs are being funded by internally generated funds. FORWARD LOOKING STATEMENTS Statements made in this report that are not strictly historical may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Important factors include, but are not limited to, (a) 25 26 heightened competition, including price competition from existing competitors, from newly formed competitors and from the entry into the Company's markets of standard insurance companies which historically have not competed in the Company's specialty markets, (b) overcapitalization of the insurance industry, (c) contraction of the markets for the Company's various lines of business, (d) development and performance of new specialty programs, (e) the ongoing level of claims and claims-related expenses, (f) adequacy of claim reserves, (g) the ability to complete value-adding acquisitions, (h) the ability of the Company to fully integrate the recently acquired Lalande Group and its customers and managers into the Company's business, (i) the ability to consummate the APS asset sale on the agreed terms, (j) the results of the pursuit by the Board of Directors of additional strategic alternatives to maximize shareholder values, (k) effects of Year 2000 problems encountered by the Company and those with whom it deals, and (l) general economic conditions and fluctuations in interest rates. 26 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign exchange rates and commodity prices. The Company's consolidated balance sheets include assets whose estimated fair values are subject to market risk. The primary market risk to the Company is interest rate risk associated with investments in fixed maturities. The Company has no foreign exchange or commodity risk, and its exposure to equity risk is immaterial. INTEREST RATE RISK The Company's fixed maturity investments are subject to interest rate risk. Increases and decreases in interest rates typically result in decreases and increases in the fair value of these investments. Most of the Company's investable assets come from premiums paid by policyholders. These funds are invested predominately in high quality, U.S. government and municipal bonds with relatively short durations. The fixed maturity portfolio has an average duration of 3.4 years and an average rating of "AAA." The fixed maturity portfolio is exposed to interest rate fluctuations; as interest rates rise, fair values decline and as interest rates fall, fair values rise. The changes in the fair value of the fixed maturity portfolio are presented as a component of shareholders' equity in accumulated other comprehensive income, net of taxes. The effective duration of the fixed maturity portfolio is managed with consideration given to the estimated duration of the Company's liabilities. The Company has investment policies which limit the maximum duration and maturity of the fixed maturity portfolio. The Company utilizes the modified duration method to estimate the effect of interest rate risk on the fair values of its fixed maturity portfolio. The usefulness of this method is to a degree limited, as it is unable to accurately incorporate the full complexity of market interactions. The table below summarizes the Company's interest rate risk and shows the effect of a hypothetical change in interest rates as of December 31, 1998. The selected hypothetical changes do not indicate what could be the potential best or worst case scenarios (dollars in thousands):
Estimated Estimated Hypothetical Estimated Change in Fair Value After Percentage Increase Fair Value at Interest Rates Hypothetical Change (Decrease) in December 31, 1998 (bp=basis points) in Interest Rates Shareholders' Equity ----------------- ----------------- ------------------- --------------------- U.S. Treasury securities $ 25,200 200 BP Decrease $ 26,395 .7 (including short-term 100 BP Decrease 25,797 .4 investments) 100 BP Increase 24,603 (.4) 200 BP Increase 24,005 (.7) Obligations of states, $ 186,710 200 BP Decrease $199,616 7.7 municipalities and 100 BP Decrease 193,163 4.0 political subdivisions 100 BP Increase 180,257 (4.0) 200 BP Increase 173,804 (7.7) Total fixed maturity $ 211,910 200 BP Decrease $226,023 8.5 investments (including 100 BP Decrease 218,967 4.3 short-term investments) 100 BP Increase 204,854 (4.3) 200 BP Increase 197,797 (8.5)
27 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated Financial Statements are on pages 36 through 63:
Page ---- Report of Management 36 Independent Auditors' Report 37 Consolidated Balance Sheets as of December 31, 1998 and 1997 38-39 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997, and 1996 40 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997, and 1996 41-42 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 43-44 Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 45-63
The following Consolidated Financial Statements Schedules are on pages 64 through 75:
Schedule Page -------- ---- Independent Auditors' Report on Supplementary Information 64 I Summary of Investments 65 II Condensed Financial Information of the Registrant 66-72 III Supplementary Insurance Information 73 IV Reinsurance 74 VI Supplemental Information 75
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 28 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item with regard to Executive Officers is included in Part 1 of this report under the heading "Executive Officers of the Registrant". ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Items 11, 12 and 13 will be supplied by a Schedule 14A filing or an amendment to this report. 29 30 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, 1998 and 1997 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements, December 31, 1998, 1997 and 1996 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) 30 31 3.2 Articles of Amendment to the Articles of Incorporation dated June 9, 1988 (Exhibit 3.2)(2) 3.6 Articles of Amendment to Articles of Incorporation effective August 13, 1993 (Exhibit 3.6)(7) 3.7 Bylaws of Registrant as amended through May 1, 1998 (Exhibit 99.3) (12) 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 (Exhibit 4.6) (10) 10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4) 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). 10.31 1995 Stock Option Plan of the Registrant (Exhibit 10.31) (9) 31 32 10.36 Form of Change of Control Agreements (Exhibit 10.36) (6) (11) 10.37 Employment Agreement dated April 25, 1998 between Glenn W. Anderson and the Registrant (Exhibit 99.5) (13). 10.38 Change of Control Agreement for Glenn W. Anderson (Exhibit 99.7) (13). 10.39 Replacement Non-Qualified Stock Option Agreement dated July 24, 1998 between Glenn W. Anderson and the Registrant (Exhibit 99.6) (14). 10.40 GAINSCO, INC. 1998 Long Term Incentive Plan (Exhibit 99.8) (14). 10.41 Stock Purchase Agreement by and among GAINSCO, INC., Carlos De la Torre, Rosa De la Torre, National Specialty Lines, Inc., De La Torre Insurance Adjusters, Inc., and Lalande Financial Group, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.6) (15). 10.42 Stock Purchase Agreement by and among GAINSCO, INC., McRae B. Johnston, National Specialty Lines, Inc., and Lalande Financial Group, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.7) (15). 10.43 Stock Purchase Agreement by and among GAINSCO, INC., Michael Johnston and National Specialty Lines, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.8) (15). 10.44 Stock Purchase Agreement by and among GAINSCO, INC., Ralph Mayoral and De La Torre Insurance Adjusters, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.9) (15). 10.45 Employment Agreement by and among De La Torre Insurance Adjusters, Inc., Carlos De la Torre and GAINSCO, INC. (Exhibit 99.10) (15). 10.46 Employment Agreement by and among National Specialty Lines, Inc., McRae B. Johnston and GAINSCO, INC. dated August 17, 1998 (Exhibit 99.11) (15). 10.47 Employment Agreement by and among National Specialty Lines, Inc., Michael Johnston and GAINSCO, INC. dated August 17, 1998 (Exhibit 99.12) (15). 10.48 Employment Agreement by and among De La Torre Insurance Adjusters, Inc., Ralph Mayoral and GAINSCO, INC. dated August 17, 1998 (Exhibit 99.13) (15). 10.49 Asset Purchase Agreement dated March 9, 1999 between the Registrant, Agents Processing Systems, Inc. and Insurance Business Solutions Incorporated (16). 32 33 11 (Not required to be filed as an Exhibit. See footnote (1)(m) on page 51 of this 10-K Report for information called for by number 11 of the Exhibit Table to Item 601 of SK) 22.2 Subsidiaries of Registrant (16) 24.2 Consent of KPMG LLP to incorporation by reference (16) 25.1 Powers of Attorney (16) 27 Financial Data Schedule (16) - ------------------ (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. (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. 33 34 (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) 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, 1996. (11) 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, 1997. (12) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Current Report on Form 8-K dated May 5, 1998. (13) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Form 10-Q/A Amendment dated June 16, 1998. (14) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Form 10-Q Report for quarter ended June 30, 1998. (15) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Current Report on Form 8-K dated August 26, 1998. (16) Filed herewith (see Exhibit Index). (b) Reports on Form 8-K During the last quarter of the fiscal year ended December 31, 1998, 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. 34 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GAINSCO, INC. (Registrant) /s/ Glenn W. Anderson - --------------------------------- By: Glenn W. Anderson, President Date: 03/30/99 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- Joel C. Puckett* Chairman of the Board 3/30/99 - ------------------------------ Joel C. Puckett /s/ Glenn W. Anderson President and Chief 3/30/99 - ------------------------------ Executive Officer Glenn W. Anderson /s/ Daniel J. Coots Senior Vice President and 3/30/99 - ------------------------------ Chief Financial Officer Daniel J. Coots /s/ Sam Rosen Secretary and Director 3/30/99 - ------------------------------ Sam Rosen John C. Goff* Director 3/30/99 - ------------------------------ John C. Goff Robert J. McGee, Jr.* Director 3/30/99 - ------------------------------ Robert J. McGee Harden H. Wiedemann* Director 3/30/99 - ------------------------------ Harden H. Wiedemann John H. Williams* Director 3/30/99 - ------------------------------ John H. Williams
*By: /s/ Glenn W. Anderson ------------------------- Glenn W. Anderson, 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. 35 36 REPORT OF MANAGEMENT The accompanying consolidated financial statements were prepared by the Company, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include some amounts that are based upon the Company's best estimates and judgement. Financial information presented elsewhere in this report is consistent with the accompanying consolidated financial statements. The accounting systems and controls of the Company are designed to provide reasonable assurance that transactions are executed in accordance with management's criteria, that the financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against claims from unauthorized use or disposition. The Company's consolidated financial statements have been audited by KPMG LLP, independent auditors. The auditors have full access to each member of management in conducting their audits. The Audit Committee of the Board of Directors, comprised solely of directors from outside of the Company, meets regularly with management and the independent auditors to review the work and procedures of each. The auditors have free access to the Audit Committee, without management being present, to discuss the results of their work as well as the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon recommendation of the Audit Committee, appoints the independent auditors, subject to shareholder approval. Glenn W. Anderson President and Chief Executive Officer Daniel J. Coots Senior Vice President and Chief Financial Officer 36 37 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, 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, 1996, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1995 and 1994, 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, 1998, appearing on pages 18 and 19, is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived. KPMG LLP Dallas, Texas February 19, 1999 37 38 GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
Assets 1998 1997 ------------ ----------- Investments (note 2): Fixed maturities: Bonds held to maturity, at amortized cost (fair value: $60,978,145 - 1998, $90,527,669 - 1997) $ 59,788,233 89,733,503 Bonds available for sale, at fair value (amortized cost: $143,806,030 - 1998, $122,022,184 - 1997) 145,588,002 123,650,289 Certificates of deposit, at cost (which approximates fair value) 595,000 595,000 Marketable securities, at fair value (cost: $316,117 - 1998, $0 - 1997) 268,585 -- Short-term investments, at cost (which approximates fair value) 4,749,139 2,823,393 ------------ ------------ Total investments 210,988,959 216,802,185 Cash 3,982,059 696,513 Accrued investment income 4,224,230 4,714,828 Premiums receivable (net of allowance for doubtful accounts: $81,000 - 1998, $81,000 - 1997) (note 1) 14,885,063 14,249,890 Reinsurance balances receivable 2,392,576 2,604,511 Ceded unpaid claims and claim adjustment expenses (note 1) 35,030,001 29,524,026 Ceded unearned premiums 22,387,599 19,146,272 Deferred policy acquisition costs (note 1) 11,320,142 11,618,136 Property and equipment (net of accumulated depreciation and amortization: $8,175,798 - 1998, $5,710,365 - 1997) (note 1) 6,716,636 6,941,232 Current Federal income taxes (note 1) 5,031,950 796,631 Deferred Federal income taxes (notes 1 and 6) 6,669,093 2,676,555 Management contract 1,687,571 1,737,570 Other assets 3,216,611 2,176,957 Goodwill (notes 1 and 9) 17,057,772 -- ------------ ------------ Total assets $345,590,262 313,685,306 ============ ============
See accompanying notes to consolidated financial statements. 38 39 GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 Liabilities and Shareholders' Equity
1998 1997 ------------- ------------- Liabilities: Unpaid claims and claim adjustment expenses (notes 1 and 5) $ 136,798,149 113,227,009 Unearned premiums (notes 1 and 5) 63,601,677 64,004,507 Commissions payable 4,279,431 2,207,421 Accounts payable 7,311,920 3,542,075 Reinsurance balances payable 1,327,997 745,805 Deferred revenue 1,935,290 635,807 Drafts payable 5,834,846 9,393,375 Note payable (note 4) 18,000,000 -- Dividends payable (note 7) 365,690 365,300 Other liabilities 651,364 1,001,747 ------------- ------------- Total liabilities 240,106,364 195,123,046 ------------- ------------- Shareholders' Equity (note 7): Preferred stock ($100 par value, 10,000,000 shares authorized, none issued) -- -- Common stock ($.10 par value, 250,000,000 shares authorized, 21,740,657 issued at December 31, 1998 and 21,701,118 issued at December 31, 1997) 2,174,066 2,170,112 Additional paid-in capital 87,778,548 87,697,754 Accumulated other comprehensive income (notes 2 and 3) 1,138,941 1,058,268 Retained earnings 22,086,868 35,188,460 Treasury stock, at cost (844,094 shares in 1998 and 826,894 shares in 1997) (note 1) (7,694,525) (7,552,334) ------------- ------------- Total shareholders' equity 105,483,898 118,562,260 ------------- ------------- Commitments and contingencies (notes 5, 8, 9, and 10) Total liabilities and shareholders' equity $ 345,590,262 313,685,306 ============= =============
See accompanying notes to consolidated financial statements. 39 40 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- ---------- ---------- Revenues: Net premiums earned (note 5) $ 92,203,393 102,255,979 106,792,928 Net investment income (note 2) 9,802,702 9,731,132 9,160,518 Net realized gains (note 1) 692,510 326,905 471,956 Insurance services 2,927,587 2,631,319 2,379,154 ------------- ------------- ------------- 105,626,192 114,945,335 118,804,556 ------------- ------------- ------------- Expenses: Claims and claim adjustment expenses (notes 1 and 5) 86,352,980 62,085,643 58,378,720 Commissions 23,321,414 21,536,034 24,347,250 Change in deferred policy acquisition costs and deferred ceding commission income (note 1) 297,994 1,015,802 (519,257) Underwriting and operating expenses 16,933,893 15,546,068 15,499,641 ------------- ------------- ------------- 126,906,281 100,183,547 97,706,354 ------------- ------------- ------------- Income (loss) before Federal income taxes (21,280,089) 14,761,788 21,098,202 Federal income taxes (note 6): Current expense (benefit) (5,571,134) 2,860,704 5,145,780 Deferred benefit (4,046,391) (22,442) (67,145) ------------- ------------- ------------- (9,617,525) 2,838,262 5,078,635 ------------- ------------- ------------- Net income (loss) $ (11,662,564) 11,923,526 16,019,567 ============= ============= ============= Earnings (loss) per share (notes 1 and 7): Basic $ (.56) .57 .75 ============= ============= ============= Diluted $ (.56) .56 .74 ============= ============= =============
See accompanying notes to consolidated financial statements. 40 41 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ----------- ---------- ---------- Common stock: Balance at beginning of year $ 2,170,112 2,167,037 2,163,748 Exercise of options to purchase shares (39,539 in 1998, 30,749 in 1997 and 32,888 in 1996) 3,954 3,075 3,289 ----------- ---------- ---------- Balance at end of year 2,174,066 2,170,112 2,167,037 ----------- ---------- ---------- Additional paid-in capital: Balance at beginning of year 87,697,754 87,610,379 87,543,175 Exercise of options to purchase shares (39,539 in 1998, 30,749 in 1997 and 32,888 in 1996) 80,794 87,375 67,204 ----------- ---------- ---------- Balance at end of year $87,778,548 87,697,754 87,610,379 ----------- ---------- ----------
41 42 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997, and 1996
1998 1997 1996 ------------ ----------- ----------- Retained earnings: Balance at beginning of year $ 35,188,460 24,517,265 9,673,968 Net income (loss) for year (11,662,564) (11,662,564) 11,923,526 11,923,526 16,019,567 16,019,567 Cash dividends (note 7) (1,462,070) (1,310,518) (1,176,270) Tax benefit on non-qualified stock options exercised 23,042 58,187 -- ------------ ----------- ----------- Balance at end of year 22,086,868 35,188,460 24,517,265 ------------ ----------- ----------- Accumulated other comprehensive income: Balance at beginning of year 1,058,268 496,675 1,073,597 Unrealized gains (losses) on securities, net of reclassification adjustment, net of tax (note 3) 80,673 80,673 561,593 561,593 (576,922) (576,922) ------------ ----------- ----------- ---------- ----------- ---------- Comprehensive income (loss) (11,581,891) 12,485,119 15,442,645 =========== ========== ========== Balance at end of year 1,138,941 1,058,268 496,675 ------------ ----------- ----------- Treasury stock: Balance at beginning of year (7,552,334) (5,438,774) (1,012,592) Change during year (142,191) (2,113,560) (4,426,182) ------------ ----------- ----------- Balance at end of year (7,694,525) (7,552,334) (5,438,774) ------------ ----------- ----------- Total shareholders' equity at end of year $105,483,898 118,562,260 109,352,582 ============ =========== ===========
See accompanying notes to consolidated financial statements. 42 43 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ---------- ---------- Cash flows from operating activities: Net income (loss) $(11,662,564) 11,923,526 16,019,567 Adjustments to reconcile net income (loss) to cash provided by/(used for) operating activities: Depreciation and amortization 4,744,084 4,756,982 4,720,625 Change in deferred Federal income taxes (4,046,391) (22,442) (67,145) Change in accrued investment income 490,598 (406,643) 231,051 Change in premiums receivable 187,021 1,574,653 89,191 Change in reinsurance balances receivable 211,935 (448,185) 1,349,492 Change in ceded unpaid claims and claim adjustment expenses 5,505,975) (2,810,872) (2,062,548) Change in ceded unearned premiums (3,241,327) (2,866,259) (10,271,826) Change in deferred policy acquisition costs and deferred ceding commission income 297,994 1,015,802 (519,257) Change in management contract 50,000 50,000 50,000 Change in other assets (440,620) (272,994) (260,110) Change in unpaid claims and claim adjustment expenses 23,571,140 7,535,421 10,680,125 Change in unearned premiums (402,830) (1,250,646) 11,729,830 Change in commissions payable 2,072,010 (481,916) 481,984 Change in accounts payable (2,140,412) (1,128,872) 35,232 Change in reinsurance balances payable 582,192 (312,118) (759,133) Change in deferred revenue (369,872) 42,507 100,907 Change in drafts payable (3,558,529) 3,174,331 3,649,779 Change in other liabilities (371,359) 2,157 (388,508) Change in current Federal income taxes 4,212,277 (314,296) (1,472,129) ------------ ---------- ---------- Net cash provided by/(used for) operating activities $ (3,745,182) 19,760,136 33,337,127 ------------ ---------- ----------
(continued) 43 44 GAINSCO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ---------- ---------- Cash flows from investing activities: Bonds held to maturity: Matured $ 30,636,243 16,594,930 10,831,897 Purchased (2,253,813) (3,434,618) (19,694,034) Bonds available for sale: Sold 46,326,098 37,694,342 38,403,636 Matured 1,520,000 7,544,426 8,179,440 Purchased (71,425,415) (92,169,999) (48,506,215) Certificates of deposit matured 595,000 420,000 450,000 Certificates of deposit purchased (595,000) (420,000) (425,000) Property and equipment purchased (504,229) (891,693) (1,385,136) Marketable securities sold 28,191 -- -- Net change in short-term investments (1,312,442) 17,838,889 (14,686,870) Net assets acquired through purchase of subsidiary, net of cash acquired of $ 5,865,515 (12,464,783) -- -- ------------ ---------- ---------- Net cash provided by/(used for) investing activities (9,450,150) (16,823,723) (26,832,282) ------------ ---------- ---------- Cash flows from financing activities: Proceeds from (payments on) notes payable 18,000,000 -- (1,750,000) Cash dividends paid (1,461,679) (1,261,530) (1,129,024) Proceeds from exercise of common stock options 84,748 90,450 70,493 Treasury stock acquired (142,191) (2,113,560) (4,426,182) ------------ ---------- ---------- Net cash provided by/(used for) financing activities 16,480,878 (3,284,640) (7,234,713) ------------ ---------- ---------- Net increase (decrease) in cash 3,285,546 (348,227) (729,868) Cash at beginning of year 696,513 1,044,740 1,774,608 ------------ ---------- ---------- Cash at end of year $ 3,982,059 696,513 1,044,740 ============ ========== ==========
See accompanying notes to consolidated financial statements. 44 45 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (1) SUMMARY OF ACCOUNTING POLICIES (a) Basis of Consolidation The accompanying consolidated financial statements include the accounts of GAINSCO, INC. (the Company) and its wholly-owned subsidiaries, General Agents Insurance Company of America, Inc. (General Agents), General Agents Premium Finance Company (GAPFCO), Agents Processing Systems, Inc., Risk Retention Administrators, Inc., GAINSCO Service Corp. (GSC), Lalande Financial Group, Inc. (Lalande Group), National Specialty Lines, Inc. (NSL) and De La Torre Insurance Adjusters, Inc. (DLT). General Agents has one wholly-owned subsidiary, MGA Insurance Company, Inc. (MGAI) which, in turn, owns 100% of MGA Agency, Inc. GSC has one wholly-owned subsidiary, MGA Premium Finance Company. GSC controls the management contract and charter of GAINSCO County Mutual Insurance Company (GCM) and its accounts have been included in the accompanying consolidated financial statements. All significant intercompany accounts have been eliminated in consolidation. The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Nature of Operations The Company is predominantly a property and casualty insurance company concentrating its efforts on certain specialty markets within the commercial auto, auto garage, general liability, property and personal nonstandard auto insurance lines. The Company is approved to write insurance in 48 states and the District of Columbia on a non-admitted basis and in 44 states and the District of Columbia on an admitted basis. The Company markets its commercial lines of insurance through 180 non-affiliated general agents' offices and its personal line nonstandard auto is marketed through approximately 800 non-affiliated retail agencies. Approximately 72% of the Company's gross premiums written during 1998 resulted from risks located in Arkansas, California, Florida, Georgia, Louisiana, Pennsylvania, Tennessee and Texas. 45 46 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (c) Investments Bonds held to maturity are stated at amortized cost, bonds available for sale and marketable securities are stated at fair value with changes in fair value recorded as a component of comprehensive income. Short-term investments are stated at cost. The "specific identification" method is used to determine costs of investments sold. Provisions for possible losses are recorded only when the values have experienced impairment considered "other than temporary" by a charge to realized losses resulting in a new cost basis of the investment. Proceeds from the sale of bond securities totalled $46,326,098, $37,694,342 and $38,403,636 in 1998, 1997 and 1996, respectively. The realized gains were $721,404, $384,184 and $516,997 in 1998, 1997 and 1996, respectively. The realized losses were $28,894, $57,279 and $45,041 in 1998, 1997 and 1996, respectively. (d) Financial Instruments For premiums receivable, which include premium finance notes receivable, and all other accounts (except investments) defined as financial instruments in Financial Accounting Standards Board (FASB) Statement 107, "Disclosures About Fair Values of Financial Instruments," the carrying amount approximates fair value due to the short-term nature of these instruments. The carrying amount of notes payable approximates fair value due to the variable interest rate on the note. These balances are disclosed on the face of the balance sheets. Fair values for investments, disclosed in note 2, were obtained from independent brokers and published valuation guides. (e) Deferred Policy Acquisition Costs and Deferred Ceding Commission Income Policy acquisition costs, principally commissions, 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. The Company does not utilize investment income when assessing recoverability of deferred policy acquisition costs. 46 47 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The change in the resulting deferred asset is charged (credited) to operations. Information relating to these net deferred amounts, as of and for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
1998 1997 1996 ------------- ------------- ------------- Asset balance, beginning of period $ 11,618,136 12,633,938 12,114,681 ------------- ------------- ------------- Deferred commissions 19,709,462 19,912,479 21,932,779 Deferred marketing and underwriting expenses 4,747,538 5,335,856 5,854,088 Deferred ceding commission income (373,435) (85,152) (76,765) Amortization (24,381,559) (26,178,985) (27,190,845) ------------- ------------- ------------- Net change (297,994) (1,015,802) 519,257 ------------- ------------- ------------- Asset balance, end of period $ 11,320,142 11,618,136 12,633,938 ============= ============= =============
(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 ---------------------------- 1998 1997 ------------ ------------ Land $ 865,383 865,383 Buildings 6,289,065 6,265,159 Furniture and equipment 5,232,279 3,239,458 Software 2,505,707 2,281,597 Accumulated depreciation and amortization (8,175,798) (5,710,365) ----------- ------------ $ 6,716,636 6,941,232 =========== ============
47 48 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (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) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, 25 years. The Company will periodically review the recoverability of goodwill based on an assessment of future operations to ensure it is appropriately valued. (i) Treasury Stock The Company records treasury stock in accordance with the "cost method" described in Accounting Principles Board Opinion (APB) 6. The Company held 844,094 shares and 826,894 shares as treasury stock at December 31, 1998 and 1997, respectively, with a cost basis of $9.12 and $9.13 per share, respectively. (j) Premium Revenues Premiums are recognized as earned on a pro rata basis over the period the Company is at risk under the related policy. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of policies in force. (k) Claims and Claim Adjustment Expenses Claims and claim adjustment expenses, less related reinsurance, are provided for as claims are incurred. The provision for unpaid claims and claim adjustment expenses includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on past experience modified for current trends; and (3) estimates of expenses for investigating and adjusting claims based on past experience. Liabilities for unpaid claims and claim adjustment expenses are based on estimates of ultimate cost of settlement. Changes in claim estimates resulting from the review process and differences between estimates and ultimate payments are reflected in expense for the year in which the revision of these estimates first become known. 48 49 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The process of establishing claim reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured claim and the settlement of the claim. Some judicial decisions and legislative actions broaden liability and policy definitions and increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult claim reserving process. Ultimate liability may be greater or lower than current reserves. Reserves are monitored by the Company using new information on reported claims and a variety of statistical techniques. The reserves are reviewed annually by an independent actuarial firm. The Company does not discount to present value that portion of its claim reserves expected to be paid in future periods. 49 50 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 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 ------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ (Amounts in thousands) Unpaid claims and claim adjustment expenses, beginning of period $ 113,227 105,691 95,011 Less: Ceded unpaid claims and claim adjustment expenses, beginning of period 29,524 26,713 24,650 ------------ ------------ ------------ Net unpaid claims and claim adjustment expenses, beginning of period 83,703 78,978 70,361 ------------ ------------ ------------ Net claims and claim adjustment expenses incurred related to: Current period 59,635 53,969 53,037 Prior periods 26,718 8,117 5,342 ------------ ------------ ------------ Total net claims and claim adjustment expenses incurred 86,353 62,086 58,379 ------------ ------------ ------------ Net claim and claim adjustment expenses paid related to: Current period 19,693 17,807 17,178 Prior periods 48,595 39,554 32,584 ------------ ------------ ------------ Total net claim and claim adjustment expenses paid 68,288 57,361 49,762 ------------ ------------ ------------ Net unpaid claims and claim adjustment expenses, end of period 101,768 83,703 78,978 Plus: Ceded unpaid claims and claim adjustment expenses, end of period 35,030 29,524 26,713 ------------ ------------ ------------ Unpaid claims and claim adjustment expenses, end of period $ 136,798 113,227 105,691 ============ ============ ============
50 51 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 For 1998 the unfavorable development in claims and claim adjustment expenses was primarily the result of unanticipated unfavorable development in commercial auto liability for the 1997, 1996 and 1995 accident years. The development in net claims and claim adjustment expenses incurred for 1997 and 1996 was largely a result of claim reserve increases recorded for commercial auto claims in Kentucky for the 1996 and 1995 accident years and adverse development in claim adjustment expense reserves for commercial auto in the 1996, 1995 and 1994 accident years. (l) Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income tax items are accounted for under the liability method which provides for temporary differences between the reporting of earnings for financial statement purposes and for tax purposes, primarily deferred policy acquisition costs, the discount on unpaid claims and claim adjustment expenses and the nondeductible portion of the change in unearned premiums. The Company paid income taxes of $0, $3,175,000 and $6,617,909 during 1998, 1997 and 1996, respectively. (m) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ------------ ------------ ------------ Numerator: Net income (loss) $(11,662,564) 11,923,526 16,019,567 ------------ ------------ ------------ Denominator: Denominator for basic earnings per share- weighted average shares 20,881,357 20,996,386 21,441,389 Effect of dilutive securities: Employee stock options 355,329 248,863 280,274 ------------ ------------ ------------ Denominator for diluted earnings per share- weighted average shares and assumed conversions 21,236,686 21,245,249 21,721,663 ============ ============ ============ Basic earnings per share $ (.56) $ .57 $ .75 ============ ============ ============ Diluted earnings per share $ (.56) $ .56 $ .74 ============ ============ ============
51 52 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (n) Stock-Based Compensation In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123). Statement 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. Under Statement 123, the Company elects to measure compensation costs using the intrinsic value based method of accounting prescribed by APB 25. (o) Accounting Pronouncements In February 1997, the FASB issued Statement 128, "Earnings Per Share". The Statement was effective for financial statements issued for periods ending after December 15, 1997. Earnings per share for prior years presented in these financial statements have been restated to comply with Statement 128. Effective January 1, 1998, the Company adopted FASB Statement 130, Reporting Comprehensive Income. Statement 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholder's equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements, it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Effective January 1, 1998, the Company adopted FASB Statement 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company makes operating decisions and assesses performance for the commercial lines segment and the personal lines segment. In 1998, the personal lines segment was not material. In February, 1998, the FASB issued Statement 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". The Statement was effective for fiscal years beginning after December 15, 1997. The Company has no benefit plans falling within the scope of Statement 132. 52 53 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (2) INVESTMENTS The following schedule summarizes the components of net investment income:
Years ended December 31 -------------------------------------------- Investment income on: 1998 1997 1996 ------------ ------------ ------------ Fixed maturities $ 9,109,856 9,218,089 8,331,441 Short-term investments 896,940 782,051 1,055,481 ------------ ------------ ------------ 10,006,796 10,000,140 9,386,922 Investment expenses (204,094) (269,008) (226,404) ------------ ------------ ------------ Net investment income $ 9,802,702 9,731,132 9,160,518 ============ ============ ============
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-1998 $5,668 235 (16) 5,887 US Government securities-1997 5,404 79 (7) 5,476 Tax-exempt state & municipal bonds-1998 54,120 972 (1) 55,091 Tax-exempt state & municipal bonds-1997 84,330 855 (133) 85,052 Bonds available for sale: US Government securities-1998 13,734 235 -- 13,969 US Government securities-1997 27,322 83 (1) 27,404 Tax-exempt state & municipal bonds-1998 130,072 1,787 (240) 131,619 Tax-exempt state & municipal bonds-1997 94,700 1,580 (34) 96,246 Certificates of deposit - 1998 595 -- -- 595 Certificates of deposit - 1997 595 -- -- 595 Total Fixed maturities-1998 $ 204,189 3,229 (257) 207,161 Total Fixed maturities-1997 212,351 2,597 (175) 214,773
53 54 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The amortized cost and estimated fair value of debt securities at December 31, 1998 and 1997, by maturity, are shown below.
1998 1997 --------------------------- --------------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ------------ ------------ ------------ ------------ (Amounts in thousands) Due in one year or less $ 31,335 31,489 35,142 35,187 Due after one year but within five years 123,550 125,323 140,571 141,871 Due after five years but within ten years 46,692 47,734 30,608 31,527 Due after ten years but within twenty years 2,612 2,615 6,030 6,188 ------------ ------------ ------------ ------------ $ 204,189 207,161 212,351 214,773 ============ ============ ============ ============
Investments of $14,115,000 and $12,965,000, at December 31, 1998 and 1997, respectively, were on deposit with various regulatory bodies as required by law. (3) ACCUMULATED OTHER COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement 130 requires that a company include in accumulated comprehensive income certain amounts which were previously recorded directly to shareholders' equity. 54 55 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The following schedule presents the components of other comprehensive income:
Years ended December 31 -------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Unrealized gains on securities: Unrealized holding gains (losses) during period 825,494 1,202,911 (400,702) Reclassification adjustment for amounts included in net income (690,968) (338,921) (486,871) ------------ ------------ ------------ Other comprehensive income (loss) before Federal income tax 134,526 863,990 (887,573) Federal income tax expense (benefit) 53,853 302,397 (310,651) ------------ ------------ ------------ Other comprehensive income (loss) $ 80,673 561,593 (576,922) ============ ============ ============
(4) NOTE PAYABLE In December of 1998, the Company obtained a note payable for $18,000,000 with a commercial bank. Interest is due monthly at an interest rate that approximates the 90-day London Interbank Offered Rate (LIBOR) plus 175 basis points (6.7842% at December 31, 1998). Principal payments of $500,000 are to be paid each quarter beginning January 1, 2000 with the balance of $10,500,000 due at maturity of the note on October 1, 2003. The Company recorded interest expense of $101,763 during 1998. The Company paid no interest during 1998. Funds were used to make the Lalande Financial Group, Inc. acquisition (see note 9). (5) REINSURANCE In 1998, 1997 and 1996, General Agents and MGAI (the Insurers) wrote casualty policy limits of $1,000,000. 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. 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 for a single 55 56 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 catastrophe. The Company also carries property excess per risk reinsurance which covers property claims exceeding $300,000 up to $5,000,000 net loss each risk. From time to time the Company makes use of facultative reinsurance to cede unusual risks on a negotiated basis. GCM has entered into fronting arrangements with non-affiliated insurance companies. GCM retains no portion as the business written under these agreements is 100% ceded. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by 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, 1998 and 1997 total $33,707,000 and $29,943,000, respectively. The amounts deducted in the consolidated financial statements for reinsurance ceded as of and for the years ended December 31, 1998, 1997, and 1996 respectively, are set forth in the following table. Premiums and claims ceded to the commercial automobile plans of Arkansas, California, Louisiana, Mississippi and Pennsylvania are designated as "plan servicing".
1998 1997 1996 ------------ ------------ ------------ Premiums earned $ 1,982,459 1,709,053 1,929,455 Premiums earned - plan servicing $ 3,767,180 4,090,774 4,760,785 Premiums earned - fronting arrangements $ 41,199,644 33,106,441 16,081,808 Claims and claim adjustment expenses $ 5,346,960 2,200,182 (206,429) Claims and claim adjustment expenses - plan servicing $ 4,429,621 4,569,993 6,886,339 Claim and claim adjustment expenses - fronting arrangements $ 34,992,635 24,616,491 11,317,277
56 57 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 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:
1998 1997 1996 ------------ ----------- ---------- Unearned premiums - plan servicing $ 1,139,560 1,552,654 2,149,286 Unearned premiums - fronting arrangements $ 20,194,814 17,160,782 13,625,619 Unpaid claims and claim adjustment expenses - plan servicing $ 9,380,484 9,431,814 11,012,699 Unpaid claims and claim adjustment expenses - fronting arrangements $ 13,927,694 8,623,890 4,321,085
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. Beginning in 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. As of December 31, 1998, 1997, and 1996, the balance in such escrow accounts totalled $0, $0 and $1,100,000, respectively. For 1998, 1997 and 1996, the premiums earned by assumption were $0, and the assumed unpaid claims and claim adjustment expenses were $360,000, $810,000 and $1,845,000, 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. 57 58 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (6) FEDERAL INCOME TAXES In the accompanying consolidated statements of operations, the provisions for Federal income tax as a percent of related pretax income differ from the Federal statutory income tax rate. A reconciliation of income tax expense using the Federal statutory rates to actual income tax expense follows:
1998 1997 1996 ------------ ------------ ------------ Income tax expense (benefit) at 35% $ (7,448,031) 5,166,625 7,384,371 Tax-exempt interest income (2,182,650) (2,486,582) (2,308,364) Building rehabilitation tax credit -- (41,984) (77,102) Other, net 13,156 200,203 79,730 ------------ ------------ ------------ Income tax expense (benefit) $ (9,617,525) 2,838,262 5,078,635 ============ ============ ============
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 --------------------------- 1998 1997 ------------ ------------ Deferred tax assets: Unpaid claims and claim adjustment expenses $ 4,987,915 4,375,152 Unearned premiums 2,936,508 3,158,477 Deferred service fee income 226,703 214,164 Alternative minimum tax credit 2,478,259 -- Net operating loss 1,083,983 -- Other 36,045 34,026 ------------ ------------ Total deferred tax assets 11,749,413 7,781,819 ------------ ------------ Deferred tax liabilities: Deferred policy acquisition costs and deferred ceding commission income 3,968,311 4,086,944 Unrealized gains on investments 623,690 569,837 Depreciation and amortization 402,565 386,463 Capitalized software 84,160 56,248 Other 1,594 5,772 ------------ ------------ Total deferred tax liabilities 5,080,320 5,105,264 ------------ ------------ Net deferred tax assets $ 6,669,093 2,676,555 ============ ============
In assessing the realization of its deferred tax assets, management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon management's consideration of expected reversal of deferred tax liabilities and projected future taxable income, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets. As of December 31, 1998, the Company has net operating loss carryforwards of approximately $3,097,094 for tax return purposes which, if not utilized, will expire in 2018. 58 59 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (7) SHAREHOLDERS' EQUITY The Company has 250,000,000 shares of authorized $.10 par value common stock. Of the authorized shares, 21,740,657 and 21,701,118 were issued as of December 31, 1998 and 1997, respectively and 20,896,563 and 20,874,224 were outstanding as of December 31, 1998 and 1997, 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. In 1991, the Company adopted a policy to pay a quarterly cash dividend of $.01 per share on its common stock every quarter until further action by the Board of Directors. The Board of Directors increased the cash dividend to: $.0125 per share in November 1995, $.015 per share in August 1996, and $.0175 per share in November 1997. The amount of consolidated statutory shareholder's equity or policyholders' surplus of General Agents and MGAI was $69,825,964, $76,495,883 and $57,011,890 at December 31, 1998, 1997 and 1996, respectively, and the amount of consolidated statutory net income (loss) was $(13,682,598), $14,155,450 and $15,829,108 for the years ended 1998, 1997, and 1996, respectively. The amount of policyholders' surplus of GCM was $2,000,000, $2,000,000 and $2,000,001 at December 31, 1998, 1997 and 1996, respectively, and the amount of statutory net income (loss) was $(340,460), $44,569 and $115,563 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company's statutory capital significantly exceeds the benchmark capital level under the Risk Based Capital formula for its major insurance companies. Statutes in Texas and Oklahoma restrict the payment of dividends by the insurance company subsidiaries to the available surplus funds derived from their realized net profits. The maximum amount of cash dividends that each subsidiary may declare without regulatory approval in any 12-month period is the greater of net income for the 12-month period ended the previous December 31 or ten percent (10%) of policyholders' surplus as of the previous December 31. In 1999 General Agents (the Oklahoma subsidiary) can pay dividends of up to $6,982,596 without regulatory approval and MGAI (the Texas subsidiary) can pay dividends of up to $1,985,721 without regulatory approval. In 1988, the Board of Directors declared, pursuant to a Rights Plan, a dividend distribution of one common share purchase right on each outstanding share of $.10 par value common stock. The dividend distribution was made on March 18, 1988, payable to shareholders of record on that date. In 1993, the Board of Directors amended the Rights Plan and extended the expiration date of these rights from March 18, 1998 to May 25, 2003. Each right, as amended during 1993, has an exercise price of $70. The rights are not exercisable until the Distribution Date (as defined in the Rights Plan). The Rights Plan provides, among other things, that if any person or group (other than the Company, one of its subsidiaries or an employee benefit plan of the Company or a subsidiary) acquires 20% or more of the Company's common stock (except pursuant to an offer for all outstanding common stock which the Continuing Directors (as defined in the Rights Plan) have determined to be in the best interests of the Company and its shareholders), if a 20% holder engages in certain self-dealing transactions or if a holder of 15% or more of the Company's common stock is declared an Adverse Person (as defined in the Rights Plan) by the Board of Directors, each holder of a right (other than the 20% holder or the Adverse Person, whose rights 59 60 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 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. (8) BENEFIT PLANS At December 31, 1998, the Company had three plans under which options could be granted: the 1990 Stock Option Plan (90 Plan), the 1995 Stock Option Plan (95 Plan) and the 1998 Long-Term Incentive Plan (98 Plan). Under the 90 Plan, all options available have been granted and are fully vested. Any unexercised options will expire in the year 2000. The 95 Plan was approved by the shareholders on May 10, 1996 and 1,071,000 shares are reserved for issuance under this plan. Options granted under the 95 Plan have a maximum ten year term and are exercisable at the rate of 20% immediately upon grant and 20% on each of the first four anniversaries of the grant date. The 98 Plan was approved by the shareholders on July 17, 1998, and the aggregate number of shares of common stock which may be issued under the 98 Plan is limited to 1,000,000. Under the 98 Plan, stock options (including incentive stock options and non-qualified stock options), stock appreciation rights and restricted stock awards may be made. No awards were outstanding under the 98 Plan at December 31, 1998. Options for 579,710 shares were granted to Glenn W. Anderson at an exercise price $5.75 per share. The exercise price of each outstanding option equals the market price of the Company's stock on the date of grant. A summary of the status of the Company's outstanding options as of December 31, 1998 and 1997, and changes during the years ended December 31, 1998 and 1997 is presented below:
1998 1997 ------------------------------- --------------------------- Underlying Weighted Average Underlying Weighted Shares Exercise Price Shares Average Options ---------- ---------------- ---------- Exercise Price ------- -------------- Outstanding, beginning of period 1,352,713 $ 8.32 1,352,786 $ 8.38 Granted 835,814 $ 5.93 158,425 $ 8.60 Exercised (39,539) $ 2.14 (30,749) $ 2.94 Forfeited (608,348) $ 10.36 (127,749) $ 10.63 ---------- ---------- Outstanding, end of period 1,540,640 $ 6.42 1,352,713 $ 8.32 ========== ========== Options exercisable at end of period 1,238,104 711,978 Weighted-average fair value of options granted during the period $ 1.96 $ 4.82
60 61 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The following table summarizes information for the stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price --------------- ----------- ---------------- -------------- ----------- -------------- $ 2 to 9 1,188,801 4.65 years $ 5.18 1,027,001 $ 4.93 $ 9 to 11 351,839 7.36 years $ 10.63 211,103 $ 10.63 ---------- ---------- $ 2 to 11 1,540,640 5.27 years $ 6.42 1,238,104 $ 5.90 ========== ==========
During 1998 options previously granted to officers under the 95 Plan were exchanged for options of a lesser amount with an exercise price equal to the market price of the Company's stock on the date of exchange. The Company applies APB 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined consistent with Statement 123 for the options granted, the Company's net income and earnings per share would have been the pro forma amounts indicated below:
Year ended Year ended ---------- ---------- December 31, 1998 December 31, 1997 ----------------- ----------------- Net income (loss) As reported $ (11,662,564) $ 11,923,526 Pro forma $ (12,139,335) $ 11,368,790 Basic earnings (loss) per share As reported $ (.56) $ .57 Pro forma $ (.58) $ .54 Diluted earnings (loss) per share As reported $ (.56) $ .56 Pro forma $ (.58) $ .54
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1998 and 1997, respectively: expected volatility of 32.6% and 33.6%, risk free interest rates of 5.04% and 5.88%, expected dividend yields of 1.2% and .74% and an expected life of 7.5 years for both periods presented. 61 62 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The Company has a profit sharing and trust plan for the benefit of its eligible employees. The annual contributions amounted to $0, $396,838, and $578,107 for 1998, 1997 and 1996, respectively. The Company has an incentive compensation plan under which all full time employees with at least six months of service participate. Factors applicable to the incentive compensation plan are: Company's net income level, individual performance, employee's salary and level. (9) BUSINESS ACQUISITION On October 23, 1998, the Company completed the acquisition of the Lalande Financial Group, Inc. (Lalande Group). The Lalande Group includes National Specialty Lines, Inc. (NSL) and De La Torre Insurance Adjusters, Inc. (DLT). NSL is a managing general agency which markets nonstandard personal auto insurance through approximately 800 retail agencies in Florida. DLT is an automobile claims adjusting firm that provides claim services on NSL produced business and to outside parties. The purchase price was for $18 million in cash paid at closing plus up to an additional $22 million in cash to be paid over approximately five years contingent upon the performance of the Lalande Group. The purchase was financed with a commercial bank borrowing of $18 million (note 4). The transaction resulted in goodwill of approximately $17.2 million which is being amortized on a straight line basis over 25 years. The acquisition was accounted for as a purchase and the results of operations since the acquisition date have been consolidated. The pro forma unaudited results of operations for the years ended December 31, 1998 and 1997, assuming the purchase of the Lalande Group has been consummated on January 1, 1997, are presented below:
1998 1997 --------- --------- (Amounts in thousands, except per share data) Revenues $ 112,039 122,724 Net income (loss) $ (12,285) 10,857 Basic earnings (loss) per share $ (0.59) 0.52 Diluted earnings (loss) per share $ (0.59) 0.51
(10) CONTINGENCIES The Company is a defendant in the proceedings styled William Steiner v. Joseph D. Macchia, Joel C. Puckett, Daniel J. Coots and GAINSCO, INC., filed in the United States District Court for the Northern District of Texas, Fort Worth Division. In that case, the plaintiff asserts claims on behalf of a putative class of persons who purchased the Company's common stock between August 6, 1997 and July 16, 1998, inclusive. The plaintiff asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the Company's financial results did not reflect the Company's true financial position and results of operations in accordance with generally accepted accounting principles in that they understated reserves for claims and claim adjustment expenses. The Company believes that it has meritorious defenses to plaintiff's claims and intends to vigorously defend the action. In the normal course of its operations, the Company has been named as defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. The Company's management believes that unpaid claims and claim adjustment expenses are adequate to cover possible liability from lawsuits which arise in the normal course of its insurance business. In the opinion of the Company's management the ultimate liability, if any, resulting from the disposition of all claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company does not have any financial instruments where there is off-balance-sheet-risk of accounting loss due to credit or market risk. There is credit risk in the premiums receivable and reinsurance balances receivable of the Company. At December 31, 1998 and 1997 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. 62 63 GAINSCO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (11) QUARTERLY FINANCIAL DATA (UNAUDITED) The following table contains selected unaudited consolidated financial data for each quarter (in thousands, except per share data):
1998 Quarter 1997 Quarter --------------------------------------- -------------------------------------- Fourth Third Second First Fourth Third Second First ------ ----- ------ ----- ------ ----- ------ ----- Gross premiums written $ 26,144 22,722 22,224 20,072 26,763 23,055 26,938 23,020 Total revenues $ 25,980 26,373 26,532 26,742 28,816 28,484 28,850 28,795 Total expenses $ 26,764 25,012 32,702 42,429 25,381 27,253 22,980 24,570 Net income (loss) $ 69 1,397 (3,770) (9,359) 2,887 1,464 4,409 3,164 Earnings (loss) per share: Basic $ .00 .07 (.18) (.45) .14 .07 .21 .15 Diluted $ .00 .07 (.18) (.45) .14 .07 .21 .15 Common share prices (a) High 7 5/16 8 1/16 9 7/8 8 13/16 10 3/16 9 15/16 9 3/8 10 Low 5 7/8 5 3/4 6 7 7/8 8 8 1/2 8 1/8 8 3/4
(a) As reported by the New York Stock Exchange. 63 64 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION The Board of Directors and Shareholders GAINSCO, INC: Under date of February 19, 1999, we reported on the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Dallas, Texas February 19, 1999 64 65 Schedule I GAINSCO, INC. AND SUBSIDIARIES Summary of Investments - Other Than Investments in Related Parties (Amounts in thousands)
As of December 31 --------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ----------------------- ----------------------- 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 $ 5,668 5,887 5,404 5,476 7,731 7,748 Tax exempt state and municipal bonds 54,120 55,091 84,330 85,052 97,199 97,977 Bonds available for sale: U.S. government securities 13,734 13,969 27,322 27,404 -- -- Tax exempt state and municipal bonds 130,072 131,619 94,700 96,246 76,880 77,644 595 595 595 595 595 595 Certificates of deposit 316 269 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Marketable securities 204,505 207,430 212,351 214,773 182,405 183,964 ---------- ---------- ---------- ---------- ---------- ---------- Short-term investments 4,749 4,749 2,823 2,823 20,662 20,662 ---------- ---------- ---------- ---------- ---------- ---------- Total investments $ 209,254 212,179 215,174 217,596 203,067 204,626 ========== ========== ========== ========== ========== ==========
See accompanying independent auditors' report on supplementary information. 65 66 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Balance Sheets December 31, 1998 and 1997
Assets 1998 1997 ------------- ------------- Investments in subsidiaries $ 104,547,799 117,359,673 Cash 1,178 1,614 Net receivables from subsidiaries 2,121,291 1,308,015 Short-term investments 43,538 83,475 Other assets 125,218 191,716 Goodwill 17,057,772 -- ------------- ------------- Total assets 123,896,796 118,944,493 ============= ============= Liabilities and Shareholders' Equity Liabilities: Accounts payable $ 47,208 16,933 Note payable 18,000,000 -- Dividends payable 365,690 365,300 ------------- ------------- Total liabilities 18,412,898 382,233 ------------- ------------- Shareholders' equity: Preferred stock ($100 par value, 10,000,000 shares authorized, none issued) -- -- Common stock ($.10 par value, 250,000,000 shares authorized, 21,740,657 issued at December 31, 1998 and 21,701,118 issued at 2,174,066 2,170,112 December 31, 1997) 87,778,548 87,697,754 Additional paid-in capital 1,138,941 1,058,268 Accumulated other comprehensive income 22,086,868 35,188,460 Retained earnings Treasury stock, at cost (844,094 shares in 1998 and (7,694,525) (7,552,334) ------------- ------------- 826,894 shares in 1997) 105,483,898 118,562,260 ------------- ------------- Total shareholders' equity Total liabilities and shareholders' equity $ 123,896,796 118,944,493 ============= =============
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) Statements of Operations Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Revenues - dividend income $ 3,900,000 3,700,000 9,900,000 Investment income 2,255 3,779 -- Expenses - operating expenses (2,342,404) (1,367,178) (1,191,222) ------------ ------------ ------------ Operating income before Federal income tax benefit 1,559,851 2,336,601 8,708,778 Federal income taxes: Current benefit (354,324) (455,679) (467,559) Deferred benefit (439,874) -- -- ------------ ------------ ------------ (794,198) (455,679) (467,559) ------------ ------------ ------------ Income before equity in undistributed income of subsidiaries 2,354,049 2,792,280 9,176,337 Equity in undistributed income (loss) of subsidiaries (14,016,613) 9,131,246 6,843,230 ------------ ------------ ------------ Net income (loss) $(11,662,564) 11,923,526 16,019,567 ============ ============ ============ Earnings (loss) per share: Basic $ (.56) .57 .75 ============ ============ ============ Diluted $ (.56) .56 .74 ============ ============ ============
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 67 68 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Common Stock: Balance at beginning of year $ 2,170,112 2,167,037 2,163,748 Exercise of options to purchase shares (39,539 in 1998, 30,749 in 1997 and 32,888 in 1996) 3,954 3,075 3,289 ------------ ------------ ------------ Balance at end of year 2,174,066 2,170,112 2,167,037 ------------ ------------ ------------ Additional paid-in capital: Balance at beginning of year 87,697,754 87,610,379 87,543,175 Exercise of options to purchase shares (39,539 in 1998, 30,749 in 1997 and 32,888 in 1996) 80,794 87,375 67,204 ------------ ------------ ------------ Balance at end of year $ 87,778,548 87,697,754 87,610,379 ------------ ------------ ------------
(continued) 68 69 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Retained earnings: Balance at beginning of year $ 35,188,460 24,517,265 9,673,968 Net income (loss) for year (11,662,564) (11,662,564) 11,923,526 11,923,526 16,019,567 16,019,567 Cash dividends (1,462,070) (1,310,518) (1,176,270) Tax benefit on non-qualified stock options exercised 23,042 58,187 -- ------------ ------------ ------------ Balance at end of year 22,086,868 35,188,460 24,517,265 ------------ ------------ ------------ Accumulated other comprehensive income: Balance at beginning of year 1,058,268 496,675 1,073,597 Unrealized gains (losses) on securities, net of reclassification adjustment, net of tax 80,673 80,673 561,593 561,593 (576,922) (576,922) ------------ ----------- ------------ ------------ ------------ ------------ Comprehensive income (loss) (11,581,891) 12,485,119 15,442,645 =========== ============ ============ Balance at end of year 1,138,941 1,058,268 496,675 ------------ ------------ ------------ Treasury stock: Balance at beginning of year (7,552,334) (5,438,774) (1,012,592) Change during year (142,191) (2,113,560) (4,426,182) ------------ ------------ ------------ Balance at end of year (7,694,525) (7,552,334) (5,438,774) ------------ ------------ ------------ Total shareholders' equity at end of year $105,483,898 118,562,260 109,352,582 ============ ============ ============
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 70 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $(11,662,564) 11,923,526 16,019,567 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 171,502 -- -- Change in investments in subsidiaries -- (5,390,712) -- Change in net receivables from subsidiaries (813,276) 5,981,096 (3,593,152) Change in other assets 66,498 (32,224) (95,992) Change in accounts payable 30,275 11,046 5,887 Change in other liabilities -- -- (900) Equity in (income) loss of subsidiaries 14,016,612 (9,131,246) (6,843,230) ------------ ------------ ------------ Net cash provided by/(used for) operating activities 1,809,047 3,361,486 5,492,180 ------------ ------------ ------------ Cash flows from investing activities: Net change in short-term investments 39,937 (83,475) -- Purchase of subsidiary (18,330,298) -- -- ------------ ------------ ------------ Net cash used for investing activities $(18,290,361) (83,475) -- ------------ ------------ ------------
(continued) 71 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Cash flows from financing activities: Proceeds from (payments on) notes payable $ 18,000,000 -- -- Cash dividends paid (1,461,679) (1,261,530) (1,129,024) Proceeds from exercise of common stock options 84,748 90,450 70,493 Treasury stock acquired (142,191) (2,113,560) (4,426,182) ------------ ------------ ------------ Net cash provided by/(used for) financing activities 16,480,878 (3,284,640) (5,484,713) ------------ ------------ ------------ Net increase (decrease) in cash (436) (6,629) 7,467 Cash at beginning of year 1,614 8,243 776 ------------ ------------ ------------ Cash at end of year $ 1,178 1,614 8,243 ============ ============ ============
See accompanying notes to condensed financial statements. See accompanying independent auditors' report on supplementary information. 71 72 Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT GAINSCO, INC. (PARENT COMPANY) Notes to Condensed Financial Statements December 31, 1998, 1997 and 1996 (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, 1998, 1997 and 1996 included elsewhere in this Annual Report. (2) RELATED PARTIES During 1997, the Company made a capital contribution to GAINSCO Service Corp. by forgiving an intercompany debt in the amount of $5,390,712. The Company acquired the net assets of the Lalande Group of $1,101,024 in October 1998 through a 100% purchase. The following table presents the components of the Net receivables from subsidiaries at December 31, 1998 and 1997:
Name of Subsidiary 1998 1997 --------- --------- Agents Processing Systems, Inc. $ 883,224 883,224 GAINSCO Service Corp. 425,593 218,287 General Agents Insurance Company of America, Inc. 812,474 206,504 --------- --------- Net receivables from subsidiaries 2,121,291 1,308,015 ========= =========
See accompanying independent auditors' report on supplementary information. 72 73 Schedule III GAINSCO, INC. AND SUBSIDIARIES Supplementary Insurance Information Years ended December, 1998, 1997 and 1996 (Amounts in thousands)
Other Reserves policy Amortization Deferred for claims claims of deferred Other policy and and Net Net Claims policy operating Net acquisition 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, 1998 Property and casualty insurance $11,320 136,798 63,602 5,835 92,203 9,803 86,353 (24,382) 40,255 88,559 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total $11,320 136,798 63,602 5,835 92,203 9,803 86,353 (24,382) 40,255 88,559 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Year ended December 31, 1997 Property and casualty insurance $11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 37,082 98,139 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total $11,618 113,227 64,005 9,393 102,256 9,731 62,086 (26,179) 37,082 98,139 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= 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 ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Net of the amortization of deferred ceding commission income. See accompanying independent auditors' report on supplementary information. 74 Schedule IV GAINSCO, INC. AND SUBSIDIARIES Reinsurance Years ended December 31, 1998, 1997 and 1996 (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, 1998: Premiums earned: Property and casualty $ 134,733 -- -- 134,733 Reinsurance -- (43,221) 691 (42,530) ---------- ---------- ---------- ---------- Total $ 134,733 (43,221) 691 92,203 0.7% ========== ========== ========== ========== ========== Year ended December 31, 1997: Premiums earned: Property and casualty $ 137,071 -- -- 137,071 Reinsurance -- (34,815) -- (34,815) ---------- ---------- ---------- ---------- Total $ 137,071 (34,815) -- 102,256 -- % ========== ========== ========== ========== ========== 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 -- % ========== ========== ========== ========== ==========
See accompanying independent auditors' report on supplementary information. 74 75 Schedule VI GAINSCO, INC. AND SUBSIDIARIES Supplemental Information Years ended December 31, 1998, 1997 and 1996 (Amounts in thousands)
Column A Column B Column C Column D Column E Column F ------------ ------------ ------------ ------------ ------------ ------------ Reserves for unpaid Discount Deferred claims if any, Affiliation policy and claim deducted with acquisition adjustment in Unearned Net earned registrant costs expenses Column C premiums premiums ------------ ------------ ------------ ------------ ------------ ------------ Year ended December 31, 1998 Property and casualty insurance $ -- 11,320 136,798 -- 63,602 92,203 ------------ ------------ ------------ ------------ ------------ ------------ Total $ -- 11,320 136,798 -- 63,602 92,203 ============ ============ ============ ============ ============ ============ Year ended December 31, 1997 Property and casualty insurance $ -- 11,618 113,227 -- 64,005 102,256 ------------ ------------ ------------ ------------ ------------ ------------ Total $ -- 11,618 113,227 -- 64,005 102,256 ============ ============ ============ ============ ============ ============ 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 ============ ============ ============ ============ ============ ============
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, 1998 Property and casualty insurance 9,803 59,635 26,718 (24,382) 68,288 88,559 ------------ ------------ ------------ ------------ ------------ ------------ Total 9,803 59,635 26,718 (24,382) 68,288 88,559 ============ ============ ============ ============ ============ ============ Year ended December 31, 1997 Property and casualty insurance 9,731 53,969 8,117 (26,179) 57,361 98,139 ------------ ------------ ------------ ------------ ------------ ------------ Total 9,731 53,969 8,117 (26,179) 57,361 98,139 ============ ============ ============ ============ ============ ============ 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 ============ ============ ============ ============ ============ ============
(1) Net of the amortization of deferred ceding commission income. See accompanying independent auditors' report on supplementary information. 76 EXHIBIT INDEX
Sequentially Exhibit Number 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) 3.6 Articles of Amendment to Articles of Incorporation effective August 13, 1993 (Exhibit 3.6)(7) 3.7 Bylaws of Registrant as amended through May 1, 1998 (Exhibit 99.3) (12) 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 (Exhibit 4.6) (10) 10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4) 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).
77
Sequentially Exhibit Number Description No. Page - -------------- ----------- -------- 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). 10.31 1995 Stock Option Plan of the Registrant (Exhibit 10.31) (9) 10.36 Form of Change of Control Agreements (Exhibit 10.36) (6) (11) 10.37 Employment Agreement dated April 25, 1998 between Glenn W. Anderson and the Registrant (Exhibit 99.5) (13). 10.38 Change of Control Agreement for Glenn W. Anderson (Exhibit 99.7) (13). 10.39 Replacement Non-Qualified Stock Option Agreement dated July 24, 1998 between Glenn W. Anderson and the Registrant (Exhibit 99.6) (14). 10.40 GAINSCO, INC. 1998 Long Term Incentive Plan (Exhibit 99.8) (14). 10.41 Stock Purchase Agreement by and among GAINSCO, INC., Carlos De la Torre, Rosa De la Torre, National Specialty Lines, Inc., De La Torre Insurance Adjusters, Inc., and Lalande Financial Group, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.6) (15). 10.42 Stock Purchase Agreement by and among GAINSCO, INC., McRae B. Johnston, National Specialty Lines, Inc., and Lalande Financial Group, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.7) (15). 10.43 Stock Purchase Agreement by and among GAINSCO, INC., Michael Johnston and National Specialty Lines, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.8) (15). 10.44 Stock Purchase Agreement by and among GAINSCO, INC., Ralph Mayoral and De La Torre Insurance Adjusters, Inc. dated August 17, 1998 relating to acquisition of Lalande Group (Exhibit 99.9) (15). 10.45 Employment Agreement by and among De La Torre Insurance Adjusters, Inc., Carlos De la Torre and GAINSCO, INC. (Exhibit 99.10) (15).
78
Sequentially Exhibit Number Description No. Page - -------------- ----------- -------- 10.46 Employment Agreement by and among National Specialty Lines, Inc., McRae B. Johnston and GAINSCO, INC. dated August 17, 1998 (Exhibit 99.11) (15). 10.47 Employment Agreement by and among National Specialty Lines, Inc., Michael Johnston and GAINSCO, INC. dated August 17, 1998 (Exhibit 99.12) (15). 10.48 Employment Agreement by and among De La Torre Insurance Adjusters, Inc., Ralph Mayoral and GAINSCO, INC. dated August 17, 1998 (Exhibit 99.13) (15). 10.49 Asset Purchase Agreement dated March 9, 1999 between the Registrant, Agents Processing Systems, Inc. and Insurance Business Solutions Incorporated (16). 11 (Not required to be filed as an Exhibit. See footnote (1)(m) on page 51 of this 10-K Report for information called for by number 11 of the Exhibit Table to Item 601 of SK) 22.2 Subsidiaries of Registrant (16) 24.2 Consent of KPMG LLP to incorporation by reference (16) 25.1 Powers of Attorney (16) 27 Financial Data Schedule (16)
EX-10.49 2 ASSET PURCHASE AGREEMENT DATED MARCH 9, 1999 1 EXHIBIT 10.49 ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement"), executed on March 9th, 1999 but effective as of April 1, 1999 (the "Effective Date"), is between Agents Processing Systems, Inc., a Texas corporation ("Seller"), GAINSCO, Inc., parent company of Seller ("GAINSCO"), and Insurance Business Solutions Incorporated, a Colorado corporation ("Purchaser"). W I T N E S S E T H : WHEREAS, Seller desires to sell certain of the assets and transfer certain of the liabilities of Seller related to Seller's business, and Purchaser desires to purchase certain of the assets and assume certain of the liabilities of Seller; NOW, THEREFORE, in consideration of the mutual representations, warranties and covenants herein contained, and on the terms and subject to the conditions herein set forth, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: (a) "Assets" shall mean, with respect to Seller, all of the assets listed on Exhibit A hereto. (b) "Assumed Liabilities" shall mean all of Seller's obligations under the Contracts. (c) "Closing" shall mean the closing of the transactions contemplated herein, which shall occur on the Effective Date. (d) "Contracts" shall mean the customer base contracts listed on Exhibit B hereto. (e) "Employees" shall mean those persons listed on Exhibit C hereto. 2 (f) "Year 2000 Ready" shall mean that software is able to perform date-sensitive functions prior to and after December 31, 1999. ARTICLE II PURCHASE AND SALE SECTION 2.1 PURCHASE AND SALE OF ASSETS. Subject to and upon the terms and conditions contained herein, at the Closing, Seller shall sell, transfer, assign, convey and deliver to Purchaser, free and clear of all security interests, liens, claims and encumbrances, and Purchaser shall purchase, accept and acquire from Seller, the Assets, and Purchaser shall assume the Assumed Liabilities. Purchaser shall acquire no interest in any other property of Seller other than the Assets. SECTION 2.2 CONSIDERATION. As consideration for the Assets, Purchaser shall (i) pay $25,000 in cash to Seller at the Closing, (ii) agree to assume the Assumed Liabilities, and (iii) take the actions contemplated in Section 2.4 and in Article VI hereof. SECTION 2.3 NO ASSUMPTION. Except for the Assumed Liabilities, Purchaser shall not assume or agree to pay, perform or discharge any liabilities or obligations of Seller, whether accrued, absolute, contingent or otherwise. SECTION 2.4 EMPLOYMENT AND RELATED AGREEMENTS. Purchaser shall offer employment on an at-will basis to the Employees, in each case at the salary set forth opposite such person's name on Exhibit C hereto. Purchaser shall offer the Employees benefits which are consistent with those listed on Exhibit C hereto. In the event Purchaser elects to terminate the employment of any Employee prior to the first anniversary of the Effective Date for any reason other than for cause, Purchaser shall provide Employee with a severance package to the terminated Employee that is at least as favorable as that described on Exhibit D hereto. Purchaser shall reimburse Seller an amount equal to one half of any severance payment, not to exceed the amount set forth on Exhibit D hereto, for one employee of Seller not being offered employment by Purchaser, with such payment to be made not more than 30 days following Purchaser's receipt of an invoice from Seller for Purchaser's share of the severance amount. Purchaser shall maintain an office in the area of Fort Worth, Texas for at least one year following the Closing and shall not require any Employee to relocate to an office more than 30 miles from the existing office of Seller as a condition to continuing employment with Purchaser. For a period of two years after the first anniversary of the Closing, in the event Purchaser decides that economic factors make it no longer feasible to maintain an office in Fort Worth, Texas, Purchaser shall give both Seller and then current Employees not less than 90 days' prior written notice of its intention to close the Fort Worth office. Seller shall not, for a period of five years following the Closing, solicit any Employee for employment with Seller or its affiliates. SECTION 2.5 INSURANCE. At Closing and for a period of three years after Closing, Purchaser will maintain in full force and effect an Errors and Omissions ("E&O") insurance policy with an insurance carrier (or carriers) rated A- or better by A.M. Best. Purchaser shall name 2 3 GAINSCO, and its subsidiaries as additional insureds under the policy during this period. The policy shall require at least 30 days notice of cancellation or material change to GAINSCO. Purchaser will provide evidence of such insurance at or before Closing and evidence of subsequent policy renewals during the two year period following the Closing. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER AND GAINSCO Each of Seller and GAINSCO, jointly and severally, represents and warrants that the following are true and correct as of the date hereof: SECTION 3.1 ORGANIZATION AND GOOD STANDING; QUALIFICATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, with all requisite corporate power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. SECTION 3.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance by Seller and GAINSCO of this Agreement and the other agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by Seller and GAINSCO. This Agreement and each other agreement contemplated hereby have been duly executed and delivered by Seller and GAINSCO and constitute legal, valid and binding obligations of Seller, enforceable against Seller and GAINSCO in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. SECTION 3.3 NO VIOLATION. Neither the execution, delivery or performance of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with, or result in a violation or breach of the terms, conditions or provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of Seller and GAINSCO or any agreement, indenture or other instrument under which Seller and GAINSCO is bound or to which any of the Assets are subject, or result in the creation or imposition of any security interest, lien, charge or encumbrance upon any of the Assets or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Seller and GAINSCO or the Assets. SECTION 3.4 CONSENTS. No consent, authorization, approval, permit or license of, or filing with, any governmental or public body or authority, any lender or lessor or any other person or entity is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or the agreements contemplated hereby on the part of Seller and GAINSCO. 3 4 SECTION 3.5 ASSETS. Upon consummation of the transactions contemplated hereby, Purchaser shall receive the Assets free and clear of all security interests, liens and encumbrances. Except as set forth in Sections 3.5 and 3.6, all Assets are being conveyed on an AS IS, WHERE IS basis, with no representations and warranties being made with respect thereto. SECTION 3.6 YEAR 2000 READINESS. Seller warrants that at the Closing, Seller owns all right, title and interest to all software included in the Assets and such software does not infringe upon any proprietary or other intellectual property rights of any third person. To the best of Seller's knowledge, all software contained in the Assets is Year 2000 Ready. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants that the following are true and correct as of the date hereof: SECTION 4.1 ORGANIZATION AND GOOD STANDING. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the state of Colorado, with all requisite corporate power and authority to carry on the business in which it is engaged, to own the properties it owns, to execute and deliver this Agreement and to consummate the transactions contemplated hereby. SECTION 4.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance by Purchaser of this Agreement and the other agreements contemplated hereby, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by Purchaser. This Agreement and each other agreement contemplated hereby have been duly executed and delivered by Purchaser and constitute legal, valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms, except as may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or the availability of equitable remedies. SECTION 4.3 NO VIOLATION. Neither the execution, delivery or performance of this Agreement or the other agreements contemplated hereby nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with, or result in a violation or breach of the terms, conditions and provisions of, or constitute a default under, the Certificate of Incorporation or Bylaws of Purchaser or any agreement, indenture or other instrument under which Purchaser is bound or (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over Purchaser or the properties or assets of Purchaser. 4 5 SECTION 4.4 CONSENTS. No consent, authorization, approval, permit or license of, or filing with, any governmental or public body or authority, any lender or lessor or any other person or entity is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement or the agreements contemplated hereby on the part of Purchaser. ARTICLE V CLOSING DELIVERIES SECTION 5.1 DELIVERIES OF SELLER. At the Closing, Seller is delivering to Purchaser the following: (a) a Bill of Sale conveying the Assets that are personal property to Purchaser; (b) an Assignment and Assumption Agreement with respect to the Contracts in the form attached as Annex I hereto (the "Assignment and Assumption Agreement"); and (c) such other instrument or instruments of transfer as shall be necessary or appropriate, as Purchaser or its counsel shall reasonably request, to vest in Purchaser good and indefeasible title to the Assets. SECTION 5.2 DELIVERIES OF PURCHASER. At the Closing, Purchaser is delivering to Seller the following: (a) $25,000 in cash; and (b) the Assignment and Assumption Agreement. SECTION 5.3 FURTHER INSTRUMENTS OF TRANSFER. Following the Closing, at the request of Purchaser, Seller shall deliver any further instruments of transfer and take all reasonable action as may be necessary or appropriate to (i) vest in Purchaser good and indefeasible title to Assets that are personal property, (ii) transfer to Purchaser all licenses and permits included in the Assets and (iii) evidence assignment of the Contracts to Purchaser and assumption of the related Assumed Liabilities by Purchaser. 5 6 ARTICLE VI POST-CLOSING OBLIGATIONS SECTION 6.1 WINDOWS PRODUCT. Following the Closing, Purchaser shall offer to customers of Seller, i.e. those who are parties to the Contracts ("Customers"), a Windows-based managing general agency software product (the "MGA Product"), based on pricing outlined in Section 6.3, which MGA Product shall contain the features set forth on Exhibit E hereto. Such offer shall be made no later than the first anniversary of the Effective Date and shall remain open to customers of Seller at least until the fifth anniversary of the Effective Date. SECTION 6.2 LICENSE OF MGA PRODUCT. Purchaser shall grant to GAINSCO five (5) right to use licenses to use the MGA Product, with no license fees, in perpetuity, pursuant to license agreements as used by Purchaser with respect to other licensees of Purchaser's products. These right to use licenses shall be fully assignable and transferable to GAINSCO's agents who are not Customers. The licenses will include Purchaser's General Agency Accounting System, Work Item Tracking System, Direct Installment Billing Module, Claims Tracking Module, Premium Finance Module, and Policy Issuance Interface Module. Maintenance fees associated with the relevant product, at Purchaser's then-applicable rates, will commence upon order and installation of each individual license. SECTION 6.3 SALE OF MGA PRODUCT. In addition to preferred pricing to be offered to Customers by Purchaser throughout Purchaser's product line, Purchaser shall allow Customers to purchase the MGA Product at a fixed price of $12,500 for the duration of the DOS support period set forth in Section 6.5 below. The MGA Product shall consist of a right to use license for Purchaser's Access-based General Agency Accounting System, including General Ledger and Accounts Payable Modules. Purchaser shall offer to such Customers a migration path from their existing software to the MGA Product. Other modules and services shall be provided at a preferred customer discount rate. SECTION 6.4 SALE OF MGA PRODUCT TO GAINSCO AGENTS. Purchaser shall allow those agents of affiliates of GAINSCO who are not Customers to purchase the MGA Product consistent with the discount schedule set forth on Exhibit F hereto. SECTION 6.5 SUPPORT. Purchaser shall provide support services with respect to Seller's DOS-based product being purchased as part of the Assets (the "DOS Product") for a period of three years following the Effective Date, which support services shall be substantially similar in quality in all respects to the standard of support services provided by Purchaser to its other customers. The parties agree and acknowledge that such support services shall not include any duty to provide upgrades with respect to the DOS Product; including but not limited to enhancing the DOS Product to perform in a client operating environment beyond Microsoft Windows 98 and a network operating environment beyond Novell NetWare 4.11. 6 7 SECTION 6.6 MAINTENANCE FEES. Beginning with the year 2000 and ending on the third anniversary of the Effective Date, Purchaser shall not increase the maintenance fees for the DOS Product charged to Customers by more than 10% per year, it being understood that no increase will occur during 1999. SECTION 6.7 NON-SOLICITATION OF POLICYHOLDERS AND MGA'S. Purchaser shall not, for a period of five years after the Effective Date, either directly or indirectly, (i) solicit any policyholder of any affiliate of GAINSCO, to cancel, amend, or otherwise change any existing policy in favor of another insurer or (ii) solicit any managing general agent of any affiliate of GAINSCO to discontinue or otherwise terminate that status as a managing general agent. SECTION 6.8 NON-COMPETITION. Seller and GAINSCO will not, for a period of five years following the Effective Date, engage in the business of development and marketing of software to managing general agents. SECTION 6.9 DEVELOPMENT OF EDI. Purchaser will undertake a development project on behalf of GAINSCO to develop an Electronic Data Interface ("EDI") between the Purchaser's MGA Product and internal insurance systems operated by and for affiliates of GAINSCO. Purchaser will provide $100,000 worth of services for this EDI project, based on its customary rates and of a quality equal or better than the quality of services Purchaser provides to its other service customers, at no charge to GAINSCO. Such services shall be performed pursuant to a work order to be mutually agreed upon by GAINSCO and Purchaser. SECTION 6.10 RECEIPT OF PAYMENTS. To the extent that Seller or GAINSCO, on the one side, or Purchaser receives payment with respect to any account receivable of the other party, the receiving party will promptly forward such payment to the other party. SECTION 6.11 ADVISORY REPRESENTATIVE. GAINSCO shall have the right to designate a person to meet with Purchaser, and Purchaser shall meet with such person not less than quarterly, to discuss the obligations of Purchaser under this Article VI. In addition, such designee of GAINSCO shall be appointed to the customer advisor committee or similar body maintained by Purchaser with regard to customer relations. ARTICLE VII INDEMNIFICATION SECTION 7.1 INDEMNIFICATION BY SELLER AND GAINSCO. Subject to the terms and conditions of this Article, Seller and GAINSCO, jointly and severally, agree to indemnify, defend and hold Purchaser and its directors, officers, agents, attorneys and affiliates harmless from and against all losses, claims, obligations, demands, assessments, penalties, liabilities, costs, damages, 7 8 attorneys' fees and expenses (collectively, "Damages"), asserted against or incurred by such indemnitees by reason of or resulting from: (a) a breach of any representation, warranty or covenant of Seller contained herein, in any exhibit, schedule, certificate or financial statement delivered hereunder, or in any agreement executed in connection with the transactions contemplated hereby; (b) any product liability or breach of warranty claims relating to products sold by Seller prior to or on the Effective Date, and all general liability claims arising out of or relating to occurrences of any nature relating to Seller's business prior to the Effective Date, whether any such claims are asserted prior to, on or after the Effective Date; (c) any tax filing or return or payment made, or position taken, by Seller that any governmental authority challenges and that results in an assertion of Damages against Purchaser; or (d) any liability related to Seller that has not been expressly assumed by Purchaser. SECTION 7.2 INDEMNIFICATION BY PURCHASER. Subject to the terms and conditions of this Article, Purchaser hereby agrees to indemnify, defend and hold Seller and GAINSCO and their directors, officers, agents, attorneys and affiliates harmless from and against all Damages asserted against or incurred by any of such indemnitees by reason of or resulting from: (a) a breach by Purchaser of any representation, warranty or covenant of Purchaser contained herein or in any exhibit, schedule or certificate delivered hereunder, or in any agreement executed in connection with the transactions contemplated hereby; or (b) the failure of Purchaser to pay, perform and discharge when due any of the Assumed Liabilities. SECTION 7.3 CONDITIONS OF INDEMNIFICATION. The respective obligations and liabilities of Seller and GAINSCO and Purchaser (the "indemnifying party") to the other (the "party to be indemnified") under Sections 7.1 and 7.2 with respect to claims resulting from the assertion of liability by third parties shall be subject to the following terms and conditions: (a) Within 20 days (or such earlier time as might be required to avoid prejudicing the indemnifying party's position) after receipt of notice of commencement of any action evidenced by service of process or other legal pleading, the party to be indemnified shall give the indemnifying party written notice thereof together with a copy of such claim, process or other legal pleading, and the indemnifying party shall have the right to undertake the defense thereof by representatives of its own choosing and at its own expense; provided that the party to be indemnified may participate in the defense with counsel of its own choice, the fees and expenses of which counsel shall be paid by the party to be indemnified unless (i) the indemnifying party has agreed to pay such fees and 8 9 expenses, (ii) the indemnifying party has failed to assume the defense of such action or (iii) the named parties to any such action (including any impleaded parties) include both the indemnifying party and the party to be indemnified, and the party to be indemnified has been advised by counsel that there may be one or more legal defenses available to it that are different from or additional to those available to the indemnifying party (in which case, if the party to be indemnified informs the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such action on behalf of the party to be indemnified, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for the party to be indemnified, which firm shall be designated in writing by the party to be indemnified). (b) In the event that the indemnifying party, by the 30th day after receipt of notice of any such claim (or, if earlier, by the 10th day preceding the day on which an answer or other pleading must be served in order to prevent judgment by default in favor of the person asserting such claim), does not elect to defend against such claim, the party to be indemnified will (upon further notice to the indemnifying party) have the right to undertake the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party and at the indemnifying party's expense, subject to the right of the indemnifying party to assume the defense of such claims at any time prior to settlement, compromise or final determination thereof. (c) Notwithstanding the foregoing, the indemnifying party shall not settle any claim without the consent of the party to be indemnified unless such settlement involves only the payment of money and the claimant provides to the party to be indemnified a release from all liability in respect of such claim. If the settlement of the claim involves more than the payment of money, the indemnifying party shall not settle the claim without the prior consent of the party to be indemnified. (d) The party to be indemnified and the indemnifying party will each cooperate with all reasonable requests of the other. SECTION 7.4 WAIVER. No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement, any exhibit or any document, instrument or certificate contemplated hereby shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party's rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies. 9 10 SECTION 7.5 DISPUTE RESOLUTION. To the extent that disputes arise between the parties regarding compliance with any of the terms of this Agreement, the parties agree to work together in good faith to resolve such disputes. SECTION 7.6 COSTS, EXPENSES AND LEGAL FEES. Each party hereto shall bear its own costs and expenses (including attorneys' fees), except that each party hereto agrees to pay the costs and expenses (including reasonable attorneys' fees and expenses) incurred by the other parties in successfully (i) enforcing any of the terms of this Agreement or (ii) proving that another party breached any of the terms of this Agreement. ARTICLE VIII MISCELLANEOUS SECTION 8.1 AMENDMENT AND ASSIGNMENT. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by all the parties hereto. Neither this Agreement nor any right created hereby or in any agreement entered into in connection with the transactions contemplated hereby shall be assignable by any party hereto without the prior written consent of the other party. SECTION 8.2 PARTIES IN INTEREST; THIRD PARTY BENEFICIARIES. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto. Neither this Agreement nor any other agreement contemplated hereby shall be deemed to confer upon any person not a party hereto or thereto any rights or remedies hereunder or thereunder except for Employees, Customers and agents of affiliates of GAINSCO, who shall be express third party beneficiaries of the provisions regarding them set forth herein. SECTION 8.3 ENTIRE AGREEMENT. This Agreement and the agreements contemplated hereby constitute the entire agreement of the parties regarding the subject matter hereof, and supersede all prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. SECTION 8.4 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in its 10 11 terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION 8.5 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS. SECTION 8.6 NOTICE. Any notice or communication hereunder or in any agreement entered into in connection with the transactions contemplated hereby must be in writing and given by depositing the same in the United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person. Such notice shall be deemed received on the date on which it is hand-delivered or on the third business day following the date on which it is so mailed. For purposes of notice, the addresses of the parties shall be: If to Purchaser: Insurance Business Solutions Incorporated 3443 S. Galena, Suite 110 Denver, Colorado 80231 Attn: Rich Hurley If to Seller c/o GAINSCO, Inc. or GAINSCO: 500 Commerce Street Ft. Worth, Texas 76102-5439 Attn: Richard Buxton with a copy to: Byron F. Egan, Esq. Jackson Walker L.L.P. 901 Main Street, Suite 6000 Dallas, Texas 75202-3797 Any party may change its address for notice by written notice given to the other parties in accordance with this Section. SECTION 8.7 SERVICE OF PROCESS. Service of any and all process that may be served on any party hereto in any suit, action or proceeding arising out of this Agreement may be made in the manner and to the address set forth in Section 8.6 and service thus made shall be taken and held to be valid personal service upon such party by any party hereto on whose behalf such service is made. 11 12 In witness whereof, the parties have executed this Agreement as of the date first written above. PURCHASER INSURANCE BUSINESS SOLUTIONS INCORPORATED By: /s/ Richard W. Hurley Its: President SELLER AGENTS PROCESSING SYSTEMS, INC. By: /s/ Richard A. Laabs Its: Vice President GAINSCO GAINSCO, INC. By: /s/ Glenn W. Anderson Its: President and CEO 12 13 ANNEX I ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption Agreement (this "Agreement") is made and entered into as of April 1, 1999 by and between Agents Processing Systems, Inc., a Texas corporation ("Assignor") and Insurance Business Solutions Incorporated, a Colorado corporation ("Assignee"). RECITALS WHEREAS, Assignor and Assignee are parties to that certain Asset Purchase Agreement dated to be effective of even date herewith among them and GAINSCO, Inc. (the "Purchase Agreement"), pursuant to which, among other things, Assignor is to assign to Assignee its rights to, and Assignee is to assume Assignor's obligations under, the Contracts (as such term is defined in the Purchase Agreement); and WHEREAS, Assignor desires to assign all of its right, title and interest with respect to, and its obligations under, the Contracts to Assignee, and Assignee desires to accept and assume all of Assignor's rights and obligations thereunder. NOW, THEREFORE, in consideration of the following mutual promises and covenants, the parties agree as follows: 1. On and as of the date hereof, Assignor assigns, transfers and conveys to Assignee all of Assignor's right, title and interest in, and all of Assignor's obligations under, the Contracts. 2. From and after the date hereof, Assignee assumes all of Assignor's obligations under the Contracts and agrees to fully and faithfully observe and perform each of the covenants and conditions set forth therein to be observed or performed by Assignor without alteration or modification. 3. The Contracts remain in full force and effect according to their terms and references to Assignor contained in the Contracts are deemed to refer to Assignee. 4. The validity, performance and enforcement of this Agreement shall be construed, interpreted and governed in accordance with the laws of the State of Texas applicable to agreements fully executed, delivered and performed there. i 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first appearing above. AGENTS PROCESSING SYSTEMS, INC. By: ------------------------------- Its: ------------------------------- INSURANCE BUSINESS SOLUTIONS INCORPORATED By: ------------------------------- Its: ------------------------------- ii EX-22.2 3 SUBSIDIARIES OF 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 National Specialty De la Torre Insurance Lalande Financial Mutual Insurance Finance Company Company, Inc. Lines, Inc. Adjusters, Inc. Group, Inc. Company 75-2447701 75-2371163 75-1767545 65-0125014 59-1909039 65-0544438 (Texas) (Texas) (Texas) (Florida) (Florida) (Florida) - ----------------------------------------------------------------------------------------------------------------------------------- ------------------ 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 4 CONSENT OF KPMG LLP 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 statements (No. 33-48634 and No. 33-37070) on Form S-8 of GAINSCO, INC. of our reports dated February 19, 1999, relating to the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998, and all related schedules, which reports appear in the December 31, 1998 annual report on Form 10-K of GAINSCO, INC. KPMG LLP Dallas, Texas March 30, 1999 EX-25.1 5 POWER OF ATTORNEY 1 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. ------------------------------------ GLENN W. ANDERSON 2 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. --------------------------------------- DANIEL J. COOTS 3 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. ----------------------------------- JOHN C. GOFF 4 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. ------------------------------------ ROBERT J. McGEE, JR. 5 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. ----------------------------------- JOEL C. PUCKETT 6 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. ------------------------------------ SAM ROSEN 7 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. -------------------------------- HARDEN H. WIEDEMANN 8 SPECIAL POWER OF ATTORNEY THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TARRANT ) THAT I, the undersigned, of Tarrant County, Texas, have made, constituted and appointed and by these presents do make, constitute and appoint JOEL C. PUCKETT and GLENN W. ANDERSON, 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, 1998, each of said attorneys and agents to have power to act in the name of and on behalf of the undersigned on 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 ____ day of March, 1999. ----------------------------------- JOHN H. WILLIAMS EX-27 6 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF GAINSCO, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1998, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME AND CASH FLOWS FOR THE YEAR ENDING DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 145,588,002 59,788,233 60,978,145 268,585 0 0 210,988,959 3,982,059 2,392,576 11,320,142 345,590,262 136,798,149 63,601,677 0 0 18,000,000 0 0 2,174,066 0 345,590,262 92,203,393 9,802,702 692,510 2,927,587 86,352,980 297,994 16,933,893 (21,280,089) (9,617,525) 0 0 0 0 (11,662,564) (.56) (.56) 83,703 59,635 26,718 19,693 48,595 101,768 (26,718)
-----END PRIVACY-ENHANCED MESSAGE-----